unite or die: small sa coal miners under press

JOHANNESBURG/LONDON ? South Africa's junior coal miners, some of them tiny producers, face intense pressure to consolidate, but the varying quality of their deposits and what are often poor locations will prevent many tie-ups and may force some to simply shut up shop.

Battling escalating costs, ageing mines, unclear regulation and woefully inadequate rail and port export capacity, smaller players face a stark decision: join forces, combine with cash-flush partners ? as many have already done ? or shut down, analysts and industry executives say.

"The mining BEEs [black empowerment mining firms] are too small to be sustainable," said Nchakha Moloi, a former senior government official turned mining entrepreneur, referring to the small miners.

"I would agree 100% that consolidation is necessary ... Consolidation is a fundamental principle of business - the bigger you are, the more efficient you become."

But the often poor grade of assets ? not to mention a lack of clarity on the role of a new State mining firm and worries around nationalisation ? will make tie-ups tough to achieve.

South African coal production, mostly thermal coal used for power generation, is dominated by five big players, but a host of small-time producers are also competing, a consequence of the shape of deposits in some areas and mostly of black empowerment deals over the past two decades.

The empowerment deals, which sought to right the wrongs of years of white minority rule, focused on ownership and not on sector growth, mining experience or funds of those taking charge. As a result, plots were split, and thousands of mining and prospecting licenses handed out. Many produce very small amounts ? as little as a few hundred thousand tonnes a year.

Insiders say many firms are laden with debt and are too far from transport lines, which means they are excluded from independent export sales, and cannot survive alone.

The Quattro export capacity scheme at Richards Bay Coal Terminal (RBCT) gave around a dozen small miners export access, but these firms produce so little individually that they have been forced to sell coal to traders who offer pre-financing.

Glencore and BHP Billiton are the most active in pre-financing coal among the junior miners. Without this activity, industry sources say, Quattro would have failed because the small miners produce only a couple of capesize cargoes a year and would have struggled with cash flows.

Adding to consolidation pressure is state power utility Eskom, the destination for most South African coal, as it frets over supplies. It has said about 15 new projects are required over the next two to four years to ensure power demand is met.

WHY CONSOLIDATE

Aggregation makes sense. Output from players currently outside export agreements could add another 10-million tons per year of overseas sales, according to analysts, just under mining major Xstrata's exports from the country.

With a larger size, miners could secure cheaper funding, pay off debts and ensure reasonable margins. Larger cash flows also make it easier to manage regulatory delays and uncertainty.

There is certainly a lot to play for, as observers fret that a fragmented sector may be missing out the full benefits of a commodities boom that has lifted Chile, Australia and others.

South Africa has one of the world's top concentrations of coal reserves, and its relatively low-cost structure and an enviable position allowing access to both the Atlantic and Pacific coal markets make it potentially a swing producer.

But consolidation will be easier said than done.

Large players such as Anglo American, Xstrata and BHP show little interest in snapping up smaller fish and instead are working to rationalise their own operations, analysts said.

There are exceptions among the traders. Glencore, joining forces with politician-turned-businessman Cyril Ramaphosa and a BEE group, has bought junior Umcebo but is awaiting the transfer of mining licences. In partnership with Ramaphosa's Shanduka Resources, Glencore mines around 9-million tons a year from coal operations in Witbank and KwaZulu-Natal.

Small players are more likely to consolidate among themselves. But while many small-cap miners are keen to do deals, few have found partners.

"Part of the problem with consolidation is there are not a lot of quality assets around. There are a lot of assets, but they are not particularly good assets," a top executive at one junior coal miner said.

"Access is a big issue, because without access to rail and port, you have nothing in a bulk commodity business like coal. The other aspect is the assets themselves -- the size, the scale, the quality, environmental issues."

Indian firms, for example, set their sights on South African coal, either through trading deals or partnerships, to feed escalating domestic demand. But they have so far largely failed, and have shifted their attention to Mozambique and elsewhere.

Among the few deals, Keaton Energy bought 74% of Leeuw Mining earlier this year to gain a foothold in the export market. Leeuw holds a 207 000 t/y allocation through Quattro.

Some junior miners are looking to expand near their mines by buying up adjacent blocks.

Forbes Coal is looking to consolidate with mines or projects close to its two South African assets. The junior miner has two operating mines in KwaZulu-Natal.

Other analysts said Coal of Africa, which has good coking coal assets in Limpopo province, might be a reasonable target or buyer, although the company faces environmental licensing problems that could deter potential investors. The company has said it keeps an eye out for deals.

Consolidation is on the cards in the long run in the potentially lucrative Waterberg area near the Botswana border, where a number of small miners have acquired licenses.

Small players have no hope of creating profitable operations there on their own, analysts say, because costs are prohibitive.

"Newcomers to the Waterberg area have applied for licenses," said Xavier Prevost, a senior independent analyst. "The problem is that if they will mine small, they will not survive."