Name of the Project
Makhado hard coking and thermal coal project.

Location
Limpopo, South Africa.

Client
Baobab Mining & Exploration, the owner of the mining right for the Makhado hard coking and thermal coal project (Makhado project), is majority-owned by MC Mining (69%), formerly Coal of Africa Limited.

The Industrial Development Corporation owns 5% of Baobab’s shares; 20% is held by a community trust, with seven local communities situated in the project’s vicinity being the beneficiaries, and the remaining 6% is held by a black industrialist.

The development of Makhado will provide significant direct and indirect benefits for these communities in one of the poorest areas of South Africa.

Project Description
Makhado is classified as an evaluation asset and has not historically been mined.

The original Makhado project development plan included a 26-month construction phase followed by a four-month ramp-up to achieve a production rate of 5.5-million tonnes of saleable coal a year.

While MC Mining progressed regulatory matters pertaining to the project, it reviewed the Makhado development plan and reassessed its strategy to unlock near-term shareholder value. This resulted in an amended plan requiring reduced capital expenditure (capex), a shorter construction period and earlier-than-planned production. The revised plan has resulted in reduced execution risk and an accelerated construction.

The directors of MC Mining approved the revised plan in September 2017. Makhado will generate four-million tonnes a year of run-of-mine (RoM) coal and produce 1.7-million tonnes to 1.8-million tonnes a year of saleable coal, comprising 700 000 t/y to 800 000 t/y of hard coking coal and 900 000 t/y to one-million tonnes a year of export-quality thermal coal. 

The original Makhado project plan envisaged the project producing 12.6-million tonnes a year of RoM coal generating 2.3-million tonnes a year of hard coking coal and 3.2-million tonnes a year of lower-grade thermal coal.

The Makhado project has a 46-year life-of-mine (including the potential west pit), and potential for future expansion of mining and processing if appropriate.

MC Mining expects that a substantial portion of the hard coking coal produced would be sold locally, with the balance sold on international markets.

Potential Job Creation
An estimated 900 jobs will be created during the construction phase of the project. MC Mining expects that the outsourcing of mining and processing to experienced third parties, who have previously operated in South Africa, will result in the creation of an estimated 650 permanent employment positions once the colliery is at steady-state production.

Value
The original Makhado project had an estimated capex of $296-million ($406-million before foreign exchange fluctuations). 

Under the revised development plan, capex has been reduced, with the processing plant and mine construction costs estimated at $79-million (R1.1-billion).

Duration
The revised strategy expects the colliery to be built in 12 months, from 26 months initially.

Latest Developments
MC Mining subsidiary, Baobab Mining & Exploration, has reached an agreement on the terms and conditions under which it will acquire the two key properties required for its Makhado project.

Baobab will buy the Lukin and Salaita properties for R70-million.

The company has been pursuing various options, including going the legal route or negotiations on commercial terms with the owner of the properties, a private company that uses the properties for commercial hunting.

The purchase price will be settled in two tranches of R35-million, with the properties pledged as security until the purchase price is settled.

The initial tranche is payable on transfer of the properties, while Baobab will have access to the properties on payment of this amount to the conveyancing attorneys. The purchase will be funded from in-house cash flows.

The second tranche will accrue interest from the date of transfer at the South African prime interest rate (currently 10%) minus 3%.

It is payable on the earlier of the third anniversary of the transfer of the properties or the first anniversary of production of coal underlying the properties, or on completion of a potential land claims and expropriation process that will, in all likelihood, result in Baobab’s receiving market-related compensation under current legislation.

Should the properties be expropriated in favour of land claimants, MC Mining will negotiate access terms with the relevant authorities and the successful claimants, expected to be communities that have a shareholding in Baobab.

The acquisition paves the way for the company to proceed with geotechnical and related studies for the mine’s infrastructure.

MC Mining has made considerable progress in terms of achieving important milestones at Makhado, including signing an offtake agreement for about half of the hard coking coal to be produced at the mine.

Negotiations for the sale of the remaining hard coking coal, as well as the thermal coal, are at an advanced stage, while funding initiatives are also progressing.

Key Contracts and Suppliers
Minxcon (competent person’s report).

Proposals for full mining services have been sourced from various contract mining companies, with turnkey processing plant construction and operating quotes obtained from potential service providers.

On Budget and on Time?
Construction will start once access to the site has been received, offtake agreements formalised and project funding secured.

Contact Details for Project Information
MC Mining, tel +27 10 003 8000, fax +27 11 388 8333 or email adminza@mcmining.co.za.