What Happens When a Junior Miner Grows Up?

Wescoal (WSL) has a production target of 8 million tons per annum. This may appear a lofty target for what was originally a coal trading business with zero production less than a decade ago, but Wescoal produced 3.3mt in its last reported financial year (from two different mines).

And it has just bought Keaton Energy, which itself produced c.2.3mt in its last financial year (and adds a producing mine and a number of greenfield resources to the portfolio).

If Wescoal does nothing else, it is likely to (logically) produce 5.6mt in the coming year.

Yet, Wescoal is not doing “nothing”. Rather the contrary, it is a flurry of activity.

During the Group’s FY 17 period, it produced no coal from its original Khanyisa Mine (the first of its mines it ever started). Necessary regulatory consented have been granted to extend this mine, and the Group is expecting it to contribute just shy of 1mt pa from now (making it a total of four producing mines in its portfolio now). Likewise, Intabane is expecting to contribute a further 1mt pa while Vangattfontein should comfortably make it to 3.6mt pa.

Collectively, I expect the Group to achieve a very easy 7.2mt pa by FY 19E. The balance to arrive at 8mt pa is likely to come from the greenfield Moabsvelden resource that lies inside the acquired Keaton business (in fact, more is likely, as Moabsvelden appears able to generate 1.6mt pa; this would take Wescoal’s producing assets number up to five!)

OK, so within the next 2 to 5 years, a 8mt pa product target by Wescoal is quite achievable.

Why is this important?

It is simple: This will make Wescoal comfortably the second largest (predominantly) coal producer on the entire JSE.

Exxarro currently produces around 40mt to 44mt pa, but a some of its major assets are coming to the end of their lives. Therefore, going forward, Exxarro’s production profile could drop significantly.

That aside, the best estimate I can get of coal production in South Africa is about 270mt pa. That puts Exxarro at c.16% market share and it implies that Wescoal’s 8mt pa would give it a 3% market share. Other than the tail-end producers, the balance is generated by Anglo (who are pulling out, I believe), BHP Billiton, and Glencore.

All of these latter producers are diversified miners, global in their reach and, in Anglo’s case, I believe that they are steadily disinvesting (likely that the others are quietly doing so too).

Hence, as pure plays, that leaves Exxarro and Wescoal.

Ignoring Exxarro’s BEE investor problems, Exxarro’s production profile is likely declining while Wescoal’s is growing (and Wescoal is black-owned). In fact, with Wescoal’s growth and black-owned status, it is extremely well-positioned to pick up any assets out there for sale and help consolidate this sector.

Therefore, I arrive at my question: What happens when a junior miner grows up?

The answer is quite simple and quite exciting: Diversification of mines drives down the cost of funding (both equity and debt), the share rating rises and the returns to scale of the operations kick-in generating higher returns on equity.

In other words, beautiful economics begins…

Now is 8mt pa enough to not be a junior miner? I don’t know, but I would argue that size is relative. If you are the second largest pure producer in a market and hold multiple assets, I would argue that you are least a mid-tier miner then and not a junior one…? Maybe many would disagree with me, but we will see.

All I am going to say is that Wescoal shares are currently trading on a Price Earnings (PE) of 3.8x (when using normalized HEPS). And this profit was generated on only 3.3mt pa production. Thus, imagine what forward multiple Wescoal is potentially trading on if it reaches its 8ma pa target? Now add a bit of spot coal upside (as resource prices appear to be lifting)…

Yes, AWSM Fund does hold Wescoal, but I hope you can start to see why from the above narrative.

If you want some more background to Wescoal, see some old posts here:

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