Securing sufficient thermal coal for State-owned power utility Eskom to keep the lights on going forward is vital in the face of what coal commentators refer to as a projected Eskom coal supply ‘cliff’ from 2015 – a 60-million-ton yearly deficit in the required coal volumes for the country’s developing power stations, namely Medupi and Kusile, as well as the possible construction of Coal Three.

The Integrated Resource Plan Green Shoots Scenario estimates that Eskom will require 4.5-billion tons of coal by 2040, of which 2.5-billion tons is still unsecured.

In light of this, professional audit, tax and advisory firm KPMG Africa mining transaction leader Werner Jacobs says it is reasonable to assume that the bulk of the unsecured thermal coal requirement will have to originate from yet-to-be developed coal mines.

He says that by factoring in the Mining Charter requirement for 26% black economic-empowerment (BEE) shareholding and Eskom’s requirement that a portion of its coal be secured from black-controlled mining enterprises – mining enterprises that are 50% plus one share black- controlled – it is clear that there is an immediate need to start developing an emerging black junior coal mining sector in South Africa to help secure part of the coal needed by the power utility going forward.

Jacobs highlights, further, that the success of an emerging black coal sector, and the success of South Africa’s coal sector, hinge on the emerging black junior coal sector being one that is broad based, transformative, skills generative and sustainable, as opposed to a sector that measures transformation using narrow ownership criteria, which, moreover, benefit only the well-connected few.

Coal advisory firm XMP Consulting senior coal analyst Xavier Prevost points out that serious consideration must be given to the weaknesses and future opportunities for coal, bearing in mind that there has been very limited investment in new development or expansion in the industry as a consequence of depressed international prices and continuous lack of foreign capital.

He says this is partly a result of the accepted traditions of the coal mining industry, which suggest that bigger is better, pointing out that smaller blocks could also be mined profitably, which will open up opportunities for emerging black junior coal miners in the coal mining industry, as well as potentially provide additional and sorely needed inputs for secondary local energy production.

Nevertheless, it must be noted that while a sustainable emerging black junior coal sector needs to be fostered to help meet Eskom’s future coal demand, there are several challenges facing the emerging black junior coal miners that have to be overcome to ensure their entry into the major-coal-producer-dominated environment.

Major Challenge
Despite South Africa’s coal abundance, factors that may hamper the development of a prosperous and sustainable emerging black junior coal mining sector are a lack of funding or an inability to secure funding to conduct pre- feasibility and bankable feasibility studies. This is coupled with the challenge of limited access to rail and infrastructure to export thermal coal; lack of skills and training to conduct coal mining; and a general lack of funding and market relationships.

According to the South African Coal Roadmap – a document that explores the interventions required for the domestic coal industry to maxi- mise the commodity’s contribution to the South African energy mix – released in August last year, the development of new mines, which require substantial capital to develop and build, is fundamental to ensure that existing coal-fired power stations remain operational.

The roadmap illustrates that a typical new mine supplying a power station with ten-million tons a year of coal would thus require an initial capital investment in the order of R10-billion to R15-billion. In other words, meeting Eskom’s projected requirement of 60-million tons a year of new coal will, therefore, require investment of between R60-billion and R90-billion for the construction of at least ten new mines.

Assuming that a large portion of the funding required can be debt-financed, and given that the South African mining industry has typically been funded by foreign capital, it still leaves a substantial portion that will require equity finance.

An alternative to securing foreign investment for emerging black miners is for Eskom to consider investing in emerging miners or acquiring and developing its own mines, thus securing supply, suggests Jacobs. It could also do this through the signing of guaranteed offtake agreements, enabling junior and emerging black junior miners to more easily secure their required funding.

Moreover, access to rail is a key challenge for most junior coal miners – not only for emerging black junior coal miners.

Further Challenges
Major challenges impacting on the coal sector include the challenge of securing applicable mining rights, water-use licences and envi- ronmental permits in a reasonable timeframe to conduct mining (bearing in mind that it can take more than three years to secure these approvals); deeper and fragmented thermal coal seams with lower-quality pits and yields; a lack of infrastructure; and the increasing cost of mining driven by declining stripping ratios, narrower seams and higher labour, electricity and diesel costs.

Another challenge impacting on the coal sector and, in turn, negatively impacting on investment in, and the development of, greenfield opportunities is regulatory uncertainty – in particular, the general uncertainty around the implications of the Mineral and Petroleum Resources Development Act (MPRDA) Amend- ment Bill and the effect of this on domestic coal pricing. Continued uncertainty around the MPRDA Amendment Bill will continue to hold back investment in the South African coal sector, says Jacobs.

Specifically, uncertainty surrounding the possibility of coal being declared a strategic mineral is prevalent.

Meanwhile, in the longer term, a drive towards the adoption of cleaner energy may negatively affect export coal demand. Although it is unlikely, renewable energy will make a significant dent in the global market’s demand for coal, nuclear energy is once again making a comeback, particularly in China, where there is significant concern around carbon emissions.

Realistically, and despite these challenges, it is important that new players be exposed to the coal market to boost economic development and to contribute towards South Africa’s competitiveness in the global arena. Another reason to develop a market such as this one is that it contributes to job creation, skills development, increased tonnages and economic growth, says black-controlled RBT-Grindrod CEO Bongani Biyela, one of the players willing to also accommodate emerging black junior coal miners.

Junior Port Options
Discussions are under way among the Richards Bay Coal Terminal (RBCT), Transnet and RBT-Grindrod regarding future port developments for emerging black junior coal miners.

The option proffered by RBT-Grindrod, a joint venture between investment group RBT Resources (50.1% shareholding) and South African transport firm Grindrod (49.9% shareholding), is the R2-billion phased expansion of its existing three-million-ton-a-year facility, Navitrade, into an eventual 20-million-ton-a-year facility tailored exclusively to emerging black junior coal miners. It proposes a fully mechanised, brownfield port solution, also at Richards Bay, but entirely separate from the existing private-sector-owned RBCT as an alternative route to market.

The RBT-Grindrod expansion project presents Transnet with an option to venture into a private–public partnership, where public investment would focus on rail and port infrastructure, says Biyela.

He explains that the existing facility, together with the adjoining land, will be developed in phases, aligned with market demand and with rail and port developments, thereby ensuring financial viability. An initial five-million tons is being developed over the next six months, with a subsequent eight-million-ton-phase development and ten-million-ton-phase development before the eventual 20-million tons throughput capacity is achieved.

“We will also look at developing an inland coal hub (accommodating different grades of coal, spot loading and beneficiation) once the yearly throughput capacity reaches eight-million tons. This coal hub will enable junior miners to consolidate their volume in a cooperative fashion so as to enable those with low production volumes to access export markets and exploit economies of scale as a collective,” highlights Biyela.

The intention is to allocate 50% of the terminal capacity to emerging black junior coal miners and 50% to mature BEE mining companies that will act as anchor tenants.

This is a long-term infrastructure project and will bring about long-term benefits for junior miners, complementing existing terminals and contributing to the competitiveness of South Africa, he enthuses.

Meanwhile, in terms of port capacity building between the RBCT and Transnet, it is still unknown at this stage whether the RBCT will agree to an expansion from its current capacity of 91-million tons a year to 110-million tons a year for the express purpose of accommodating coal juniors, in partnership with Transnet, or if Transnet will instead build its own 32-million-ton-a-year capacity terminal.

However, all parties agree that key to any new development will be Transnet’s agreeing to increase its rail capacity commensurately to ensure that rail expansion matches port expansion. Transnet plans to rail 75-million tons of coal this year.

Way Forward
The face of South Africa’s coal industry and, by association, the economy of the coal-dependent country are set to change, mainly owing to factors such as the closure of most of the large collieries within ten years, the potential growth of BEE producers and the emergence of strong com- petition in the export market.

It is, therefore, advisable that, before embarking on large-scale capital spends to build new port terminals and upgrade rail capacity to cater for emerging BEE coal miners, several factors be considered, according to Jacobs.

A clear regulatory and legislative environ- ment that is conducive to foreign direct investment needs to be fostered. He says that this can, however, only happen once clarity on the MPRDA Amendment Bill is provided and once a clear and definitive indication from government on whether thermal coal will be declared strategic is given. If it is, an indication of whether South Africa will be able to export thermal coal once Eskom’s requirements are met is also still needed.

Jacobs says that while it is important to enable junior and emerging coal miners to rail export-quality coal to export markets, as with coal producers generally, Eskom’s security of supply challenges would certainly be alleviated if emerging miners initially focused on supplying coal locally.

The transfer of appropriate skills and opera- tional know-how to emerging coal miners is also still needed.

It is likely that while many emerging black junior coal miners will vanish as a result of the tough economy, many more will survive and thrive in future.