Could coal mining be the SA mineral sectors business incubator?

Publication: 01 September 2017 | Leadership

Coal mining in South Africa-already a segment well-populated by small-scale and emerging miners-presents exciting opportunities for the 'incubation' of new mining entrants and their evolution into the more established junior miner status

Diversifying ownership patterns in the mining sector faces a number of barriers to entry, not least of which are the high capital costs and long lead times before returns are realised. In coal mining, however, there is already an active segment of miners who operate almost below-the-radar on small, manageable and profitable deposits.

The Fossil Fuel Foundation categorises these players as  small-scale or  'emerging' miners, as their turnover generally falls below the R50 million per annum that the foundation regards as the minimum cut-off to qualify as a 'junior miner' and of course, well below the R7 billion mark that demarcates the bottom end of the major players.

Especially with Eskom's moves to source more coal from black-owned enterprises, there is a real opportunity for emerging miners in the coal segment to climb the ladder and grow their businesses into more sustainable and profitable companies.

In this sense, the coal market should be lever­ aged as a valuable 'incubation' space for new entrants to cut their teeth, build their capacity and balance sheet, and prove their worth to potential customers, financiers and joint venture partners.

There are certainly plenty of small coal deposits available to be mined; these do not present commercial prospects for the larger players as these companies' overheads require economies of scale. In many cases, these deposits are mineable by opencast methods, which require less financial commitment and depth of technical skill than starting or running an underground colliery.

The opportunity is there for these operators to grow into the fold of 'junior miners' a more well resourced level of mining activity that can access broader funding through public listing. Being in the junior mining bracket usually also allows miners to steadily develop their in-house skills through being more sustainable and profitable-which are the usual preconditions for attracting and retaining the best calibre of professional employees.

Many recent coal projects have been identified and pursued by smaller companies from countries like Australia; if these 'outside eyes' can look in and pick up good deposits bringing their own financial resources to make it happen-then there should be scope for local players.

A vital starting point for homegrown compa­nies to leverage the opportunities in Eskom's coal-buying policy is, really, to build a strong technical foundation on which a project can progress. This is particularly important in light of the difficult finance-raising climate.

Step one is for emerging miners to develop credible  pre-feasibility and  feasibility studies, based on well-planned drill targets and solid technical investigations and analyses by competent persons in the relevant disciplines. This then begins to open doors at development finance institutions, which have the mandate to contribute to more inclusive economic growth. These studies need to have independent veri­fication of volume, grade and mineability of a deposit.

This information is obviously also crucial to prospective customers like Eskom, which has had to become much more active about control­ling the quality of coal arriving at its power stations. The entry of smaller contributors to Eskom's supply chain can raise its exposure to sub-standard power station product, so the greater the quality assurances that new entrants can provide, the better. The larger miners tend to have the resources to manage the quality and consistency of their product better-whether it is through online scanners on conveyor belts or on rail trucks.

The advantages of supporting small-scale coal players as early as possible in their growth trajectory will, therefore, also make life easier for Eskom in terms of ensuring better quali­ ties delivered. The emerging miner's journey begins with understanding the coal deposit well and, thereby, laying the groundwork to mine it properly while reducing project risks.

Important among the permitting require­ments are the environmental and social impact assessments, which also need to be conducted­ although, initially at a relatively high level of conceptualisation-for each potential mining scenario. Similarly, water studies are also required to obtain the optimal placement of operations that would mitigate contamination risks.

The basic rule is that a sound prospect is more likely to attract the necessary finance. As the industry 'legends' advised everyone at the recent Junior Mining Indaba, it is the orebody that dictates but correct management is still the key to successful mining. They also encour­aged us to get our hands dirty and to invest in the hard work.

I would say that this hard work starts with the early technical studies; most small-scale companies in coal would have to outsource their studies but they need to build capacity through understanding what is being investigated and uncovered in the exploration stages. This will form the bedrock of a company's growth-cre­ating that in-house capacity that will help find and leverage the next deposit and the next.

There is also a role for the government in streamlining its permitting processes to facilitate the efforts of small-scale operators. Unexplained delays in permitting applications remains an issue, and this can hold up projects and significantly undermine their chances of success.

While larger firms may have the resources to endure the delays and to regularly follow up and expedite applications where possible, this is seldom an option for smaller operators with limited capacity.

An important value-add from consulting engineers and scientists could be not  just the technical studies, recommendations and advice but also the financial valuations of the deposits being explored. These valuations may be focused on establishing the potential of a new deposit or a going concern in the form of an operating mine.

What new entrants to the coal market really have to do is to steadily reduce the risk of each prospect, so that it becomes attractive to financiers. There are no shortcuts; the studies all need to be done and they need to be done thoroughly; if the deposit is good, the value will increase steadily as the studies progress and as the level of certainty grows about what is in the ground and how readily it can be extracted. If we can get these basics right in this highly prospective segment of the coal mining industry, then we can expect more growth from emerging miners-helping to transform the ownership profile of South African mining and developing vital business experience to help carry forward the sector as a whole.


Leadership Could coal mining be the SA mineral sectors business incubator


Lesley Jeffrey, principal geologist (coal) | SRK Consulting


SRK Africa