BHP Billiton’s SA coal on the line?

[] — IT appears Ingwe’s Koornfontein colliery is about to be put up for sale, but a bigger issue is whether BHP Billiton has decided that all of Ingwe – its South African energy coal arm – is non-core.

The rumours have been around since the beginning of the year. They were denied in February by BHP Billiton group president energy, Philip Aiken, who said flatly that Ingwe was a core business for the group.

Despite this, and subsequent denials by Mohamed Seedat, the newly appointed president of energy coal based in Johannesburg and which reports to Aiken, the rumours have not gone away.

If anything, they have intensified with one source reckoning that the only business BHP Billiton considers core in South Africa is the Hillside aluminium smelter at Richards Bay.

Asked about the possible sale of Koornfontein which was first reported on the website of the UK-based McCloskey Coal Report, Seedat said: “We are always reviewing our portfolio of assets. I cannot say more than that.”

And asked about the possible sale of Ingwe, Seedat said: “I can categorically state there are no plans to sell Ingwe. We are in the process of setting up the energy coal headquarters in Johannesburg which involves moving staff here from Australia.

“It makes no sense to do that if we were going to sell Ingwe. I don’t know where this speculation is coming from.”

On the face of it Seedat’s standpoint holds water, and Nedcor Securities analyst David Pleming said he would be “very surprised” if the group was to dispose of Ingwe.

Said Pleming: “It makes sense to sell certain assets nearing the end of their economic life, but getting out of the South African coal sector completely would raise questions over BHP Billiton’s overall commitment to being in the energy coal business. They need the geographical diversity of production out of South Africa.”

BHP Billiton’s EBIT (earnings before interest and tax) earnings from energy coal nearly trebled to $616m in the year to June (2004 – $234m). Ingwe accounted for $187m of those earnings, about 30%. BHP Billiton’s other major energy coal operations are in Australia, Colombia and New Mexico.

But a recent string of developments affecting BHP Billiton’s South African operations seem to be fuelling the speculation including the sale earlier this year of the group’s chrome operations.

Ingwe is currently going through a radical restructuring and management overhaul which is aimed at “rebasing” the group’s cost structure to ensure operations remain competitive.

BHP Billiton CEO, Chip Goodyear, told analysts in August that no further funds would be invested in Ingwe’s operations until this restructuring programme showed the required results.

As a result the proposed $280m expansion of the Klipspruit mine had been put on hold. That affects the so-called “Western Complex” project through which BHP Billiton was looking at a joint venture with Anglo American to combine Ingwe’s mines at Khutala and Klipspruit and its Weltevreden coal resoruces with Anglo’s coal resources at Zondagsfontein, Smaldeel and Beesting.

Seedat said the Ingwe management staff had been relocated from Johannesburg to Witbank to be closer to the collieries. The energy coal headquarters in Johannesburg would amount to about 12 people at full strength.

Ingwe is South Africa’s largest producer of steam coal employing some 7,500 people, and is also the largest shareholder in the Richards Bay Coal Terminal (RBCT). It has a 37,4% stake which entitles it to export 26.9 million tons annually at the RBCT’s current nameplate export capacity of 72 million tons/year.

In financial 2004, Ingwe sold 54.2 million tons of coal of which 20.1 million tons went on the export market, 32 million tons to Eskom and the balance to South Africa’s domestic consumers.

Koornfontein is one of six operating Ingwe Collieries. It is an underground mine producing some 6 million tons/year of coal for the export markets, but has only some three years of underground reserves left. There are still extensive reserves that could be mined by opencast methods.

Some of Ingwe’s collieries have been suffering from technical and geological problems. For the past few years the group has been “buying-in” unspecified volumes of coal from third party producers to meet shortfalls in its export commitments.