ASX-, Aim- and JSE-listed Coal of Africa Limited (CoAL) has reached a $10-million agreement with Grindrod subsidiaries Grindrod Corridor Management and Terminal de Carvão da Matola for the settlement of historic and future liabilities relating to CoAL’s take or pay obligation at the Matola Terminal, in Mozambique.

CoAL’s total allocation at the terminal was three-million tonnes a year, of which it had to use a minimum of 2.25-million tonnes.

The junior coal miner noted that its turnaround strategy, which included the closure of the lossmaking Mooiplaats colliery, in Mpumalanga, the disposal of the Woestalleen complex, also in Mpumalanga, and the cessation of production at the Vele mine, in Limpopo, ahead of the plant modification at the colliery, had resulted in the production of no coal, which exposed the company to its take or pay obligations.

“The company partially mitigated this exposure by subleasing its capacity to third parties but as a result of the differential in rail costs between the Maputo and Richards Bay rail corridors, was unable to totally offset its 2.25-million-tonne-a-year commitment,” CoAL explained.

The $10-million payment, which would be settled in two tranches of $6-million and $4-million respectively, would settle the current liabilities recorded to date, since the agreement came into force in 2009, as well as cover all future take or pay obligations until December 31, 2016, when the throughput agreement with the Grindrod subsidiaries would expire.

“The potential take or pay liability for these periods would have been significant assuming an annual take or pay obligation of 2.25-million tonnes a year and this settlement will materially mitigate any future exposure,” CoAL indicated.

The company added that, following the settlement, it would be able to export coal during the settlement period with no take or pay obligations and would, therefore, have sufficient export capacity to meet scheduled production from the Vele colliery to the end of the 2016 calendar year.

"The settlement agreement results in certainty for CoAL shareholders and eliminates the company's exposure in the 2014, 2015 and 2016 calendar years, while preserving access to the port capacity for future production,” CoAL CEO David Brown commented.

Following the expiry of the initial throughput agreement in 2016, the terms of this agreement would be renegotiated for a further two five-year periods and one further two-year period starting in the 2017 calendar year, ensuring that the company had sufficient capacity to export coal produced by its Vele colliery and its Makhado project.

Meanwhile, Brown also noted that the company had assessed its funding options, which included the completion of a recently announced equity raise and the execution of the sale of its noncore assets.

“The equity raise will enable the company to free itself from these legacy issues and start the process of rebuilding value for all stakeholders. This agreement demonstrates management's continued execution of the turnaround strategy in resolving all material legacy issues," he stated.