September 14, 2011 Continental Coal Is Now Just Days Away From An Aim Listing
By Our Man in Oz Anyone who has experienced electricity cuts in southern Africa will appreciate the business plan of Continental Coal, an ambitious South African coal producer with both domestic and export operations. The simple proposition of selling coal to a power-hungry region is one of the company?s greatest strengths, especially as it also has a long pipeline of development projects and plans to export from one of the world?s great coalfields. But, if it was as simple as digging and delivering, Continental?s share price would be a lot higher than it is today.
South Africa is never simple, especially when it comes to mining, the country?s most important industry, and the one subjected to the greatest level of political interference. Repeated references to the worst of all investment words - ?nationalisation? - don?t help. As the Financial Times said in a headline last week, South Africa suffers from ?undermined potential?, and that dynamic has been no help to Continental at all. If the company could simply get on with the business of mining it would not be trading at a lowly A27.5 cents on its home stock exchange in Australia, where deep, and understandable doubts, are entrenched about the investment credentials of Africa.
Next week, however, could see a change of fortune for Continental as it achieves a long-planned objective of listing in London. With the delightful London stock market code of COOL, Continental will open for trading on the Aim market on Monday September 19th, providing British investors with a closer look at a business which has been posting some useful numbers since making the transition from explorer to producer, and which now has plans to grow quickly. Continental?s chief executive Don Turvey and executive director Jason Brewer are currently in London to spread the word about their business. What they will be saying is essentially the same as what Don said at the annual Africa Down Under conference in Perth two weeks ago, when Minesite?s Man in Oz had a chance to listen and dissect his message.
Continental is currently a two-mine business. Both mines are small, although there?s a third under construction, also small. In the pipeline are at least seven new mines, which will also be relatively small, but with the potential to grow. The mines in production are Vlakvarfontein and Ferreira. The new mine is Penumbra. All are located on the coalfields to the east of Johannesburg, and all are close to excellent rail and port infrastructure, and coal-hungry power stations.
For some reason, though, South African mining executives like to wrap a good story in unnecessary packaging, clouding what?s happening on the ground with what might, or might not, happen in the future. In the case of Continental, the opacity creeps in in relation to the possible futures around mines at Vaalbank, Project X, De Wittekrans, Knapdaar, Wesselton, and Leiden. Those projects might, one day, be important sources of coal for Continental, but while it is understandable that Don wants to display his pipeline, today his company is simply a two-mine business producing two million tonnes of thermal coal. Continental might well be, as Don said, a company that has ambitions to become ?a major mid-tier southern African-focused thermal coal mining business?, but even that point is strangely convoluted. You are either major, or you are mid-tier.
So investors need to shift Continental?s blue-sky hyperbole to one side, and concentrate on what?s in hand. And what?s in hand is a business operating the Vlakvarkfontein mine, about 100 kilometres east of Johannesburg, and the Ferreira mine, about 200 kilometres south-east of Jo?burg. Both mines, as well as the company?s future potential developments, are in the heart of South Africa?s coalfields and in amongst an impressive array of coal-fired power stations, and in the neighbourhood of the famous Sasol coal to liquids plant.
Vlakvarfontein is ticking over at a rate of around 100,000 tonnes of coal a month from a conventional open cut operating. Sales are being booked at between US$20 and US$22 a tonne, leaving a margin of between US$5.00 and US$7.00 after total costs of around US$15 per tonne. Two coal seams, each about five metres thick, are being mined, in close proximity to potential customers at the nearby Kendal power station.
Ferreira is a similar business, but with a shorter life expectancy of just three years. It is producing small quantities (40,000 tonnes a month) of export-quality coal, and 15,000 tonnes a month for domestic power production. Coming up quickly, is the third relatively small mine, Penumbra, located three kilometres from Ferreira, and which is expected to produce its first coal within the next nine to 12 months.
If all goes to plan, Continental will then be on track to become a producer of seven million tonnes of coal a year from a series of mines. Most production will be consumed in domestic power production, but there will also be a small but growing export operation. By 2015, production could rise as far as 10 million tonnes a year, from a resource base which could grow to 500 million tonnes of coal. There?s also the possibility of future production from exploration projects underway in neighbouring Botswana.
Continental is pleased with progress over the past 12-months, and Don has a solid check list of achievements, which he ticked off in Perth. ?We?ve managed to get to full production at Vlakvarkfontein, and we?ve completed the acquisition of an unlisted South African coal company?, he said. ?Our Ferreira mine is operating at improved levels. We?ve started export sales from Richards Bay. We?ve seen successive quarterly increases in production, and announced JORC-compliant reserves and resources.? For the next 18 months Don is optimistic that Continental can deliver more growth. ?We?re confident of a continued strong performance at Vlakvarkfontein and Ferreira?, he said. ?We?ll see the start of production at Penumbra and a development decision in the next months on De Wittekrans. We?ll get the pre-feasibility underway on Vaalbank and Vlakplaats. We should be in that time period getting production up to around five million tonnes with export sales up to 1.5 million tonnes.?
Continental is a company with great potential. It is producing a simple product from a world-class mineral field. It has strong domestic demand, and excellent export potential. But, it is also a company with South African roots. For investors who understand what that means, and the risks thus encapsulated, Continental is a company to watch. And it will be much easier to watch it in London from Monday.
CCC Price at posting:
24.5¢ Sentiment: Hold Disclosure: Held
