Saturn Minerals 18 April2012 6


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Saturn Minerals 18 April2012 6

  1. 1. Leaders in Corporate ResearchSaturn Minerals Inc CDN$ 23c 18 April 2012Third coal discovery points the directionforwardShare Price: 23c Saturn Minerals Inc (SMI, TSX-V. SMK, Xetra®) is a mineral exploration specialist whose major focus is on the Cretaceous coal play in Eastern Central Saskatchewan and Western Manitoba, in an area known as the Pasquia Hills. Saturn has started to release results from its winter drill program. On the face of it a relatively small amount of actual drilling has been achieved however that drilling has resulted in a new coal find of significant thickness and provided data that strongly points to a short to mid term direction for the exploration program. It should be said at the outset that a second warm winter on the Saskatchewan/Manitoba border has resulted in reduced, aborted12m High: CDN$0.380 or amended exploration programs for most operators in the area.12m Low: CDN$0.160 Saturn was not excepted though its early decision to useMarket Cap: CDN$18.1m helicopter access and support rather than trust the backwoods logging tracks to survive the meltwaters was proven a soundShares in Issue: 82,222,251 choice. It should be noted that the last two winters have been 82,222,251 fully diluted subject to the well-documented La Nina phase of the El Nino Effect. The El Nino cycle is expected to revert to a neutral stateCash: CDN$0.5m cash (31 December 2011). about now (April 2012). That should be good news for those wishing for a lasting hard freeze in North America this coming winter.TSX-V Code: SMI Saturn’s discovery, the third coal find in three years drilling, is a composite thickness of 26m starting at a depth of 15m and endingSector: Mining at 45m. It has been christened Thunder. In the context of theMarket: TSX-V district finds so far, this is very shallow and on the thicker side. It is certainly of a bulk mineable thickness and taken with the depths ofWebsite: the other finds seems to imply a general trend of ‘deep’ interceptsCompany Contact: +1 604 685 6989: in the west to shallow in the east. Deep here is a relative term, but a strip ratio of 5-10 in the west drops to 2 in the east of the district.Description: Canadian energy minerals Coal quality tests (proximate analysis) are underway but the visualexplorer and First Nations partner with description and deportment of the coal and any partings throughextensive properties in a new coal province the 26m intercept strongly suggest to us that it will be comparable to earlier finds and therefore of a saleable quality.Analyst: Ian Falconer The new find is on the same geophysical trend as the KarolinaTel: 020 79293399 discovery on the Overflowing property but around 2km away. The company has named the N-S oriented feature the OverflowingEmail: Trend and it is along this 8km long trend that we expect Saturn to focus its coal exploration efforts going forward. We feel that this discovery should provide strong enough support for the company’s geological model to commit to a full resource estimation program next winter and we look forward to hearing both confirmatory coal quality results and that significant financing has been achieved. Group Declared Adjusted Adjusted P/E Divi YieldY/E Sales Profit Profit EPS ratio $m $m $m $ c. %2009A 0 (2,327,000) (0.05) N/A N/A N/A2010A 0 (873,000) (0.02) N/A N/A N/A2011E No Estimates2012E No EstimatesHardman & Co. Leaders in Corporate Research 1Tel: +44(0)20 7929 3399
  2. 2. Leaders in Corporate ResearchSaturn Minerals Inc 18 April 2012What This Discovery Means for Saturn’s Coal ProgramApart from the obviously good news that 26m of coal has been found starting at 15m depth thisannouncement has other implications for coal exploration in the region.Shallowing to the EastCoal discoveries seem to be getting generally shallower to the east. This reflects the macro-sedimentary environment across the region and suggests that at a regional scale sediment influx wasbroadly east to west. That doesn’t mean to say that local sediment flow could not have been in anydirection but, as can easily be seen in a winding river, water may appear to flow back up a valley for ashort distance before it curves back towards the sea. This simple finding has broad exploration andproduction implications that can be distilled into two very simple mining parameters, the Strip Ratio –that amount of overburden that must be removed compared with the thickness of the saleable coalseam below it and the starting depth – the minimum depth at which coal occurs. These parametersprovide simple but effective first pass comparative tools.The lower the strip ratio and the shallower the depth, the better the likely economics of a coal deposit.Paleao-Valley Geophysical Model Effective In TrendGeophysics is proving a reliable guide towards coal discovery in some situations, but not necessarilyan accurate definer of resource quantity or quality. This is no big news to geological explorers buteach new resource district has a balance between the use of discovery tools like geophysics andgeochemistry, and evaluation tools such as drilling of cores and running of downhole logs. Both themassive Karolina discovery and the new Thunder discovery were located by geophysical anomalywithin the larger anomalous trend. A good analogy might be a string of pearls hidden under a blanket.The sense of touch (geophysics) can tell that there are distinct entities along a defined line, but can’tresolve the reason for the line (the string) or the nature of the entities (the pearls could be cultured orwild, or even just glass beads). Only direct observation of the physical entities themselves can resolvetheir nature.Karst Pit Geophysical Model Needs Refinement Outside TrendIn other situations i.e. outside the linear trend, now named the Overflowing Trend, geophysicalevidence alone is not providing the same degree of reliability. This may reflect the very differentcharacteristics of Saturn’s dual provenance sedimentary model with the paleo-valley/graben modelproviding the district-scale basin available for sedimentation and the micro-environmental changesdefining localised coal deposition rates and preservation. Outside that relatively conventionalerosion/sedimentation environment the hypothesised karstic pit depositional environment lacks theconsistency of surficial erosion and instead provides a collapsed surface upon which acceleratedclastic sedimentation may occur where it intersects with surface drainage or organic sedimentationmay occur where there is little intersection with surface drainage. The potential uneven collapsedepths dependent on different amounts of cavernous dissolution, followed by highly localised infillmechanisms make the karstic pit environment much more variable. Potentially they contain vastthicknesses of continuous coal, but not every pit will contain the same coal, from the same time or ofthe same quality so targeting just the karstic pits is a higher risk exploration strategy than following thetrend. It is unknown if more than one trend exists in the district. The other operators in the PasquiaHills District have not released sufficient evidence to evaluate.Stratigraphy Not Yet EstablishedThe new discovery holes did not reach Devonian basement. In fact they did not reach deep enough torun the down-hole geophysics tools required for stratigraphic correlation logs to be produced. Thereare other ways (mineralogical, paleontological, isotopic and geochemical) to establish a stratigraphiccorrelation but they are very time consuming and expensive compared to the relatively quick andsimple down-hole logs. Until we know where in the coal sequence this new discovery lies drawing aline between discovery holes is not a valid exercise. In other words we can’t say that there is anycontinuity between the Karolina and Thunder discoveries or whether we would expect to find another50+m of coal below the current max depth of the hole at Thunder (~50m).Hardman & Co. Leaders in Corporate Research 2Tel: +44(0)20 7929 3399
  3. 3. Leaders in Corporate ResearchSaturn Minerals Inc 18 April 2012But if It WereIf the top of Thunder corresponds to the top of Karolina the average dip is around 1 in 70, effectivelyflat where mining engineering is concerned, but enough slope to affect in-pit hydrogeology. Thismeans that the coal can be pre-drained by gravity without any complex engineering, and anyaccumulated water easily pumped a short distance into water handling facilities or re-injected down-dip. This makes working conditions in-pit easier and reduces the residence time required on stock-piles to air-dry production. Or if coal-to-liquids manufacture is the end-use then it allows a consistentmoisture content to be achieved, again reducing time and cost impacts from the manufacturingprocess. Put at its most basic, close to flat-lying coal is the best coal to mine.Flat-lying and Thick Is Best All RoundThe coal intersected is described as “three thick seams and a series of thinner, lower coal seamstotalling 25.85m in thickness”. This description suggests that the majority of the 26m thickness is abulk mineable target with or without washing, though coal quality tests will be required to confirm ouranalysis. Over 5m thickness, less than 50m depth and flat-lying would be a great coal mining targetwhere present over a decent areal extent. Such pits are easily engineered to be geomechanicallystable. The machinery can be scaled to a desired production rate and static handling plant can besited in optimum positions rather than compromising to be able to store large amounts of overburden.Not only is mining easier, but once mining has been completed remediation is easier and quicker thanwith deeper, steeper pits.Going ForwardSaturn has stated that it is considering contracting out a re-analysis of its geophysics data to provide asecond opinion and possibly generate a new set of targets. This may have significant value indistinguishing which of the karstic targets is likely to hold coal and which is more likely to hold clasticsediment (muds, sands & gravels).We feel that the next order of the day should be an all out effort to define a maiden resource. Such aprogram will inevitably provide extra data to support or challenge the current geological model but itshould also materialise the effort and investment put into the prospects so far.Having situated the Overflowing Trend prospects in the palaeo-environment as some of the shallowestpossible, shown that multiple geophysical anomalies of the same order as the Thunder discovery existalong that 8km long trend, proven that almost 90m continuous thickness of coal can be present alongparts of that trend and that the company has the support and involvement of the local First Nations, itseems the right next move to systematically test the dimensions of the coal discoveries as a matter ofpriority. It is hard to think how much further the advance of the project can be de-risked.The petroleum exploration program is running separately, and is generally a summer activity due tothe larger scale of drilling requiring that large amounts of drilling fluid be stored (without freezing). Wediscussed that program in our previous note.AnalysisSaturn continues to deliver excellent results for its shareholders and ample evidence that a substantialcoal resource may exist on its licenses. It now needs to buck the current Canadian junior trend andraise funds for a substantial drill program next winter. It seems to us that the potential rewards areeasy to see, so lets look at the exogenous risks.Weather riskThe last two warm winters have forced shortened drill programs due to problems gaining access tosites, not activity on the sites themselves. This can be mitigated to a great degree by using helicopteraccess and by careful site selection. However some compromise is likely between ideal drill locationand a drill site that is both accessible and useful. The Canadian reporting code allows for drilling to beexecuted on an irregular pattern, so that shouldn’t really be a problem in todays computerised world.Hardman & Co. Leaders in Corporate Research 3Tel: +44(0)20 7929 3399
  4. 4. Leaders in Corporate ResearchSaturn Minerals Inc 18 April 2012What is need is an extended period of stable cold weather, the normal for the Saskatchewan/Manitobaborder region. While we can’t predict the weather, the appropriate experts say that the La Nina/El Ninoclimatic variation is due to have subsided by the coming winter and with that in mind, to see theextremes experienced in the northern hemisphere in winter 2011/12 would be exceptionally unusual.Beyond that there are other solutions, drill pads & rigs that specially made for heli-access, driving newor replacement roads through the muskeg or even just waiting another year.So the risk of the weather getting in the way of exploration is a chimera. At most it increases costs orcauses a delay. It will not prevent exploration.Commodity riskCoal is currently on the up globally. Indonesia’s move to restrict exports so that its own industry has alonger supply life is a hedge on a national sale against coal prices rising. If enacted as stated it musthave knock-on effects in the Pacific seaborne thermal coal market. Southern and South Eastern Africais an area of current expansion both of coal mining and coal-fired power with long term export dealsbeing struck with Indian power generators and steel makers, while the Indian coal and steel sectorsare mired in corruption & controversy. The whole sub-continent is struggling with power shortages,and Pakistan in particular even though it sits on vast low grade coal reserves.The long term and continuing use of coal is accepted by all major and credible studies, most of whichsee global use of coal increasing until 2050. The global market for thermal coal is forecast to fall after2050, but there are sub-trends apparent before then such as the increase in coal quality (reduction inash and sulphur content) due to stricter emissions standards leading to the higher use of coal washingand lower use of brown coals. So while the use of ALL coals may be forecast to fall after 2050 that isnot true for the higher quality coals. Their use will continue to rise until substantially after 2050 unlessthere is a major technological breakthrough. In Saskatchewan the natural expression for that would bea move away from the southern brown coal fields (currently firing Boundary Dam) towards the higherquality coals seen in the Pasquia Hills area, though that move is somewhat mitigated by the likely useof captured CO2 in Enhanced Oil Recovery. The use of metallurgical coal is not forecast to fall untilglobal population starts to fall, for which there are no firm forecasts before 2100. There is no realisticalternative in iron & steel production.Urban demand for liquid fuels will drop in middle and high income markets (Europe, Japan, Coastal NAmerica, Australasia, Coastal S America, Coastal China & Urban India) and in many cases will be metby increased high quality thermal coal use. However we do not believe that vehicular electrification willimpact liquid fuel consumption in intra-continental North America, Australasia, Africa, South America,Rural India, Central & SE Asia or the vast majority of Russia for the foreseeable future. These marketswill continue to be dominated by incremental increases in efficiency of ICEs and the vehicles theypropel.There is a credible argument that a technology that abates CO2 emissions from coal-poweredgeneration as well as industrial CO2 production such as steel, providing a permanently captured anduseable CO2-based product (such as a long-life building material) will encourage the long term use ofcoal in the energy systems of all nations, not just those committed to reduce carbon emissions. Theother by-products of large-scale coal use (gypsum, fly ash, heavy metals, etc) are all being used incommercial or pre-commercial enterprises providing environmentally positive and often profitableoutcomes for raw materials previously seen as waste or pollutants. Indeed in the UK we are nowstarting to see old fly ash being mined to recover remainder fine coal and be processed as a filler forplastics ( and in Australia fly ash is being used for magnesium metalproduction ( We believe that the elimination or use of fly ash as aproduct of electricity generation would bring coal with CCS into a credible environmental comparisonwith any other electricity generation mechanism in a full life-cycle analysis (i.e. one that includes themining phase for all its components and credits its by-products).Hardman & Co. Leaders in Corporate Research 4Tel: +44(0)20 7929 3399
  5. 5. Leaders in Corporate ResearchSaturn Minerals Inc 18 April 2012So our belief is that commodity risk in coal is on a national policy level (or in the case of the EU aneconomic bloc level). Where research is being conducted into the use of coal, solutions to its negativeaspects are being found. In the most liberalised markets the profitable solutions will prevail, in morestructured markets some encouragement of environmentally benign or beneficial uses of coal & itsproducts can be expected. Policy makers will decide and it is for coal producers and users to convincethem that their product can and will be used to best economic effect, whether that be by replacingcrude oil as a raw material for transportation or by using all the products of combustion.Financing Risk – we are still in the grip of tight credit terms but good projects will always attractinvestors. A trend towards vertical integration of commodities supply chains suggests that majortraders, power generators and steel makers will provide a higher proportion of start-up finance for newprojects than historically. We cannot discount the idea that in areas where CO2 can be captured andused for Enhanced Oil Recovery, oil companies may wish to secure strategic supplies of CO2 arisingfrom power generation or that in the face of decreasing returns from macro-scale oil refineriesdownstream oil companies may diversify into Coal-to-Liquids production on a regional scale.ConclusionIt is now time for Saturn to push forward with a resource estimation drill program. If there are anymajor pieces of preparation work left outstanding but required to de-risk such an investment we can’tsee them.Hardman & Co. Leaders in Corporate Research 5Tel: +44(0)20 7929 3399
  6. 6. Leaders in Corporate ResearchSaturn Minerals Inc 18 April 2012DisclaimerThe conclusions and opinions expressed in the investment research accurately reflect the views of the first named analyst. Hardman & Co providesprofessional independent research services and the companies researched pay a set fee in order for this research to be made available. While theinformation in the research is believed to be correct, this cannot be guaranteed. There are no other conflicts of interest.Neither Hardman & Co nor the analysts responsible for this research own shares in the companies analysed in this research note. Neither do they holdany other securities or derivatives (including options and warrants) in the companies concerned. Hardman & Co does not transact corporate finance andtherefore does not earn corporate finance fees. It does not buy or sell shares, and does not undertake investment business either in the UK orelsewhere.Hardman & Co does not make recommendations. Accordingly we do not publish records of our past recommendations. Where a Fair Value price isgiven in a research note this is the theoretical result of a study of a range of possible outcomes, and not a forecast of a likely share price.Our research is issued in good faith but without legal responsibility and is subject to change or withdrawal without notice. Members of the professionalinvestment community are encouraged to contact the analyst concerned.This research is provided for the use of the professional investment community, market counterparties and sophisticated and high net worth investors asdefined in the rules of the regulatory bodies. It is not intended to be made available to unsophisticated individuals. In the UK, any such individual whocomes into possession of this research should consult their properly authorized professional adviser, or undertake one of the ‘self certified’ sophisticatedinvestor tests that are available.This research is not an offer to buy or sell any security.Past performance is not necessarily a guide to the future and the price of shares, and the income derived from them, may fall as well as rise and theamount realised may be less than the original sum invested. For AIM and PLUS shares, it is the opinion of the regulator that risks are higher.Furthermore the marketability of these shares is often restricted.This document must not be accessed or used in any way that would be illegal in any jurisdiction.In some cases research is only issued electronically and in some cases printed research will be received by those on our distribution lists later thanthose receiving research electronically.The report may be reproduced either whole or in part on condition that attribution is given to Hardman & Co, and on condition that Hardman & Coaccepts no liability whatsoever for the actions of third parties in this respect.Hardman & Co is not regulated by the Financial Services Authority (FSA).© Hardman & Co. Hardman & Co 4-5 Castle Court London EC3V 9DL United Kingdom Tel: +44(0)20 7929 3399 Fax: +44(0)20 7929 3377 www.hardmanandco.comHardman & Co. Leaders in Corporate Research 6Tel: +44(0)20 7929 3399