The Herald (Harare)

15 May 2014

Zimbabwe: Hwange Rejects Van Hoog's Offer

HWANGE Colliery Company has terminated discussions with major shareholder Mr Nicholas van Hoogstraten for a $50 million loan citing issues around management control and cost of the funding.The board is now focusing on restructuring the business to turnaround its fortunes. Hwange rejected the offer for a five-year convertible irredeemable loan stock in the sum of $50 million from Mr van Hoogstraten, at an estimated cost of $9 million made up of interest at 10 percent, plus 3 percent of turnover and 17 percent of profit per annum.

Mr van Hoogstraten also wanted effective management control during the five-year loan tenure. The loan was to be extended through Willoughby's, an investment vehicle owned by Mr van Hoogstraten.

Hwange chairman Mr Farai Mutamangira said the deal collapsed after the two failed to agree on key issues.

"After consultation with major shareholders and failure to break the deadlock on the issue of management control, and also having regard to the costs of the funds, the company was unable to progress with this offer further," said Mr Mutamangira in a letter to shareholders dated May 7.

Cognisant of the need to take drastic measures to save HCCL, the board and management has put together an "aggressive and definitive plan" to turnaround the fortunes of the company.

The turnaround plan to be presented to major shareholders seeks to address concerns on non-commercial activities in the company, restructuring of executive management by resizing senior management positions and bring on board a chief operating officer to strengthen management;

The board also resolved to cut 50 percent of current staff and reduce the wage bill by 50 percent.

According to the plan, the company will be restructured into six operating divisions as follows; Hwange Colliery Holdings, Hwange Coal Mining, Hwange Plant and Equipment, Hwange Coal Processing and Cokeworks, Hwange Properties and Estates as well as Hwange Hospital.

The objective is to ensure that these divisions are profitable as units and that they raise capital on the basis of their own balance sheets.

The pricing of Hwange Power Stations coal will be revised to commercial levels of about $35 per tonne from $29.

Balance sheet restructuring will be carried out to convert $100 million of short-term debt to long-term debt and enable the company to meet its current obligations.

The Government as a major shareholder has been approached to consider the conversion of debt to equity.

Under this structure, shareholders have the option of swapping debt for equity or making direct cash injections.

On operations, the company is troubled by legacy debts amounting to about $150 million and over the past two years about $35 million has been spent on servicing some of these debts, said Mr Mutamangira.

"With increased production the company will be in a good position to clear legacy debts and quickly return to profitability.

"While the legacy debt has weighed down the performance of the company, clearly the debt will be cleared with improved production performance premised on acquisition of new mining equipment," he said.

HCCL remains severely constrained due to subdued capacity shortage working capital. The average tonnage being produced is 200 000 tonnes per month, enough to break even, said Mr Mutamangira.

The company has also come under increased competition from Makomo Resources, Coal Brick and Chilota Colliery. This competition has eaten into the market share of HCCL as it is benefiting from relatively new coal concessions with shallow coal deposits, lean cost structures and price undercutting.

However, the coal miner sees production increasing to between 450 000 and 500 000 tonnes, boosted by contract capacity.

Hwange awarded Mota-Engil of Portugal a contract to mine and the company is expected to commence operations in the second half of this year.

The contractor will produce 200 000 tonnes of coal per month. This will assure HCCL of a monthly turnover of not less than $18 million.

At this level, and assuming costs are contained below $9 million a month, HCCL will have sufficient turnover and gross margin to not only grow the business but also, to service its legacy debts, said the chairman.

Going forward, company will require as much as $150 million to fully recapitalise. The markets for both coal and coke products remain fairly buoyant but characterised by intense competition.

The coal reserves of HCCL are critically low with most of the open cast resource that is commercially viable to mine now below five years from completely running out.

The JKL Pit, where the dragline is stationed is the most affected. Without the Government support in the form of additional coal reserves, the life of the mine remains critical and hence the need for shareholders to engage to save the Company.

The views of the Government regarding the future of Hwange are to be carefully considered and common positions found, said Mr Mutamangira.

"Hwange Colliery Company Limited needs to capitalise and re-model its operations to reinstate the inherent competitive advantage.

"The Company's long term capitalisation strategy will be anchored on securing significant debt and/or equity injection in the estimated sum of $150 million, to bring about a complete turnaround of the company," said the chairman.

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