There are power outages and new projects are hungry for power supplies. Just to highlight how bad the countries power shortages are: “Free State farmers were on Thursday asked by Eskom to cut their power consumption by 10%, mainly during peak hours”. "Power supply in both countries remains very tight. Regular load shedding and reduced supplies are forecast to continue for the next 5 years. Not a great state of affairs in a minerals boom for a major commodities exporter.
Another problem for miners in Southern Africa is the high Rand. This might actually cool new mining capacity. This and the constrained port export capacity, mean that there should also be ample short term coal for domestic power production. But new power stations need to be built on sustainable supplies of low grade coal which don’t have export potential. Low grade means high water, high ash coal that requires washing and can only be transported short distances. These types of projects offer captive, cheap coal supplies because they barely have an alternative market. In these tenders coal supply and power station development and management is being offered as a single contract.
Both CIC Energy of Canada and Aviva Corp of Australia are front-runners for power purchasing agreements which would help underwrite the financing of their combined 1500MW power stations based on their own delineated coal supplies. See Article A2. Aviva has outlined a 1 billion tonne resource, though the coal will require washing to reduce ash to 30%.
CIC Energy is actually proposing a larger 5,000MW project based on Botswana's Mmamabula coal field. CIC has agreements in principle to supply power to both Botswana and South Africa, but negotiations have snagged over the price of the power, the cost of the project and engineering constraints.
One gets the impression that Eskom is delaying the bidding despite political pressure to ensure it attracts competitive bids from several consortia. It has a large amount of capacity to negotiate with. I am wondering if Aviva is a serious bidder for early development, or whether it might be delayed. For security of supply reasons I think both parties will be winners, it’s just that the more competitive bidder will secure more capacity. Reading its ASX announcements “The drilling campaign is expected to be completed by the end of August, with final coal quality test results expected by the end of October”. CIC Energy is also struggling securing power plant components, so there is some scope for delays. Last week, CIC Energy announced that the schedule for the Mmamabula project would be delayed by about six months. It said strong demand for power plant builds, and the prevailing engineering resource constraints, were increasing lead times for power plant equipment and construction services. So CIC is also facing delays. See Article 1 and Article 1A. For info on the competitor see Article 2.
Source: Article 3. If you read the following statement you will get the impression that Eskom is between a rock and a hard place in its current coal procurement negotiations – see article 4.
Aviva has the advantage I suggest of exposure to another promising project - a proposed coal-fired power station in Western Australia where the arguments are even more compelling. This exposure might however be of concern to Eskom. Aviva has 118mil shares on issue at 87c = $100mil, plus $22mil in cash reserves. Major shareholders already control 83% of the company’s stock.
Andrew Sheldon www.sheldonthinks.com