Keaton Energy Has More Plans for South African Coal

BRISBANE, Australia - Sept. 12, 2013 - PRLog -- Keaton Energy CEO, Mandi Glad, is hoping to follow up this week’s proposed A$19.7m (US$17.8m) capture of Australia’s Xceed Resources with another transaction in about six months time as the Johannesburg-listed firm chases down 5mtpa in thermal coal sales.

“We had earmarked about four or five possible transactions that could be done. The Xceed bid is the second, and of the rest there’s one more possible, but it’s still about six months away from completion,” Glad said in an interview with the South African Coal Report (SACR).

In July, the company announced a small bolt-on acquisition of Mooiklip, a metallurgical coal mining prospect near its Vaalkranz colliery in South Africa’s KwaZulu-Natal province.

Glad is also promising a vast improvement in the company’s performance from existing operations, principally the Vanggatfontein open pit mine near Delmas in Mpumalanga province, the heartland of South Africa’s thermal coal production.

That’s where the bid for Xceed Resources comes into play by dint of its 74% stake in Moabsvelden, a 43.9mt prospect of which 30.7mt of coal are in the proven reserve category. The Moabsvelden project is near Vanggatfontein which means the capital cost of bringing it to production is vastly reduced owing to the benefits of shared infrastructure.

“A positive for Moabsvelden is that it will be entirely open castable, with a low stripping ratio and a mine life in excess of 15 years,” said Keaton Energy in an announcement to the Johannesburg Stock Exchange on August 26.

Said Glad: “Xceed comes with a project finance term sheet with Standard Bank, but our requirements [for project finance] is much lower because of the shared infrastructure”. Of the estimated R240m ($24m) in capital expenditure for Moabsvelden, about R160m will be contributed by Keaton Energy in line with Xceed’s 74% stake.

The 26% balance of the project capital is for the account of Xceed’s empowerment partner. And of the R160m, Keaton hopes as much as possible can be provided out of cash flow. “Maybe we can keep the Standard Bank loan down to between R40m to R60m ($4m to $6m),” says Glad.

The outcome for Keaton Energy from owning Moabsvelden will be the addition of 1.3mtpa to 1.4mtpa of saleable product taking total saleable product from Keaton to 4.2mtpa – just below its stated strategic production target.

It will also open up the export markets for the first time with some 0.5mtpa of thermal coal production from Moabsvelden being sold to Gunvor, the European oil and commodity trader, as part of a financing arrangement – first reported as a possibility by the SACR in its June 18 edition.

Gunvor, through its affiliate Plusbay, helped finance Keaton Energy’s bid for Vaalkrantz in 2011 taking its investment in the firm to 19.9%. In order to finance the bid for Xceed – which is part share-based – Gunvor will buy 32.6m shares, equal to $5.8m, in Keaton taking its stake to 34.99%, with the balance of the deal finance comprised of an offtake from Moabsvelden.

Most of the coal produced from Moabsvelden would be supplied to Eskom. There had been no discussion on pricing with the South African utility at this stage, said Glad.

Gunvor’s 34.99% stake in Keaton Energy is just below the trigger for a mandatory offer to minority shareholders in Keaton. Glad acknowledges, therefore, financing further acquisitions by issuing equity to Gunvor is not on the cards as there is no intention Keaton Energy wants to lose control of the company.

“There are other ways of doing it [financing future deals], however. We could take a shareholder loan, or work with other traders although my first port of call would be to Gunvor because I think they have earned that,” Glad said.

Certainly, Gunvor has invested in Keaton Energy for the long haul. While it is buying shares in Keaton Energy at about R1.78/share, the trader will be conscious this is well below the level at which it financed the Vaalkrantz acquisition only two years ago.

As for Xceed, its board has approved the proposed transaction and has agreed not to withdraw its support. It’s also helpful to the transaction that the company’s main shareholders are also its board members.

The deal has been given about six months to succeed. Details of the scheme of arrangement will be issued to Xceed shareholders in late October.

In addition to its 74% stake in Moabsvelden, Xceed also has interests in two other projects - Bankfontein and Roodepoort - which together with Moabsvelden contain a total of 114mt of thermal coal resources.

The transaction comes at a good time for Keaton Energy which is hoping to recover some of its stature following a difficult 2013 financial year in which it posted a total loss of R132m ($13.2m). This compares to a profit of R112m ($11.2m) in the 2012 financial year.

Cash on hand in Keaton Energy also fell heavily in the last financial year, but Glad said operational improvements, especially at Vanggatfontein, would show a vastly improved company this year.

For the first quarter of the current financial year, Keaton Energy reported a 48% improvement in production at Vanggatfontein, delivering some 526,034 tonnes of washed thermal coal to Eskom.

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