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Independent Research

Allegiance Coal (ASX:AHQ)

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Subsequent to our March 2018 update, Allegiance Coal (“Allegiance” or “the Company”) has
made major progress on key fronts on its Tenas Coking Coal Project (“Tenas” or “the Project”),
located just 375km by rail from the under-utilised Ridley Island Coal Terminal (“RICT”) in
northwestern British Columbia, Canada.
To reiterate, Tenas has the potential to produce mid-volatile, semi-soft coking (“SSCC”) or
PCI coal at FOB costs in the lower 5% of the global sea-borne trade with resultant robust
returns from the Project. This is by virtue of the low strip ratio and access to infrastructure; the
Project has ready access to power and transport, including being just 24km from the Canadian
National Rail (“CNR”), which links directly to the RICT.
The Company is currently undertaking a definitive feasibility study (“DFS”) which is expected
to be completed in Q1, CY19; this is predicated on a 20 year mine life producing 750,000 tpa of
clean product with a low estimated up-front capital cost of US$70 million and operating costs
in the order of US$55/tonne saleable product. The production profile has changed from those
as presented in previous studies, largely due to the requirement to complete a comprehensive
permitting process. Given this permitting requirement it was decided to go with a larger upfront
production, however the expected commencement of production is now in 2022.
A key milestone has been entering into a contributing joint venture (“JV”) with Itochu Trading
Company of Japan (“Itochu”), a major global commodities trader and a Fortune 500 company.
The first stage of the two stage earn-in includes Itochu paying staged payments totalling C$6.6
million for 20% of the Project, and then having the right to earn up to a further 30% equity at
the Project level through a consideration based upon a valuation for Tenas based on all permits
to operate being in place.
Benefits flowing from this agreement include that the Company will likely now be fully funded
through to production, without the need to raise equity (and hence dilute shareholders) to fund
their share of the up-front capital and pre-development costs. The association with Itochu (who
will have the coal marketing rights) will also provide access to potential offtake partners and
Japanese banks.
Coal quality test work has confirmed the suitability of the Tenas coal for the sea-borne midvolatile
SSCC and PCI markets, with this supported by tests carried out by a number of north
Asian steel mills, with interest now being shown for offtake.
Key milestones over the short to medium term include completion of the DFS, finalisation of
offtake and financing and successful permitting.
KEY POINTS
Funded through to production: The JV with Itochu, dependent upon the Stage 2 stake,
means that Allegiance should be fully funded through to production - the upshot of this is that
there should be no more (or only limited ) dilution of shareholders.
Community relations: The Managing Director, Mark Gray, has relocated to Telkwa, which
should prove invaluable in forming and nurturing strong community relations.
Potential for a niche product: The potential Tenas product is such that may be in demand to
fill a niche market as a blending metallurgical coal, and thus attract a premium over other SSCC
products.
Steady news flow: The ongoing activities should result in ongoing positive news flow over
the short to medium term.
VALUATION SUMMARY
We have updated our valuation for Telkwa, with the total risked company value increasing
from A$125.2 million to A$207 million. This results in a risked, base case diluted per share
valuation of A$0.396/share, up from A$0.326/share. However, given that our current valuation
is financed and post tax, and also has Itochu as a JV partner, the previous and current valuations
cannot be directly compared. This valuation is also based on assumptions regarding Itochu’s
final Project stake and the price paid for that.
There is upside by virtue of the potential for future expansions (dependent upon the approval of
all stakeholders) of an already very robust project - this upside has been demonstrated by the
results of the staged PFS as released to the market in July 2017, and would only require minor
additional up-front capital expenditure due to the use of a modular coal preparation plant and
leasing of mobile equipment.
We would expect share price catalysts to be the completion of, and positive results from the
DFS and material progress on offtake, financing and permitting.
Underlyings
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11 BIT STUDIOS SA is a Poland-based company engaged in the game development industry. Its product portfolio includes four games: Anomaly Korea, Sleepwalker's Journey, Funky Smugglers and Anomaly Warzone Earth. The Company produces video games for different devices, such as video consoles, personal computers (PC), and Apple products (iPhone, iPad), among others.

Allegiance Coal

Allegiance Coal is engaged in the acquisition and exploration of coal tenements in Australia.

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