Coal news and updates

Empowerment rules mean price of coal for Eskom will rise

ESKOM will face a coal price squeeze by 2017-18, when its existing contracts with the major producers expire, because of the government’s insistence that the power utility’s new suppliers must be 50% plus one share black-owned.

Higher input costs for Eskom could mean further painful tariff increases for its customers.

None of the major producers meets that ownership requirement, the CEO of coal miner and trader Wescoal Holdings, André Boje, said on Monday at the release of the company’s results for the six months to September. The junior miners with majority black ownership have not made the necessary investments now to supply the state power utility with the 60-million tonnes of coal it will need to replace those contracts in four years’ time.

The utility will have to renegotiate its contracts with the major producers, and "that is when prices will rocket for Eskom", Mr Boje said. Eskom is facing an oversupply of coal because it overestimated its power requirements and underestimated the amount of power coming from renewable energy sources.

Wescoal intended to comply with this higher black economic empowerment ownership requirement but it was still uncertain over what time frame this level had to be achieved. An empowered entity, Waterberg Portion Property Investments, headed by Robinson Ramaite, owns 34.9% of Wescoal.

In the six months to September, Wescoal grew headline earnings per share by 65.2% from a year earlier, to 11.4c, on the back of a 32.5% increase in revenue to R465.7m. No interim dividend was declared.

The main driver for the increase in revenue and earnings was new production from the Intibane colliery, which came on stream in June and produced 350,234 tonnes. As a result, Wescoal’s coal output rose 39% to 896,185 tonnes.

Wescoal is also securing the necessary regulatory approvals to bring its Elandspruit mine, newly acquired from Glencore Xstrata, on stream by the last quarter of 2014. But the trading division, which contributed 56% of revenue, contributed only 7% of earnings before interest, depreciation and amortisation as volumes fell 13%.

Mr Boje said this would change when the purchase of MacPhail, which is awaiting Competition Commission approval, was completed.

The integration of the two businesses would provide bigger volumes and critical mass, and improve negotiating power with suppliers in a sector where the number of traders has risen from 12 in 2007, to 42.

Wescoal has secured a R179m debt facility from Investec, of which R79m was for the MacPhail transaction and R100m for working capital. At the end of September Wescoal’s debt-to-equity ratio was 28.6%.

Mr Boje said major coal producers such as Glencore Xstrata, BHP Billiton and Anglo Coal were considering disposals of their second- and third-tier coal assets, which could open up further acquisition opportunities. Although Wescoal was focused on supplying the domestic market, opportunities were also arising to secure more export allocation through the Richards Bay Coal Terminal (RBCT).

Referring to the recent dispute between Transnet CEO Brian Molefe and BHP Billiton over giving more junior miners access to RBCT, Mr Boje said at the price of about $72 a tonne, which prevailed for most of this year, junior miners could not afford to export.

At the Quattro Terminal set aside for junior miners, 1.1-million tonnes of the 4-million tonnes of export capacity was not used last year because of the high costs in making Rb1-specification coal, which was not justified at current coal prices.

Wescoal could still export profitably because it has secured a contract to export coal below this specification. Mr Boje said it was estimated that this year 1.8-million tonnes of the Quattro capacity would not be used.

Junior miners were not using the Matola terminal at Maputo for export either because of rail and handling costs.

Source: www.bdlive.co.za