ZYL versus the rest of the worldCan't say I wrote this, a mate...

ZYL versus the rest of the world

Can't say I wrote this, a mate far better at FA did...

WHY ANTHRACTIE?

The highest quality end of the coal spectrum due to highest carbon content and lowest impurities. It's used as a redundant in the processing of specialized metallurgical ores, including iron ore, chrome ore, manganese ore, titanium and in the general market for the manufacture of iron and steel in the metallurgical industry.

Because of its met coal cousins' abundance, most smelters, which require met coal feed, have been designed to use coking coal as the flux. However recent developments in smelter technology developed in Japan have developed smelting technology which primarily uses anthracite as the feed and have achieved efficiency gains of up to 30% over traditional smelters.

Glencore/xstrata have been busily converting their South African smelters across to this technology suggesting that if they were to shut down capacity due to market downturns they would shut in the tradition coke fired smelters first.

Unlike the more traditional markets like thermal or coking coal with established markets with tonnages being dictated by global demand which in turn is driven by global growth, anthracite market is driven by the ability to supply - in an over simplified synopsis "if you can guarantee supply you'll find the buyers".

The other benefit of anthracite over other coal types is that it is a smokeless burning coal ensuring that it is far more environmentally acceptable than burning thermal or brown coal to create energy.

MARKETS/PRODUCERS

It's hard to get hard information on anthracite markets however from digging around it appears that total global production is about 600mtpa. However most of that's low grade and consumed in domestic power stations. Only about 40mtpa finds its way to world export markets and of that about half is likely to disappear as Vietnam and China become net importers.

The largest world producer is China. They produce about 450mtpa and much of that is consumed by their energy producers, suggesting that the quality is at the lower end of the spectrum. They are a net importer and their ability to increase production would be limited by supply, given that their availability at these production levels is now just 22 years.

Vietnam have been an important export market supplier, however by 2015 domestic demand is expected to ensure that they transition from exporter to net importer.

Ukraine produces about 50mtpa. Their production is largely consumed by its power industry.

Russia is one of the few suppliers that's expected to grow their export market. It's almost impossible to get accurate data on this market however they appear to export about 10mtpa. Their industry is constrained by large distances need to ship product to port and extreme climatic conditions due to the harsh Siberian winters where most of the resources are based.

NEW PRODUCTION

It would appear that the main player in the export markets going forward will be Russian-based Siberian Coal.

Siberia have a resource of 330mt and expect to export about 10mt this year. Siberia's ability to increase production dramatically appear to be constrained by distance to port (2000km!) and the harsh Siberian winters.

Both of these difficulties combine during the harsh winter months to ensure that the quality of the coal is compromised during the transport process.

Canadian Fortune is in the process of developing a large deposit in BC. This will require them to construct a 125km rail lie to connect to the main line. Distance to port is around 330km and they hope to export about 3mtpa.

Another Canadian-listed company East Coast is expecting to commence production from 2 Ukrainian based mines. This will produce largely into the domestic market, however 1mtpa may be available for export. They expect to produce at $38 per tonne which is extremely low. However when I consider they logistics I'm sceptical, they are a long way from port and are mining at a depth of 800mtrs.

The rest of the expected new supply is minimal.

Unfortunately information of new supply out of Vietnam China and North Korea is hard to determine however all new production from China and Vietnam is expected to be used domestically and North Korea sell all its production to China from what I can determine.

MARKET SUMMARY

The market is only constrained by supply. Developments in smelting technology which favour anthracite as a feed ensure that if you can guarantee supply you'll sell all you can produce.

New supply is constrained and Vietnam, who has been until now one of the main exporters, is expected to become a net importer.

Much of the known world supply is in the lower grade category ensuring that it is only suitable as power station feed.

Many of the major untapped deposits suffer from the tyranny of being a long distance from port in difficult climatic locations and in many cases are at great depth ensuring large cap costs to bring them on line.

COMPARING ZYL

When we compare ZYL's resource base with those of the major players ours compares favourably. ZYL'z total resource is about 300mt, Siberian has 320mt and Fortune has I think about 225mt.

ZYL's assets are either within trucking distance of rail lines or have rail lines running through its properties. All projects are with 200km of port or ports.

Their various assets allow them to meet various different users' specifications due to varying qualities of the product that will be produced from their different operations.

They aren't a one operation company. They now have 3 separate projects.

With the exception of Siberian the most bullish production projects of the new supply seems to be constrained to about 4mtpa. While our current feasibility studies are based on around 2.5mtpa, ZYL have expressions of interest to take far more than that and I think most people that know the company expect that ultimately production will be many multiples of that.