Take a medium-term outlook on coal

Minority shareholders in Resource Generation (Resgen) may be forgiven for questioning the apparent lack of progress in getting final funding approval from a club of lenders for a loan to build its flagship coal mine, but a lot of work is being done to satisfy lenders’ requirements.

Resgen is developing a substantial coal mine, Boikarabelo, in the Waterberg that will produce about 6m t/year in its first phase. Though work on preparing the site began in 2011 when previous management said lenders were queuing up to provide the US$552m needed to build the mine, there’s still no financing and no coal.

Last year Resgen’s major shareholders, the Public Investment Corp, Altius Investment Holdings and Noble Group, finally became impatient and replaced the CEO, chairman and deputy chairman. Altius founder Rob Lowe stepped in as CEO in November.

Some progress has been made in the past seven months. An execution plan was drawn up that will reduce capital costs to $515m and manage risk by appointing a limited number of experienced engineering, procurement and construction contractors. Sedgman has been appointed to build the processing plant and Stefanutti Stocks has been appointed for contract mining.

There is also a new mine plan to mine more selectively rather than do bulk mining and preparations have been made to participate in government’s next call for independent baseload coal power.

A “developmental tariff” has been negotiated with Transnet Freight Rail to transport coal to Richards Bay, which will be more economical than railing it to Durban.

Resgen is trying to secure a nonbinding memorandum of understanding on coal supply from Eskom to obtain credit approvals, while a coal supply agreement will be a condition to secure financial close.

But finality on the funding remains elusive. Though the loans seemed to be in the bag by late last year, it turns out that was not the case. In February, Resgen said it expected finality on funding by the middle of this year.

A meeting of all funders scheduled for May had to be postponed by a month. At the June meeting, outstanding matters were identified that needed to be addressed before the various banks’ credit committees could consider the application.

In the meantime, Resgen is being supported by an unsecured loan from Noble

Resources International.

Lowe says commercial terms for the debt funding with the consortium of lenders was agreed in mid-2016, subject to each consortium member receiving approval from its credit committee. Since then, Resgen’s management has focused on finalising all the project-related issues necessary for the credit committees to consider the application.

“The number of items that needed to be finalised was daunting, but we are pleased that this work is now substantially completed and that we are now ‘project ready’,” Lowe says. “It’s particularly pleasing that the independent reports are all supportive of the project. We’re expecting the lenders to be able to commence their credit approval processes in August.”

Resgen shares, at 92c, are not well traded on the JSE, turning over just 8,000 a month. In Australia the average daily volume is 100,000200,000. The price has been volatile, ranging from a low of 42c last June to a high of 200c in October. That could mean the shares are responsive to good news (like securing the funds), but shareholders eyeing profits from coal need to take at least a three- to five-year view.