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Here comes the night

[] -- PAUL Miller's Keaton Energy is typical of the new breed of coal miner to hit the JSE’s (electronic) boards.

“We exist for two reasons,” he says. “We have access to mineral rights that weren’t previously available (due to the minerals bill in South Africa), and the economics of the coal industry.”

At the time of writing, coal prices out of Richards Bay, which has the world’s largest single export terminal, were at all-time highs. Analysts reckon those prices are strictly spot market and that short-term trading factors may be at work, much as the uranium market has been affected by speculators.

“Maybe Indian buyers have been caught in a short squeeze,” says Xavier Prevost, senior coal industry analyst at Wood MacKenzie, a coal industry consultancy. Nonetheless, contract prices are equally impressive. Says Miller: “When contract prices expire, they are due to be reset upwards.”

For Keaton Energy, planning is based on coal prices of about 12 months ago. Miller can’t be more specific yet as the newly listed company hasn’t published its price assumptions. But he adds that the company and its advisors don’t expect coal prices to fall to levels of about four years ago.

That was before China became a net importer of coal. Since then, the Asian coal trade, dominated by China and India, has pushed prices through the roof.

According to the latest International Energy Agency (IEA) statistics, published in 2007, China hosts 14,2% of global coal reserves, produces 39,5% of world production and consumes 45% of total production. India hosts 13,5% of global reserves but produces only 7,3% of total world output. It uses 8,7% of world production. And from a supply perspective, Indonesia is the world’s biggest exporter of thermal coal.

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Combined, these three Asian countries control 51,2% of global production, and consume 54,4% of production. China and India are net importers and are ravenously hungry for fresh sources of coal, hence the upward pressure on prices.

This has been mirrored by a substantial drop in exports to Europe by South African producers in favour of Asia. According to Wood MacKenzie, exports to Asia has surged to 12,3m tons in 2007 from 3,1m in 2006. As a percentage of total South Africa exports, Europe now comprises 67% compared with 88% in 2006. “The trend is expected to continue,” says Prevost.

For South Africa, there has been an explosion of junior mining enterprises in the coal sector, helped by the minerals legislation.

There are the listed powerhouses that dominate the sector such as Anglo Coal, BHP Billiton, Exxaro Resources, Xstrata and its joint venture partner, African Rainbow Minerals Coal (ARMCoal). But there’s also a raft of unlisted wannabees including HCI Khusela, Mashala Coal and Shanduka Coal, an entity thought to have Swiss trading house Glencore as its ‘unofficial’ partner.

In addition to the listed junior player Keaton Energy, there are other listed rivals such as South African Coal Mining Holdings, formerly Yomhlaba Resources, Coal of Africa Ltd, and the long-standing (but beleaguered) Hwange Coal.

And yet for all these interests, coal exports in South Africa fell in 2007 against the previous year and are expected to fall again to about 62 million tonnes.

“A third of the year has gone and it’ll be almost impossible to catch up,” says Miller. Owing to high prices, however, coal producers’ revenue will be higher, but on a volume basis it will be down, notwithstanding the massive global appetite.

That sounds crazy, and not all of it can be laid at the door of Transnet, South Africa’s transport utility whose capacity constraints are well documented.

One market rumour is that the electricity utility, Eskom, is placing as much pressure on exporters to redirect exports for its own needs, even though Eskom power stations were built to consume lower quality product. There’s no evidence this is the case, but the power crisis in South Africa has led Eskom to request a 45 million tonnes stockpile over the next few years.

“South African inland coal sales are expected to increase in tonnages and prices, mainly due to new power generation demand,” says Prevost. But domestic prices will start to ease when new long-term Eskom projects come into effect, he says.

Thus South Africa joins many other developing economies in coralling its own coal for domestic use, a development that’s bound to put pressure on the internationally traded coal price.

For South Africa’s junior miners, especially in the coal industry, this is great news. Prevost, however, sounds a cautionary note: “There’s not a piece of coal that hasn’t been drilled in South Africa,” he says, hinting that talk of future enormous coal deposits may not be economical, record prices notwithstanding. “Some projects are feasible whereas others seem mere speculation to me,” he says.

On 5 February, Rio Tinto said it had boosted its coal reserves in South Africa with the discovery of just over one billion tons at its Chapudi venture, situated in Limpopo province. The total resource at Chapudi now stands at two billion tons. BHP Billiton’s hostile bid for Rio Tinto may serve as an informative backdrop to this claim.

But as with Rio Tinto’s claim, there may be some over exuberance in the market.

Keaton Energy, a company not yet producing cash flow, has a market capitalisation of R2bn at the time of writing. “It’s head spinning,” says Miller, “but we attracted a strong base of institutional support and private investors and not everyone got what they wanted.” The potential for a quick turnaround of shares on listing was also carefully watched. “It’s fair to say some got fewer shares than they wanted,” he says.

Keaton has about 206m tons of coal in the measured and indicated category from which the company hopes to eventually produce 2m t/year.

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