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Larry Myles Reports
Special Energy Report
The Demand for Anthracite
September, 2010
King Coal ….
Primary Energy Source on a Global
Scale
 It is quite telling that
after two and a half centuries human
initiative has yet to develop a more
reliable, or cost-effective way to keep the
lights turned on in our cities and towns; or
provide an alternative impetus to producing
the steel we need to build our skyscrapers,
as well as power the industries necessary to
sustain our modern civilization.
Coal
must be regarded as more than just a
reliable source of energy. Even as coal
continues to play a vital role in the
generation of electricity around the world;
the history of coal usage includes the
lifting of millions of people out of
poverty, as the first industrial
revolution could not have happened
without coal.
Contrary to some of the
revisionists who are attempting to rewrite
history, they will have a tough time when it
comes to downplaying the importance of King
Coal. Reason: Not only has coal enjoyed a
partnership role in the history of man
during the 18th and 19th and 20th centuries,
coal is now poised to play an equally
important role in the 21st century; as the
bustling economies of China and India intend
to use coal to fuel a 2nd Industrial
Revolution.
Cheap coal is no longer part of anyone’s
reality…
According to the Energy
Information Agency (EIA), coal is the
fastest growing fuel source in the
world; and has been for seven consecutive
years. Expect coal to outdistance all other
energy sources combined for at least the
next two decades. So great is the expected
demand for coal, we must prepare to
experience chronic under-supply and a rise
in prices.
 When it comes to an
(insatiable) appetite for coal, people
automatically think of China; and so
they should, as China consumes almost
half of the world’s annual coal
production, or 2.8 billion tonnes. This is where India gets a passing
mention as one of the world’s largest
coal consuming countries; coal being one of
the primary sources of energy, accounting
for over 65% of the total energy consumption
in the country.
Accounting for global
supply and demand, India’s consumption
rarely enters into the equation, because
after all, India is also known as the
world’s third largest producer of
coal and, up until now has
been able to (easily) handle its own
domestic needs through in-country supply.
Due to fundamental changes in
how India deals with extraction issues, such
as the outright banning of coal mining in
the coastal state of Goa; I expect India to
become a very visible player as they move
from coal self-sufficiency to an
aggressive net importer. EIA estimates
that within ten years, India’s coal
consumption will triple; and
importing coal will obviously become more
important.
With India and China playing
hard, to capture manufacturing dominance in
the world, industry insiders forecast that
in 2011, America will slip into second place
for the first time in 110 years.
Is there any doubt that the price of all
grades of coal will continue to
increase? Nipping at the heels of a rapidly
fading America is India; an important BRIC
country flexing its industrial muscle and
not afraid to burn the most reliable and
cost effective fuel source on the planet in
their drive to be a tier one global
manufacturer.
Anthracite:
Manufacturing means steel…
….and making steel means
anthracite
In the world of steel making,
anthracite (hard coal) will
play an increasingly crucial role;
particularly when it comes to PCI’s (pulverized
coal injection products) and ultra low
volatile (ULV-PCI) products that are being fed directly
into the Chinese and Indian blast furnaces.
This will allow for a reduction in
the use of coke as anthracite can be used as
a superior and cleaner substitute.
For those of you unaware of the value of
‘blue coal’ or ‘hard coal’, you may be
surprised to know that in the industry it is
sometimes referred to as the black gold
of the coal world. Anthracite is a very high
quality, premium coal with the highest rank,
carbon and energy content of all coals.
Equally important, anthracite accounts
for only about 1% of the world coal reserves.
Other unique properties make anthracite crucially important for
use in a wide range of thermal, water
purification and composite materials
products.
This includes the making of steel, as well
as for fuels used to manufacture cement and
of course, boosting the generation of
electricity.
In 2009 China announced it
would no longer be exporting anthracite due
to increased domestic consumption. China, currently producing
over 50% of the world’s
anthracite, has now turned into a net
importer of the blue coal! As the world
economies rally out of the recession, this
is going to present a real iceberg in the
harbour of growth and construction. Next stop,
Vietnam, the world’s second largest
anthracite producer, has cut back on exports
to satisfy their own growing domestic
needs. As Vietnam rebounds out of recession,
the supply of anthracite for export will be
uncertain, at best. There is no getting away
from it, global growth of industry
will depend on finding a new source of
anthracite.
As a general rule, suppliers
of good quality anthracite, target their
pricing at 60-70% of the delivered coke
price. With coke prices forecast to reach
new highs, you can understand why anthracite
really does deserve the black gold
label.
With global demand for all
coal increasing, the demand for
anthracite can overtake all
expectations. As stated, it is
industry-critical to secure new supply sources. This
brings me to discuss Eastcoal Inc.
(TSX.V: ECX). Thanks to the
vision of this Vancouver based junior coal
company, and due to a positive change in the
political direction of the Ukraine and its
neighbours, Eastcoal
is poised to reap the benefits of this
untapped market for years to come. Let me
hit you with my high card right off the top:
76.2 million tonnes
of proven hard coal,
in a past producing
mine with much of the infrastructure intact.
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History of Coal Mining in Ukraine
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From 1.4 million tonnes in 1880,
coal production in the Donetsk
or Donbass region (eastern
Ukraine) rapidly increased to 11
million tonnes in 1900 and 16.9
million during 1913. The Donbass
was quoted as "producing 70% of
the Russian Empire's coal".
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Post-World War I, the coal
mining industry of the Donbass
resumed growth, reaching an
output of 83.7 million tonnes
prior to Word War II - more than
half the coal production of the
USSR.
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Peak production of hard coal
from the Donbass basin to date
was around 200 million tonnes
per year in the 1970's, ranking
Ukraine as the second highest
producer in Europe after Poland.
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Post break up of the Soviet
Union, the mining industry of
Ukraine no longer received the
investment it needed and annual
output spiralled down to an all
time low of 50 million tonnes in
the mid 1990's.
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As a result of 1997
restructuring plan for the
mining industry (whereby
non-profitable mines closed and
better ones received
investment), tonnage increased
to 80 million per year which has
remained the output figure to
the present day. In 2009, 56% of
coal produced was used for Power
Generation and 44% for the Steel
Industry.
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Imports from Russia and Poland
of some 11 million tonnes are
required to meet Ukrainian
demand, while 5.5 million are
exported.
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Always the case, timing is
everything! In 2008 Eastcoal
turned its focus away from hunting copper in
British Columbia to concentrating on
bringing a proven resource of
blue coal back to production in
Ukraine. Probably best to glide over the
early perceptions held by many, of doing
business in a country that shared more of
its history and culture with Russia than with the rest
of Europe. That is what I mean by vision;
as of early in 2010, there is strong global,
and strengthening local demand for coal;
while the political scene and economic
fundamentals are much improved.
The Company now finds itself uniquely
positioned as the leader in foreign
investment into coal mining in Ukraine, and
definitely enjoys a coveted "first
mover advantage” in assessing other
projects.
Consider: Ukraine is on pace to
complete the privatization of coal mines
attractive for investment by last quarter
2014, according to a statement by the
Ukraine Coal Ministry.
Obviously
Eastcoal
is well ahead of the
pack; through its subsidiaries Ukraine
Energy and East Coal Company, the Company
owns the Verticalnaya coal mine located in
southeast Ukraine. Plans are to re-open the
mine on a significantly expanded basis!
I insist you do your own due
diligence by visiting the Company website
and reviewing the information made
available. There are news releases
outlining the process of acquiring a dormant
coal mine with a minimum of 76 million
tonnes of anthracite;
populating the board with powerful and
extremely knowledgeable coal people with
exponentially proven track records; and
leaving nothing to chance, supplying the
investment community with a pair
of NI 43-101 technical documents.
What I will do in this first
of three reports on Eastcoal, is to
leave you with a few highlights from
the initial (NI43-101) technical report:
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Summary of Geology
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The geology
of the Verticalnaya Mine area is
rather straight forward.
Structurally the strata are
contained in a southern dipping
limb of a syncline, and are not
disrupted by numerous fault
structures although some simple
fault structures do occur. The
coal seams are contained in
strong competent strata,
predominantly siltstone and
sandstone.
Nature of Evidence
Site Condition
Rehabilitation activities have
been restricted to general
clearance and housekeeping. The
surface area and facilities are
considered to be in reasonable
condition.
Boiler room cyclones for gas
cleaning and stack appear in
need of repair.
Mine water settling ponds are
overgrown with vegetation.
   
Infrastructure
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The main
administration building is
functional, capable of providing
services required for management
and workers.
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A
mine boiler is installed and
operating.
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A
main electrical sub-station is
built and operational, having
two independent power supplies.
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A
railway link runs within 800m of
the mine site.
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Land for building of a coal
preparation plant and the
disposal of waste material from
mining operations is available
to the new skip shaft.
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There are two fire protection
tanks.
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A
new clean water tank has
recently been constructed.
Reserves and Resource Estimation
Methods
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Resources and reserves were
evaluated to conform to the
standards set out in the former
Soviet Union.
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Standards used were meticulous
and thorough, but did not take
account of economic marketing
factors when estimating
reserves.
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Original reserve blocks and seam
data have been used to estimate
the resources and reserves to
the JORC (2004) standards.
And
most important…
Reserves and Resources Statement
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Measured: 57,300,000 tonnes
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Indicated: 18,900,000 tonnes
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Total: 76,200,000 tonnes
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Worth repeating:
The Company now finds itself uniquely
positioned as the leader in foreign
investment into coal mining in Ukraine, and
definitely enjoys the coveted "first
mover advantage” in assessing other
projects. Consider: The Donbass Region in
eastern Ukraine has a long history of coal
production. Due to political and economic
conditions, annual coal production had
fallen from 200 million tonnes to 80
million tonnes.
Ukraine: Boom or Bust?
A frank but positive look; as the
Ukraine has always been known as the bread
basket of the world. But, is it really an
economic basket case? For more,
BNN speaks to Anders Aslund, senior
fellow, Peterson Institute for International
Economics
The country is now entirely stable; the duly
elected Ukraine government is clearly
motivated, as are its neighbors, to bringing
prosperity to the entire region
through the development of the next major
source of anthracite. Either way, we are on
the cusp of conception, as
Eastcoal
moves from a small yet plucky Vancouver
junior, to a major global player in the
business of King Coal.
More to come? Count on it.
Larry Myles
604-408-7600
1-877-405-7600
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Larry Myles is neither a
geologist nor a financial analyst. I do not
purport to offer personal investment advice
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fact are derived from reliable sources, an d
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