First half t

hermal coal production from commercial mines owned by mining company Exxaro is expected to increase by 12%, mainly owing to the inclusion of coal operation Exxaro Coal Central (ECC) and higher production at the Grootegeluk coal mine, in Limpopo, and the North Block Complex coal mine, in Mpumalanga; however, this will be partly offset by lower production from the Leeuwpan coal mine, in Mpumalanga, and the closure of the Inyanda coal mine, also in Mpumalanga.

This is according to Exxaro FD Wim de Klerk’s first half ending June 30 preclose message, in which he also points to slightly higher metallurgical coal production volumes for the first half of 2016 compare with the first half of 2015.

Coal buy-ins are expected to increase by 20% because of a shortage of export coal after the closure of Inyanda in 2015 and before Belfast starts production. Export sales volumes are expected to increase 81%, mainly owing to the inclusion of ECC.

The ECC team is now based in Mpumalanga and is rolling out various optimisation initiatives that are showing results, with the business continuing to generate profits, says De Klerk.

In the meantime, Exxaro continues to assess further improvement opportunities and markets to enhance the current outlook of the EEC even further.

Sales to State-owned power utility Eskom are expected to decrease 2%, owing to reduced offtake from the Leeuwpan mine.

Domestic thermal coal sales are expected to increase by 2%, mainly as a result of higher demand in the domestic market.

Thermal coal production from tied mines, mines that are linked to Eskom power stations, is expected to decrease by 4% because of the closure of the Arnot mine, in Mpumalanga. Therefore, sales to Eskom are expected to decrease in line with production.

The Arnot coal supply agreement (CSA) with Eskom ended on December 31, 2015. A closure steering committee consisting of representatives from Exxaro and Eskom has been instituted to deal with all related matters.

All production at Arnot has ceased and the mine equipment has been reclaimed from the underground sections. Consultation with employees, in terms of Section 189 of the Labour Relations Act, is ongoing and is expected to conclude in the third quarter of 2016 with 1 800 employees and contractors impacted, De Klerk said in June.

He explains that Exxaro continues discussions with Eskom to ensure that full provision for the rehabilitation funds, mine closure costs, and post mine closure costs, in terms of the National Environmental Management Act regulations, as stipulated in the CSA, is reached for mines that are closing.

Large capital projects at Matla, in Mpumalanga, remain unfunded by Eskom, with the Mine 1 shaft on care and maintenance. In the meantime, the remaining mine shafts (Mine 2 and Mine 3) are expected to produce 8.5-million tonnes for the full year of 2016 against contractual volumes of 10.1-million tonnes. Exxaro is continuing to engage Eskom to provide the required capital funding and is considering available recourse in terms of the CSA.

Exxaro expects the total coal capital expenditure (capex) for the first half of 2015 to be up 32% as optimisation remains a focus area. The expenditure for the first half of 2016 is 12% lower than was guided in March, mainly as a result of timing. Full-year 2016 coal capex is expected to be in line with Exxaro’s March guidance of R2.848-million.

In relation to Exxaro’s market supply, it expects the domestic thermal volumes for the second half of 2016 to remain at current healthy levels. Volumes in the metals markets will reduce as steel production company ArcelorMittal South Africa ceased production at its coke and chemicals plant, in Newcastle, KwaZulu-Natal, for emergency maintenance. This is expected to persist until the first quarter of 2017.

Export markets depend heavily on Indian demand for lower-quality coal products with pricing expected to remain flat. Further growth is expected in the Africa, Pakistan and South East-Asia markets and the Exxaro group is well positioned with a strong product mix to supply these markets, says De Klerk.

Mine Updates

Grootegeluk capex for the first half of 2016 is expected to be 13% lower than that reported for the first half of 2015. No major changes are expected to the full-year 2016 Grootegeluk capex, as reported in March this year, although the timing of the truck replacement programme is being refined, which will affect future years, De Klerk notes.

All coal deliveries to the Medupi power station, in Limpopo, are in line with Addendum 9 of the CSA.
Exxaro is continuing to engage with Eskom on a possible Addendum 10. The discussions include consideration of the options to reduce future take-or-pay obligations through coal storage and/or possible movement of coal to the Mpumalanga region.

Further, the Thabametsi mining right, in the North West, has been awarded. The first run-of-mine coal to Grootegeluk’s beneficiation complex could be delivered by the year 2019 (subject to infrastructure development such as rail, water and roads in the Waterberg). The rate of production ramp-up will, ultimately, depend on the Department of Energy’s (DoE’s) Coal Baseload Independent Power Producer Procurement Programme (CBIPPPP).

A bid was submitted by the Thabametsi independent power producer (IPP) in the first bid window under the CBIPPPP on November 2, 2015. The preferred bidders are expected to be announced by the DoE in the third quarter of 2016.

Detailed engineering designs are complete, as well as the tender process, for the two major construction packages, for bulk earthworks and civils and the processing plant, at the Belfast project, in Mpumalanga.

Exxaro anticipates that the suspension of the water-use licence at Belfast will be lifted and the project’s rezoning licence authorised by the third quarter of 2016. Construction was scheduled to start in the second half of 2016. Should an appeal be registered, a further delay in the start of construction can be expected.

Coal resources at Inyanda mine were depleted in September 2015. In December 2015, a sale and purchase agreement was concluded for the assets and liabilities, which include the mining right, plant assets and a private rail siding. The sale is subject to conditions precedent, including the Section 11 transfer of mining rights under the Mineral and Petroleum Resources Development Act. The conditions precedent remain outstanding.