Wescoal pursues Keaton in R525m acquisition

JOHANNESBURG (miningweekly.com) – Fresh from concluding its R178-million black economic empowerment (BEE) transformation deal, coal mining and trading company Wescoal has made a formal bid for junior coal miner Keaton Energy, securing significant resources for future development.

Wescoal, setting its sights on being a key player in the consolidation of the South African junior coal mining sector as a means to significantly grow the company, submitted a firm offer this week to acquire Keaton for around R525.59-million.

The acquisition will be settled through a scheme of arrangement equating to R1.80 a Keaton share, comprising a R1.20 a share, or R350.39-million, settlement in cash and the balance through the issue of 87.6-million Wescoal ordinary shares.

The share component comprised a switch ratio of 0.3 Wescoal shares for every one Keaton share held, at an issue price of R2 a consideration share.

Upon completion of the deal during the first half of the 2018 financial year, Keaton will become a wholly-owned subsidiary of Wescoal and be delisted from the JSE.

The transaction excludes Keaton’s assets marked for disposal, namely Leeuw Mining and Exploration and Amalahle.

Wescoal previously reported optimism for the year ahead as it leveraged a series of milestones and initiatives to support its aspirations for eight-million tons a year of run-of-mine (RoM) and its revenue diversification strategy.

The Keaton acquisition stemmed from the strong platform the company built after laying the foundations for a total renewal in 2015 and a successful 2016, Wescoal CEO Waheed Sulaiman said in an update to shareholders.

In December, Wescoal successfully concluded and implemented the five-year 51% direct BEE deal, earmarking the multimillion-rand equity injection for further inorganic, acquisitive growth, as well as unlocking organic growth options.

In 2016, the company also concluded contracts with State-owned power utility Eskom and export coal sale contracts through the expansion of Elandspruit colliery and operationalising the Khanyisa colliery.

Wescoal’s five-year coal supply agreement with Eskom, which started on November 1, will see the delivery of some 7.8-million tons of coal beneficiated at Wescoal’s processing plant, which equates to 165 000 t/m RoM coal from Elandspruit.

The group also concluded export contracts for more than one-million tons a year for the next three years, significantly derisking and diversifying the miner’s future revenue streams.

“The Keaton business being acquired offers the benefits of consolidation, alignment of infrastructure, regional synergies and also meets the standards for Eskom and export contracts,” he explained.

Several other synergies have been identified, enabling the enlarged entity to significantly reduce operating costs and overhead expenses.

The deal offered economies of scale, including an opportunity to leverage overheads and lower fixed unit costs across businesses, saving costs through the potential rationalisation of Keaton Energy and Wescoal head offices; the bolstering of financial and operating efficiencies and a reduction in administrative costs.

In addition, Wescoal will gain scale of production and size through the ownership of low-cost, long-life core assets with a large resource base and significant infrastructure; an increased resource base for Eskom supply and potentially for the export market; and further greenfield upside within Keaton’s own pipeline.

Benefits to the company’s balance sheet and free cash generation structures will also be seen, with an opportunity to restructure and consolidate debt funding with potential savings realised; a higher degree of coal price leverage with respect to large customers; and the enhanced ability to raise funding and fund pipeline and acquisition assets from a larger pool of operating cash flows.

Wescoal plans to fund the acquisition through a combination of internal cash resources, debt facilities and the cash raised by Wescoal through its BEE transaction implemented in December.

The transaction remains subject to due process and approvals by the relevant competition authorities and all shareholders, besides others.