Appendix 6 - 20031023 BRC Reevaluation (Norwest Corporation).pdf

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Conrad Houser Vice President

136 East South Temple, 12th Floor Salt Lake City, UT 84111 Tel (801) 539-0044

USA (800) 266-6351

Fax (801) 539-0055

October 23, 2003 File No. 2932

Carol Hoover & Dune Lankard Eyak Preservation Council P. O. Box 460 Cordova, AK 99574

Subject: Bering River Reserve

Dear Carol and Dune:

This letter report is in response to your request for a reevaluation of potential Bering River coal resource project economics. Based on your instructions and comments, all costs for roads external to the mine, tramways, and dredging are considered to be provided by others and not included in the project’s economics.

This letter report is based on Norwest Corporation’s (Norwest) report to the Eyak Preservation Council dated April 24, 2001.

Assumptions in the earlier report continue to be used unless otherwise noted.

TRANSPORTATION FROM With the removal of $237 million in infrastructure development MINE TO SHIP costs, the transportation system changes significantly. We envision coal transported from the mine to ocean going ships in three stages:

! Coal would be loaded from a small mine stockpile unto over-the-road trucks at a cost of $0.25 per tonne;

! Trucks would travel the 55 - 65 miles to a port facility at a cost of about $8.75 per tonne; and ! A third party would provide a port storage facility where coal would be received, stockpiled, loaded on to barges or directly to ships. Coal would be transloaded by barge and floating crane or directly loaded onto Panamax-size vessels at a total gross estimated cost of $4.25 per tonne including the contractors return on capital costs to build the facility.

November 11, 2003

Letter to Carol Hoover

The total transportation cost to water would be about $13.00 per tonne.

COAL PRICES The median coal heating value, based on 1984 KADCO work, is 7,500 Kcal. Coal prices for 6,000 Kcal to Korea West have reached a recent high of $35.80 per tonne. This equates roughly to $45.00 per tonne for Bering River Coal1. Net of $10.00 ocean freight charges, the Freight on Board (FOB) price of a blended coal from Bering River could optimistically be $35.00 per tonne.

Results using this price are shown in Table 1. A more reasonable FOB price for project planning purposes would be about $30.00 per tonne resulting in the figures show in Table 2.

It should be noted that the resulting NPV is highly dependent on price assumptions. A $1.00 change in the FOB price affects the NPV by over $11M.

DISCOUNT RATES The prior Norwest study used discount rates of 10% and 5%.

These rates reflect a thoroughly engineered project with a solidly contracted revenue stream. Such is not the present case.

Operational coal mines are currently being sold using discount rates between 12% and 8%. A rate of 14% is very liberal at this point in the project’s evolution. A 10% discount rate is shown in Tables 1 and 2 for comparison purposes.

1 This is a gross assumption based on Table 3.3 in the April 2001 Norwest report. Geologic modeling has not progressed to the point were a weighted average quality for the reserve can be accurately estimated. Note that Norwest uses a recoverable reserve value of 35 million tonnes while an Eyak Preservation Council e-mail mentions 3.5 billion tonnes of reserves. This higher number apparently comes from Geology and Coal Resources of the Bering River Field, by Robert B. Sanders, U.S.

Geological Survey – Anchorage, Proceedings of the Focus on Alaska’s Coal ’75 Conference, October 15-17, 1975, page 58.

This report states the 3.6 billion ton number is hypothetical and to a depth of 3,000 feet. The 35 M ton figure is based on conclusions from the KADC 1984 drilling program. See Geology and Coal Resources of the Bering River Coal Field, Jane Smith and P.D. Rao, pg 298.

Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 15 Year 16 Totals Tons sold 500,000 1,500,000 1,500,000 1,500,000 2,000,000 2,000,000 2,000,000 3,000,000 3,000,000 400,000 35,400,000 Sales price, $/tonne FOB $35.00 $35.00 $35.00 $35.00 $35.00 $35.00 $35.00 $35.00 $35.00 $35.00

Total mine revenue $17,500,000 $52,500,000 $52,500,000 $52,500,000 $70,000,000 $70,000,000 $70,000,000 $105,000,000 $105,000,000 $14,000,000 $1,239,000,000

Total cash costs $20,314,359 $46,927,787 $46,927,787 $46,927,787 $62,380,977 $62,380,977 $61,843,645 $89,616,349 $89,616,349 $11,952,086 $1,074,424,484

Net income -$2,814,359 $5,572,213 $5,572,213 $5,572,213 $7,619,023 $7,619,023 $8,156,355 $15,383,651 $15,383,651 $2,047,914 $164,575,516

Total Capital $34,796,800 $25,394,400 $0 $0 $20,296,800 $0 $0 $22,707,600 $0 $0 $0 $148,886,800

TOTAL INCOME -$34,796,800 -$28,208,759 $5,572,213 $5,572,213 -$14,724,587 $7,619,023 $7,619,023 -$14,551,245 $15,383,651 $15,383,651 $2,047,914 $15,688,716

Net Present Value 14% ($41,488,962) 10% ($34,252,414)

ECONOMIC EVALUATION

Table 1

Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 15 Year 16 Totals Tons sold 500,000 1,500,000 1,500,000 1,500,000 2,000,000 2,000,000 2,000,000 3,000,000 3,000,000 400,000 35,400,000 Sales price, $/tonne FOB $30.00 $30.00 $30.00 $30.00 $30.00 $30.00 $30.00 $30.00 $30.00 $30.00

Total mine revenue $15,000,000 $45,000,000 $45,000,000 $45,000,000 $60,000,000 $60,000,000 $60,000,000 $90,000,000 $90,000,000 $12,000,000 $1,062,000,000

Total cash costs $20,314,359 $46,927,787 $46,927,787 $46,927,787 $61,843,645 $61,843,645 $61,843,645 $88,635,040 $88,635,040 $11,821,245 $1,067,331,129

Net income -$5,314,359 -$1,927,787 -$1,927,787 -$1,927,787 -$1,843,645 -$1,843,645 -$1,843,645 $1,364,960 $1,364,960 $178,755 -$5,331,129

Total Capital $34,796,800 $25,394,400 $0 $0 $20,296,800 $0 $0 $22,707,600 $0 $0 $0 $148,886,800

TOTAL INCOME -$34,796,800 -$30,708,759 -$1,927,787 -$1,927,787 -$22,224,587 -$1,843,645 -$1,843,645 -$24,551,245 $1,364,960 $1,364,960 $178,755 -$154,217,929

Net Present Value 14% ($98,930,285) 10% ($109,374,851)

ECONOMIC EVALUATION

Table 2

Letter to Carol Hoover

Table 3 presents a comparison of results for various discount rates from the 2001 Norwest report and this letter report.

Table 3 Comparison of Results

[Year of Norwest Report] at xx% discount rate

2001 at 10%

2001 at 5%

2003 at 14%

2003 at 10%

2003 at 14%

2003 at 14%

FOB Coal Price ($/tonne) 35 35 35 35 30 38.65 Life of Mine (years) 16 16 16 16 16 16 Maximum Production Rate (M tonnes per year) 3 3 3 3 3 3 Total Capital ($M) 386 386 149 149 149 149 Transportation Costs – Mine to Ship ($/tonne) 17.20 17.20 13.00 13.00 13.00 13.00 Royalties2 ($/tonne) 1.50 1.50 0 0 0 0 Taxes3 other than Income Tax ($/ton) 0 0 0.50 0.50 0.50 0.50 Pre-Income Tax Cash Flow ($M) 25 25 16 16 (154) 139 Net Present Value ($M) (121) (74) (41) (34) (99) 0

SUMMARY More than 100 years since its discovery and after a series of studies by interested parties, the Bering River coal deposits remain a riddle. High quality coal is definitely in place. Quality characteristics of the coal make it suited to some but not all purposes. The geology of the resource is complex; the coal will be difficult to mine. There is no existing infrastructure to alleviate development costs. Transport of the coal from the mine to the customer will be expensive.

As shown in Table 3, a $38.65 FOB coal price would be necessary to produce a positive NPV; at both $35.00 and $30.00 FOB the project NPV is highly negative.

2 This report assumes the minerals are owned in fee and removal is not subject to any surface or mineral royalties.

3 No Black Lung tax is charged to exports. It is assumed all coal will be exported to Korea. Also includes electric power costs of $0.15 as typical of other mines. This mine, however, will require its own power source. No capital has been included for power plant design, permitting, construction, or transmission lines. Further, no provisions have been provided for housing employees at or near the site.

Letter to Carol Hoover

The viability of a coal mine project is most sensitive to market prices.

If a market is found to provide long term contracts indexed from a current FOB price of about $40 per tonne for 7,000 Kcal coal, investors might be willing to proceed with mine development.

Sincerely, NORWEST CORPORATION

Conrad Houser Vice President

CH/ab