Junior coal mining and trading company Wescoal will have to look after its flagship Elandspruit Colliery if it is to continue delivering the exquisite results it released on Thursday.
Despite only being operational for six months, the new mine accounted for 81% of the headline earnings for the year ended March 31 2016, according to Alpha Wealth portfolio manager Keith Mclachlan.
It means that, barring any unexpected incidences halting production, the earnings are practically guaranteed to surge in the coming year and the company will deliver even better numbers than the current results, which are the most impressive in the company’s history.
“22 cents of the 27 cents in headline earnings was generated in the second half of the year,” says Mclachlan. “And that implies that 44 cents will be generated next year, which is almost double…. So the management of Elandspruit will make or break the next set of financial results.”
Despite a difficult trading environment, Wescoal profits after tax were up 78.8% to R51.8 million and headline earnings per share up 76.1% to 27.1 cents per share year-on-year.
Production also increased, by 22%, to over 2 million tons per annum, while net cash flows from operations almost tripled to R207.7 million. Unsurprisingly, the company decided to pay R10 million to shareholders in dividends, which Wescoal’s acting CEO Waheed Sulaiman says will amount to around 4 cents per share.
The company also improved efficiencies, reduced operating expenses by R22 million to R168 million down from R191 million the previous year
The importance of the new asset to the company’s long-term prospects is not lost on management, who have put efforts into de-risking the new mine, spending the majority of R52 million in funds raised last year to improve support infrastructure.
Says Sulaiman: “We built decent roads, we improved the water management systems, so there’s a lot of work that’s been done already to keep the mine in a good state. So there is nothing that particularly stands out as a massive risk there.”
Wescoal also said that, by the end of the year, the company is on track to increase its BEE shareholding to 50.1% which is key to securing contracts with power utility Eskom and other export opportunities.
Mclachlan says Wescoal will thus have less spot-price risk because the contracts it has with Eskom will mean it will pay a fixed amount. The downside is the opportunity cost the company will face if the spot price of coal rises and Wescoal is locked into those contracts. But its trading business allows it to mitigate that risk somewhat.
“Their washing plant can switch between export grade and internal thermal grade for Eskom so that when the spot price runs, they will always have an option to export a portion of that product,” says Mclachlan.
The company is not risk-free by any measure. As with any mining operation it is vulnerable to safety stops and wage disputes, but Sulaiman is confident with the level to which such concerns are currently being addressed.
Wescoal’s share price closed at R1.97 per share, up 1.03% on Thursday. The share price was not markedly affected by the release, as the company had released a trading statement last month stating it expected a significant uptick in earnings. On that day, the price surged 10% to R1.73 and it has been climbing gradually ever since.
Keith Mclachlan holds Wescoal stocks in the portfolio he manages at Alpha Wealth.