Slippage in R6bn Makhado funding “not a catastrophe”

Coal of Africa (Coal of Africa) CEO, David Brown, said a slippage in the development of its R6bn Makhado project owing to funding difficulties would “not be catastrophic” as it could rely on cash flow from Universal Coal assets.

“What we’re saying is that were there slippage in the development of Makhado it would not be catastrophic; not like it would have been two years ago,” said Brown. “We’re not saying there is slippage yet. We are not there and we’re not anticipating it,” he added.

Brown was commenting following the presentation of the firm’s interim results in which he provided an update on the firm’s Makhado and Vele projects in South Africa’s Limpopo province, as well as progress with a R1.38bn reverse takeover of Universal Coal, an Australian firm with operating assets in Mpumalanga province.

He warned that CoAL was attempting to raise project capital for Makhado in a difficult market.

“I think we’re trying to caution that turnaround strategies are premised on an improving operating climate, but 2016 has started worse than many people anticipated,” he said of export coal prices. The export coal price would be “lower for longer”, he said.

“I don’t think that the viability of Makhado is in jeopardy. I’m just saying that we are trying to raise finance against a backdrop that’s not very positive,” he said.

In December, CoAL announced that it had signed a memorandum of understanding to sell a 34% stake in the CoAL subsidiary that owns Makhado to Qingdao Hengshun Zhongsheng Group, a Chinese industrial conglomerate, for $114m.

The Chinese had undertaken to arrange debt. Brown anticipated a 50:50 debt to equity split as a financing structure for the project.

Some 26% of the project would be sold to local communities and entrepreneurs, possibly with the assistance of the Industrial Development Corporation and the Public Investment Corporation, state-owned institutions.

It was amid funding constraints that CoAL’s bid for Universal Coal was important, Brown said: “With Universal Coal we will have cash flow,” he said. Universal Coal is positioned to produce about 3.5 million tonnes a year of saleable coal from its Kangala and New Clydesdale Colliery in about a year’s time.

CoAL’s bid for Universal Coal was almost complete with shareholders from both companies  approving the deal. Regulatory clearances were still required, but the transaction ought to be complete by April, said Brown.

Brown also alluded to the possibility that in lieu of financing Makhado according to its current timetable – with full production of about six million tonnes a year pencilled in for 2020 – the company might more easily finance regional consolidation using Universal’s footprint in Mpumalanga province as a platform.

“There are junior firms operating in Mpumalanga province on a standalone basis at these prices. So there is some logic to the strategy of combining operations in a greater quantum,” he said.