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ASX-listed Universal Coal has begun talks with Chinese and Indian groups following approaches to invest in its Berenice-Cygnus coking coal project close to South Africa’s border with Mozambique, a person familiar with the matter told Deal Journal Australia.

Universal Coal, which has a market value of $35 million, may decide to appoint a financial adviser as early as this month to manage the process of bringing in a strategic partner, the person says. Discussions with potential investors have so far taken place on an informal basis, the person added.

It comes around a month after Zyl Ltd, which is developing the Mbila and Kangwane steelmaking coal projects in South Africa, appointed a unit of Macquarie Capital to advise on two approaches to buy or partner the company. Zyl shares were trading at 12 cents prior to its announcement December 14, but have doubled in value since then to give the company a market capitalisation of $127m.


South African coal is attracting interest from steelmakers increasingly frustrated by infrastructure bottlenecks, lengthy permitting processes and a lack of big deposits for investment elsewhere in the world, including Australia.

ArcelorMittal, the world’s biggest steel producer by market share, has already staked out a position in the country through a 16 per cent interest in Coal of Africa.

To be sure, investing in South Africa isn’t without risk. The country’s ruling African National Congress party is pressing on with a study of the possible nationalising of the mining industry, amid pressure from its youth arm to redistribute wealth in the country to tackle widespread poverty. Costs in South Africa’s mining sector are rising quickly, and there are concerns about the reliability of power supplies.

But it’s notable Chinese and Indian companies have invested heavily in parts of Africa like the Democratic Republic of Congo, which are more prone to social and political instability. South Africa’s courts have also demonstrated an independence from the state, and the ANC has promised any debate on nationalisation of mines will be a transparent process for investors.

Universal Coal chairman Tony Harwood said last month the Berenice-Cygnus project in Limpopo province has a gross resource of at least 1.3 billion tonnes of soft coking coal, and it has the potential to become a mining operation capable of producing between 10 million and 15 million tonnes by 2015. The coking coal projects are “set to be a major focus for the company in 2012”, he said at the time.

The Berenice-Cygnus deposit is located 30 kilometres from a railway siding linked to the ports of Maputo in Mozambique and South Africa’s Richards Bay, the world’s largest coal terminal. In November, analysts at Canaccord BGF called Berenice-Cygnus a “game changer” for Universal Coal, dwarfing the potential earnings from its three thermal coal projects in South Africa that are closer to development. It estimated the earnings potential for Universal Coal from the Berenice-Cygnus deposit at $US143 million annually before accounting for interest, tax, depreciation and amortisation.