Wescoal puts pay to rocky past as half-year earnings surge

Waheed Sulaiman, CEO, Wescoal Holdings

JOHANNESBURG-listed coal junior, Wescoal Holdings, served notice it was primed for growth through acquisition as it sought a medium-term run-of-mine (ROM) production target of eight million tonnes a year (mtpa).

Its ambitious growth target followed a resoundingly solid six months trading period in which it took headline earnings to 27.8 cents per share versus 5.1c/share at the halfway point of its previous financial year.

The stand-out aspects of the six months, ended September 30, were the ramp-up of its Elandsrand colliery and finalisation of a five-year, 7.8mtpa supply agreement with Eskom.

It also secured three-year export supply deals through trading partners for some one million tonnes/year, albeit at fixed prices. Whilst this will mean Wescoal doesn’t get the full benefit of recently improved coal prices, it and the Eskom deal significantly de-risk the firm’s income streams and give it space and time to spec out growth options.

NOISE

Wescoal has removed much of the noise that characterised its business dating from early 2015 when the firm’s chairman, Robinson Ramaite, fell out with founding CEO, Andre Bojé.

The dispute turned on a black economic empowerment (BEE) transaction which has since been consummated such that Wescoal is now 59% empowered. This enables it to supply Eskom from Elandspruit in terms of BBB-EE regulations that say new suppliers to the power utility must be black-controlled.

The price paid for the transaction, however, was the dilution of shareholders. In terms of the transaction, Wescoal shareholders – Ramaite, Simeka Capital, and Eric Nthuthuko Mzimela – subscribed for nearly 125 million new Wescoal shares for R211m.

Waheed Sulaiman, CEO of Wescoal, said the aim now was to repay shareholders for the dilution through dividend flow – a special R10m dividend was announced in September – and improved returns on production.

Scaling up Elandspruit is a major step in that direction. It reached nameplate capacity of 1.3mt in the period (2015 H1: 300,000 tonnes) which helped increase Wescoal’s group operating profit margin to 10% (2015:2%).

Including production from Intibane colliery, total production for the period was 1.6mt (2015: 600,000 tonnes). The firm’s suspended Khanyisa colliery was granted a 20-year Water Usage Licence by the government but additional regulatory consents remain pending before mining activities can recommence.

Cash generated was R98m, less than R129m generated in the previous half-year but purchases of plant and property was much less in the current period which enabled Wescoal to cut debt and pay a dividend.

“We are a company that is looking to grow which is why we are putting in work around the base of the company,” said Sulaiman in an interview.

“We are in conversations with other parties; some advanced, others not. This is not growth at any cost and we are not chasing after numbers,” he added.

However, Wescoal was looking at potential bolt-on acquisitions – discussions Sulaiman said happened “all the time” – as well as more meaningful growth deals.

“We are also looking at new resources and new business whether that be in greenfields or existing operating mines. There is a very strong desire to use the money that we have raised in the BEE transaction, where shareholders have been diluted, to generate growth that compensates for the dilution,” he said.

Shares in Wescoal increased 3.3% by midday in Johannesburg taking gains in the year to date to 105%. At R2.50/share, the company is capitalised at R594m.