Ex­pan­sion plans to take Keaton En­ergy from min­now to mid-tier


Finweek English Edition - - INSIDE - BY DAVID MCKAY

Keaton En­ergy may not pay a maiden div idend for it s 2014/15 f inan­cial year as promised six months ago, judg­ing by the re­sponse of CEO Mandi Glad to a ques­tion posed by Finweek. “No com­ment,” she said when asked if money was too tight to men­tion.

As it stands, Keaton is rea­son­ably well cap­i­talised.

At the in­terim stage in Novem­ber last year, the com­pany in­creased net cash f low to R113m from R70m yearon-year. It also cut net debt to R271m from R324m pre­vi­ously – no mean feat con­sid­er­ing how poor the coal mar­ket was last year, es­pe­cially for small-cap play­ers.

Un­for­tu­nately, the coal mar­ket has de­te­ri­o­rated f ur­ther since Keaton’s in­terim re­sults were re­leased.

Sell­ing ma­te­rial to Eskom – which Keaton does from its Vang­gat­fontein mine i n Mpumalanga – i s steady busi­ness ow­ing to medium- to longterm con­tracts, but Keaton has some i nternational ex­po­sure t hrough its Vaalkrantz col­lier y, a ge­o­log­i­cally chal­lenged mine that sells met­al­lur­gi­cal coal to Brazil, among other des­ti­na­tions.

It also suf­fered the ef­fects of stock theft from its Vaalkrantz op­er­a­tion, a devel­op­ment which Glad de­scribed as “hor­rific”. “It’s not some­thing you ex­pect from within your own [Keaton] fam­ily,” she said.

More im­por­tantly from a strate­gic point of view, how­ever, is the fact that Keaton has some hefty cap­i­tal ex­penses on the hori­zon.

Keaton i s build­ing t he R300m Moab­svelden project in Mpumalanga and said in Novem­ber last year that it ex­pected to make an in­vest­ment de­ci­sion on the larger R650m Braak­fontein prop­erty, also in Mpumalanga prov­ince, at the mid-point in the cal­en­dar year. The t wo projects will add 3m tons a year (mtpa) of coal pro­duc­tion and cat­a­pult Keaton into the mid-tier coal­pro­duc­ing cat­e­gory, but they will also stretch the bal­ance sheet at a time when the busi­ness en­vi­ron­ment is de­pressed and bank terms are trick­ier to ne­go­ti­ate than usual.

It’s pos­si­bly ow­ing to the tight busi­ness con­di­tions that are also per­suad­ing Glad that she needn’t push hard on a coal sales agree­ment for ma­te­rial from Moab­svelden to Eskom. “We have agreed on vol­umes and the prod­uct; we just haven’t agreed on price and we’re not push­ing it hard be­cause we want to get a good price from Eskom,” said Glad. Play­ing the wait­ing game with Eskom is likely to be a po­si­tion most new sup­pli­ers will adopt.

Eskom has a well-pub­li­cised coal sup­ply def icit, which it said would kick in in about 2018; it is, there­fore, some­thing of a price-taker. How­ever, Glad also al luded to other fac­tors inf lu­enc­ing the coal-sup­ply agree­ment (CSA) re­lated to black eco­nomic em­pow­er­ment (BEE).

“We will have to se­ri­ously look at the CSA for the BEE con­di­tions,” she said. “I can’t yet say if we will have a con­di­tion that al­lows us two years to get to the re­quired BEE lev­els, or not.” In terms of new reg­u­la­tions for coal sup­pli­ers to Eskom, the sup­plier has to be 50% plus one share em­pow­ered, which is prov­ing a headache for most com­pa­nies.

Then there’s the l ike­li­hood that Moab­svelden may be de­layed ow­ing to a hold-up in the grant­ing of a wa­ter use li­cence from South Africa’s depart­ment of min­eral re­sources. “There will def­i­nitely be a de­lay, but I still don’t be­lieve it will be ma­te­rial,” said Glad.

She ac­knowl­edged, how­ever, that t he com­pany should have been i n devel­op­ment on the project al­ready. Moab­svelden is planned as a 1.4mtpa ther­mal coal mine and was due to hit full pro­duc­tion in 2016.

“We have yet to re­ceive the wa­ter l icence, which comes from the fact that we had to amend the mine works, which led to a com­plete re­design of the project,” said Glad. Moab­svelden was bought as part of the takeover of Xceed Re­sources, an Aus­tralian com­pany, for R183m in 2013.

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