Coal news and updates

Coal of Africa’s half a billion-dollar baby

Johannesburg Stock Exchange (JSE)- and AIM-listed Coal of Africa Limited (CoAL) is hoping to put it’s troubles and travails behind it with the development of the Makhado coal field in South Africa’s northern province, Limpopo. But, viewed from any angle, it’s a big ask. The project will require $450 million in peak funding, and the company has only just completed an equity raise to resolve certain legacy issues.

The company is not currently generating any cash flows at present, which makes the task of getting Makhado – and its other greenfield project in the form of Vele – into production all the more challenging. This is because the ‘legacy’ Mooiplaats colliery – which is up for sale and has an interested buyer – appears to be stalled due to a lack of funding in the current coal price environment. The Sale and Purchase Agreement has been extended to the end of June in order to allow the buyer to secure funding. Should this be successful, CoAL would receive in the region of R250 million.

The Vele colliery, which was only recently completed, needs to be reconfigured. “At the moment Vele can only produce a thermal coal product, so we have suspended production to effect the plant modification, which will allow Vele to produce semi-soft coking coal,” says Celeste Riekert, investor relations manager at CoAL. Vele will require a further R250 million to be able to get it to deliver a dual feed product. The proceeds from the equity raise and the sale of Mooiplaats will provide the company with sufficient capital to commence the plant modification. And the modification will only commence once the amended water use license has been granted.

So any hope of an economic return for shareholders rests with Makhado. It is the first hard coking coal asset to be explored within the greater Soutpansberg assets the company has rights to. The plan is to build a 5.5 million tonnes per annum (Mtpa) mine capable of producing 2.3Mtpa of hard coking coal and 3.2Mtpa of thermal coal. “Hard coking coal trades at a premium to the thermal coal price,” says Riekert. The Makhado hard coking coal has a good Coke Strength after Reaction (CSR) that makes it suitable for iron and steel manufacturing.

The dual output (thermal and metallurgical) gives the company options, as does its allocation through the Matola terminal in Mozambique. “We can sell the thermal component domestically, or we can export it through Matola,” says Riekert.

The share price rallied from the doldrums on news that the company had received the mining license for Makhado, rising from 26c/share to the current price of R1.15/share. But there is a long way to go before the projects starts producing saleable coal.

“The mining right for Makhado has been granted and the company awaits the approval of the Integrated Water Use Licence from the Department of Water and Sanitation,” says Riekert. But uncertainty envelops the project when it comes to funding and off take.

Makhado will be funded through a combination of debt and equity, but the company cannot specify the precise mix at this point. Of the equity component, 26% has been allocated to a Black Economic Empowerment consortium which includes communities around Makhado. But this still needs to be funded too.

“We will also aim to get a strategic partner to invest a further 23% of the equity required,” says Riekert. In terms of strategic investors ArcelorMittal (as one of South Africa’s largest consumers of metallurgical coal) still remains a large shareholder in the company, although was not invited to participate in the equity raise.

Assuming a debt-equity split of 50/50, investors will need to follow their rights in order to avoid severe share dilution. At the current share price, and assuming the company is able to attract both a strategic investor (to take up the 23%) as well as funding for the BEE consortium (26%), existing shareholders would be diluted in the region of 41%.

The capital expenditure relating to the provision of power is included in the price tag of $450 million, which includes an overhead line to the plant. Eskom have already allocated 20Mva for the plant, which is the only part of the operation that will be consuming electricity.

The current coal price environment; the misconfiguration of Vele; and costly take-or-pay contracts all led to CoAL bleeding cash and having to return to the market to do a three stage equity raise in August and September (2014) and May for a total of 695 million shares. Four large shareholders participated: BHE, Investec Asset Management, M&G Investments, and TMM HoldingsM. “The Company has sufficient funds to sustain all company and regulatory requirements until we commence the construction of Makahdo next year,” says Riekert. It is anticipated Makhado will be built over 26 months, beginning in July 2016 should all go according to plan. First production and ramp-up is expected during 2019.

source: http://www.mineweb.com