April 21, 2010
Continental Coal Is Building Up A Nice Head Of Steam In South Africa, As It Powers On Towards A Production Goal Of Nine Million Tonnes Per Year
By Charles Wyatt
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This year looks like being pretty exciting for Australian-listed Continental Coal, which has its assets in South Africa. It helps, of course, that coal is flavour of the month, but you can have huge amounts of coal but will make no money out of it unless off-take agreements are in place and unless transportation is no great problem. In the case of ContiCoal, as it’s called, it started mining activities at its Vlakvarkfontein mine a few weeks ago, blasting is now underway, and it expects to achieve first coal sales in May. The company has secured up to 300,000tonnes per month of rail allocation for its planned exports of thermal coal. This allocation matches the company’s forecast annual steady state production of export thermal coal from its Vlakvarkfontein, Vaalbank and Project X coal mines in the coming 18 to 24 months. So that is transportation sorted. Meanwhile, Andrew Macaulay and Bruce Buthelezi, chairman and managing director of the company, have combined with director Pete Landau to pull off a blinder as far as off-take is concerned.
As Bruce admits, the deal was a long time in the making, but EDF Energy, Europe’s leading electricity producer, agreed at the end of March to provide a US$20 million financing package for the development of these same mines in return for securing all production of thermal coal for export. The funds will be repaid over five years from the sale of the coal, with the price based on market AP14 benchmark FOB Richards Bay for an initial period of 20 years. Vaalbank and Project X mines are expected to start production at a combined rate of 2.4 million tonnes per year in 2011, so that fits together very nicely and it is all being tied up on a big red bow with ContiCoal issuing 40 million options to EDF at A$0.05 each and another 40 million at A$0.10 cents each. The present share price is A$0.057, so EDF will not be exercising the options yet awhile, but when it does ContiCoal’s finances will benefit accordingly.
As a result of this initial deal the company can complete on the acquisitions of its assets and get on with development. Only three weeks on, however, and it has agreed a similar deal for its Vlakplaats coal mine – same amount and repayable out of coal sales. In no seconds flat Continental Coal has transformed itself from an also-ran into a leading South African junior coal company with first production only a month away. This has not yet been fully recognised in the share price, which has risen only modestly from the A$0.048 cents price they were trading at when the company requested suspension prior to these announcements. Maybe the current noise around coal is so loud that ContiCoal is struggling to make itself heard, or maybe Australian investors are worried about South African politics, or both.
What they may have missed too is the additional US$27 million funding that has been agreed with a South African resource-focussed investment consortium. This is being delivered by way of a five year debt facility at 10 per cent interest, and will be used to pay off amounts outstanding under the company’s existing debt facility as well as to provide a top -up as required for completing acquisitions and for developing Vlakplaats. There is a fair degree of flexibility over repayments, as they can either be repaid out of cash flow over the five year period, or fully on maturity, or converted into equity on a basis which will have to be negotiated in advance. There is an indication here that the anonymous resource focused investment consortium could be part of a BEE plan, but a word with Bruce Buthelezi shows that this is not the case. ContiCoal’s BEE partner, with a 26 per cent stake, is Masawu Investments. Bruce points out that Masawu is effectively him and some friends.
All the four coal mines involved in these off-take and financing deals are located in South Africa’s Central Basin, to the east of Johannesburg. This coal mining region accounts for 75 per cent of the country’s total coal resources, and 80 per cent of production. Vlakvarkfontein, Vlakplaats, Vaalbank and Project X lie within 70 kilometres of each other in the Witbank coalfield, where there are 60 opencast and underground collieries in operation. All of which means infrastructure is not a problem. Vlakvarkfontein, in which ContiCoal has a 60 per cent interest, is at the eastern edge of the coalfield and lies less than five kilometres from the Richards Bay rail line and 13 kilometres from Eskom’s Kendal Power Station.
Vaalbank will be an underground bord and pillar single seam mining operation focussing on the # 4 Seam which averages 2.44 metres in thickness. Its neighbour, the Dorstfontein Colliery, is currently developing 40 million tonnes of resources along this same seam. ContiCoal is working on 75 million tonnes of resources which should give it a 30 year mine life and, like Vlakvarkfontein, it is double washing coal to product export thermal coal and domestic coal. The difference between the two mines is that the domestic coal is expected to sell at a slightly better price, which will push average revenue up to Rand 460 per tonne, compared with costs of Rand 341 per tonne. Vaalbank is only 10 kilometres south of Project X, which is right next door to the Richards Bay rail line and the Komati Power Station. Project X will also be an underground operation, similar to Vaalbank, focussed on the same two products and mining #2 Seam as well as #4 over a 20 year life. It is likely to come into production by the end of this year, several months earlier than Vaalbank.
There are more mines in the offing, but the last of the four which have funding and off-takes in place is Vlakplaats, a project which is surrounded by others producing 7.4 million tonnes per year, mostly for the export market. Vlakplaats is going to be a combined open pit and underground mining operation exploiting the same two seams as Vaalbank and Project X will exploit, but the difference is that Vlakplaats has resources of 122 million tonnes, which should keep it going for 50 years. It will produce mostly export A-grade thermal coal, meaning that this mine will probably be the star of the ContiCoal show when production starts at the end of 2011. By that time ContiCoal will be well on the way to its long-term production target of nine million tonnes per year.
This is a company with a good story to tell, with an excellent portfolio of coal assets and an ambitious production profile in one of the world’s largest coal mining regions, where all the infrastructure is close to hand. It could not have a better BEE partner than its own founder and managing director, and he will be instrumental in further strategic acquisitions. The company now has to spread the story further afield and generate more attention from investors, lest a competitor make an opportunistic bid. Maybe a presentation at one of our Forums would get things moving, as the bullish case for thermal coal exported to China and India remains strong.