Take a medium-term out­look on coal

Financial Mail - Investors Monthly - - Analysis - Char­lotte Mathews

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.

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