A Ten-Fold growth opportunity sitting right in front of you thanks to Eskom's coal cliff

by Francois Joubert, Editor of Red Hot Penny Shares, 20 September 2018
A Ten-Fold growth opportunity sitting right in front of you thanks to Eskom's coal cliff
In May 2018 I told investors about Eskom's impending coal supply shortage, the Eskom Coal Cliff.

For years Eskom hasn't invested in new coal mines, and it hasn't been willing to sign new contracts with large mining companies.

Whilst diversification of supply is a good idea, the fact remains there are only a handful of miners that can supply the massive volumes that Eskom requires to keep its coal hungry power plants running.

It seems that this policy has come to bite Eskom now.

 

According to information released by EE Publishers and Eskom energy expert Chris Yelland at least FOUR Eskom power stations have less than 10 days of coal stockpiles on hand.

Apparently, Eskom requires at least 1.3 million tonnes of ADDITIONAL coal per month to keep its plants running.

That’s more than 15 million tonnes a year. We’re not talking just one coal mine here. Eskom needs a mega mine or two. But mines this big don’t materialize overnight.

So – this makes Eskom desperate for more coal – else the power grid will fail!

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After months of denial Eskom’s CEO admits there’s trouble


Eskom’s CEO, Phakamani Hadebe hasn’t been that clear on the trouble that’s brewing for Eskom.

But on 28 August he reported to parliament that NINE power stations in Mpumalanga had VERY LOW coal stockpiles. He added that “to manage this coal during the rainy season is going to be a huge challenge”.

And according to a Nersa report there are “currently 10 stations with less than 20 days of coal and five of these with less than 10 days of coal in their stockpiles”.

Eskom is currently working on at least 12 contracts with miners to try and stem the crash in its coal stockpiles.

And that’s where the opportunity lies…
 
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Eskom wants more coal than miners can supply!
 
In a recent interview Wescoal CEO, Waheed Sulaiman, said that its relationship with Eskom presents great opportunities.

Eskom is literally asking for more coal than Wescoal can supply.

And with the export price of coal rising past $100 per ton from 2016 levels of $50’s per ton, there’s a massive market for coal.

So, with the CEO saying that “we are looking at new projects and opening up new areas”, it’s clear there are expansion opportunities!
 

Talk is cheap, but this little miner can deliver

 
Wescoal, even though it is only a mid-tier miner, can definitely start to deliver coal on a large scale to Eskom.

You see, the company acquired a coal mining project with its acquisition of Keaton Energy. The project, the Moabsvelden mine, is right next to one of Wescoal’s existing mines.

It could use the same coal processing plant to beneficiate coal – meaning less capital cost and no construction needed. That means rapid mine to market potential!

The Moabsvelden mine has reserves of around 43.8 million tonnes of coal just from open cast mining. Going underground could extend this by a big margin. Combining this operation with the one next door could add 2 million tonnes of coal production per year to Wescoal’s bottom line.

Now you might think that it’ll cost a lot of money to get this mine started in a short time…

And that’s true.

But Wescoal has the cash.

You see, recently the company was the recipient of a R160 million cash windfall!

It sold an old mine at the end of its life, as well as an exploration project that it does not plan on developing. This put R160 million cash into the company’s pocket. And with all this cash – Wescoal is perfectly poised for more growth.
 
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Wescoal is SO much cheaper than its JSE listed peers
 

Wescoal reported results on 26 June 2018. The company increased revenue from R2.1 billion to R3.5 billion.

Earnings per share soared from 11.3cps to a massive 46.4cps.

The company is valued at R877 million today – with its profit for the last year equalling a massive R201 million - that means the company will make its own value in profits in just four years!

If you compare it to its largest competitor Exxaro, you see why the share is so attractive. Exxaro is on a PE of 16.45 whilst Wescoal trades on a PE of 4.22!

Exxaro’s latest revenue was R22 billion, compared to its market value of R54 billion.

So investors pay more than R2 per R1 revenue Exxaro generates. At the same time, investors only pay 21c per R1 revenue Wescoal generates.

In short – if investors assign the same valuation to Wescoal as they do to Exxaro the company would sit on a share price of +-R16, compared to its current R1.97. And that’s without further production growth. It is therefore possible for Wescoal to grow Ten-Fold in a matter of mere years.

Simply put – Wescoal is in a great position. The company is cash flush. It has a client in deep need of coal – and it can charge a premium for it.

And most of all – the share is VERY attractively priced!
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A Ten-Fold growth opportunity sitting right in front of you thanks to Eskom's coal cliff
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