Hillsborough Resources Limited

Hillsborough Resources Limited

August 13, 2007 05:00 ET

Hillsborough Resources Issues Financial Results for Second Quarter of Fiscal 2007

VANCOUVER, BRITISH COLUMBIA--(Marketwire - Aug. 13, 2007) - Hillsborough Resources Limited (TSX:HLB) advises that it has now issued its interim financial results for the three month and six month periods ended June 30, 2007.

Hillsborough incurred a net loss of $71,836 during the second quarter of 2007, compared to earnings from continuing operations in the second quarter of 2006 of $707,839. Included in the 2007 loss, however, is a $215,000 provision for Hillsborough's share of the start-up losses for the quarter of Peace River Coal Limited Partnership ("Peace River Coal") plus the effect of unrealized foreign exchange gains. Hillsborough's net loss for the first six months of 2007 was $262,312, including a provision of $393,000 for its share of Peace River Coal's start-up losses. Hillsborough's earnings from continuing operations for the three month and six month periods ended June 30, 2006 were $707,839 and $1,969,858 respectively, and include the effects of a $979,200 gain in the first quarter of 2006 from a recovery of future income taxes.

At the Quinsam mine, demand for coal from the domestic markets has remained strong through the first half of 2007, reflecting the strength of the regional cement industry which is the dominant segment of Quinsam's domestic market. Revenues during the three and six month periods ended June 30, 2007 were $5,786,222 and $14,714,928 respectively compared to $8,725,328 and $13,527,665 respectively for 2006, and include the revenues from international shipments that occurred in the first quarter of 2007 and the second quarter of 2006. Quinsam's average revenue per tonne of coal sold during these periods was $52.99 and $53.02 respectively for 2007 compared to $51.59 and $50.88 respectively for 2006, with the increase arising from the realization of price increases under Quinsam's long-term domestic contract renewals effected over 2006, partially offset by the impact of a stronger Canadian dollar on sales denominated in US dollars which include certain domestic contracts in addition to international market shipments.

Contribution from sales during the three month and six month periods ended June 30, 2007 were $631,715 and $1,881,676 respectively, yielding contribution margins of 11.0% and 12.8%, compared to contribution from sales in the same periods of 2006 of $1,723,780 and $3,120,448 and contribution margins of 19.8% and 23.1% respectively. The lower contribution from sales in the second quarter of 2007 is partly attributable to there having been no international shipments in the quarter, whereas such shipments did occur in the first quarter of 2007 and the second quarter of 2006. However, both the lower contribution from sales in 2007 and the lower contribution margins are also reflective of production difficulties that have been experienced at the Quinsam mine over the course of the year to date. As noted in the first quarter report, adverse weather conditions over winter had impacted production levels and resulted in significantly higher costs per tonne of coal sold during the quarter, though production had returned to normal levels in February and March. Further production difficulties were experienced commencing in April, related primarily to persistent mechanical difficulties with a newly-deployed roof bolter and also to the impact of certain faulting on underground mining conditions, and these difficulties continued throughout the quarter. Quinsam has been working to resolve the roof bolter issues, and the manufacturer has now agreed to exchange the unit for a new replacement at no cost to Hillsborough, with the new unit expected to be deployed in mid September.

Quinsam Development Activity

During the second quarter of 2007, a re-assessment was made of the surface potential at Quinsam. As a result, mine plans are currently being developed for an open pit operation on Quinsam's 7 South block, which is 3 kilometres from the coal preparation plant by existing road and is adjacent to the 5 South block which Quinsam is currently mining underground. Based on Quinsam's NI 43-101 compliant reserve and resource estimate as of December 31, 2006, an estimated 2.5 million to 3.5 million tonnes could be recoverable under a five-year plan to produce 500,000 to 700,000 tonnes per year, at favourable costs using area mining techniques. Development and operation of the 7 South pit will also facilitate acceleration of the reclamation of several old open pits. Area mining of 7 South will enable backfilling of these old pits as well as 7 South itself, resulting in a substantial reduction in overall surface disturbance at Quinsam. Quinsam is now seeking regulatory approval to commence taking a bulk sample in the last half of 2007 to produce a trial cargo, and has also commenced the process of seeking a mine permit amendment for the proposed open pit.

Hillsborough also announced on August 6, 2007 the signing of a memorandum of understanding with a major international energy company under which, subject to certain conditions being met, a coal off-take agreement would be entered into providing long-term, fixed and/or floating price contracts for the purchase of thermal coal for delivery into the international market. As part of the off-take agreement, certain portions of the contracted volume totaling $31.5 million would be pre-paid, with the proceeds used to fund increased production at the Quinsam mine, including the cost of modifying the Middle Point barge-loading facility to a ship-loading facility for post-panamax size vessels, as well as other general capital requirements of Hillsborough.

In addition, a total of $5 million will be advanced to Hillsborough by way of a subordinated unsecured note, convertible under certain conditions into common shares of Hillsborough, to be used for general corporate purposes and also for drilling, testing and engineering necessary to confirm the feasibility of development of the 7 South block and Quinsam North, being the two main potential sources for increased production at Quinsam. It is anticipated that $2.5 million of the principal would be advanced immediately upon completion of the definitive agreement, with the remaining $2.5 million advanced upon receipt of permitting for the 7 South pit operation.

Further details will be developed and disclosed as the definitive agreement is finalized, and completion of the proposed transaction remains subject to a number of conditions, including but not limited to completion of the definitive agreement and regulatory approval.

Wapiti Property

At the Wapiti thermal coal property in northeast BC, an NI 43-101 compliant technical report was completed and filed in February 2007 providing an updated resource estimate of 80.1 million tonnes measured and indicated plus a further 35.2 million tonnes inferred. The large resource tonnage offers the opportunity for mine development based on the export market as well as the regional industrial markets both in British Columbia and Alberta, and Hillsborough is in active discussions with potential customers in those markets. The regulatory approval process is under way for a bulk sample to enable shipment of trial cargo to potential customers, with the objective of taking the sample starting in the second half of 2007. Hillsborough is continuing the process of obtaining regulatory approvals for a Wapiti thermal coal mine in support of its market development activities, and over the second quarter of 2007 has also completed an initial internal assessment of underground mining potential on the Jackpine block within the Wapiti property indicating favourable underground mining conditions and costs that would be competitive with surface mining. While initial development would likely be based on area mining, an underground mine plan could be incorporated into the overall property development.

Peace River Coal

In January 2007, Peace River Coal commenced operations at the Trend mine. The coal preparation plant that had been modified in late 2006, including addition of a fines wash circuit, was commissioned, and the first shipment for the Japanese market was successfully loaded during March. Shipments of coal, including trial cargos, into international markets continued through the second quarter, yielding sales proceeds to Peace River Coal of $16.3 million for the quarter. The acquisition and deployment of a leased aluminum train set was completed in June of 2007, improving the efficiency with which coal can be transported to the Ridley Terminal port facilities at Prince Rupert. With improvements made over the first six months of 2007, plant operations have enabled targeted throughput capabilities to be achieved. The ramp-up of raw coal production has progressed more slowly than planned due to issues related primarily to equipment and labour availability, though Peace River Coal is working to address these matters. Labour availability is an issue for the overall northeast British Columbia region, however, and must be addressed over the longer term.

The Trend mine is currently in the pre-commercial production phase, ramping up pit and plant operations to commercial production levels and undertaking market introduction initiatives to develop a long-term customer base. Peace River Coal is therefore capitalizing most expenditures, net of sales proceeds, as mine development costs and the pre-commercial production phase is expected to be completed by the end of the third quarter of 2007.

As previously announced, Peace River Coal had provided its partners with a 2007 program and budget totaling $53 million, and participation by Hillsborough in its pro rata share of that program would have entailed a net funding requirement of approximately $11.2 million. Participation in any proposed program and budget by the partners is not obligatory under the terms of the limited partnership agreement, with each partner able to elect to participate partially or not at all but subject to dilution provisions. Hillsborough conducted an evaluation of the investment merits of participation in the 2007 program and budget, and from that analysis determined that the cost at which the necessary finance could be arranged was too high relative to the investment merits. Hillsborough accordingly elected to not participate in the 2007 operating program and budget. Agreement has also now been reached to return to Hillsborough $1.95 million which had been held within Peace River Coal from its formation for application to future cash calls. Based on recalculations of the partners' participating interests as advised by the general partner of Peace River Coal, and reflecting the return of the $1.95 million, Hillsborough's 20% interest in Peace River Coal was diluted to approximately 14.1% effective August 1, 2007.

About the Corporation

Hillsborough Resources Limited is a coal mining company that operates the Quinsam underground thermal coal mine in Campbell River, British Columbia, serving the local and west-coast U.S. cement industry. The Company is a limited partner in the Peace River Coal Limited Partnership, which has substantial metallurgical coal properties both in production start-up and under development near Tumbler Ridge, British Columbia. In addition, the Company is developing the proposed Wapiti thermal coal mine in the same region. Hillsborough also holds the Bingay Creek metallurgical coal property located in the Elk Valley region of southeast British Columbia.

This release may contain forward-looking statements regarding the Corporation's business or financial condition. All statements in this release, other than statements of historical facts, that address future production, reserve potential, exploration drilling, exploitation activities and events or developments that the Corporation expects are forward-looking statements. Although the Corporation believes the expectations expressed in such forward-looking statements are based on reasonable assumptions, such statements are not guarantees of future performance and actual results or developments may differ materially from those in the forward-looking statements. Actual results could differ materially from those described in this news release as a result of factors including but not limited to the following: adverse exploration or development results; adverse due diligence findings; re-assessments of corporate or development objectives and requirements; additional technical developments and considerations; unexpected increases in the costs of producing coal, changes in international coal or transportation markets, a rapid change in the value of the Canadian dollar particularly with respect to the US dollar, a fundamental slow down in the North American, Asian or worldwide economies; and other factors. Investors are cautioned that any such statements are not guarantees of future performance and that actual results or developments may differ materially from those projected in the forward-looking statements.

Contact Information

  • Hillsborough Resources Limited
    David Slater
    President & C.E.O.
    (604) 684-9288
    (604) 684-3178 (FAX)
    Website: www.hillsboroughresources.com
    CHF Investor Relations
    Cathy Hume
    (416) 868-1079 ext. 231
    (416) 868-6198 (FAX)
    Email: cathy@chfir.com