Coal miner AfriOre goes for gold in Africa

Looking to shift gears again, metal-explorer-turned-coal-miner AfriOre (AFO-T) intends to bring another South African coal operation into production with an eye toward becoming a gold producer.

The company plans to use its coal operations as a “cash cow” to provide funding for the acquisition and development of gold projects. The company is looking for: at least one gold project at or near production and economic at current gold prices; marginal gold projects with at least 1 million oz. gold and profitable at a gold price of around US$350 per oz.; and projects with the potential to host multi-million-ounce deposits.

Led by Michael Van Aswegen, vice-president of exploration, the company is in negotiations to acquire interests in four projects (out of a possible 25).

Despite losing its partner on the FSC gold project in South Africa, near the Witwatersrand goldfield region, AfriOre plans to test three targets that could possibly host extensions to the Witwatersrand basin. Iamgold (IMG-T) dropped its half-interest in the project last June after a second drill hole on the project cut rocks deemed too young to correspond to the targeted Witwatersrand rocks that might host gold mineralization. AfriOre has about 60% of the project’s land package assembled.

Currently, AfriOre’s primary asset is its half-interest in the Spring Lake colliery in South Africa. CIBC Capital Partners advanced the purchase price for the 1999 acquisition and gained a 50% stake. The colliery was combined with AfriOre’s adjacent exploration properties.

After suffering a partial roof closure in mid-2001, the mine recovered and is currently running at full capacity, producing 960,000 run-of-mine tonnes of anthracite annually. Sales for 2001 are pegged at 600,000 tonnes. The company says the 38 million tonnes of reserves and resources should keep the mine running at its current pace for at least 20 years — longer with secondary extraction. Since AfriOre took over the operation, production has climbed by 75%, revenue has increased significantly to just under $20 million in 2001, and operating profits rose to about $6 million from around $700,000.

Travelling east, the Somkele anthracite project, about 60 km from the coal export facility at Richards Bay, is at the feasibility stage. AfriOre has 100% rights to more than 147 sq. km containing four project areas. The company envisages Somkele producing at a relatively modest rate of 40,000 tonnes per month, much lower than the 2 million tonnes per year envisaged by previous companies. Some 60 million tonnes of low-sulphur anthracite resources defined in the area’s complex geology will initially be targeted by a series of small open pits. Somkele’s low (0.7%) sulphur content makes it a valuable long-term source of blend for Springlake’s anthracite, which averages 1.5% sulphur. Certain markets require sulphur levels less than 1%.

So far, AfriOre has spent about $750,000 on an ongoing feasibility study at Somkele. Development costs are anticipated to be $800,000, and equipment costs should ring in at $8 million. Financing for the project is made possible by a forward sales contract. A production decision is expected at Somkele in February. Pending a positive decision, permitting and financing, AfriOre says the operation could be in production as soon as the end of July. The bottom-line profit is projected to be $2 million per year over a lifespan of five years. The operation’s payback period is pegged at less than one year.

With Somkele up and running, AfriOre’s share of annual cash flow from the two coal operations, which would churn out more than 1 million tonnes per year, is estimated at $4 million. A 3-year take-or-pay contract covering about 600,000 tonnes per year has been secured. The company expects to account for more than half of the South African coal market (making it South Africa’s largest anthracite and specialty coal producer) in about two years. When AfriOre took over Springlake, it had just three customers.

In addition to Springlake and Somkele, the company has rights to some 964 hectares with defined anthracite resources. Other projects contain up to 400 million tonnes of anthracite, metallurgical and coking coals, delineated by previous drilling. One of those is the Soutpansberg coking coal project north of Pietersburg, where the company intends to update a previous feasibility study. Production is estimated to be as high as 2 million tonnes per year.

The company has also acquired rights to a graphite project in Namibia. Plans entail updating a previous feasibility study completed by Rio Tinto (RTP-N) before it abandoned the project.

The company hopes listing its shares on the Toronto Stock Exchange will give it a financial boost as well. The shares began trading on Dec. 31, 2001; at the same time, its shares were delisted from the Canadian Venture Exchange.

For the six months ended Aug. 31, the company posted earnings of $979,612 (or 5 per share), compared with a loss of $567,451 (3 per share) for the corresponding period of 2000. Revenue between the two periods climbed to just less than $5.1 million from about $4.1 million. AfriOre attributes the increase to the strong operating performance of the Springlake colliery. The company has $4 million cash on hand.

The company’s non-core diamond and base metal projects are on the auction block.