Financial Mail - Investors Monthly
Marriage of convenience
Keaton’s absorption into Wescoal may be the tonic it needs, writes Charlotte Mathews
It intends to make more purchases in the coal sector, whether listed or unlisted companies or standalone projects
Keaton Energy and Wescoal Holdings both went through major upheavals two years ago. Wescoal has emerged stronger; Keaton has lost a little of its mojo. Its absorption into Wescoal may be the tonic its operations need.
In the first few months of 2015 there was a boardroom fallout at Wescoal between chairman Robinson Ramaite and founder/CEO Andre Boje over its empowerment strategy, resulting in Boje’s departure. Under Ramaite, and Boje’s replacement Waheed Sulaiman, Wescoal had pushed up its empowerment shareholding above 60% by late last year, achieving more than the 50% plus one share insisted on by major customer Eskom.
Around the same time, Keaton discovered employees of its Vaalkrantz colliery had been complicit in stealing about R24.7m of stock over a 12month period. The internal theft was particularly unfortunate because Keaton had been carrying the loss-making mine for some time to avoid retrenchments. Though Keaton said collusion was hard to detect, the event shook the market’s faith in Keaton’s management.
By the end of January this year, just before the Wescoal offer was announced, Keaton’s shares at 141c were still about 36% less than they were at the beginning of 2015, while Wescoal’s were 9% better.
Coal miners like Keaton and Wescoal with little in the way of coal exports have been buffeted by negative sentiment over Eskom’s handling of its coal contracts, so share price performance has not been impressive.
In early June, Keaton and Wescoal shareholders voted in favour of a scheme of arrangement presented by Wescoal, under which Wescoal has offered R526m or 180c/share for Keaton shares: 120c to be paid in cash and the rest in Wescoal shares in the ratio of 0.30 of a Wescoal share for one Keaton share. It results in the delisting of Keaton.
Chris Logan, CEO of Opportune Investments, who held just over 9m Keaton shares at the time of the general meeting to vote on Wescoal’s offer, said he was not a particular fan of mining shares but he bought Keaton shares after the offer was announced as a value play because they were trading at a significant discount, sometimes up to 36%, to the offer price. The discount might have reflected some of the complexities and conditions to the deal. He said he remained openminded on whether he would retain the Wescoal shares he received under the offer.
Shareholder Albie Cilliers questioned in e-mails to Keaton and at the general meeting whether Keaton shareholders were being offered a fair price. He asked Keaton chairman David Salter what the directors of Keaton considered to be the value of Keaton shares but Salter would not be drawn.
Salter said independent experts had expressed a view on the offer price, the board was presenting it to shareholders to decide whether to accept it. The directors and other major shareholders had accepted it on behalf of the shares they held. The shares were only worth what someone was prepared to pay for them, he said.
The only remaining conditions after shareholder approvals remained the finalisation of the sale of Keaton’s Vaalkrantz colliery to Bayete Mining, which Salter said awaited only one signature, and approval from the competition commission. The commission approved it unconditionally on June 7.
The 60c Keaton shareholders are receiving in the form of Wescoal shares could be worth retaining. While there is nothing Wescoal management can do about the wider operating environment for coal miners, the combined entity’s empowerment credentials, highly motived management and growing critical mass put it in a competitive position to secure more assets, more Eskom con-
The only remaining conditions after shareholder approvals remained the finalisation of the sale of Keaton’s Vaalkrantz colliery
tracts and grow its exports.
Momentum SP Reid analyst Sibonginkosi Nyanga says the merger with Keaton will help Wescoal to achieve its goal of being an 8Mt/year coal producer. Being a larger producer, with black empowerment credentials, would benefit Wescoal as a supplier to Eskom. Keaton’s major shareholders supported the deal and it would provide Keaton with new management. Nyanga says Momentum SP Reid maintains a positive outlook on Wescoal shares.
Financial results for both companies for the year to March will be published before the end of June. Based on interim results and subsequent operational updates, the Wescoal-Keaton group will be producing at least 8Mt of coal a year in the near term and growing its revenue from the current R3bn.
The 8Mt includes the production that Keaton’s Moabsvelden project will add. Moabsvelden has obtained its integrated water use licence and at last report was seeking finance to begin construction. On Wescoal’s side, its Elandspruit, Intibane and Khanyisa complexes are all ramping up to steady state production.
Keaton’s Vanggatfontein and Moabsvelden are near Kendal power station, as are Wescoal’s Khanyisa and Intibane mines. Elandspruit is closer to Middelburg.
Among its goals at interim stage, Wescoal cited the need to grow its resources beyond the current 15-year horizon. It said the Keaton deal would give its shareholders access to a business with long-life core assets, a strong pipeline of projects and would improve Wescoal’s price and liquidity by adding more shareholders. There were potential synergies and economies of scale, it said. The deal would give it greater price leverage when negotiating with large customers and would enhance its ability to raise funding.
Sulaiman said despite the dilution resulting from issuing shares to Keaton shareholders, after the deal Wescoal’s black shareholding would remain well above 50% since Keaton also has black shareholders.
After Wescoal’s BEE deal late last year, a group of black shareholders in a special purpose vehicle hold more than 57%-59% of Wescoal’s shares and are locked in for five years. Their stake will drop below 50% as a result of the dilution, but Wescoal has other black shareholders, who are not locked in, such as Sulaiman himself.
After the takeover, Keaton CEO Mandi Glad and chief operating officer Jacques Rossouw will depart. Sulaiman says Wescoal does not need to add more senior management. Its own management team is skilled and energetic and able to run the larger entity.
There are no plans to sell any Keaton assets, he says. Keaton was already in the process of disposing of assets such as Vaalkrantz that Wescoal considered to be less attractive.
Sulaiman does not expect Wescoal’s acquisition drive will stop at Keaton. It intends to make more purchases of assets in the coal sector, whether listed or unlisted companies or standalone projects.
Wescoal is not the only junior with those ambitions. Ichor Coal and Coal of Africa have shown they are also in the market for acquisitions so the sector could become more lively in the next year or two, offering the prospect of some speculative price appreciation.