B U F FA LO C O A L
BUFFALO COAL
Buffalo:
Up And Charging PRODUCTION: Colin Chinery
Trading profitably but with major technical, safety and inherited financial issues, Buffalo Coal called in mining heavyweight Rowan Karstel to devise and lead a rescue and recovery strategy. Challenges remain says the reforming CEO, “but things are looking ten times better than they were twelve months ago.”
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Buffalo Coal in the Biggarsberg Mountains of KwaZulu-Natal is caught between seams of rich deposits and the overhang of inherited debt. In between; the hopeful buttress of re-structuring and sharpened efficiencies. A high quality thermal and metallurgical coal producer, Buffalo Coal’s two operating mines, Magdalena and Aviemore near the town of Dundee supply thermal coal and anthracite to the domestic and export markets. Although trading profitably, Buffalo Coal is faced with several challenges, some technical, some financial, and largely inherited, which CEO Rowan Karstel is determined to pay off while continuing to drive up operational
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performance and safety standards. Before his arrival Buffalo had gone through a rebrand in 2014 and away from its previous name Forbes & Manhattan Coal. During the coal price slump, a sizeable amount of debt had been built into the company as it resorted to taking on a loan of some R200 million from Investec and a smaller sum from STA, a mining contractor. Resource Capital Fund (RCF) had become involved when it acquired Forbes Manhattan and provided convertible loan notes. “Over the last three or four years with coal prices very low, Buffalo was unable to service its loans to RCF and had to convert into equity, which is why today RCF owns 85% of the company.
MEDIUM HORIZON Fast forward to 2018 and the plan “is to repay Investec in the coming years and hopefully add some value to RCF going forward,” says Karstel. “We need to take a medium-term horizon on Buffalo.” A professional mining engineer with 20 years in the industry in South Africa and globally, Karstel arrived at Buffalo from RSVENCO where he was Executive: Strategic Development, a year ago, parachuted in as Interim CO and fire fighter. “I came after being asked to step in and help out. At that stage it all looked doom and gloom. I was fortunate that coal prices turned, we managed to focus on a few key core risks, and here we are, still alive today. And things are looking ten times better than they were twelve months
INDUSTRY FOCUS: MINING
Rowan Karstel ago. Some of the key core issues that were resolved were the outstanding tax to SARS, updating the closure and rehab fund, and resolving a legal claim over the Aviemore Mining Rights with a local farmer.” Aviemore, a drill and blast operation stretching across 5,550 hectares, produces 45,000 tonnes of anthracite coal a month. But with operational constraints thwarting optimum efficiency, Karstel and his team did a scoping study on new adit and expansion options to increase the life of mine. The new adit will cost R240 million and construction will take about 18 months to complete. To maximise the process plant capacity, the plan is to increase production from two to four sections with the new adit and increase the NPV value add. AVIEMORE THE KEY “Aviemore expansion is the key thing at the moment. We have had a bankable feasibility study due to be finished in March 2018, and we have a few months to finalise the funding.” Buffalo’s other primary asset in Dundee is the Magdalena thermal coal deposit,
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// TAKEN TOGETHER, I WOULD SAY THE WORK WE HAVE CARRIED OUT SO FAR HAS ALREADY INCREASED THE LIFE OF AVIEMORE FROM THREE TO 15 YEARS PROVIDED WE GET THE FUNDING // currently operated by STA Coal Mining Company, and with a monthly capacity of 120,000 tonnes. “However, the open-cut reserves near Magdalena have depleted, and coal is mined from only underground sections. The KwaZulu-Natal coal fields are difficult to mine with lots of dykes, sills and bad roof conditions making the risk profile much more complex. The challenge is always to have enough pitroom for the underground sections once geological difficulties is encountered,” says Karstel. While Magdalena has its own beneficiation plant, coal from Aviemore is processed in a wash plant at Buffalo’s Coalfields site on the outskirts of Dundee, whose potential Karstel is keen to develop. “We are also looking at buy-in opportunities for neighbouring mines to fully utilise the 120,000 tpm wash plant.”
Magdalena’s geological issues will be addressed in due course, but Buffalo is focusing its current efforts on the expansion work at Aviemore. “The Aviemore anthracite mine is very profitable and our current prime revenue driver. “It’s all about fully utilising your existing assets, and by keeping the wash plants full it reduces our fixed costs, a key factor in mining. Taken together, I would say the work we have carried out so far has already increased the life of Aviemore from three to 15 years, provided we get the funding.” Kastel’s restructuring began with the development of a robust marketing model. “Because we are a junior we don’t have the balance sheet to take the risk on the logistics side. We sell the coal FCA or FOR, which means we get a Rand price
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INDUSTRY FOCUS: MINING
for the coal and we don’t take the rail and port risk. And this model has been working very well. “When I came here, safety, environment and community was a real challenge. On the environmental side, there were a lot of issues, and we drew up an action plan which we slowly worked through and budgeted for. “Our safety record was not good, and I managed to get a BHP Billiton retired health and safety manager to join us and develop a new safety strategy, and through this we have changed the safety culture. “The major focus areas are leading indicators and visible felt leadership with the management team.” OUT IN THE COMMUNITY With two large local towns, Dundee and Dannhauser, Karstel spends time in the communities. “I have good relationships with both mayors, and we make sure we support the communities.”
BUFFALO COAL
Karstel, who has given himself a “five-year window” at Buffalo, knows that as the biggest local employer, the company’s fortunes carry a heavy social and economic impact. “If something happens to Buffalo, Dundee will take a really big knock. In South Africa, we have what I call the three ugly triplets; poverty, unemployment, and inequality, and if I can make sure we keep the business alive and the people employed then we have made one big step forward for Dundee and South Africa. “A CEO can be replaced at any time, but I will feel mission achieved if I know my people working on the mine have job security for the next 10 years and more and can support their families.” Radical re-structuring such as Karstel has embarked on demands supportive expertise, so how has he set about attracting quality staff in a sector where such recruitment is more than usually challenging? “Yes, it is a challenge, but I am fortunate that having worked for majors such as BHP Billiton and Xstrata Coal, and juniors so I know the mining and the coal sectors well, and know where to look for people and persuade them to come and work for us. “My management style has always been to foster a culture of innovation, to give people a bit of freedom, think a little wider, and then learn smart risk taking. Then I will try to remove the obstacles where I can so they can achieve their goals. “Ultimately you need to empower your teams, and this has always been my management style. And the people I ask to come and help often say they like to work in the environment I have created. For myself I like to be visible and lead from the front. Taken together, it’s all part of creating a step culture change in the company.” On the technical side Karstel and his team have been developing reserves statements. “We need to understand exactly the geology and what the economic life of the mines are
in difficult mining conditions. Reserve statements are key components when you want to raise funds for expansion for debt and equity funding. SUSTAINABILITY ““We have done a lot of work on process costing so that we know exactly what levers to pull to maximise values to generate positive cash flow. My approach has always been holistic and to look at the whole value chain and to see how we can generate a sustainable business.”
// I STILL THINK THERE IS AN OPPORTUNITY FOR COAL IN SOUTH AFRICA // Is Buffalo intrinsically a sustainable business? “Yes I believe so. The next challenge is to get the funding for the new Aviemore adit in early 2018 and generate enough cash to repay the Investec loan, I would say we have a solid sustainable business.” In 2014, South Africa produced $11bn worth of coal, $8bn worth of platinum group metals and $6bn each of gold and iron ore. Coal was king by a mile. But while SA needs a healthy, modern and growing coal industry, economic uncertainties and political indecisions and wild talk, have blighted advancement, and mining groups have become increasingly wary of investing in South Africa. Karstel is more confident. “I still think there is an opportunity for coal in South Africa. Thermal coal is still the cheapest way to generate baseload power for a third world country. Anthracite is used by the local smelters and the number of producers the last few years have declined which puts Buffalo Coal in a good position. People should remember that there is clean coal technology which enables thermal coal to be burnt significantly cleaner for the future.
BULLISH AND AMBITIOUS “We supply coal into the thermal market and anthracite markets both for domestic consumption and for exports, and what we produce we sell. I am still very bullish about coal, especially over the next 10 to 15 years.” But like the mining sector as a whole, the Government’s political agenda for the industry troubles him. “The challenge we have is more with Mining Charter 3 - our biggest risk for growth. Hopefully, with the Chamber of Mines taking the Government to court early in 2018 these issues can be sorted out. “Personally, I am very positive about South Africa. We are definitely one of the top Third World countries, and with a solid economy with good infrastructure, good banks and a sound legal system, I am very positive about where we sit. The politicians always have their own agenda, and they come and go but I think we must look at the bigger picture and more long term.” Meantime back at Project Buffalo, Karstel points to “exciting opportunities in the in the short and medium term. We have done some really good things including best practice implementation in various areas. The first challenge is to secure the funding for the adit, and if we can get it organised the next few months, deliver the project on time, we will move closer to being one of the top junior coal players in South Africa. The second challenge is to deliver consistent production targets so that we have the cash flow to repay back the Investec loan.”
BUFFALO COAL 011 656 3210 info@buffalocoal.co.za www.buffalocoal.co.za
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Journey of a
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Exclusive interview with CEO Andrew Darfoor ALSO IN THIS ISSUE:
Buffalo Coal / Nautic Africa / Grindrod / SAOTA
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DECEMBER 2017