Johannesburg — COAL producer Exxaro on Friday marked the start of construction on an expansion to its Grootegeluk project in Limpopo, which the company believes will see the mine become the biggest coal operation in the world.

The R9,5bn project will see annual production rise from about 18-million tons to 33-million tons by 2015. Exxaro temporarily suspended the project's funding programme after power utility Eskom asked for a review of parts of an agreement to supply the new 4800MW power station at Medupi, which is expected to come online in 2012.

The issue has now been resolved and Grootegeluk is set to supply Medupi an average of 14,6-million tons of coal a year over the next 40 years. Deliveries to Medupi will start in the second quarter of 2015.

CEO Sipho Nkosi said Exxaro had already spent R505m on the earlier stages of the project and expected to spend about R4,5bn of the total capital cost by the end of May 2012. Most of the required funding arrangements were in place.

"The Grootegeluk expansion represents one of the largest mining growth projects in southern Africa and the progress we are making bears testimony to the ability of Exxaro to successfully plan, develop and implement projects of this magnitude," Nkosi said.

The project includes modern systems that will enable Exxaro to cut costs by crushing run-of-mine material in the pit before transporting it to processing plants via conveyor belts.

"It's really state of the art," Cadiz analyst Peter Major said.

"This is definitely the most significant of the Exxaro mines; they don't have another great deposit to open up so they'll keep expanding this."

But the major deal with Eskom reflected a long-term problem for Exxaro, Mr Major said.

With limited capacity to export coal through the Richards Bay Coal Terminal, Exxaro was "tied" to the national power utility, which had restricted the benefits to Exxaro of the current high international coal price.

"If the overseas prices go up, Eskom does end up paying higher prices, but there's not the same immediate impact."

The project also involves the construction of 794 housing units at a cost of R590m for employees in the nearby town of Lephalale.