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Strapped for cash

Charlotte Matthews | Thu, 06 Jun 2013 08:31

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[financialmail.co.za] – Eskom wants to contract more than a billion tons of coal over the next 40 years from black-owned companies, which ought to stimulate the junior mining sector. There are several examples of listed junior miners who have built up their businesses partly by selling to Eskom, including Keaton Energy, Wescoal, Continental Coal and Coal of Africa.

Grant Wishart, a technical adviser with diversified consulting group Emerald Green, told the Fossil Fuel Foundation’s junior coal mining ventures conference last week that not only did Eskom favour junior coal miners with high levels of black empowerment participation, there could even be potential funding from the Development Bank of Southern Africa for companies that were fully compliant with all requirements.

Finding financiers to bankroll BEE coal ventures is a huge challenge. Wishart said some companies had raised money on stock exchanges but as far as bank financing was concerned, junior coal miners with small reserves were regarded as high risk. The most common source of funding was advances from coal traders, but this was mainly offered for export quality coal, and tended to be based on good relationships.

Kuyasa Mining executive chairman Ayanda Bam told the conference that financing was one of the many problems facing black entrepreneurs trying to establish viable coal businesses in SA. Bam, who started Kuyasa in the mid-1990s, said the first hurdle he and his partners had encountered was accessing coal resources. The best coal reserves are held by the big mining houses, and when they relinquish unused deposits, they sell them on auction.

A junior mining company wanting to buy one of these deposits has to raise funding, and the cost of servicing those loans eats into margins, rendering the smaller miners less competitive. “After we got our reserves, then the hardship began,” Bam said. When he and his partners visited financiers and Eskom in 1996 they found it very hard to raise money.

The reason that many black entrepreneurs holding licences for coal deposits sell these rights for cash is that it is just as difficult now as it was then for a black miner to access funds. But Bam does not believe in handouts. Unless black people were fully engaged with the economy, they would have no reason to defend it, he warned.

Meanwhile, in his budget vote in parliament last week, public enterprises minister Malusi Gigaba said he was taking steps to put in place a mine development fund by the end of the current financial year to finance mainly early-stage exploration coal mines. Bam said there was also a great need for a mechanism to assist black junior miners with technical and business skills.

Other speakers at the conference highlighted several issues that junior coal miners need to tackle in order to survive. Myles Sinclair, also from Emerald Green, said miners could not be accountants but they should at least understand some accounting language and be organised.

Many small businesses tend to run away from their creditors when they fall behind with payment, instead of communicating openly with them. They also tend to believe one large contract will save their business. Instead, the amount of cash tied up in that contract can break a business when it has to wait for payment. Signing suretyships was a big danger for a small businessman, Sinclair said. Clauses like “joint and several” liability and “any and every” debt in the surety document could allow the banks to seek full payment of the debt from one signatory, many years after he had signed, unless he took steps to cancel it.

Barberry Group financial director Ashoken Ganasen said total demand for rail was about 40Mt more than available capacity but it was critical for junior miners to use rail rather than trucks to keep costs down. It costs between 26c/t/km and 45c/t/km to rail coal, compared to 70c-R1,10/t/km to transport it by truck. The cost of logistics could be half, or even equal to, the costs of production.

While the turnaround time on the Richards Bay Coal Terminal Coallink line, at 58 hours, was world standard, the general freight business sector used mainly by small miners had an average turnaround time of 9,2 days.

Ref: http://www.financialmail.co.za/business/money/2013/06/06/strapped-for-cash

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