First Makhado project hard coking coal off-take agreement secured

Posted by Daniel Gleeson on 29th October 2018

MC Mining Ltd has concluded a Coal Purchase Agreement for hard coking coal (HCC) to be produced by the Makhado hard coking and thermal coal project located in South Africa’s Limpopo province. The parties to the Agreement are MC Mining’s subsidiary, Baobab Mining & Exploration (Pty) Ltd, the owner of the Makhado project, and Huadong Coal Trading Center Co, Ltd (HDCTC), a Chinese state-owned enterprise and a subsidiary of the China Forestry Group Corp.

The Purchasing Group is the owner of the Zhonglin Rugao, Zhonglin Xinminzhou and Zhonglin Suqian ports as well as Yangtze River water and harbour space and canal shoreline, together with 780,000 t of berth-space. HDCTC has logistics and bulk commodity trading interests, utilising the Purchasing Group’s substantial logistics infrastructure, and traded in excess of 5 Mt of iron ore and coal during the past two years.

Key highlights of the agreement:

  • Three year off-take resulting in the supply of a minimum of 400,000 t/y of HCC to HDCTC (half of Makhado’s annual HCC production)
  • Makhado project is expected to produce up to 800,000 t/y of HCC as well as between 900,000 and 1 Mt of export quality thermal coal
  • Agreement confirms the quality of the Makhado HCC and international demand for the product
  • Represents another significant step in the development of the Makhado project which will generate significant employment opportunities in the Limpopo province.

Under the terms of Agreement, the first supply of HCC is due 18 months after construction of the Makhado project commences and is subject to the following conditions precedent:

  • Baobab confirming by 1 April 2019 that it has secured funding for the capital, mining and operations for its Makhado project, extendable by 12 months
  • HDCTC and the company procuring the necessary internal and regulatory approvals to proceed with the Agreement, also by 1 April 2019
  • Makhado site works commencing by 30 June 2020.

It is envisaged that the coal will be sold free-on-board (FOB) at the Matola Terminal in Maputo, Mozambique. The HCC sales price per the Agreement is linked to a published index price, confirming the marketability of Makhado’s coal. International prices of HCC have been positive over the last 18 months and the Company is confident that long-term prices will remain favourable.

South Africa produces significant quantities of thermal coal, primarily used for heat, steam and electricity generation, sold to domestic and export customers. However, the country has a very limited domestic supply of high-quality metallurgical coal resulting in coke producers having to import HCC for the manufacture of metallurgical coke. This coke is used in furnaces with iron ore and a flux (lime) to produce pig iron (steel). It is anticipated that the balance of Makhado’s HCC production (not sold to HDCTC) will be sold domestically.

The development of MC Mining’s flagship Makhado project is expected to facilitate economic growth in the Limpopo province and the Agreement has the potential to generate significant foreign currency inflows for South Africa. The timeframes envisaged in the Agreement are in line with the Heads of Agreement signed with China Railway International Group, announced in September 2018. The HOAs will result in the negotiation of a funding package for the Makhado EPC coal handling and processing plant, 85% of the EPC costs and contract mining operations, conditional upon the finalisation of mutually acceptable terms and conditions by June 2019.

David Brown, CEO commented: “The signing of the first HCC off-take agreement is a significant step for Makhado, reaffirming its worldclass coal qualities and international appetite for this type of coking coal. South Africa is a traditional producer of thermal coal with currently no significant HCC being produced which results in producers having to import the commodity. Makhado’s coking coal has the necessary attributes to replace some of these imports whilst the development of the project will generate employment opportunities in the Limpopo province and make a positive contribution to the national balance of payments.