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SPOTLIGHT: CoAL seeks $540m to fund growth

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Coal of Africa (CoAL) needs more than $540m in finance to back its continuing transformation from junior to producing miner, ceo John Wallington told Metal Bulletin.

The capital will be used to bring its Makhado coal mine in Limpopo province, South Africa, into commission in about two years’ time, and step up other projects in order to double its output.

Its other big challenge is securing affordable rail transport for its consignments between Limpopo and South African ports, Wallington said.

CoAL took on the status of mining company, as opposed to junior, when it commissioned its Vele mine, in Limpopo, at the start of this year. The company plans to boost output there to 1 million tpy by the end of 2012, Wallington said.

The Makhado mine should come online in 2014. In its first phase of output, it should produce 2.5 million tpy of what, at this point, looks like hard coking coal.

For this expansion, the company needs finance.

“When your company is transforming from junior to operating miner, the balance sheet is a challenge. You’re not generating cash yet, but you are operating. You must finance that, plus growth,” he said.

“It’s an exciting time for us, but also nervy because it is a high-risk period. We are vulnerable,” he added.

In its September 2011 quarterly statement, CoAL reported that cash reserves had declined to $8.8 million at the end of September, compared with $22.8 million at the end of June.

CoAL needs $43 million by the end of April to pay for the Chapudi asset, also in Limpopo, which it is buying from Rio Tinto, as well as $500 million to develop Makhado.

The company is negotiating with Exxaro Coal for it to take up a 30% option in the Makhado project, which would give the project a good capital boost.

CoAL is also finalising an offtake agreement with ArcelorMittal Group, for half of Makhado’s output.

ArcelorMittal is expected to sign an offtake deal on the strength of the results of tests on Makhado coal samples, but these tests have been taking much longer than either company expected.

This has been one of the factors making it a nerve-racking time for CoAL, Wallington said.

The steelmaker is now close to agreeing the offtake deal, however, and Exxaro’s executive general manager for business development, Ernst Venter, told Metal Bulletin that his company is likely to take up the option in the project.

A decision will be made before the end of May, he said.

India in CoAL’s sights
Looking even further ahead, Wallington said CoAL will be targeting India, as it is the most attractive international market for coking coal.

“India will rely on South Africa, Mozambique and Australia for its coking coal. It will become an important customer of ours in the next 10-20 years,” he added.

Better rail transport needed
“Infrastructure is a massive concern, but it is a cost issue, rather than supply,” Wallington said.

Rates on the Maputo line to the Matola Coal Terminal are double those on the line to Richards Bay, Wallington said.

“This [cost disadvantage] is not going to support significant expansion from the Limpopo [region],” he added.

“[However] although rates on the Maputo-Matola line are higher, the route is still viable, and CoAL is in constant discussions with [rail operator] Transnet about the [freight] rates.”

Another constraint is that while the Richards Bay Coal Terminal could ship 91 million tpy and could accommodate an increase in coal shipments, this cannot be serviced by the existing rail capacity, Wallington said.

Transnet is planning improvements to the rail network over the next few years to ease pressure on the coal corridor between the Limpopo, where CoAL’s Vele mine is located, and Richards Bay, but bottlenecks will persist until these are implemented.

Analyst Carole Ferguson, of Fairfax in London, agrees with Wallington that rail transport is expensive, but said the margins on coking coal can absorb the costs.

Bianca Markram
editorial@metalbulletin.com

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