The Northern Miner, Volume 94 Number 15, Jun 2 - 8, 2008

Coalcorp raises $120M for 'streamlined growth'

HOPE TO INCREASE PRODUCTION AT LA FRANCIA, IN COLOMBIA

VANCOUVER -- After a strategic review prompted by an unsolicited takeover offer, Coalcorp Mining (CCJ-T, CCJMF-O) is planning to ramp up production at its La Francia coal mine in Colombia to 6 million tonnes per year by 2010.

Coalcorp has a new multifaceted growth strategy that involves expanding and streamlining operations at one coal mine, La Francia, and selling off another, Caypa.

To finance the expensive new vision, the junior is raising $120.1 million by selling 66.7 million units at $1.80 apiece to GMP Securities. Each unit consists of one share and one warrant, exercisable at $2.50 for five years.

A 10-million-unit overallotment is also on the table, which would bring gross proceeds to $138 million.

Coalcorp owns and operates La Francia, a 3-year-old mine in northeastern Colombia that produces high-volatile, bituminous coal. Coal is currently mined from pits A and B at La Francia I, which still holds coal reserves of 21.9 million tonnes. Key to the expansion plan is development of pit C at La Francia I and pit D at La Francia II, which host total proven coal reserves of 51.5 million tonnes and probable reserves of 1.6 million tonnes. Together, the four pits hold 75 million tonnes of coal reserves.

The company's expansion plan is based on even greater reserves -- 80 million tonnes -- because Coalcorp expects to add reserves by converting some other resources into reserves, exploring for new resources within its extensive land package, and revising the current mining plan. One possible revision would be a deepening of pits A and B.

La Francia currently produces 2 million tonnes of coal annually. Ramping production up to 6 million tonnes per year gives the project a 12-to 14-year mine life and will require Coalcorp and its contract mining partner, the Masering consortium, to add significantly to the site's mining fleet. Six new waste-stripping excavators will be added to the fleet and the company's current fleet of coal excavators and 30-tonne trucks will be doubled.

Coalcorp expects to reach a 4- million-tonne mining rate by the end of 2008. It will take until the end of 2010 to reach 6 million tonnes of coal production per year. The main goal of the expansion is to allow the company to take advantage of spot prices for coal.

In conjunction with the production expansion at La Francia, Coalcorp has started building the rail spur to connect the mines with the Fenoco line that links to the northern ocean ports near Santa Marta. The spur should be complete by September and will give Coalcorp 3.5 million tonnes of annual rail capacity.

To meet its 6-million-tonne goal, the company has also started the process to acquire an additional 2.5 million tonnes of annual rail access for 2010 and later.

If the bid succeeds, not only will Coalcorp have the additional capacity it requires but it will be able to transport its coal at a significantly lower cost than it currently pays to ship coal to port by truck.

The expansion will eat up all of the $120-million financing. Commissioning the rail infrastructure is expected to cost $25 million. Financing the new mining equipment and infrastructure upgrades bears a $30-million price tag.

Another $15 million is earmarked for developing the new infrastructure. Prestripping operations will cost $30 million and the remaining $20 million is tagged for other costs, such as exploration drilling and acquisition of additional rolling mining stock.

Another result of the company's strategic review is the decision to sell or wind down all non-core assets. In particular, Coalcorp is in the process of disposing of the Catpa coal mine and the Cartagena port lands and associated port licence.

Coalcorp determined that the Caypa mine will not be cash flow positive in the near or medium term, hence the decision to sell. The company says it has received offers to acquire the subsidiary that holds the rights to Caypa and expects to enter into a binding agreement shortly.

Coalcorp says it has already received an offer to acquire the Cartegena port and expects to complete the sale shortly.

The sale of Caypa is expected to produce considerable savings but Coalcorp is moving on other cost-cutting fronts.

The company is examining the possibility of reducing its Colombian workforce and members of senior management have agreed to take a 25% salary reduction.

Finally, Coalcorp has also terminated its exploration joint-venture agreement with BHP Billiton (BHP-N, BLT-L).

The deal -- which would have seen BHP spend at least $3.5 million per year for a period of three years on exploration at Coalcorp's properties -- was signed only last year.