Coal of Africa: Negative 10-Bagger Implats ex-CEO reckons ready to rebound
Like the continent which it is named after, Coal of Africa possesses great potential that it has struggled to live up to. Its shares trade at a fraction of where they were two years back, earning it the dubious distinction of being a negative Ten Bagger. But CEO David Brown, who previously held the same position at the mighty Impala Platinum, is convinced he's not wasting his time with the small coal company. The road has been a long one, but he's confident that after the sale of its troublesome Mooiplaats Colliery, Coal of Africa is well on the road to recovery. If you're a patient investor, watching this interview might just convince you to join him. – AH
ALEC HOGG: Welcome back to Power Lunch. Joining us in our studio here, at the Johannesburg Stock Exchange, is David Brown. He's the Chief Executive of Coal of Africa. Previously the CEO of Impala Platinum and I'm sure he's glad, in a way, that he's not involved in that sector anymore but I guess things have not been that easy for you, David in the coal. Coal of Africa is a much, smaller business. I guess you've been getting out of bed earlier in the morning to try and get this one fixed.
DAVID BROWN: Thanks, good afternoon Alec, certainly we embarked on a turnaround strategy probably some 12 to 15 months ago. One of the things that attracted me to Coal of Africa was the very substantial, significant resources that it has access too. It's got very good, high quality, hard coking coal resources, which do trade as a premium to your normal thermal coal and certainly with, add that to the substantial resources, certainly attracted me as being in a company that was worthwhile getting stuck into and helping sort out.
ALEC HOGG: So it's got potential.
DAVID BROWN: It's got great potential.
ALEC HOGG: But its hard work to get the potential unlocked.
DAVID BROWN: Yes, I think the problem at the moment, is the macro-environment. Certainly from commodity prices and coal, in general, is that obviously prices have come off again during this calendar year, another 20 percent down. In this SA mining scene there's, obviously some policy issues and difficulties, which investors are shying away from and that's the message that I get, certainly from London and America. Then you couple that with the fact that the junior space tends to be more future dated, in terms of access to cash flows. People are tending to, if they're going to get into commodities they want to get into 'near cash' generators rather than the longer dated resources.
ALEC HOGG: This is the stock that was around R8.50, two-and-a-half years ago. It is trading at 60-cents now. Up nicely, since you did the announcement on Mooiplaats, but it's a long way. That's a negative ten-bagger already. I guess people are being, attracted by the potential in the same way as you are but sometimes it takes longer to unlock than anticipated.
DAVID BROWN: Look, I think we've got great support from our large institutional shareholders. As you know, we announced an equity raise, the EGM shareholders voted in favour of the 88-odd percent shareholders who voted at the EGM, 99 percent were in favour, so quite clearly there's a good understanding of what we need to do. The fact that we need to raise this money in order to get to the next phase, I think you are right, giving the commodity environment and given the SA mining scene, it is probably going to take longer to unlock than maybe two or three years ago.
ALEC HOGG: And the sale of Mooiplaats, how firm is that?
DAVID BROWN: Look, I think that's an asset that's proved quite difficult to sell. We put that on the block, so to speak, some months ago. We had a lot of interested buyers. I think the real issues were access to funding, given the decline in commodity prices. If you're a seller, it is probably a good time to be a buyer of assets at this point in time, given the valuations and trying to sell an asset that had been making losses for the group is quite difficult. The buyer is someone who has a contiguous piece of ground and therefore will be able to unlock substantial synergies, and therefore make economic sense for this person, as the purchaser.
ALEC HOGG: So you looked all around the market and you ended up selling to your neighbour?
DAVID BROWN: Kind of…yes.
ALEC HOGG: That doesn't tell us that the price was…were you a price taker, 250-million? It sounds like a lot of money but in this case.
DAVID BROWN: Yes, look I think we would have probably preferred more but given the commodity price environment and the fact that there was really no natural buyers of the asset, other than this individual who had a contiguous piece of ground. It wasn't as if we had a lot of choice, so we were price takers in that regard, yes.
ALEC HOGG: All right, now people are looking at this share price. They're saying it is down by more than tenfold, in the last two-and-a-half years. David Brown left a big job at Impala, to come and run it. Its bargain basement levels. You've had institutions who've been prepared to put money behind it. What's the story that the small shareholder is missing, because he isn't coming in here and mopping up the stock?
DAVID BROWN: Well I think the real issue is access to 'near term' cash flow, and that's really, I think the difficulty that a lot of new investors have. As I said, the commodity stocks are somewhat out of favour. At this point in time, and if you're going to get into commodity stocks you tend to flee for, shall we say, the big market-caps, which are still paying dividends and there is cash flow coming from those stocks. Whereas ourselves, as an investment thesis, effectively, we're a longer-term play, we've obviously got to work to develop those resources and cash flow will only be in, probably two to three years' time.
ALEC HOGG: But you have got rid of the cash drainer?
DAVID BROWN: Yes, the cash drainers… On the cash burn basis we've reduced our cash losses from about R68m, in the previous financial year and in fact, going forward for the next financial year, would probably be down to about ten or $11m. We've done all the cost cutting that we need to do. We've put all the elements in place. We've now just got to be moving forward, in terms of the developments of the projects.
ALEC HOGG: Any regrets.
DAVID BROWN: In terms of…?
ALEC HOGG: You, personally.
DAVID BROWN: No, I don't think so.
ALEC HOGG: I suppose platinum was a pretty tough place to stay in.
DAVID BROWN: Yes, and if you remember, my last six-months was fairly tolerated, Impala Platinum. We had the strike with AMCU at that stage, in early 2012. Then obviously Zimbabwe, the difficulties in terms of being able to operate up there, so from my point of view, I'd been with Impala for 14 years. I was looking for a fresh challenge. I'm not going to go and ask for my job back again. I've moved on and, certainly, I'm really enjoying the challenge at Coal of Africa. It's a great team. It's a young team and I want to see them develop over time and be able to deliver value to shareholders over the next couple of years.
ALEC HOGG: You referred, right in the early part of this conversation, to the difficulties of operating in South Africa that you hear from London and New York that there's not that much appetite to come and invest here. Unpack that for us.
DAVID BROWN: Look, I think it's with regard to the investment Dollar. Effectively, during the early 2000's, when we had a locked-in commodity boom it was quite easy to sell South Africa and sell the commodity space, to international investors, particularly in the U.S. and the U.K., and that's obviously become a lot more tricky over the last couple of years. I think, in part, starting with the rumblings of nationalisation, I think then with the recent changes in the legislation and the regulatory environment. Each time there's a change that creates additional uncertainty and with that uncertainty, given the fact that mining is a 'long lead' game. It requires a significant amount of capital. Investors are looking for certainty over a prolonged period of time and, quite clearly, when you keep changing the rules, people tend to get a little uneasy.
When you couple that with the fact that we are particularly looking further East for our money now, there has been a, thank goodness, a renewed appetite, particularly, coming from China.
ALEC HOGG: How clean is the mining legislation in South Africa? How clean is the Mineral's Department?
DAVID BROWN: Clean as in…?
ALEC HOGG: Non-corrupt.
DAVID BROWN: Look, as I say, I haven't personally had issues with it, per say. I think some of the issues that we have had is around capacity, in terms of being able to deliver within reasonable timeframes. I think there is definitely a need to ensure that the red tape or the bureaucracy improves and that we are able to get license applications approved a lot quicker.
ALEC HOGG: So it is more incompetence than people holding out for cash?
DAVID BROWN: I don't know about incompetence or competence. I think it's a capacity issue, whether they've got sufficient resources available to them to actually, deliver.
ALEC HOGG: David Brown is the Chief Executive of Coal of Africa.