Ben Magara, Anglo Coal SA CEO
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Scramble for SA coal underway
Brendan Ryan
Posted: Fri, 15 Feb 2008

[miningmx.com] -- SOARING international energy prices and Eskom’s desperate need for more coal to feed its overworked power stations have stoked southern Africa’s coal sector as investors scramble to bring new coal mines on line.

South Africa’s energy crunch – and similar situations facing various countries such as China and India – has huge implications and not just for South Africa, which has, so far, been the main exporter of coal from the sub-continent.

New coal projects are under development and/or evaluation in Botswana, Mozambique and even Zimbabwe – near Beitbridge – in addition to those in South Africa.
I hate monopolies like Eskom and Transnet
The existing Matola terminal in Maputo is being expanded and a new coal export terminal built at Beira, while there’s long-term planning for a new rail link to export coal from Botswana through the Namibian port of Walvis Bay.

And it’s not just traditional, dig-it-out-of-the-ground-and-burn-it coal mining developments. Projects are looking at alternative uses of the coal such as in coal-bed methane (CBM) schemes – through which methane gas is extracted from the underground coal seams – and coal-to-liquid (CTL) schemes that convert the coal into other fuels.

Particular attraction is that there’s a lot of money to be made in coal and it can be made by junior and small mining companies because you do not have to be a resources heavyweight like Anglo American, BHP Billiton or Xstrata to crack it in this business.

Boiled down to the basics you need a fleet of earthmoving equipment and a mining right. Once up and running, it’s like owning a petrol station in Zimbabwe that actually has fuel to sell.

Trucks sent by the buyers queue at the mine gate to load the coal, which they get only after providing proof of payment in advance into the mining company’s bank account.

As an example take the recent deal in which Motjoli – a private company owned by (former Department of Minerals and Energy deputy director general) Nchaka Moloi and partner Nonkqubela Mazwai – sold out its stake in ASX and JSE-listed Coal of Africa (formerly GVM Metals).

Motjoli held the mineral rights to one coal project – Holfontein – which it sold to Coal of Africa in October 2006 for equity worth about R95m. Motjoli has just sold its Coal of Africa shares to a consortium consisting of Signet Mining Services and Mvelaphanda Holdings for about R330m. Nice.

Setting up a small, opencast coal mining operation is not that expensive or difficult, and Eskom is going out of its way to help small, BEE companies get started in the business, provided they meet Eskom’s business requirements.

Coal companies supplying Eskom also have a major advantage in the current power crisis. There’s no way Eskom is going to cut off its nose to spite its face by chopping power to the collieries that are supplying its power stations.

Just how badly Eskom needs the coal was spelt out at the McCloskey South African coal exports conference held recently in Cape Town when Eskom GM primary generation Rob Lines laid out the situation in his presentation.

Lines confirmed speculation that Eskom had run critically short of coal supplies with certain stations down to just three days of stocks to burn at one point.

Lines added: “We are currently building that stock position back up, and we are doing it without having to resort to emergency measures. We now have five to six days stocks in place and are improving that situation on a daily basis despite the continuing very high burn rate on our power stations.”

Despite Lines’s confident tone, reality is that two years ago Eskom’s power stations typically had around three months’ supply in their stockyards.

In the short term, Eskom needs to add 5.4 million tonnes (mt) to its stockpiles in the next three months so it can meet peak demands over the winter months. In the medium term, Eskom wants to build up its stockpiles by 11mt by the end of the year.

Anglo Coal SA CEO Ben Magara is the man tasked with making this happen because he has been appointed to head up the Eskom Coal Working Group created to tackle the energy crisis.

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Magara said: “We have the capacity to fix the problem. Eskom has told us what coal it needs supplied to which station. We are now looking at the optimal way to meet those requirements.”

Magara declined to comment on how he believed Eskom had got into this fix. There was no shortage of suggestions from other South African coal industry delegates attending the conference but on condition of anonymity. It does not pay to be seen biting the hand that feeds you.

A key issue is price and how soaring foreign prices for coal are having a knock-on effect on the South African market to the detriment of Eskom.

The South African thermal coal market splits in two on product quality. Export coal has a higher thermal value and a lower ash content than the coal Eskom burns.

Eskom’s entire business case has been built around paying a rock-bottom price to the South African coal industry for poor quality coal that it cannot export, which is something that Public Enterprises Minister Alec Erwin does not seem to be aware of. Erwin recently criticised the South African coal groups for supplying poor quality coal to Eskom’s power stations and threatened to divert coal from the export market to meet Eskom’s needs.

South African Mining and Development Assocation (Samda) director Sipho Dube told the conference in his presentation that: “He (Erwin) clearly does not know that Eskom burns low-quality coal.”

Eskom’s contracts with the collieries that supply its power stations are confidential, but it pays up to R180/t for coal. Two years ago export coal sold for around $40/t (about R280/t) free-on-board (fob) Richards Bay.

The current export spot price is around $115/t (about R860/t) fob Richards Bay, and the major South African exporters cannot meet demand from their own operations so they are “buying-in” coal from small South African coal companies that do not have access to the export market through the Richards Bay Coal Terminal (RBCT).

End result is that domestic prices for poorer quality South African coal have been driven up well above what Eskom is currently prepared to pay.

According to one industry source: “Eskom has tried to rigidly enforce its contracts which are focused on paying the lowest possible price for the poor quality coal it takes. But Eskom can no longer do it because of the rise in export coal prices, which has had a knock-on effect on prices in the domestic market.”

So much for the bullish side of the coal business. The bad news is that South African coal companies face very real constraints in developing their businesses and, in particular, in getting their coal onto the export market.

These include delays in getting mining permits granted by the Department of Minerals and Energy (DME) and, in particular, huge logistical problems in getting coal railed to the ports by Transnet Freight Rail (TFR – the former Spoornet).

Lines told the conference that Eskom had actually approached the DME directly to speed up the process of getting mining rights granted over certain deposits which it wanted developed because it needed the coal, and fast.

Coal industry executives are particularly vitriolic about TFR because it’s an organisation they have been battling with for the past five years without success to get it to increase rail capacity to the coal export ports of Richards Bay, Durban and Maputo.

“At least Government has accepted that Eskom is a national emergency. We have faced a similar situation with TFR for years but nothing has been done about it because I don’t think Government really knows what’s going on,” says one coal company director.

A coal company CEO adds: “It’s all very well to say (Transnet CEO) Maria Ramos is turning Transnet around. She has sold off non-core assets like the Waterfront but she has yet to make an impact at the operational level getting trains to run when they are supposed to.”

The RBCT and TFR have had a running battle for the past three years over who is to blame for poor coal export performances. Despite record prices, the RBCT’s coal exports have dropped for the past two years and, in 2007, it exported 66,1mt compared to an initial target of 75mt.

Negotiations on a new tariff structure for use of the Witbank/Richards Bay line have run nearly two years past the deadline that they were supposed to be settled. If anything, TFR is getting more hardline. A presentation given on behalf of CEO Siyabonga Gama demanded a far greater share of the spoils.

Gama said it was going to cost TFR some R20bn to build the rail infrastructure to raise capacity to 91mt/year compared with the R1,1bn that the RBCT had spent to expand the terminal.

He added TFR estimated that it would get 6% to 8% of the value created and the coal companies would get between 85% and 90%.

“We view this situation as unfair, skewed and unsustainable. We want a fair risk/reward contribution and that means significantly higher rail tariffs.”

Reaction from Tom Kearney, commercial director of London-listed Bisichi Mining, which operates the Black Wattle colliery near Witbank, was one of disbelief. He told delegates: “I hate monopolies like Eskom and Transnet. In the private sector you would lose your job if you messed up as big as Eskom has.

“Competition works. There’s no reason why we should not have a choice of rail operator in South African so as to get some real service.”