Media coverage
26 JULY 2012
CoAL shares waiting on three key triggers
Source: www.miningmx.com
Author: David McKay
COAL of Africa (CoAL) CEO, John Wallington, was in no mood to gloss over the decline this year in the company’s share price. “That’s a worry,” he said of the 50% slide. He added, however: “When you’ve got BHP Billiton and Anglo American also under pressure, what chance do you have?”
True, the whole resources market has been troubled lately, with China’s lower than expected second quarter 7.6% GDP growth the latest link on the worry beads. Yet for CoAL, there are three good reasons for thinking the share is oversold, and due a recovery.
One is the coal price itself, which is no doubt weighing on CoAL, even though the bulk of the company’s value is in its reserves or resources. Prompt deliveries of thermal coal, the stuff power stations burn, slipped by $1 to $3 per tonne earlier this month, to trade at between $82 to $83/t before recovering earlier this week to about $84/t. The activity was mostly driven by the trading market, but it’s taken the coal price to mid-June levels which was where the market was supposed to have bottomed out.
“We’d like to say we told you so, but no-one likes being right on falling prices,” said Bevan Jones, GM of London Commodity Brokers’ (LCB’s) Johannesburg office. “Whilst it remains very profitable for European utilities to burn coal, the fact remains that there is too much supply,” he says. However, world markets would at least support sideways movement if not a recovery, Jones adds. As a result, it’s thought coal exports ex-Richards Bay are heading north from here.
Secondly, the South African government is expected to make a stronger statement about an agreement with Unesco (United Nations Educational, Scientific and Cultural Organisation) regarding a suitable buffer zone for mining activities near the Mapungubwe World Heritage site in the Limpopo province. The border of the Mapungubwe Park is some 15km from CoAL’s Vele coal mining development. Unesco wants the buffer zone to be enlarged, which would be negative for other coal mining developments in the region, and ban CoAL from open-cast mining at Vele.Thirdly, a positive decision is expected in September regarding Exxaro Resources’ option on a 30% equity stake in CoAL’s Makhado coal prospect. Makhado is in the vicinity of Vele in a complex of coal resources known as the Soutpansberg coalfields; it is estimated by CoAL that it owns some 8 billion tonnes in coal resources. “We are positive on the possibility Exxaro will invest, but there’s also a chance their board decides not to,” says Wallington. “That’s why we’ve got a plan B.”
In another vote of confidence, Investec has agreed to pump $58.7m into CoAL through a combination of debt and equity funding. In terms of the arrangement, CoAL may ask Investec to subscribe for a further 81 million shares over the next 12 months. This equates to around R330m based on CoAL's current share price, minus a 5% discount of the prevailing price at the time.
“This debt and equity financing package signals good support for our long-term growth strategy,” says Wallington. “The funds will be used for expenditure on key items for the Makhado Project, additional funding for the ramp-up of production at the Vele Colliery and for general working capital purposes.”
“It has been very frustrating,” says Wallington of the share price, particularly as his team has pulled the balance sheet into shape lately, and helped remove uncertainty surrounding ecological opposition to Vele.
“There’s reason to believe the share is oversold,” said Stephen Meintjies, an analyst for Imara SP Reid. “There would be a lot of disappointment if the Exxaro deal didn’t work out. It would have to be a very good plan B to make up for that disappointment.”
This article, which first appeared in Finweek, has been updated to reflect the latest information on the company.