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Additional	Information
Market:	ASX
Sector:	Coal
Epic:	RES
News:	Latest news
Web Site:	Resource Generation
Other Articles:	19-02-201015-02-201011-02-2010

Resource Generation Limited is developing energy for power-strapped South Africa

by Andrew McCrea

Resource Generation Limited is an ASX listed emerging coal producer with its major asset a 30 per cent interest in three coking coal and thermal coal deposits in the Waterberg Coal Field in South Africa.  The 30 per cent interest in the properties, Lisbon, Zoetfontein and Koert Zyn Pan, can be increased to a 70 per cent interest upon expenditure by Resource Generation of US$5m over three years towards a Bankable Feasibility Study (BFS).  

The 70 per cent interest is currently owned by a Black Economic Empowerment (BEE) group, Lukale Mining Ltd.   The coal properties were acquired from BHP Billiton and BP Coal due to pro-BEE changes in South Africa’s minerals legislation.

Resource Generation also owns four coal thermal deposits in Tasmania, previously owned by BHP Billiton and Rio Tinto.

Recent Developments

•    Granted an ESKOM (South Africa’s State owned power company) Generation Division Vendor Number to supply ESKOM new power stations

•    Appointed Paul Jury as Managing Director.  Previously, he developed ASX-listed Resource Pacific Holdings Ltd from a market value of A$50m to eventual takeover by Xstrata at an exit value of A$1.15 billion.

•    Capital raising of A$12m through a placement of 66.7m shares at A$0.18 per share

•    Change of name from Comdek Ltd to Resource Generation Ltd

•    Acquisitions of wholly owned coal projects in Tasmania previously owned by BHP Billiton and Rio Tinto

•    78% increase in JORC inferred coal resource estimate to 739 million tonnes of thermal and coking coal.  Majority of the resource of 650 million tonnes is thermal coal

•    New program of drilling to commence in late 2008 for exploration and development of South African coal properties

Comment by Andrew McCrea (AFSL: 288191)

South Africa’s nation-wide shortages of electricity, leading to forced blackouts are forecast to last until 2012 (Morgan Stanley, ESKOM) and beyond.  While electricity outages have been reduced of late, they are not gone for good.  The lack of investment by ESKOM in future electricity generation has opened the door for a newcomer like Resource Generation to develop its thermal coal resources and supply ESKOM with much needed coal.

As many as eight new power stations will be needed over the next 20 years and substantial coal resources such as Resource Generation’s will likely be needed to supply some of these needs. 

Resource Generation’s coal resources are located in the Waterberg Coalfield in Limpopo Province, north of Johannesburg and Pretoria.   The Waterberg Coalfield is South Africa’s largest coal resource for the future, as coal reserves from the main Karroo Basin are depleted.   The area is serviced by a rail line 40 km south east of Resource Generation’s coal properties to Richard Bay Coal Terminal (RBCT).
RBCT has undergone capacity upgrades and preference is given to pro-BEE companies.  The Company’s BEE partner will be of assistance in this regard.

Resource Generation’s coal deposits are 30 kilometres from JSE listed Exxaro Resources’ Grootegeluk Colliery’s coal deposits in the Waterberg Coalfield.  The latter will supply ESKOM’s new Medupi power station.  Given this, Resource Generation’s coal project is not likely to supply Medupi.

Eskom is also building another coal-fired plants, Kusile.   However, this will be supplied by Anglo Coal.
Eskom is carrying out environmental assessments for two new coal-fired power plants it may build to meet rising demand for electricity. ESKOM is considering sites in Lephalale, in the coal-rich Waterberg region of northeast South Africa, and near Sasolburg, south of Johannesburg.

Good potential exists for Resource Generation to develop its coal properties and to negotiate supply contracts from ESKOM as well as supply hungry export markets for its thermal coal.   However, while rail access to Richards Bay Coal Terminal is less than 50km away, the challenge for Resource Generation will be to get rail and port access to sell its product.  For thermal coal suppliers, transportation costs have a significant effect on the price of this coal.   Ideally, Resource Generation could develop its thermal coal resource for one of the new power plants contemplated like Lelhalale, which would be in the Waterberg region.

If Exxaro decides to build new rail network capacity up to the Waterberg area, Resource Generation could likely “piggy-back” off the network.  However, at present there is no definitive decision by Exxaro to expand the capacity of the network.  

Tasmanian Coal Properties
The Company’s Tasmanian four coal properties are well placed for rail infrastructure and more than one port option.  The Woodbury and Bonnie Tier (Latrobe) properties have a historical, pre JORC resource of 12 million tonnes.   It is envisaged this could increase to 100 million tonnes.  Further exploration could unearth 200 million tonnes of thermal coal in the Jericho East and Jericho West properties, historical estimates were 60 million tonnes.  With thermal coal export prices buoyant, these properties appear to have reasonable profit potential given infrastructure nearby.

Summary
Resource Generation is an interesting early stage coal play with global thermal and coking coal prices forecast to remain robust due to demand from South Africa and Asian markets.  Waterberg coal for power stations does have a higher ash content of 35 per cent (as well as higher moisture and sulphur content) compared  to premium coal ash content of eight to 10 per cent.  Therefore, the Company’s thermal coal would be primed for the domestic power market.

The Company has plenty of cash after the recent placement, is operating in South Africa where coal fuelled power stations and electricity will continue to be in short supply.   Its thermal coal property Koert Louw Zyn Pan is highly prospective for a significantly greater coal resource.  

We wouldn’t be surprised to see the current South African coal resource increased to 1billion tonnes in 2009.  With the recent appointment of ex-Resource Pacific chief, Paul Jury as Managing Director we believe the Company will move to aggressively develop its coal assets.   Resource Generation is likely to regain market support - as it delineates its coal resource in South Africa and delivers a Bankable Feasibility Study by mid- 2009.  Possible time frame to supply electricity starved South Africa from its Waterberg coal properties, allied with strong thermal coal prices is close to ideal.

 

Vital Statistics

ASX Code: RES
Share Price: A$0.13 (1 October 2008)
52 Week Range: A$0.12 – A$0.22
Market Capitalisation:  A$80.4m
Shares Outstanding: 618.3m
Options unlisted: 91.5m (at A0.20 – A$1.60 strike)
Ave. Daily Turnover: 1.3m shares
Cash on hand: A$12.5 (August 08)

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