asx code pzc pan asia corporation limited...ð coal industry participant pt kopex mining contractors...

Copyright © 2012 RM Research Please refer to important disclosures located at end of this report.

Corporate Restructure...Focus on TCM Pan Asia has recently restructured its projects to focus on its 75% controlled TCM

Coal Project. This is highly justified by recent exploration success that highlightsthe continuity of the coal seams contiguously to the north of the expanding coalresource at TCM.

The restructure freed up A$2.6 million in cash that was previously loaned toRanrich Investments Limited allowing Pan Asia to dedicate cash and managementresources to advancing the TCM Project to completion of Feasibility Study.

As part of this, Pan Asia exchanged its right to earn a 50% interest in the BCKPProject for a royalty of US$1 per tonne on all coal sold from the permit, limited to atotal of US$15 million. This could represent an important source of future fundingfor the Company as it progresses its goal to be a major supplier of key resourcesinto the expanding Asian markets.

Resource Inventory Growing The TCM Project (which has also recently been granted “Clean & Clear” status by

the Ministry of Mines and Energy) currently contains 128.8 million JORC tonnesof measured, indicated and inferred resources of high calorific value thermal coal.Significantly, the TCM Project has 50.3 million tonnes in the Measured categoryand another 38.1Mt in Indicated. The Feasibility Study is now advanced withdetailed geotechnical assessment, coal seam gas analysis, civil engineering, minescheduling, and capital and operating cost estimations close to finalisation.

Coal industry participant PT Kopex Mining Contractors (KMC) is conducting theFeasibility Study based on annual coal production of 1.5 million tpa from TCM.Stage 3 drilling, which consisted of 4 boreholes, not only highlighted thecontinuation of the coal seams but identified that the major coal seams (SU andSM seams) were nearer to surface than expected and that the parting between theseams was narrowing to the north. These are significant findings that have thepotential to enhance project economics.

Thermal Coal Outlook Robust The outlook for thermal coal in the South East Asia/China region continues to be

very robust. Due to its proximity to the developing nations in Asia, Indonesia has afreight advantage over the Australian export market. This ensures that demand forthe product remains strong, as long as coal quality is acceptable. TCM Project coalquality analysis thus far suggests that product will be highly sought after.

Price Catalyst

Completion of Feasibility Study at TCM-late June 2012.

Action and Recommendation

Speculative Buy. RM Research believes that Pan Asia’s flagship TCM Projecthas significant potential to increase resources and we have a price target of 81cents based on peer analysis. The latest positive news from drilling to the north ofthe mineral resource suggests further growth in the scale of the project.

Pro-Forma Capital Structure

Sector Materials

Share Price (A$) 0.145

Fully Paid Ordinary Shares (m) 117.6

Opt (ex $0.20-$1.00, exp 12-15) (m) 17.2

Market Capitalisation (dil) (A$m) 17.1

Cash (A$m) 2.8

Directors & Management

Domenic Martino Non Exec Chairman

Alan Hopkins Chief Executive Officer

Luke Martino Non Exec Director

Michael Pixley Non Exec Director

Major Shareholders

HSBC Cust Noms (Aust) Ltd 5.5%

LJM Enterprises (WA) Pty Ltd 4.2%

Analyst

Guy Le Page +61 8 9488 0800

Share Price Performance

21 May 2012

ASX Code PZC

Speculative BuyPrice target: 81 cents

Pan Asia Corporation LimitedFocus zeroes in on emerging TCM Project


21 May 2012

Immediately adjacent to PTArutmin ATA mine

High calorific value thermal coal6,200 kcal / kg (AR)

128Mt of JORC measured, indicated& inferred resource, with significantpotential to increase target(target 200Mt+)

Haul road in (51kms to BatulicinBarge Loading Terminal)

COMPANY BACKGROUNDPan Asia Corporation (“Pan Asia” or “the Company”) is an emerging supplier of energyresources into expanding Asian markets.

The Company’s strategy is to target mid-tier projects that it can add significant value to.

This involves Pan Asia undertaking drilling programmes to prospective areas to generatesignificant JORC tonnages. It then completes Feasibility Studies and ensures all titles/approvals are obtained, so that the project is made ready for development partnerships/offtake agreements.

INDONESIA – THERMAL COALPan Asia’s focus is on thermal coal in Kalimantan, Indonesia.

Its coal interests include:

1) A flagship pre development project (TCM – South).2) High priority exploration (TCM North).3) A pipeline of significant project opportunities.

Our view has always been that the jewel in the crown of the asset portfolio purchased fromInnovation West was the pre-development project, TCM, which is now the main focus formanagement of the Company.

From seafood scraps tocoal developer...

...with a focus onIndonesia

Portfolio has beenrefined to enhancequality and ensurealignment of interests

FIGURE 1: IndonesianProjects (source: PanAsia Limited)

Project portfolio consistsof producing mines, near–term developments andexploration assets

Energy for Asia

...with a focus on Indonesia

FIGURE 1: Indonesia –Kalimantan: #1 Thermalcoal exporting region inthe world (Pan AsiaCorporation Limited)

Our view is still that TCM isthe jewel in the crown

FIGURE 2: PT ArutminATA coal mine adjacent toTCM deposit (Source:Pan Asia CorporationLimited, ASXPresentation (28/03/2012)

PT Arutmin ATA coal mine adjacent to TCM

Close to Asian Markets

TCM: 75% interest (25% Local Partners) (3,440Ha)


21 May 2012

TCM PROJECT

A Production and Operation IUP (licence) was granted for TCM in June 2010. This licencefacilitates the commercial extraction of coal from the 3,440 hectare project area for a period of15 years (renewable). This issuance of this license has allowed the Company to advanceplanning and discussions on commencing mining at TCM. A “clear and clean” status hasalready been granted by the Ministry of Mining and Energy Resources (9/5/2012) whichmeans that the IUP does not overlap on any other concessions.

PT Kopex Mining Contractors (KOPEX) is nearing finalization of a full Feasibility Study intocommencing underground operations at TCM, with a view to produce 1.5mtpa for at least 15years.

The quality of the product from the ATA mine and that expected from the TCM Project is ofvastly superior quality to that of most other operations in Kalimantan. This enhances projecteconomics and product demand.

A maiden resource statement for TCM was released in May 2010, with an indicated JORC-compliant resource of 19.7Mt with an additional 11.0Mt in inferred category. The phase 2drilling programme resulted in the resource increasing to 53.2 million tonnes in total (a 73%increase), with 22.2Mt in Indicated category and the remaining 30.8Mt in Inferred category.This re-estimated resource resulted in a small decrease in coal quality with average calorificvalue of 6,566 kcal/kg (ADB) versus 6,682 previously; ash content rising from 12.09% to13.52%; total moisture increasing from 4.64% to 6.41%; but sulphur content decreasing from1.83% to 1.52%.

In October 2011 an additional 18 boreholes, bringing the total to 35, resulted in a further 115%increase in Resource to a total of 114.6Mt. Enhanced understanding of the complexity of theTCM deposit achieved through the current drill programme facilitated a maiden MeasuredResource of 35.6Mt, as well as a 57% increase in Indicated Resource to 35.1Mt and a 42%increased in Inferred Resource to 43.9Mt.

In May 2012 a further 20 boreholes were added to the database, 4 of which were contiguousand to the north of the previous resource boundary. This resulted in a 12% increase in TotalMineral Resource to 128.8Mt, including a substantial lift in Measured Resource of 41% to50.3Mt.

Equally, if not more, significant was that the 4 boreholes drilled to the north identified that thecoal seams targeted for underground exploitation are shallower than expected and the partingbetween the coal seams narrows.

Further drilling is ongoing with another 6 to 10 boreholes now being drilled in a stage-4 drillprogramme testing the northern continuity of the coal seams. RM Research anticipatesfurther encouraging exploration results to flow through to increased mineral resources. Thisshould sustain a long-life coal mining operation that should underpin Pan Asia’s push into theranks of coal production companies listed on the ASX.

Feasibility Study

Pan Asia, through its major contractor KOPEX, is close to finalizing the Feasibility Study oncommencing underground mining at TCM.

Golder Rock Mechanics Technology, a subsidiary of Golder Associates, has concluded adetailed geotechnical study that has resulted in recommendations on underground minedesign parameters. This study made conclusions on roadway design, panel and pillar widthsand type and frequency of rock support which in turn will be inputs for KOPEX to deriveoperating cost estimates.

CRL Energy, a reputable New Zealand based research and consulting company, has issued afinal Coal Seam Gas Content and Composition Analysis” report. It concluded that the methanelevels in the coal seam gas extracted from samples were rated as “low to medium”. This hasallowed KOPEX to design ventilation and gas drainage systems for the proposed undergroundmine.

The IUP facilitatescommercial coal extractionfor 15 years

Quality of coal from TCM

Measured resourcesincreased by 41% to50.3 Mt

Current JORC Resource is128Mt

JORC now:Measured 50MtIndicated 38MtInferred 40MtTOTAL 128Mt

...Near completion

Methane levels in the coalseam have been rated aslow to medium


21 May 2012

A detailed civil engineering site survey has been conducted over the TCM license area. Thishas facilitated selection of localities for the coal handling and preparation plant, stockpiles andwaste dumps, drainage, roads, offices, accommodation village and other necessaryinfrastructure.

All initial capital and operating cost estimates have already been received and reviewed. It isanticipated that start-up capital and pre-production costs will be in the region of US$190m.

A detailed life of mine (LOM) schedule and mine design is very close to being finalized. It isRM Research’s opinion that the recent positive borehole results outlining a northernextension of coal seams at shallower levels means that this design and schedule will requirere-optimisation. Although this will undoubtedly cause some delay to project start-up it is likelyto result in enhanced project economics.

Production Pipeline

RM Research forecast that Pan Asia will be entering the coal producer ranks within the next12-24 months. We anticipate production from TCM of at least 1.5 million tonnes per annum,with the potential to expand output further by leveraging off the knowledge and experience ofunderground coal extraction garnered from the TCM experience and its relationship withKOPEX. To support this production profile, it will be necessary to raise significant amounts ofadditional funds for capital expenditure and pre-production costs. Alternative funding initiativessuch as attracting mining and logistics experts and potential customers may assist in reducingfuture shareholder dilution.

The Company is targeting the delineation of a resource in excess of 200 million tonnes byDecember 2012, which will result in attributable resources for Pan Asia of more than 150million tonnes.

We note that the production and resource targets outlined by Pan Asia are becoming lessdependent on exploration success. We maintain our view that the achievement of these goalswould provide enormous upside to the Company’s valuation. Indicatively, a Company with athermal coal production profile of at least 1.5 million tonnes per annum and a resource base ofover 150 million tonnes, should command a market capitalisation of several hundred milliondollars.

ESTIMATED OF VALUE & PEER GROUP COMPARISONRM Research hasconducted an analysis ofcoal companies listed on theASX. Based on the closingshare prices of 10 May2012, we have looked at theenterprise value (EV =market capitalisation plusnet debt position) for a groupof four companies and theratio of each one’s EV tototal mineral resourcetonnage, measured andindicated resource tonnageand ore reserve tonnage.The average EV: total

mineral resource is $0.93 per tonne.

Based on Pan Asia’s current mineral resource position of 75% of 129Mt and the applicationof the peer group average, a share price target of $0.81 per share is derived.

The average EV: measured and indicated resource among the same peer group is $1.60 pertonne, reflecting the higher confidence levels of the resource base compared to inferredresources.

Initial pre-productionCAPEX has come in atapproximately US$190million

We are projecting sellablecoal at a rate of 1.5 Mtonnes per month, over amine life of 15years +

RM Research areprojecting attributableresources to Pan Asia inexcess of 150Mt by late2012

FIGURE 4: ASX Listedpeer comparisons -EV/Total Resource tonnes(source: RM Researchinternal modelling).

RM Research is projectinga near term price target of81 cents

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21 May 2012

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Pan Asia is starting to validate thefaith that RM Research had in ahigh level of conversion tomeasured and indicated resourcesin Pan Asia’s total mineralresource after completion of aseries of infill drill programmes andthis is reflected in its current statusof 69% of total resource inmeasured and indicated.

The average EV: reserve isA$9.90 per tonne.

Even a modest ore reservemedium-term target of 25Mt, whichwould be sufficient to support anattributable production profile of1.5Mtpa to Pan Asia over a life of>15 years, would support an EV ofmore than A$165m. This is afactor of around 10 times greaterthan the current market value ofthe Company.

COAL MARKET OUTLOOKWe have lowered ourestimates for ThermalCoal over 2H 2012 onthe back of forecastoversupply in globalmarkets. Moving in to2013 however, risingproduction costs in theUnited States and Chinaare likely to partly offsetsupply increases.

Coal prices ex Indonesiaare likely to come inaround betweenUS$100-US$107 per

tonne from recent prices approaching US$120/tonne (Figure 7).

In the face of weak demand, Trading volumes have also been relatively low in recent monthsmostly due to oversupply from Colombian, U.S., South African and Russian exporters. Coaldemand in Europe in particular remains flat with increasing supplies being pushed into thePacific coal market in turn generating regional oversupply.

Again moving into 2013 we see improving supply – demand balances with rising US andChinese costs likely to put a floor on Thermal Coal prices around US$90/tonne. We also seepotential for supply disruption with rising costs likely to see a number of shutdowns in Chinaand US.

September-December Quarter prices are likely to fall in the region of US$95/tonne from recentlevels around US$102.40. In CY 2013 RM Research considers prices will move towardsUS$110/tonne. In the face of softening Chinese internal demand, we anticipate that Indianimports will surpass China by 2H 2012. The increased projected import tonnages are also inresponse to severe domestic coal shortages.

FIGURE 5: ASX Listedpeer comparisons -EV/Total Measured +Indicated Resourcetonnes (source: RMResearch internalmodelling).

FIGURE 6: ASX Listedpeer comparisons -EV/Total Ore Reservetonnes (source: RMResearch internalmodelling).

FIGURE 7: Asian CoalPrices (source: Platts,Bloomberg, Citi Research& Analysis, 9 May 2012).

Thermal coal prices areprojected to fall to a low ofaround US$95 this yearbefore rising toUS$110/tonne in CY 2013

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21 May 2012

CORPORATEThe last major corporate event was the restructure of the Memorandum of Understanding withRanrich Investments Limited (“RIL”) (29/2/2012) in respect to the BCKP IUP project. Theparties agreed to acquire the interests of PZC in exchange for US4.50 million and a royalty ofUS$1.00 per tonne up to US$15 million. RIL representative Honardy Boentario also agreed tostep down from the board on 7/3/2012. RIL are also to deliver approximately 220,000 tonnesof coal to PZC’s designated buyer. By way of background, RIL and PZC subsidiary InnovationWest Pty Ltd (IW), entered into an MOU in 2010 for the financing of and investment in variouscoal projects. The repayment of the finance was based on RRI making contracted coalshipments to a designated buyer arranged by IW. Since entering into the original financingarrangement, RRI has struggled to provide the scheduled coal deliveries and as a result, PZCthen restructured this and had the principal monies outstanding under the contract repaid.

DIRECTORS AND MANAGEMENTDomenic Martino NON EXECUTIVE CHAIRMANMr Martino is a Chartered Accountant and a former CEO of Deloitte Touche Tohmatsu(Australia). He specializes in corporate finance including mergers and acquisitions, initialpublic offerings and strategic opportunities. He has assisted many high profile companies in adiversified number of industries and is currently Chairman of Synergy Plus Limited (ASX:SNR); a Director of AIM listed Gladstone Pacific Nickel Ltd; Chairman of ORH Limited(ASX: ORH) a mining services company; Chairman of Australasian Resources Limited (ASX:ARH) currently developing a billion tonne iron ore resource in the Pilbara; and a Director ofClean Global Energy Ltd (ASX: CGV), an underground coal gasification company. MrMartino was a founding Director and former Chairman of coal bed methane companies BlueEnergy Limited and Sydney Gas Limited (acquired by AGL Energy Limited, one ofAustralia’s major integrated companies with a market capitalisation of around A$6 billion).

Alan Hopkins CHIEF EXECUTIVE OFFICERMr Hopkins brings over 20 years' experience serving as CEO in resource companies withinternational operations. This includes extensive experience with start-ups and turnaroundsituations managing through phases of exceptional growth. His previous positions includeserving as a founding Australian Executive of international mining engineering group EdwardL Bateman Pty Ltd, CEO of Carnegie Corporation Ltd, CEO of Moonstone DiamondCorporation Ltd as well as CFO of Grants Patch Mining Ltd.

Luke Martino NON EXECUTIVE DIRECTORLuke has over 20 years experience at partner and board level with major accounting firms andis a Director of several private and public companies. He has gained significant experienceand established credibility in the mining & resources, property and hospitality industries. Lukeis the Company Secretary of Victory West Moly Limited, and Sunbird Resources Limited.Luke is also a director of Westzone Enterprises Pty Ltd a property development company thatrecently completed a A$100 million shopping centre. He is the former Chairman of KonektLtd, former director of NuEnergy Limited and a former Director of South Pacific ResourcesCorporation, a Canadian publicly listed company with mining projects in the Republic ofIndonesia. He is also a former Board Member of the Deloitte Australian practice. Luke holds aBachelor of Commerce (UWA), is a fellow of the Institute of Chartered Accountants, a Memberof the Australian Society of Certified Practicing Accountants and a Member of the Institute ofCompany Directors.

Michael Pixley NON EXECUTIVE DIRECTOR

Mr. Pixley has worked as a merchant banker with over 20 years experience in Asia and hasextensive networks and relationships that provide the Group with access to key personnel inthe government, corporate and private business sectors. Mr. Pixley has been a Director ofboth listed and unlisted companies in Australia and the United States. In addition, in 1992 hejoined a prominent Asian group with both listed and private companies having extensivebusiness interested throughout Asia, United States of America and Australia.

The sale of PZC’s interest inthe BCKP IUP has freed upUS$4.50 million in cash andallowed the Company tofocus on TCM

Domenic was formerly CEOof Deloitte ToucheTohmatsu

Alan has over 20 yearsexperience including aperiod as CEO of CarnegieCorporation

Luke has extensiveexperience in mining,energy, property andhospitality

Extensive experience as adirector of both listed andunlisted companies inAustralia and US


21 May 2012

RISK ANALYSIS Sole Project Focus: PZC is very much focussed on TCM however RM Research

believes exploration conducted on this high-quality coal project provides plenty ofexploration upside.

Exploration Risk: Follow up exploration at TCM may fail to outline commercially viablecoal deposits on the project area. We believe this risk is very low at this stage.

Financial Position: The Company has limited cash reserves (around A$2.80 million)which may necessitate an equity raising within the next three to six months. It is likely thatPan Asia will require more funding in the near term, so that it can inject capital into thedevelopment of the TCM coal project. This may cause dilution to existing shareholdersalthough RM Research anticipates that alternative funding arrangements such as projectpartnering and prepayment financing may reduce the likelihood of future dilution.

Commodity Risk: Thermal coal is seen as a less attractive long term solution to theworld’s energy requirements due to its relatively large carbon footprint. RM Researchbelieves that demand for thermal coal is unlikely to diminish in the medium term. This isdue to the introduction of new clean coal burning technology and the necessity for agradual phase out of coal fired power generation due to the limited supply of alternativeenergy fuels such as crude oil, uranium and natural gas and long lead time to production.

Market Risks: Further declines in equity markets may continue to put pressure on juniorresource companies as investors switch out of “risk” into perceived safe haveninvestments such as cash, gold and counter cyclical equities. Our medium term view isthat the risk premium has been eroded for many junior resource companies and we seenear term upside.

Currency Risks: A strengthening Australian dollar (as funds flow back into riskiercurrencies) may make the price of copper and gold in local (Australian) currency termsless attractive. This could have negative influences on Australian copper miners howeverit is more relevant to producing companies.

Sovereign Risk: Indonesia has a history of being a difficult operating environment forforeign companies. Recent changes to the foreign investment rules and regulations havesecured more robust project tenure and more desirable monetary policies.

Coal Quality: The quality of coal delivered is critical to maintaining healthy operatingmargins. The quality of the TCM Project’s thermal coal product is relatively high with goodcalorific values >6,500 kCal/kg on a air dried basis.

Infrastructure Risks: The transportation of coal to suitable loading facilities is critical andany delays could place financial pressure on the Company. We believe however thataccess to existing transport and coal processing infrastructure facilitates appearsfavourable for rapid project development and a quick return on investment.

CONCLUSIONRM Research believes that Pan Asia is starting to derive value from its flagship TCM Projectin Indonesia. The final feasibility study is due to be completed during the current quarter,although we are anticipating a re-optimisation after the recent excellent exploration results tothe north of the current mineral resource.

Although not without sovereign, project execution and financing risk Pan Asia has negatedthis risk by engaging highly reputable and experience technical, marketing and financingpartners/advisers. RM Research envisages substantial upside from current share price levelsand accordingly rates the Company as a Speculative Buy with a near term price target of 81cents.

Pan Asia is highly leveragedto the performance of TCM

The Company has limitedcash reserves and mayrequire additional capital inthe short term

Recent market trends haveseen a switch out of riskassets

Indonesia has proved achallenging investment andoperating environment

The project is well placedadjacent to existingroads/coal processinginfrastructure


21 May 2012

Registered OfficesPerthL2, 6 Kings Park RoadWest Perth WA 6005

Phone: +61 8 9488-0800Fax: +61 8 9488 0899

PO Box 154West Perth WA 6872

Email / [email protected]. rmresearch.com.au

RM Research Recommendation CategoriesCare has been taken to define the level of risk to return associated with a particular company.Our recommendation ranking system is as follows:

Buy Companies with ‘Buy’ recommendations have been cash flow positive for some time and have a moderate tolow risk profile. We expect these to outperform the broader market.

Speculative Buy We forecast strong earnings growth or value creation that may achieve a return well above that of thebroader market. These companies also carry a higher than normal level of risk.

Hold A sound well managed company that may achieve market performance or less, perhaps due to anovervalued share price, broader sector issues, or internal challenges.

Sell Risk is high and upside low or very difficult to determine. We expect a strong underperformance relative tothe market and see better opportunities elsewhere.

Disclaimer / DisclosureThis report was produced by RM Research Pty Ltd, which is a Corporate Aurthorised Representative of RM Capital Pty Ltd (Licence no.221938). RM Research received payment for the compilation and distribution of this report. RM Research Pty Ltd has made every effortto ensure that the information and material contained in this report is accurate and correct and has been obtained from reliable sources.However, no representation is made about the accuracy or completeness of the information and material and it should not be reliedupon as a substitute for the exercise of independent judgment. Except to the extent required by law, RM Research Pty Ltd does notaccept any liability, including negligence, for any loss or damage arising from the use of, or reliance on, the material contained in thisreport. This report is for information purposes only and is not intended as an offer or solicitation with respect to the sale or purchase ofany securities. The securities recommended by RM Research carry no guarantee with respect to return of capital or the market value ofthose securities. There are general risks associated with any investment in securities. Investors should be aware that these risks mightresult in loss of income and capital invested. Neither RM Research nor any of its associates guarantees the repayment of capital.WARNING: This report is intended to provide general financial product advice only. It has been prepared without having regarded to ortaking into account any particular investor’s objectives, financial situation and/or needs. Accordingly, no recipients should rely on anyrecommendation (whether express or implied) contained in this document without obtaining specific advice from their advisers. Allinvestors should therefore consider the appropriateness of the advice, in light of their own objectives, financial situation and/or needs,before acting on the advice. Where applicable, investors should obtain a copy of and consider the product disclosure statement for thatproduct (if any) before making any decision.DISCLOSURE: RM Research Pty Ltd and/or its directors, associates, employees or representatives may not effect a transaction uponits or their own account in the investments referred to in this report or any related investment until the expiry of 24 hours after the reporthas been published. Additionally, RM Research Pty Ltd may have, within the previous twelve months, provided advice or financialservices to the companies mentioned in this report. As at the date of this report, the directors, associates, employees, representativesor Authorised Representatives of RM Research Pty Ltd and RM Capital Pty Ltd may hold shares in Pan Asia.

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asx code pzc pan asia corporation limited...ð coal industry participant pt kopex mining contractors...

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