Minergy grapples with coal oversupply as it reaches sustained output

• ---

  Company believes Botswana and Namibia will pursue power independence from South Africa

However, lower volumes were recorded during November and December 2021, impacted by the new COVID-19 variant and the related effect on workforce availability and border access, as well as by rain interruptions and lower regional sales. “The higher rainfall did not result in flooding as was the case in the comparative six-month period, thanks to good drainage solutions being in place at the mine,” Morné du Plessis, the CEO, wrote in a cautionary statement to shareholders.

Following increased production volumes, the group revealed that sales tonnes increased by more than 55 percent. Du Plessis said a better product mix was obtained from the fully commissioned plant, with improved sales of the more profitable pea product being recorded. Against the comparative six-month period to December 2020, selling prices increased, attributable to a stable South African Rand, an improved sales mix was achieved, and prices increased, he noted. Minergy disclosed that it did not benefit from the price momentum of international coal.

“The inability of the South African Rail agency, Transnet Freight Rail (TFR), to manage infrastructure, resources and security arising from copper cable theft and vandalism has resulted in a significant decrease in the export of coal through Richards Bay,” du Plessis explained. “Consequently, local producers returned product to the regional market, resulting in an oversupply. Minergy had expected an undersupply, and inadvertently lost the opportunity to take advantage of the strong pricing.”

As it appears to du Plessis, TFR – in conjunction with the South African coal industry – has been able to improve security issues and performance, boding well for a recovery of inland market pricing and opportunities as export coal prices remain high. Minergy expects the international pricing for southern Africa coal to remain high, driven by the continued China/Australian standoff and Indonesian export restrictions.

Coal supply is under pressure, with demand increasing as several majors divest from coal, given the negative coal narrative. Minergy expects an undersupply in the regional market as a result. “As mentioned, nameplate capacity is now achievable, with a strategic focus on sales to support the increased saleable product,” du Plessis said, adding that this will enable Minergy to generate sufficient cash flow to stabilise the business. “Major cement and steel producers have, however, notified Minergy of plant shutdowns early in 2022. Alternative placement of product will be sought.”

Breakeven sales volumes were not achieved in the six-month period ended 31 December 2021. This was mainly due to only commissioning Stage 4 midway through the six-month period and a slowdown in sales during the last two months of the period. Du Plessis added that the slowdown was directly influenced by a major cement producer experiencing a breakdown and reducing purchases accordingly.

As a result of sales remaining below breakeven, further operating losses were incurred, albeit at lower levels with better cost recoveries at increased volumes. Input costs were negatively impacted by a 52 percent increase in diesel prices, which was difficult to pass on to customers. Minergy believes that countries such as Botswana and Namibia will pursue power independence from South Africa (illustrated by the Botswana tender and discussions with interested parties in Namibia) and finds itself located centrally to supply both South Africa and southern African countries.

The Ministry of Mineral Resources, Green Technology and Energy Security invited the company’s subsidiary, Minergy Coal (Pty) Ltd and three other selected local bidders to tender for the design, finance, construction, ownership, operation, maintenance and decommissioning at the end of its economic life (minimum 30 years) of a 300MW (Net) Greenfields Coal-Fired Power Plant in Botswana, as an Independent Power Producer (IPP).

This forms part of the government’s 11^th National Development and Integrated Resources Plan. It is expected that the power plant will be operational by 2026. The closing date for the bid is 30 March 2022. Minergy is collaborating with Jarcon Power to submit the bid. If successful, Minergy Coal says it will be responsible for providing coal to the power plant for the duration of the Power Purchase Agreement of 30 years and that other income streams are also being envisaged.

“This profitable sale of coal will have the benefit of ensuring a steady cash flow to Minergy, utilisation of current uneconomical coal seams and diversifying income streams,” du Plessis said. Minergy is the only bidder to have an operational mine.