Terra Energy LLC, a subsidiary of ASX-listed TerraCom Limited, has signed a binding term sheet with a wholly-owned subsidiary of the Kingho Group, one of China’s largest private coal companies, for offtake of hard coking coal produced from the Baruun Noyon Uul (BNU) Coal Mine in the South Gobi region of Mongolia.

The agreement with Inner Mongolia Kingho Group is for 7.5 million tonnes over 5.5 years with pricing linked to a commercially in confidence mine gate pricing structure, which reflects the recently improved coking coal prices observed in the market.

A definitive sale agreement will be developed in the coming weeks to reflect the binding commercial terms in the term sheet. Payment terms are US Dollars in the form of 100% Irrevocable Letter of Credit issued by first class international bank.

TerraCom’s chairman Cameron McRae said, “This is a significant milestone for the TerraCom Mongolian Business Unit on a number of fronts and is reflective of the broader strong upward price trend for hard coking coal.”

He said among the positive outcomes of the term sheet were:

  • Confirmation of the strong BNU coal brand in China and recognition of the value-in-use of this coal when compared to other hard coking coal available in southern Mongolia and northern China.
  • The point of sale for the coal will be at mine gate which removes Terra from the requirement to be involved in management of the supply chain in Mongolia and northern China. This allows Terra to focus on its core competency of mining whilst its partner Kingho, which is one of the largest transporters and users of coal in northern China, focuses on delivery to customers.
  • The commercial terms of this binding agreement essentially underwrites a profitable Mongolian business unit delivering the cash margins as previously advised to the market and establishes a platform from which further expansion and growth can occur.

Cameron McRae said, “This combined with the significant positive progress made with the acquisition of the Blair Athol Coal mine in Queensland positions TerraCom well to capitalise on the strong coal coking and thermal coal markets through production from BNU hard coking coal mine and Blair Athol thermal coal mine by the end of 2016.”

China Kingho Group was formed in 1996 and is one of largest privately held mining and energy companies in China. Over recent years, the company has developed significant expertise in resources development, coal washing, coal chemical, fine chemicals, clean energy, coal gasification and logistics.

Since being founded in 2000, Inner Mongolia Kingho Group has imported more than 26 million tonnes of raw coal from Mongolia and has the annual capacity to wash 8 million tonnes of coal, produce 4 million tonnes of coke, produce 400,000 tonnes of methanol from coke oven off-gas and produce 200 million coal ash bricks.

TerraCom has fully commissioned the BNU mine in Mongolia and its goal is to become one of the largest and highest quality coking coal producers in Mongolia, providing exceptional value for its steel-producing customers.

The company is also focused on developing two priority projects in Queensland - the large Northern Galilee thermal coal project and the high energy prime thermal coal Springsure project.

In order to support further growth and expansion, TerraCom continues to evaluate cash generative assets for potential acquisition. In this regard, it recently announced that it has reached agreement to acquire the Blair Athol Coal Mine from the Blair Athol Joint Venture, with production scheduled to recommence by the end of the year.

TerraCom is also evaluating the acquisition of a hard coking coal mine in Kalimantan, Indonesia, a 500,000 tonne/annum operation in close proximity to road, barge and port infrastructure connecting it to the seaborne coal market.

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