Monday, January 24

Wescoal in a ‘sweat stain’


Not to be left behind in the rally in commodities, Wescoal Holdings’ (WSL) stock price has soared from its lows of less than 80 cents per share (cps) to its current high of 200 cps, according to the close. Friday.

The domestic thermal coal group Recently reported results for the six months to the end of September 2021 that supported this rally, with sales increasing 28% year-on-year (year-on-year), Ebitda (earnings before interest, taxes, depreciation and amortization) grew 32% year-on-year and sales overall earnings per share multiplied by five.

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As a junior miner who has worked hard to get close to scale, it’s great to see Wescoal’s various project mines and pipelines look solid.

Importantly, the new mine, Moabsvelden, came online and produced excellent results over the period, while the group’s Arnot joint venture signed a 10-year Coal Supply Agreement (CSA) with Eskom and should increase production from the fiscal year 22.

Read:

Wescoal to begin construction of a new coal mine in February – CEO
Eskom’s coal fleet is ‘sinking’, expert says

Cash generation appeared as the only weak point, but once a large ad hoc cash receipt is excluded in the prior period, cash generation saw all other metrics up. This enabled the group to reduce the net debt from R1 billion from its prior period to R900 million and, more importantly, all the group’s covenants are being easily honored.

The agreements are important not only from a solvency perspective, as most banks no longer make loans for coal projects. Not even those in brownfields.

Despite the critical nature of the coal that feeds our network, the proverbial taps appear to have been turned off.

Therefore, keeping Wescoal’s existing financing lines open is critical, while its cash generation needs to shore up its balance sheet for future expansions.

Read: SA Banks Say They Can’t Cut Coal Financing Yet

Probably related to this, the group has presented an evolution in the strategy of being a coal mining and trading group focused on becoming “a diversified investment company with diversified portfolios in the medium and long term.”

When asked what this means, Wescoal management was explicit in saying three things.

First, the group will hold and sweat its existing coal assets. This makes sense as most of these assets are reaching a stable state with CSA over the long term with Eskom which should produce nice and steady free cash flows. Also, to be frank, our country needs this supply of coal.

Second, the group will consider other resources other than coal to invest. This also makes sense as the mid-tier mining sector in South Africa has suffocated with regulation, and there are many excellent assets at stake for those with the skills, the capital, and the appetite.

Afrimat

Afrimat has already started sourcing some of these gems to great effect on its own diversification drive, and perhaps Wescoal will join them soon.

Read:

Afrimat continues its journey to a mid-level mining house
The Best Money Managers Share Their JSE Stock Picks (Part I)

Finally, and most intriguingly, Wescoal will seriously consider investing in renewable energy projects. These are no miner Projects.

This move will change not only Wescoal’s underlying business, but the group will be able to intelligently access cheaper financing in this sector, thus offsetting the capital drought in its coal portfolio.

Who knows, the free cash flows from coal mines that initial investments in renewables may eventually reverse – the free cash flows from renewables may one day be used to support coal mining.

In this way, simply having access to capital can 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 escaping the fact that Eskom and South Africa need coal for the foreseeable future.

In any case, the non-coal evolution of Wescoal will be an interesting strategy to watch how it unfolds …

Keith McLachlan is Chief Investment Officer at Integral Asset Management.


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