[miningmx.com] – SHARES in Coal of Africa (CoAL) slipped 10% today
(August 1) to R3.30/share on news that it suffered losses at its thermal coal mines,
and would have a funding shortfall of $15.7m in the September quarter
notwithstanding having raised $58.7m (R484m) in cash and debt through Investec.
The share decline is now 55% since January.
If these fourth-quarter results show anything, it’s that CoAL is caught mid-stride
between its thermal coal mining and its new strategy of becoming the dominant
coking coal producer in the Limpopo province. The sudden decline in the thermal
coal price has caught CoAL’s management by surprise and also reveals how little
flexibility there’s left in its Mpumalanga assets. It needs to bridge the shortfall.
Enter Exxaro Resources. There’s talk that Exxaro is keeping a close watch of
platinum assets, or possibly mulling diversification into copper. But neither could be
as compelling right now as a dip at CoAL which, for Exxaro, must be a screaming
buy.
That’s why deliberations to take a 30% stake in CoAL’s Makhado coking coal
resources must surely be a paper-thin pretext for a larger discussion regarding the
takeover of the company as a whole.
In Exxaro’s hands, especially with a balance sheet so lowly geared (4%) and some
R8bn in finance, CoAL would represent a logical, affordable piece of brownfields
business. Exxaro already supplies five million tonnes/year to ArcelorMittal SA
(Amsa).
In CoAL it has 8 billion tonnes of coking coal optionality on its doorstep. CoAL also
has infrastructure. The Soutpansberg to Maputo rail corridor is an expensive one in
terms of tariffs, but not as expensive as building a new one, which is de rigueur in
most other new coal districts. CoAL also has first option on some 20Mt of terminal
capacity at Maputo by dint of a deal with Grindrod, which has the port concession.
So what does Exxaro think of all this? Sipho Nkosi, Exxaro Resources CEO, says to
wait until September. That’s when a joint feasibility study on Makhado will be
complete. Pretty non-committal then. He does allow himself the following comment,
however: “The metallurgical coal industry is an asset with long-term fundamentals
that we value.’
There’s one other factor that would suggest Exxaro’s intentions regarding CoAL are
much larger than a minority stake in Makhado. When one talks of Makhado, it’s
impossible to separate it from the Chapudi coking coal assets that neighbour it. This
is a mega-mine of some scale that would earn Exxaro a major beating were it only
to take a minority position. Just how many businesses does Exxaro not want
to operate, having only 39% in Tronox; and 25% in Kumba Iron Ore?
