SA coal down in the dumps

[] — ANGLO American is selling its Kleinkopje multi-product colliery – which still has up to 20 years of economic life left – in the latest example of disinvestment by a major mining group from South Africa’s coal sector.

That follows a string of disinvestments by BHP Billiton and Rio Tinto, while another major SA coal exporter – Xstrata – has confirmed it is “conducting a review of its Mpumalanga complex, comprising the Spitzkop and Tselentis collieries near the town of Breyten’.

An Xstrata spokesperson said: “This commenced in 2010 and we are considering all our options.’

In February I cautioned that Mines Minister Susan Shabangu should be careful what she wishes for after she told Business Day newspaper she hoped Anglo American would follow the example of BHP Billiton in selling off coal assets.

BHP Billiton is selling various coal projects it no longer intends developing, in the latest of a string of divestments over the past few years by the group which used to be SA’s largest coal exporter. That’s no longer the case, following the disposal of its Optimum and Koornfontein collieries, along with export allocations through the Richards Bay Coal Terminal (RBCT) totalling 8 million tonnes (mt) per year.

BHP Billiton executives point to its investments in the Douglas/Middelburg optimisation and Klipspruit projects as examples of the group’s commitment to SA’s coal sector. But these projects involve replacement production. There’s no growth, despite the fact that a group presentation in 2007 listed 13 possible new coal projects in SA.

As I also highlighted earlier, Rio Tinto made its position clear when it sold its Chapudi assets to Coal of Africa in November last year at the rock-bottom price of $75m. Instead, Rio went after Australian junior Riversdale Mining – which owns extensive coal assets in Mozambique – initially bidding $3.5bn, which it has subsequently increased to $3.9bn.

The coal assets Rio walked away from in SA are substantial and the group owned them outright, while Mozambique faces logistical problems similar to those of SA about increasing coal exports.

Should it succeed, Rio will still have to pump in extra billions of dollars to develop Riversdale’s two proposed mines and the associated rail and port infrastructure. The key factor appears to be a belief those logistical constraints can be solved more easily in Mozambique than in SA.

According to Anglo, its Kleinkopje mine “no longer fits strategically into the portfolio of the company’s thermal coal business’. The main justification for all these asset sales has been the promotion of black economic empowerment – which is, no doubt, why Shabangu likes what’s going on.

“Size counts when it comes to squaring off against a government, as BHP Billiton and Rio proved in Australia last year in the dispute over its proposed new mining tax.”

But again, as I pointed out previously, that’s not necessarily good for the coal sector or for SA Inc in terms of foreign exchange revenues from coal and coal company tax payments.

Heavyweight mining groups with technical skills and deep pockets are being replaced by companies that may not be that well endowed. SA’s coal sector is becoming more fragmented, which isn’t going to help in its struggle to overcome the problems about provision of the required rail and port infrastructure.

Size counts when it comes to squaring off against a government, as BHP Billiton and Rio proved in Australia last year in the dispute over its proposed new mining tax.

Size also counts when it comes to funding your own rail and port infrastructure, which Rio and BHP Billiton have done in Western Australia for their iron ore mines.

So, ironically, business conditions facing SA’s coal sector appear to be deteriorating despite bullish developments, such as rising export prices and booming demand from Eskom.

One coal industry executive says: “Pressure is building up on the profit margins from all sides and it’s just getting too hard to deal with.’


The main problem areas cited include operational issues with Transnet Freight Rail (TFR) and increasing government interference. That manifests itself in a variety of ways, ranging from Eskom pushing for more controls over coal exports to protect its domestic supplies as well as direct involvement by the department of mineral resources (DMR) in private sector business arrangements.

Latest example of DMR interference is the Quattro scheme, in terms of which 4mt/year of coal is earmarked for export through the RBCT specifically for empowerment coal companies.

The DMR has just unilaterally replaced scheme manager Mhlatuze Bay Coal Administrators (Mhlatuze) with Ubu Logistics, whose major shareholders include former public enterprises minister Alec Erwin and former public enterprises director general Portia Molefe.

The DMR has justified its action by claiming it had just uncovered fraud involving R5.5m at Quattro by a former employee. DMR spokesperson Bheki Khumalo said: “Legally, we play no oversight role in the affairs of Mhlatuze, as there’s no statute that defines the relationship between ourselves and Mhlatuze. While we’re mindful of the legal intricacies that normally define relationships between government departments and non-government organisations, we can’t turn a blind eye to malpractices that undermine government transformation initiatives and the values that must necessarily constitute good governance.’

But Mhlatuze has retorted the fraud was actually discovered by Mhlatuze’s management after the employee had left and was reported to the DMR and other stakeholders in July last year.

A Quattro exporter says: “The DMR is using this as an excuse to shift management of Quattro to a politically well-connected group that we must pay to run the scheme without having any say in that decision.’

Then there’s the return of former TFR CEO Siyabonga Gama to Transnet, after being summarily dismissed by the Transnet board in June last year after a lengthy and independent investigation into “alleged serious breaches in certain procurement contracts’. Gama was reinstated to Trans­net’s executive board in February this year following a review of his case by the restructured Transnet board which – since he was fired – now has a new CEO, new chairperson and various newly appointed directors.

One coal exporter said: “The real problems with TFR started when Gama took it over in 2005.’

RBCT export statistics back that contention. The RBCT exported a record 69mt in 2005 but exports then slumped to 61.8mt by 2008 and 61.1mt over 2009. Gama was suspended in September 2009 and coal exports promptly rose to 63.4mt last year as Transnet acting CEO Chris Wells focused closely on turning around the underperformance by TFR on the Richards Bay line.

At investor conferences during his tenure as TFR CEO, Gama repeatedly laid all the blame for the cut in export levels on the coal companies, which he claimed weren’t producing the coal. That was rejected by the coal exporters, who blamed TFR’s lack of rail capacity and operational underperformance for most of the problems.

In June 2009 Wells and then Transnet CEO Maria Ramos conceded TFR had been responsible for much of the export shortfall during 2007 and 2008.

– The article first appeared in Finweek