Pictured: Makhado hs the potential to be a world-class hard coking coal mine.

The last six months have not been easy for mid-tier coal producer Coal of Africa (CoAL), with poor production output, wage strikes and a high LTI rate. But it’s not all bad news, prospects at its Makhado project look first rate, writes Laura Cornish.

Fatalities, LTIs and strikes have impacted the coal sector, including CoAL. It seems unfortunate that in a period when the world, and South Africa in particular, is in desperate need of coal, the sector cannot deliver. Thanks to the Matola port derailment, which CoAL relies heavily upon, an asset closing and another up for sale, the company has delivered unhealthy production statistics of its six-month period to December 2012, with no promise for a brighter short-term future.

A restructure or a sale

The eMalahleni-based Vuna colliery’s coal reserve was due to be depleted by the end of March 2013, at which time the supply of ROM coal to the Woestalleen complex will cease. While the company continues to assess various options to restructure the Woestalleen processing complex, it has already engaged all stakeholders in a section 189(A) process, notifying the 274 affected employees of the pending closure of the Vuna colliery and its impact on the complex.

CoAL has also started a tender process for the sale of this asset and various offers are already being evaluated.

The situation at Mooiplaats is equally dismal. Four of the eight LTIs recorded at the company’s Ermelo Mooiplaats colliery resulted from an incident involving a mine vehicle transporting employees. CEO John Wallington says the focus on improving safety management at the mine has intensified as a result.

Operations at Mooiplaats also were temporarily suspended at the end of September 2012 when the 176 National Union of Mineworkers (NUM) members, of the 368 people employed at the colliery, embarked on a protected wage-related strike. A wage agreement was subsequently reached resulting in employees returning to work on 1 November 2012. The strike action at Mooiplaats was primarily responsible for ROM production decreasing by 41.4% to 388 100 t while coal processed declined from 804 000 t to 388 000 t. As part of the initiative to address the long-term viability of the operation, CoAL is assessing various strategic restructuring alternatives, which may include disposal. Following the derailment on the Matola Corridor on 18 February 2013, production at Mooiplaats will continue until stockpile capacity is reached.

The upside

The good news is that mining researcher and consultant Wood Mackenzie has confirmed that CoAL’s Makhado project has the potential to be a world-class hard coking coal product, with the potential to produce approximately 2 Mtpa of hard coking coal and 3 Mtpa of thermal coal.

The Soutspansberg coalfields-based Makhado project represents CoAL’s initial project within the greater Soutpansberg coalfield area and is currently finalising the additional external verification processes required for the definitive feasibility study (DFS) on the opencast mining area. The DFS includes both hard coking coal and a thermal coal fraction and since Q3, CY2012, has been upgraded to provide greater operational certainty and reduced project risk. The study is expected to be published Q2, CY2013.

“The confirmation of the product quality as a hard coking coal supports our technical assessment and augurs extremely well for placing this product into the market and the future development of the project,” says Wallington.

Wood Mackenzie has assessed the typical quality of the coking coal at Makhado to be hard coking based on its specifications relative to other international coking coal products. The consideration was based on the global outlook for coking coal and the coal quality parameters that contribute to Makhado’s value-in-use in order to estimate the attractiveness of the coal in selected target markets. These markets are closely aligned to the key growth destinations for seaborne coking coal.

The Vele coking and thermal coal colliery achieved 1 000 fatality-free production shifts during the reporting period and continued to produce export grade thermal coal to offset costs while the test trials on potential metallurgical coal are being concluded. The mine produced 449 000 t of ROM coal and 439 000 t of coal was processed during the period, yielding 126 318 t (FY2012 H2: 46 066 t) of saleable export quality thermal coal.

The intended plant expansion at Vele is expected to deliver improved yields and operational efficiencies. It has been divided into two phases:

  • Phase 1 – will allow for the dewatering of the ultra-fines product by installing filter presses eliminating the need for the temporary slurry pond and is scheduled for completion early in the second quarter of CY2013.
  • Phase 2 – construction is expected to commence in CY2013 and be completed in the second half of CY2014. The approval of Vele Phase 2 by the board is subject to the completion of product testing currently underway. This phase includes the installation of a permanent ROM tip and crushing facility, primary and middlings coal wash plant modules as well as a fines recovery plant.

Production at Velecolliery has been temporarily suspended following the derailment primarily to reduce operating cash costs during this period and the lack of stockpile capacity.

Commenting on CoAL’s performance over thepast six months ended December 2012, Wallingtonsays: “The key development of this period was the strategic partnership agreement signed with Beijing Haohua Energy Resource Company Limited (BHE) through the equity placement of US$100 million (R924.7 million). The partnership with BHE has significantly strengthened the financial structure of the company, which will aid in the development of CoAL’s projects. The exchange of technical and operational expertise will facilitate the growth and development of CoAL and the coking coal industry in South Africa.”

Hopefully, the next reporting period for CoAL will deliver a better performance. A completed restructure of operations, an export route back on track and the progression of its Makhado project are worth looking forward to.

Beijing Haohua Energy Resource – CoAL’s strategic partner

At the end of September 2012, BHE through its subsidiary Haohua Energy International (HEI) (Hong Kong)submitted a binding offer to provide the company with US$100 million of equity funding with the transaction to be executed in two stages:

  • an initial placement of US$20 million, completed during the reporting period
  • a conditional placement of US$80 million.

All necessary People’s Republic of China CoAL shareholder, regulatory and statutory approvals required for the conditional placement were satisfied in January 2013 and HEI subscribed for a further US$80 million of shares in CoAL at £0.25 (R3.49) per share. The parties have commenced discussions regarding cooperation on commercial, technical and operational matters, enabling the company to draw on BHE’s expertise during the development of the Makhado project as well as the Chapudi, Mopane and Makhado extension projects.

The six months under review

  • ten LTIs) during the period including a vehicle incident at the Mooiplaats thermal coal colliery in July 2012 where four employees were injured
  • 2.6 Mt of ROM coal and just over 1 Mt of export quality coal produced during the six months
  • reduction in export coal sales to 636 264 t due to the reduction in production volumes after the strike action that lasted for six weeks at Mooiplaats, and the impact of tippler upgrades at the Matola terminal in Maputo, Mozambique
  • ongoing pressure on index linked RB1 export quality thermal coal prices, which declined from an average of US$100/t during the six months ended 30 June 2012 to an average of US$87/tfor the period ended 31 December 2012
  • sales of export quality coal on the domestic market during the six months decreased by 13% to 341 685 t
  • sales of middling coal increased by 25.9% from 375 768 t in the six months ended June 2012 to 473 154 t for the December 2012 period. A new one year supply agreement was concluded with Eskom for the supply of coal on improved terms
  • agreement concluded with BHE wholly owned subsidiary, Haohua Energy International (Hong Kong)
  • total gross equity capital raise of US$53.5 million through a placing of US$44.8 million with institutional investors and an equity derivative facility of US$8.7million with Investec Bank.