[miningmx.com] — THE proposed listing of Forbes Manhattan Coal Corporation (Forbes Coal) shares on the JSE is another indication that no matter the infrastructural difficulties, South Africa’s coal sector is responding to the onset of Asian demand.
And it’s growing. Shipments from Richards Bay Coal Terminal (RBCT) in the last six years shows a remarkable shift in buying patterns. In 2005, for instance, 65% of all shipments were “Atlantic’ whilst Indian demand was relatively small at 5% of total. China demand did not exist.
Today, an estimated 15% of all RBCT exports go to China while nearly 30% are absorbed by India. That’s quite a transformation. Atlantic seaborne trade has fallen to a fifth of total since 2005. And if Transnet Freight Rail gets its act together and takes coal deliveries to 81 million tonnes/year, you can bet a great deal of that will also be heading to Asia.
For investors, the consequence has been a nice flowering of small to mid-cap coal companies. Forbes Coal’s CEO and president, Stephan Theron, says the listing of shares in Johannesburg is not directed at a capital raising exercise, but it’s clear from our interview that Forbes plans to grow aggressively.
Following a planned tripling in production, mostly thermal coal, to 1.5 million tonnes, Forbes will consider possible corporate action.
“It’s important we get to the 3 to 4 million tonnes/year level and into the mid-tier bracket,’ says Theron. “This makes for a strong business case. After that we can look for exploration.’ Botswana holds little attraction for Forbes Coal, principally owing to the infrastructural problems of railing coal down from the Waterberg. Rather, it’s Mozambique (and Zimbabwe a distant second) that interests Forbes, although in my humble opinion, infrastructure is no less constrained in either of those geographies.
For investors, Forbes hopes to take its place among a growing population of mid-tier, pure-play, coal producers on the JSE. To be honest, it’s welcomed. Pure plays are often rollercoaster rides, going public while the bulls are in full stride and very frequently rising and falling in concert with market conditions in a way the diversifieds don’t (and shouldn’t). As an investment prospect, the pure plays (coal, ferrochrome, even gold) can be a lot of fun.
What’s interesting is how relatively few of the emergent coal companies on the JSE actually have their investment origins in South Africa, bar the likes of Optimum Coal Holdings, Sentula Mining (really still a contracting company), and the coal assets in the unlisted Shanduka Resources.
In fact, there’s a preponderance of Australian headquartered coal firms operating in southern Africa, some listed here. Resource Generation, Coal of Africa Ltd, Continental Coal, Universal Coal – all digging for coal in South Africa but which have investment support either in Sydney, London or, as is the case with Forbes Coal, Toronto.
Quite how this will change is difficult to say. Coal producers in South Africa such as Wescoal Holdings, can make a living out of supplying the domestic non-Eskom market. These are the cement, sugar and brewing industries, traders, and chemical companies which generate some 16 million tonnes in a demand a year. But it’s hard to find a route through RBCT to the lucrative export market.
Currently, some 4.5 million tonnes of export entitlement through RBCT is through the Quattro system, created to help encourage emergent, black-owned coal companies.
Administratively, Quattro is in limbo following allegations of fraud by its former manager. And 4.5 million tonnes is probably not enough longer term to give this important part of the coal sector scale, although some coal exporters with Quattro entitlement are notorious for not actually having the production to fulfill their quotas.
So government’s plan – more speculation among private sector sources than “plan’ I have to admit – is to significantly beef up the tonnages passing through the Quattro system, possibly by having Eskom Enterprises contribute some 3 million tonnes of entitlement it owns through RBCT, and which dates back to the days it traded some product offshore.
No-one’s saying exactly on what terms Eskom would provide its RBCT entitlement to Quattro users, although Brian Dames, Eskom CEO, said in an interview for the upcoming Mining Year Book, that the Eskom RBCT entitlement should be “leveraged’ for common gain.
The other worry, however, is if emergent, black-owned companies receive greater entitlement through Quattro, who makes way on TFR’s crowded infrastructure? This will surely alarm the current crop of mid-tier coal players, such as Optimum Coal Holdings, and emergent juniors like Keaton Energy.
