The low cost and relative abundance of South Africa’s coal has assured it a central place in the nation’s economic life; according to the Chamber of Mines of South Africa, in 2012 94% of domestic electricity generation was derived from coal-fired thermal power stations, which consume about 130m tonnes of the 250m tonnes produced annually in South Africa. Coal also is a useful earner of foreign exchange: after gold and the platinum group of metals, the nation’s coal exports are the third largest mineral earners. It is little wonder, then, that punitive policy changes are viewed with interest beyond the industry, and that the future of the nation’s coal sector is a frequent component of public discourse. Two potential strategic shifts in particular have risen to the fore over the past year, each of them bringing potentially far-reaching implications for the sector.

Sectoral Transformation

While the Department of Mineral Resources’ (DMR) list of licensed coal mines runs to 120 facilities, the state-owned power provider Eskom sources the bulk of its thermal coal from four major producers: BHP Billiton, Xstrata, Exxaro and Anglo American. Moving away from this reliance on a small number of the industry’s largest players has recently become a strategic goal for the utility according to its recent pronouncements.

In late 2012 Minister of Public Enterprises Malusi Gigaba chaired a convocation of industry stakeholders aimed at encouraging smaller mining firms to play a greater role in the supply of coal to the nation’s power stations – a principle to which Eskom has publicly subscribed. “We have looked at our need for coal going forward, and we want to see how we can ensure at the same time that we see fundamental transformation of the industry and assist the development of emerging coal miners,” Eskom chief executive Brian Dames told the local press after the meeting.

More specifically, the company’s new policy would “see the development of black-owned mining companies of size and scale, and who are in the industry for the long term.” Currently, around 30 mines in South Africa might be described as “black empowerment” facilities according to the 26% black ownership standard established by the Minerals and Petroleum Resources Development Act (MPRDA) – a number that is significantly reduced if the alternative 50%-plus-one-share standard is applied.

New Strategies

While there is little doubt Eskom could exercise its considerable purchasing power to support black-owned mines and affect the sectoral transformation that it has outlined, there are few details regarding specific policies or a timeline for their implementation. Strategies discussed to date include the creation of a mine development fund by which Eskom could team up with development finance institutions and private sector capital to invest in emerging miners’ projects, as well as the possible consolidation of smaller black-owned mining facilities into larger entities more suitable for development.

Other related initiatives include the establishment of an inland terminal to provide a centralised location for the beneficiation of coals, a project that Eskom believes would encourage new mining companies to broaden their coal trading activity.

As for the proposed timeline, Eskom has secured off-take agreements with a number of coal suppliers that extend through 2018, so it is likely that any significant changes to its purchasing profile would be established after this time. Eskom has estimated that between 2013 and 2040 it will require some 4bn tonnes of coal to feed its power stations, and that it will be able to secure 1.3bn tonnes of it from new, black-owned mining companies. Despite some gaps in its announced policy, one thing, therefore, remains certain; should Eskom’s target be met, the industry’s largest players will feel the noticeable impact of this transformation on their balance sheets.

A New Focus

While the structural change proposed by Eskom might be ameliorated by compromise within the industry, South Africa’s geology presents a more intransigent strategic issue to which South Africa’s coal miners must adapt themselves. Establishing the size of nation’s coal reserves has proved difficult over recent decades. The estimates of 49bn tonnes provided by British Petroleum (BP) and the US Department of Energy in 2008 were based on assessments made by the South African Geological Survey (now the Council of Geosciences) during the 1980s. However, in the early 2000s the Department of Minerals and Energy (DME) had reduced this estimate to around 31bn tonnes, and went as far as temporarily lowering it to 26bn tonnes in 2005. By 2007 the DME had revised this figure upwards to 29bn tonnes, an estimate that BP has since come in line with.

Resource Projects

However, dissatisfaction regarding methodology and, therefore, the accuracy of recent estimates moved the Council for Geoscience (CGS) to begin establishing a resource determination project for coal in 2010, a study encompassing 21 coalfields. As of early 2013 the survey was complete but the CGS’s report had yet to be published, although one of its key findings has been widely anticipated by the industry. “The indications are that we have ample coal in South Africa, but structurally we have to make a shift from the Highveld to other coal fields,” Dick Kruger, deputy head of techno-economics, Chamber of Mines of South Africa, told OBG.

Estimates for peak coal production at the Witbank and Highveld coalfields, from which around 80% of the total run-of-mine (ROM) coal is derived, have not been well established, but there is an industry consensus that their long-term sustainability is in question. In 2009 the Department of Mineral Resources stated that “it has become more and more apparent that production from the Witbank-Highveld coalfields will be difficult to sustain in the not-so-distant future” and that it is probable that “by 2020, reserves in many of the large coal mines in these coalfields will be near exhaustion”. It also identified what many in the industry consider to be the future of the sector: the Waterberg coalfield in the north-eastern Limpopo province. Thought to contain as much as 50% of South Africa’s remaining coal reserves, the field has a strike length of about 40 km from north to south and 88 km from east to west, and was discovered as long ago as 1920 during water drilling operations.

A number of surveys and exploratory drilling projects have taken place in the intervening years, but to date only one mine has been established on the field – the Exxaro-owned and -operated Grootegeluk facility, which employs 2000 people and produces 18.6m tonnes per year of thermal and semi-soft coking coal. It also is home to the world’s largest beneficiation complex, where more than 7000 tonnes per hour of ROM coal is upgraded in six different plants, the bulk of which is transported directly to the Matimba power station 7 km away, with the remainder sold domestically to industry on short-term contracts.

More Move In

The Waterberg field, however, is expected to become a much more congested area in the near future with a number of players coming in; prospecting rights under the Mineral and Petroleum Resources Development Act have been granted to more than 15 other firms, the majority of which are currently exploring the deposit, while Exxaro Resources CEO Sipho Nkosi has stated that the field holds enough coal to accommodate eight power stations.

However, the development of the field presents a number of challenges. While conventional mining will be sufficient to exploit the shallow seams of the two major formations, the Grootegeluk and the Vryheid, deeper resources will require alternative technologies. Anglo American is currently assessing the potential of one such technology through its exploration for coal-bed methane. In South Africa the extraction of methane remains a relatively new process, but it has the potential to be a valuable one in the context of future power generation.

Making Connections

The lack of adequate transport infrastructure represents another significant challenge. Transnet currently has plans to upgrade the Waterberg line by increasing axle loads, constructing new passing loops and electrifying the ThabazimbiLephalale section, but if the development of the field is to take place on the scale envisaged by some, alternative transport options – such as improved road networks – might also be necessary.

Infrastructure development is synonymous with realising sectoral aspirations to extract and transport coal to power stations and ports, and to unlock vast mineral resources in the country. Interconnecting the Waterberg with the transport grid is a strategic goal for the government, as laid out in the National Infrastructure Plan, which cites increasing rail capacity to Mpumalanga and Richards Bay, and shifting from road to rail in the former, as central to the sector’s development. Nonetheless, while the Waterberg is widely accepted as the future source of the nation’s coal supply, addressing the challenges posed both by the nation’s geology while at the same time affecting a restructuring of the industry remains to be seen.