Wescoal’s BEE deal not only brings in cash and helps it to secure an Eskom coal supply agreement for its Elandspruit colliery, but it also puts other companies seeking to meet Eskom’s BEE requirements into its sights.
In announcing the deal, Wescoal said it would use the R178.1m cash injection from the share issue to acquire "identified listed mining companies".
At least three junior coal companies have been trying to sign long-term coal supply agreements with Eskom: Universal Coal, for its New Clydesdale colliery; Resource Generation, for its Boikarabelo mine; and Waterberg Coal Company, for its Waterberg mine.
Universal Coal was recently the target of rival takeover offers by Coal of Africa (CoAL) and IchorCoal. CoAL valued the company at US$126.4m or A$0.25/share and IchorCoal valued it at US$80.9m or A$0.16/share. Universal’s shares are currently at A$0.155. CoAL’s bid, which was accepted by Universal’s board, fell through on a technicality. Eric Mzimela, one of Wescoal’s BEE shareholders, is also a shareholder in Universal’s Kangala colliery.
"We have a number of acquisition targets on our radar," Wescoal CEO Waheed Sulaiman says, "[including] companies that are currently selling to Eskom."
Wescoal produces about 4Mt of coal a year from three collieries — Elandspruit, Khanyisa and Intibane — and it last year generated revenues of R1.5bn. It has a trading arm that distributes coal in bulk throughout SA and Southern Africa.
Wescoal’s agreement with chairman Robinson Ramaite, Mzimela and Simeka Capital is that they will put their existing shares in Wescoal into a special purpose vehicle (SPV) and subscribe for 124.9m new Wescoal shares at 169c each. Their combined stake in Wescoal will rise to 59% from 37%, more than Eskom’s BEE requirement for new coal supply agreements of a minimum of 50% plus one, which many other suppliers are battling to meet.
It is not an overly expensive transaction. The shares are being issued to the SPV at a 10% discount to the volume-weighted average price, and 169c is at the midpoint of the past three years’ trading range. Wescoal is providing R35.5m in finance, which is relatively modest as BEE deals are sometimes wholly vendor financed. The Industrial Development Corp (IDC) is lending R178.1m to the SPV. The package includes R2.2m to cover the IDC raising fee and other associated set-up costs.
The SPV is committed to maintaining Wescoal’s BEE at a minimum of 51% for the duration of the Eskom agreement, which is five years. The lock-in could be extended by negotiation if the Eskom agreement is renewed.
Wescoal has also decided to distribute R10m as a special dividend, in addition to the R10m declared at year end, which is equivalent to 4c/share. Wescoal’s shares added 4%, to 198c, in the weeks after the announcement.
The downside is that the deal significantly dilutes other Wescoal shareholders, as the number of issued shares will increase by 55%. Wescoal is seeking a waiver of the requirement that a general offer be made to all shareholders. The deal also reduces liquidity in the shares and increases Ramaite’s personal stake: he will hold 50.3% of the BEE SPV, which means he will hold an effective 29.7% of Wescoal.
Brendon Hubbard, investment manager at ClucasGray, which holds 3.48% of Wescoal shares, says the dilution is acceptable in view of the advantages of the deal. With its empowerment shareholding, cash and debt capacity, Wescoal is in a better position than most other junior coal miners to make acquisitions. Ramaite’s significant stake in the company is also positive as it aligns his interests with those of shareholders, Hubbard says.
Sulaiman says Wescoal’s management has met with shareholders and believes they understand the need for this transaction. They will be able to vote on it at a meeting in mid-November.
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