[miningmx.com] –IN THE image stakes coal is making something of a minor comeback. When you look at the figures, the modern world can’t function without it. For coking coal alone, global demand is expected to increase to a little short of 300 million tonnes/year by 2014 from 250 million tonnes this year.
Speaking at a coal conference convened by The Geological Society of South Africa (GSSA) in Johannesburg earlier this week, Dawie van Wyk of GeoCoal Services, pointed out that it requires 300 tonnes of coal to manufacture a single wind turbine.
Wind turbines must be the icon of the green technology revolution: those soaring, elegant constructions, their blades sweeping silently far above the rolling pastures below. And yet did you know that in addition to all the dirty coal it takes, wind turbines also consume 300 tonnes of iron ore and 260 tonnes of steel in their fabrication. That’s just one turbine. They rarely operate alone; in fact, flocks of wind turbines are required to make the power replacement argument.
More persuasive, however, is the economic argument behind coal usage. As a source of power generation it’s ridiculously cheap; well, relatively.
On a levelised basis, which accounts for the present value of the total cost of building and operating a generating plant over its financial life, power from wind turbines costs about $70 per Mw/hour, according to a study by the EIA (US Energy Information Administration). Solar power, another new generation alternative, costs $180/MWhr.
By comparision, coal fired power generation remains the lowest cost at just over $30/MWhr. Gas is slightly more expensive.
So it’s with some dismay that the South African government seems hell bent on having us pay so much more for power, not just during the peak capital periods of Eskom’s spend – now until 2015 – but well beyond that. The Integrated Resource Plan 2 (IRP2010) sets down proposals to reduce the level of power from coal to 56.7% of total from the current 86.5% by 2030, with nuclear and gas making up the difference, assisted by power from renewable energy such as solar and wind.
Surely the focus is wrong. Better, I would have thought, to give attention to the economic stimulus of liberating the vast coal resources of the Waterberg, a deposit with huge regional impact since it straddles the South African and Botswanan border.
Developing inland coal resources demands huge infrastructural spend and there are no fatal flaws in plans to build the so-called Ponta Techobanine Inter Regional Heavy Haul Railway line which would link the Waterberg with Zimbabwe, Mozambique and Swaziland.
In South Africa, the development of the country’s coal resources has leant itself reasonably successfully to black economic empowerment. Roughly 21% of coal production, which predominantly goes to Eskom, is from smaller black-owned companies. This is unusual as coal deposit ownership is traditionally heavily consolidated in South Africa mainly among Exxaro, Anglo Coal, BHP Billiton, Xstrata and Sasol.
If only supply problems among the smaller companies could be monitored better. Eskom has complained that poorer grades of coal has led to lower power generation, but it’s impossible to check every truck each small time miner supplies to Eskom.
Fuel to Harmony
Bernard Swanepoel was much maligned during his final months at Harmony Gold. While he may have outstayed his welcome, it’s worth remembering that it was Swanepoel who “discovered’ the Papua New Guinea (PNG) assets that are serving the group’s share price so well. (Current Harmony incumbent was Australasian regional manager for a time so would have known about Wafi’Golpu if not completely complicit in acquiring the asset).
Some analysts reckon the Wafi/Golpu deposit in PNG is worth $3.8bn or some R60 per Harmony share and that the prospect’s valuation could increase to R130/share based on a gold and copper price assumption of $1,427/oz and 435 US cents respectively. Harmony owns 50% of Wafi/Golpu, slated to come on stream in 2015 with a capital spend of $2.2bn, and stay-in-business capital of $50m/year.
Swanepoel bought Wafi/Golpu, and the other PNG asset, Hidden Valley, which is now ramping up production, in 2004, after buying then owner Abelle Ltd, a Perth-based company. The properties were previously owned by CRA which was part of Rio Tinto. CRA representatives were forced out of the country amid a hail of bullets in one of the PNG’s civil disruptions, and it goes some way to explaining why Wafi/Golpu wasn’t developed before.
“There’s gold washing down the rivers,’ said JP Morgan’s Steve Shepherd at the time of Harmony’s initial development Wafi/Golpu. If the upside expectation among analysts, giving Wafi/Golpu a value of R8bn, turns out to be true, that may be borne out.
The question is whether this all leads to corporate action of the type that is giving extra fuel to Harmony’s share price, up a third since the beginning of 2011.? Firstly, Harmony’s partner in the PNG, Newcrest, has a pre-emptive right over the shares it doesn’t own in the assets.
Secondly, the complete takeover of Harmony means having to pay for the patchy nature of the South African assets. You can’t call that a banker.