Modun Resources wins preferred coal briquettes supplier to Mongolian Govt.

Modun Resources (ASX: MOU) is on the road to commercialising the wholly-owned Nuurst Coal Project in central Mongolia, with the company's subsidiary (Modun Resources LLC) being selected as a preferred supplier of coal briquettes to the Mongolian Government.

Modun was one of four tenderers through the Mongolian National Committee for Air Pollution Reduction which sought domestic and international expressions of interest to establish a new cleaner fuel production facility.

The next step for Modun is that the key terms and conditions of the Product Sale and Purchase Agreement will be negotiated directly with the Mongolian Government, with the briquette plant to have an initial name plate capacity of 200,000 to 250,000 tonnes per annum.

Rick Dalton, managing director for Modun, commented: “Discussions with the Mongolian Government about formalising this arrangement into an off-take agreement for the supply of Nuurst coal briquettes will commence immediately."

Mongola is targeting around October / November 2014 to be using the cleaner coal. The government is committed to reducing pollution as evidenced by the Presidential election campaign where it has become a centerpiece of Tsakhiagiin Elbegdorj re-election campaign.

Modun was selected as one of four preferred suppliers as part of the government's 'Clean Air Initiative' to reduce air pollution in Ulaanbaatar.

The company's successful proposal was based on using thermal coal from its Nuurst Project and creating briquettes using a binderless coal briquetting process, which after being independently tested in Australia and Mongolia, have resulted in a substantial increase in energy and decrease in emissions.

This proven technology crushes the raw coal and uses hot gas to dry the coal to extract moisture. The dry coal is then compressed under extreme pressure to bind it together into briquettes. This is a low cost mechanical solution.

This combined with the low costs to run the briquette plant will ensure that Modun can supply a low emission, low cost and high performing product at a competitive price.

Tender process

The tender process sought domestic and international expressions of interest to establish a new cleaner fuel production facility.

The Resolution passed by the Government Committee instructs the Ministry of Environment and Green Development and the Ulaanbaatar City Mayor’s Office to negotiate a Product Sale and Purchase Agreement with Modun for the supply of Modun’s Nuurst Project coal briquettes. Negotiations on the terms and conditions of this Agreement will commence immediately.

Ulaanbaatar ranked No.2 of world city pollution list

Ulaanbaatar is the second most polluted city in the world according to the World Health Organisation, following Ahwaz in Iran.

The majority of the pollution in Ulaanbaatar stems from the burning of low grade, high moisture raw coal in the Ger district and local power stations, with the establishment of the National Committee for Air Pollution Reduction (Committee) set-up to specifically focus on the issue.

With Mongolian energy demands continuing to rapidly grow - with energy demand forecast to grow 1000mw to 4000mw in the next 10 years - the county needs to tackle the pollution issue immediately.

Nuurst coal briquettes within the 'Clean Air Guidelines'

Importantly - the emissions produced from Nuurst Project coal briquettes fall within the 'Clean Air Guidelines' required by the government, which enabled Modun to be successful with the tender and become a preferred supplier.

Dalton added, "We have been through an extensive testing process and we are excited to be the only international company selected as a preferred supplier of coal to the Mongolian Government under their Clean Air Initiative."

Modun is the only preferred supplier who owns their coal reserve, which importantly guarantees coal supply for making the briquettes and greater control, while also placing the company in a position to have compelling economics by reducing the coal acquisition costs over its competitors.

The Modun licenced area is large and has room for the briquette plant to be built on site right next to the coal mine, which will further reduce costs and logistics, with the binderless coal briquetting process a proven technology and a very cost effective way of upgrading coal quality

Another plus for the company is that its relationship with Mongolian Government is strong, with Modun hosting two government delegations to Australia to learn about the technology and continue to have discussions at high levels within the government.

This also places Modun in a position to potentially expand the size of the agreement after the first year.

The Nuurst Coal Project has a 478 million Resource of sub-bituminous coal, and is close in infrastructure - including being six kilometres to existing rail.

Mongolia dependent on coal

Mongolia has vast untapped coal resources and is dependent on coal, due to not having large known gas reserves, while only having limited funds to import power from Russia or China - while there is also a reluctance to be dependent on either of these neighbours for their power supply.

Even with the Mongolian Government continuing to look at alternative options for power generation, the majority of their future power needs will be from a coal source, which is why the government is keen to identify a “clean coal” solution.

Modun is positioned to tap this demand.

Over the last few years the government have trialled semi-coke briquettes, however the results have been unsatisfactory from a government point of view, resulting in the Committee seeking expressions of interest to establish a new cleaner coal production facility earlier this year.

Public support for Modun

Modun has received and been encouraged by public support for the company displayed by the Office of the Mongolian President, along with the various representatives of the Mongolian Government in recent weeks.

Dalton added, "we look forward to working with the government to help achieve the objectives of the Clean Air Initiative."

Key terms of the Product Sale and Purchase Agreement

The key terms and conditions of the Product Sale and Purchase Agreement will be negotiated directly with the Mongolian Government.

Modun was provided with the following information that was used to help support its proposal:

- The briquette plant is to have an initial name plate capacity of 200,000 to 250,000 tonnes per annum;

- Total demand for domestic raw coal usage in the Ger District is between 700,000 to 900,000 tonnes per annum; and

- The pricing for domestic briquettes approved by the Committee for last year's winter was between MNT150,000 to MNT170,000 per tonne (approx. $US105 to $US119 per tonne) (source: www.air.president.mn). Pricing for next years and future winters are to be negotiated as part of the Product Sale and Purchase Agreement.

Analysis

This is a significant achievement for Modun as the only international company selected as a preferred supplier of coal to the Mongolian Government under their Clean Air Initiative.

The differentiating factor for Modun's Nuurst Coal Project over other thermal coal companies within Mongolia is its access to infrastructure - including being six kilometres to existing rail and 35 kilometres from 220kv main power grid, which provides for low CAPEX when compared to other projects.

Another plus is low production operating costs of $US13/tonne, with a 2.3:1 ROM stripping ratio.

This combined with the low costs to run the briquette plant will ensure that Modun can supply a low emission, low cost and high performing product at a competitive price.

The size of Modun's resource also opens up options of export to China as well as any growth in domestic supply.

This is a valuation enhancing win for Modun in the short and medium term.

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