Homeland Energy Group Ltd.
TSX : HEG

Homeland Energy Group Ltd.

April 06, 2010 10:26 ET

Homeland Energy Group Provides Operations Update

TORONTO, CANADA--(Marketwire - April 6, 2010) - Homeland Energy Group Ltd. (TSX:HEG) ("Homeland" or the "Company") provides an update on its operations in South Africa and a report on the progress of a number of initiatives.

The company's Kendal operation has undergone significant change over the last six months, both at the management level and with respect to improving operational throughput and efficiencies. Management and the board of directors are committed to improving the Kendal operation and making it profitable in the short term as a platform for optimized production, growth and improving value for all shareholders of the Company. A major part of the funding required for working capital, operating deficit (as the mine works towards steady state operation) and Q4 2009/Q1 2010 capital expenditure plan was met by funds infused by GMR Energy ("GMR") by way of a shareholder loan and private placement (see releases dated November 18, 2009, December 7, 2009, January 8, 2010 and February 11, 2010). Going forward, the balance of the capital expenditure plan for 2010 is proposed to be funded largely by the cash flows from operations. However, the liquidity situation at the Kendal operation remains in a critical position. Any shortfall in achieving the sales targets and a delay or lower realization of sale of noncore assets would put stress on the company's cash flow position, which in turn would impact the capital expenditure program and create the need to raise additional funds.

The following is a summary of the Company's progress to date:

Rights Offering Prospectus:

In reviewing the Company's preliminary prospectus (see press release dated February 11, 2010), the Ontario Securities Commission raised a question concerning the accounting treatment of the Company's investments in Madic Operation (Pty) Ltd. and Numin (Pty) Ltd. (the "Entities"). The Company has decided to address this in the 2009 year end financial audit. As a result, continued review by the Ontario Securities Commission of the rights offering prospectus will be delayed until after the audited financial statements for the year ended December 31, 2009 have been filed. Please see the Company's press release of March 18, 2010 for additional details on this accounting issue.

Kendal Loan:

Payment of the Debt Service Reserve Account was to commence in March 2010. A waiver has been received deferring this payment to June 2010. Repayment of the loan will commence in June 2010. This loan repayment is anticipated to be funded during 2010 largely by the sale of non-core assets.

Loan Agreement with GMR:

The due date for the loan with GMR, previously announced January 8 and February 11, 2010, has been extended to May 31, 2010

Kendal Colliery:

  • Contract Re Tendering - The Company continues to work diligently to reduce mining and plant costs through re-tendering and the appointment of new contractors. The scope of work for the plant re-tender includes comprehensive Key Performance Indicators ("KPI's") which will guarantee that the contractor performs to optimize the Company's production. This will assist with the production of a consistent quality of coal being delivered to market and will facilitate securing long term coal sales contracts. The Company has to date received tender responses from two companies who have agreed to meet our standards regarding plant availability and product quality. This, along with bonus and penalty clauses, is expected to significantly improve wash plant performance. The process to retender the mining contract has also begun with completion anticipated in Q2, 2010. The Company expects to reduce its mining costs materially through this tendering process.

  • Production - Run of Mine production is at approximately 75% of capacity or 100,000 tonnes per month. This was purposely instituted to reduce mining costs and stocks until such time as the coal sales program and wash plant performance improved. Coal stocks are currently about 50,000 tonnes. Run of mine production will be ramped up again to 150,000 tonnes per month once additional coal sales contracts are secured.

    Investigative studies were completed to reduce the amount of fines produced during mining operations to alleviate associated problems in the washing plant. This has resulted in a 10% reduction in fines, improving the value of product produced.

  • Marketing– A marketing strategy has been developed by the management team under the guidance of KPMG. The strategy comprises market research and the development of a comprehensive domestic customer database for South Africa. The database includes contacts, prices, use of coal and quality requirements.

  • Coal Sales Contracts – the Company's objective is to tie up 70 to 75 % of production through long term contracts with end users, with the balance being sold on the spot market. To date, a 120,000 metric tonne, 12 month contract for large and small nuts has been signed with Envicoal (Pty) Limited ("nuts" comprise the 2-3 inch size fraction). The Company's marketing team is currently engaged in advanced negotiations with several end users, including steel, cement and paper companies, on long-term 12-month and 3 year contracts. All contracts are being negotiated on the understanding that following the initial 1 to 3 year term, they would be extended for an additional 3 to 5 years and possibly life-of-mine. The dialogue with each company is progressing well, with results expected in Q2, 2010.

  • Operations - The phase II expansion project which comprises a Run of Mine tipping and crushing arrangement at the southern side of the reserve, and a 1.4 kilometer overland conveyor with 5,000 tons of surge capacity is under construction. When complete, the project will reduce transport and re-handling costs destined to the plant by approximately US$1.6 million per year.

  • Construction - Homeland is planning to construct an additional wash plant to wash the discards and a crushing and screening plant for crushing and screening raw coal from the number 4 seam in order to make a product that is useable for the South African power generation market. A proposal has been received from a third party for plant construction with Homeland paying on a cost per tonne basis for ownership, operation & maintenance. Ownership would be transferred to Homeland after approximately 3 years. The plant can be commissioned within 6 months from start of construction and will further improve sales and profitability in 2011.

  • KPMG Advisory Services ("KPMG") have been engaged to assist in the optimization of the Kendal operation (see press release dated Nov. 18, 2009). KPMG has worked closely with the Company since the fall of 2009 to compile a marketing strategy, scope of work and KPI's for the Plant tender, compiling the scope of work for the mining tender, development of the Management information system as well as several cost reduction initiatives. KPMG is compensated on a performance/success rate basis.

Eloff:

At the Eloff prospecting right, an area in the northwest quadrant of the property has been identified as a target for potential mining; however, an additional 50 boreholes must first be drilled. In principle, agreement for drilling has been reached with a prominent farmer on the land and a further meeting with any remaining farmers is scheduled to take place shortly. All drilling is planned to be completed by the end of August, 2010, after which the Corporation will assess the results. Results are anticipated in Q4, 2010.

Exploration:

Drilling completed to date on the Dwarsfontein prospecting right is being compiled into a Preliminary Feasibility Study; it is anticipated that the report will be completed before the end of Q3, 2010.

In conclusion, the Company continues to implement a cost reduction program throughout the Company's operations and at the same time to optimize the operations at the Kendal Colliery. Homeland is working with all stakeholders to ensure the Company is able to meet its financial and operating commitments. Nonetheless, shareholders are advised that certain risks exist for the future performance of Homeland's operations. If the Company is unable to meet the objectives set out herein, the Company will face significant pressure on its cash flow in the coming months.

Homeland Energy Group Ltd. (TSX:HEG) is a coal producer with operations in the Witbank area of South Africa. The company also has a large-scale development property in South Africa and exploration interests in Southern Africa. Homeland will continue to seek out interests in additional coal projects in South Africa and neighbouring countries as well as internationally. Homeland is a shareholder in Homeland Uranium Inc., a Canadian uranium exploration company focused on projects in Niger and the United States. Homeland Energy Group Ltd. is currently traded on the Toronto Stock Exchange under the symbol "HEG" with 302,115,756 common shares issued and outstanding. www.homelandenergygroup.com.

Qualified Person

This news release was reviewed by Homeland's Senior Coal Geologist and QP, Graham Gemmell, Pr.Sci.Nat., a Qualified Person as defined in National Instrument 43-101.

Forward-Looking Statements

"This press release contains or refers to forward-looking information, including statements regarding the estimation of mineral resources, exploration results, potential mineralization, exploration and mine development plans, timing of the commencement of operations and estimates of market conditions, and is based on current expectations that involve a number of business risks and uncertainties. Factors that could cause actual results to differ materially from any forward-looking statement include, but are not limited to, failure to convert estimated mineral resources to reserves, the grade and recovery of ore which is mined varying from estimates at the Kendal Colliery, capital and operating costs varying significantly from estimates, the preliminary nature of metallurgical test results, delays in obtaining or failures to obtain required governmental, environmental or other project approvals, political risks, uncertainties relating to the availability and costs of financing needed in the future, changes in equity markets, inflation, changes in exchange rates, fluctuations in commodity prices, delays in the development of projects and the other risks involved in the mineral exploration and development industry. Forward-looking statements are subject to significant risks and uncertainties, and other factors that could cause actual results to differ materially from expected results. Readers should not place undue reliance on forward- looking statements. These forward-looking statements are made as of the date hereof and the Company assumes no responsibility to update them or revise them to reflect new events or circumstances other than as required by law."

Please visit www.homelandenergygroup.com

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