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INTERVIEW: Coal of Africa CEO David Brown

Makhado continues to advance despite Environmental Review.

WARREN DICK: Good day, I’m Warren Dick, the editor of and joining me on the podcast today is David Brown. He’s the Chief Executive Officer of Coal of Africa who today released their interim results to the end of December. Good to have you with us David.

DAVID BROWN: Well, thank you very much.

WARREN DICK: There’s quite a lot happening at Coal of Africa (CoAL) at the moment. I think the first point I wanted to touch on was the acquisition of Universal Coal. You’ve made an offer for the company and today you have an update as to how that acquisition was proceeding. Can you just give us an update there in terms of, as I understand it, the 40% support that you’ve got from shareholders, and you need to get to 51% in order for this transaction to progress?

DAVID BROWN: Thanks for that, yes, look from our perspective, the proposed transaction we still believe is a value accretive and highly compelling transaction for both Universal and CoAL shareholders and we’ve had a number of milestones that have been achieved in the last few weeks. A couple of weeks ago, we had our AGM where the CoAL shareholders approved unanimously to proceed with the transaction and all resolutions were positively voted on. The second point was obviously in terms of there are certain conditions still outstanding, so we put an extension or variations to the offer and we anticipate the offer will close now on 15 April, and as we stand now, we are sitting at just under 56% acceptances, so we have over the 50% mark as we speak now.

There is a sub-limit, which may be the 40% you’re referring to and that’s on loan note acceptances and we believe that, while not there yet, there is a shareholder who will be tendering in very shortly and that will push us over the 40%. So effectively the conditions are still outstanding, are obviously to ensure that the last bit of the funding agreements are finalised. We are anticipating that over the next couple of weeks.

In addition to that, there are a couple of smaller points which we are ticking off as we work through. So there is nothing to indicate at this point in time that we would not be able to complete and close this transaction by the middle of April.

WARREN DICK: Right, so just to get that right, so in terms of the offer made to Universal shareholders, 56% have agreed to your offer and just from that 56%, you gave them the option of either receiving cash plus a CoAL share, if I’m not mistaken, or receiving a note. How much of that 56% have opted for the note?

DAVID BROWN: Well at this stage, we’re at round about 37.5% or 37.6%. We need to get to 40% in terms of one of the conditions associated with the deal and as I said, we know that there is a shareholder who’s in the pipeline, they’re going through their administration documentation phase and once they are in and counted then we should be over the 40% mark with advances of loan notes as well.

WARREN DICK: And that would fulfil obviously one of the outstanding conditions precedent.

DAVID BROWN: Absolutely right, yes.

WARREN DICK: Once that closing date, April 15 has come along, what happens then, how long does it take effectively to close that transaction following April 15?

DAVID BROWN: Yes look, as you can imagine a transaction of this nature is quite complex in terms of the administration and closing issues, but should be all done and dusted in approximately two weeks after that date. So by the end of April, people should be paid out, shares issued, monies raised and the offer then will be alive effectively from early May, in terms of being a consolidated subsidiary of Coal of Africa.

WARREN DICK: Ok, great, so just in terms of the offer as well, whatever you get is the amount of shares that you acquire, there’s no mechanism for buying out the rest of the minorities that didn’t vote for the transaction?

DAVID BROWN: No, there is not, we were considering looking at a Scheme of Arrangement, but obviously that methodology wasn’t available to us, and therefore, we’ve gone for the option of obviously acquiring as much as we can, and quite clearly, you know, as long as we get above 50% we will have achieved the objective of what we set out to so.

WARREN DICK: Right, ok, so that’s Universal Coal. Let’s turn our attention to Makhado. You’ve gone ahead – from the update again, you’ve signed a Memorandum of Understanding with seven local communities for their BEE component which is 20% of the project. You’re looking for a partner for a further 6%, you’ve also gone ahead and you’ve received the Integrated Water Use License there for 20 years, but the High Court ordered a review of the Environmental Authorisation to be conducted. So just give us an understanding what happens there, with that review. What are the potential consequences for the company and how that ties into the overall development plan for Makhado, which as I understand, you’re busy doing the front end engineering and design work for at the moment.

DAVID BROWN: Ja, sure, on the interim interdict, originally there were two elements to it. The first one was they were trying to compel Coal of Africa to do a regional impact study and assessment. That was overturned, so that particular aspect is not applicable any more. The second one was that the environmental authorisation was reviewed by the appropriate authorities, so quite clearly that’s not for Coal of Africa to do, that’s for the Regulatory Authorities, which in this case is LEDA, or the Limpopo Economic Development Agency which are busy with this now, and essentially, as soon as their documentation is all complete and they’ve finalised their position, then quite clearly there will be a process to obviously bring this back into the legal system whereby we would then seek to obviously overturn the interim interdict in its entirety. The process, quite clearly is a legal process and in that regard one is not always necessarily in control of the deadlines and timelines and it does take some time for these matters to wind their way through the court system in South Africa.

So from that point of view even though we at this stage do not anticipate it having any impact on the project development timetable quite clearly theres always a risk element to that but we think that the risk element is muted and therefore will not impact.

And as you rightly said there are a number of activities that we have to get on with anyway so all that happened is that these elements i.e. the overturning the interim interdict as well as the funding, as well as the front end engineering design work as well as the contractual process in terms of a) bringing in the strategic equity partner, getting the epc (Engineering, Procurement and Construction) agreements in place, etc. theres a lot of work that needs to take place between now and the end of this calendar year. So we just see this as another one of the parallel streams that we will be working on separately to obviously ensure that it doesn’t impact on the overall timetable. But there are lot streams and strands that will be running on a parallel basis.

WARREN DICK: Ok, one of those strands as you updated the market today is around Baobab Mining and Exploration. So as I understand it you have the Makhado Coking Coal project and then you have the Baobab Mining and Exploration which owns the mining license for Makhado, is that right?

DAVID BROWN: Effectively the Makhado project is just the name of the project code. Baobab Exploration and Mining etc. is the legal entity which will house the Makhado project. So at some stage we need to sign off on one of them and we thought rather than having the two names because quietly that can be confusing for investors and other stakeholders.

WARREN DICK: Right, so it’s essentially one and the same thing – the BEE partner will own 26% of Baobab Mining and Exploration where that license is actually held.

DAVID BROWN: Absolutely and we’ll need to get that piece of admin sorted out in the next few months. Obviously it’s not pivotal and crucial to the advancement but as I say it’s probably good just to clear up any misunderstandings.

WARREN DICK: Just on that development of Makhado, as that environmental authorisation is reviewed, you’ve signed a Memorandum of Agreement with a company called Hengshun to purchase – effectively what’s going to happen is that will purchase a 34% interest in the project for roughly $113m at this stage, and its somewhat of a moving target with what’s happening and what’s transpiring with the project which implies a value of $335m for Makhado as a whole and that in return they would receive an EPC contract, the right to effectively build the colliery as I understand it for which would be worth about $400m and they may provide debt as well. Is that right?

DAVID BROWN: Not might, they have to provide the debt which is a package deal which is why we felt it was appropriate that effectively this company, Hengshun is more of a construction EPC type company rather than a company that takes equity stakes. We encourage them to look at taking an equity stake because quite clearly what that means is that Coal of Africa will receive funds from the sale of the shareholding which will enable CoAL then to fund its portion of the capital requirements, bearing in mind that CoAL will still be 40% shareholder in the underlying Baobab/Makhado project.

So in essence from that perspective what we are doing is with this process is we’re saying you want the EPC, we would like you to come in as an equity shareholder and on top of it, if you want the EPC you also need to provide either yourself or facilitate 50% of the project’s finance or funding in the form of a debt instrument. So essentially the funding of the project as a whole will come from – 50% of it will come from debt, the balance of 50% i.e. whatever it is, say $400m and by the way the front end engineering design works will actually finalise that pricing so from that point of view if we take $200m odd, i.e. 50% of the $400m you’re left then with $200m which is required to be funded.

Now that $200m will be funded by your shareholding on pro rata basis. So if we take $200m CoAL will then have to fund $80m, i.e. 40% of $200m so that’s how much Coal of Africa will have to put in. And that $80m obviously we will have the funding because we will have sold the equity stake both to the strategic partner and the black economic empowerment partner. Then in addition to buying their stakes they will also need to pay pro rata their capital contribution. So Hengshun are 34%, they would need to put in $68m and we would need to put in $52m on the same basis.

WARREN DICK: Ok so just to get those numbers right for the ownership of Makhado – so you have 26% which will be BEE and then Hengshun come in and effectively they’re paying for 34%, so 26% + 34%, ok right.

DAVID BROWN: So yes, so we end up with 40% yes.

WARREN DICK: Ok great so effectively that would lower the capital required for the actual CoAL shareholders, to as you said, $80m on the equity side, is that right?

DAVID BROWN: That’s right but as I said that money we would have because by virtue of both Hengshun and the BEE buying their shares in the Baobab/Makhado project. So we will have that money on the balance sheet. We won’t need to raise any additional funding.

WARREN DICK: Ok great. David we’re going to have to leave it there. It was very interesting and thank you for your time.

DAVID BROWN: Thank you very much and thanks for giving us the opportunity.

WARREN DICK: That’s was David Brown the Chief Executive Officer of Coal of Africa.

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