Coal of Africa Continues to Record Losses

BRISBANE, Australia - April 8, 2013 - PRLog -- In the words of one UK-based analyst, six months of “thrashing around” resulted in yet another loss-making period for Coal of Africa (CoAL). “Let’s hope their thrashing about for the next six months is more successful,” said Whitman Howard's Roger Bade. Flooding and derailments have already been reported at CoAL's mines in the second half of its financial year.

In truth, the last three years have been typified by one hiccup after another for CoAL, a 5Mt to 6Mtpa thermal and coking coal producer listed in Johannesburg, London and Sydney. Some mishaps have been more serious than others such as the now infamous closure of its Vele coking coal project in South Africa’s Limpopo province.

The proposed 2.5Mtpa mine was shut under pressure from environmental groups which continue to threaten the mine’s operations to this day. There are other headwinds. According to Investec Securities, Vele is far from a port, marking it down as vulnerable to coal price gyrations.

More recently, CoAL suffered a strike at Mooiplaats, a thermal coal asset in Mpumalanga province. The colliery was already a marginal producer; now it has six months to prove itself, or join CoAL’s only other operating thermal coal operation, the Woestallen processing complex which is under the hammer because the Vuna colliery that supplies it will be exhausted in April.

John Wallington, CEO of CoAL since May 2010, has endured a tough time. Behind him stands non-executive chairman David Brown, formerly CEO of Impala Platinum, the world’s second largest platinum producer. Brown was drafted in to CoAL as part of a plan to stiffen the board and help the executive give impetus to a strategy installed by Wallington, but beset by ill fortune.

Brown acknowledges that with an interim loss of US$117M on a mere $83.7M in revenue, the ability of CoAL to scale up its new generation of projects has become a burning imperative.

“You’ve hit the nail on the head,” he says in an interview with the South African Coal Report (SACR). “We need to start generating cash,” he says, adding that CoAL shareholders will have to wait until the next financial year before the pressure is off the balance sheet.

The company has certainly weighed into the capital markets raising $53M in share placements, followed by the sale of up to 24.9% of the company to Beijing Haohua Energy (BHE) in return for $100M.

The coal price is not helping though. CoAL's average price received for the six months to end-December fell to $87/t from $100/t a year earlier. Cash reserves fell 6% to $18M, and with coal prices now at $84/t, the outlook doesn’t look pretty.

“desperately looking for new finance”, although a note in its interim results announcement says it is seeking short-term finance.

It all turns on Vele, especially in the short term. “If Vele succeeds, the company can go into a cash positive position and then we can concentrate on the real prize,” says Brown.

The real prize is Makhado. CoAL last week unveiled details of Makhado’s potential: a 2Mtpa hard coking coal mine with a further 3Mpta in thermal output. The findings are subject to a definitive feasibility study (DFS) that Brown says is due in the second quarter of the 2013 calendar year.

“The Makhado DFS review has presumably been driven by recent board appointments which have added a new level of rigour to the company,” said Investec Securities in a note to its clients. “The results [from the DFS] are an important positive for the company,” it added.

If Makhado turns out as good as it looks, CoAL will then turn to financing the prospect. Once again, balance sheet concerns will come to the fore: “We will look at a combination of debt and equity,” says Brown who adds that BHE would be an obvious candidate for debt finance.

Interestingly, Brown doesn’t mention BHE equity finance suggesting, perhaps, he favours retaining control of CoAL whereas the thought process previously was that it would become a Chinese-controlled company.

“If we can’t cover all the costs, we would go to the market. We’re optimistic about this because we’d be seeking finance for a specific project with a specific return,” he says. First, though, Vele has to produce the goods, or cash flow problems will return to haunt CoAL again.

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