Every Friday morning, SAfm’s AMLive’s radio anchor Dhashen Moodley speaks to Martin Creamer, publishing editor of Engineering News and Mining Weekly. Reported here is this Friday’s At the Coalface transcript:
Moodley: Well, South Africa is all set to launch its first-ever Coal Futures Market in January, is that right?
Creamer: It is right, I just feel it appropriate to pay my respects to Nelson Mandela before we start. May his dear soul rest in peace.
Yes, South Africa is all set to launch its coal futures market, because we’ve never had a coal futures market and we are not strong on futures markets. But, South Africa produces 255-miilion tons of coal a year and consumes about three quarters of it domestically. That quarter that is exported will feature in this new futures exchange, which they hope to start going on the Johannesburg Stock Exchange in January next year.
What that means, is that if you are a coal miner, you can plan forward, because you might have coal in the ground now that you will only take out of the ground in April next year, but you can then work out a price of what you will get when you mine it and sell it in April next year, so it gives a lot more certainty and flexibility to the mining industry, which at the moment has forward sales available to it. In other words, they can sell to a fixed buyer at a fixed price and sell forward. In contrast, the futures market is another option and gives a lot more flexibility because if you are coming towards the end of your contract and the price regime has changed you, can then buy back your contract and recalibrate the price for resale.
It is an interesting development in South Africa; we of course have been doing this on the JSE with agricultural commodities, but haven’t really gone into the harder commodities. South Africa’s commodities have been strong, but because of the agricultural control boards we used to have form a previous era, we haven’t really moved into futures markets in the same way as other countries have. It is felt that this will be a great boost for junior miners in particular and the lot sizes will be fairly small at 500 t. It will enable junior miners to sell forward and also raise capital from the banks on the basis that they have a fixed price for their coal at a future date.
Moodley: Now, there’s a whole raft of loss-making mines in South Africa, but the irony here is that, instead of investors being discouraged, private equity investors are seeing an opportunity.
Creamer: Private equity investors are eyeing South Africa’s growing list of loss-making mines and this is what we hear from Deloitte. The private equity side of mining is not something that we are used to in South Africa, because we are used to going to the public equity, going to raise equity capital on stock markets in public offerings of shares on the Johannesburg Stock Exchange and the getting debt from banks.
Those traditional sources are drying up and we see that the banks are shying away form giving money to mining activities and, at the same time, the big companies are writing off large amounts. The world of mining wrote off something like $75-billion worth of asset value in impairments last year. This opens the way for private equity that sees bargains coming up. They see assets being valued at a lower level on balance sheets and also, with private equity taking over single assets, they get rid of all the corporate overheads that some of the companies are used to and they can focus. The idea will then be to fix these mining assets over a period of time and then sell them back into the market.
Moodley: Beneficiation has been the name of the game in South Africa. Many have been asking: “Are we not benefiting from the minerals that we extract from the earth?” But, now there is a black-controlled mining company setting to reach a new benchmark on this.
Creamer: It is interesting that this black-controlled mining company is led by a woman. A grandmother, in fact, and she opened her new assets in the Northern Cape in the manganese field there. No less than three Cabinet Ministers just heaped praise on her.
They are saying that if a grandmother, that lacks experience in mining and is under capitalised, can actually move beyond exporting raw ore and add value to it in a way that she is demonstrably doing there, because you could see the tall shaft, you could see the big sinter plant and you can see the effort now going into smelting at Coega. This is Daphne Mashile-Nkosi’s Kgalagadi Manganese and what she is saying is that not a single speck of raw ore will leave this plant. She has put her money where her mouth is and it is interesting that the money is there.
All of a sudden you see funders and, these are developmental finance institutions, international ones, like the African Development bank saying, “Hey, here we’ve got a model that we can show to the rest of Africa. We can show that this grandmother of three and mother of four is able to come in here and actually produce what we have been saying is our ideal.” She is doing it also with the smelting leg and you can see the funding is coming through from the smelting leg of this project in which billions of rands has already been invested.
One can say that there is some political support out of there, when people actually do what the politicians want in Africa, and say we will add value, you get international development institutions saying we will fund that, as we are seeing in the case of Kgalagadi Manganese, lead by Daphne Mashile-Nkosi.
Moodley: Thanks very much. Martin Creamer is publishing editor of Engineering News and Mining Weekly, he’ll be back with us at the same time next week.