An ex­cep­tion in a strug­gling sec­tor

Financial Mail - Investors Monthly - - Analysis - Marc Hasenfuss

SA re­source ven­tures are hardly cov­eted by in­vestors these days — prob­a­bly for good rea­son.

But let’s as­sume there are long-term pun­ters who can look past the reg­u­la­tory mine­field, po­lit­i­cal curve balls, labour hitches and a tricky op­er­at­ing en­vi­ron­ment. Such steely nerved pun­ters might do well to have a closer look at Wescoal — even though “smaller” coal min­ing op­er­a­tions have fared fairly dis­mally on the JSE.

There’s quite a lot in Wescoal’s an­nual re­port that a ra­tio­nal mar­ket should find en­cour­ag­ing. The ac­qui­si­tion-bol­stered rev­enue line looks ro­bust, and op­er­at­ing mar­gins (there are size­able coal mer­chant func­tions) are close to 10%.

There are strong cash flows: R359m from op­er­at­ing ac­tiv­i­ties and a net R213m (equal to 82c or 48c a share re­spec­tively.) This un­der­pins Wescoal’s de­ter­mined div­i­dend pol­icy.

The com­pany also has a sol- id track record of de­liv­er­ing on its prom­ises.

In all, there is lit­tle to sup­port the mar­ket rat­ing on Wescoal — a dis­mis­sive earn­ings mul­ti­ple usu­ally re­served for coun­ters where growth prospects are about to hit the wall.

In this re­gard, there is much com­fort to be taken from the an­nual re­port’s over­view of op­er­a­tions.

Most im­por­tantly, the re­cent ac­qui­si­tion of Keaton En­ergy for R525m has boosted Wescoal’s re­sources to more than 300Mt through four op­er­at­ing mines and pro­cess­ing plants, as well as on­go­ing par­tic­i­pa­tion in the coal sup­ply chain in­fra­struc­ture.

Keaton brings aboard the Vang­gat­fontein mine — roughly the same size as Wescoal’s flag­ship Eland­spruit mine.

The syn­er­gies re­alised from the deal are tan­gi­ble, with the an­nual re­port dis­clos­ing sav­ings of more than R40m a year.

The an­nual re­port gives a com­mit­ment to fur­ther im­prove op­er­a­tional cost sav­ings and ef­fi­cien­cies by elim­i­nat­ing du­pli­ca­tion in con­tract ser­vices and as­sess­ing which ser­vices to in- and out-source.

Mid­del­burg-based Eland­spruit — which can pro­duce up to 3Mt run-of-mine coal a year and has a life of about seven years — should un­der­pin prof­itabil­ity in the medium term. The mine cur­rently pro­duces 220,000t a month from the open­cast area and about 30,000t a month from the un­der­ground op­er­a­tion.

In his an­nual re­view, CEO Wa­heed Su­laiman says Wescoal wants to op­ti­mise ex­ist­ing busi­nesses and as­sets, and “pay par­tic­u­lar at­ten­tion to the group’s cap­i­tal struc­ture with a view to in­creas­ing value to share­hold­ers”.

Per­haps more in­trigu­ingly, he says Wescoal will con­tinue to look for ex­ter­nal growth op­por­tu­ni­ties and par­tic­i­pate in the con­sol­i­da­tion of the coal sec­tor. Though there is a clear fo­cus on max­imis­ing value from ex­ist­ing as­sets, he be­lieves more ac­qui­si­tion op­por­tu­ni­ties ex­ist for coal and re­lated strate­gic in­fra­struc­ture as­sets.

In this re­gard, IM be­lieves a deal be­tween Wescoal and the prof­itable coal min­ing op­er­a­tions of Hosken Con­sol­i­dated In­vest­ments could cre­ate an

em­pow­ered min­ing com­pany with scale and the abil­ity to ex­e­cute more ac­qui­si­tions.

Though ac­qui­si­tions or merg­ers would likely bring Wescoal to the at­ten­tion of more in­vestors, the com­pany is not ne­glect­ing its cur­rent struc­ture.

In Au­gust it pro­posed the sale of its open­cast Leeuw Braak­fontein Col­liery in KwaZulu-Natal for R103m. The pro­ceeds will be mo­bilised to cull short-term bor­row­ings and fund strate­gic growth op­tions.

The pro­posed deal fol­lows hard on the heels of the sale of its In­tibane col­lieries in Mpumalanga for R57m.

The over­all sense at Wescoal is that ex­ec­u­tives are work­ing hard at sweat­ing ex­ist­ing as­sets and look­ing for deals to se­cure op­er­a­tional sus­tain­abil­ity.

Ju­nior min­ing ven­tures come with ex­tra risk and high fail­ure rates — but gut feel is that Wescoal could be a no­table ex­cep­tion. At cur­rent lev­els any spare cash might be well spent on a few Wescoal shares.

Newspapers in English

Newspapers from South Africa

© PressReader. All rights reserved.