Paul Miller, MD Keaton Energy
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Eskom gets nervous over SA's coal production
Brendan Ryan
Posted: Tue, 19 Aug 2008

[miningmx.com] -- ESKOM is getting extremely worried about the ability of South Africa’s coal sector to supply its future coal needs according to Keaton Energy MD Paul Miller.

“Obviously, that’s good for us, “ Miller commented pointing out that competition between Eskom and domestic industrial consumers had driven the price of the grades of coal that both use to levels around R180/t to R200/t.

Keaton is currently developing three coal projects with the largest – Delmas – expected to start production early next year. Delmas will supply the bulk of its production to Eskom.

Miller quoted from a paper given by Eskom executives at the recent Junior Coal Mining Ventures conference held in Johannesburg which showed that South Africa’s coal production had remained flat since 2004 while Eskom’s consumption had risen sharply.

According to the presentation – by Piet Viljoen and Jeanie Moothoo – Eskom’s burn rate had risen at an annual rate of 4.5% from 88Mt in 1999 to 125Mt in 2007.

Over this period South Africa’s coal production had grown at an annual rate of only 1.4% from 218Mt in 1998 to 243Mt in 2007.

The presentation stated that Eskom “had been forced to use discard coal” to meet the requirements of its power stations.

Discard coal is the “waste” product from the operations of export collieries.

These “wash” their run-of-mine (ROM) production to upgrade the raw coal to the higher thermal specifications demanded by foreign customers.

The low-grade discard coal volumes have traditionally been stockpiled by the export mines in massive dumps because there was no market for this product in South Africa.

These dumps were compacted and covered with earth to prevent the contained coal burning through spontaneous combustion.

Coal companies are now recovering that discard material and selling it to Eskom along with current discard production.

“How else do you think major coal groups like Anglo Coal and Exxaro have been able to step up to the plate and agree to deliver 45Mt of coal over the next two years to Eskom over and above their current production?” Miller asked.

“But the big question now facing Eskom is this - just how long will the discard coal volumes last?” he added.

The 45Mt Miller referred to is the volume of coal that Eskom says it has contracted to buy-in to rebuild the coal stockpiles at its various power stations which it had depleted over the past few years.

Eskom expects to burn 129Mt of coal in its power stations this year. The Eskom presentation forecasts this could rise to 200Mt by 2018 which is a 55% jump.

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But the presentation added that Eskom could increase its coal consumption by almost 70% if all return-to-service stations come on stream along with the new Medupi and Kusile stations as well as “Coal 3 and 4”.

Coal 3 and 4 are additional coal-fired power stations but their construction is dependent on the timing of Eskom’s programme to build nuclear power stations.

Eskom estimates total SA thermal coal consumption - including export volumes - at 270Mt for 2008 rising to 374Mt in 2018 and pointed out South Africa’s coal industry will not meet demand this year.

Eskom estimated supply for 2008 at 246Mt which is a 9% shortfall on forecast demand of 270Mt.

It said that, if all the new coal projects currently being considered are actually initiated, then supply would amount to 384Mt in 2018 providing a slim margin over forecast demand of 374Mt.

But Eskom highlighted the potential for a shortfall in that production forecast. To deliver the predicted volumes some 43 new mines will have to be opened at a cost of R100bn. Some 23 of these new mines would be required to supply Eskom’s requirements.

Despite such favourable business fundamentals the Keaton share price has come under severe selling pressure recently along with many other junior miners.

Since it listed on the JSE in April, Keaton has dropped 50% from a high of R15.5 to a low of R7.65 from which it has recovered to current levels around R9.65.

Miller blamed this on the forced selling of Keaton – and other junior miner – shares by institutions which had to find the money to meet redemptions from their funds by large investors.

“We have seen a lot of forced selling of our stock which is not related to the fundamentals of our business which remain sound.

“ In response, we have gone to shareholders whom we have noticed are sellers of our stock and offered to place those shares for them. That has been a large factor in the recent recovery in the price of Keaton shares,” Miller said.