South African coal miner Wescoal recently reported its performance for the first half of the 2019/20 financial year, to the end of September. While revenues stayed static at R2.1-billion, compared with the previous six months, gross profit fell to R195-million from R276-million, total comprehensive income dropped to R51-million from R108-million, cash generation declined to R126-million from R291-million, while operating costs rose to R184-million from R104-million. Headline earnings per share fell to –11.9 c from 23.5 cents. The company’s gearing (debt) ratio increased from 18% to 36%.
“We want to acknowledge this is a disappointing set of results,” Wescoal CEO Reg Demana tells Mining Weekly. “We’ve experienced a lot of challenges on the operational front.”
Complicating matters were the costs of two merger-and-acquisition deals (reportedly costing R18-million) that did not come off.
The company’s biggest customer is State-owned electricity utility Eskom, which currently accounts for 57% of Wescoal’s revenues. “We have done some work to diversify,” says CFO Izak van der Walt. But, he points out, Eskom is still central to the company’s business model. The utility provides the coal miner with long-term contracts and a steady offtake of its production.
The miner has three operational collieries currently – Elandspruit, Khanyisa and Vanggatfontein. It has two projects being developed, namely Arnot and Moabsvelden, of the latter being a greenfield project. And it has another asset, Leeuw Braakfontein Colliery (which is in an advanced stage of exploration), which it considers noncore; however, its disposal deal fell through. The company may make another attempt to sell it.
Wescoal uses mining contractors to operate its mines. However, this led to some disruptions late last year and early this year. “In the very short term, we are still committed to contract mining,” states Demana. But the company fully realises that the country’s contract mining sector is under severe stress. A number of contract miners have gone into liquidation. Liviero Mining, which operated Vanggatfontein, had to be placed in business rescue late last year and had to be replaced (by Stefanutti Stocks Mining Services, in March this year).
Wescoal is looking at how it can support its contract miners. At one of its operations, he notes, the company directly bought new earthmoving equipment, which is now being operated by the contract miner, whose own equipment had been ageing and was unreliable. The miner is reviewing the situation and may move to a hybrid approach, bringing certain mining services in-house while continuing to contract others out. But, he cautions, this would not be a quick or easy transition.
Meanwhile, various turnaround initiatives are now delivering results for the miner. Production is up, and greater sales will follow. The company expects to reach its run-of-mine production target by the end of this year.
Wescoal has also successfully negotiated the refinancing of its existing credit lines, providing extra liquidity, and established an asset-based funding mechanism, in both cases with the same consortium of South African banks.
Regarding Arnot and Moabsvelden, Demana reports both these are on track to deliver significant volumes of coal next year. “We’re in a strong position to execute these projects with the financing we now have in place,” assures Van de Walt. Arnot is awaiting the last of the conditions precedent to be met and the deal is expected to be closed soon. Wescoal held 50% of Arnot, with the other 50% held by a broad-based black economic empowerment consortium. Van der Walt described the Arnot ownership structure as a “landmark . . . setting the scene for transformation”. Moabsvelden is wholly owned by Wescoal.
Demana assures that the company should be returned to profitability, and its performance improved, over the next two years. “The year that’s been . . . has proven the resilience of the business,” adds Van der Walt. “The prospects are strong for Wescoal.”