Strategic Natural Resources says Eletheni attracting interest from power firms and offtake partners

Strategic Natural Resources (LON:SNRP) is in talks with several “large, independent power companies” as part of a concerted push to bring on board major customers for coal from the company’s Elitheni Mine in South Africa, according to director Jeremy Metcalfe. 

The operation, in the Eastern Cape Province, is on schedule to begin production towards the end of next year, or early 2012.

It was always expected output would be used to fuel a mine mouth power station built by partner IPSA (LON:IPSA), a company led by one of SNR’s founding directors, Peter Earl.

However the strategy has changed and Earl, along with fellow founding director Elizabeth Shaw have left the SNR board.

Elitheni has a 150 million tonne resource, although SNR has drilled only 3 percent of the project area, which measures 1,800 square kilometres. By extrapolation the company estimates there could be as much as 3 billion tonnes of coal of which as much as 1 billion could possibly be recovered.

Initially the mine will produce 500,000 tonnes a year, most of which will be earmarked for the export market. However some will also be mined to satisfy the local industrial market. Eighteen months to three years down the line that figure could be as high as 2.5 million tonnes per annum. 

But let’s take a step back. The domestic market will be crucial initially. 

And in the short term the company is targeting what it calls the industrial steam market. 

You see, most manufacturers of any size in South Africa tend to have their own miniature power stations attached to their factories. 

That’s because businesses in the Republic have learned not to rely on the rather rickety national grid system for their electricity. 

However, these privately-owned coal driven plants tend to be old, inefficient and grimy units that belch black smoke into the atmosphere.

So what SNR has done is quite clever. It has teamed up Thermax Babcock Wilcox and a firm called ACE, which are supplying a new generation of burners to local industry.

The burners will use smokeless Elitheni coal, which will be cheaper and greener than fuel transported hundreds of miles from Witbank in the north of the country.

At the same time the company assessing proposals from the “two to three” large independent power generators I mentioned at the start, though it could be up to another five years before a plant is up and running.

“What we are doing now is looking at the merits of the various independent power companies who have beaten a path to our door. They are there and extremely serious,” Metcalfe said.

“What we are talking about is a 600 megawatt plant that would take two million tonnes of our coal  each year for the next 25 years. A power station of that size will take around five years to get up and running.” 

Separately, a recently-commissioned feasibility study showed coal was of a sufficient quality for export, while the infrastructure also exists to get the fuel to a port, subject to certain upgrades to the rail track and port handling facilities.

Initially, the coal will be shipped through the port at East London, though eventually it will go via the deepwater facilities at Coega, 15 miles east of Port Elizabeth.

Metcalfe sees India and Turkey as large potential markets, although China and possibly South Korea have also been earmarked as export destinations.

In total the group is talking to at least 20 separate customers looking to agree off-take deals with SNR, Metcalfe said.

The AIM-listed miner owns 74 percent of Elitheni. Under South African law 26 percent must be held by black economic empowerment partners.

A recent change in the shareholder register has brought in MP and businessman Phumelele Stone Sizani, who has taken a 22 percent stake in the company while investing around £2 million. SNR’s original partner, a company called Vuwa, retains a 4 percent shareholding.

“We have a highly motivated and respected member of the South African parliament joining the Elitheni board, who I hope  will eventually be encouraged to come on the SNR board,” Metcalfe said. 

“He has also made a very substantial investment in the company. He has been following what we are doing and can see where we are going. Clearly, he thinks the company is about to take off.”

With first major production set to begin in little over a year, the company will need to raise project finance for Elitheni, while negotiations have already begun with contractors vying to run the project.  

Analysts estimate it will cost the comparatively modest sum of £20-£40 million to develop the mine.

“If we get it right then we want to raise most of the money for Elitheni through bank finance,” Metcalfe said.

“Yes we will be raising equity. I have no doubt about it. We have always made it clear there will be an equity raise at some point. 

“But the board believe most of the finance could  be provided by  the banks. Assuming the banks are back lending.”