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30 April 2012 23:01

Special Report Podcast: John Wallington - CEO, Coal of Africa

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Christy Filen is Moneyweb's mining correspondent.

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    CoAL raises production in March quarter‎.

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    CHRISTY FILEN: Today we have the CEO of Coal of Africa, Mr John Wallington. John, welcome in studio with us today.

    JOHN WALLINGTON: Thank you.

    CHRISTY FILEN:  You released a quarterly production update today, was quite a book, you’ve had a lot of irons in the fire this last quarter.

    JOHN WALLINGTON: Yes, really the turning point was November/December when Vele got its authorisation and that was off 14 months of a really difficult period for the company before that. So this is now a transition, this is now going into the new phase for the company, so this has been a very busy three months.  

    CHRISTY FILEN: I know a lot of focus is placed on your startup mine Vele but maybe let’s start with some of your existing operations for a change. You’ve got two operations in Mpumalanga, you’ve got the Woestalleen complex and Mooiplaats, you recently announced that you were undergoing a review of Mooiplaats, maybe elaborate on that?

    JOHN WALLINGTON: Ja, look, we’re in the middle of an operational review where we’ve got some initiatives in place to try and maximise the performance of the mine but certainly we see the long-term value of Mooiplaats being more strategic in that we’d like to see some sort of partnership with some of our neighbours to see if there is some way of creating a synergy there and maximising the utilisation of a plant. We have a processing plant that has been constructed, which is a very efficient one but it will never be utilised fully by the mine and there are many strategic options around that that we’re looking at. So from an operational perspective, which is a short term, we’re trying to maximise the mine performance but then strategically we’re looking at other options like that.

    CHRISTY FILEN: I see the production tonnage there up 13%, your export coal production from Woestalleen and Mooiplaats together and your run of mine also up quarter on quarter with 8%, so the production numbers looking good. Sales negatively affected by the North Block at Vuna.

    JOHN WALLINGTON: Yes and the market, the market is fairly soft, so we ended the quarter with higher stocks at the port than when we started and the market looks as if it’s going to continue to be relatively soft over the next quarter but it does look as if the second half could strengthen a little bit.

    CHRISTY FILEN: We’ve seen the coal prices come off quite a bit since last year and your share price as well has taken quite a knock over the last year. Do you think the two are related or is it more have to do with the ramp up of Vele and the like?

    JOHN WALLINGTON: Well, there are two aspects to that question, I think all mining stocks, all commodity stocks, you’ll see have been fairly volatile and they’re all lower than they were, there’s no doubt about  that. Coal of Africa is a company in transition, it was a junior exploration player and it is moving into the mining business space and mining and project development space. So it will have a higher risk profile than, say, one of the larger mine companies, which have significant cash flows already coming in. So I’d say it’s a combination of the two, certainly it’s not, as we know, it’s not easy global economic times right now.

    CHRISTY FILEN: On that particular point, on your cash flows, I see you guys have managed to renew a US$40m revolving credit facility with JP Morgan or is it a new one?

    JOHN WALLINGTON: It’s a new one, ja.

    CHRISTY FILEN: It’s a new facility but you’ve got some extensive cash flow planned for the next quarter. How do you see things panning out from a cash flow perspective?

    JOHN WALLINGTON: Again, this is a company that is spending more cash than it’s generating right now. That is just a natural consequence of the phase that we’re in and we’re constantly looking at all the different options that we have to generate the cash that we need. There may be a time that we’ll need to raise cash again but there are certainly partnerships, we’re looking at a number of strategic partnerships, which may fill that gap or even further debt financing. But it’ll be a combination of all of the above I would suspect.

    CHRISTY FILEN: Okay, I know you’re going to need quite a substantial amount of cash, particularly to invest in your partnership with Rio Tinto on the Chapudi properties. How is that project going?

    JOHN WALLINGTON: Well, it’s great actually, I think the final regulatory approvals will come through imminently, I think we’re days, certainly not more than a week or two away but probably days away from that final regulatory approvals going through. We can then accelerate the exploration process and again that’s investment that’s required but the little bit that we’ve got, the information that we’ve got already that this is going to be a significant resource, we’re already looking at nearly a 2bn ton resource and it’s to prove that up and give us more confidence in what products are in there.

    CHRISTY FILEN: Okay that’s interesting and then you see that fitting into your plans for Makhado?

    JOHN WALLINGTON: Well, Makhado and Vele are the two major projects that we’ve had all along, what this acquisition does because the properties are significant in size and they’re contiguous to our existing properties, it gives us a number of options, it gives us scale and it gives us optionality and it gives us flexibility, which mining companies often don’t have. So from a resource point of view it’s first class.

    CHRISTY FILEN: Okay, I see you’ve also confirmed that the Makhado resource is of a hard coking coal quality…

    JOHN WALLINGTON: Absolutely, ja.

    CHRISTY FILEN: …and that you’ve sent test batches through to ArcelorMittal, one of your shareholders?

    JOHN WALLINGTON: Ja, there’s been significant test work done both by ArcelorMittal and overseas and certainly we now have a very, very good idea of what the product is. It is a hard coking coal, there’s a large number of different brands of hard coking coal but pleasingly it falls into that category.

    CHRISTY FILEN: Okay, so ArcelorMittal likely to use it in their steelmaking process?

    JOHN WALLINGTON: We certainly hope so and certainly that’s what we would expect. Nearly every steel plant in the world uses a blend of coking coals and I would suspect that would continue with ArcelorMittal and so what we would like to see and I’m sure Arcelor would like to see is that ultimately we would be replacing some of the imported coals with the Makhado product.

    CHRISTY FILEN: What sort of percentage shareholding does ArcelorMittal have in Coal of Africa?

    JOHN WALLINGTON: 16%

    CHRISTY FILEN: 16%, okay, all right. I know Exxaro has an optionality to climb into the Makhando project, I think it’s up to 30%...

    JOHN WALLINGTON: Yes.

    CHRISTY FILEN: …have they given an indication of which way they’re going to go?

    JOHN WALLINGTON: Yes, the formal process has been triggered, once we’d finished we presented the feasibility study to them, they are now…we’ve had significant interaction between the two companies, they are now taking it through their processes, they’re doing their own review of the work that we’ve done and certainly there’s a more significant interaction between the companies as that process accelerates. Certainly what we believe and the indications from Exxaro is that by June we will have a decision on that matter and so far it’s looking very promising.

    CHRISTY FILEN: Okay. I was fortunate enough to actually visit your handover of your plant at the Vele mine last week and also at the same time you loaded some coal for export out to the Maputo port. In the official release you actually said that you were testing the axle bearing capacity?

    JOHN WALLINGTON: Well, this is now a new route, there hasn’t been coal been transported from the northern Limpopo area to Maputo. So, ja, there’s some trial, test work that needed to happen on that point of view, so both from the producing at Vele point of view, getting it to the siding and for the rail. It all went very well, which is good to know.

    CHRISTY FILEN: So this is a trial run for Transnet, have they had to put extra rolling stock in place and…?

    JOHN WALLINGTON: They will in time, as our volumes ramp up there will be more rolling stock required, ja.

    CHRISTY FILEN: Okay and your access to the Maputo port, have you got an allocation at the port?

    JOHN WALLINGTON: Well, we’ve got the 3m ton allocation at present and, of course, the option for any expansion but the key at the moment is to utilise the allocation that we have.

    CHRISTY FILEN: Okay, well, ja, logistics playing an incredibly important part with where your mines are situated

    JOHN WALLINGTON: Correct, ja.

    CHRISTY FILEN: Where do you see the coal price going in the next, say, year?

    JOHN WALLINGTON: Hopefully up [laughing].

    CHRISTY FILEN: [Laughing]

    JOHN WALLINGTON: Like all commodities and, of course, when one wakes up it depends which part of Europe is in trouble and what that tends to do with the markets. We would all like to think that…I think we’re at closer to the lower end of the commodity cycle than not. I would suspect that we would see an improvement in the prices in the next six to 12 months.

    CHRISTY FILEN: Your main competition obviously for a coking coal type substitute comes from your Australian counterparts, who are much closer to the Indian and Chinese markets, how do you see yourself gaining a foothold in those markets?

    JOHN WALLINGTON: I think the Indian market we hopefully will be the one that we’re most likely to gain a foothold. There are two elements to that, one, the particular product that we produce would, in some of the plants, will become a very good niche product for them and secondly that India are looking to diversify significantly their supply because they get an overriding percent proportion of their coal coming out of Australia. So I think the combination of the diversification requirements, the supply/demand projections of the future and the fact that this is a coal that should fit very well with some of their plants. In other words that should hopefully give us the in that we need.    

    CHRISTY FILEN: Okay, well, thanks very much. That was John Wallington, the CEO of Coal of Africa, joining us in studio today to chat to us about their quarterly production update.

    The SAfm Market Update with Moneyweb is broadcast on SAfm 104-107fm, weekdays at 18:00 to 18:30.
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