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ZYL Limited to gain control of Kangwane anthracite asset
Monday, February 04, 2013 by Bevis Yeo



ZYL Limited stands to gain control of the Kangwane Central Anthracite Project for a reduced upfront payment ZAR40 million, from the original ZAR100.5 million. The restructuring simplifies funding and increases the likelihood of securing funding.

ZYL Limited (ASX: ZYL) has executed a deal with its partners to gain control of the Kangwane Central Anthracite Project in South Africa in the near term for a significantly reduced cash outlay.

Under the Memorandum of Understanding, the company can secure 50.1% of Kangwane for an upfront payment of ZAR40 million (A$4.3 million) compared to the original ZAR100.5 million that was originally anticipated.

It also shifts the focus of ZYL’s obligations to advance the project towards development by reducing the magnitude of the required upfront payments to the vendors.

The restructuring simplifies the current, more complicated funding structure and increases transparency for the benefit of all stakeholders.

“The revised proposal is required to consolidate the ownership structure and to reduce the complex funding issues, which in turn significantly enhances ZYL’s prospects of securing the necessary funding to develop the project,” chief executive officer Ian Benning said.

“This is an important milestone for ZYL as it is the first step in rebuilding the company and refocusing the business towards the development of the Kangwane Central Project following the announcement in December to tender the return of the Mbila Resources (Pty) Ltd shares to the vendors.”

Revised transaction details

The revised deal cancels ZYL’s obligation to subscribe for preference shares, alleviating the previous preference share subscription amounts to be paid by ZYL upfront to vendors Siyanda and Double Ring.

Instead, the company will pay ZAR40 million in ordinary shares to the vendors by way of a special dividend upon fulfilment of the various conditions precedent of the MOU.

Partners in Kangwane have also agreed to fund their proportionate share of any expenditure.

In addition, ZYL’s obligation to contribute a further ZAR30 million into the project by way of an equity subscription along with the ZAR5 million loans to the vendors will now be payable only following the approval and granting of all the licenses and permits required in order to undertake mining activities.

These licences include, but are not limited to the mining right and a water use license, which is expected in the fourth quarter of 2013.

The additional equity subscription does not increase ZYL’s stake in the business but is instead made to capitalise the business.

Kangwane

The Kangwane Central Anthracite Project will be developed in a phased manner commencing as an opencast mine and over time will transform into an underground operation. The majority of the production in the first 10 years of mining will be extracted by opencast mining.

The preferred development strategy is based on the use of a contractor for opencast mining and an owner-operated model for underground mining.

Throughout both the open pit and underground operations the processing plant will be an owner-operator based facility.

The Project is projected to deliver a strong cash flow and returns to shareholders, and transform ZYL into a producer of high grade anthracite.

This is in line with ZYL’s strategic plan of taking advantage of the predicted significant global shortfall in the availability of seaborne anthracite in the next few years.

A Bankable Feasibility Study by RSV Enco Consulting for Kangwane had demonstrated strong economic returns:

- Project NPV of US$148m at a discount rate of 8%, based on 100% equity (after tax)
- Nominal IRR of 41.0% (27.2% real)
- Robust economics on an initial Project life of 20 years
- Phased development optimised to produce circa 1.2 Mtpa ROM (˜700 ktpa saleable) for the first eleven years, thereafter circa 900 ktpa ROM (˜400 ktpa saleable) from a combination of open cast and underground operations
- The on-mine ROM total operating cash costs will average US$42.39 per tonne for the opencast and US$30.24 per tonne for underground
- Start-up capex of US$67.6m for the opencast with additional capex required in years 6-7 and 12 of US$70.8m to establish the underground mines
- JORC-compliant Reserves of 19.3 Mt, including Proven Reserves of 17.4 Mt
- The Project will produce a very low sulphur, 16-17% ash product
- Gross Project revenue of US$1.475 billion (pre-tax)
- Net operating cash flow of $754 million
- Average selling price of US$136/tonne FOB, excluding a low sulphur premium
- Operating cash flow margin 31.5%

The results from the BFS demonstrate a long life anthracite project with robust economics and inherent flexibility by virtue of having multiple opencast pits in combination with underground sections.

Additionally the Kangwane Central Project is located in an area that is well serviced with key infrastructure and is approximately 100km in a straight line from the port of Maputo which will be used to export Kangwane Central Project’s product for the global steel and associated industries.

The Kangwane Central Project has JORC-compliant resources of 200 Mt, all in the Measured Category of which less than half will be exploited during the initial 20 years of mining.