SERITI Resources has iced plans to diversify its asset base as it had “its work cut out” restructuring the 28 million tons (Mt) a year coal business it will acquire from South32 on June 1 – about 20 months after the deal was first announced.
“The business has lost its way,” said Doug Gain, CFO of Seriti Resources in a conference call today regarding South African Energy Coal (SAEC), South32’s 92%-owned company. “We have got our work cut out integrating the business.”
The acquisition of SAEC by Seriti Resources has been embroiled in controversy after it emerged South32 was renegotiating a coal supply agreement (CSA) with Eskom, the power utility. Gain said today the improved CSA provided Eskom “a good deal” as it had the option after 2024 of seeking a new supplier whilst claiming entitlement to infrastructure conveying coal from SAEC’s Ifalethu mine to its Duvha power station.
Once concluded, Seriti’s acquisition of SAEC will make it one of South Africa’s largest suppliers to Eskom as well as provide 12Mt a year in export coal. Seriti was founded on the 2017 acquisition of Anglo American’s domestic coal mines for R2.4bn.
Gain said the company would retrench some employees at SAEC’s Wolverkrans mine which had been put on care and maintenance ahead of a restructuring. Whilst the mine had “high quality coal” it also faced “headwinds in its unit costs,” he said.
All in all, the SAEC business was likely to run at a loss for as much as 18 months, a situation which now fully accounts for South32’s decision in April to amend its original deal with Seriti by providing $50m in restructuring costs. South32 also agreed to fund $200m for the rehabilitation of SAEC’s mines.
Mike Teke, CEO of Seriti, said the company would also look for opportunities in the business. “It will be about efficiencies” as well as “growth opportunities”. Teke said last year there were “immense opportunities” in chrome, manganese and iron ore.
Seriti is also mining at New Largo, an operation is bought separately from Anglo American for R850m in 2018 and has plans to commission Pegasus, a high quality coal mine, in the second half of the current year.
In addition to this new production, there are ambitions for the Khutala mine which produced 12Mt a year eight to nine years ago, but had a current run-rate of six to seven million tons annually.
Gain said there was “a desire to see a life extension of Khutala” which supplied its Kendal power station. Kendal is one of Eskom’s critical power stations, but it depends if Eskom is able to stump up its capital development which was “multi-billion rand” in any format.