FORTUNE MINERALS ANNOUNCES UPDATED DEFINITIVE FEASIBILITY STUDY FOR MOUNT KLAPPAN METALLURGICAL COAL PROJECT

11/04/2010

Robust economics verified for new rail haulage strategy to port of Prince Rupert

LONDON, ON, Nov. 4 /CNW/ - Fortune Minerals Limited (TSX-FT) ("Fortune" or the "Company") is pleased to announce positive results for the updated definitive (*bankable) Feasibility Study for its 100% owned Mount Klappan anthracite coal project in northwest British Columbia ("B.C."), Canada. This study, by Marston & Marston Inc. ("Marston"), indicates very attractive economics for the project using a railway development strategy with haulage of coal products by unit train to the port of Prince Rupert on the existing Dease Lake Rail Line.  This railway transportation strategy is now commercially feasible for the development as a result of new capital and operating cost quotes that were recently received from the Canadian National Railway Company ("CN"), which operates on the Dease Lake Line to Minaret, 150 km south of Mount Klappan.  Notably, the railway right-of-way and roadbed has already been largely constructed between Minaret and Mount Klappan and provides an existing transportation corridor that can be easily upgraded.  The railway provides a simple and scalable transportation solution for the project that allows Fortune to capitalize on Mount Klappan's world class resources.

The Company continues its active dialogue with all project stakeholders and is particularly pleased with the ongoing support for the project from Federal and Provincial governments as well as local communities.

HIGHLIGHTS OF THE STUDY:

  • In-situ Reserves of 102 million tonnes in the initial pit for the Lost Fox deposit;
  • Minimum 20-year mine life at the 3 Mtpa initial planned production rate;
  • Larger 2.8 billion tonne global resource for future expansion;
  • Production of premium PCI coal used to manufacture steel in an expanding global market;
  • Ability to diversify into other metallurgical coal products;
  • Initial capital (1st 4 years) of C$ 768.4 million for the mine, surface facilities and railway;
  • Cash cost FOB loading vessel in Prince Rupert US$ 104.79 / tonne (C$ 110.30 / tonne);
  • Pre-tax IRR of 25.4%, and 8% discounted NPV of C$ 1.0 billion at base case price of US$ 175 / product tonne PCI;
  • Pre-tax IRR up to 60.2% and 8% discounted NPV up to C$ 3.8 billion at coal price sensitivities up to US$ 300 / product tonne of PCI;
  • Pre-tax IRR increases to 32.0% and 8% discounted NPV to C$1.2 billion at the base case PCI price with third party contribution of railway capital sensitivity of 50%.

Fortune has engaged Deloitte & Touche Corporate Finance Canada Inc. ("Deloitte") as the Company's financial advisor to pursue strategic alternatives for the development of Mount Klappan (see Fortune news release, dated June 30, 2010).  Deloitte is assisting Fortune by identifying potential strategic financial partners for the project and evaluating potential transactions.  Fortune is pleased with the progress of discussions to date with Tier-1 strategic investors and expects this announcement to provide positive momentum to the process.

(*A bankable / definitive Feasibility Study is a comprehensive engineering and economic analysis of a project (typically prepared to +/- 15% precision) that is used by financial institutions to determine the credit worthiness of a proposed development for project financing.)   

GENERAL INFORMATION:

Fortune retained Marston to prepare an update to its 2005 and 2008 definitive Feasibility Studies for the Mount Klappan anthracite metallurgical coal project (see Fortune news releases, dated October 17, 2005 and August 7, 2008).  This new study updates the capital and operating costs for the project based on a railway development strategy after CN provided capital and operating cost quotes for the railway that are commercially competitive with trucking the coal to the port of Stewart. 

The Marston Feasibility Study update assesses only the economics for the Proven and Probable Reserves contained in the initial Lost Fox mine for the Mount Klappan project.  The study is based on an open pit mine and wash plant producing 3 million tonnes per annum ("Mtpa") of clean coal, consisting of a premium 10% ash ultra-low volatile pulverized coal injection ("PCI") product used to manufacture steel. The study contemplates the upgrade and extension of the Dease Lake Railway Line for haulage of coal products by unit train to the port of Prince Rupert for export.

COAL LICENSES AND LOCATION:

Fortune owns more than 15,000 hectares of contiguous coal licenses located 330 km northeast of the port of Prince Rupert in northwest B.C.  These licenses straddle the B.C. railway right-of-way and roadbed, which provides road access to the site from Highway 37

RESOURCES AND RESERVES:

The Mount Klappan project consists of 4 resource areas referred to as the Lost Fox, Hobbit-Broatch, Summit and Nass deposits.  Collectively, they contain Measured Resources of 107.9 million tonnes, Indicated Resources of 123.0 million tonnes, Inferred Resources of 359.5 million tonnes and 2.213 billion tonnes classified as **Speculative Resources (see News Release, dated June 22, 2004).  The in-situ and PCI product reserves were calculated from the resources for the Lost Fox deposit area for the 2005 definitive Feasibility Study and remain the same.

MINERAL RESERVES FOR THE LOST FOX DEPOSIT AREA
IN-SITU COAL RESERVES (Mt) 10% ASH PRODUCT RESERVES (Mt)
  Proven     Probable     Total     Proven     Probable     Total  
85.6 16.1 101.7 51.6 9.2 60.8

The Mount Klappan mineral resource and mineral reserve estimates were prepared in 2004 and 2005, respectively by Marston in compliance with National Instrument 43-101.  Richard Marston, P.E. is the Qualified Person responsible for the estimates.  **Speculative Resources estimated in 2004 are no longer used under NI 43-101.  Further information regarding the Mount Klappan Mineral Resource and Mineral Reserve estimates is available from the Company's disclosures under the Company's profile on the SEDAR website at www.sedar.com.

MINING:

The reserves for the Lost Fox deposit will support clean coal production of 3 Mtpa over a minimum mine life of 20 years.  The mine will utilize conventional open pit mining using 177 tonne class trucks, with 26 m3 hydraulic shovels for waste rock mining and 17 m3 backhoes to mine the coal from 10 metre benches.  The life of mine average in-pit strip ratio is 6.6 bank cubic metres ("bcm") of waste rock / tonne of coal, with a clean coal strip ratio of 11.6 bcm / PCI product tonne.

PROCESS PLANT AND ON-SITE INFRASTRUCTURE:

Coal from the Lost Fox deposit will be processed in a wash plant constructed at the site for the production of a 10% ash, ultra-low volatile PCI product for the overseas steel industry.  The Mount Klappan wash plant will use standard processing methods of heavy media separation, cyclones and froth floatation with annual washability yields ranging between 47 and 70%, averaging 57.3% for the 14 coal seams that are economic in the initial open pit mine.  The plant is configured to produce other premium anthracite products in the future, including charge carbon for electric arc steel manufacturing, coke replacement and metallurgical processing, as well as sinter.

PCI COAL QUALITY
10% Ash Product (air dried basis)
Specification Mean
Residual Moisture 0.9%
Ash 10%
Volatile Matter 6.5%
Fixed Carbon 82.6%
Sulphur 0.5%
Gross Calorific Value 31.1 GJ / t
Gross Calorific Value 7423 kcal / kg
Gross Calorific Value           13,352 Btu / lb
HGI 40-45
Size 0-50 mm

A camp will be constructed to accommodate the work force of approximately 470 employees, primarily from nearby communities, and working on a rotational basis. Power supply for the process plant, camp and other facilities would be generated by diesel with an installed load of 11.7 megawatts.  However, the B.C. Government is extending the electrical grid north along Highway 37 to Bob Quinn Lake, and if the grid is extended to Mount Klappan, it has the potential to reduce operating costs for the project.

RAILWAY:

CN operates on the Dease Lake Line under a long-term lease with B.C. Rail between Fort St. James and Minaret to its current terminus, 150 km south of Mount Klappan.  This existing railway requires upgrades to the track and sub-grade to accommodate fully loaded unit trains (263,000 pound / car) with efficient haulage of coal to the port.  The railway right-of-way and roadbed has been substantially completed beyond Minaret to Mount Klappan.  Capital of C$ 317.8 million has been estimated to upgrade and extend this railway and is included in the initial capital for the project with Fortune paying this cost.  The Feasibility Study contemplates that Fortune will lease six, 127 car train sets with capacity of 95 tonnes / car to transport the production of 3 Mtpa to the port with the cost of leasing included in the operating costs. Rail transportation provides a simpler and scalable alternative compared with trucking that was previously contemplated. 

PORT:

Railway transportation provides access to the port of Prince Rupert, which has a modern government-owned, bulk handling facility with capacity for up to 16 Mtpa that is underutilized and is capable of loading Cape-size ocean vessels.  This terminal also provides an opportunity to blend and split cargos with coal from other Canadian producers and is up to 36 hours closer to Asia than other west coast ports.  Collectively, these make Prince Rupert the preferred point of export for potential customers.

ECONOMIC ANALYSIS:

The Marston Feasibility Study update uses a base case price of US$ 175 / tonne of PCI product and a Canadian : US dollar exchange rate of C$ 1 = US$ 0.95The Lost Fox Mine produces robust economics using base case conditions. 

LOST FOX MINE BASE CASE ECONOMICS
  Pre-Tax After Tax
IRR 25.4% 20.7%
NPV (8% Discount)     C$ 1,027.8 M   C$ 667.4 M
Capital (1ST 4 Years)                                        C$ 768.4 M

Capital to achieve full production is C$ 768.4 million during the first four years of the project and includes the mine, process plant and all required on-site and railway infrastructure.

CAPITAL SUMMARY
Capital Item Cost C$
Mine & Equipment 222.4 M
Process Plant & Facilities      164.8 M
Off-site transportation 317.8 M
On-site Infrastructure 63.4 M
Total      768.4 M

The operating costs for the Mount Klappan project include all mining, processing, transportation, royalties and administration FOB vessel in Prince Rupert and total C$ 110.30 / tonne (US$ 104.79 / tonne).  This is within the range of cash costs for all Canadian metallurgical coal producers.

OPERATING COST SUMMARY C$ / TONNE
Waste Drilling & Blasting 8.56
Stripping & Topsoil Removal 26.27
Coal Loading & Haulage 4.53
Mine Maintenance 4.13
Operations Support & Interim Reclamation      6.30
Coal Processing & Loadout 7.48
Supervision & Administration 2.46
Total Direct Operating Cost 59.74
On-site Infrastructure 4.05
Mine Overhead 1.89
Coal Transportation - Rail 30.84
Coal Terminal 6.00
Selling, General & Administration 0.24
Production Royalties 7.54
Total Indirect Operating Costs 50.56
FOB Vessel Cash Cost C$ 110.30
FOB Vessel Cash Cost US$      104.79

The Mount Klappan project produces attractive rates of return for the development for coal price sensitivities above US$ 150 / tonne, mining only 3.6% of the in-situ resource.  The Mount Klappan project is well positioned to benefit from the projected global shortage of high quality metallurgical coals that will result in strong prices for the foreseeable future.  Coal price sensitivities for the project were prepared to assess project economics with prices up to US$ 300 / tonne, the price for metallurgical coal attained in 2008.

COAL PRICE SENSITIVITIES
FOBT PRICE
(US$ / t)
Pre-Tax
IRR
Pre-Tax NPV
(8%)
After Tax
IRR
After Tax NPV
(8%)
$150 16.6% C$ 476 M 13.1% C$ 252 M
$175 25.4% C$ 1,028 M 20.7% C$ 667 M
$200 33.4% C$ 1,598 M 27.5% C$ 1,095 M
$225 40.8% C$ 2,163 M 33.6% C$ 1,518 M
$250 47.6% C$ 2,719 M 39.2% C$ 1,934 M
$275 54.2% C$ 3,285 M 44.6% C$ 2,357 M
$300 60.2% C$ 3,837 M 49.6% C$ 2,771 M

Initial capital for the Mount Klappan development includes C$ 317.8 million for the upgrade and extension of the Dease Lake Rail Line to Mount Klappan.  The Feasibility Study assumes the total capital cost for this infrastructure would be paid by Fortune.  Sensitivities were prepared in the event of a third party user or government paying 25 or 50% of this infrastructure cost.  This would lower Fortune's costs for the development and further improve project economics.

THIRD PARTY RAIL CONTRIBUTION TO CAPITAL
  25% Contribution 50% Contribution
  Pre-Tax After Tax Pre-Tax After Tax
IRR 28.4% 23.1% 32.0% 26.0%
NPV (8% Discount)   C$ 1,092.5 M   C$ 723.4 M   C$ 1,154.2 M   C$ 777.0 M
Capital (1ST 4 Years) C$ 688.9 M C$ 609.4 M

ABOUT ANTHRACITE COAL:

Mount Klappan has very large resources of high quality anthracite metallurgical coal, the highest rank coal based on carbon and energy content.  Anthracite is used in a broad range of applications, including reductants used in metallurgical processing, blend coals for blast furnace coke replacement, and charge carbon, sinter and PCI coals used to manufacture steel.  Only about 1% of world coal reserves are anthracite grade, making Mount Klappan coal a relatively uncommon premium product.  Global annual anthracite production is approximately 565 million tonnes with 85% of supply currently produced in China, which notably became a net importer in 2008.  Vietnam, the world's second largest producer with annual production of approximately 43 million tonnes, is curtailing exports in order to satisfy domestic requirements.  Mount Klappan is well positioned to service the growing demand from the growth of emerging economies, primarily in Asia and constrained supply.

OPPORTUNITIES:

Opportunities exist to further improve the economics for the Mount Klappan project and were identified in the 2008 Marston Feasibility Study update.  They include:

  • There is a significant opportunity to expand the economic resource base for Mount Klappan and Marston has recommended a four-phase drill program to increase and upgrade the resources in the Inferred and Speculative classes to Measured and Indicated.  In addition, the current resources are only estimated to a depth of approximately 300 metres.  Drilling by Fortune, Gulf and Shell have identified thick intersections of coal beneath this depth that may be amenable to future underground mining.
  • The current study is predicated on diesel-generated power and the use of diesel mining equipment.  The B.C. Government is extending the provincial electrical grid along Highway 37.  Access to grid power would eliminate the need for on-site power generation, allow for the use of more efficient electric-cable shovels and electric assisted haul trucks, and alleviate uncertainties associated with fluctuations in the price of diesel.
  • Opportunities exist to finance mobile equipment for the mine through a "lease-to-purchase??? program and would lower the up-front capital for the development.

CURRENT ACTIVITIES:

Substantial engineering, feasibility and environmental work have already been completed for the Mount Klappan development, totalling more than $86 million.  The development plan has been designed so that there will be no significant adverse impacts on fish habitats.  The project is currently in the B.C. Environmental Assessment ("EA") pre-screening process and Fortune expects to complete the EA process after it identifies a financial partner. Fortune is working with the local communities to explain the project and its benefits and potential impacts. Development of Mount Klappan will bring long-term employment to an area already adversely impacted by the downturn in the forestry industry as well as provide important infrastructure for the benefit of other projects and the public.

Fortune is pursuing opportunities to attract a strategic partner for the development of the Mount Klappan project and has retained Deloitte to assist the Company in this process. With rail transportation to the port of Prince Rupert commercially feasible, robust economics from the initial development, strong prices for metallurgical coal products extending into the foreseeable future, and the potential to expand production from a world class resource base, Mount Klappan will benefit a broad range of stakeholders for many years.

The scientific and technical information contained in this news release is based upon information prepared by or under the supervision of Richard Marston, P.E. of Marston & Marston Inc., who is a Qualified Person under National Instrument 43-101.

ABOUT FORTUNE:

Fortune is a diversified resource company with several mineral deposits and a number of exploration projects, all located in Canada.  The Company is focused on the development of its NICO gold-cobalt-bismuth-copper deposit in the Northwest Territories and its metals processing plant in Saskatchewan.  Fortune Minerals owns the buildings and equipment from the Golden Giant Mine at Hemlo, Ontario, which have been dismantled for relocation to NICO.  Fortune also owns the Mount Klappan anthracite coal deposits in British Columbia, the Sue-Dianne copper-silver deposit and other exploration projects in the Northwest Territories.  Fortune is focused on outstanding performance and growth of shareholder value through assembly and development of high quality mineral resource projects.

This press release contains forward-looking information.  This forward-looking information includes, or may be based upon, estimates, forecasts, and statements as to management's expectations with respect to, among other things, the proposed development of and anticipated production from the Mount Klappan project, the establishment of a railway link to Prince Rupert and the pursuit of strategic alternatives for the Mount Klappan project. Forward-looking information is based on the opinions and estimates of management at the date the information is given, and is subject to a variety of risks and uncertainties and other factors that could cause actual events or results to differ materially from those projected in the forward-looking information.  These factors include the risk that the Company may not be able to arrange the necessary financing to construct and operate the Mount Klappan mine and/or the railway link to Prince Rupert, the risk that the Company may not be able to conclude a strategic transaction for Mount Klappan or an agreement with CN for the transportation of coal from Mount Klappan to Prince Rupert, the possibility of delays in the commencement of production from the Mount Klappan project, the inherent risks involved in the exploration and development of mineral properties, the risk that actual capital and operating costs for the Mount Klappan project may differ from those anticipated, uncertainties with respect to the receipt or timing of required permits and regulatory approvals, the uncertainties involved in interpreting drilling results and other geological data, fluctuating metal prices and other factors. Readers are cautioned to not place undue reliance on forward-looking information because it is possible that predictions, forecasts, projections and other forms of forward-looking information will not be achieved by the Company. The forward-looking information contained herein is given as of the date hereof and the Company assumes no responsibility to update or revise such information to reflect new events or circumstances, except as required by law.

Troy Nazarewicz, CIM, FCSI, CPIR
Investor Relations Manager
Fortune Minerals Limited
148 Fullarton Street, Suite 1600
London, Ontario, CANADA
N6A 5P3
Tel. 519-858-8188
Cel. 519-709-8489
www.fortuneminerals.com
Information presented in this website was accurate at the time of posting; however, some information may be superseded by subsequent disclosures. The reader is cautioned to review all postings to ensure they are aware of any updated information.

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