Coal of Africa moves into production
Article Date: Jun 09 2009Whatever the misgivings of environmentalists and complaints of rival fuel lobbies, even in a recession there remains a strong demand for coal to generate electricity in parts of the world afflicted with power shortages and to enable steelmakers and other industries to keep their furnaces glowing. One beneficiary from this state of affairs is South Africa-focused Coal of Africa Ltd (CoAL), which is poised to switch next year from losing money to making substantial profits.
Based in Perth, Western Australia, and steered by abrasive managing director Simon Farrell, AIM-quoted CoAL has newly started producing thermal coal for power generation from its Mooiplats project. The company already boasts combined reserves and resources of 1.7 billion tonnes and suggests this figure could be nearly doubled before long.
CoAL also has a crucial off-take agreement with Indian tycoon Lakshmi Mittal’s Luxembourg-based steelmaking giant Arcelor Mittal and, suggests Farrell, might consider acquisitions and moving its shares, also listed in Johannesburg and Australia, from AIM to the Full List. Arcelor Mittal’s majority-owned South African subsidiary has agreed in principle to take the first 2.5 million tonnes a year of hard coking coal for its furnaces produced by another CoAL project, Vele, which the company aims to have in production by the end of this year.
The deal also gives Arcelor Mittal, which has taken a 16.3 per cent stake in CoAL, an option on the next 2.5 million tonnes of annual production from Vele. The agreement in principle becomes a hard deal after CoAL has to take a bulk sampling of Vele’s contents, for which it needs Ministry of Mines approval, but which Farrell sounds confident of completing in time.
By the end of this year, Farrell says he expects to have Mooiplats yielding positive cash flow, with planned output rising from 140,000 tonnes a month next December to 200,000 tonnes a month by the second half of next year. Now seeking firm off-take agreements for Mooiplats’ coal, he cites estimates by Australia’s Macquarie investment group that, although world supplies of both coking and thermal coal are likely to exceed demand this year, demand is set to grow by five to seven per cent thereafter, fuelled by China, India, Brazil and Japan.
CoAL, which has no debt and £50 million in the bank, suggests the capital spending needed to take Vele into production could be some £22 million. Highlighting available infrastructure, access to ports and intrinsically low costs, Farrell suggests that Mooiplats’ thermal coal output could generate an annual operating margin of between £330 million and £500 million and hints at potential cash flow from that source of up to £70 million in the first full year, reaching between £155 million and £250 million the year after.
For Vele, Farrell foreshadows annual operating margins of around £62 million. CoAL’s strategy is to use cash flow from Mooiplats and Vele to bring another South African coking coal project, Makhado, near the Zimbabwean border and with estimated resources of 1.5 billion tonnes, into production.
Arcelor Mittal is not the company’s largest shareholder. Some 17.3 per cent is owned by Africa Management, partly representing the interests of Tokyo Sexwale, CoAL’s South African Black Economic Empowerment partner and a member of the South African government.
Hitherto, investing in CoAL has been a nerve-wracking experience. After soaring from 10.5p in 2006 to 223p last year, the shares collapsed to 26.5p before rallying to 93p now. Obviously, in a recession there is a risk that key buyers will stay away or seek to renege on their commitments, but the company seems confident about its existing deals and longer-term prospects.
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