Coal min­ers

Finweek English Edition - - COMPANIES & INVESTMENTS - David Mckay

The less volatile coal price is the rea­son South African coal stocks, big and small, have slum­bered through­out the cur­rent pe­riod of rand de­pre­ci­a­tion. In fact, of all the coal stocks on the JSE, it’s the diminu­tive Wescoal Hold­ings that has pro­vided the value, a com­pany that plies its trade al­most ex­clu­sively within South Africa’s bor­ders while its peer group has ex­po­sure to the ex­port mar­ket.

The stock is up 155% in the last 12 months while erst­while com­peti­tors such as Coal of Africa (CoAL), Keaton En­ergy, and even the di­ver­sif ied play Exxaro Re­sources are all down, sig­nif­i­cantly in some in­stances. Shares in CoAL are 66% weaker over the last 12 months.

David Brown, ex­ec­u­tive chair­per­son of CoAL, who is cur­rently in search of a CEO to re­place the re­cently de­parted John Walling­ton, says the rand has had lit­tle im­pact on the com­pany. “A 10% weak­en­ing does not com­pen­sate for an ap­prox­i­mately 28% fall in ther­mal coal prices,” he said

bout 83% of Wescoal’s pre­tax earn­ings in its 2012 fi­nan­cial year were de­rived from sales to Eskom with the bal­ance from the com­pany’s trad­ing di­vi­sion which ser­vices the do­mes­tic coal mar­ket, in­dus­trial con­sumers such as ce­ment maker PPC or bev­er­ages firm, SAB. Prices for this coal have been on par­ity with ex­port prices.

Still, the do­mes­tic trad­ing mar­ket has not been a mas­sive boon for Wescoal. It’s worth not­ing just how low mar­gins can be: the trad­ing di­vi­sion was worth 13% of pre­tax earn­ings but nearly half of to­tal reve- nue. That’s why the com­pany is look­ing at bulk­ing up its mar­ket share. A R79m takeover of an un­named ri­val, an­nounced on the JSE last week, will dou­ble Wescoal’s trad­ing abil­ity and give it greater bar­gain­ing power, says its CEO, An­dre Bojé.

A coal ju­nior hop­ing to re­verse the share slide is Keaton En­ergy. Its CEO Mandi Glad says Keaton hopes to gen­er­ate enough cash in its cur­rent 2014 fi­nan­cial year to not only f inance an ag­gres­sive ac­qui­si­tion pol­icy, but to pay div­i­dends, and pay down debt. It seems am­bi­tious at first glance.

How­ever, in­ter­na­tional trad­ing group Gun­vor owns about 10% of Keaton En­ergy from when the coal ju­nior bought Leeuw Min­ing in 2011 and would be will­ing to part eq­uity fi­nance other ac­qui­si­tions as Keaton En­ergy chases down its strate­gic goal of reach­ing 5m tonnes/year of pro­duc­tion.

Some 16 projects have been iden­ti­fied; five of them re­jected for value or tech­ni­cal rea­sons, while four are “on the go”, says Glad. One of them is Mooik­lip, a dinky 4.5mt an­thracite prospect in KwaZu­luNatal that Keaton hopes to buy.

Says Glad of the cur­rent year: “The pro­duc­tion re­sults this year are look­ing good and in a year’s time I hope to speak of mas­sive bank bal­ances that may al­low us to pay div­i­dends.” Asked how this would be jug­gled with ac­qui­si­tions and debt serv­ing, Glad re­sponded: “With dif­fi­culty.”

Keaton re­ported a bank bal­ance of R19.6m at the close of its last fi­nan­cial year com­pared to a R60.5m bal­ance at the end of the pre­vi­ous fi­nan­cial year.

David Brown

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