Operations Review

With power consumption in South Africa forecast to exceed supply in approximately three years, it’s a matter of time until there is demand for the first shipments of coal to leave our massive Boikarabelo mine in the country’s Waterberg region.

 

Boikarabelo – which means ‘to be responsible’ in the local dialect – will be a world-class, low-cost, open cut mine. There are probable reserves of 744.8 million tonnes of coal, beginning 20 metres below the surface, on 35% of the tenements we control, and the mine’s potential has been confirmed by contracts to supply almost all its production for its first seven years, and a significant proportion for the following 30 years, to export and domestic customers.

Coal sales contracts

  Stage 1
(saleable production: 6 mtpa)
Stage 2
(saleable production: up to 25 mtpa)
Years 1–3 4–7 8 9–12 13–14 15–20 21–35 36–38
CESC 1.0 2.0 4.0 4.0 4.0 4.0 4.0 4.0
Noble 0.5 0.5 0.5 1.5 2.0 2.5 2.5
Valu 1.0 1.0 2.0 2.0 2.0 2.0
Total export 2.5 3.5 6.5 7.5 8.0 8.5 6.5 4.0
Domestic 3.0 3.0 3.0
Total 5.5 6.5 9.5 7.5 8.0 8.5 6.5 4.0

Economic importance to South Africa

The value of Boikarabelo and its economic importance to South Africa have been endorsed by the acquisition of 19.5% of Resource Generation’s issued share capital by Public Investment Corporation SOC Limited (PIC), one of Africa’s largest investment managers with assets of over R1.6 trillion ($170 billion). PIC is wholly owned by the South African government and invests funds on behalf of the country’s public sector entities, including the Government Employees Pension Fund.

Another significant South African shareholder is Altius Investment Holdings (Pty) Limited. Altius is a new generation black economic empowerment investment holding company focused on commodity businesses that have the potential to benefit the national economy. Importantly, we have established strong links with local communities, whose goodwill will be essential to Boikarabelo’s success, and we have supportive partners in our BEE (black economic empowerment) operating subsidiary Ledjadja Coal (Pty) Limited.

Contributing to local communities

Everything we do at Boikarabelo follows five core values:

    • Zero harm – making sure it is a safe coal mine.
    • Equality – ensuring that men and women have an equal opportunity to work at the mine.
    • Low environmental impact – minimising the impact the mine has on the surrounding Waterberg region.
    • Supporting the local economy – ensuring that as many services as possible are sourced from the local region.
    • Be responsible – aiming to be responsible in all aspects of our work and community activity.

    The health and safety of our employees and their families are a key priority. Safety procedures are non-negotiable, aimed at achieving ‘zero harm’, and in March 2015 Boikarabelo’s safety officer completed the Chamber of Mines Safety Officer Course.

    In December 2014, we held our second World AIDS Day event for the local community, with health practitioners from nearby clinics giving free tests for HIV/AIDS and tuberculosis to more than 200 people.

    Regular meetings are held with our local communities to keep each other informed about developments and employment opportunities at the mine and any concerns that people have.

 

Our human resource development program, which forms part of Boikarabelo’s social and labour plan, holds educational events at a number of schools and also funds an adult basic education and training program that is well attended by members of our local communities. The program develops skills so people can secure a range of jobs at the mine, including as welders, fitters, electricians and plumbers.

We also support our neighbouring communities through securing supplies and services from local businesses wherever possible. Workshops are held for business owners and more than 250 small, medium and micro enterprises are registered on Boikarabelo’s electronic supplier database.

The Boikarabelo project covers 22,000 hectares, with a wide range of game including giraffe, kudu, impala and water buck, and we have instituted an environmental management plan to limit the mine’s impact. This includes a feeding and conservation program for African white back vultures, which have been classified as an endangered species, and we now have a colony of 120 birds, with 40 breeding pairs.

Planning the first production

In the seven years since we identified the potential of the Waterberg region, which accounts for 40% of South Africa’s remaining coal resources, all necessary land for the mine and its infrastructure has been acquired, all regulatory consents have been received, and rail haulage and port access contracts for the mine’s first seven years’ production have been signed.

Where there was bush veldt, today there is a construction camp for up to 1,320 people, with power and water services connected. The camp incorporates kitchen and dining facilities for up to 5,000 cooked meals a day, accommodation units ready for immediate occupation by 400 people, and offices with telephone and data communications that already are occupied by site personnel.

A 40 kilometre rail link to Transnet Freight Rail’s network has advanced and 13 kilometres of a 58 kilometre pipeline to the Marapong effluent treatment plant, which will supply water and is part of the mine’s social and labour plan, have been completed.

We also have a detailed operational readiness plan so we can speed up the path to production as soon as the remaining finance is secured. This covers the delivery and commissioning of initial mining equipment, recruitment and training, the initial box cut, and commissioning of the coal handling and preparation plant to produce the first saleable coal.

Continuing progress

During the past year, while negotiating to secure the finance to complete construction, we continued to develop Boikarabelo’s infrastructure.

The first three of the rail link’s seven bridges were completed, together with earthworks, drainage and retaining walls for its intersection with the main line. The intersection will be complex, with multiple lines so trains with up to 200 wagons can pass each other without delays.

Water supply infrastructure, including holding tanks and pumping facilities from the mine’s borehole field, was installed and pipes were laid along a 13 kilometre section of the Marapong pipeline. We also signed a contract to construct the Marapong effluent treatment plant.

Poles and 21.2 kilometres of 132kv electricity transmission lines for the power supply were erected, and a substation and switch room are due for completion in October 2015, funded by a deferred payment facility.

We also signed two additional contracts with FLSmidth Roymec (Pty) Limited, the South African black economic empowerment subsidiary of FLSmidth & Co, the leading supplier of plant, equipment and services for the global minerals industry which had designed the coal handling and preparation plant, the largest item in the capital budget. These further contracts covered the engineering, procurement, supply and construction management of the plant, including on-site mechanical and electrical installations.

Funding the mine’s construction

A year ago, we expected production to begin in mid-2016, subject to securing debt funding of US$500 million to complete construction and buy mobile equipment.

The first tranche of this finance was secured in August 2014, when we signed a loan facility for up to US$113 million with Komatsu Financial Limited Partnership for the cost of the mobile equipment fleet.

The weakening coal price, however, delayed credit approval from the club of financiers with which we were negotiating to obtain the remaining US$400 million capital requirement. In February 2015, due to the time the negotiations were taking, the financiers agreed to our disclosing their names: Rand Merchant Bank, HSBC Bank, Industrial Development Corporation of South Africa, PIC, Noble Group and Export Finance & Insurance Corporation. We also announced that a term sheet was being finalised to provide all the remaining funding, with loans agreed by Noble Group in 2013 becoming part of the facility.

 

Eventually, in June 2015 we were close to an in-principle agreement with the club of financiers on the term sheet for a multilayered funding package. Together with other funding commitments, this would have provided the necessary finance and we believed we were on the verge of being able to construct the mine.

Finalising these negotiations, however, has been hampered by a weakened API4 coal price forecast. This has prompted the financiers to ask us to investigate whether a contract mining model could reduce the mine’s cost and capital requirement, thereby lowering gearing. Previously, contract mining options were evaluated and found not to be viable. However, it is possible in the current market that circumstances may have changed. Consequently, we are now seeking quotes from mining contractors – a process that is likely to take several months to complete. Meanwhile, we are exploring alternative debt funding solutions.

It’s a matter of time for Boikarabelo

While the weak coal price has delayed our securing the remainder of the finance to build the mine, it’s only a matter of time until the funds are raised. Global demand for coal continues to grow, as demonstrated by recent proposals to develop new mines in Australia. The forecast power shortfall in South Africa will increase demand for coal there and international studies conclude that Asian imports of coal also will grow.

With low production costs, transport arrangements in place and the initial years’ production already underwritten by sales contracts, Boikarabelo is positioned to benefit from this growth in demand, while contributing to South Africa’s economy through exports. We are optimistic, therefore, that the project finance to bring the mine to reality will become available in the coming year.

Meanwhile, we thank our shareholders, employees and many others who share our confidence in the potential of Boikarabelo.

* This information was prepared and first disclosed under the JORC Code 2004. It has not been updated since to comply with the JORC Code 2012 on the basis that the information has not materially changed since it was last reported.

Information in this report that relates to exploration results, mineral resources or ore reserves is based on information compiled by Mr Dawie Van Wyk who is a consultant to the Company and is a member of a Recognised Overseas Professional Organisation. Mr Van Wyk has sufficient experience which is relevant to the style of mineralisation and type of deposit under consideration and to the activity which he is undertaking to qualify as a Competent Person as defined in the 2004 Edition of the ‘Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves’. Mr Van Wyk has given and has not withdrawn consents to the inclusion in the report of the matters based on his information in the form and context in which it appears.

Resource Generation Limited
Annual Report 2015