Strategic Natural Resources (SNR), a junior resources company formed to exploit strategic energy based demands in South Africa, is completing a milestone year featuring multimillion- rand developments in prospecting, producing and marketing coal from its pioneer Eastern Cape coalfield.
SNR chief operations officer David Nel tells Mining Review Africa that the company’s top priority after its formation in 2004 was to find the right partner. “We embarked on a long and sometimes lonely road to find a suitable company to join us in our Eastern Cape initiative,” he says
. “We needed to find someone who had enough confidence to tackle the South African power market, which everyone knows it is dominated by Eskom, and we were introduced to a UK based company called Independent Power Corporation which had set up Independent Power South Africa (IPSA).”
IPSA, which was the first independent power operator in South Africa with the country’s first independent power station in Newcastle supplying steam and energy to Carbochem, saw the potential of power in the Eastern Cape.
“There are two immediate and substantial cost advantages to establishing a power operator, as well as a fuel supplier, in the Eastern Cape,” Nel points out. “First, a local power source will eliminate the huge cost, with anything up to almost 17% of power being lost in transmission along power lines over the long distance from Mpumalanga. Second, a local coal field will cut out the substantial cost of transporting coal from the Witbank area.”
In 2006 IPSA became involved and started fuelling the project. “We purchased full ownership of Elitheni Coal, which was set up specifically to exploit the Eastern Cape coalfields, and in June this year we concluded BEE deals with Vuwa Investments and Mazizi Msutu, to which we sold 21% and 5% respectively.”
Following an application from the company to the Department of Mines and Energy (DME) on 10th September 2008, the total area under exploration and applied for now stands at about 190,000 hectares. To date, only 2,500 hectares have been drilled representing 1.3% of the total area within the applied licence.
“SNR’s latest resource update in October 2008 confirmed an in-situ coal resource of 97.2 million tonnes, an increase of 140% on the previous resource statement only five months previously. The new resource of 97.2 comprises 44.5 million tonnes measured, 26.3 million tonnes indicated and 26.4 million tonnes inferred. Based on these figures Elitheni’s mining engineering consultant Rudi Gerber confirmed 52 million tonnes of extractable coal.
“That is not a lot of coal in itself, but this represents less than 1% of the prospecting area we have in hand or on application. And that 1% alone is enough to fuel IPSA’s initial power generation plans for 20 years, and enough for it to commit and move to a bankable state.
“We started with 9,283 hectares as our initial new order prospecting rights. In December last year we added 27,000 hectares,” Nel says. “An adjacent 26,000 hectares is in the approval process and we have done a great deal more drilling this year, more than 400 holes.”
In a bold development in September, SNR took a very strong step forward by deciding to triple its prospecting area from 60,000 to just under 180,000 hectares. “The applications for this new development, named Project Ndlovu, have gone in, but we are not expecting to receive final approval before April 2009.
“While our focus has been on prospecting up to the present, we have now moved from a prospecting to a production phase.
“A very small portion of the prospecting area lends itself to open-cast mining, and we have started trial opencast mining in the area. Our underground mining will be according to a mining right over the initial 9,283 hectares, which is due for its record of decision before the end of 2008,” he says.
“The open-cast mining is not really to generate major initial cash flow but rather to assist us in site establishment for our underground shaft. It allows us to kick-start the process. I would envisage a starting date in terms of the underground shaft work at around the middle of 2009.
“Stockpiling for IPSA will only commence around the second or third quarter of 2010, so we will have just over a year to develop the necessary number of sections to be able to produce the tonnage that IPSA will require from the second or third quarter in 2010.”
Turning to the marketing of Eastern Cape coal, SNR’s coal mine, which is 10 km southwest of Indwe, will provide the closest available coal to the growing Eastern Cape industrial market.
IPSA is already committed to the provision of 500 MW of power generation in the Eastern Cape, and has just announced that it is increasing the scale of its clean coal-fired power plant development programme in that region from 500 MW to more than 1 000 MW through the addition of new steam turbine units to be built between East London and Port Elizabeth.
This followed SNR’s announcement of an increase in its Elitheni mine’s proven and inferred coal reserves, and that the company had started commercial operations at Indwe. IPSA and SNR have now agreed outline terms for new off-take agreements to permit IPSA to increase the overall scale of its coal-fired development, and to accelerate the in-service date of some of its initial capacity based on the use of Elitheni coal, not only at the mine mouth itself, but also in other parts of the Eastern Cape using rail transport to take Elitheni coal from Indwe to other sites.
“We have a framework agreement which commits the two parties to each other,” Nel reveals, “and are converting that to a firm fuel supply agreement.
“The plan is to ramp up the initial one mtpa production rate required in a year – 15 months to three to four mtpa to enable IPSA to meet its doubling of capacity from 500 to 1 000 MW – in fact the figure I now hear is 1,275 MW, which would put us very close to five mtpa in the followup agreement,” Nel says. “IPSA has not announced a timeframe, but is fast-tracking it, and my sense is that the target would have to be reached within a five years.”
The initial IPSA power generation will probably be at the Indwe mine, perhaps 250 MW, with another 250 or 300 MW en route to East London.
“We are also in discussion with another potential off-take partner – a very significant one,” Nel says. “As far as other marketing possibilities are concerned, SNR is engaged in discussions with Coega, as well as various ferromanganese plants that are going up in the Eastern Cape.
“There is also a possibility of export, depending on the demand for metallurgical coal, and what yields will be achieved.
The continuing high level of coal prices, and Eskom’s increasing need for coal, have been well published, but SNR believes something which has not been that well discussed is the very interesting secondary market.
With export prices booming and Eskom requiring an increasing quantity of coal, the part of the coal consumer market that really suffers is the small consumers’ market. These are the people who are struggling to get coal, secondly are paying a lot more for it, and thirdly are suffering more if they are far away. “We at SNR are very well positioned to meet the needs of that part of the industrial and local market.”