Red Hill Energy Inc.
TSX VENTURE : RH

Red Hill Energy Inc.

April 09, 2008 09:15 ET

Red Hill: Transportation and Economic Assessment Study on Ulaan Ovoo Coal Project in Northern Mongolia Outlines Several Potentially Highly Profitable Transport Scenarios to Various Asian Markets

Red Hill to Commence Pre-Feasibility Study at Ulaan Ovoo

VANCOUVER, BRITISH COLUMBIA--(Marketwire - April 9, 2008) - Red Hill Energy (TSX VENTURE:RH) reports that the recently completed Transportation and Economic Assessment study commissioned by the Company on its 100%-owned Ulaan Ovoo Coal Project in northern Mongolia indicates the project can be developed as a highly profitable mining operation with a potential Internal Rate of Return (IRR) ranging from 24% up to 56%, depending on various transportation and destination scenarios and a Net Present Value (NPV) at a 10% discount rate, of between USD 148.8 million and 509 million depending on transportation method and market targeted. (An increase in thermal coal price of just USD 20/tonne above the conservative estimates used in the report, well under current levels, would increase the NPV (10% discount rate) to greater than USD 1.2 billion and the IRR to over 130%.)

This extensive 70-page study, authored by senior Professors at the Mining Management Department of the Mongolian University of Science and Technology in Ulaanbaatar, Mongolia, assessed economics based on half of the project's estimated recoverable reserves (78 of 142 million tonnes) initially mined at 6 million tonnes per year over 13 years, with potential for a combined 20-25 year mine life. However, considering results of the 2006 Scoping Study completed by Behre Dohlbear (USA), the project could be considerably larger. The Scoping Study identified a total of 208.8 million tonnes of coal resources at Ulaan Ovoo, which would be sufficient to support a 34-40 year mine life. These additional resources were not considered in the current conservative study.

The Ulaan Ovoo Coal Project is in northern Mongolia, 8 kilometers from the Russian border and approximately 120 kilometers west of the Trans-Mongolian Railroad. Mongolia is linked by rail to its neighbors, China to the south and Russia to the north. China is the world's largest coal consumer, and Russia's eastern seaboard is one of the world's largest coal exporting regions. Ulaan Ovoo coal is high quality thermal coal similar to that of Russia's eastern seaboard, which receives some of the highest equivalent coal sale prices in the world.

The current study provides the first-ever detailed transportation analysis specific to the Ulaan Ovoo Coal Project. The study evaluated the economics of eight different transportation scenarios for delivering Ulaan Ovoo coal to the world's largest coal markets. In six of the scenarios, coal would be shipped to the eastern seaport of Vostochny near Vladivostok, Russia, sold and then later independently shipped primarily to Japan, South Korea, and Taiwan (the three largest coal importing nations in the world) as well as to other seaports in Asia and elsewhere in the world. Two scenarios consider exporting coal to China in order to support China's growing demand for thermal coal. The options were further broken down by new railroad construction and the rental or purchase of trains as well as transport in trucks to existing railway stations.

Mr. Ranjeet Sundher, Red Hill's President, stated today that: "The conclusions of the Transportation and Economic Assessment of our Ulaan Ovoo Coal Project are very positive for Red Hill Energy, its shareholders and the people of Mongolia."

Based on the results of this study, the Company now plans to initiate an independent Pre-Feasibility Study for the Ulaan Ovoo Project. Details of this planned study will be outlined in a forthcoming press release. The Company also plans to commission a similar detailed Transportation and Economic Assessment Study for its two other coal projects, Chandgana Tal and Chandgana Khavtgai, which together contain 798.3 million tonnes of high quality thermal coal (329.0 million tonnes Measured, 469.3 million tonnes Indicated) plus an additional 409.0 million Inferred tonnes of coal.

The two Chandgana projects are located approximately 150 kilometres from rail spurs linking to the Trans-Mongolian Railroad.

Specifics of the Ulaan Ovoo Economic and Transport Study are outlined below:

Scenario 1 - New 117 kilometre railroad is built to Dzida Railway Station, Russia. The coal is shipped through the territory of Russia to the port of Vladivostok and sold, enabling it to be resold to third countries.

Scenario 1A - Locomotives are rented from the railroad company.

Scenario 1B - Locomotives are purchased by the mine.

Scenario 2 - A new 120 kilometre railroad is built to Shaamar Railiway Station, Mongolia. The coal is shipped on the Trans-Mongolian Railroad through the railway port of Sukhbaatar at the northern border to Dzida Railway Station, Russia. Shipments continue from there to Vladivostok.

Scenario 2A - Locomotives are rented from the railroad company.

Scenario 2B - Locomotives are purchased by the mine.

Scenario 3 - A new 120 kilometre railroad is built to Shaamar Railway Station, Mongolia. Coal is shipped south along the Trans-Mongolian Railroad to the border port of Zamiin Uud and into China to be sold on the domestic market. Locomotives are purchased by the mine.

Scenario 4 - Trucks are used to transport the coal to the chosen railway station. The existing roads are upgraded to handle the increased traffic.

Scenario 4A - Coal is transported by truck to Dzida Railway Station, Russia, where it is transported by train to Vladivostok for sale at the eastern seaboard.

Scenario 4B - Coal is transported by truck to Shamaar Railway Station, Mongolia, where it is transported by train across the Mongolian border to Vladivostok for sale at the eastern seaboard.

Scenario 4C - Coal is transported by truck to Shamaar Railway Station, Mongolia, where it is transported by train south into China.

For each scenario, the estimated total mining production, operation and transportation costs were compared against the anticipated revenues at an annual production of 6 million tonnes. The results, shown below, indicate that the Ulaan Ovoo Project is profitable in all scenarios.

The most profitable scenario is 4A and would involve truck transport of coal to the existing Dzida Railway Station followed by rail transport to Vostochny Port. This scenario also involves the lowest capital expenditures and has a payback time of only 4 years.

The following table (Table 1) outlines scenarios for transporting Ulaan Ovoo coal to Russia's coal export terminals located on the Russia's Eastern Seaboard. The table can also be viewed on the Company's website at www.redhillenergy.com.



Table 1. Russian Transportation Scenarios
--------------------------------------------------------------------------
Rail Loading Station Dzida, Russia Shaamar, Mongolia
(117 km) (120 km)
------------------------------ ------------------- -------------------
Method of Transport to Station Railroad Railroad
------------------------------ -------------- --------------
Item Unit Road Rent Purhase Road Rent Purchase
--------------------------------------------------------------------------
Scenario 4A 1A 1B 4B 2A 2B
--------------------------------------------------------------------------
Total Capital
Investment million US$ 291.5 335.8 366.5 292.3 337.6 374.1
Annual Sales
Revenue million US$ 420.0 420.0 420.0 420.0 420.0 420.0
Annual Corporate
Income Tax million US$ 32.3 32.9 32.6 26.1 31.2 30.8
Net annual
profit million US$ 98.3 100.3 99.5 79.8 95.2 93.8
--------------------------------------------------------------------------
Production Cost US$/tonne 13.73 13.73 13.73 13.73 13.73 13.73
Transportation
Cost US$/tonne 27.83 27.40 27.55 32.03 27.38 28.69
Total Cost
(includes taxes) US$/tonne 53.60 53.30 53.40 56.70 54.10 54.40
Sale Price (fob) US$/tonne 70.00 70.00 70.00 70.00 70.00 70.00
Net Profit US$/tonne 16.40 16.70 16.60 13.30 15.90 15.60
--------------------------------------------------------------------------
NPV (10%
discount rate) million US$ 509.4 486.1 482.6 364.4 451.6 433.2
Internal Rate of
Return (IRR) Percent 56% 46% 41% 45% 43% 38%
Payback Years 4 4 5 5 5 5
--------------------------------------------------------------------------


The following table (Table 2) outlines scenarios for transporting Ulaan Ovoo into China, the world's largest coal consuming nation. This table can also be viewed on the Company's website at www.redhillenergy.com.



Table 2. Chinese Transportation Scenarios
--------------------------------------------------------------------------
Rail Loading Station Shaamar, Mongolia (120 km)
--------------------------------------------- ----------------------------
Method of Transport to Station
---------------------------------------------
Item Unit Railroad Road
--------------------------------------------------------------------------
Scenario 3 4C
--------------------------------------------------------------------------
Total Capital Investment million US$ 337.6 292.3
Annual Sales Revenue million US$ 300.0 300.0
Annual Corporate Income Tax million US$ 19.6 13.7
Net annual profit million US$ 60.3 42.6
--------------------------------------------------------------------------
Production Cost US$/tonne 13.73 13.73
Transportation Cost US$/tonne 17.79 22.73
Total Cost (includes taxes) US$/tonne 39.90 42.70
Sale Price US$/tonne 50.00 50.00
Net Profit (per tonne) US$/tonne 10.10 7.30
--------------------------------------------------------------------------
NPV (10% discount rate) million US$ 226.8 148.8
Internal Rate of Return (IRR) percent 27% 24%
Payback years 5 6
--------------------------------------------------------------------------


The study used very conservative price estimates of USD 70/tonne for Vostochny Port and USD 50/tonne for the Chinese market. With thermal coal now receiving over USD 130/tonne at Vostochny Port (Argus Media) and Chinese steam coal prices over USD 70/tonne (Barlow Jonker), the project may be significantly more profitable than estimated. Several major Asian economies (Japan, South Korea, and Taiwan) rely almost entirely on imported coal, and China's own coal production cannot keep pace with its rapidly expanding economy.

Exporting coal to China is cheaper than shipping through Russia and there is demand for Mongolian coal in China. In 2007, China imported over 3 million tonnes of coal from Mongolia (Barlow Jonker). Last year, China became a net importer of coal as its growing demand for energy outstripped domestic production. As domestic coal prices continue to rise and the country continues to import Mongolian coal, this scenario may become even more promising.

The high spot prices at Vostochny Port (among the highest in the world) make transporting coal through Russia the most profitable scenario. Depending on the demand for coal in both markets and the transport scenario chosen, it would be possible to sell to both markets simultaneously.

Some highlights from the Economic Assessment:

- The quality of Ulaan Ovoo coal meets the standards for coals exported to the East Asian markets of Japan, South Korea and China.

- Recent increases in world coal prices and the increase in Asian coal demand have created a favourable environment for exportation of coals from Mongolia.

- There is a good opportunity for Mongolia to ship coals through Russia to the eastern seaport of Vladivostok and Vostochny Port.

- Even at these conservative prices, average annual profits of the Ulaan Ovoo coal mine would be around USD 100 million for the three best scenarios.

- One tonne of coal will cost an estimated USD 13.73 to produce.

- The project's NPV (10% discount rate) ranges from USD 364.4 million to 509.4 million for coal exported through Russia, and from USD 148.8 million to 226.8 million for coal shipped to China.

- The scenario with the highest NPV - USD 509 million - would transport the coal in trucks to the nearest Russian rail station and thus minimize the rail expense. This scenario also has the lowest total capital investment and an internal rate of return of 56%.

- An increase in coal price of just USD 20/tonne (well under current levels) would increase the NPV (10% discount rate) to USD greater than 1.2 billion and the IRR to over 130%.

ABOUT RED HILL ENERGY INC.

Red Hill Energy Inc. is a junior resource company trading on the TSX-Venture Exchange under the trading symbol RH. The Company is advancing over one billion tonnes of 100% owned coal from two Mongolian coal basins towards production. Red Hill also has multiple uranium properties and several gold and copper exploration projects located throughout Mongolia. Red Hill has a strategic alliance with Mega Uranium Ltd. to jointly develop its uranium assets and has a full-time office in Mongolia's capital, Ulaanbaatar.

RED HILL ENERGY INC.

G. Arnold Armstrong - Chairman and CEO

Ranjeet Sundher - President

The TSX Venture Exchange does not accept responsibility for the adequacy or accuracy of this release.

Contact Information

  • Red Hill Energy Inc.
    Paul McKenzie
    Director
    (604) 642-COAL (2625)
    Email: info@redhillenergy.com
    Website: www.redhillenergy.com
    or
    Fuller & Associates Ltd. of London, UK
    Nick Fuller
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    +44 (0) 20 7256 5204