Coal of Africa: plenty of coal and plenty of cash to develop it
by Ian Mclelland company news image
A large share purchase by the directors of any company is a good way to catch our attention. On 29 October, Simon Farrel, Managing Director of Coal of Africa, did exactly that, acquiring approximately £80,000 in shares via the company’s listing on the ASX.
Coal of Africa has three advanced assets in South Africa – two open cast coking coal projects, and one underground thermal coal project, all are planned to move into production in quick succession in 2008, 2009 and 2010.
The company also has a few interesting shareholders too. Arcelor Mittal, the world’s largest steel producer, has a 16.6% stake, which it purchased at 111 pence per share as part of a 2.5 million tonnes per annum off-take agreement for coking coal. Black Economic Empowerment Group, Mvelaphanda, acquired a 19% stake, paying approximately £65 million. Black Rock, JP Morgan Asset Management and GCM Resources also have significant equity stakes. Coal of Africa has managed to build a pool of solid investors through its three stock exchange listings on the ASX, AIM and JSE.
The quality assets and strong shareholder base are combined with some A$200 million in cash on the balance sheet. A further boost the balance sheet should arrive via the disposal of Nimag Group, a non-core metals processing company which manufactures and distributes nickel magnesium alloys, metal fibers and ferro-silicon magnesium alloys. Coal of Africa also recently divested of one of its other coal projects, Holfontein.
Coal Demand
Coal prices have rocketed in recent years, boosted by a combination of a rally in all commodities, constraints on dry bulk shipping capacity and a eerie combination of floods in Australia, snow in China and power disruption in South Africa all in the first half of 2008. In recent months the price of most commodities have retreated, as concerns about demand for raw materials persist, thanks to the far reaching impact of the credit crunch, and predictions of an impending global recession.
This pull back in commodities and similar retreat in commodity focused companies, has thrown up some real anomalies. Coal of Africa certainly appears to be one of them. With approximately £80 million in the bank and three projects in one of the largest coal producing regions on the planet, Coal of Africa finds itself in a strong position. The company reckons it has no need to raise additional capital from the equity markets, as it can meet its component of any financing criteria through its balance sheet.
Perhaps most encouraging of all, coking coal is still expected to fetch at or above $300/tonne in 2009 thanks to supply constraints, yet dry bulk shipping rates have plunged, which is good news for overseas importers.
Mooiplaats
Mooiplaats is the most advanced of the Company’s projects, but also the smallest. It has a measured and indicated resource of some 113 million tonnes of thermal coal and will move into production in early 2009 as an underground operation. The coal is only 1.7 kilometres from the Camden Power Plant, which is anticipated to take the lion’s share of the 30% of the proposed 3-4 million tonnes per annum output earmarked for domestic markets. The remainder of the coal will shipped via the Richard’s Bay rail line for export through Richards Bay Dry Bulk Terminal where the Company has secured export capacity of 0.9 million tonnes per annum, and has further secured increased capacity of 3 million tonnes per annum through a $15 million investment in an port upgrade. It is also worth noting that the current resource sits on only 1/3rd of the total land package held by the Company, so the potential for resource expansion is considerable.
Capital Costs to develop the mine are estimated at $110 million, and Simon Farrel reckons around $30 million is left to spend for its part, some of which is expected to come from revenues generated once saleable washed coal is being produced in Q1 2009 – ramp up will take 18 months with life of mine operating costs forecast to be around $32/tonne. Coal of Africa is still negotiating with Eskom, the South African state utility, and owner of the Camden Power Plant, about the supply of water and electricity to the mine - an update on this is expected soon – and assuming a positive outcome, will remove a major obstacle to ramping up to full production.
Vele
Vele is a larger beast, with a 441 million tonne global resource, around 45% of that resource is in the measured and indicated categories. Coal of Africa has a 74% interest, with production start up earmarked for Q4 2009, reaching 5 million tonnes per annum of hard and semi-soft coking coal at full throttle. Capex is anticipated to be around $400 million, so roughly $300 million will come from Coal of Africa. Take into account traditional debt financing ratios of 70/30 suggests the company will have to stump up around $90 million from its coffers. Based on current cash reserves, and projected cash flow from Mooiplaats, suggests this shouldn’t be an issue.
Makhado
Makhado is the gem in the company’s crown. To date a resource of 700 million tonnes has been defined, but the Company believes there could be in excess of 2 billion. Rio Tinto is also in the thick of it, and the two companies have agreed to rationalise their landholdings so the adjacent properties have the same owner. The Musina-Louis Railway passes through the property. Makhado is also anticipated to produce 5 million tonnes per annum of hard coking coal, with capex of $275 million. Production here is also targeted for 2009.
Arcelor Mittal Coal of Africa’s second largest shareholder, Arcelor Mittal has signed an off take agreement to the tune of 2.5 million tonnes per annum, with an option to increase it to 5 million tonnes per annum. Simon Farrel hinted to Proactive that size of the off take could be increased again in the future.
Transport Bottleneck?
The issue Coal of Africa does have at both of its coking coal projects is infrastructure constraints. In a research note earlier this year by Landsbanki, it was highlighted that both rail and port facilities proposed by Coal of Africa as export routes were already under strain and reaching capacity.
Coal of Africa has signed an agreement to secure coal exports via the Matola Terminal in Maputo, Mozambiqu for Vele and Makhado, initially at a rate of 1 million tonnes per annum. Grindrod, the owner of the terminal, is planning to expand capacity to 6 million tonnes per annum by 2010, and a further expansion to 10 million is also being considered. Coal of Africa has ensured the bulk of the expanded capacity will be for its own product, by agreeing to finance the expansion at favourable terms.
However, Coal of Africa’s production plans hinge on this port expansion occurring on time, which could be an issue. Blue Oar has also highlighted that the execution risk of the company’s development plans hinges on rail and port capacity expansion. By agreeing to invest in the port upgrades, and securing access, Coal of Africa has addressed the issue as far as it can possibly do so.
What is interesting to note is that despite the concerns raised by analysts, all of them have share price targets significantly higher than the current one.
CZA Price at posting:
81.0¢ Sentiment: None Disclosure: Held
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