CoAL buys cash generative Uitkomst colliery while Makhado development advances

PERTH/JOHANNESBURG (miningweekly.com) – South Africa-focused Coal of Africa Limited (CoAL) has entered into a R275-million deal to acquire Pan African Resources Coal Holdings, a subsidiary of JSE-listed Pan African Resources, which holds a 91% interest in the Uitkomst colliery, in KwaZulu-Natal.

The group also entered into a loan agreement with the Industrial Development Corporation (IDC) to advance funding of up to R240-million to CoAL subsidiary Baobab Mining and Exploration to progress the operations of CoAL’s flagship Makhado project.

These actions would propel the company forward, CoAL CEO David Brown said during a conference call on Wednesday, noting the company’s narrowed focus on restructuring its balance sheet and aligning its operations and project pipeline to be better positioned to provide a platform for growth in the junior coal sector.

With Makhado unlikely to generate cash flow during its pre-production phase over the next two to three years, the latest acquisition of a cash-generative asset will prove complementary to CoAL’s Makhado project and development project pipeline, providing cash flows to support its operations.

The Uitkomst colliery, which comprises an underground coal mine, known as the South mine, and a planned life-of-mine extension into the northern area, had processed 236 011 t of coal, sold 327 202 t of metallurgical quality coal and generated revenues of R225-million during the six months ended December.

The acquisition from Pan African Resources will be settled through cash and shares, with R125-million paid in cash and a further R25-million under a deferred consideration, which can be repaid by CoAL at any time prior to the two-year anniversary of the acquisition.

In addition, CoAL will issue 261.28-million shares, equivalent to R125-million and equating to some 9.3% of the company’s share capital, with the deemed issue price of the consideration based on an 8% discount to CoAL’s volume weighted average price at March 31.

The company aims to conclude the transaction by June, subject to a number of conditions, including regulatory approval, Uitkomst entering into a supply agreement on terms acceptable to CoAL and Uitkomst being released from its obligations as a guarantor in terms of Pan African facility agreements.

The cash consideration will be funded through internal cash resources and through the proceeds of a $13-million equity investment from Summer Trees and M&G Investment Management, which subscribed for 335.25-million shares in CoAL.

Meanwhile, the IDC will advance loan funding to CoAL subsidiary Baobab in two equal tranches of R120-million.

“While final agreements have now been executed, the transaction with the IDC was initially agreed in December 2016 and is reflective of the company’s position at that time. The funding of pre-project activities at Makhado is welcomed as we progress the project towards a construction start subject to regulatory and funding requirements,” Brown said.

On the third anniversary of each advance, Baobab will be required to repay the IDC the amount advanced, as well as the amount equal to a real after tax internal rate of return equal to 16% of the amount of each advance.

CoAL will stand surety for Baobab’s obligations to make repayments and the company will issue the IDC with warrants pursuant to each advance date, as soon as shareholder approval is obtained for each issue.

Following the advance of the first tranche, CoAL will issue warrants over ordinary shares equating to 2.5% of the entire issued capital of the company as of December 5, 2016. On the advance of the second tranche, the company will issue warrants equal to a further 2.5% interest in the company, as at the date of the second advance.

The price at which the IDC shall be entitled to buy the CoAL shares will equal a 30% premium to the 30-day volume weighted average price of CoAL shares as traded on the JSE as at December 5, 2016, equating to 60c a share.

The IDC shall be entitled to exercise the warrants for a period of five years from the date of issue.

Meanwhile, upon each advance date, Baobab will also be required to issue new ordinary shares to the IDC equivalent to 5% of the entire share capital of Baobab at the time, meaning CoAL’s shareholding in its subsidiary will be diluted accordingly.

If the second advance is not required, the IDC could elect to either be issued with a 5% shareholding in Baobab for a subscription price of R60-million, or Baobab will issue shares equivalent to 1% of the company for an aggregate subscription price of R1, or the IDC could issue a penalty fee of R12-million.

According to a 2013 definitive feasibility study, the Makhado project will produce 2.3-million tons a year of hard coking coal and 3.2-million tons a year of thermal coal over a 16-year mine life.

Reporting by Esmarie Swanepoel and Natasha Odendaal.