Makhado to be developed ahead of Vele restart

11 Oct 2017 Marian Hookham

Coal of Africa (CoAL) has reshuffled its project pipeline so that the Vele mine will be kept in mothballs and the Makhado project will be developed in half the time and for less than 70% capex set down in original budgets.

David Brown, CEO of the Johannesburg-listed coal development and production company, told the South African Coal Report that Makhado was "a market differentiator" owing to the high quality of its hard coking coal (HCC). The re-opening of the firm's Vele coal mine was now unlikely to proceed in the foreseeable future and while the firm continued to hunt down a second acquisition, nothing would be done that would imperil Makhado.

"I think it is the right thing to fasttrack Makhado. It produces HCC which is a premium product," said Brown. He added that most of the HCC would be sold into the South African market, especially to ArcelorMittal South Africa (AMSA), with the balance exported.

Both Makhado and Vele are in the Limpopo province which is thought to represent South Africa's next major coalfield, especially as coal production from the traditional base of Mpumalanga province will decline further in five to 10 years. Vele, however, has been beset with problems, largely owing to objections from environmental groups which have protested against the mine's development.

Vele is located about 30 km from Mapungubwe which is a World Heritage Site. In its prime, the mine produced about 1 mt/y of semi-soft coking coal from a resource estimated to total 680 mt. CoAL, however, shut the mine and worked on a re-engineering programme. Even with an improved coal price, however, it was not confident enough to press the button on its re-opening.

"We are still looking at opportunities around this [Vele] operation," said Brown. "It is a semi-soft coking coal and thermal coal producer so we felt that it was appropriate to concentrate on Makhado as that is a significant differentiator."

CoAL was also waiting on the last of the regulatory applications - a water licence authorising a perennial stream diversion - to be approved by the South African government before proceeding with Vele.

"Once we have that approved, we will take Vele to the board in terms of a decision on our expectations for it. We will take a view in regard to long-term pricing and its positioning in terms of its geography," he said.

SACR reported on August 1 CoAL was giving thought to the re-engineering of the project's scope. That has now happened such that planned production has been reduced to between 1.7 mt/y of saleable coal of which between 700,000 tonnes to 800,000 tonnes a year would be HCC while up to 1 mt/y would be export quality thermal coal.

This compares to the previous project target of 5.5 mt/y of thermal and coking coal which would have cost some US$275m to develop. The new capital figure on the Makhado project is between US$80m to US$85m.

Said Brown: "As we refined the project we saw significant execution risk in terms of raising capital and in terms of delivery of the project. There was operational risks as well associated with logistics. So we looked at trying to reduce volumes of production that has the benefit of increasing its life of mine substantially." The mine will produce coal for 29 years under the re-scoped project parameters compared to a previous life of mine of 16 years.

"There's always been a fear in the market that for a company of our size, raising that kind of money (US$275m) would be a stretch and, therefore, be dilutionary to equity shareholders. We hope we can demonstrate now that there will be no dilution for those shareholders," he said. CoAL is currently capitalised on the Johannesburg Stock Exchange at ZAR1.23bn (US$90m).

"We had also worked on HCC prices of about US$206/t in the original project specifications, but now we are working on US$120/t," he said.

The current HCC price is about US$190/t to US$200/t.

"If you plugged in those HCC prices the internal rate of return increases to 72% and the net present value of the project is about US$450m which shows that we have priced in very conservative assumptions. This will be a game changer for the company," he said. This compares to an original IRR of 31% placed on the project.

Brown said Makhado would be funded through a combination of debt and equity of which about 60% of the capital would be debt.

"The capital required in US dollars is very achievable," he said. "We have also had positive discussions with AMSA on HCC purchases. Given that the product will be high quality we don't anticipate any issues," said Brown.

Discussions about financing would begin this month.

Brown also confirmed that HCC and thermal coal exports would be marketed through Vitol as per a long-standing agreement with the commodities trading firm. "We have signed a marketing agreement with Vitol as of end-2012 and, to my knowledge, it is a five-year agreement. So if there is export material, Vitol would be eligible to work with us. We have been having discussions with them regarding that."

CoAL is also examining another transaction that will provide it with cash flow following the ZAR275M (US$20M) acquisition of Uitkomst, a thermal coal mine in KwaZulu-Natal province. CoAL bought the mine from Pan African Resources earlier this year. The expectation is that cash flow will contribute towards CoAL's equity contribution to Makhado, especially as the firm's legacy issues, such as outstanding payments to Rio Tinto on certain coal mineral resources, and certain overheads related to its mothballed Mooiplaats colliery in Mpumalanga province have been resolved.

CoAL said on October 2 it would sell Mooiplaats to a consortium in which South African resources entrepreneur, Patrice Motsepe, would be an investor through African Rainbow Capital, an investment house due to list in Johannesburg. Former Exxaro Resources CEO, Sipho Nkosi, as well as former CEO of Harmony Gold and former CEO of Continental Coal - Bernard Swanepoel and Don Turvey respectively - would also be invested.

The sale of Mooiplaats, for some ZAR180m (US$13m), was "... the final step in the company's balance sheet restructuring strategy", said CoAL in an announcement. It would set the course for CoAL to become "... a self-sufficient mid-tier coal mining company," it added.

Learn more about our coverage of the Asia and African coal markets.

Marian Hookham is a Research and Analysis Associate Director at IHS Markit.
Posted 11 October 2017


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