Article Published on Mining Weekly .comAustralian, South African...

Article Published on Mining Weekly .com

Australian, South African joint venture agrees to final commercial terms

By: Beth Shirley
7th August 2009

Australian miner Firestone Energy and South African coal-miner Sekoko Coal have agreed to revised, final and binding commercial terms in respect of their second agreement, following a 12% increase in the coal resource tonnage from 995,9-billion tons to 1,1-billion tons, reports Firestone.

“The resource upgrade for four properties in the Waterberg that comprise the second agreement is the result of a change to the method by which the tonnage of coal in each zone is estimated. Applying a discount yield factor to the tonnage, rather than the volume of coal and shale in each zone, results in an increase in the resource estimate of about 12%. As a consequence, and in fairness to our joint venture (JV) partner, it was necessary to renegotiate the principal commercial terms of the second agreement,” notes Firestone CEO Garth Higgo.

The revised terms are binding and will not change should further drilling or the receipt of awaited coal quality analyses increase the resource estimate, or upgrade part or all of the resource to a higher resource category.

Under the terms of the revised JV agreement, Firestone’s wholly owned South African subsidiary, Lexshell, will establish a JV through which Lexshell will earn an initial 30% interest in the four properties.

Sekoko will receive a cash payment of R13,5-million and will be issued new shares in Firestone worth R293-million, which amounts to about 868-million Firestone shares. Sekoko will be reimbursed for the expenditure in exploration and development of the four properties, an amount of not more than R293-million.

Following the approval of the bankable feasibility study (BFS) and the decision to mine by the management board of the JV, a management fee of R50-million will be paid to Sekoko over a seven-year period from the date of commercial production.

Firestone reports that it can earn a further 30% interest following expenditure of R50-million to complete the BFS to a level enabling the establishment of a future commercial mining oper- ation.

The transaction will be con- ditional on the company com- pleting a legal and technical due diligence on the properties.

Firestone has JVs with Sekoko over six farms in the Waterberg coalfield, in Limpopo province, South Africa. This coalfield is becoming increasingly important as coal reserves in the Witbank, Highveld and Ermelo coalfields of the Mpumalanga province, which currently supply the bulk of State-owned power utility Eskom’s coal power stations, will reportedly be depleted over the next 30 years.

Operations Update

Meanwhile, the exploration work programme and mining work programme undertaken by Sekoko to date are at an advanced stage. The company expects to receive mining permit approvals from the Department of Mining in due course, says Higgo.

Plans are well advanced for the JV between Firestone and Sekoko to start a small-scale mining operation by the end of 2009, producing about 60 000 t/m of thermal coal, primarily for potential sale to Eskom.

Sekoko has approached the Development Bank of Southern Africa for R100-million in funding for the small-scale mining operation. It is reported that the loan approval is at an advanced stage.

The company reports that the selected mining area comprises a 4,5-ha area of the Smitspan farm, with the full sequence of 11 coal zones and a shallow over-burden. The JV plans to mine about 60 000 t/m of run-of-mine coal, which, after washing, will yield about 40 000 t/m of saleable product, of which about one- quarter will be high-calorific value, low-ash product and three-quarters will be suitable for use as power station feed coal.

“Firestone is excited by these developments and very pleased with the progress being made by Sekoko. The planned small-scale mining operation will provide the JV partners with a starter pit for the large-scale mining operation we plan to start in 2011, capable of producing 18-million tons of saleable coal. [Apart from] providing us with an early revenue stream, the works and activities associated with the starter pit will help fast-track, and provide greater con-fidence in, the BFS,” says Higgo.

He notes that becoming a fully fledged producer will elevate Firestone’s standing with govern-ment agencies, which will help it in negotiating future offtake agreements and infrastructure access. The prestripping and infrastructure associated with the starter pit will help lay the groundwork for the large-scale mining operations and the additional knowledge acquired of the orebody will provide the company with greater confidence in metallurgical performance.

“We are working on securing an offtake agreement with Eskom to supply the Matimba power station, and have received expres- sions of interest from local merchants in the Waterberg to purchase coal,” says Sekoko executive chairperson Tim Tebeila.

He adds that there is good progress towards securing the $25-million needed to fund the BFS to start large-scale mining operations in the Waterberg.

Coal-to-Liquid Prospects

Meanwhile, Sekoko has decided to develop a coal-to-liquids plant that will produce 52 500 bbl/d of liquid fuels.

The company has commissioned the first phase of the feasibility study, which will take up to ten months. The study entails recom-mendations of appropriate technology providers for coal, the development of flow diagrams, and financial models and pilot plant investigations.

Following the global downturn, however, Sekoko has decided to slow down the momentum of the project until the oil industry becomes attractive to the market, says Tebeila.

Edited by: Shannon O’Donnell