Latest quarters point to recovery as Wescoal reports R137m loss

21st July 2020

By: Martin Creamer

Creamer Media Editor

     

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JOHANNESBURG (miningweekly.com) – Coal mining company Wescoal reported a R137-million loss for the 12 months to March 31, but performance in the latest two consecutive quarters has all the hallmarks of putting the coal-mining company back on the recovery path.

Speaking to Mining Weekly on Tuesday, Wescoal CEO Reg Demana said the rising trend of quarter four (Q4) in the financial year just past continued into quarter one (Q1) of the new 2021 financial year (FY21), raising hopes of significantly improved earnings before interest, taxes, depreciation and amortisation (Ebitda).

“We finally managed to do, on an annualised basis, eight-million tonnes of run-of-mine (RoM), which has been our stated strategic goal,” Demana said in a telephone interview.

“This four, five months of consistent performance and delivery from mining operations does give us hope that, going into the rest of the year, we should have a very good year.

“Also, financially, overall Q1 performance translated into over R150-million to R160-million Ebitda. That’s what we did in the last six months of the financial year, as well as the first six months of the financial year.

“If you look at that run rate, if we were to maintain it, we should be doubling at least the Ebitda generation from last year. So, that’s really what gives us hope. We can, I think, demonstrate with the two quarters that mining performance has turned, and that has always been the key for us,” he said.

Wescoal CFO Izak van der Walt added that production strongly picked up in Q4 and also into in Q1, with profitability always linked to the volumes output, well exceeding what was achieved in any of last year’s quarters, and even in the six months before that.

Wescoal is also set to be within financial debt covenant limits when the next quarterly covenant checks takes place, as Q1 FY21 cash flow generation is up.

Van der Walt reported that a total of R404-million of payment receipts were delayed into April and R300-million of it was received on April 1, a day after the due March 31 date and FY20 close-off.

The rest was recovered during Q1 of FY21 and the underlying receivables balance, he said, remained strong, with consistent, timely payments from customers.

However, on the liability side of the balance sheet, on the day after the FY20 year-end, the effect of the delayed receipts and increased debt levels were discernible, resulting in the net debt-to-Ebitda ratio exceeding the level required in terms of the financial debt covenants.

Lenders have since confirmed support and waivered the covenant breach in light of the uncontrollable events and specifically the delayed receipts having been recouped so shortly after year-end. As a result, R813-million of long-term debt was reclassified as current liability, and the balance-sheet position post year-end rectified following the covenant waiver from lenders, Van der Walt explained.

The company has embarked on a business-wide cost-reduction programme and will be reviewing its coal trading business, where volumes have declined significantly in the last six months. The decline in international coal prices and adverse local market conditions led to a significant decline in the Wescoal trading division’s year-on-year sales.

“We need to remove costs and overheads, we need to restructure our trading business to reflect the new reality of lower volumes as well as reduced margins. On the mining side, we must maintain continued production at the levels that we have achieved,” Demana said.

Wescoal, which employs 1 500 employees and contractors across the organisation, does not envisage job cuts. However, as a result of the review of the trading business, anything is possible, depending on the outcomes of the review.

Its capital expenditure (capex) programme of R433-million into its operating mines in the 12 months to March 31, is having a noticeable effect on improving production, with record quarter volumes out of Vanggatfontein in Q4 and other operations also trending up post the year-end.

Van der Walt reported that the company had recapitalised the Vanggatfontein mining pit and advanced stripping and separating the coal-face benches so that it can produce in parallel from different seams and manage the consistency of quality coming out of the mine. The Vanggatfontein complex absorbed just over R300-million of the total capex.

Other capital programmes were for a new mining pit at the Khanyisa mine, which will add two years of life at an exceptionally low stripping ratio and high profitability potential.

The western side of the Elandspruit mining pit was optimised to provide face-length access to increase production by an additional 200 000 t of annual production, at an investment of more than R40-million.

Meanwhile, going into Q1 of FY21, the Moabsvelden project has begun box cut development and the first coal from this greenfield project is expected towards the end of this financial year, adding ten years of a new mining pit life. Moabsvelden’s close proximity to the Vanggatfontein complex also presents the opportunity to unlock synergies, Van der Walt told Mining Weekly.

Arnot mine, which has resources of over 200-million tonnes and which is on track to commence production activities in the second half of this year, will require capex of R80-million to R100-million. To provide a first-phase life of seven years and 23 years of life-extension potential.

Arnot is an investment for Wescoal and not a subsidiary. Wescoal has a 50% equity stake in Arnot.

“Arnot OpCo CEO Bontle Aphane and her team are fully set up to run that business,” said Demana, who expects the operation to be back in production towards the end of this year, or early next year.

Arnot OpCo represents a first-of-a-kind empowerment disposal in which former mine employees have a 50% ownership of the mine. They participate in the structure of Arnot OpCo through a trust and Innovators Resources, a former employee startup.

Negotiations with Eskom for a coal sales agreement have commenced at a time when Arnot’s resource base has risen from 190-million tonnes to 210-million tonnes of coal, with the mine positioned to supply coal to Eskom’s Arnot power station by conveyor belt.

Wescoal has arrangements in place for business continuity, risk management and compliance while minimising the impact of Covid-19 on mining production. Eskom remains a key and reliable long-term customer and the company remains committed to maintaining strong and supportive relations with Eskom in the future, but the trading division also has a major energy-production client outside of Eskom.

“So, I guess you could say that Wescoal, in itself, primarily serves coal to the energy generation sector, and that will continue to remain the case for Wescoal.

“Having said that, other opportunities to look at non-Eskom or non-energy clients, the likes of Sasol and others, and cement producers, will still be considered as we go forward.

“I think the clear way for us on trading is to probably look at right-sizing the business and its cost structure and to align it with a lower volume, lower margin environment that may continue for slightly longer. As to its customer profile, we’re likely to retain that going forward,” Demana said.

On the company’s triple-S stability, sustainability and scalability strategy, Demana said: “Stability, first and foremost, is to ensure that our mining operations, month in and month out, produce at the required levels, which is, on an annualised basis, eight-million tonnes of RoM. Also to ensure that with our contractors and key service providers, there is consistency. And, of course, achieving at least 60% to 65% of sales to Eskom and catching up with all the outstanding supply to customers where we have been lagging behind.

Regarding the second S, he added: “The key thing for us is how do we sustain this business going forward, return it to profitability on a sustainable basis, and this will be the focus for this year. Remove costs out of the business, maintain sales and manage debt, carefully,” he added.

Restored production rates enabled Wescoal to establish strategic stockpiles of coal during Q4 and these are helping the group to mitigate production variability better.

In FY20, revenue declined 4% year-on-year to R3.8-billion and gross profit fell by 29% to R333-million and Ebitda by 34% to R332-million.

Headline earnings a share decreased to a loss of 32.7c a share and earnings a share were a loss at 32.6c a share.

The share buy-back programme purchased R35.6-million of the company’s shares and after careful consideration of the financial position, performance of the group and macroeconomic conditions, no final dividend was declared for FY20.

Edited by Creamer Media Reporter

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