Mr. Michael Hunter reports
CARDERO RECEIVES FINAL PRELIMINARY ECONOMIC ASSESSMENT FOR CARBON CREEK METALLURGICAL COAL DEPOSIT, BC
Cardero Resource Corp. has received the final preliminary economic assessment technical report from Norwest Corp. relating to the Carbon Creek metallurgical coal deposit. The report has been uploaded to SEDAR and is available for download from the company's website.
Cardero, through Cardero Coal Ltd., currently has a 75-per-cent interest in the Carbon Creek metallurgical coal deposit, situated in northeast British Columbia, Canada. Results of the preliminary economic assessment (all in U.S. dollars) indicate that, on a 75-per-cent basis and using a base-case coal sale price of $185 per tonne, the project returns a posttax $752-million net present value at an 8-per-cent discount rate and a 29.3-per-cent internal rate of return.
These results, together with higher and lower coal sale price assumptions, are outlined in the attached sensitivity analysis table, which also summarizes sensitivity of the project to operating and capital cost increases. Due to the scale of the project, it is economically robust and not especially sensitive to cost increases.
SENSITIVITY ANALYSIS
(in millions U.S. $)
IRR NPV at 8% NPV at 10% NPV at 12%
Base case at $185 29.3% $752 $551 $408
Coal sales at $270 46.3% $1,755 $1,335 $1,033
Coal sales at $141 16.1% $229 $142 $79
A 10% increase in direct mining costs 28.6% $696 $510 $377
A 10% increase in capital costs 28.6% $753 $551 $407
More detailed economic results are outlined in the attached Carbon Creek project summary table, together with all key assumptions used in the economic modelling.
CARBON CREEK PROJECT SUMMARY
(discounted cash flow model based on years 1 to 30 only)
Resource measured and indicated Mt 166.7
Resource inferred Mt 167.1
Underground minable tonnes Mt 115.1
Mean plant recovery % 62%
Underground clean coal tonnes produced Mt 71.4
Surface minable tonnes Mt 21.8
Mean plant recovery % 68%
Surface clean coal tonnes produced Mt 14.8
Total clean coal tonnes produced Mt 86.2
Surface mining minimum seam thickness M 0.6
Surface mining maximum strip ratio Ratio 12.5:1
Underground mining minimum seam thickness M 1.2
Full-production-rate clean coal per year Mt/yr 2.9
Preproduction capital M$ $301
Sustaining capital LOM M$ $203
Value of leased equipment LOM M$ $151
Surface mine Opex ROM basis $/t $30.62
Underground mine Opex ROM basis $/t $31.86
Surface mine Opex clean coal basis $/t $50.77
Underground mine Opex clean coal basis $/t $57.68
Processing Opex $/t $3.90
Average direct mine costs (incl. equipment lease) $/t $60.76
Haul, rail and port costs $/t $42.42
FOB price long-term base case $/t $185
Gross revenue LOM M$ $15,952
Operating costs LOM M$ $6,145
Pretax operating cash flow LOM M$ $6,149
Posttax NPV 8 (75-per-cent basis) M$ $752
Internal rate of return (75-per-cent basis) % 29.3
Posttax NPV 8 (100-per-cent basis) M$ $1,070
Internal rate of return (100-per-cent basis) % 35.1
Undiscounted posttax cash flow (75-per-cent basis) M$ $3,113
Preliminary economic assessment report
Norwest has prepared an NI 43-101 technical report and preliminary economic assessment on the Carbon Creek metallurgical coal deposit. The effective date of the preliminary economic assessment is Dec. 6, 2011, and for the updated resource estimate is Oct. 1, 2011. Investors are urged to review the Norwest report in its entirety.
The company cautions that this PEA is preliminary in nature and is based on technical and economic assumptions, which will be evaluated in further studies. The PEA is based on the current (as at Oct. 1, 2011) Carbon Creek estimated resource model, which consists of material in both the measured/indicated and inferred classifications. Inferred mineral resources are considered too speculative geologically to have technical and economic considerations applied to them. The current basis of project information is not sufficient to convert the mineral resources to mineral reserves, and mineral resources that are not mineral reserves do not have demonstrated economic viability. Accordingly, there can be no certainty that the results estimated in the PEA will be realized.
Carbon Creek updated mineral resource
The key assumptions used to calculate the previous resource estimate (published June 3, 2011) were modified to reflect the increased detail of the PEA level of study. As a result, a new recalculated resource estimate is included in the PEA, effective as at Oct. 1, 2011. Results are summarized in the attached classification of resources table.
CLASSIFICATION OF RESOURCES
Deposit type ASTM coal rank Measured (Mt) Indicated (Mt) Inferred (Mt)
Surface mvB 33.1 20.1 19.6
Underground mvB 42.4 71.1 147.5
Total mvB 166.7 167.1
The mineralized zones encountered on the property are predominantly medium-volatile bituminous coal seams, with minor increase or decrease in rank depending on structural or stratigraphic variations and depth of burial. Historical coal quality reports indicate that the coals will, with beneficiation (washing) to remove impurities, produce a product with coking properties suitable for metallurgic applications. Thermal coal suitable for electric power generation could be produced with or without further processing in addition to, or as an alternative to, a coking coal product.
Over 30 coal seams occur in the middle and upper portions of the Gething formation. Sixteen seams are present through the northern half of the Carbon Creek property. Coal deposition is typical of the Gething formation, consisting of abundant coal seams, some showing favourable metallurgical properties. The 12 seams listed in the attached raw coal quality table are developed sufficiently to be of economic significance. These seams range from 1.14 metres to 2.17 metres in average thickness. Raw coal qualities are presented for each of these seams. Values shown represent coal without out-of-seam dilution. Processing coal mixed with OSD using size-specific density and froth-flotation-separating processes (coal washing) is widely used to improve coal quality by reducing ash content and raising its calorific value. Coking properties such as free-swelling index and dilation are typically improved as well, through washing.
Raw coal qualities indicate good coking coal potential in seams 31, 40 and 52 based on average FSI values. In-place raw ash contents are generally low, and all seams will be improved with washing, which would reduce ash content further and typically increase the FSI by a few points. With careful blending, the other seams would likely be saleable in the coking coal market.
RAW COAL QUALITY
(air-dried basis)
Average Calorific
(m) Moisture Sulphur Volatile Fixed value
Seam thickness (%) Ash (%) (%) matter (%) carbon (%) Btu/lb FSI
58 1.14 2.60 12.56 0.92 28.92 55.93 12,663 2.0
55 1.57 2.74 12.42 0.68 28.59 56.26 12,893 2.5
54 1.39 2.78 5.66 0.83 27.36 64.20 13,926 1.5
52 1.63 2.18 17.14 1.88 28.33 52.35 12,178 4.0
51A 1.29 2.74 6.25 0.80 28.01 63.00 13,902 2.0
51 1.51 2.73 9.63 0.73 26.42 61.23 13,228 2.0
47 1.14 2.53 15.49 0.91 24.00 57.98 12,441 1.5
46 1.70 2.60 6.50 0.83 26.92 63.99 13,907 2.0
40 1.95 2.02 13.99 1.17 27.16 56.83 12,892 5.5
31 1.99 1.50 25.74 1.42 24.33 48.43 10,906 6.0
15 2.17 1.08 17.11 0.57 21.14 60.67 12,602 2.5
14 1.91 0.95 19.03 0.57 19.20 60.83 12,362 3.0
Minable coal
Based on the existing geological model, a general mining layout was prepared for both surface and underground mining areas. Applying mining limits, a minable tonnage estimate was developed for each mining method as shown in the attached minable coal tonnes table.
MINABLE COAL TONNES
Minable tonnes Resource tonnes
Mining method (millions) (measured and indicated)
Surface 21.8 53.2
Underground 115.2 113.5
Combined total 137.0 166.7
The run-of-mine surface-minable tonnes are significantly lower than the surface resource identified herein. This difference is explained by the fact that much of this resource is higher strip ratio and higher extraction cost relative to underground mining methods. The ROM underground tonnes exceed the geological resource estimate because the mining layout includes a small amount (1.7 million tonnes) of inferred tonnes.
Coal processing
ROM coal will be crushed and sent to a coal washery, where ash will be removed through heavy media separation of the coarse fractions and flotation for the fines fractions. Wash plant yields have been estimated on average at 68 per cent for surface mined coal and 62 per cent for underground mined coal. The clean coal will be dried in a fluidized bed dryer to approximately 6-per-cent moisture and stored in covered storage to keep it dry until shipment.
Production volume and schedule
Annual production is based on the proposed mining plans developed by Norwest. The surface mine will begin operations first, with the underground mine beginning operations two years after the surface mine. This allows time to develop an area to access the underground minable coal seams. The combined mining operation is planned for 30 years excluding preproduction development and construction time.
The surface mine is projected to begin production at 3.1 million ROM tonnes per annum and maintain this level for seven years. The expected wash plant yield of 68 per cent results in 2.1 million tonnes per annum of saleable coal from the surface mine. This production from surface mining is expected to yield 14.8 million tonnes of saleable coal over the seven-year period.
The underground mine is expected to begin production in the third year of mine operations at 590,000 tonnes per annum of ROM increasing to the steady-state level of 4.7 million tonnes per annum of ROM by the beginning of the eighth year of mining operations. The expected wash plant yield of 62 per cent results in 2.9 million tonnes per annum of saleable coal from the underground mine. The underground mine is assumed to operate 28 years producing 115.2 million ROM tonnes and 71.4 million saleable tonnes. This production schedule depletes the measured and indicated underground minable coal tonnes shown in the attached minable coal tonnes table.
Transportation
Clean coal will be loaded into highway-type coal haulers operated by a trucking contractor and hauled approximately 69 kilometres to a rail loadout on the CN railway. The coal will be off-loaded into a bottom-dump hopper and conveyed to a twin-dome-covered storage structure. Clean coal will be drawn from beneath the storage piles onto a reclaim conveyor and loaded through a batch-weighing system into unit trains. The coal will be transported to the ports of Vancouver and/or Prince Rupert for loading onto ships for transport to the Pacific Rim markets. The clean coal will be exposed to the elements during train transport and while stockpiled temporarily at the port and is expected to increase in moisture content to about 8 per cent, which is the preferred maximum for ocean shipping.
Capital costs
Preproduction capital requirements total $301-million and include coal handling, coal preparation, train loadout facilities, surface facilities, site access and power, and mine development and contingency. All major surface and underground mining equipment is assumed to be leased with a seven-year lease term at 4.5 per cent and a residual of 20 per cent. The total value of the mining equipment being leased is $151-million. Annual lease payments at full production for surface mining total $12.3-million and $9.6-million for underground.
Total capital excluding leased equipment is $504-million over the LOM. Lease payments for mining equipment total $321-million over the LOM.
Operating costs
Operating costs have been estimated for the surface and underground mines based on required equipment hours, labour hours, and materials and supplies. These costs are shown in the attached cash operating costs table on a unit basis for each mine and the coal-handling and preparation plant.
CASH OPERATING COSTS
Cost area $/ROM tonne $/clean tonne
Surface mining $30.62 $50.77
Underground mining 31.86 57.68
Coal handling and prep 3.90
Subtotal (includes equipment lease payments) 60.76
Indirect costs 10.51
Total cash costs 71.27
Economic results
Norwest prepared an economic model that captures direct costs, including labour, equipment, materials, production taxes and royalties. Indirect costs including corporate overhead, mineral tax and property tax were added to the model along with depreciation of purchased equipment and facilities. A cash flow calculation was prepared on an after-tax basis using an average free-on-board price of $185 per saleable tonne and an average clean coal production of 2.9 million tonnes per annum. Clean coal production increases from 2.1 million tonnes per annum to 3.2 million tonnes per annum over the first seven years of production and then averages 2.9 million tonnes per annum for the remaining mine life of 23 years. The first seven years include surface mine production and the ramp-up of underground mining. After seven years, the property is mined by underground methods only.
Preproduction cash outflows total $301-million over the estimated three-year development and construction period. Cash flow is positive once production begins, and payback occurs by the end of the third year of production or six years after the initial cash outflow. After payback and providing for the net profits interest, cash flow averages $115-million per year for a total net cash flow of $3.1-billion over the life of the mine for Cardero's 75-per-cent interest.
The internal rate of return for Cardero's 75-per-cent interest in the Carbon Creek joint venture is approximately 29 per cent. Net present values at 8 per cent, 10 per cent and 12 per cent are shown in the attached NPV results Cardero's 75-per-cent interest table.
NPV RESULTS,
CARDERO'S 75-PER-CENT INTEREST
(in millions U.S. $)
Interest rate 8% 10% 12%
NPV $752 $551 $408
The internal rate of return for the entire property is approximately 35.1 per cent. Net present values at 8 per cent, 10 per cent and 12 per cent are shown in the attached NPV results 100-per-cent interest table.
NPV RESULTS 100-PER-CENT INTEREST
(in millions U.S. $)
Interest rate 8% 10% 12%
NPV $1,070 $800 $605
Qualified persons and quality control/quality assurance
Gary M. Stubblefield, PE, of Norwest, is a professional engineer (Colorado, Montana and Utah) and, as such, is acting as the qualified person, as defined in NI 43-101 for certain portions of the Norwest report. Mr. Stubblefield has a BSc in mining engineering and more than 40 years of relevant experience in engineering and mine supervision and operations, including 18 years in surface coal mining. Both Mr. Stubblefield and Norwest are independent of the company under NI 43-101.
Lawrence D. Henchel, SME, of Norwest, is a registered member of the Society for Mining, Metallurgy and Exploration Inc. and, as such, is acting as the qualified person, as defined in NI 43-101 for certain portions of the Norwest report, including the Oct. 1, 2011, resource modelling for the Carbon Creek deposit. Mr. Henchel has a BSc in geology and 28 years of relevant experience as a geologist specializing in coal and industrial minerals in both exploration and mining. Both Mr. Henchel and Norwest are independent of the company under NI 43-101.
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