Wescoal to pursue junior coal consolidation as black-controlled entity, ups dividend

JOHANNESBURG (miningweekly.com) – Dividend-paying coal mining and trading company Wescoal, which delivered a solid performance on strong sales and operational efficiencies at its Elandspruit colliery, is putting itself ahead in junior coal mining sector consolidation talks as a black-controlled, JSE-listed entity that has a growing presence in both the domestic and export coal markets.

Fresh from clinching coal offtake contracts with State utility Eskom plus finalising a series of coal contracts in line with its stated intention of exporting a million tonnes of coal a year, the company’s strong cash position allowed it to declare a R10-million special dividend for the six months to the end of September that is equal to the total dividend declared for the whole of last year.

Half-year revenue rose 37.1% to R1 039.4-million and earnings before interest, taxes, depreciation and amortisation (Ebitda) soared 254% to R139.3-million.

Headline earnings a share rose 445% to 27.8c a share.
  
Wescoal CEO Waheed Sulaiman told Mining Weekly Online that the company remained an active participant in pursuing junior coal mining consolidation.

However, the immediate priority is to close the 59% black-control transaction at an extraordinary general meeting of shareholders on November 23.

Wescoal CFO Bothwell Mazarura told Mining Weekly Online that if shareholders approve the transaction, the company’s transformation to majority black control will begin in the first week of December.

Its conclusion will inject R178-million of fresh equity capital into the company for investment in growth, render the Eskom contract bankable and unlock more funding.

Top of mind will be taking steps to counter the dilution effect that the attainment of black control as well as junior consolidation will bring.

Operationally,  Wescoal management has ensured that Elandspruit has operated well in the past six months, accompanied by the clinching of Eskom and export contracts that have allowed the company to have meaningful conversations with lenders against a backdrop of cash flow certainty.

The trading business, which has margins considerably smaller than those in the mining business, is being pressed to generate appropriate returns, which may result in a further reduction of its scope and scale.

Already closed is Wescoal’s trading office in Port Elizabeth with other parts of the trading business being downsized.

Elandspruit colliery, which produced 1.3-million run-of-mine (RoM) tonnes in the six months, is now at steady state and optimisation projects at the nearby processing plant have been completed.

Additional plant capacity was introduced to boost total crushing capacity to 220 000 t and coal-washing capacity to 180 000 t a month.

Intibane colliery produced 0.3-million RoM tonnes during the half-year to meet local sales demand secured in the absence of an Eskom offtake agreement and is ramping up production to match secured offtake arrangements.

Khanyisa colliery was granted a 20-year water use licence by the Department of Water and Sanitation but additional regulatory consents remain pending from the Department of Mineral Resources before mining activities can commence.

In the six months to end September, Wescoal’s mining division made R123.5-million gross profit off a revenue of R496-million.

The division sold 724 000 t of coal to Eskom, double last year’s quantity, and 1.3-million tons in all.

Wescoal’s trading division sold an 8.7%-higher 598 000 t to contribute towards the 11.4%  Ebitda increase to R32.2-million.

The mining division, which had no reportable accidents during the period, improved its lost-time injury-frequency rate to 0.21 from 1.35.

Mining’s community programmes are being reviewed in consultation with stakeholders to ensure they meet the needs of host communities.

Mining achieved a profit margin of 24.9% and an operating profit margin of 16.8% and was the main driver in lifting Wescoal’s overall profit margin from 12.8% to 18.1%.

Containment of the operating cost base has lifted the operating profit margin to 10% from last year’s low 2%.

Headline earnings a share increased to 27.8c and after-tax profit rose to R62-million from R9.8-million in 2015.

The improved profitability translated into strong cash generation, with R98.3-million in cash generated from operations.

Cash was mainly deployed to fund ongoing capital expenditure of R48.9-million, lower interest-bearing debt by R33-million and to reward shareholders with dividend payments.

The gearing ratio fell to 21.7% compared with 45.3% in the prior period.

Ongoing improvement projects at Elandspruit include establishing a small underground mining operation at a minimal capital cost and increasing overall capacity at the processing plant through modular expansions.

The Eskom coal supply contract secured involves supplying 7.5-million tons.

Wescoal wants to acquire additional resources and strategic interests in key logistics infrastructure to support its aspiration of producing at a rate of eight-million tons of RoM coal a year from three-million tons a year currently, and diversify its revenue.

An immediate priority is to conclude the black-control transaction which will see Wescoal exceeding Eskom’s black economic empowerment ownership requirements.

In late September, a subscription agreement raised Wescoal’s black ownership to well over Eskom’s requirement of 50% plus one share by December 2016.

The mining business is centred on Elandspruit in a way that Intibane and Khanyisa cannot provide because of their smaller resource.

Elandspruit’s higher quality coal is also mineable at lower cost.

Its 15-year life-of-mine compares with Intibane’s and Khanyisa’s four to five years at the current rate of mining.

On a combined basis, Wescoal is intent on producing at a rate of eight-million tonnes of RoM coal a year, which will require the purchase of additional resources.

“We have sought to maximise the value of the assets that we do have. We have managed our projects in a manner that seeks to generate the most value out of them and that’s how we are going to continue running this company so that we are stable, predictable and maximise value from the assets that we do have,” Sulaiman told Mining Weekly Online.

Cash flow is forecast to continue to be strong, which augurs well for ongoing dividend declaration that still leaves room for growth aspirations.