JOHANNESBURG (miningweekly.com) – Coal producer Wescoal is readying for an up to 70% decrease in earnings a share for the six months ended September 30 to between 4.56c and 5.62c, blaming the weaker half-year performance on the erosion of the global mining industry over the past 12 months and global thermal coal prices, which are at multiyear lows.

It further cautioned of an up to 73% erosion in the value of headline earnings a share for the period to between 4.1c and 5.17c apiece.

“Local and global market conditions remain volatile and challenging, while conditions in the South African business environment have been further impacted by pricing pressures, power constraints, labour-related disruptions, challenges in the construction sectors and high household debt
levels, besides others.

“While Wescoal’s exposure to energy utility Eskom has provided some relief from the general decline in global prices, it has not been immune to the difficult trading environment,” the company said in a trading update on Friday.

The performance of the company’s mining division over the period was further negatively impacted by the absence of long-term Eskom contracts, while short-term contracts for the supply of 190 000 t of coal from Intibane and Khanyisa were signed in late May.

An additional short-term contract for the supply of 221 000 t of coal from Elandspruit was signed on September 7, bringing Eskom sales from short-term contracts to 362 000 t during the period, compared with 906 000 t in the first half of the prior year.

Total coal sales from the mining division narrowed from 934 000 t in the first half of the prior year to some 698 000 t in the six months under review.

“Efforts to conclude long-term Eskom coal supply contracts continue. Based on interactions with Eskom, it is understood that, if discussions extend beyond October 31, the current short-term contract at Elandspruit will be rolled forward until a long-term contract is concluded.

“Long-term contracts for the Intibane and Khanyisa collieries are dependent on the granting of regulatory permits, including water-use licences,” the company stated.

Wescoal, meanwhile, commissioned the Elandspruit project, in Mpumalanga, in the second quarter of the period, after which the project’s run-of-mine (RoM) was processed at the nearby processing plant and the beneficiated product sold to end-users.

The project was on track and had already demonstrated its ability to produce around two-million tons a year of RoM on an annualised basis, the company reported.

Debottlenecking and optimisation projects at the Elandspruit mine and
processing plant continue to increase production capacity and reduce operational risk, it added.

Wescoal’s trading division, meanwhile, delivered a “very strong” first-half performance, exceeding expectations in a difficult business environment on the back of improved credit controls and debtor management, which the company believed had limited bad debt exposure and improved the quality of the trading book.

Lower sales volumes and downward price pressures during the period had been offset by internal cost-saving and productivity initiatives, while sales from the trading division totalled 550 000 t, compared with 626 000 t during the prior period.

Wescoal further pointed out that the lack of long-term bank funding, which was reliant on the conclusion of long-term Eskom contracts, meant that the Elandspruit and other growth projects had been funded out of operational cash flows.

“About R144-million was spent on growth projects during the period. While this is testament to Wescoal’s strong cash flow generation, it has come at a price.

“Revenue-generating opportunities, which required ready cash, were forgone in exchange for the continued development of the Elandspruit project and growth opportunities were pursued with caution. The recently announced Wescoal rights issue was initiated in response to these constraints and to raise equity funding to complete development of the Elandspruit project,” it held.

Wescoal’s interim financial results would be released during the week of October 19.