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Beacon Hill Resources – Initiating coverage with a recommendation of Speculative Buy at 12.125p with a 33.3p target price

Beacon Hill Resources is building a portfolio of near term production projects in the steel feed business with interests in coal and magnesite. The management has assembled a portfolio of two projects which are Minas Moatize and Tasmania Magnesite and have entered into a Memorandum of Understanding (MoU) for 1165L, each of which has the capacity to add significant value. The flagship project is the Minas Moatize coal mine in Mozambique which was acquired last year. Here they are currently producing from a small underground mine which is coming to the end of its economic life, but the team is in the midst of constructing a far larger open pit operation with the potential of producing 2.35 million tonnes annually of saleable coking and thermal coal. All necessary finance is in place for this project where production is expected to begin in January 2012. Already an offtake agreement for the coke is in place with Global Coke, which represents Indian steel making interests, and the company is optimistic about making further such deals for the export thermal coal.

Crucially the company has a real foothold in the emerging global coking coal potential of the Tete Province in Mozambique where coal production was halted after independence was gained from Portugal in the 1970s. Active in the area are majors such as Vale and now Rio Tinto, following its £2.5 billion bid for Riversdale Mining, which seems to have radically changed the opinion of investors towards coal mining in Mozambique. Ahead of this corporate move, the country was probably seen as a bit of a frontier land with the attached political risk. But now that perception seems to have been readjusted and Rio Tinto’s investment in the Tete Province serves to underline that the coal is of good quality; and in a stroke should have improved investors’ perception of Beacon Hill. The company has demonstrated that Minas Moantize is a substantial coal resource with a decent coking coal fraction but getting the product to the port is not that straight forward. As work on refurbishing the railway system has been slower than expected, the management has sensibly been developing a trucking operation that can used in tandem to ensure coking coal gets to the port to be sold.

During the past eighteen months coal prices have doubled and this buoyancy looks likely to continue with a surge in demand expected from China and India by 2015. China is already a big importer and last year net coal imports rose 29% year-on-year. In 2010, that country consumed 540 million tonnes of coking coal but only produced 380 million tonnes. It has recently been reported in the press that China’s demand for coking coal could rise by 180 million tonnes annually by 2015 to meet the requirements of the country’s burgeoning steelmaking industry. With China’s coking coal production only expected to climb by 80 million more tonnes a year over this period, experts are talking about a demand shortfall of the order of 100 million tonnes. At the same time the ramifications of the Fukushima nuclear disaster in Japan may see demand for coal rise as governments seek to replace planned nuclear facilities with coal plants.

In the Tete Province in Mozambique the company also has a Memorandum of Understanding on the nearby Licence 1165L to acquire a non-JORC compliant resource of 450 million tonnes along with the potential for coking coal, which is four times as big as the Minas Moatize project. There’s little doubt that Tete is fast turning out to be one of the world’s largest undeveloped coking coal regions and so it’s no surprise to see the majors there in force. Vale has just opened its new $1.7 billion mine at Moatize with production capacity set to rise to 11 million tonnes a year. Also opening this year should be the joint venture operation between the Australian mining group Riversdale (now Rio Tinto) and Tata Steel where production is set to hit six million tonnes a year by 2016. At Licence 1165L, Beacon Hill is commencing development and certainly any operation could potentially be a significant play in the region

Project number three is a magnesite project which is the third largest JORC-compliant resource in Australia and so also begs attention. Magnesite is processed into MgO which is a key raw material in the manufacture of steel. The Chinese are the main suppliers but resources in China seem to be running low which has been good news for the price of this important mineral. Beacon’s asset is the Arthur River Project in where the mining lease was granted in August 2010The group is in the process of completing a scoping study and it is the intention of the Group to bring the project towards the feasibility stage in 2012. Such swift progress is possible as, apart from a JORC compliant resource, both the prefeasibility plan and metallurgical study have been completed. Currently a drilling programme is underway with the goal of defining additional resources and helped in developing the mine plan. Early results point to the potential of there being more magnesite than the 39 million tonnes that has already been defined.

Investors could be well be witnessing the birth of a substantial steel feed concern that is on the verge of a strong cash flow whilst is building up an enviable position in the Mozambique coal industry supported by its partner Global Coke. The next twelve months could begin to see the true potential of the company’s two other projects unfurl which would allow a fuller valuation to be placed on Beacon Hill Resources. We recommend the shares as Speculative Buy at 11.0p with a target price of 33.3p.

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