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Pictured: Continental Coal CEO, Don Turvey

South Africa’s coal sector was the highest mining revenue earner in the country during 2011, generating more than R87.8 billion. Continental Coal’s CEO, Don Turvey, speaks to Reggie Sikhakhane on the future of coal, developments within the company and his views on the Department of Mineral Resources’ strides towards making coal a strategic mineral.

With state-owned power utility Eskom under pressure to ensure sufficient coal supply for its power stations, a demand by Asian and Indian markets for lower-grade coal, previously dominated by the domestic market, coupled with the need for swift intervention in the transportation of coal, the mineral remains an ongoing discussion point.

The Department of Mineral Resources (DMR) indicated in 2011 that it intended to classify coal as a strategic mineral, upon realisation that lower-grade coal was being largely accepted by economies such as India and Asia for power generation. Coal miners were also getting higher prices for lower-grade coal in comparison to domestic sales – a major threat to Eskom.

Turvey explains, however, that coal has always been a strategic mineral in South Africa. “Being a part of the Chamber of Mines, I don’t think it is clear yet what is meant by coal becoming a strategic mineral, and by the same token, what the impact on the sector will be. Coal has been a strategic mineral all along, unless it means that it will come with certain restrictions to coal exports, which would make no sense at all.”

There is a misconception in the coal market about achieving a balance between domestic use and export. “The domestic supply of coal is being subsidised by exports and works hand-in-hand. In many businesses, the capital from exports covers the costs for domestic supply.”

Nonetheless, Turvey points out that albeit the outcome of the status of coal becoming officially labelled as a strategic mineral, it will not affect Continental Coal. “In our case, it is not an issue because we supply coal directly to Eskom from our eMalahleni-based Vlakvarkfontein coal mine, which is essentially a domestic mine.

“The coal is of a higher grade at our additional coal operations and is suitable for the export market. Because we do not understand how coal’s reputation as a strategic mineral will impact us, along with the rest of the coal industry, it brings a level of uncertainty, which is not good for markets,” he says.

Company developments

Continental Coal reveals that it has been informed by its legal representatives that an amount of US$3 million (R27.13 million) has been received of the total US$10 million for the sale of its shareholding in the VanMag mine.

The company also notes that its discussions and negotiations regarding a potential long-term off-take agreement, strategic partnership and stand-alone funding agreement for its De Wittekrans coal project has advanced significantly over the past two months.

In November last year, Continental Coal announced that an optimisation study on the De Wittekrans project had delivered positive results. As a result, discussions with parties that had previously submitted indicative funding and off-take proposals have intensified, particularly with India-based coal and power utility companies and major global commodity trading groups.

A secure partnership and funding arrangement will allow Continental Coal to fully fund the development of a planned initial seven-year opencast mine, along with the forecasted 30-year underground mine development. Turvey adds that the company will also secure a long-term strategic off-take partner for the planned exports of a thermal coal product ideally suited for the Asian markets.

Further update on the progress of these negotiations and the status of the company’s discussions with the five parties should be announced in the current quarter.

Operations

The company’s Penumbra underground coal mine in Mpumalanga is on track for a successful ramp up in thermal coal production for the 2013 financial year, with monthly production reaching 14 000 t in January, compared to 2 694 t during December 2012, representing a more than 400% increment. Export sales also dramatically increased from 5 212 t in January, compared to 854 t in the previous month. Penumbra is forecast to produce 750 000 tpa of ROM (run-of-mine) coal over a 10-year life period.

Penumbra, which is yet to be fully operational, is underway with the development of underground mine infrastructure and services at the base of twin declines. The company has successfully increased ROM production owing to the development of more coal panels, greater underground flexibility and a shift in focus towards production in the first of the two underground continuous miner sections.

Completion of outstanding mine development and construction activities is ongoing. The remaining underground capital development and surface infrastructure, including the main ventilation shaft fans and shaft, is scheduled to be completed in April 2013.

Mine operations at the Ferreira coal mine, situated just outside of Ermelo, continued to perform strongly in January 2013 following the establishment of new opencast mining operations. During January, the mine achieved ROM coal production of 56 886 t.

Vlakvarkfontein also continued its strong performance in 2013 with ROM production in January of 103 751 t, which is in line with the average monthly ROM production achieved in the December 2012 quarter.

Industrial action

The mining industry, particularly South Africa’s, has been plagued with labour relations turmoil that have impacted significantly on the output of many mining companies, hurting the country’s economy and sending investors running.

Turvey says the coal sector has been fortunate and not suffered the consequences of industrial action on a scale as large as other sectors such as gold and platinum.“We settled our wages with the Association of Mineworkers and Construction Union, which went well, and as a result we did not fall victim to industrial action-related stoppages. The situation requires constant engagement with all stakeholders. Such challenges are often the larger community,” adds Turvey.

Outlook

Despite the current climate overshadowing the mining industry – fluctuating prices, global economic uncertainty and labour relations turmoil – Turvey is optimistic and believes the coal sector will again perform beyond expectations this year. “The South African domestic market seems strong and I don’t see a reason for change as we all know that Eskom needs more supply of coal.”

He admits, however, that financing expected growth may be challenging. “There will be a need for more coal mines as we seek to assist in the domestic supply of coal to Eskom although I believe the biggest challenge will be financing such operations.”

Regarding the export market, Turvey concedes that there is also a large potential for growth, especially owing to recent developments in other coal-producing regions such as Australia and Colombia. “We have seen strikes in Colombia’s coal sector, the first time in almost 23 years, which should have a large offset on other coal producing regions. We are also aware of the challenges experienced by the coal sector in Australia regarding infrastructure–all of these factors could open up opportunities for South Africa-based coal miners,” he explains.

Turvey highlights that demand for energy has not declined as most had expected, despite a ramp up by many countries to invest in renewable energies. “The global demand for energy has instead risen, opposed to falling and, this, coupled with the ever increasing population dynamics, will see the demand for coal to fire power stations remain for years to come.”

 

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