The electricity crisis in South Africa has not only highlighted the importance of growing the country’s power generation capacity but also its ability to supply coal feedstock to power plants. Around 85 percent of electricity generated in South Africa is produced from coal fired stations, and this dependence is likely to continue for the foreseeable future.

While sectors across the South African economy are therefore viewing the electricity crisis as a significant challenge to business, global growth consulting company Frost & Sullivan believes that coal miners are faced with a huge opportunity.

“Coal mining companies have the opportunity to tap into this rising domestic demand for coal in order to grow their businesses,” says Frost & Sullivan metals & mining analyst Wonder Nyanjowa. “Exxaro Resources has already positioned itself well by signing contracts to supply 14 million tonnes of coal to Eskom’s Medupi power station. This is in addition to the 14.7 million tonnes that it supplies to the Matimba power station.”

The increased demand for coal is also likely to result in supply imbalances. While this will result in increased competition for the available coal, it could drive up prices. If production remains stagnant, exports are also likely to suffer as most of the available coal will be directed towards power generation activities.

However, coal mines will of course not be spared the difficulties brought about by Eskom’s supply constraints.

“The mining industry lost one week of production time in 2008 when Eskom could not guarantee the availability of adequate power,” Nyanjowa says. “The mining industry’s electricity consumption was curtailed at 95% of normal consumption in 2009, which, when combined with other operational problems that mining companies were facing, reduced capacity utilisation in the mines to levels around 90%.”

There is also a dire need to improve the manner in which coal is transported from the mines to the power stations. With coal reserves adjacent to certain plants decreasing, a great deal more coal is now being transported over long distances to each plant.

“It has become important for stakeholders in the coal industry to address the transportation challenges that are being experienced in moving coal from the mines to power generating plants.” Nyanjowa says. “The costs associated with this have risen enormously over the past couple of years.”

Nyanjowa believes it is therefore imperative for coal companies to develop new mines in close proximity to existing or new power stations.

“Exxaro is expanding the production capacity of its Grootegeluk mine in the Waterberg coal basin from 18 million tonnes per annum to 36 million tonnes in 2013,” he notes. “The bulk of this incremental production is targeted at Eskom’s Medupi power station.”

Although the speed and extent of the global economic recovery remain uncertain, commodity prices are likely to put up a strong performance in 2010. This will boost the worldwide mining industry, although challenges particular to South Africa may dampen local prospects.

“The global mining industry is likely to be buoyed by growing physical demand for commodities, the strong possibility of speculative buying and rising prices,” says Frost & Sullivan metals & mining analyst Wonder Nyanjowa. “This is likely to encourage miners to expand production capacity.”

However, Nyanjowa warns that South Africa may not reap the full benefits of this rebound.

“Many of the local challenges that adversely impacted on production in 2009, such as electricity supply shortages, a lack of skills and safety concerns, are likely to continue affecting the performance of the mining industry in 2010,” he says. “In addition, the prospect of higher commodity prices, particularly in the gold, platinum and coal sectors, is likely to lead to tough wage demands from unions.”

Nyanjowa believes that growing inflation fears in the developed world, particularly the United States, an unstable US Dollar, threats of another recession from expansionary fiscal and monetary policies and negative real interest rates point towards strengthening investment demand for gold.

“A price range of $1300 to $1500 per ounce in 2010 looks likely, supported by gold demand and supply fundamentals,” he says. “Investors are likely to continue turning to gold as a hedge against uncertainties in the global economy.”

However, South Africa’s gold production is likely to slip further this year, to around 200 tonnes. This will see it drop to fourth place amongst the world’s gold producers, behind China, the USA and Australia.

While platinum was one of the biggest casualties of the global recession, Nyanjowa expects things to be much rosier in 2010.

“Frost & Sullivan anticipates that the platinum industry will recover this year on the back of stronger prospects of recovery in the global automotive sector, particularly in China and India. The launch of two new platinum-based Exchange Traded Funds in the USA will also lead to strong investment demand.”

Local coal miners, who escaped from the global slowdown with relatively minor bruises, should also remain robust.

“The bulk of the country’s coal production is consumed in the electricity generation and synthetic fuel manufacturing industries, with only a third being exported to Europe and Asia,” explains Nyanjowa. “The domestic demand for coal is set to continue growing in 2010, following expansion programmes at Eskom and Sasol that will require an additional 75 million tones of coal.”

However, South Africa’s production is likely to remain stagnant at around 240 million tonnes this year as the industry waits for new coal fields to be opened in the Waterberg basin.

Anglo Coal South Africa, a wholly owned subsidiary of Anglo American, has been recognised by the Global Business Coalition (GBC) on HIV/AIDS, Tuberculosis and Malaria for its pioneering workplace program focused on tackling HIV and AIDS in South Africa. Anglo American is South Africa’s leading private sector employer, with over 100,000 people employed at its operations.
The Business Excellence Award for Best Workplace Program will be presented to Ben Magara, CEO of Anglo Coal South Africa tomorrow night at an awards dinner in Washington D.C. The event will be attended by global health leaders including senior Obama administration officials and representatives from UNAIDS, The World Health Organisation (WHO) and The Global Fund.

HIV and AIDS is having a major impact on millions of lives in Southern Africa and Anglo Coal estimates that some 1,300 of its 9,300 employees in the region are currently infected with HIV. This award has been given in recognition of the ground-breaking work the company does in South Africa with its comprehensive HIV/AIDS response for both employees and their families.

All Anglo Coal employees are actively encouraged to test annually, with senior members of the management team taking HIV tests in public to lead by example. Employees who test positive can enrol in a free HIV management program offering care, support and treatment. As a result of this response, the company has seen mass employee engagement on this issue and 94% of permanent workers have been HIV tested since the programme began. Anglo Coal is now trending to have reduced the number of new infections to half what they were in 2005 by the end of 2009.

Anglo American was the first large company in South Africa to offer free anti-retroviral treatment to all employees back in 2002. There are currently 7,300 employees enrolled in the HIV disease management program across all Group companies in South Africa.

“These awards are given to an elite group of companies who set the standard for excellence in business action to defeat disease,” said GBC President and CEO John Tedstrom.

He continued, “They show what a business can do, and how to do it exceedingly effectively.  We need more businesses to take this kind of action. The fight against HIV/AIDS, tuberculosis, and malaria cannot be won without the corporate sector stepping up and playing an active role – and Anglo American and, specifically, its Anglo Coal division is doing exactly the kind of thing that all companies can and should do. Anglo American doesn’t just talk, they take action. And their action saves lives.”

Ben Magara, CEO of Anglo Coal South Africa, commented, “We have been dedicated to the issue of HIV and AIDS since the 1990’s and thanks to great leadership, a simple, clear system with world class medical support and a passion amongst all our employees to tackle HIV and AIDS, we are making headway against this disease.  We are incredibly proud of this recognition from the GBC and Anglo Coal continues to increase its efforts in this area, having recently extended our policy commitment to include the families of all our employees.”

To ensure broader community awareness of the issues around HIV and AIDS, Anglo Coal has recruited and trained over 250 ‘peer educators’. In addition, Anglo American will this year commit approximately R10 million ($1.2 million) to health and AIDS related services in disadvantaged areas of South Africa.

The GBC awards recognise companies which have demonstrated extraordinary commitment, action and results, and have achieved exceptional success in putting their assets to work in the fight against what it terms ‘three of the greatest threats of our time’.

An investment of between R90 billion and R110 billion is required to build 40 new coal mines to meet the projected growth in domestic and export demand for coal over the next decade in South Africa. Frost & Sullivan believes this investment will be crucial to ensure that the country’s energy needs are met.

“South Africa’s energy intensive economy is overwhelmingly dependent on coal,” explains Frost & Sullivan metals and mining analyst Wonder Nyanjowa. “This fossil fuel provides about 75% of the country’s primary energy needs, supports 90% of the electricity generated and provides feedstock for the country’s synthetic fuels manufacturing plants.”

Coal is also used directly as a fuel in the steel, cement and brick manufacturing industries. The limited availability of alternative energy sources and the apparent indecision regarding nuclear energy point towards coal’s continued domination of the country’s energy mix.
“However, the production and consumption of coal in South Africa have remained fairly unbalanced, with rising coal demand in one hand and constrained supply sources on the other,” Nyanjowa says. “This necessitates additional investment.”

Eskom is expanding its power generation capacity by building new power stations and returning into service three power plants that will increase its coal consumption needs by an additional 50 million tones per annum. The expansion of Sasol’s synthetic fuels manufacturing capacity would also see its coal consumption rising by an additional 25 million tones per annum.

“In other words, the domestic demand for coal is set to increase by 75 million tones per year over the next decade,” Nyanjowa notes. “Export demand for coal from China, India and the European Union is also forecasted to remain strong.”
The existing coal production capacity of the country can not sustain this growth. Since 2003, South Africa’s coal production has remained stagnant at levels around 240 million tones a year, only posting small incremental changes at best.

Depleted coal mines in the Witbank, Ermelo and Highveld coalfields in the Mpumalanga province, together with the operational and technological constraints that coal miners have been facing, account for the stagnation of coal production. Industry sources indicate that most of the existing coal mines in the Mpumalanga province will be exhausted by 2020, whilst two collieries in KwaZulu-Natal have already closed.

“Frost & Sullivan forecasts coal supply to remain flat in the short to medium term, owing to long lead periods between exploration and commissioning of new mines,” Nyanjowa says. “The Waterberg coalfield in the Limpopo Province hosts about 50% of the country’s coal reserves and it has one colliery operated by Exxaro Resources. Other coal miners such as Anglo Coal and BHP Billiton Energy are still prospecting in the area.”

The Waterberg coalfield already has 2 coal fired power stations attached to it and it represents the future of coal mining and electricity generation in the country. However, further developments will be needed to ensure that the drive to meet the country’s energy requirements are not constrained by an insufficient coal supply.

Keaton Energy has announced that it has reached agreement on a transaction which, on conclusion, will add 2 844 hectares of prospecting rights to its 4 009-hectare Sterkfontein Project (“the acquisition”) – an increase of  71%.

Keaton Energy Managing Director Paul Miller said: “Importantly, the addition - referred to as the Sterkfontein Extension Prospecting Right – `fills out` the areas between Sterkfontein`s North 2 and South Blocks, marking a big step towards delivery on our stated strategy to consolidated our existing projects.”
Keaton Energy has already drilled 132 boreholes – a total of 25 000 metres – on the original 4 009-hectare Sterkfontein property, from which it has declared a total coal resource of 34.8 million tonnes (“Mt”), 17.5Mt in the indicated category in the North 1 and 2 blocks and 17.3Mt in the measured category in the
South Block.  Results indicated that 50% is export coal and 33% domestic steam coal.

Miller says the acquisition includes data from a recently completed, 25-hole drilling programme, which will give Keaton Energy a six-month head-start on exploration of the additional 2 844 hectares. 

The acquisition, which is subject to Ministerial Consent in terms of Section 11 of the Mineral and Petroleum Resources Development Act, involves  Keaton Energy acquiring a 74% interest in Labohlano Trading 46 (Pty) Limited, holder of the Sterkfontein Extension Prospecting right, from Money Box Investments 156 (Pty) 
Limited (“Money Box”), for an undisclosed amount.

Money Box is owned by a broad-based consortium that includes black professionals, the investment arm of the South African Women in Mining Association and local community members.