Out-Law Analysis | 29 Jun 2021 | 1:19 pm | 3 min. read
The departure of several major coal mining giants has resulted in a shift in the historic ownership trends of South Africa's coal mining operators, and is presenting opportunities for smaller operators to break into the market.
Although a number of the more traditional and entrenched South African coal mining players are exiting the market or seemingly no longer intending to invest in new coal mining projects, what remains clear is that coal will remain an integral part of South Africa's energy landscape for some time to come.
South Africa's Integrated Resource Plan 2019 said coal would “continue to play a significant role in electricity generation in South Africa in the foreseeable future as it is the largest base of the installed generation capacity and it makes up the largest share of energy generated”.
Accordingly, there are questions about the future of coal mining from an ownership perspective in South Africa.
In May 2021 the shareholders of global mining giant Anglo American approved the demerger of its South African thermal coal mining business into a new holding company, Thungela Resources. Shares in Thungela listed on the Johannesburg Stock Exchange and London Stock Exchange on 7 June 2021.
The current global focus on environmental, social and governance, or ESG, compliance is driving behavioural change in investor and institutional interest
Anglo American's decision to demerge the business follows a similar decision by South32 to sell South Africa Energy Coal (SAEC) to South African group Seriti Resources, which was agreed on 6 November 2019. Seriti finally assumed management of SAEC on 1 June 2021, and has rebadged SAEC as Seriti Power. The deal follows Seriti’s acquisition of three coal mine operations from Anglo American in early March 2018.
By contrast, Glencore, another major stakeholder in the South African coal mining industry, has indicated that it intends to continue its coal mining operations until its mines reach the end of their lives. Glencore, in its 2020 Climate Report, said selling its coal mines would not remove their associated emissions. However, it seems fair to assume that Glencore is unlikely to seek major new investment in new coal mining projects in South Africa.
The trend of major coal miners scaling down their operations in South Africa is a result of numerous factors, not least of which is the current global focus on environmental, social and governance (ESG) compliance, which is driving behavioural change in investor and institutional interest. Commercial imperatives within the global mining sector to ensure enhanced ESG compliance have increased in recent years.
An example of this is the introduction of the Mining Principles 2020 by the International Council of Mining and Metals (ICMM) which includes improved ESG practices within the mining sector.
Along with implementing the Mining Principles, ICMM members are required to publicly report on their sustainability performance against the Global Reporting Initiative Sustainability Reporting Standards. The objective of this transparent disclosure is to provide a certification tool to interested stakeholders in a company's ESG achievements. Some of the biggest names in mining, including Glencore, Anglo American, BHP and Rio Tinto, are ICCM members and are therefore required to comply with the Mining Principles.
Investors are taking a keen interest in the operations of coal mining companies and their actions towards achieving ESG goals and this, in turn, has become a major driver behind investment decisions. Companies which achieve or plan to achieve ESG objectives which are aligned with international standards and agreements – such as the Paris Climate Agreement and UN Sustainable Development Goals – are more likely to attract new investment from institutional investors.
Similarly, shareholder activist groups are requiring financial institutions to be more responsible in their dealings with mining companies, to ensure that they are implementing their climate change undertakings.
South Africa's coal mining sector appears to be going through a change of landscape not dissimilar to that experienced in the North Sea oil and gas production sector in recent years, where a new breed of investors has acquired North Sea assets from exiting market participants such as ExxonMobil.
The likes of Thungela and Seriti appear to have seen an opportunity to extract additional resources from mines that were previously owned by the likes of Anglo American and South32. South Africa's coal reserves are currently estimated at 53 billion tonnes and, considering the present production rate, this equates to roughly 200 years of extractable reserves – feeding the appetite of new coal miners to fill the void left as the incumbents depart.
The protracted construction of the Kusile and Medupi power stations (the latter, when fully operational, will be the 8th largest coal-fired power station in the world) further highlights the gap that will need to be filled by new players as a result of the previously entrenched coal miners exiting the market.
As historical mining giants begin to downscale their coal mining operations in South Africa, as a country reliant on coal for its electricity generation the need for coal remains a practical reality and the recent transactions may show the potential future landscape of coal mining ownership in South Africa.
Khetha Shezi is a corporate law expert at Pinsent Masons, the law firm behind Out-Law.com. Kirsten Gilbert-Dempsey of Pinsent Masons also contributed to this article
29 Oct 2020