Not to be left behind in the commodity rally, the Wescoal Holdings (WSL) share price has roared upwards from its lows of below 80 cents per share (cps) to its current high of 200 cps, as per Friday’s close.
The domestic thermal coal group recently reported results for the six months to end-September 2021 that backed this rally, with sales rising 28% year-on-year (y/y), Ebitda (earnings before interest, taxes, depreciation and amortisation) growing 32% y/y and headline earnings per share shooting up five-fold.
As a junior miner that has worked hard to approach scale, it is great to see that Wescoal’s various mines and project pipelines all look robust.
Importantly, the new mine – Moabsvelden – came on stream and produced excellent results during the period, while the group’s Arnot joint-venture signed a 10-year coal supply agreement (CSA) with Eskom and should add nicely to FY 22’s production.
Cash generation appeared as the one weak spot, but once an ad hoc large cash receipt in the prior period is excluded, cash generation tracked all the other metrics upwards. This allowed the group to degear its previous period’s R1 billion in net debt to R900 million and, importantly, all the group’s covenants are being easily met.
The covenants are important not just from a solvency perspective as most banks no longer lend into coal projects. Not even brownfields ones.
Despite the critical nature of coal feeding our grid, the proverbial taps appear to have been turned off.
Thus, keeping Wescoal’s existing funding lines open is critical while its cash generation needs to shore up its balance sheet for any future expansions.
Likely related to this, the group has unveiled an evolution in strategy from being a focused coal mining and trading group to becoming “a diversified investment company with diversified portfolios in the medium to long term”.
When asked what this means, Wescoal management was explicit in saying three things.
Firstly, the group will keep and sweat its existing coal assets. This makes sense as most of these assets are reaching steady-state with long-term CSAs with Eskom that should produce nice, steady free cash flows. Also, to be blunt, our country needs this coal supply.
Secondly, the group will consider other resources other than coal to invest in. This also makes sense as the mid-tier mining sector in South Africa has suffocated on regulation, and a lot of great assets are up for grabs for those with the skills, capital and appetite.
Afrimat has already begun snapping up some of these gems with great effect on its own diversification drive, and perhaps Wescoal will join it soon.
Finally, and most intriguingly, Wescoal will seriously consider investing into renewables projects. These are non-mining projects.
This move will change not just Wescoal’s underlying business, but the group may cleverly be able to access cheaper funding in this sector, thus offsetting the capital drought in its coal portfolio.
Who knows – the free cash flows from coal mines that seed investments into renewables may eventually reverse: free cash flows from renewables may one day be fed into supporting coal mining.
In this way, merely having access to capital may become a competitive advantage of its own for those who have the skills, capital and appetite to develop coal mines in South Africa.
What strange times ESG (environmental, social and governance) pressure is creating, despite our country’s need for coal. And there is no getting away from the fact that Eskom and South Africa need coal for the foreseeable future.
In any event, Wescoal’s non-coal evolution will be an interesting strategy to watch unfold …
Keith McLachlan is investment officer at Integral Asset Management.