With two highly productive coal mining assets and a strong pipeline of projects under development, Optimum Coal looks set to become one of South Africa’s largest coal mining companies. CEO Mike Teke talks to Gay Sutton about the company’s strategy for growth.
Optimum Collieries, located in the Witbank coalfield region of Mpumalanga, have a relatively long history of coal production. Opened in 1968 by BHP Billiton, the collieries’ primary customer for many years was the Hendrina power station, run by the South African power utility Eskom. Over the intervening years however, as BHP expanded the collieries, it also increased its customer base to include the inland and export markets.
The collieries entered a new era of growth in 2008 when they changed hands and formed the primary asset of Optimum Coal, a vigorous new company backed by the Rand Merchant Bank (RMB) and driven by the aim of becoming one of South Africa’s largest coal mining companies.
“During our first year in operation we were fortunate in that we were in a sweet spot in terms of coal export prices, which reached a high of $150 a ton,” explained CEO Mike Teke. “This enabled us to pay off our debts from the acquisition and generate cash to develop our assets.”
The company’s first action was to initiate a programme of development and expansion of its assets. Optimum Collieries, which then comprised three open cast mines, Pullenshope, Kwagga and Eikeboom, made an investment of R558 million to construct and commission a new underground mine, Boschmanspoort. Production began in 2008 and by 2009 Boschmanspoort was producing 2.6 million tons. The target for this year is four million tons. “We are particularly proud of our achievement here, because we began producing coal from the mine while we were still building the infrastructure,” Teke said.
A second major early investment was targeted at creating a balance between company growth and business sustainability. “We believe that while we are taking measures to grow our assets, it’s important that sustainability is not left behind,” said Teke.
With water becoming a scarce commodity in many areas of South Africa, the company invested R550 million in the construction of a water treatment plant close to the Pullenshope mine. Now fully operational, the plant has the capacity to treat 15 million litres of water a day from Optimum Collieries, and the company plans to supply the water to the local community. “We don’t want to make a profit out of this,” said Teke, “but we are now in advanced negotiations with the local municipality, and the aim is to sell the water at a price that will help cover our operational expenses.” Initially, the plant will recycle water only from the company’s collieries, but its remit could become wider as enquiries have been received from other businesses in the region keen to recycle their water.
The company’s growth since its launch in 2008 has been strategically driven. The first acquisition was quickly followed by a second in 2009, another BHP Billiton operation, Koornfontein Mines, also located in the Witbank coalfields just 25 km from Optimum Collieries.
Today, Optimum Coal employs around 2,200 full time employees and some 1,000 contractors across all its operational and development sites, and predicts an output of around 18-19 million tons of run-of-mine coal this year. Some 7.6 million tons of this will go for export through the port of Richards Bay where Optimum is a shareholder and the fourth largest exporter, and 6.7 million tons will be supplied to Eskom, with 5.5 million tons to Eskom’s Hendrina Power Station.
From the beginning, the company’s strategy was to increase the footprint of its existing operations and acquire further assets. “We also made the decision to remain a pure play coal mining company and not to diversify,” Teke said. “We had two platinum projects, for example, and we made the decision to sell those, thereby entrenching our position in the coal industry.”
The next stage in company development came on 29 March this year when Optimum Coal was successfully floated on the Johannesburg Stock Exchange, raising a total of R1.6 billion. This is now being ploughed back into the development of company assets and to pay off the debt from the acquisition of Koornfontein Mines.
Optimum Coal gained a strong pipeline of projects through its two acquisitions, and these are at various stages of development. Currently Optimum Collieries is set to run until 2033 and Koornfontein Mines until 2027, but the new developments should extend that lifespan considerably. The most advanced project is an extension of the Kwagga mine called Kwagga North. In August this year the board approved a capital spend of R600 million on the project, which is expected to cost R722 million in total. Work has progressed quickly and 15 per cent has already been spent on infrastructure and mine construction by the end of June 2010.
The company also has two greenfield interests in the Ermelo coalfield, Mpumalanga. The first is the Vlakfontein Project and the second is the Overvaal Project. Development is on-going and these projects could potentially deliver another 10 years of coal production. Further North in Limpopo, the Mpefu Project is under development, while Koornfontein Mines is being extended in both the 2 and 4-seam Projects, and the Schoonoord Project, part of Optimum Collieries, looks set to be developed soon, leveraging the existing infrastructure.
“Today, our company is over 60 per cent black owned,” Teke said, “and amongst our black shareholders we have two significant groups. Our employees own 25 million of the 251 million shares in issue, and the communities within which we operate own the same number of shares.” This distribution of shares gives Optimum a solid base of broad based black empowerment and a solid financial foundation, as neither of these two groups is encumbered by debt.
“With the development of black economic empowerment, many companies have found themselves in huge debt through encumbered shareholders,” he explained. “And being unable to service that debt they are often unable to do business or acquire more assets. Our case is the opposite. Our black shareholders are predominantly unencumbered and have no debt.”
This puts Optimum Coal in a great position to continuously evaluate acquisition opportunities. “We see ourselves playing a key role in the consolidation of the coal mining industry in South Africa,” Teke concluded. www.optimumcoal.com
