Is coal rising from the ashes?

This article was featured in the 15 October 2015 edition of finweek.
This article was featured in the 15 October 2015 edition of finweek.

Johannesburg - Activity in SA’s coal sector is heating up even though international prices for the fuel are at rock bottom, and are forecast by Goldman Sachs to remain weak for the foreseeable future.

The reason for the local excitement is that selling coal to Eskom is proving very good business. “If you’re exporting coal, you will be bleeding,” says Tony Weber, CEO of Universal Coal. “If you’re in the Eskom space, it’s proving a magical place to be,” he added.

Universal Coal is a Sydney-listed business that operates two coal mines in Mpumalanga province – Kangala and New Clydesdale Colliery – the latter bought from Exxaro Resources earlier this year.

It is currently subject to a hostile takeover offer from IchorCoal, a German business which is managed by former ArcelorMittal South Africa CEO, Nonkululeko Nyembezi-Heita.

Predictably, Weber doesn’t think IchorCoal’s 16 Australian cents/share offer is valuing the company properly but there’s the likelihood of a bidding war breaking out as there are now two other rival offers under construction; one from a company with significant SA coal exposure.

Whilst neither Universal or IchorCoal are listed in Johannesburg (not yet anyway), the point is that investors are willing to take a position on Eskom’s looming coal deficit. Weber calls IchorCoal’s bid “opportunistic”; the opportunity is that Eskom will pay a premium for coal.

A coal share that is available for SA investors is Resource Generation (Resgen). The company is headquartered in Perth, Australia, but has a listing in order to comply with local empowerment laws. 

It, too, is the subject of opportunism with two of its shareholders attempting to change the composition of its board just as the company signs a $500m plus financing deal with a Swiss private equity firm – itself an expression of new found confidence in the sector.

Paul Jury, CEO of Resgen, said that sentiment to the coal sector may well have changed by the time the firm’s Boikarabelo project comes on stream, up to 28 months after the finance package is signed off. “We are terribly in love with the ore body,” said Jury.

There are other cases of coal companies stabilising after recent wobbles. Coal of Africa has shored up its balance sheet by concluding an equity deal with its Chinese shareholder while Wescoal – having ejected its founding CEO, Andre Bojé, earlier this year – is on a firmer footing.

“We had a difficult final quarter in our previous financial year, and a tough first quarter in the new year largely because we were operating on a short-term contract to Eskom, but we think the second half of the year will be better,” said Waheed Sulaiman, CEO of Wescoal.

This is an excerpt of an article that originally appeared in the 15 October 2015 edition of Finweek. Buy and download the magazine here.

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