Diversified media, entertainment and investment group HCI is moving into the coal business, attracted by the profits to be made from supplying burgeoning demand from Eskom's power stations.
The group has teamed up with empowerment mining group Khusela Women's Investment, formed two years ago by former Harmony Gold executives Fleur Honeywill, Khosi Sibisi, Amanda Matthee and Khetiwe McClain.
Khusela initially focused on mining title conversions and was closely linked to Harmony, but it has now parted company with the gold group and wants to get into coal mining.
Honeywill has been appointed MD of the new joint venture, HCI Khusela Coal. HCI holds 80% and Khusela 20%. HCI is providing a funding facility of up to R45m, which will allow the JV to take its current three coal mine projects to the bankable feasibility stage.
"HCI had been looking at getting into the resources field for some time, but could not find the right partner with the right assets," says Honeywill. "Khusela has the assets in terms of holding rights to various coal deposits but, like many empowerment companies, has no money.
"We needed an investment partner to back us so we could develop our operations. We had talked to a lot of potential partners but found that, time and again, people would promise the earth but not put up the money."
Honeywill's background in the mining industry is extensive. She started off working in health and safety for the National Union of Mineworkers, then joined Ingwe, the SA coal arm of BHP Billiton. She left to work as a head-hunter for several years before joining Harmony.
Honeywill believes the coal sector is attractive to junior mining companies because new legislation has opened up resources previously "locked up" by the major mining companies, and because the economics of the business have greatly improved as a result of rising demand from Eskom.
Small coal miners also have greater access to the export market than before, because of the phase-five expansion of Richards Bay Coal Terminal (RBCT), but Honeywill is focusing on Eskom at this stage.
It is cheaper to build a mine to supply Eskom, because getting into the export market involves building washing plants to upgrade the coal, as well as either building or gaining access to a load-out terminal where the coal will be loaded on to trains for transport to Richards Bay.
"A small mine to supply Eskom will cost R12m-R15m to build, compared with a capital cost of around R25m to build a small export mine," says Honeywill. "We have been in close consultation with Eskom, which has been extremely helpful and has advised us technically. Eskom has a strict procurement process in terms of which you have to be verified by them as a source of coal."
HCI Khusela Coal's three properties are in the Bronkhorstspruit/Ogies region. At this stage only the Bronkhorstspruit deposit can be classified as a "measured resource", containing 22 Mt of coal at a calorific value of 21 megajoules/kilogram. The two Ogies projects are viewed as "reconnaissance" resources and cannot be classified until further exploration work is carried out.
Honeywill says the two Ogies projects have the potential to be "multiproduct" mines supplying both Eskom and the SA domestic market. "With so much coal being diverted to the export market, there is good business to be had selling upgraded coal to specialist SA industries that need it. The domestic prices for this kind of coal are almost on a par with export prices," she says.
Honeywill adds that the attraction of the coal business is low capital expenditure requirements in comparison with other mining operations, combined with respectable profit margins.
She estimates a small colliery supplying Eskom would make operating profits of around R20/t. From that must be deducted royalties, tax, and depreciation charges.
Ranking the Analysts 2009
