Resource Generation’s Boikarabelo coal mine, in the Waterberg region of South Africa, is sitting within the Waterberg coal field that potentially 40 per cent of South Africa’s remaining coal resource. The 16,900 hectares of farmland owned by the company are estimated to produce over a billion tonnes of coal in the 200 year life of the mine – bringing this mine into production will represent a huge step for the single-project South African firm.
Now, interim CEO Rob Lowe is tasked with implementing the final stages of construction and bringing the mine into production. He has made major steps in progressing debt funding for the Boikarabelo project from a majority South African ‘debt club’ and is also realigning the mine with a South African focused commercial strategy – key positions held by South African people and a direct benefit to the South African local community. Lowe, who retains his position as CEO at Altius Investment Holdings, was appointed after a recent board shake-up, to make the company better suited to the South African business environment.
Lowe has three key priorities for the Boikarabelo mine under his captaincy. Firstly, he wants the best in class of South African mining expertise, of which the recruitment process is under way. Secondly, to minimise risk in the project by outsourcing mining operations and finally to secure the debt funding from majority South African funders.
“We lost some expertise with the exit of the previous Australian management but kept all of the South African expertise in place which is important as every country has its own culture and we want key executives to be South African and to understand the South African ways of business,” he said.
The biggest step forward made under Lowe’s leadership has been to make progress in organising a debt club made up of HSBC, Rand Merchant Bank, the Industrial Development Corporation and the biggest shareholder, the Public investment Corporation, to work towards a funding solution.
Lowe said: “The value of the project is $700 million, of which $300 million is equity and $400 million debt. The equity has now largely been spent and anybody visiting the site will see real mining activity – offices built, labourers’ camps built, a rail link under construction, electricity pylons and power lines built – but we needed to raise the $400 million and that has been an elusive aspect up until now.”
The next key deliverable on the mine is having the finalised term sheet fully approved by July and move into further construction by Q4 2016.
Since becoming interim CEO, Lowe has made crucial progress in ensuring the Boikarabelo project enters its final stages of construction, but he values the contribution of the previous management in getting the project where it is now: “The previous management put a first-class project together in terms of developing the project, finding the resource, buying the farms, and getting all the permits in place – water permits, power permits, environmental assessments, logistics and mining rights.”
Lowe’s key focus has been to ensure the development was ‘strategically aligned with South Africa’, and while it is a difficult time to produce a coal mine considering macro-economic pressures, Lowe said South Africa is craving such a project on a micro level.
“South Africa needs the coal, it needs the energy which is generated from this coal, South Africa needs job creation and also a good story in mining.”
Lowe knew that to raise the debt funding predominantly from South Africa, the project had to be in line with South African business culture, and here is where we see what Lowe calls ‘the honest disagreement’ with the previous management.
He said: “They felt they could manage the project from Australia but we disagreed.
“The new board now has four distinguished South Africans and two distinguished Australians. We are recruiting South African financiers so the project is strategically aligned to the country where it is located.”
This change in strategy has been well received by the key stakeholders in South Africa and now Resource Generation is in a position to push on with a new approach to operations.
The interim CEO is inviting investors to see how the change from owner mining to contract mining will save the company significant financial investment and reduce risk.
He said: “Contract mining has two benefits, it reduces the capital expenditure required as we won’t have to buy $140 million worth of yellow goods and also reduces risk by using very capable contract miners in South Africa with very good track records.”
“We are going for a maximum of two engineering procurement and construction (EPC) contractors with good balance sheets with which we will have recourse against in the event of any failure,” he said. “We think we have a better project, better quality coal, a better execution plan and a better mining plan with contract mining.”
He hopes this will ensure protection for the company against third-party failure.
After a complete review of geological data, new information suggests there is a better reserve than anticipated, with higher quality coal available. Lowe says through selective, sophisticated mining techniques Resource Generation will mine the sweet, better quality coal in the first 10 years to ‘maximise revenues during that critical repayment period’. Afterwards tackling the lesser quality coal and postponing the complex mining by a decade.
Despite the slump faced by the commodity market and coal prices over the last year, Lowe has assured investors that because the project is essentially surface mining, with just a 20-30m overburden, even with a depressed domestic and seaborne coal price the mine will be profitable and when those prices improve investors will really feel the benefit.
The project already has a domestic offtake contract with Noble Group, who own 13% of Resource Generation, but Lowe is keen to provide a counter-party as further comfort for investors.
“A new feature on offtake is absolute optionality, if the domestic market is more attractive than the seaborne we can switch suppliers with ease when respective prices improve.” said Lowe, highlighting how profitable the domestic production can be.
Lowe described how big a part the sub-contractors have played in the coal mine’s construction up to this point – especially Transnet, who are responsible for the rail link and EHL Consulting Engineers, who built the power line to the new on-site sub-station.
“Transnet have been absolutely terrific in support of the project and have already committed capital expenditure to upgrade the line,” he said. “EHL have built the entirety of the contract very well, it’s all finished and ready to be connected in July. I am thrilled with the work they have done.”
Corporate Social Responsibility
Since the project’s inception, Resource Generation has ensured that corporate social responsibility has been at its heart and has made sure it makes a positive impact in the local area through the project.
During construction the mine will provide around 3000 temporary jobs in the area, which will come down to 640 full-time roles, half of those roles will be filled by women according to Lowe based on the unusual 50% male/female employment policy.
The Boikarabelo coal mine will raise R250 million per annum to the local economy and about R500 million to national finances.
Lowe said: “It’s important that the community feels that it can embrace the project for real reasons rather than rhetoric. It’s very easy to come and say ‘you will benefit from the project’ with nothing material ever happening. We always felt it best to demonstrate real practical examples from the very beginning.
“And when we are able to, local groups will be able to participate in the equity of the project. This is something I am accelerating now that I am in my role, so I want in particular to have local groups who have equity and women’s groups to be involved. We want some women’s groups to become equity shareholders.”
Moving forward, Lowe said it is unlikely Resource Generation will look at producing other mines, one of Lowe’s targets for the company is to shift Resource Generation from coal mining to energy production and having approval for a 260MW coal-fired independent power provider makes this begin to be a reality.
“We will use our own coal and have an IPP and we are looking at other energy opportunities in gas,” he said and looking to the future he added, “In five years the mine will be under production, the IPP will be built, it will be a fully-fledged energy company, very different from what it is today.”
And with a large resource, funding secured, a plan to build the IPP and a settled governance, Resource Generation looks like a robust organisation as they move into the final stages of construction and building a coal-generating mine.