July 27, 2015

Key takeaways from SCC briefing

We attended yesterday a briefing conducted by Semirara Mining and Power Corp (SCC) on the recent mining accident and the following are the salient points of the discussion:

 - Contrary to speculation, the company claimed that landside was caused by the collapse of the backfill (overburden materials) at the mouth of the northern portion of the pit and not from seeping seawater. This appears consistent with the initial findings of a Department of Energy probe.

 - The circumstances behind the recent incident were different from what occurred in February 2013, when a landslide at the Panian mine’s western wall resulted in five confirmed deaths. The remains of five missing workers were never recovered. The 2013 landslide was triggered by water seeping through cracks behind the wall, thus causing the soil to become unstable. Water inflow is currently being controlled through the use of cut-off walls and dewatering wells.

 - Management is confident that the suspension will be resolved even before its inventory runs out. The company noted that it is in full compliance of the safety measures initiated after the 2013 accident and has even instituted additional measures beyond what is required. Following last week’s incident, the SCC has already outlined additional safety measures that it will implement, including the installation of a slope stability radar (which was delivered last Saturday), and will be presented to the DoE.

 - In the worst scenario that SCC will not be able to continue to mine Panian, SCC said it is ready to shift mining operations to its new mine – Narra (formerly Bobog). Narra is located one kilometer east of the current Panian pit. Pre-stripping and mine development work at Narra were ongoing prior to the suspension of operations. Coal extraction could begin in two months although the volume will not be substantial at the onset.

 - SCC said the Panian field will be fully exhausted in one and a half (1 1⁄2) years with reserves estimated at 15-16m MT. Narra has coal reserves of 40m MT but a recent company disclosure to the Exchange dated 26 June indicated that based on the most recent study for Narra, “the coal reserve in this mine site is not 40m MT but 69.7m MT”. Another site – Molave (formerly Himalian) has a potential of more than 80m MT.

 - Power generation production of SCC’s 2x300 MW Calaca coal-fired power plant (Calaca 1 and 2) is not expected to be greatly affected by the incident. While Calaca 1 (300 MW) has only two weeks of coal inventory left, SCC still has on hand around 800m MT of saleable coal. Annual coal consumption for one 300 MW unit is estimated at 1m MT. Meanwhile, SCC has on stock 1m MT of unwashed coal (equivalent to 700m of washed coal) that is reserved for use by SCC’s greenfield power plants, Calaca 3 and 4 (2 x 150 MW). Commissioning of Calaca 3 began early this month while Calaca 4 is targeted to begin commissioning runs in last week of July.

 - Data from the Wholesale Electricity Spot Market (WESM) show that Unit 1 started offering power on 7 July, ramping this up to as high as 120 MW on 22 July. Not surprisingly, reliability runs remains erratic with the unit down the whole day yesterday. Meanwhile, SS said it is looking to further expand its power generation business by an additional 300 MW with the company targeting to sign EPC contracts for Calaca 5 and 6 (2 x 150 MW) before year end.

 - The company said it can bring in imported coal from Indonesia in as short as ten days. The total landed cost of coal is currently estimated to be between 3-5% more expensive that SCC coal. Current power supply agreements provide for full pass through of the cost of coal. Although SCC can import coal as a last resort, management said there are no plans yet to import coal since it believes that the suspension will be lifted before its inventory runs out.

Our take: Although it is difficult to speculate on how the authorities would decide on this issue, we believe a protracted suspension of SCC’s entire mining operations is unlikely. Indeed, in yesterday’s briefing, management said it is believes the DOE would probably remove the suspension order in stages as the accident area is located away from SCC’s active areas (one kilometer to the east and 400-500m to the west). In the worst scenario that SCC will not be able to continue to mine Panian, SCC may shift mining operations to Narra. – WealthSec