Strategic Natural Resources (LON:SNRP) has signed a long-awaited off-take agreement over a proportion of the coal it intends to produce from its Elitheni project in South Africa. A deal has been struck with Swiss based steel supplier and commodity trader Trasteel International SA, which will buy up to an initial 2.0 million tonnes of Elitheni coal. The first shipment under the contract will be loaded in June 2012, with around 500,000 tonnes of coal scheduled to be shipped during the following twelve months. The balance of the coal, around 1.5 million tonnes, is scheduled to be shipped before the end of the calendar year 2014.

This initial order represents less than 1% of the already proven Elitheni coal deposit, which currently stands at 150 million tonnes. SNR said it would be looking to negotiate further sale agreements covering its existing proven deposits as well as further coal discoveries on the property, where exploration is under way. As part of today’s announcement, there was no indication that Trasteel would provide upfront finance to help SNR pay for the infrastructure development at Elitheni ahead of the start of production. Nevertheless, broker Evolution Securities described the agreement as “transformational” and the SNR share price responded with a 20% rise to 25.88p.

The off-take agreement is based on a 5500 Kcal/kg coal, Freight On Board (FOB) Port of East London, using the API4 price as a reference. The API4 is the benchmark price for Steam Coal exported from Richards Bay in South Africa, as published by Argus McCloskey for a 6000 Kcal/Kg coal. Trasteel has also been granted a right of first refusal, on terms to be mutually agreed between the parties, on any coal produced in excess of the initial 2.0 million tonnage covered under the agreement.

Coal from Elitheni will be shipped through the Port of East London in the Eastern Cape of South Africa. SNR remains in advanced discussions with Transnet Port Terminals, the South African national ports authority and operator, about building coal handling facilities at the Port of East London. The coal will be delivered to the port using a combination of road and rail transport, given the close proximity of the mine to the port. SNR is also currently in discussions with Transnet Freight Rail, the national rail operator, about upgrading the rail link between…

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