50% BEE demand stalls Eskom coal deal

Walking into the Waterberg Coal Company's boardroom, finance director Lawrie Mackintosh picks up a R2 coin and puts it in his pocket. "Times are hard and I'm a Scotsman," he says.

Times are indeed hard for the ASX- and JSE-listed mining company based in Limpopo. The company is sitting with only about R1-million in cash, having recently recorded losses of more than R570-million for its 2014 financial year.

The aspiring coal miner has been fighting a battle to secure a supply contract with Eskom. In 2010, it signed a memorandum of understanding to supply the power utility with coal for 30 years, but Eskom keeps shifting the goalposts for its black empowerment requirements, so a final deal has yet to be nailed down.

The struggle has cost the company dearly. Its share price has fallen more than 80% since its last memorandum of understanding with Eskom. If it manages to build its mine, however, it has the potential to become the second-biggest producer of coal in Africa.

But to supply Eskom, Waterberg Coal would need to be at least 50% black empowered - a far higher benchmark than South Africa's Mining Charter, which requires only 26% for a mining licence.

"We are finding the levels of bureaucracy in South Africa higher than in other countries ... But, we want to move into this space, so we have made a decision to work our way towards complying," CEO Stephen Miller said.

To help navigate South Africa's tricky regulatory environment, the Australian-born Miller got the politically connected Mathews Phosa in as chairman about two years ago. Phosa has since fallen out of political favour after publicly siding with Julius Malema when he was suspended as ANC Youth League leader.

But Miller said Phosa's involvement had helped the company over the past two years, and he continued to guide it through regulatory pitfalls. "He has the support of the capital markets and that of the banking system, and that is more important for us."

An apparent spat between Waterberg Coal's high-profile empowerment partners - including multimillionaire Tim Tebeila through Sekoko Coal, and television personality turned businesswoman Basetsana Khumalo - has complicated things.

But the company is going ahead with plans to increase its black empowerment credentials to beyond 50% .

"Sekoko Coal holds a 30% stake in the project, and with our other shareholders from Firestone and in Waterberg Coal, we are about 40% black empowered. I think we can get the other 10% through our funders," Miller said.

It is unclear how that will happen, but the company is in discussion with a local consortium of banks to raise about R1.8-billion in capital by the second quarter of this year.

Even though negotiations with Eskom are far from resolved, the company has decided to start development on the mine - with the first coal destined for export in 2016. If all goes well, it plans to export 4-million tons of coal a year by 2020.

A stand-alone export project could bring in much-needed cash and form the basis for the company's ambitions to build a coal-fired power station and move into independent power generation.

But, for all of that, Waterberg Coal will still need to sign that supply agreement with Eskom, and Miller hopes this will happen soon.

The biggest issues that still need to be resolved are around pricing, coal quality specifications, scheduling and, now, the additional black empowerment requirements.