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A coal merger that would be made in mining heaven
A tie-up with Tavistock Collieries is high on Duiker Mining's wish list, writes JULIE WALKER
DUIKER MINING, this year's number 10 finisher in the Top 100 ranking, joins elite company in achieving a fourth successive place among the top 20. This gives the coal mining group the honour of a second year as one of Business Times's Royal Companies.
Duiker turned 51 this year and managing director Hugh Stoyell says 1997 has been one of the busiest ever.
The biggest news was the step taken by the Lonrho group to grow its coal interests from the medium league in terms of size into the big time with the offer to purchase JCI's coal interests, Tavistock Collieries.
AT THE COALFACE: Duiker chairman Terence Wilkinson, who has served the Lonrho group and Duiker for 25 years.
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Stoyell is delighted that, if this deal is concluded, a long-standing item on Duiker's wish list would come true.
"It would be exciting for us, not only in terms of its current operations, but because it would give Duiker a much larger allocation at the Richards Bay Coal Terminal. At present, Duiker has a 6,43% allocation of the terminal's total capacity (soon to be raised from 63 million tons to 66,5 million tons) and Tavistock would bring another 14.19%, taking the total to 20,62%." Duiker also has 15,9% of the much-smaller Durban Coal Terminal.
"Generally, Duiker has traded all its Richards Bay Coal Terminal export entitlement, and it has also leased entitlement from other parties," says Stoyell.
Shell was a regular supplier of additional RBCT capacity to Duiker.
Earlier this year, Tavistock itself took a quantum leap with the R445-million purchase of Shell South Africa's coal interests, including 50% of the Ingwe-managed Rietspruit colliery.
Tavistock owns and manages the Phoenix, Tavistock and South Witbank collieries, and has a 50% interest in, and management of, both the ATC (underground) and ATCOM (opencast) coal mines. It also has 6% of the Ingwe-managed Douglas-Tavistock joint venture.
Stoyell points out that some of the Tavistock mines are adjacent to Duiker's operations, which could have significant taxation benefits and, for good measure, Tavistock also has significant coal reserves.
"It is also important that the merging of the two coal groups could result in the deferment of future capital expenditure. Each of us has plans for a new mine, Duiker at Goedgevonden, and Tavistock the Caroline project at Breyten. Caroline is contiguous to our Tselentis mine, which has only four or five years of reserves left, and Caroline could make use of all the existing Tselentis infrastructure at a large saving in capital cost."
Goedgevonden would go onto the backburner until further new production capacity was required. "We were supposed to make a start on Goedgevonden this year but, as we have still not been granted an official mining authorisation by the Department of Mineral and Energy Affairs, this protracted delay might well be fortuitous."
Stoyell says operations would be rationalised to achieve economies of scale and the optimal sourcing of products in both the inland and export markets. These arrangements would result in lower unit costs, better quality control, more efficient logistics and improved customer service. Further benefits would be realised from the enhanced utilisation of assets of the contiguous mines and head office services.
"Duiker has nurtured a culture of mining at a low cost, and has built up sound marketing expertise, while Tavistock has developed excellent infrastructure and good mining practices. We could benefit from one another's strengths. All round, this merger would make very good sense," says Stoyell.
Was it unthinkable even a year ago? "I have thought about this for a long time. We, too, have our dreams," he says, smiling.
Weaker export coal prices have made it a tough year, but Stoyell is confident this is merely a temporary feature, and not a fundamental problem with the global coal market. "Demand is still strong, but there is a surplus of coal on the international market at present. A lot of coal is coming out of Australia and South America and, for the time being, the growth in supply exceeds the growth in demand."
Stoyell says export prices have eased from the mid-$30 a ton to the mid-$20 levels, which are likely to persist for the first half of next year.
The South African Coal Report notes flat demand for steam coal in Europe; most buyers seem well covered for the rest of the year, and adequate rainfall has restored hydro power production in Scandinavia. Spain, in particular, reduced its orders.
Duiker, part of the Lonrho stable, is chaired by Terence Wilkinson, who also runs Lonrho's Southern African mining operations. Earlier this year, Anglo American became obliged to reduce a recently acquired 27% holding in Lonrho. Talks of a merger between JCI and Lonrho were succeeded by the announcement that JCI would actually buy Anglo's stake in Lonrho. The sale of Tavistock would not signal a desire by JCI to get out of coal as it would maintain a substantial indirect stake in the enlarged Duiker through its Lonrho stake.
Wilkinson has served the Lonrho group and Duiker for 25 years, and Stoyell joined Duiker in 1992. The pair have known each other for many years, both having started out in the now-dissolved Rand Mines.
Duiker was built on coal and gold, yet, in 1993, Wilkinson took Duiker out of its last large gold investment, in the Erfdeel-Dankbaarheid portion of Anglo American's Freegold operations, and applied the proceeds in buying Agip Coal South Africa. In retrospect, this was a brilliant commodity switch. As an almost pure coal company, Duiker has thrived, and grown both financially and in stature as a coal-mining investment since the early 90s.
Says Stoyell: "We greatly appreciate the valuable contribution every member of the Duiker team has made towards our sterling performance and its ranking in the Business Times Top 100 companies during the past four years."