Coal miner MC Mining’s share price on the JSE rose by 15% on the afternoon of August 30, after the company announced that it had determined a preferred development option for its Makhado hard coking coal project, which would lower the development costs and, therefore, the peak funding required.

The company in April reported that a bankable feasibility study (BFS) for the fully licensed and shovel-ready project, in Limpopo, had been completed by independent mining industry consulting firm Minxcon.

Seeking to unlock near-term shareholder value, the base case development plan in the BFS was designed to minimise the upfront capital expenditure by using the existing Vele Colliery infrastructure, as this mine remains on care and maintenance.

The BFS assessed the mining of 3.2-million tonnes a year of run-of-mine (RoM) coal from the Makhado West Pit. The coal would be crushed and screened at Makhado and the resulting coal transported 134 km to the modified Vele Colliery coal processing plant (CPP) for processing.

The Vele plant would yield an average of 500 000 t/y of a mid-volatile hard coking coal (HCC) for sale domestically and internationally and 600 000 t/y of a 5 500 kcal thermal coal by-product.

The saleable coal would need to be transported 55 km to the Musina railway siding.

Although the base case BFS showed favourable financial outcomes, MC Mining subsequently commissioned Minxcon to assess potential alternative development scenarios for Makhado. This assessment was completed with a view to optimise capital expenditure and reduce operational costs.

The two alternative scenarios assessed by Minxcon both provide for an increased net present value (NPV) and internal rate of return (IRR).

In an update to shareholders, MC Mining said the higher NPV and IRR were primarily owing to reduced transportation costs over the life-of-mine, which improves operational margins and generates long-term value for shareholders.

While the peak funding requirements for both scenarios were higher, the payback periods were slightly shorter owing to the lower operating costs, the coal miner noted.

The first option of moving the Vele CPP provides the most attractive financial metrics but removes the Vele asset from MC Mining’s portfolio and limits future exploitation of the Vele Colliery.

The construction of a new plant at Makhado provides similar results but requires additional peak funding of R145-million, while also keeping the Vele CPP intact for future exploitation.

The increased peak funding requirement for both scenarios resulted in Minxcon assessing the option of reducing the Makhado peak funding requirements through a build, own, operate and transfer (BOOT) arrangement.

The BOOT funding options significantly reduce the funding requirement of both alternatives.

Accordingly, the new Makhado CPP option using a BOOT financing arrangement is considered to be the preferred option as it provides similar results, while keeping the Vele CPP intact for future exploitation of that coal resource.

MC Mining has started talks with potential BOOT funding providers.

It has also approached potential service providers to complete the detailed study work that will allow for a full process plant design specifically for the Makhado CPP to be undertaken.

Minxcon confirmed that this engineering design work could potentially materially reduce capital costs and, consequently, the peak funding requirement.

The company is also progressing discussions with potential debt and equity providers and expects to conclude these arrangements in the fourth quarter of this year.

“Once developed, Makhado is expected to be South Africa’s pre-eminent coking coal mine and would replace a significant amount of imported hard coking coal. MC Mining continues to explore potential marketing strategies for Makhado’s coal while the composite funding package for the development of the project is being concluded,” MD and CEO Godfrey Gomwe noted in an August 30 update to shareholders.

He added that the company was planning to start with certain early-works activities at Makhado later this calendar year and, funding dependent, construction was expected to begin in early 2023.

Meanwhile, as MC Mining is considering building a CPP at Makhado, it would need to assess potential alternative exploitative scenarios for the Vele Colliery.

The previously envisaged phased approach to the development of Makhado project would have resulted in the processing of Makhado’s crushed and screened coal at the Vele CPP, which would have required modifications to the Vele CPP of about R397-million.

The improved market conditions and construction of a new CPP at Makhado create optionality for the potential restart of operations at Vele.

Options being evaluated include the possible outsourcing of operations at the colliery and the company is currently assessing potential partnerships in this regard.  

Any Vele development model that includes elements of outsourcing would reduce the start-up working capital funding and prioritise resources on the development of the flagship Makhado project, which remains the priority for the company.