Expansion plans to take Keaton Energy from minnow to mid-tier
AT THE INTERIM STAGE IN NOVEMBER LAST YEAR, THE COMPANY INCREASED NET R113MCASH FLOW TO FROM R70M YEAR-ON-YEAR.
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.