Wescoal storms back, optimism high

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[miningmx.com] – SHARES in Wescoal Holdings gained just over 7% in
early JSE trade following a strong resurgence in earnings for the coal producer in its
2012 financial year, and indications that domestic pricing in the current period will
take earnings higher yet. Shares in Wescoal are 16% higher in the last week. It was
last trading at 73 cents/share.

“It is expected that the trading division will continue to experience strong demand –
and with large producers’ focus on export, restricted supply will continue,’ the
company said in commentary to its results today, in which it posted headline
earnings of R17.9m, representing a R57m turnaround year-on-year.

Wescoal supplied 1.52 million tonnes to Eskom from its Khanyisa mine, but it also
traded coal through its marketing division. This trading acitvity is in the domestic
market, where increased exports of certain grades of coal – helped by improved
tonnages at Transnet Freight Rail (TFR) – have created a shortage of local coal. As a
result, domestic coal prices are in excess of export parity, which some market
watchers believe is between R700 to R800/t. The current export price of thermal
coal is about $81/t or R664/t.

Commenting on its Eskom supply revenue stream, Wescoal said it hoped to increase
volumes to the electricity utility with the start of mining from its Vlakvarkfontein
mine, a mine in Mpumalanga province with resources of 3.7Mt from two farms.
“Deliveries to Eskom continue unabated, however negotiations are at an advanced
stage to secure a three-year contract to include the Vlakvarkfontein resource,’
Wescoal said in its results commentary.

A mining right application for an 1.8Mt portion of Vlakvarkfontein had been
submitted to the Department of Mineral Resources. Mining is expected to be granted
in the second half of the 2012 financial year, Wescoal said. An application to mine
another farm at Vlakvarkfontein was also in process, it said.

Wescoal did not provide an update of negotiations that are thought to involve the
purchase of mineral rights from a mining house – enough to catapult the company’s
total coal resources to beyond 10 years and respond to the oft-levelled criticism of
Wescoal that it hasn’t sufficient resource life or optionality.

The deal is also expected to complement the pending R450m acquisition of the
Pegasus project in Mpumalanga province that Wescoal bought from BHP Billiton
Energy South Africa (Becsa), and its joint venture partner, Bisichi. Wescoal said it is
seeking a joint venture partner to help finance the project.

On the issue of financing, Wescoal said it would set aside some R250m for project
development. However, cash resources fell R11m in the year under review to R20m,
partly as a function of an increase in cash payables over receiveables. Debt to equity
was reduced to 12% from 23% in the previous year. It said it remained committed
to balancing its debt to “other funding alternatives’. Group net debt was a mere
R13m.

In addition to a strong performance from the trading division in the current financial
year, Wescoal said its mining division would “. continue at maximum production
and, with Vlakvarkfontein coming on stream later in the year, increased profitability
is forecast going forward’.

“Overall, management expects strong growth in both divisions for the year ending
March 2013, with the Vlakvarkfontein resource contributing substantially from there
on,’ Wescoal said in its results commentary.

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