An exception in a struggling sector

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.