24 October 2007
Managing Director's Address To Annual Meeting
First Public Annual Meeting
I would like to welcome you all to Pike River Coal's first annual meeting as a public listed company. It is great to see
more than 70 shareholders have taken the opportunity to attend this meeting and the subsequent tour of the mine site, in
what should be an interesting and informative day.
We have made significant progress over the past year. This includes:
- a successful IPO in July 2007 raising $85 million from New Zealand and Australian investors
- construction of a 12km access road, including 7 bridges, to the tunnel entrance
- construction of the tunnel to 1634 metres, 71% complete. I am pleased to say we had a new daily record of 12 metres
last week
- substantial progress with mine site infrastructure including establishment of power to the mine, delivery of the
slurry pipeline for coal transport and construction of buildings
- construction of the mine equipment, which is on track for delivery when required
- and lastly, recruitment of a further 11 senior staff
On the downside we have incurred a capital cost increase, mostly associated with increased tunnelling costs. I will
touch on this later, but firstly turning to the hard coking coal market.
Coal Market and Prices
The Pike River mine is poised to benefit from an expected jump in hard coking coal prices next year. Demand from India
and China continues to be highly influential. For the first time ever, China has this year become a net importer of both
thermal and coking coal. Pike will produce a premium hard coking coal used in the steel making process. Market observers
are currently expecting this type of coal to sell at about US$120-125 per tonne in the next Japanese Fiscal Year
(commencing 1 April 2008). This compares to the current price of US$96 per tonne. Longer term coking coal prices from
2010 onwards are also expected to lift due to ongoing strong international demand.
Even at full production of 1 million tonnes per year, Pike is a relatively small player in the international market. 135
million tonnes were traded internationally in 2006. However, Pike premium coal has some very good selling properties.
This includes an ultra low ash content (ash is a by-product) and high fluidity (useful for binding coals when making
coke) which has resulted in strong demand from international steel mills and coke makers. Seventy percent of the first
three year’s production has already been sold by Pike River under long-term contract, subject to agreement on the sales
price.
All coal produced by Pike River will be exported and is expected to be sold in US dollars. A lower kiwi dollar is
therefore better for the company once in production. The New Zealand dollar has remained stubbornly high over the past
year; due largely to high local interest rates. However, New Zealand trading banks are forecasting an easing of the NZD
against the US dollar next year. Higher New Zealand and Australian exchange rates relative to the US dollar also
typically translate to higher international coal prices as the Australian coal producers dominate the supply of product.
Mine Development Update
Tunnel Construction and Capex Budget
Good progress is being made with construction of the tunnel which will give us access to the underground coal deposit.
The tunnel has been more than doubled in length in the past five months since May 2007 to 1634 metres (71% complete) by
international contracting firm McConnell Dowell. There is a further 666 metres to go and we expect to hit first coal at
the end of April 2008. That is about one month later than previously forecast, although there is still potential for
some slippage of 1 to 3 months. However, that is an inherent risk with any tunnel construction project.
Whilst rates of tunnel advance have been good, the tunnel rock itself has proven to be more fractured than expected in
May 2007. Due to the difficult surface topography– this is “tiger country” - it was not possible to drill the tunnel
alignment with test holes before construction started. Accordingly, our expert geological advisors have had to rely on
rock outcrops and surface mapping to predict tunnel rock conditions. The possibility of more difficult conditions was
allowed for in project costings, but not to the extent encountered. In fact, based on tunnelling experience to date, we
now expect nearly all the tunnel to be in the more expensive rock classes, rather than a maximum of 40%.
In September 2007, the Board approved an $11 million (6%) increase in the mine development budget. This takes the
approved budget to $185 million (excluding the working capital budget of $33 million which is unchanged).
Overall, the benefit to Pike River of higher coal prices is expected to more than offset the increased mine development
costs.
Infrastructure
Significant progress has been made with other key mine site infrastructure in the past 5 months. This includes:
June 2007 – a $19.2 million coal preparation plant contract signed (within budget) with Brightwater-PEAT Limited
July 2007 – an $11.6 million electrical supply contract to the mine completed (within budget) by Westpower and
Transpower
August 2007 – the administration and engineering buildings completed (where we are now) by Evan Jones
August 2007 – final formation of access road to mine site completed.
A major piece of infrastructure required is the coal preparation plant. This plant will receive all of the raw coal from
the mine through a 10.6 kilometre coal slurry pipeline. That coal will be “washed” at the plant to remove diluting rocks
and deliver a clean, dewatered product into stockpiles for haulage to the port at Greymouth. Site preparation, detailed
design and hazard reviews for the coal preparation plant have been completed. To recover several months lost time in
starting construction, certain plant pre-fabrication work will be done 'off-site’.
Construction of the plant will commence late October and be completed in May 2008 in time for first coal processing.
Mining Equipment
In the first year of mining, coal will be recovered by three mining machines. These machines construct tunnels in the
coal seam to provide access for the high pressure water cutting system, which will be implemented in the second year of
mining. The first machine, a $3.8 million roadheader manufactured by Waratah Engineering in Australia, is due for
delivery to the mine site in November 2007. This roadheader was on display at an international mining exhibition in
Sydney (NSW) in early September and attracted a lot of attention for its design and safe modes of roof support
installation. The two companion continuous miners, also being manufactured by Waratah at a combined cost of $9.0 million
are currently en route from initial fabrication in Germany to Waratah. Delivery of the continuous miners to the mine
site is scheduled for January 2008.
The mine has also taken possession of its first two flameproof load haul dump machines, two personnel transporters and a
general purpose underground tractor in the past couple of months. These will be followed in the coming months with
several more similar machines.
Mine Design and Production
Considerable work has been undertaken by the Pike engineering team in the past few months on detailed planning for the
ventilation shaft and pit bottom area. The pit bottom is the 'underground heart' of the mine. The results from 3
recently drilled boreholes have usefully confirmed our geological model for that area. Production in the 12 months after
hitting first coal is forecast at 240,000 tonnes (year ended 30 April 2009), building to 1 million tonnes in the
following 12 months (year ended 30 April 2010).
Health and Safety
A high standard is demanded in health and safety by the company and from our contractors. In the year ended 30 June
2007, 119,000 hours had been worked on the mine development with 7 injury events (1 for every 17,000 hours worked). It
is pleasing that none of the injuries concerned was classed as serious harm.
Recruitment
Pike has appointed a highly experienced management team with over 180 years of combined coal mining experience.
Recruitment of the general mine work force is now a major activity. Over the next six months, fifty staff will be
recruited in time for first coal. In a noteworthy initiative; a New Zealand first, Pike has organised a vastly quicker
testing process with New Zealand qualification and training authorities, for employees with overseas qualifications.
This accelerated the process of obtaining formal recognition of a senior mine engineer's qualifications by 3-4 months
and will benefit Pike and other mining employers going forward.
Transport
Transport is an integral part of the mine operation. Pike River coal will be transported by the West Coast Coal Company
Limited (WCCC) consortium by road to Greymouth and moved on two purpose built self propelled vessels to Port Taranaki
for export to India, Japan, Brazil, Europe and other markets.
A shipbuilding contract for the vessels has been signed by Jebsens Kristian Rederi AS (WCCC member). Commencement of
ship and port construction is pending completion of WCCC's financing arrangements. Jebsens have agreed terms of ship
financing, subject to final documentation and Jebsens board approval. Port Taranaki Limited (the WCCC lead member), has
agreed in July 2007 with its shareholder, Taranaki Regional Council, that subject to the satisfactory completion of a
public consultation process, the shareholder would support Port Taranaki debt financing via provision of a guarantee.
WCCC and Pike River have extended the expected date for completion of ship and port financing to 15 November 2007 (or
such later date as the parties agree).
As flagged in the IPO prospectus, several alternatives for transporting the first 6 months of coal exports, in the
region of 60,000 tonnes, are being explored. This includes shipping by barge from Greymouth or railing through Solid
Energy's transport chain to Port Lyttelton.
Financial
The company made a loss of $657,000 in the year ended 30 June 2007, which should be viewed in the context of our current
pre-production activities. $57 million was invested in the mine development during the year ended 30 June 2007, and a
further $20 million since, taking the total amount invested since 1 July 2005 to $105 million.
The company completed a successful IPO in July 2007 which raised $85 million (prior to costs). This allowed repayment in
July 2007 of $18.5 million short-term loans from shareholders used to fund mine development costs.
Westpac Bank has been mandated on an exclusive and best efforts basis to arrange debt funding of $65 million and is to
work with other banks experienced in mining finance to fund those facilities. This debt would be available once the
tunnel intersects the coal seam, expected to be April 2008. Pike River is working with Westpac to progress introduction
of a second bank, with the objective of finalising debt financing by the end of January 2008.
New Zealand Oil & Gas has agreed that at any time after 1 January 2008, if Pike River requests funding to complete the development of the
mine into first coal production, having expended the $85 million raised under the IPO, NZOG will provide equity funding
or other financial support of up to $25 million to Pike River on usual and reasonable ‘arms’ length terms and conditions
which we have yet to agree. We are also evaluating alternative means of bridging the funding gap until bank debt is
available.
Carbon Emissions Trading Policy
The Government has announced its carbon emissions trading policy in September 2007. Whilst the policy is yet to move
through the legislative process, importantly, coal exports are to be exempted from the emissions trading scheme. To do
otherwise would be to penalise the New Zealand coal industry compared to our international competitors and we are
pleased to see this matter being treated rationally.
Community and the Environment
The company plays an increasingly important part in the local Grey District community. Pike will become the Grey
District’s fourth largest employer once the mine is running at full production. At that time the local spend on labour,
services, power and transport will be approximately $35 million per annum. We are pleased to sponsor many worthy local
organisations and events. This includes main sponsorships of the West Coast Search and Rescue bus and the Moonlight
Community biathlon. Pike's growing workforce and families are also very active in local sporting and community events.
Pike has implemented several significant environmental programmes. One of these is a pest control programme where thirty
five kilometres of tracks are currently being established in the local catchment areas to service four hundred and sixty
rat bait stations and stoat kill traps. The objective is to significantly reduce predation which has seriously harmed
native birdlife including the locally found blue duck (whio).
As those of you here today will have observed, construction of access to the mine and facilities has required very
careful engineering and construction to minimise environmental impacts. Much consultation has been undertaken with the
Department of Conservation, local councils, iwi and other interest groups to achieve this result. We wish to thank those
parties, and the various companies involved in construction for meeting the high standards set. We intend to ensure
these high standards are maintained in underground mining operations.
Closing Comments
In summary, progress with the mine development is proceeding satisfactorily, coal prices are expected to improve
significantly next year and there is an expectation that the New Zealand dollar will weaken against the US dollar over
the next year. The company’s share price has picked up in recent weeks to its current level of approximately $1.00. As
we get closer to first coal production, risk continues to be removed from your investment. I would expect this to
translate to an improved share price – but that is in the hands of the market! I wish to express my thanks to the Pike
management team and staff for their efforts over another very busy year and for what I am sure will be an equally busy
and productive year ahead.
For a view of the Powerpoint slides accompanying this release please visit:
www.pike.co.nz – latest news, or by emailing vikkis@pike.co.nz.
Thank you.
ENDS