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Pike River Coal – Making an Operating Coal Mine

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					   Pike River Coal – Making an Operating Coal Mine
                                           G. Ward

        Chief Executive Officer, Pike River Coal Limited, PO Box 25263 Wellington,
                                    gordonw@pike.co.nz.


                    A New Premium Hard Coking Coal Mine
Making a new operating hard coking coal mine at Pike River is comparable to running a race.
But it’s not a short dash to the finishing line. Rather it is very much in the nature of a multi-
sports endurance event, like a business version of an ‘Ironman’ or the Coast to Coast. Each
stage is different, demanding and delays are usually detrimental. You need a great support
team and great stamina. And at the end of the race, there is a prize. Steve Gurney won a
BMW in the 2004 Coast to Coast. Well our coal could be used in making steel for the car. But
the prize at Pike River will be much more widely spread. Once we are running at full
production from mid 2009, the returns include dividends and potential capital growth for
investors, a net gain for the local environment, taxes and royalties for the government, and
employment and wealth creation for the Grey District Community. You might say there are
no losers!

So that sounds great. But how did we get there? What hurdles did this new mine have?




The Hurdles

All new mine developments have similar challenges to overcome, like marketing, finance,
construction, recruitment and environmental management. What makes developing the Pike
River coal deposit unique is a combination of:

   •   remote location in the Paparoa Ranges – making access and construction difficult
   •   the environmental values of land administered by Department of Conservation
       required for access
   •   a more complex geology – eliminating some mining methods
   •   its moderate sulphur levels in the coal – posing a marketing challenge.
Remote Access – An Innovative Solution

The race to coal – remember this is an endurance event, kicked off in earnest in the late
1990’s. Choosing the best way to access the coal, whilst minimising environmental impact
was of critical importance.

The Pike River coal deposit is situated about 50 kilometres northeast of Greymouth. The
nearest public road was 14 kilometres away and the coal deposit sits 100 metres below the
surface of the rugged Paparoa ranges. Lord of the Rings country. Not an easy place to get to,
even by helicopter. In fact the walk out from the coal adit in the Upper Pike area took 7 hours.




                                   Figure 1. Paparoa Ranges

After careful evaluation and extensive consultation with the Department of Conservation
(DOC) and independent expert consultants the decision was made to use a 2.3 kilometre
tunnel for access. The tunnel had several big advantages over a number of alternatives
including a coal haulage road, an aerial ropeway, and fluming coal on the surface.




                                Figure 2. Constructing the Tunnel
The main benefits were firstly in keeping coal trucks out of the lower Pike stream catchment -
reducing noise, dust and physical disturbances, and secondly allowing continuous transport of
coal in water from within the mine down to a coal processing plant located out of the DOC
estate, 10 kilometres away on Pike River owned land.

The tunnel had the disadvantages of a higher upfront cost, but delivered a long term and more
reliable solution at a much lower annual operating cost. Today we are advancing the tunnel
the last 200 meters to intersect the coal seam at 2,300 metres. Work on the tunnel started 22
months ago. This is a major engineering challenge which has not been without its moments.

Environmental Values – A Successful Marriage

Obtaining consents and access was a marathon with hurdles. Pike River successfully
negotiated that process by overcoming numerous environmental issues during the mine
planning, design and consenting stages.

Pike River has held the rights to explore and mine the coal deposit for many years, but access
agreements and resource consents were also required. The Resource Management Act is well
known for potentially being a tortuous process with uncertain outcomes.

The Department of Conservation and Timberlands West Coast (then) administered the land
that we needed access over. In the Upper Pike area this included several hectares of native
bush. Thirteen hectares of land in total was required for roading and facilities much of which
had been logged in the 1960’s. A solitary bachelor blue duck (whio) was present. This is not
representative of males on the West Coast! Iwi cultural values needed to be understood and
recognised. Controls for water quality and surface subsidence effects were important. Thank
goodness – no powelliphanta snails! After a process extending over 7 years (including drilling
and feasibility studies), the final access agreement and mining resource consents were
obtained in 2004.

One of the secrets to our success in completing that process has been the willingness of the
Board and management, at all levels, to engage in extensive consultation, listen to concerns
and either demonstrate or engineer solutions. Sometimes compromise is necessary to deliver
the best result.

Many initiatives have been taken by Pike River to minimise environmental impacts in
addition to the access by tunnel. This includes recycling all water used for mining and coal
transport from the coal preparation plant back up to the coal face to reduce water take from
Pike stream. Power lines have been zigzagged along the access road rather than running up
one side, in order to interfere with as few trees as possible. We have also run Hendrix cables,
which are expensive insulated power cables, so that the trees do not have to be trimmed as
much and reducing fire risk.
                       Figure 3. Slurry Pipeline and Hendrix Power Cable

We have not had a serious environmental incident since construction started. This is testament
to the excellent job performed by the Pike River environmental and project management
team, DOC staff assisted by a liaison officer and the contractors involved.

I am proud that we have achieved one of our key goals from day one of minimising impacts
on the environment; and that we have successfully blended the mine development into its
bush setting.




                              Figure 4. Pike River Amenities Area

We will also ensure that current best environmental practice is maintained throughout mining
operations. Where appropriate, cutting edge technology like laser ground surveys for
subsidence management, will be employed. The Pike River mine is very much a modern mine
employing latest mining techniques, equipment and software, and adopting best practice from
Australia in many areas.

Complex Geology – Mining using Water

This is the ‘cross country’ section. Geology in the mountainous West Coast of New Zealand
poses somewhat different mining challenges to most coal deposits on flatter, less faulted land.
                Figure 5. Cross-section – Paparoa Ranges and Tunnel Alignment

The solution was straightforward. Mining a thick coal seam at a dip, like Pike River, had been
done for many years using hydro monitoring. This is a high pressure water cutting system
used for several decades around the world and by Solid Energy successfully in several West
Coast mines. Pike River had all the right ingredients including plenty of water where 6 metres
of rain is dumped each year on the Paparoa Ranges.




                          Figure 6. Schematic of the Hydraulic Monitor

An important aspect to successful mining in complex geology is use of in-seam drilling. This
is a mine planning tool, where an underground drilling unit drills several hundred metres
ahead, allowing the coal seam to be mapped. That way the miners can ensure that the mining
equipment which cuts the roadways, actually cuts coal rather than missing the mark and
hitting rock. The mine plan is consequently very flexible and changes in geology can be
updated almost immediately. Another advantage is reducing impacts otherwise caused by
surface drilling.
A local hydro mine, the Solid Energy operated Spring Creek mine near Greymouth, is
currently producing 750,000 to 800,000 tonnes on an annualised basis.

Marketing – Coal with Special Qualities

Marketing was a hurdle in the early days prior to development, due to the issue of moderate
sulphur levels in the coal. All Pike River coal will be exported. Whilst Pike River has some
superb selling features such as 1% ash and off the scale fluidity, the average sulphur level of
about 1.5% was a little high for some steel mills.

The solution was to market two brands of premium hard coking coal – a 1.2% sulphur coal
and a 1.9% sulphur coal. With the international markets for coal currently running very hot,
this is not an issue, but it will serve to protect Pike River’s competitiveness if market demand
eases at some future point.

It goes without saying, but I will say it anyway, that understanding your market is critical. We
have a very experienced coal marketer responsible for this area. Pike River announced in May
2008 that we have sold our first coal (1.2% sulphur) for US$300 per tonne, triple the price
forecast at the time of Pike River’s 2007 initial public offer. Pike River coal quality is up
there with the best in the world. Coal has so far been sold into India and Japan, and future
markets will include South America, China and Europe.



                                                                                             300


                                                                                             250




                                                                                                    1
                                                                                                    USD$ per tonne
                                                                                             200


                                                                                             150


                                                                                             100


                                                                                             50


                                                                                             0
   2000         2002        2004           2006          2008             2010       2012
                          Japanese Fiscal Year (year beginning 1 April)

          Historic                                         Pike River IPO forecast
          Broker consensus forecast 9 June 2008            Broker consensus forecast 14 July 2008



                              Figure 7. Hard coking coal price graph

The Building Journey

The Japanese typically plan for 80% of a project duration to be spent in planning and 20% in
execution. This has been mirrored at Pike River. Whilst the need for speed was obvious, a
great deal of time had to be spent in planning and consenting. Once done, it was all go to get
to coal. A key reason was the market view on coal prices. In 2005, the industry and market
view was that ‘peak’ coal prices which had rocketed to a record US$125 per tonne, were not
around to stay. How wrong has that turned out to be! Similar to the then widely held view that
oil would not hit US$100 per barrel!

Recognising that time is money, the Pike River Board green-lighted the mine development in
September 2005. This decision was made prior to completing all the funding arrangements
which were planned to be by debt and an initial public offer of shares. One reason, and shown
to be of great value now, was our desire to lock down costs with tunnelling and construction
contractors.

The time required to construct the access tunnel set the critical path to first coal. All other
aspects of the development had to be carefully planned to ensure that infrastructure and plant
and equipment were built and delivered on time. A resources boom has coincided with this
process. Consequently, there has been significant cost pressure and competition for resources
and people. Many complex projects needed to be completed at Pike River. For example, the
orders for the roadheader and continuous miners were placed 2 years ago. It is pertinent to
note that we have not encountered a single day’s delay to first coal for any reason other than
the tunnel. The only substantial cost increase since the May 2007 IPO prospectus has been
due to the tunnel and ventilation shaft. Even then costs have only exceeded budget by about
10%, when it is not uncommon to see cost overruns in mining projects of 50-100%.




                           Figure 8. Roadheader under Construction

Tunnel construction kicked off in September 2006, after a narrow access road to the portal
entrance had been built. A number of challenges in the road were conquered including a
difficult 500 metre section in the Upper Pike, where unexpectedly, an additional 100,000
tonnes of conglomerate rock had to be trucked off site. Seven major bridges were installed,
one of which required the largest crane in the South Island for installation and power was
connected to site in mid 2007.

Work on the $20 million coal preparation plant began in November last year and this plant is
now operational. The ten kilometre $6 million coal slurry pipeline is installed.
                                 Figure 9. Coal Preparation Plant

Also in November 2007 we announced a new coal transport agreement with Solid Energy NZ
Limited. Coal is being trucked to a rail loading point at Ikamatua and railed 250 kilometres to
Port Lyttelton for export. As this is an existing proven transport route, this step substantially
derisked the Pike project.

Building a great operation requires great management. Pike River’s first employee was Peter
Whittall, General Manager – Mines. Peter started in February 2005. Around Peter, we have
built a highly experienced and talented team. Senior management has more than 150 years of
coal mining experience.

Part of the race has been to recruit. We now have more than 70 staff and will build that to 150
when hydro mining is up and running next June. Reasons for joining Pike River include
lifestyle, challenge and something different. The West Coast is world renowned for its scenic
beauty. It is a fantastic place for outdoor living – hunting, fishing, tramping, diving and the
like. Then there is the location of the mine, its integration into the native bush and the unusual
hydro mining technique. Miners don’t have to work week on, week off as they would in the
outback. They can get home for the family dinner each night. Or off to the pub. Being a public
listed company allows us to offer all our employees participation in the company’s future
success through an employee share purchase plan. Job applications are at the front door!

Funding Leg – New Zealand’s Largest IPO in 2007

All of that work has cost a lot of money and a separate, demanding process of funding has
been conducted in tandem.

Mining has traditionally been seen by investors as a risky exercise in New Zealand. This is
quite odd. Mining of minerals, aggregate and petroleum produced $4.5 billion of sales
revenues in 2007. The destruction of the finance sector in New Zealand over the last 2 years
has reportedly cost investors $1 to 1.5 billion. Why do investors blink when they look at
resources?

Primarily it is a lack of knowledge. The Australian stock exchange has more than 800 listed
resource companies, but New Zealand has eight. Resources and coal mining are not well
understood here. Pike River Coal became New Zealand’s only listed coal company in July
2007 when it successfully raised NZ$85 million in its Initial Public Offering, accepting over-
subscriptions of NZ$20 million. The company dual listed in Australia to increase market
appetite and obtain support from Australian brokers and coal analysts. This has proven to be a
prudent decision. Approximately 10% of Pike River is held by Australian investors and a
number of institutions from other countries have since invested due to Pike River having an
Australian listing.

Funding was completed in March 2008 when a NZ$60 million rights issue and a US$30
million convertible bond issue to Liberty Harbor (part of Goldman Sachs Asset Management)
was finalised. Pike River is well positioned to fund future growth opportunities currently
having no debt. I expect that the bonds issued to Liberty Harbor will all be converted into
Pike River shares by the end of their 3 year term.

The Prize

The prize for a successful mine operation at Pike River includes:

Dividends and capital growth

Investors at the IPO stage have seen their shares increase in value from $1 to more than $2,
100% in a year. Pike River expects to be paying dividends in the year ended 30 June 2010.
The dividend policy is to pay at least 50% of available after tax cashflows.
     Rebased Price (Based at 1,000 on 20 July 2007)




                                                      3,000




                                                      2,500               Pike River Coal

                                                                          NZX 50 (Gross)

                                                      2,000




                                                      1,500




                                                      1,000




                                                       500
                                                          Jul-07 Aug-07 Sep-07 Oct-07 Nov-07 Dec-07 Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08



                                                               Figure 10. Share price performance: Pike River Coal vs NZX 50

Environmental benefits

Pike River contributes to an extensive pest control programme in the Pike Stream and Kakapo
catchments covering 1350 hectares. So far more than 100 rats, dozens of stoats and thousands
of possums have been eradicated. We are making a better environment for native birds in the
area. We also make a separate contribution to a blue duck enhancement program. Water
quality is managed to fully protect against adverse affects and the mine will be fully
rehabilitated when completed.
                     Figure 11. Blue Duck (Whio) and installing Pest Bait Stations

Royalties and taxes

Pike River expects to pay substantial royalties and taxes. These depend on future coal sales
prices and operating performance, but this could be of order $100 million per annum
(McDouall Stuart, July 2008), depending on coal prices and exchange rates.

West Coast employment

Pike River will be the fifth largest employer on the West Coast. A workforce of 150 personnel
and downstream employment of a further 450 people, will inject considerable money into the
local economy.

West Coast spending

Spending in the Grey District area of more than $25 million per annum (including wages,
power and trucking) when at full production, which will provide a major stimulus for regional
prosperity.




               Figure 12. The West Coast benefits from Pike River in a number of ways

One of the features of the Pike River mine is its long life at 18 years or more, with upside
potential in the deeper Paparoa seam. The Pike River prize is set to deliver for a long time and
we are ready to mine!

McDouall Stuart Securities NZ Limited 7 July 2008. “Pike River Coal: Almost there…” Research report.

				
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