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Interview with Steve Mallyon, Managing Director of Riversdale Resources Limited: Well-Positioned in the Capital-Intensive Bulk Commodities Major Coking Coal Business.

on 7/12/2018
We learned from Steve Mallyon, Managing Director of Riversdale Resources Limited, that Riversdale is an Australian-incorporated company, with a major coking coal set of assets in southern Alberta, Canada. The company's flagship project is the large, highly competitive, low-cost Grassy Mountain hard-coking coal project, with a resource of about 200 million tons. We learned from Mr. Mallyon that they have developed a large-scale, open pit, mine plan for a 4.5 million product tons a year operation, with very efficient infrastructure. Riversdale has done a massive test program, involving eight steelmakers to make sure that this product produces an excellent coke and are working with off-takers at the moment. The company expects to complete the permitting process in 12 months. The construction period is going to be about 20 months long. With its fantastic board and solid operating team, Riversdale Resources is well-positioned in the capital-intensive bulk commodities business.

Steve Mallyon, Managing Director of Riversdale Resources Limited

Dr. Allen Alper: This is Dr. Allen Alper, Editor-in-Chief of Metals News, interviewing Steve Mallyon, Managing Director of Riversdale Resources Limited. Steve, could you give our readers/investors an overview of your company?

Steve Mallyon: Thank you, Allen. Riversdale was established essentially as a pure hard coking coal story based on the management and board's previous experience in South Africa and Mozambique with the original Riversdale Mining. There is no other legal or commercial connection with that former company. It's simply the same name. Riversdale Resources is an Australian-incorporated company with a major coking coal set of assets in southern Alberta. That's our focus for the foreseeable future.

Dr. Allen Alper: Could you tell our readers/investors a little bit about the Grassy Mountain project, how big it is, and what the plans are for it, and why it's so important?

Steve Mallyon: Yes. Grassy is our large coking coal story to date. The resource for Grassy itself is about 200 million tons, and will continue to grow because of the nature of the geology surrounding us in the Rocky Mountains of southern Alberta, right on the Canadian-U.S. border. The project was actually a byproduct of oil and gas exploration in the '50s and '60s, and was finally acquired by two companies, Devon Oil out of Houston and CONSOL Energy out of Pittsburgh in the '70s. A lot of work was done on looking at not just the oil and gas potential, but the coal potential, culminating in a large coal sample being extracted in the late '70s, early '80s.

Nonetheless, the downturn in the coal sector in the early '80s impacted the potential to bring the project on. Following that, the two companies, Devon and CONSOL, kept the project intact, but by 2011 had decided to exit, CONSOL, as most of your readers will know, becoming a pure gas player, Devon already a major oil and gas producer. Our involvement dates from late 2012, when we first became involved. We acquired the property in 2013 and have since done a massive amount of work on coal quality, on drilling the resource, delineation, mine planning, and site engineering, as well as the permitting side, which we can talk about a bit later.

Grassy Mountain will be a producer of hard coking coal. There are no byproducts, but having said that, just 20 kilometers to our west, there are five big hard coking coal mines operated by Teck, which as the name suggests, only produce a hard coking coal product for global markets. It is a well-known coal field, Crowsnest Coalfield, which extends from Fernie in British Columbia through to Frank in Alberta, and encompasses the Teck mines as well as the Riversdale, so a well-known area that produces hard coking coal and has done so for the last 50 years. It's just that this project interested us because it looked awfully like a product in Australia called Rangal Coal Measures, which are typically multi-product assets, of which quite a few have been developed. The coking properties are similar, and that's what really attracted us to Grassy, the potential to produce a good-quality hard coking coal.

Managing Director, Steve Mallyon spoke at the Energy, Mines and Money Conference in Brisbane, Australia on June 20th. Exciting times for Riversdale Resources as the Grassy Mountain Coal Project continues moving through the regulatory process.

Dr. Allen Alper: That sounds excellent. Could you tell our readers/investors your plans for the project, getting permitted, then into production, and what kind of employment etc.?

Steve Mallyon: My CFO and I had both worked for RBC and had some experience in the Canadian coal sector and how business is done in Canada. Nonetheless we did take our time with the Grassy Mountain transaction to understand what really matters in Canada, which is often different from what matters in Australia or what matters in Africa.

In Canada, there are only two things that really matter, with respect to large resource development. One is First Nations and the other is community. They've been the two big drivers, and they've been the top priorities for Riversdale. Community and First Nations relations are core activities we never take for granted. We entered into an impact and benefit agreement with one of the First Nation communities, Piikani Nation, in 2016. A local community golf club became the site of a big automated rail loop, so we've rebuilt the golf club in Crowsnest Pass as one of the largest community projects in the regions.

Riversdale has developed a mine plan for a large-scale, open pit, 4.5 million product tons a year operation. What is interesting with that development is, with the application of some new processing equipment from Australia, we believe that this project is highly competitive with its peers. It can produce coal in the first quartile of the global cost curve, as a result of the very low strip ratio that we've experienced through our mine planning sequencing. That strip ratio, unlike what we often experience back in Australia, is low throughout the entire proposed 25-year life of Grassy Mountain primarily as a result of the thick 22 metre coal seams largely following topography such that the long term strip ratio remains low.

The product will be a mid vol hard coking coal. It'll be processed through a 1,120-ton-per-hour coal processing plant, be conveyed over an overland conveyor 4.5 kilometers to this automated rail load-out. Riversdale has concluded a port agreement and expects to finalise rail tariffs in 2018. The end product will be exported from Westshore Terminal, which is located about 40 kilometers south of Vancouver. Logistics was management’s biggest concern in Canada because of the long rail distance. But, we found a very efficient rail system, very efficient port, which operates 24/7, enabling Riversdale to be competitive with the Australians, particularly out of Newcastle and to a lesser extent Dalrymple Bay, which is closer than Westshore to Asia, yet does not impose a significant cost penalty.

What we do have, in terms of our competitiveness with the Australians, which are the biggest coking coal producers on the planet, is reliability. The weather conditions over the last few years, the ongoing disputes between rail operators and miners and regulators in Queensland, has had an impact on off-takers’ perception of supply security from Queensland. Canada has a fairly unblemished reputation for reliability on shipping coal, particularly out of British Columbia and Alberta. We're building upon that. We're working with off-takers at the moment, after a long and large scale carbonization test program involving eight steelmakers, to ensure that this product produces an excellent coke. Part of it is the logistics, which we cannot guarantee, but certainly deliver upon commitments, with respect to large tonnage, to places like Korea, Japan, China, India, Europe, and South America.

That's the current plan. We're some way through permitting now. We're poised to go into a joint review panel with the Canadian federal government and the Alberta provincial government. Our expectation is that, with ministerial approvals, we have potentially 12 months for completion of that permitting process. We're actively putting together, not only an operational team at Grassy Mountain, but also a full owners' construction team, which will manage a lot of the contracts that we're about to enter into. The construction period is about 20 months long. We're not overly impacted by weather conditions in the Rocky Mountains. That's partly because we've seen our neighbors operating, without many off days, despite snow, rain and high winds. Grassy is an excellent location with good proximity to rail as well as Highway 3, which is a major highway system that runs through central Alberta and down to Montana.

Dr. Allen Alper: That sounds excellent. Could you tell our readers/investors about how long it would take, once you get permitting, to build the plant, and about the life of the mine, and how many employees you'll employ?

Steve Mallyon: Yes. It's a big project, so we are going to ramp up very quickly to 4.5 million tons over less than 24 months. The construction period, about 20 months, will employ 385 full-time employees for this particular project. We're in an area which currently provides FIFO workers for the oil sands industry and also for the existing coal operations in B.C. There are about 200 coal industry workers in the town, so quite a good knowledge of mining in the Crowsnest Pass area. A lot of the labor for construction will come from local sources. Based on the current schedule, should permitting be completed by the federal and provincial authorities next year, we will commission this project in early 2021, with the first coal shipped in mid-2021 out of Westshore.

The capital cost to first coal, about $630 odd million Canadian. It's a fairly low capital intensity relative to recent projects like Daunia and Caval Ridge and others in Australia. Part of the reason for that is that we already have rail and port infrastructure established as well as large power supply. In fact, the interconnector between Alberta and British Columbia, as well as Montana, actually crosses our project, so no real issues with respect to power.

I think the other features of the project are that it is a conventional truck and shovel operation. At the moment, in Alberta, when we've spoken to major equipment suppliers, the waiting time is not too extensive because of the massive downturn in the oil sands industry. Therein lies the Riversdale strategy, similar to what we did previously in places like Mozambique. We tend to try and build these projects when no one else is building. Rather than be focused on generating a giant hole in the ground and putting the associated infrastructure around it, we really think timing is important. It enables us to actually meet budgets and other guidance that we put out to our shareholders, not because we may be the best operators in the world, but simply because, with the right timing, we don't have competition for labor, for steel-making or steel fabrication capability, pipe-feeding instrumentation and electrical work. We're not competing against a Suncor, or an Imperial Oil, or a Texaco.

We're able to develop a project and utilize a lot of surplus capacity that's currently available around Calgary, and Edmonton, Fort McMurray. There are a lot of people who want to tender on this project. Hence, we've been pushing very steadily towards completion of permitting during the first half of 2019 to enable us to kick off this process and really build a project in a very competitive way.

Dr. Allen Alper: That sounds excellent. Could you tell our readers/investors a little bit about your background, your team, and your board?

Steve Mallyon: We have a fairly large board. It's been assembled because it's a large project. We have Michael O'Keeffe as our Chairman. Michael and I both started out in mining in Queensland. We both ended up at Mount Isa Mines, which was the then-biggest company in Queensland. Both of us worked in the copper division, not as much on coal. Michael went on to Glencore, and I went on to Billiton in the UK, and worked on a number of initiatives, with Billiton before their merger with BHP in 2001. We came back together when I was in the banking industry helping to finance the original Riversdale, Riversdale Mining, in 2004. With a lot of luck and Michael's capability, we were able to put together the Mozambique story over the years, which culminated in a buyout in 2011.

In terms of other members, our CFO, Anthony, is also out of the banking sector. He worked at RBC with me. We have a number of other people with tremendous operating experience. Tony Redman's on our board, a former chairman of Anglo-American Coal, lots of great experience there in both underground and open pit development, which has been useful for us over the years. On the team itself, aside from Anthony, and myself, and the management team, we brought in Alisdair Gibbons from Caval Ridge, BMA's newest operation. Alisdair helped develop that operation, which commissioned in 2012. He's come onboard and brought some really good people with him. I guess it's a motto within our company that we feel experience pays. We tend to try and attract people who have done many projects before.

That also applies to the sort of consultants that we've utilized, certainly in Canada. On the environmental side, we've used Millennium, which is a group that's done a lot of good work in oil sands but also in coal. In terms of coal itself, from Australia, we've had McElroy Bryan as our competent person. The head of McElroy Bryan, Kerry Whitby, is on the JORC committee, so a really good safety net for us in developing our reserve and resource numbers. We've also had very experienced guys like Bob Leach on coal quality, an expert on both Canadian and Australian coal quality.

Overall, we're very comfortable on certainly having some of these older guys working with us. We have lots of new, young engineers, geologists, enviro scientists, community people teamed in Blairmore, but behind them, there's a bunch of 70-year-olds. This is not their first rodeo, that's for sure.

Dr. Allen Alper: It sounds like you have an extremely strong, experienced board and team, so that's great. You're well-equipped to carry out the project.

Steve Mallyon: Yes.

Dr. Allen Alper: Could you tell our readers/investors a little bit about your capital and share structure?

Steve Mallyon: Riversdale is a public unlisted company. Just to explain what that means, we're subject to the same corporate governance requirements as a listed company in Australia and the company was always set up to be listed. Our major shareholders are Resource Capital, the big U.S. private equity fund, based in Denver and Perth, and Macquarie Bank from Australia, and the management team. Management these days still has a reasonable percentage in the company, probably around 30%. We put a lot of our own money in to really make this story develop. We have about 170 small shareholders many of them coming from the original Riversdale. They have been extremely loyal to the company. As a result we are keen to reward them by getting Grassy through permitting and into development.

We have plans to eventually IPO. We had a look this year, yet did not believe the pre-permitted status of the project served the interest of our shareholders. While not the key driver for the project, Riversdale wants to demonstrate some clarity around permitting. Permitting is often the biggest bugbear for projects at this stage. We feel we're very close now, with the pending appointment of a joint review panel. About three or four months ago, there wasn't that clarity, and we decided to defer an IPO probably until 2019.

At this point, Riversdale is looking at listing on the Australian Exchange, which provides a reasonable comparative with similar coal companies although, when you look around the world, there are not too many pure hard coking coal stories. Luckily, in the U.S., there are a few that are kicking off now or recovering. Some of the former companies like Alpha Coal that were around a few years ago, have come back and been resuscitated.

The great thing about the industry, why we're here, and why we've set up the company this way, is that over the last five or six years, we feel the hard coking coal sector is totally dominated by about five majors. About 50% of production is produced by just five companies, the biggest obviously being BMA, which is the joint venture between BHP and Mitsubishi. Normally, you would say, "Look, is that a good business for a junior company like Riversdale to be in?" Our view is it's exactly the business to be in, because everything's is so regulated. The majors aren't renowned for being innovative and wanting to bring on new projects every five minutes. In fact, with those five companies that dominate the industry, coal is not their number one business. For BHP, their number one business is iron ore. For Teck, their number one business is probably oil sands, and for Glencore, I very much doubt whether hard coking coal is anywhere near one of their top five businesses at the moment.

We like that sort of industry structure. There's some discipline out there that we don't often see in copper, or gold, or base metals, or battery materials. It's a business that has good growth prospects, but the interesting thing about Riversdale’s approach to Grassy Mountain is that it's not reliant upon good growth in the demand for hard coking coal. Grassy is being developed and marketed as a replacement coal. It's low cost, its long life and a big resource. Coal quality is consistent from day one and through the next 25+ years. It's a replacement for the Rangal Coal Measures in Australia, which are very mature, some of them 40 years or more old, and are starting to come offline over the next four or five years.

Grassy is poised to replace those products. The reliability of infrastructure in Canada, particularly where we are, is really important because we think that's something that can differentiate us from some of the Aussies in recent years, who have experienced weather issues, rail outages, and a few operating issues as well. That's essentially the corporate approach. We have a really good set of governance principles, because we're subject to the ASIC guidelines. We're a dual-compliant company. As I mentioned, one of the drill committee is the guy who is our competent person. We think, as a result, we have that transparency that is often lacking in many juniors, even to the extent of disclosing our cost structure, our capital, and so on. We just presented it at a conference recently. That information is on our website and available to all interested parties

Dr. Allen Alper: That sounds excellent. Could you tell our readers/investors why they should consider investing in Riversdale Resources?

Steve Mallyon: Sure. I think if we pick up the key themes that we've talked about today, it provides what I believe to be the answer. One is experience. This is not our first outing. It's not our board's first outing. Between our team members on the ground in Blairmore and Sydney, we've developed 15 projects. In fact, we developed three inside the original Riversdale. I believe in this business, experience is critical. It's not a game for beginners. Bulk commodities are seriously capital-intensive businesses, and you need every moon to be in perfect alignment, from the First Nation engagement, through to community, through to geology, coal quality, and then of course infrastructure, and then the marketing. We have all of those bases covered with a hugely experienced and successful board and a pretty solid operating team.

I think the other reason, Allen, why people should invest, is simply the future of this industry. It is a very structured industry. There isn't a desire by the majors to bring on new capacity quickly. There are certainly a lot of mine restarts, but if you look at those restarts and look at the industry cost structure, you can understand why a big chunk of the new restarted production is probably swing production, because it's high cost. If you look at Grassy, cash cost is around $70 U.S. a ton, including everything down to the port. We're competitive with the majors, including BHP, Teck, Glencore, Anglo-American. We're in that same first quartile of production.

The next point is that we're producing a single hard coking coal product, which is probably why our capital intensity, capital cost per tonne of capacity, is also competitive. We don't have extensive stockyards. We don't have storage of other products. We produce a single product, hard coking coal, which goes down to a small stockpile at Westshore Terminal, is put on a boat every week, and shipped off to Asia. So quite a simple logistical chain, but also low working capital, which we find really important. We don't like putting a lot of capital into processes that don't provide a return, and working capital is something we watch very carefully.

What I do want to say is, that when I mentioned strip ratio previously, our strip ratio is low relative to other big projects. It starts at 7.4 to one on a washed product basis, and it is still around nine to one, 20 or 25 years later. That generates a terrific margin for Grassy Mountain and for our shareholders year in, year out, because one thing in this business that you can really count on is not enjoying a $300 a ton coking coal price for very long. Occasionally the industry goes through a sustained downturn, and prices fall to $100 U.S. a ton or lower. If you cannot generate a margin at that point, it is a serious challenge to keep everything running, as many Australian, Canadian and US producers and developers found out between 2013 and 2016.

In our business we cannot future-proof everything, but we believe if we're just that little bit lower than some of the majors in terms of our cost, and a little bit higher in terms of our margin, we're going to survive very nicely. That's the key investment thesis. We're a group that has a proven track record, not only on the mining side, but much more importantly in generating value for shareholders. Many companies certainly talk about their technical prowess. Technical success is satisfying, yet financial return to stakeholders - shareholders, community and First Nations will ensure we remain. You'll find that we never position ourselves as the greatest operator in the world, but we're not shy about talking about our track record in delivering value to shareholders, as we did with the original Riversdale, and we will replicate with Grassy Mountain.

Dr. Allen Alper: That sounds excellent, like very strong reasons for our high-net-worth readers/investors to consider investing.

Riversdale Resources Limited
Suite 2, Level 1,
6 McIntosh Street
Chatswood NSW 2067

+61 2 9419 6100

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