Anglo Coal, the world’s sixth-largest private sector coal producer and exporter, is growing its production profile in South Africa, and is expanding its operations into Southern Africa. The company that has been South Africa’s biggest coal producer since 2006 expects to grow its output from 60 million tonnes per annum (mtpa) by 50% to some 90 mtpa by 2015.
“We are producing about 100 mtpa internationally at the moment, of which about 60% is South African,” chief executive Ian Cockerill says. “We are exporting about 16 million tonnes from South Africa and providing about 44 million tonnes to the domestic market.
“Most of our US$369 million South African profit in the first half of 2008 (up 107%) was driven by export coal, although our exports amounted to only 25% of our coal production. Most of the balance goes to Eskom. While the bulk of our production is for Eskom, these contracts are basically on a cost-plus basis – the real money came from the export collieries.”
Despite the large volume of low-margin domestic sales, South Africa contributed close to 70% of Anglo Coal’s total operating profit in 2007. “There is a little other trade; we sell to Sasol, and there are a couple of other smaller inland trade customers, but our major business is basically Eskom and export.
” Anglo Coal expects no dramatic increase in its South African output overall for 2008. “However, Isibonelo colliery came into full production in 2007, Mafube is ramping up this year, and with a number of projects in the pipeline, we are clearly in a significant growth phase. Some of the new projects include replacement as well, but we expect a consistent export output level and a steady growth in the inland business. We are looking at volumes this year of about what we had in 2007, but obviously the price line is going to be somewhat different.”
Cockerill says that the generic cost pressures many industries, including mining and manufacturing, face are also a concern for Anglo Coal. Various measures are continuing across the business to reduce costs. These include asset optimisation, continuous improvement and supply chain initiatives.
Apart from the significant contribution by Anglo Coal SA to the group’s bottom line, coal production remains a key catalyst to the economic growth of both the country as well as Anglo American in South Africa. “If you look at the projects that Anglo American has in the pipeline, its use of electricity is likely to grow quite substantially over the next 10 to 15 years,” Cockerill says. “It would be counterproductive to say we want to reduce our participation in the domestic coal business in South Africa, when the intention is to expand production in the country elsewhere in the group. So we are playing our part to provide energy for South Africa as a whole, but importantly, also to help secure the project pipeline elsewhere within the Anglo American group.
” Cockerill goes on to express his enthusiasm in Anglo Coal’s future. “Looking at the company from an international point of view, we are clearly committed to coal. We have a reasonable project pipeline here in South Africa, there are tremendous organic growth opportunities in Australia, we are very much consolidating our presence in Colombia, we have a growing production profile of metallurgical coal in Canada, and we are looking at a project in China.”
“We spent US$8.5 million on exploration in the first half of 2008, looking at extensions to our various operations as well as defining resources for our planned projects,” Cockerill says. An ore body is fairly quickly identified, but fully evaluating it takes longer. In fact, the time from the initial exposure of a new field to the time of actual coal production can take seven to ten years.
“For the moment we will continue to spend on exploration at the rate of around $18 million per year, which is a modest quantum of expenditure linked into the information we need in the time required,” he explains. “If we need to speed it up we will. One of the issues is that we have a suite of too many mines that are either mature or overly mature, so we are generating the new projects to develop more emerging mines for a better spread of assets.
“It is my belief that for the next four to five years there will be a sustained high-level momentum of capital expenditure linked to new projects, as well as stay-inbusiness capital,” Cockerill predicts. “We’re probably also going to spend time on bringing down operating costs. We are looking at more fuel-efficient trucks, and conversion from long-haul truck fleets to cheaper conveyor systems. These are opportunities we are investigating, but they will require capital expenditure.”
Anglo Coal SA’s two current big spends in terms of capital expenditure are Zondagsfontein and New Largo. Both form part of Anglo Inyosi Coal (AIC), a 73/27 joint venture between Anglo Coal and the Inyosi BEE consortium.
The other component is stay-in-business capital, which is forming part of the US$544 million the company is spending this year, but the major proportion is on the new projects. And then there are smaller projects coming on line as well.
Major new Mines to Cost over US$2 Billion
The current wave of expansion started with Isibonelo Colliery and Mafube (the latter is a 50/50 joint venture with Exxaro). The next major new project to come on line will be Zondagsfontein, where construction is fairly advanced. “We are starting to open up some of the mining areas, with the accent on getting the basic infrastructure and shafts in place. Foundations have been poured and you’re starting to see some physical structures rising – the civils are happening,” Cockerill enthuses.
Capex on this underground mine will reach US$505 million. First production is scheduled for the third quarter in 2009 while full production of 6 mtpa is expected in 2012. The life of this mine will be 20 years.
The other major project is New Largo mine, which is scheduled to start production in 2012 and reach full production of a massive 15 mtpa by about 2015. This will depend on timing of Eskom’s new 4,800 MW Kusile power station, which it will supply. This project has more than 700 million tones of resources and has an expected life of mine in excess of 40 years. New Largo is still at feasibility stage and approval is expected in 2010. “It’s very early days on this project, but some preliminary site layout preparation work is being done at the power station site,” Cockerill says.
There are other AIC projects still classified as unapproved, which form part of the longer-term Anglo Coal project pipeline. These are Heidelberg (Gauteng) and Elders (Mpumalanga).
Then there are other smaller projects coming on line. “We have a number of very significant coal discard dumps in the Witbank area, and we are investigating possibly up to 1,200 MW of electricity generating capacity, using these huge dumps as fuel,” Cockerill says. “We believe there is enough discard coal contained within the dumps, and still to be produced, to supply such a plant for several decades. We’re looking at starting with a smaller 300 MW project with the capability of scaling up. That would be another big project costing a lot of money, and then in the longer term if we do anything with our significant resources in the Waterberg that would also be a major operation.
“So trust me, there is no shortage of potential projects,” he says. “The big challenge for us is making sure we spend that capital wisely, and we are probably in the situation now where we have to start looking at capital prioritisation.”
Cockerill points out that there are nine operating mines, either at full production or reaching it by 2010, so that Anglo Coal-controlled production will reach around 65 mtpa at that stage. After implementation of the SA project pipeline, however, production could increase a dramatic 50% on current levels to reach 90 million tonnes in 2015.
He goes on to say that Southern Africa is clearly of great strategic importance to Anglo Coal and to the Anglo American group as a whole, “and our commitment to Southern Africa is unwavering.
“We have just opened an office in Botswana. The operation there involves only exploration and evaluation at this stage, but we see a lot of potential there, not just for coal, but coal bed methane (CBM) as well.
“The fact that we’ve opened an office there tells you that this has gone past the level of initial geological curiosity. There is a specific project team on site dealing with everything from grassroots exploration to project delineation, and the next stage is very much commercial evaluation. We now need to make a call as to whether this can be commercially exploited,” he says.
Going one step beyond coal alone, Cockerill comments: “there are not only a lot of opportunities for us to consolidate our position as a coal producer, but also to look at other associated activities like gas, where we can possibly extract more value than we have ever done before.
” There seem to have been some miscalculations about the actual high degree of real growth in South Africa, according to Cockerill. “The growth in demand for electricity and the need to step up the pace in terms of additional generating capacity, are natural extensions of this growth. What role are coal and other forms of energy production going to play in this situation?”
Certainly at this stage Eskom is clearly looking at spreading its portfolio, which suggests that it would want to increase its nuclear capability in areas far from coal mines like the Western Cape – which makes good economic sense.
“An energy production mix in this country with an increased nuclear component seems inevitable, added to which you’ve got other alternatives as well,” Cockerill explains. “What becomes very clear is that the global growth in demand for energy cannot be satisfied by just nuclear power or any other single alternative.”
He expresses the strong belief that coal will continue to play an important role, and that this would depend on the willingness of coal companies to work in conjunction with other energy producers, such as the power companies, to research clean coal technologies. “The coal companies, in conjunction with governments, as well as the power producers, all have a responsibility towards ensuring that they still have access to coal,” Cockerill says.
“To my mind, the question isn’t whether the future is going to be carbon-zero. The future is going to contain carbon and we are going to have to deal with it in a responsible manner. Certainly Anglo Coal is going to be looking very hard at how it can play its role in this regard, otherwise we put our product, our business, our environment and the other business units of Anglo American at risk. Anglo Coal SA has already taken an industry leadership role in many areas, from mine water reclamation and treatment, to CBM exploration.
“Despite some of the issues around coal, it is still likely – beyond our children’s lifetime – to remain a very large proportion of energy production as the alternatives cannot meet the demand on their own,” he concludes.