Mar­riage of con­ve­nience

Keaton’s ab­sorp­tion into Wescoal may be the tonic it needs, writes Char­lotte Mathews

Financial Mail - Investors Monthly - - Feature -

It in­tends to make more pur­chases in the coal sec­tor, whether listed or un­listed com­pa­nies or stand­alone projects

Keaton En­ergy and Wescoal Hold­ings both went through ma­jor up­heavals two years ago. Wescoal has emerged stronger; Keaton has lost a lit­tle of its mojo. Its ab­sorp­tion into Wescoal may be the tonic its op­er­a­tions need.

In the first few months of 2015 there was a board­room fall­out at Wescoal be­tween chair­man Robin­son Ra­maite and founder/CEO An­dre Boje over its em­pow­er­ment strat­egy, re­sult­ing in Boje’s de­par­ture. Un­der Ra­maite, and Boje’s re­place­ment Wa­heed Su­laiman, Wescoal had pushed up its em­pow­er­ment share­hold­ing above 60% by late last year, achiev­ing more than the 50% plus one share in­sisted on by ma­jor cus­tomer Eskom.

Around the same time, Keaton dis­cov­ered em­ploy­ees of its Vaalkrantz col­liery had been com­plicit in steal­ing about R24.7m of stock over a 12month pe­riod. The in­ter­nal theft was par­tic­u­larly un­for­tu­nate be­cause Keaton had been car­ry­ing the loss-mak­ing mine for some time to avoid re­trench­ments. Though Keaton said col­lu­sion was hard to de­tect, the event shook the mar­ket’s faith in Keaton’s man­age­ment.

By the end of Jan­uary this year, just be­fore the Wescoal of­fer was an­nounced, Keaton’s shares at 141c were still about 36% less than they were at the be­gin­ning of 2015, while Wescoal’s were 9% bet­ter.

Coal min­ers like Keaton and Wescoal with lit­tle in the way of coal ex­ports have been buf­feted by neg­a­tive sen­ti­ment over Eskom’s han­dling of its coal con­tracts, so share price per­for­mance has not been im­pres­sive.

In early June, Keaton and Wescoal share­hold­ers voted in favour of a scheme of ar­range­ment pre­sented by Wescoal, un­der which Wescoal has of­fered R526m or 180c/share for Keaton shares: 120c to be paid in cash and the rest in Wescoal shares in the ra­tio of 0.30 of a Wescoal share for one Keaton share. It re­sults in the delist­ing of Keaton.

Chris Lo­gan, CEO of Op­por­tune In­vest­ments, who held just over 9m Keaton shares at the time of the gen­eral meet­ing to vote on Wescoal’s of­fer, said he was not a par­tic­u­lar fan of min­ing shares but he bought Keaton shares af­ter the of­fer was an­nounced as a value play be­cause they were trad­ing at a sig­nif­i­cant dis­count, some­times up to 36%, to the of­fer price. The dis­count might have re­flected some of the com­plex­i­ties and con­di­tions to the deal. He said he re­mained open­minded on whether he would re­tain the Wescoal shares he re­ceived un­der the of­fer.

Share­holder Al­bie Cil­liers ques­tioned in e-mails to Keaton and at the gen­eral meet­ing whether Keaton share­hold­ers were be­ing of­fered a fair price. He asked Keaton chair­man David Sal­ter what the di­rec­tors of Keaton con­sid­ered to be the value of Keaton shares but Sal­ter would not be drawn.

Sal­ter said in­de­pen­dent ex­perts had ex­pressed a view on the of­fer price, the board was pre­sent­ing it to share­hold­ers to de­cide whether to ac­cept it. The di­rec­tors and other ma­jor share­hold­ers had ac­cepted it on be­half of the shares they held. The shares were only worth what some­one was pre­pared to pay for them, he said.

The only re­main­ing con­di­tions af­ter share­holder ap­provals re­mained the fi­nal­i­sa­tion of the sale of Keaton’s Vaalkrantz col­liery to Bayete Min­ing, which Sal­ter said awaited only one sig­na­ture, and ap­proval from the com­pe­ti­tion com­mis­sion. The com­mis­sion ap­proved it un­con­di­tion­ally on June 7.

The 60c Keaton share­hold­ers are re­ceiv­ing in the form of Wescoal shares could be worth re­tain­ing. While there is noth­ing Wescoal man­age­ment can do about the wider oper­at­ing en­vi­ron­ment for coal min­ers, the com­bined en­tity’s em­pow­er­ment cre­den­tials, highly mo­tived man­age­ment and grow­ing crit­i­cal mass put it in a com­pet­i­tive po­si­tion to se­cure more as­sets, more Eskom con-

The only re­main­ing con­di­tions af­ter share­holder ap­provals re­mained the fi­nal­i­sa­tion of the sale of Keaton’s Vaalkrantz col­liery

tracts and grow its ex­ports.

Mo­men­tum SP Reid an­a­lyst Si­bonginkosi Nyanga says the merger with Keaton will help Wescoal to achieve its goal of be­ing an 8Mt/year coal pro­ducer. Be­ing a larger pro­ducer, with black em­pow­er­ment cre­den­tials, would ben­e­fit Wescoal as a sup­plier to Eskom. Keaton’s ma­jor share­hold­ers sup­ported the deal and it would pro­vide Keaton with new man­age­ment. Nyanga says Mo­men­tum SP Reid main­tains a pos­i­tive out­look on Wescoal shares.

Fi­nan­cial re­sults for both com­pa­nies for the year to March will be pub­lished be­fore the end of June. Based on in­terim re­sults and sub­se­quent op­er­a­tional up­dates, the Wescoal-Keaton group will be pro­duc­ing at least 8Mt of coal a year in the near term and grow­ing its rev­enue from the cur­rent R3bn.

The 8Mt in­cludes the pro­duc­tion that Keaton’s Moab­svelden project will add. Moab­svelden has ob­tained its in­te­grated wa­ter use li­cence and at last re­port was seek­ing fi­nance to be­gin con­struc­tion. On Wescoal’s side, its Eland­spruit, In­tibane and Khany­isa com­plexes are all ramp­ing up to steady state pro­duc­tion.

Keaton’s Vang­gat­fontein and Moab­svelden are near Ken­dal power sta­tion, as are Wescoal’s Khany­isa and In­tibane mines. Eland­spruit is closer to Mid­del­burg.

Among its goals at in­terim stage, Wescoal cited the need to grow its re­sources be­yond the cur­rent 15-year hori­zon. It said the Keaton deal would give its share­hold­ers ac­cess to a busi­ness with long-life core as­sets, a strong pipe­line of projects and would im­prove Wescoal’s price and liq­uid­ity by adding more share­hold­ers. There were po­ten­tial syn­er­gies and economies of scale, it said. The deal would give it greater price lever­age when ne­go­ti­at­ing with large cus­tomers and would en­hance its abil­ity to raise fund­ing.

Su­laiman said de­spite the di­lu­tion re­sult­ing from is­su­ing shares to Keaton share­hold­ers, af­ter the deal Wescoal’s black share­hold­ing would re­main well above 50% since Keaton also has black share­hold­ers.

Af­ter Wescoal’s BEE deal late last year, a group of black share­hold­ers in a spe­cial pur­pose ve­hi­cle hold more than 57%-59% of Wescoal’s shares and are locked in for five years. Their stake will drop be­low 50% as a re­sult of the di­lu­tion, but Wescoal has other black share­hold­ers, who are not locked in, such as Su­laiman him­self.

Af­ter the takeover, Keaton CEO Mandi Glad and chief oper­at­ing of­fi­cer Jacques Ros­souw will depart. Su­laiman says Wescoal does not need to add more se­nior man­age­ment. Its own man­age­ment team is skilled and en­er­getic and able to run the larger en­tity.

There are no plans to sell any Keaton as­sets, he says. Keaton was al­ready in the process of dis­pos­ing of as­sets such as Vaalkrantz that Wescoal con­sid­ered to be less at­trac­tive.

Su­laiman does not ex­pect Wescoal’s ac­qui­si­tion drive will stop at Keaton. It in­tends to make more pur­chases of as­sets in the coal sec­tor, whether listed or un­listed com­pa­nies or stand­alone projects.

Wescoal is not the only ju­nior with those am­bi­tions. Ichor Coal and Coal of Africa have shown they are also in the mar­ket for ac­qui­si­tions so the sec­tor could be­come more lively in the next year or two, of­fer­ing the prospect of some spec­u­la­tive price ap­pre­ci­a­tion.

Coal com­fort … search­ing for more pos­i­tive mar­ket sen­ti­ment

Wa­heed Su­laiman Pic­ture: FI­NAN­CIAL MAIL

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