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The craziest thing Eskom's ever done - and the one 106% profit opportunity it presents

by , 17 May 2015

“There is no crisis with the supply of coal to Eskom.”

These are the words of Brian Molefe, Eskom's new acting CEO in an interview with MiningMX.

Clearly he's unaware of the fact that Glencore is busy closing down its 10 million tonne a year Optimum Coal operations…

Or perhaps he's forgotten about the fact that a huge amount of Eskom's long term coal agreements are coming to an end in 2017.

And never mind that... He clearly wasn't thinking when he went on to say that Eskom would ONLY BUY COAL from suppliers with 50% plus one share black ownership.

Eskom’s furnaces will run cold if this happens…

There simply aren’t enough mines with more than 50% black ownership to supply South Africa’s power plants with coal.

I don’t believe there are enough black business people with enough money to secure the amount of coal mines needed to supply Eskom with all the coal it needs.

Simply put – while Eskom intends to try and uplift black empowerment from this deal I foresee it as yet another way for an elitist black minority to benefit even more.

We’ll probably see some of the fat cats buying up coal from miners like BHP Billiton, Anglo Coal and Glencore and then on-selling it to Eskom at a massive premium.

That’s if these big miners don’t close their operations before this happens…

Whatever the outcome – Eskom is unreasonable for expecting that its coal suppliers need to get more than 50% of their operations in black hands within two years. These companies can’t give away shares. And where are black communities simply going to get billions upon billions of rands to buy these shares?

No, politically connected cronies will get these contracts to enrich themselves further.

If you can’t beat them – join them!

Fortunately this turn of events does present  some opportunities as well.

Wescoal, for instance, a company I’m very positive on is ripe for the picking at the moment.
Recently, the company’s founder and CEO Andre Boje had a falling out with one of the company’s black directors and majority shareholders, Muthanyi Ramaite. Boje wanted to unlock value for shareholders and sell the company to foreigners.

Ramaite on the other hand felt that the company should try and reach the 50% black ownership mark.

Boje subsequently quit as CEO of the company.

And Ramaite has since bought another R4.9 million worth of shares in Wescoal.

I side with Ramaite. Eskom will implement its crazy plan. So instead of fighting it, take advantage of it. And that’s what Wescoal’s doing.

The company will supply Eskom 4 million tonnes of coal per year by the end  of 2016 – granted it meets the 50% BEE target.

That means it has another year and a half to canvas for BEE qualified investors.

In the meantime the company has a short term supply agreement with Eskom in place and a long term agreement will be in place, it’s only a matter of time.

Up 22% in a day – but there’s more gains in sight!

Wescoal’s share price dropped when CEO Andre Boje quit on 31 March 2015. From a high of 237c to 154c.

But this week the company announced its Eskom supply agreement and the talks it's having to increase black ownership to 50%.

And the markets suddenly realised the immense opportunity Wescoal presents.

The share price immediately jumped 22%.

But it’s still lower than the December high by a fair 24%.

And when the company finishes the mine its building and starts supplying Eskom with 4 million tonnes of coal a year in 2016…

Well, then the share price will shoot through the roof.

My conservative estimates are for a R3.30 share price. But in all likelihood the share could jump up by as much as 106% by then…

So don’t say I didn’t tell you.

Here’s to unleashing real value

Francois Joubert

Editor, Red Hot Penny Shares

The craziest thing Eskom's ever done - and the one 106% profit opportunity it presents
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