Resource Generation takes major steps forward to developing Boikarabelo coal mine

Resource Generation (ASX: RES) has been granted a 30 year Mining Right for its Boikarabelo mine by the South African Department of Mineral Resources, in a major step towards the development of the mine scheduled for late 2013.

The notification was received by its Ledjadja joint venture which is developing one of South Africa’s largest remaining coal deposits at Boikarabelo.

Managing director of Resource Generation, Paul Jury said, "we expect that the mining right will facilitate our discussions with Eskom regarding coal supply to its power stations in Mpumalanga and with Transnet regarding transport to domestic customers and ports."

The Ledjadja joint venture submitted the Mining Right Application, including a social and labour plan and a mining work program, in February 2010.

Boikarabelo has a massive 6.4 billion tonne resource – a 120 metre thick coal seam at shallow depth of 20-35 metres. Current probable reserve is 745 million tonnes of thermal coal, which has the potential to increase sas this reserve amounts to only 35% of the resource bearing tenements.

The execution of formal documentation and establishment of a $2 million rehabilitation deposit will be completed over the next three weeks. The company has a 74% shareholding in the joint venture.

Resource Generation has also announced today that new BEE (black economic empowerment) partners will facilitate the development of the Boikarabelo coal mine.

Fairy Wing Trading 136 (Pty) Limited (FWT), a company owned by a group of South African businessmen and women with strong commercial and government relationships, has agreed to acquire the 26% shareholding in the Ledjadja JV that was owned by its original BEE (black economic empowerment) partner.

To assist the acquisition, Resource Generation will provide a loan of R80 million ($11.5 million) to FWT. The loan, which will be secured over FWT’s shares in Ledjadja and repayable out of the first dividends due to FWT from the joint venture, will be made available in three tranches.

The first tranche of R60 million will be paid during the next quarter following finalisation of documentation for the Mining Right for Boikarabelo, which will incorporate FWT as the BEE partner.

The second tranche of R10 million will be paid on 30 September 2011 with a third tranche of R10 million on 30 September 2012. The loan will be provided from Resource Generation’s existing funds.

Paul Jury said as the company moves toward completion of the Boikarabelo coal mine, "we will have partners who are able to contribute considerable value through commercial guidance and relationships."

As part of the transaction, the Ledjadja joint venture will assume Resource Generation’s obligation to pay to Apex Resources Inc. a royalty of R2 per tonne of coal shipped up to a limit of R30 million.

Importantly, Resource Generation is making significant progress securing water for the Boikarabelo mine. A company has been chosen as the preferred party to construct, operate and maintain a wastewater treatment plant at Marapong, approximately 50 kilometres from Boikarabelo.

The water treatment plant will benefit the local community as it will treat municipal effluent and is expected to generate up to 16 megalitres of water per day, which will be pumped to the mine site via a new pipeline.

The cost of the plant is already included in the $552 million capital expenditure budget for the mine’s development.

Resource Generation has been working for 18 months with the Lephalale Local Municipality in Limpopo Province on plans for the plant and is a key responsibility as part of its social and labour plan, which has been submitted with its Mining Right Application for the Boikarabelo mine.

Paul Jury said the plant would provide sufficient water to meet the medium and long-term needs of the mine. This would include after its stage 2 expansion, and it would also provide the local municipality with essential infrastructure and environmental protection.

Resource Generation has been solidly re-rated in the market since 2010, its share price reflecting the development of Boikarabelo, one of South Africa’s largest remaining coal deposits that should assist Eskom to gain much needed new supply of coal to meet towering domestic power demand. With this in mind, even the current market valuation of Resource Generation may prove to be relatively conservative at current prices.