SepFluor bets R1.7bn on notoriously difficult fluorspar

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“WHAT have these guys been smoking and where can I get some?” has been the default reaction to the news that Sephaku Fluoride (SepFluor) – an unlisted mining development company – is about to sink R1.7bn into building a fluorspar mine and concentrator near Rust de Winter, north of Pretoria.

Not only does the company intend getting the new mine into production by the first quarter of 2019 despite the toxic regulatory and investment climate in South Africa – where the Chamber of Mines and the Department of Mineral Resources (DMR) are at each other’s throats – but fluorspar is a niche business and one that is notoriously tricky to survive.

Fluorspar mining in South Africa has been dominated for past 30 odd years by the Vergenoeg mine – originally a joint venture between the former Metorex and Spanish industrial minerals group Minersa – which is now wholly owned by Minersa.

Broadly speaking, in the good times there is space in the South African fluorspar business for Vergenoeg and a junior producer or two but – in the bad times – only Vergenoeg survives. The most notable junior casualty in the sector over the past decade was the formerly listed Sallies operation.

But SepFluor’s backers and management are confident they are going to make a go of their Nokeng Fluorspar mine for a number of reasons, starting with the fact that they have successfully managed to get it financed despite the grim state of the international commodity markets and the fact that it is located in South Africa.

The funding is split between debt and equity with the equity portion led by mining entrepreneurs David Twist and Rudolph de Bruin along with Italian investor Carlo Baravalle. The debt is being put up by a consortium consisting of Nedbank along with the Dutch and German development banks.

The three banks signed on the dotted line on June 9, just five days before mines minister, Mosebenzi Zwane, released Mining Charter Three. Said Charter is being interdicted by the Chamber of Mines, which has plunged the mining sector into a state of “lawfare” with the DMR.

SepFluor CEO, Rob Wagner, points out the banks have built conditions into the finance agreements that enable them to exit if conditions change materially, but he adds “… we do not believe things will change materially but we are certainly evaluating the implications of the new Charter”.

The banks have also insisted on a key condition for SepFluor’s marketing strategy, which is that they have required the company to sell forward 40% of its expected production during the first three years of operation in order to get the debt funding.

There’s an obvious question: why would any major buyer of fluorspar agree to such a long-term commitment from an unknown supplier that has yet to bring its mine into operation? Usually the sales process is a protracted one with buyers taking test samples followed by bulk shipments to ensure the end product meets specifications before entering into sales contracts.

The reason – according to Wagner – is that SepFluor has agreed to sell the 40% forward fixed at current prices which are between $240 and $260 a tonne. The buyers have agreed to this because the fluorspar market is currently recovering from the last slump and prices are expected to rise over the next three years.

Wagner commented: “We spent an insane amount of time on aeroplanes over the past 18 months to do face-to-face interviews and get these sales agreements in place.” Despite the forward sales commitments, he maintained the return on equity for the project is still 25% to 30%.

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