London-listed Edenville Energy has signed a 12-month agreement for Brahma Energies to produce and sell at least 4 000 t a month of washed coal from Edenville’s Rukwa coal project, in Tanzania.
Under the terms of the agreement, which takes immediate effect, Brahma will take on full day-to-day operational management and control of the Rukwa mine, including all operational costs.
Edenville will continue to provide oversight of the activities.
Brahma is a local Tanzanian mine operator and commercial and logistics specialist with up to 70 coal transport vehicles at its disposal and experience in mine operations, mine management and coal commercial sales.
The offtake agreement, which can be extended by mutual agreement, will enable Edenville to sell all of its washed coal to parties introduced by Brahma, the company said on August 1
Given the state of local demand, it is expected that sales will be concluded with customers in Tanzania and with those in neighbouring countries. As a result, the net target sales price for Rukwa coal delivered at the gate of the mine is currently estimated to be between $35/t and $50/t of washed product.
Edenville will receive $10/t of washed coal sold at the minimum price of $35/t, plus 60% of any sales revenue above $35/t of washed coal as part of a profit sharing arrangement. Brahma will be responsible for the collection of any taxes and royalties from coal sales after the second month.
Edenville believes this will motivate the Brahma operational team to ensure the maximum output, sales volume and sales price are achieved. Edenville management will work closely with the operator on any proposed sales contracts.
Edenville will continue to manage and fund operational costs from its existing cash resources during the first two months of the agreement, following which the company expects Rukwa to become cash flow positive on an ongoing basis.
Edenville will also retain the right to deploy additional capital to expedite production ramp-up if deemed necessary. Any such capital deployed will have to be repaid to Edenville before any profit share is paid out.
Brahma’s commitment to produce 4 000 t a month will be contingent on the plant being in working order and any commitment above 4 000 t a month will be contingent on further plant improvements, Edenville said.
“Unlike previous agreements, this contract does not cap the Edenville upside in terms of coal sales price. Brahma have agreed that a stockpile of run-of-mine (RoM) coal will be built up over the coming months to seek to ensure production and sales [consistency] even during the rainy season, which can severely curtail access to RoM.
“With a regular supply of washed coal, the company is optimistic it will be able to secure attractive market prices for domestic and regional sales,” Edenville CEO Noel Lyons said.
Following a visit to Rukwa and an analysis of the operation, the newly appointed management of Edenville concluded that the mine would benefit from more oversight and better on-site management to meaningfully build on the low and sporadic historical production and sales, and to allow Rukwa to achieve its potential.
Currently, the Rukwa wash plant, which has an input capacity of 100 t/h, is yielding only about 35 t/h of washed coal output. There is, therefore, scope to increase this yield following the completion of ongoing repairs.
Based on its initial analysis and following consultation with Brahma since the company was appointed on August 3, Edenville believes an initial 4 000 t a month of washed coal can be achieved from the wash plant by mid-September following the completion of the repairs to the plant.
A further increase to 6 000 t a month of washed coal will then be targeted, albeit following additional maintenance and repairs to existing infrastructure, as well as the possible deployment of additional equipment.
Output could be increased even further with longer or double shifts and by possibly adding additional working days.
However, Edenville said it is pursuing a conservative approach to increase production steadily from initial levels, until such time as the operational capacity of both staff and existing machinery is better understood. As such, Edenville said it would be monitoring progress and looking at ways to further improve output above the stated target in future.
The current at-the-gate sales price range of $35/t to $50/t is low when compared with international coal prices. However, transportation costs, which are compounded on top of this price, are high because of the remoteness of Rukwa.
The price structure also reflects the royalty regime in Tanzania, which includes the transport costs in its calculation. To achieve international coal prices, the mine would need both large, consistent production and sales quantities, as well as reasonable access to international ports by road or rail.
Therefore, sales of Rukwa coal are currently focused on local markets only, particularly cement companies that require coal as part of their production processes.
Regional coal prices have, however, risen over the past year and Edenville believes there is potential for further increases if global demand for coal continues at current trends.
Edenville also believes the establishment of a reliable source of washed coal at Rukwa will strengthen the company’s position on any further offtake negotiations.
SOURCE: MINING WEEKLY