Despite navigating murky waters, coal junior Buffalo swings back into the black as coal prices rise

VANCOUVER (miningweekly.com) – Dual-listed, high-quality coal producer Buffalo Coal has swung back to profit for the first three months of 2017, boosted by improving demand for its anthracite and bituminous coal.

The Johannesburg-based junior public company, with listings on the TSX-V and the JSE’s AltX exchanges and reporting in South African rands, recorded headline profit for the period of R0.01 a share, compared with a loss of R0.04 a year earlier. The net profit for the quarter ended March was R4.2-million, compared with a net loss of R12.1-million for the comparable quarter in 2016.

Net revenues earned came to R163.9-million, missing a single analyst forecast for about R185.5-million, but better that the R138.3-million a year earlier. This reflected an increase of 18.6%, because of higher realised sales prices. During the period, the group’s sales were 227 000 t, up from 198 000 t/y earlier, mainly owing to 39 000 t anthracite discard sold during the period.

Bituminous sales for the period totalled 121 000 t, of which 50.9% were export sales and 49.1% were domestic sales, a 9.8% year-on-year fall, in line with a decrease in bituminous saleable output.

Anthracite sales (including calcine) for the first quarter were 106 000 t, of which 71.3% were export sales and 28.7% were domestic sales, up by 66.3% over the same period in 2016.

Total run-of-mine output for the period was 8.9% lower at 342 000 t, as output at the Magdalena underground mine, in KwaZulu-Natal, slowed because of difficult geological mining conditions and pitroom constraints, Buffalo advised.

The Aviemore operation saw 10.4% lower output because it encountered dykes, which slowed down production.

LEGAL WOES
Buffalo reported that at March 31, the group had outstanding debt with Investec of R178.6-million and $27.3-million outstanding on the RCF convertible loan.

Subsidiary BC Dundee was required to meet specified debt covenants at March 31, and was in breach of certain of these covenants at this date, resulting in an event of default under the debt agreement. However, on November 22, 2016, Investec provided a forbearance letter stating that it does not intend to exercise its rights to request early payment of the outstanding debt.

However, it has reserved its right to review this decision periodically, with no obligation to keep the company advised in this, Buffalo cautioned.

Owing to continued cash constraints, the scheduled R7.5-million repayment of the term loan facility was not made on time, also constituting an event of default. Subsequent to quarter-end, BC Dundee entered into the sixth amendment to the term loan and revolving credit agreement and the undrawn working capital facility balance of R22-million was made available.

Further, Buffalo last year received a letter of demand from the South African Revenue Service (SARS) regarding an investigation conducted by them on diesel refunds claimed by BC Dundee under the South African Customs and Excise Act, 91 of 1964.

The SARS commissioner has disallowed diesel refunds in the amount of R13.8-million (including interest) for the period December 2012 to February 2016. Buffalo has applied to SARS to suspend payment; however, this request was denied. SARS has requested payment in three equal instalments of R4.9-million between March and May. Buffalo has requested SARS to enter into more favourable instalment terms and is awaiting feedback.

Buffalo advised that it has disputed the disallowance of diesel refunds and believes it has a defendable case, however, the outstanding amount owing has been included in trade and other payables. During March and April, the company made the first and second instalment repayment of R4.9-million.

During 2016, Buffalo’s 70%-owned Zinoju Coal unit received correspondence from SARS after conducting an audit of the 2012 to 2014 tax returns, disallowing a R3-million expense claimed in the 2012 tax return. The amount attracted penalties of R1.5-million and interest of R1.8-million, all of which have been paid at the end of the quarter.

Buffalo has raised an objection to SARS disputing the penalties and interest levied, however, the objection was disallowed. The company the lodged an appeal to the SARS commissioner to defend its case and is awaiting feedback from SARS.

Meanwhile, legal action has been brought by the Avemore Trust in the High Court of South Africa against, among others, the South African Minister of Mineral Resources, BC Dundee and Zinoju regarding Mining Right 174, challenging the decision by the Minister, subsequent to an internal appeal process concluded during September 2014, to grant a converted mining right to BC Dundee and to grant consent for the cession of the converted mining right to Zinoju.

Buffalo stated that despite there having been various settlement offers between the parties, should settlement not be reached, BC Dundee and Zinoju intended to oppose the application. The company’s external legal team, including senior counsel, have advised of a defendable case in terms of Avemore Trust’s approach to the matter.

MR301, as well as the approval for the environmental management plan, for its KwaZulu-Natal-based colliery was retracted on the back of “procedural issues” relating to an earlier objection by Avemore Trust over the award process.

On September 15, 2015, an urgent court order was granted, pending final determination, for the Ministerial decision to be of no force and effect, to interdict the minister from awarding MR301 to any other party and for the company to continue to mine in terms of MR301.

The company has instituted a review application in October 2015 to obtain final relief in the form of an order setting aside the Ministerial decision. On March 23, 2016, Avemore Trust filed a counter application for the Ministerial decision to be referred for consideration by the Minister. The company's external legal team has indicated a strong likelihood of the review application being successful.

Both matters are ongoing.