Fortune Minerals updates Mt. Klappan feasibility study

Vancouver A lot has changed in the two and a half years since Fortune Minerals‘ (FT-T) last feasibility study for the Mount Klappan anthracite coal project 102 million proven and probable tonnes of it 330 km northeast of Prince Rupert, B.C. The price of steel has climbed relentlessly upwards. Labour costs have sky-rocketed. And oil has more than doubled in price.

“In the interim, since 2005,” says Julian Kemp, Fortune Minerals’ VP finance and CFO, “we saw the escalating costs. So the company recognized it had to update the numbers. But don’t forget, you still have to ask yourself why the price of steel is up? Well, look at the price of coal, that’s up too.”

Some aspects of the project are the same. The 2008 feasibility study, like the 2005 one, still envisions running a 3 million tonne per year operation with at least a 20-year mine life, developing an open pit mine using truck and shovel extraction, depending on diesel power and producing a 10% ash, ultra-low volatile pulverized coal injection product.

But other aspects have changed. At $617 million, capital costs are almost $200 million higher than they used to be. Reserves are also up. The 102 million proven and probable tonnes of anthracite coal in the new study are about 40 million tonnes greater. The base case price of coal is also $50 dollars higher at $150, although the internal rate of return (IRR) is a bit lower. The current study delivers 28.9% with an 8% discount rate whereas in 2005 the IRR was calculated at a bit over 30%.

As for infrastructure, although Fortune Minerals still likes the idea of improving and extending a railroad to the port of Prince Rupert, it has focused on trucking anthracite to port this time round. As Kemp explains it, “For a 10 million tonne operation, you must have a railroad and the economics of building it aren’t so bad. But with a 3 million tonne one? That’s a bit harder to justify.”

Kemp says Fortune Minerals is looking to partner on the project and to that end it has retained CIBC World Markets to help shop Mount Klappan around. The hope, he says, is to close a deal within the next three to six months.

A deal would not only help generate share earnings and increase cash flow, he says, but the right partner might also have more clout with the B.C. government when it comes to moving the project forward and looking for investments in infrastructure such as the extension of the power grid and the railroad improvement.

“I mean, how much clout does a London, Ontario based exploration company have with the Premier of B.C.?” he asks. “Not much,” he answers. But a big Asian or Canadian company would.

Finding a partner for Mount Klappal is also part of Fortune Minerals’ shifting focus. The 20 year old company is preparing to emerge from its exploration cocoon and metamorphize into a mine operator with its NICO gold-bismuth-cobalt project in the Northwest Territories, slated to begin production in 2011.

With plans to develop that asset itself, 160 km northwest of Yellowknife, Fortune Minerals now wants more than ever to find partners for the Mount Klappan project. “For us to develop two projects at once would be too onerous,” Kemp says.

The plan at Nico is to operate both an open pit and underground mine. So far Fortune Minerals has outlined 22 million proven and probable tonnes grading 1.08 grams gold per tonne, 0.16% bismuth and 0.13% cobalt that would provide for a 15 year mine life. Although the company envisioned beginning operations in 2010 “that has really slipped into 2011,” Kemp says. He says the delay is largely the result of inefficiencies in the Tlicho First Nations’ permitting process.

Not that he blames them. Fortune Minerals is the first company since the Tlicho settled land claims to go through the band’s permitting process.

But in a sure sign the company is gearing up for a positive outcome, Fortune Minerals has bought the Giant Mine processing facility in Hemlo, Ontario and selected Tri-Venture FE&C to dismantle and salvage the property in preparation for the move north.

And although capital costs were slated to come in at about $215 million, Kemp says he expects they will end up at around $250 million. To finance the project, he says Fortune Minerals is talking with banks to see if it can line up enough credit rather than having to go to the market and dilute the company’s position.

On news of the feasibility study, Fortune Minerals share price lost 4 to close at $1.58.