MC Mining’s Limpopo Coal signs Contract Mining Agreement

MC Mining’s wholly owned subsidiary, Limpopo Coal Company (Pty) Ltd (LCC), signed a Contract Mining Agreement (the Agreement) with HOS in December 2022 to recommission, upgrade and operate the Vele’s coal handling & processing plant (CHPP) and undertake mining in terms of an agreed mine plan.
The Vele Colliery is located in the Thuli coalfield and has a life of mine in excess of 40 years. Vele was placed on care and maintenance in 2013 due to weak thermal coal prices and the requirement for modifications to the colliery’s CHPP that would facilitate the extraction of the smaller coal fraction and the simultaneous production of semi-soft coking coal and thermal coal. The Vele Colliery incurred high logistics costs when operational during 2012/2013, as the nearest export terminal is Maputo, which is ~760km away.
The improvement in coal prices during CY2022 created optionality for the potential recommencement of operations at Vele. MC Mining evaluated various options to recommence operations at Vele and, given the capital and working capital required and the Company’s focus on the development of its flagship Makhado steelmaking hard coking coal project, the outsourcing of operations at the colliery was considered the optimal strategy.

Contract Mining Agreement
As previously announced, the Company signed the Agreement in December 2022 and following this, HOS recommissioned and upgraded the Vele Colliery CHPP and commenced mining. The Agreement is on an exclusive basis to produce thermal coal and endures for an initial five-year period to December 2027. HOS targeted monthly production of 60,000t of saleable thermal coal from Vele and LCC earns R200/t (excluding VAT) (US$11/t) for each tonne of saleable coal produced if the average monthly API4 export coal price is above US$120/t. HOS is responsible for all mining and processing costs at Vele while LCC remains responsible for the colliery’s regulatory compliance, rehabilitation guarantees, relationships with authorities and communities as well as the supply of electricity and water.Re-engineering of operations
HOS has experienced challenges in attaining the targeted monthly saleable coal production while unit costs have been adversely impacted by the lack of access to rail capacity to transport Vele’s coal to port. The railing of coal was anticipated to result in a significant reduction in logistics costs due to the colliery’s location and the high cost of trucking coal to port and domestic customers. The challenges experienced by the colliery have been exacerbated by the decline in the API4 export thermal coal price during CY2023. The three-month average API4 price for Q1 CY2023 was US$146/t, reducing to US$115/t in Q2 CY2023, US$109/t in Q3 CY2023 and currently trades at approximately US$102/t.
HOS has informed LCC that due to the production challenges at Vele, combined with elevated logistics costs and the depressed API4 coal price, it intends downscaling operations at Vele and while it progresses a production optimisation strategy at the colliery. As a result, HOS has exercised the hardship clause in the Agreement and will downscale operations at Vele during the remainder of December 2023 and January 2024. HOS’s production optimisation strategy (Operation Shandukani) will potentially include, amongst others, changes to the mining methodology, as well as further modifications to the CHPP and securing access to rail transport at competitive prices. The evaluation of these measures is expected to take place in H1 CY2024 and will result in improved profitability at the colliery.