ENERGYMX / 06 NOVEMBER 2019 - 14.14 / DAVID MCKAY
SOUTH32 today concluded a binding conditional agreement with black-controlled mining firm, Seriti Resources, for the sale of its 91.8% stake in South African Energy Coal (SAEC), a business unit of the Perth- and Johannesburg-listed group that produces about 28 million tons a year (Mt/y) of coal, of which about half is to Eskom.
South32 will be paid R100m by Seriti Resources and receive 49% of free cash flow generated by the mines for a five-year period until March 2024 capped to a maximum of R1.5bn annually. The cash payable to South32 would be funded from internal sources, according to Seriti CEO, Mike Teke.
Graham Kerr, CEO of South32
“We already have a sustainable business from which Seriti can fund the deal,” he said at a press conference to announce the transaction finalisation earlier today. “Also, the business we are taking over is generating good cash flows.”
Phembani Group, a black-owned diversified industrial company, will retain its 8.12% stake in SAEC.
The purchase will be concluded with Seriti subsidiary Thabong Coal and two trusts representing employees and mine communities each holding a 5% stake in SAEC respectively – in line with the latest guidelines as set down in Mining Charter III.
Seriti also said that it intended to develop New Largo, a project bought from Anglo American in 2018 for about R750m. The project has been subject to a long-standing feasibility study, but Seriti said today it anticipated a 12Mt/y mine supplying Eskom’s Kusile power station for 50 years from commissioning.
The mine would be built in modular fashion. Doug Gain, CFO of Seriti, said funding of New Largo would be from a variety of sources including equipment rental agreements and from lenders, although he acknowledged that South African lenders were not partial to funding greenfields coal mines. The public market was also “soft” so an initial public offering in Johannesburg, or elsewhere, was not viable.
Prior to buying New Largo, Seriti bought the domestic coal mines of Anglo American – Kriel, New Vaal and New Denmark – for R2.15bn. The mines supply about 24Mt/y to Eskom’s Lethabo, Tutuka and Kriel power stations. On completion of the SAEC deal with South32, Seriti will become a 51Mt/y coal producer supplying approximately 36Mt/y to Eskom – the second largest Eskom supplier behind Exxaro Resources.
A number of conditions need to be met before the transaction is declared final, however. Mike Fraser, COO of South32, said whilst these conditions were not considered onerous the renegotiation of South32’s Wolverkrans Middelburg Mines (WMC) coal supply agreement to Eskom’s Duvha power station was a key element.
Hardship clauses regarding the contract had already been triggered and South32 was working through with discussions with Eskom. They could not be tripartite discussions with Seriti, however; in other words, Seriti would have to take over the negotiations on completion of the transaction.
“Any company would fail if that contract remained in place,” said Fraser who added the WMC is supplying some of Eskom’s best quality coal at the cheapest price.
Teke said it was possible that Eskom might agree to a change in the contract conditions if it was able to lock in coal supply from elsewhere from the Seriti group.
Teke declined to provide details, but one combination could see Seriti divert SAEC export coal to Eskom which it will then replace with new production from Pegasus, a shallow but high quality export-quality coal mining project in the SAEC portfolio that Seriti could also develop in tandem with New Largo.
“The combination of our energy coal businesses will realise further operational and technical efficiencies enabling us to better service our customers by offering competitive energy solutions,” said Teke in an earlier press statement.
“We remain fully committed to all of our stakeholders and welcome the participation of the South African Energy Coal employees and communities in this acquisition,” he said.
Commenting on the transaction, Graham Kerr, CEO of South32, said it marked “… an important milestone” as the group reshaped its portfolio. South32 is also considering the sale of its manganese alloy operations in South Africa. “Completion of this transaction will substantially reduce our capital intensity, strengthen our balance sheet and will improve the group’s operating margin,” said Kerr.
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