Xavier Prévost: coal warrior

Legendary coal expert Xavier Prévost talks to Leon Louw about the Waterberg, coal markets, and the future of emerging coal miners.

Xavier, there has been a lot of talk about the coal deposits in the Waterberg region of the Limpopo province. Exxaro is already mining some of that coal at its Grootegeluk Coal Mine near Lephalale. Is it time for new, emerging coal miners to start looking at this area as a source of coal in the future?

Extensive geological work has proven that big deposits of coal occur in the Waterberg. However, because no market exists for Waterberg coal, finding a market for this coal resource is the problem. Opening a mine in this arid region of South Africa will be risky: it means that the mine will have a product without a market. If a mine has a market it has an asset; without a market only liabilities exist.

We know that the quality of Waterberg coal is not the same as, for example, the coal mined in Mpumalanga. How will this affect the development of the Waterberg coalfields?
The Waterberg’s coal will only be good enough to be used by coal-fired power stations within the Waterberg. Not a lot of coal in the Waterberg can be regarded as export quality. Besides, to transport coal from the Waterberg to Mpumalanga means that an entire new rail line would need to be constructed and that would be expensive. Thus, if companies are considering mining coal in the Waterberg, they will also have to consider building a coal-fired power station nearby, similar to what Exxaro did with Grootegeluk and Thabametsi. In the Waterberg, coal mining and power generation go hand in hand. Someone at Eskom once said that the Waterberg should host seven or eight coal-fired power stations with seven or eight mines to feed them. The idea is brilliant but the execution will be almost impossible.

Why do experts consider it such a challenge to mine coal in the Waterberg?
Many constraints are prevalent in the Waterberg. One of the biggest concerns is the lack of water. As we all know, water is extremely important to mining, but it will be even more important for coal miners in the Waterberg because of the coal processing involved.

When the coal is removed from the ground in the Waterberg, it’s a mixture of rock and coal. There are different horizons of coal, shale and mudstone, so when you mine in this area you must mine the entire package. One cannot mine just the coal seams/seamlets as you do in the Central Basin (or the Witbank, Highveld, and Ermelo coalfields). The mines in those coalfields have clearly separated coal seams and rock partings. There, an operation can remove the coal and leave the rock — the coal reaches the surface relatively clean. In the Waterberg, there is such a high percentage of rock that the ash is 50–60% of the raw (run of mine) product — and of course you can’t sell it. Waterberg coal is so high in ash and when it comes to the surface it is not a marketable product. Therefore, the coal has to be beneficiated to get rid of the waste material so that the quality is improved and the ash content lowered. To beneficiate the coal you should wash it (that is, use dense media separation) and for that you need water and magnetite. That means you are separating the heavy and light particles; in other words, the good quality coal will float while the bad coal or waste will sink.

The Waterberg (Grootegeluk Coal Mine) produces about 43 million tons per annum (Mtpa) of run of mine (ROM) coal, of which less than 24Mtpa are saleable. What is not saleable is discarded — that’s a large percentage. About 50% of the Waterberg ROM goes to the dumps, and for that reason, if you want to do business in this area and open a mine you must beneficiate the coal. In the Waterberg, beneficiation is almost more important than mining, which puts additional pressure on the limited water resources. A coal mine in the Waterberg will require more water than any other mine and that is the main problem.

Will the infrastructure in terms of roads and rail be sufficient?
No. The Waterberg is about 500km from Mpumalanga, where most of the current power stations are located. If you take that into account and the fact that the mines in Mpumalanga are 540km from Richards Bay, you have about 1 000km from the Waterberg to the terminal. It would serve no purpose to build a rail line from the Waterberg to Richards Bay, because only 20% of the coal mined in the Waterberg will be of export quality — the other 80% will have to be burned in local power stations. In addition, there is no heavy rail link between Mpumalanga and the Waterberg.

As a bulk commodity, coal mining goes hand in hand with transport. Without transport you have no sales. You need to transport coal to the place where it will be used, whether it is close or far, but to rail it for 1 000km will be too costly and that would make the operation unprofitable. Transnet has been talking about building the required rail infrastructure, but whether this — under present economic conditions — will happen in the next five to ten years remains to be seen.

How has the coal price affected the South African coal mining industry?
The international coal price has dropped dramatically in the past four years. Richards Bay is selling at a relatively good price following a slight increase over the past four months or so. However, the big concern is that our markets are gone. South Africa used to sell most of its coal to Europe, being a very lucrative client. In 2007, 75% of our exports were shipped to Europe. But because of environmental issues and mostly as a result of increased competition, that market has disappeared. Colombia now exports more coal to Europe than we do; we’ve lost that market share. Currently we export only 25% of our coal to Europe.

The bulk of our coal now goes to Asia. South Africa’s main client up to a few years ago was of course China, but three years ago we stopped exports to China. Today, China doesn’t buy any coal from South Africa, although they import coal from Australia and Indonesia. Most of South Africa’s coal (46%) is exported to India. We have a few big customers in the Middle East; we sell significant numbers to Turkey, Pakistan and into the rest of Africa. Morocco is one of Africa’s biggest purchasers of South African coal.

Is Richards Bay the only port to consider when a mine is looking at exporting its coal, or does Maputo and Durban also have facilities to stockpile coal?
No of course there are other options. A number of South African coal mining companies use Maputo in Mozambique to export its product. Maputo has some advantages, but also a few disadvantages. A big advantage is that it is totally independent; you don’t have to have an allocation. The problem is that Maputo is tiny: as concerns coal, it can presently export only about two or three Mtpa, compared to Richards Bay that can export approximately 71–75Mtpa.

In addition, there is a rail problem to Maputo. To rail coal to Maputo from the mines — and provided that the mines are in the right places where it can send the coal directly to Maputo — will cost a mine twice as much as to rail to Richards Bay.

Mines can also use Durban, but it is a size terminal. This means that Durban exports mainly sized products. So after washing, the coal is further treated and separated according to different sizes. In South Africa we call it cobbles, nuts, peas, smalls, and duff, according to its size. The size is important, because some of the users have boilers that don’t use pulverized coal: they use sized coal. Sized coal combustion is different from pulverized coal. With pulverized coal, you inject it into the boiler, whereas sized coal is introduced at the bottom of the boiler, and then as it reaches the boiler it ignites and burns. Sasol also needs sized coal for its gasifiers. However, sized coal has become a very small market. There used to be a huge market in the past: many boilers in Europe used sized coal and South Africa used to sell a lot of sized coal through Durban.

The local market also needs sized coal; you don’t easily sell locally if it is not sized, except for Eskom — Eskom buys any coal. Apart from Eskom, most users of coal in South Africa’s inland market use sized coal. Many of the small collieries in South Africa still size their coal for the local market. Maputo also takes in sized coal, but not on the same scale as Durban. Richards Bay doesn’t have facilities for sized coal.

Xavier, what about young entrepreneurs looking to start a coal mine or business? Should they become involved? Is there a place for small-scale, junior miners? What will they have to do and what are the challenges?
Junior coal miners are my speciality. They constitute quite a large group — there are about 50 or 60 new or aspiring coal miners — yet, production wise they are very small. We cannot compare them with the big miners. The five big coal-mining companies — that is, Anglo American Coal, Exxaro, Glencore, Sasol and South 32 —produce about 83% of South Africa’s coal between them. These big mines control the market.

Economically, the small mines are in dire trouble. The juniors have the best and the worst of two worlds though. They have the best because government supports them and they have a big support group in the IDC, Eskom and parastatals. However, economically they are the worst off. With low coal prices, mining companies worldwide are trying to optimise operations and cutting costs wherever they can. This is the only way you can really survive at the moment. The main challenge for the juniors is that they cannot optimise; in general they are bound by deals and agreements. I have seen many of them close down one after the other. This is a market where only the very strong can survive — the weak don’t. Though, the big advantage for juniors is that they have contracts with Eskom. Having a contract with Eskom is like having money in your pocket. You can even sell coal that is below ‘spec’ and you can sell it at a good price.
Several traders in the coal mining industry buy extremely low quality coal that is not even saleable, blend it with coal from other producers to increase coal quality slightly, and then sell it to Eskom. In that way they can always remain in business. However, a major problem occurs: when you start blending coal — and blending is a very tricky business — it affects the user’s (Eskom) boiler. Particles of coal A and coal B ignite in different ways, with the result that the boilers’ thermal efficiency decreases dramatically. It can also happen that the coal doesn’t burn properly and sticks to the walls of the boiler, which causes big damage.

Junior coal miners enjoy all the support from various quarters and should be able to create a whole new industry; yet, they have not achieved this. Unfortunately, most juniors do not have the expertise and they don’t acquire the expertise they need or use the expertise available. The result is that most of their undertakings fail. They eventually have to close down and end up with enormous liabilities. In addition, they face the impact on the environment. The list gets longer. The other problem is that the political situation in the country is scaring investors and no financing is available for the juniors.

You have often talked about a coal cliff in South Africa in 2020; how many new coal mines would we have to start to prevent a situation where Eskom runs out of coal?
My hope is to start up 100 or 200 new coal mines in the next few years. Very soon, once the large mines stop producing coal, we will experience a big slump in coal production (what is called the coal cliff). It is going to happen because the big mines are slowly reducing production and will soon stop production completely. The reason is Eskom. There is no commitment from Eskom to support these big mines: Eskom’s concern lies with the small miners. Unfortunately, that is not enough. The large mines are the life support of Eskom — when they go Eskom will be in trouble.

It has already started happening. Arnot Colliery has closed down, but not because the resource has dried up. It is closed because it doesn’t have a deal with Eskom. The same thing is happening with almost all the other big coal mines; Matla has similar issues with Eskom. The only big companies that will survive are Exxaro, because of its relatively good relationship with Eskom, and Sasol, because they don’t need Eskom. Unfortunately, the rest of South Africa’s coal mines as we know them are doomed to die. When they do, Eskom’s coal burn of 120Mtpa will drop to about 20 tons per year, which means we won’t have enough electricity supply.

Why is Eskom not signing contracts with the big companies?
Eskom has officially declared that it does not want anything to do with the big mining companies, saying that the big companies are draining Eskom’s resources. According to them, it’s not a good idea to have cost plus mines. Eskom wants to go out in the market and contract coal, but the problem is there is no coal to be contracted. Eskom needs huge tonnages — we are talking more than 100Mtpa. Eskom can never get that sort of tonnage from the market because there is no coal in the market. The juniors will probably sell about 30 or 40Mtpa; but never the required tonnages — it will constitute only 10% of what is needed.

What could happen is that the juniors could buy the big mines. But the question is: will they run the mines properly? A good example is Anglo’s New Largo Colliery that was supposed to supply the new Kusile Power Station with coal. Eskom did not want to sign an agreement with Anglo. As a result, Anglo is selling New Largo.

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