The greatest and most immediate challenge currently facing the South African coal sector is security of supply for State-owned power utility Eskom, says professional services firm KPMG Africa mining transaction leader Werner Jacobs.

“It is estimated, in terms of the Integrated Resource Plan Green Shoots Scenario, that Eskom will require 4.5-billion tons of coal by 2040, of which 2.5-billion tons are still unsecured,” he states, adding that this gap cannot be bridged soon, with some Eskom power stations being subject to supply constraints from as early as 2015.

Jacobs explains that, from an economic point of view, it is not feasible for South Africa to discontinue using coal as a key source of electricity generation prema- turely. “Establishing new mines to supply existing and new coal-fired power stations is critical,” he emphasises.

According to Jacobs, many consider the Waterberg region, in Limpopo, as the solution for Eskom’s future power needs, as the bulk of South Africa’s 67-billion tons of coal reserves reside in the region, according to the Coal Resources and Reserves Study of South Africa.

He points out, however, that the region has poor infrastructure, perceived insufficient grades of coal and a lack of water.

Meanwhile, South African mining group Exxaro’s Grootegeluk mine, in Limpopo, is destined to be the main supplier for Eskom’s yet-to-be-completed Medupi power station, in Limpopo. Therefore, coal supply to exist- ing power stations in the Central basin, in Mpumalanga, will have to flow from the development of new mines in the Waterberg, Jacobs points out.

“However, the perceived lower-grade nature of Waterberg coal may not be conducive to many of the Central basin power stations and will therefore require significant infrastructure investment.”

He adds that adequate infrastructure is essential for a thriving coal mining sector in the Waterberg. “In addition, all stakeholders must look at ways to optimise the remaining resources in the Central basin. There is a need to consider building an inland coal terminal linking the Waterberg with the Central basin,” he adds.

Jacobs further points out that exporting coal provides a significant source of foreign revenue for South Africa, driven mainly by demand from China and the rest of Asia. “However, the South African Coal Road Map forecasts that the Central basin’s export-quality coal will begin to decline in the early 2020s, which again necessitates the exploration and development of coal mines and related infrastructure in the Waterberg.”

However, it is currently unclear whether there is high-grade coal in the Waterberg. “It is therefore critical that conclusive evidence of the size and quality of the Waterberg coal resource base be established as soon as possible,” he reiterates, adding that, with the looming Eskom coal supply gap, thermal coal security to Eskom should take top priority and, to close this gap, new mine development is required.

“This includes agreement on an appro- priate coal pricing model that is beneficial to Eskom and the coal producers,” Jacobs says.

Lengthy Regulatory Procedures
Compounding the situation is a current misalignment in South Africa’s minerals legislation, says Jacobs, explaining that, to develop a new coal mine, mining companies must comply with lengthy policy and legislation processes.

“Gaining the approval to mine coal depends on complying with environmental, water and minerals legislation. However, it currently takes more than three years to obtain these three critical approvals, which is not conducive to creating an environment for greenfield and brownfield mining investment,” he says.

He suggests that government create an environment conducive to coal mine development and investment in the Waterberg, which includes aligning and accelerating the misaligned environmental, water and minerals legislation.

In addition, the significant uncontracted coal supply gap that Eskom faces has raised the issue of whether South Africa’s government will be forced to declare coal a strategic national resource, which could restrict exports and discourage the sinking of capital into new coal ventures, states Jacobs.

However, according to Mining Minister Susan Shabangu, South Africa will remain a key coal exporter, even if coal is declared a strategic commodity. “But we will also have to make sure that the local supply is guaranteed through Eskom and various other players,” avers Shabangu.

Meanwhile, several coal mining rights have been allocated to black economic- empowerment (BEE) stakeholders and mining consortiums, and there are opportunities for emerging BEE companies to supply thermal coal to Eskom, says Jacobs. “The key issue is that these BEE miners do not necessarily have the required funding and skills to develop producing mines and to mine coal efficiently and optimally,” he says.

Government must, therefore, create a funding and skills development environ- ment for these emerging BEE miners to prosper, suggests Jacobs.

Handing these mining rights over to existing producers, owing to a lack of funding and know-how, is not in the spirit of broad-based BEE, he states.

“It is important to transfer the necessary funding and skills to emerging BEE miners to enable them to develop coal [mining] rights into producing mines that can supply Eskom,” says Jacobs.

Importance of Rail Transport
Access to rail is another key challenge for South Africa’s coal mining companies, posits Jacobs.

Most coal exports are channelled through the Richards Bay Coal Terminal (RBCT), while alternative ports are based in Maputo and Durban. “However, only a select few coal miners are entitled to access the RBCT, as the majority of large coal miners own a share in the terminal,” he says.

To deal with this issue and give junior and emerging BEE coal miners access to the RBCT, 23 junior coal miners collectively export four-million tons a year, in terms of the Quattro allocation project, which is being facilitated by the Department of Mineral Resources.

“In 2013, the State-owned rail company exported 71-million tons on the coal line to the RBCT, despite the latter having an export capacity of 91-million tons yearly.

“Transnet has earmarked key areas such as the Waterberg for the establish- ment of a rail line to the RBCT. It is also expanding the rail line’s capacity to 81-million tons a year, earmarked for completion by 2018.”

A key concern, therefore, is closing the rail-to-port gap, including the rest of the coal mining companies that do not have any access to rail, he posits. “Junior miners with no allocation are forced to use trucks to transport coal to the port,” he highlights.

Jacobs further explains that government is actively aiming to migrate the transport of coal from road to rail. “However, the issue is not a shortage of port capacity, but the need to increase the rail link’s capacity and give junior miners access to the port through this additional capacity.”

He states that the export of coal should continue for as long as possible to ensure a significant flow of foreign revenue, adding that there should be increased emphasis on fast-tracking the closing of the rail gap of 20-million tons a year, rather than upgrading existing port capacities.

“The RBCT and Transnet are assessing how to use the existing infrastructure better to improve efficiencies on the existing coal line,” he says.

A Different Approach
A possible alternative solution to meet South Africa’s long-term electricity requirements could be the development of the shale gas, renewables and nuclear sectors, suggests Jacobs.

“These alternatives offer large-scale baseload electricity supply options to the South African industrial economy at varying prices.”

The Karoo shale gas reserve offers an interesting opportunity to reduce energy costs and could have a similar impact on South Africa’s manufacturing sector and general economy, as has been the case in the US.

The Karoo reserve – the eighth-largest in the world – is estimated to contain 11-trillion cubic metres of technically recoverable shale gas resources, according to the US Energy Information Administration. “It also has an exploration period of nine years and a potential production ramp-up that can start in the early 2020s,” says Jacobs.

Coal – Moving Forward
Jacobs believes that collaboration between coal stakeholders and government is more important now than ever before to ensure a prosperous coal mining industry that contributes to South Africa’s economic growth and creates jobs for all its people.

“Failure to collaborate could lead to a more extensive power failure in South Africa that will lead to loss of revenue and, potentially, a failed economy,” he concludes.