A Viable Alternative To Mine The Waterberg Coal Under The Current Economic Climate

November 2015

R Karstel

THE OF COMPANIES

Project Management and Design Capability Across the Full Project Lifecycle

A collective of Linked Enterprises providing end to end solutions for Mining & Industrial clients

Concept Market

OUR ENGINEERING CAPABILITIESCoal

Mining• Geological

exploration management

• Resource to Reserve

• Competent Persons Report

• Mine Design of open pit, open cast and underground mines

• Shaft System Design

• Pumping and Piping Systems

• Financial Modeling

Energy

• IPP Interface management

• Thermal Power Generating Plants management

• Balance of Plant Engineering Design

• Energy efficiency & optimisation studies

Coal Processing

Supporting Infrastructure

• Metallurgical Test Work Supervision

• Mass, Water & Energy Balances

• Equipment Sizing, Process Data Sheets

• Plant Audits and Plant Optimization

• Problem solving / De-bottle Necking / Optimisation

• Dense Medium Separation• CHPP Design• Washability Simulations• Flow Sheet Development

• Provincial Roads• HV Power Supply &

distribution• Rail link / Rapid Load-

out Systems• Industrial Buildings &

Workshops• Water ManagementØ Supply and Storage

FacilitiesØ Clean & Dirty Water

SeparationØ Treatment solutions

• Mine Closure

Contents

1.0 Introduction1.1 Commodity Market1.2 Waterberg – The future?

2. 0 Challenges for the Waterberg Coal2.1 Water2.2 Rail2.3 Transmission and distribution

3.0 IPP Opportunity3.1 History3.2 New Legislation3.3 Coal fired IPP’s

4.0 Conclusion

1.0 Introduction

Map of Waterberg Coal Mines

1.1 Commodity Market

Commodity Price Indices

Super CycleAverage cycle 20 years of poor growth

Stimulus Packages

Poor growth next 10 – 20 years

RBCT Coal Index

Current price $50/t

World Economic Trends - ChinaThe China Syndrome

• China is a housing bubble even worse that what happened in the USA.

• In order to cool the property bubble the ruling party opened the equity market. (retail investors 85% of stock market)

• To new plan is to move away from capital-intensive, infrastructure-driven growth of decades past to towards domestic/ consumer consumption.

• Because of one child policy consumer economy will implode 2030 – growth 2%

• Chinas debt increased from $3 trillion to $28 Trillion the last 12 years

• Chinas is taking a huge gable on the global economy. To keep people off the street and everybody is working and all the surplus goods are stockpiles, warehoused etc.

• If the consumer base dry up around the world the internal problems for the Chinese economy will worsen.

• As masses moves around in cities losing jobs, unrest will sweep the country.

World Economic Trends -USA

The Debt master – US Government

• Government debt of over $17 Trillion• Wall street went nuts selling derivatives and the market grew

1000% since 1996• Global Derivative Market is now at $1 200 trillion ( 21

times the global GDP) • Warren Buffet said: “ the derivatives genie is out of the

bottle, and these instruments will most certainly multiply until some event makes their toxicity clear……are financial weapons of mass destruction, carrying dangers that are potentially lethal”

1.1 The Waterberg - The future

Exports per Coal Field

Source: SA Coal Roadmap

SA Domestic Coal Demand

Eskom R12-R14/GJNeed to go to R18 – R22/GJ to get a ROI of 15%

Source: SA Coal Roadmap

Prices of Eskom Coal

Source: SA Coal Roadmap

Electricity generation demand to drive thermal coal consumption in India

India to overtake China as major thermal coal import market in 2015

0

50

100

150

200

250

300

10 11 12 13 14 15 16 17 18 19

China India

Seaborne thermal coal imports, Mt

Data: CRU.

Strategic Corridors

18

Trans-Kalahari

Witbank-RBCT ($/t) Yield Tete- Mozambique ($/t) Yield Waterberg Coal Field ($/t) Yield

Product Price ($/t)

Coking Coal $90 $90 21%5900 $53 $53 30%-55%5400 $45 $45 30%-55% $45 25% $45 21%

Eskom 19CV(Multi Product) $26.6 20%-30% $26.6 24%

Dedicated Eskom mines >70%Mining Cost $35 $28 $15

Rail Cost $13.5 $40 $32

Port Cost (RBCT allocation) $4 $23 $4or Other Ports or $8Total $53 $91 $51 to $55

Notes1) US$ = R10 2) Yields are practical yields3) $/t is US$ per saleable ton4) Witbank Coal fields yields are typical for Multi product operations

Eskom dedicated mine mouth operations yields will be > 70%

Comparing the three rail corridors

2.0 Challenges for the Waterberg2.1 Water

Water supply from Mokolo Dam

• The Mokolo Dam is the largest dam in the catchment and was completed in July 1980 to supply water to Matimba Power Station, Grootegeluk Mine, Lephalale Municipality and for irrigation downstream of the dam (water allocation of 27.6Mm3/a)

• Mining - Exxaro and municipal requirements: 10.1Mm3/aPower station (Matimba /Marapong Township requirements): 7.1Mm3/aIrrigation (downstream agricultural requirements): 10.4Mm3/a

• Construction of Eskom’s Medupi Power Station requires 15.4 Mm3/a6.0Mm3/a is for power production9.4Mm3/a is for flue gas desulphurisation (FGD).

Because water for FGD on all six units is not available at the time of original commissioning, a decision was made to retrofit all units with FGD during the first major outages on each unit, six years after the units are commissioned.Eskom have requested an exemption is from the existing and new plant minimum emission standards until the FGD retrofit is completed by 2027

Mokolo and Crocodile River (West) Water Augmentation Project

Phase 1: A 43km underground pipeline from Mokolo Dam. Thepipeline is currently under construction and water delivery isexpected to commence in 2015 and will be capable of supplyingMedupi with 10.9 billion litres per annum to support Medupi’s sixunit operations .Due to the delay in FDG there should be around 5Mm3/a currentcapacity available for other uses.

Phase 2: The second phase of MCWAP is being designed tocapture large volumes of artificially augmented flows in theCrocodile River (West), near Thabazimbi and pipeline toSteenbokpan & Lephalale (128km).The artificial flows in the river occur as a result of water dischargedfrom wastewater treatment plants, in Johannesburg’s northernsector and also Tshwane, to the upper Crocodile River basin

Mokolo and Crocodile River (West) Water Augmentation Project

(Some of the mines plan to build water treatment plants at Lephalale sewerage works

2.0 Challenges for the Waterberg2.2 Rail

Transnet Freight Rail Expansion Plans

Waterberg Rail Project Stages

Indicative Waterberg Rail Capacity Ramp-up

The Grootegeluk mine is currently supplied with four trains every week

New 450km heavy haul line at 26 tons/axle

2.0 Challenges for the Waterberg2.3 Transmission and distribution

Eskom- Transmission and Distribution Network

Transmission capacity enough for Matimba and 3 sets at Medupi. Line upgrade ready in 2018 for other 3 sets

3.0 IPP Opportunity3.1 History

History

History

3.0 IPP Opportunity3.2 New Legislation

• South Africa is seeking offers from independent power producers (“IPP” )to buildcoal-fired plants as the state-owned utility struggles to meet demand

• The Department of Energy (“DoE”) opened the bidding process for IPP’s themiddle 2014

• DoE which has invited potential coal independent power producers (IPPs) toregister their prospective projects

• Following an analysis of the register, the department intends issuing a formalRequest for Proposals (RFP) under what is being dubbed the Coal Base loadIndependent Power Producer Procurement Programme

• The country plans to source 2,500 megawatts for the national grid fromindependent coal-based facilities.

• The funding requirements needs to be 30% B-BBEE and minimum 21% SA.

Background

DoE RFPDEPARTMENT’S MINIMUM REQUIREMENTS IN RELATION TO ECONOMIC DEVELOPMENT

DoE still debating the funding structure• Oversees funders are looking for >51%• Liquidity of SA market a challenge

DoE RFPDEPARTMENT’S MINIMUM REQUIREMENTS IN RELATION TO ECONOMIC DEVELOPMENT

DoE RFPDEPARTMENT’S MINIMUM REQUIREMENTS IN RELATION TO ECONOMIC DEVELOPMENT

3.0 IPP Opportunity3.3 Coal Fired IPP’s

IPP Process

• Reserve Statement• Coal characterisation and

specification• Mine & IPP economics

• Engage IPP partners• EIA/EMP/IWULA Mine• EIA/EMP - Power plant and transmission line• Mining Right - Mine operation• Conformation of commercial deal with DoE

• Power framework Agreements (PFA)• Mine EPCM binding bids• IPP Development Program• IPP binding bids• Transmission binding bids• Power plant concession agreement

• Strategic investors• Agreed time table for financial close• Final Power purchase agreement (PPA)• Power plant EPC final selection• Mine final EPCM selection• Transmission final EPC selection

STEP 1

STEP 2

STEP 3

STEP4

Initiate funding and start construction

STEP 5

Yes/No

IPP Business Case

Regulatory Approval process

Step1 Step 2 & 3 Step 4

Risk and obligation between stakeholders

PPA (Eskom)

O & M

Project Company

Implementation Agent (DoE)

EPC Power Station

Notes:Need to understand flow through risk to EPC

Coal Supply Agreement

Risk Profiles

• Project development cost

• Owners cost

Front end loading( 3 years) Construction Risk

( 3 years) Operational Risk( 30 years plus)

• Construction risk

• Capital exchange rate risk

• Exchange rate risk on interest payment

• Country risk• Change in

legislation• Coal supply

Typical Waterberg Stratigraphic Column

Export yield 21% 5400kcal

Eskom 22%

The mining benches that are planned for the 16 Million ton Coal mine

The upper zones of the Waterberg coals are morereactive than the lower benches and as such arepreferable for use in Pulverised Coal (PC) TechnologyPower Plant boilers.

The lower benches into Matimba Power Plant coal supply led to significant combustion related problems arising in the boilers due to the delayed combustion of the lower seam coal

By comparison to PC technology where a small(approx. 75 micron) particle has 2 seconds to burn outin the boiler, in CFBC technology, a much largerparticle, (up to 6mm), has as long as is required to burnout within the boiler as the particle keeps circulatinguntil combustion is complete. It is therefore moreappropriate to burn the low reactivity coal from thelower benches in a CFBC technology boiler in an IPPPower Plant

Suitable for PC technology(multi-product)

Suitable for CFBC

The limits of combustion technologies that can be applied to different coal qualities

Coal Combustion: Pulverised Coal Combustion• Small coal (approx. 75 micron) particle

has 2 seconds to burn out in the boiler• Temperatures > 1100 o C

Post Process Flue Gas Desulphurisation (PPFGD)

Coal Combustion: Circulating Fluidised bed• Larger coal particle, (up to 6mm), has as long as is required to burn out within

the boiler as the particle keeps circulating until combustion is complete• Temperatures 800 – 950 o c

Coal Combustion: Pulverised Coal CombustionPOWER PROJECTS - PULVERISED COAL TECHNOLOGYARCH FIRED BOILERS WITH VORTEX BURNERS FOR LOW VOLATILE LEAN COALS – 17% AND BELOW, (DOWN TO 1%)

Environmental Legislation

• Legislative changes in SA from 2012 impacting SOX and NOX levels• Only way to mitigate sulphur levels it is by adding sorbents like lime is

expensive and in limited supply in SA.

SOX• CFB combustion, where sulphur abatement happens within the

combustion process, requires more of a lower grade of limestone• PC combustion where Post Process Flue Gas Desulphurisation (PPFGD)

is used, which adds significant capital costs to the power plant• The cost of the limestone therefore needs to be weighed up against the

cost associated with processing the coal to remove the sulphur prior to it going up the stack (organic/peritic)

NOX• The abatement of Nitrous oxide emissions adds a significant cost to the

final tariff in PC combustion but is negligible in the case of CFBC combustion technology where operating temperatures in the boiler are so much lower and NOx generation is low.

PC vs CFBC ECONOMICS

COST AND QUALITY OF FUEL SIGNIFICANTLY IMPACTS OVERALL ECONOMICS

PC vs CFBC ECONOMICS

PC CFBC

FUEL FLEXIBILITY LOW HIGH

SIZE UP TO 1000MW UP TO 600MW

BOILER EFFICIENCY 98% 95%

EMMISIONS DIFFICULT AND EXPENSIVE EASY Sox, NO NOx

CAPITAL COST $1,879/KWe $1,932/KWe

COE(SAME FUEL)

$73/MWhr $78/MWhr

COE*(OPTIONAL FUEL, SA)

R584/MWhr R535/MWhr

SOURCE – IEA 2013 SOURCE – SA DOE IRP 2030* COE NEEDS TO BE HEAVILY QUALIFIED BY FUEL COST

Lime Stone Supply

Limestone• Coal quality- sulphur content• Source - Lyttleton Dolomite / Dwaalboom PPC / Limeacres PPC• Storage and logistics • Limestone up to R850/ton (high quality)• Controlling sulphur emissions can be up to 10% of coal supply cost

Water Supply

• Typically the water consumption for a CFBC plant of this nature would be 0.3 litres/KWhr

• Translating to an annual water requirement of approximately 1,340,300m3/annum.

Coal Combustion: Pulverised Coal CombustionWaterberg Coal

Transmission

• IPP Project Development Costs - $35 million• Owners Costs – (IDC, Legal, Financing charges etc) - $80 million

• Total Power Plant EPC cost– Based on 2 x 150 MWe– $ 580 million - $620 million

• Infrastructure - $ 40 million• Inventory and Working Capital - $80 million• RFP Preparation and Submission

– $ 1.5 million (estimate)Total IPP Cost - $850 million

Mine and Processing plant– $60 million

Transmission lines to Eskom grid– $25 million

High Level Budget Estimate

Successful Bid

EPC Power Plant

Mine and Processing plant EPCM/EPC

Transmission lines EPCM

Financials (Continue)

Tarrif (R/KWhr)components:• 68% power plant capital• 8.1% coal price• 1.6% sorbent (Lime stone)• Rest is O& M, sustaining capital, labour, etc.

Limestone cost for CFB R400/t ( lower quality) and PC R800/t (higher quality)

Post Process Flue Gas Desulphurisation (PPFGD) $70 -$ 90 Million will remove 90% of SO2

Fluidized bed will remove 80% of SO2. If still to high use pre-processing of the coal $25 million

4.0 Conclusion

Conclusion

1. Coal Fired IPP Ideal strategy to keep your mineral rights

2. Long term annuity investment with a decent return

3. Smaller mining footprint and contractor mining

4. Leaves the optionality to open up a bigger mine and supply the Export market

5. Ultimate product mix:• Upper benches for Eskom• Lower benches for CFB• Export market

6. “Future of coal in SA is the Waterberg - it is a timing issue”

Comparison of electricity costs generated in SA

Conclusion

Mozambique

• EDM looking to develop two new hydro projects, but…

• Relying on private sector to develop coal and gas IPPs

• Have awarded Power Purchase Agreements (PPAs) to several IPPs and MOUs with others

Zambia

• 2 PPAs signed with Coal IPPs, one of which is owned 35% by ZESCO. ZESCO also signed MOU with Botswana Coal IPP

Botswana

• 300MW greenfields IPP RFP

• 300MW brownfields IPP RFP

South Africa

• 3725MW Renewable Energy Independent Power Producer Procurement Programme

• 2500MW coal baseload IPP procurement programme

Zimbabwe

• Various greenfields and brownfields hydro projects

• 22 Licenced IPP projects

• Government developing IPP policy framework

“Sub-Sahara Africa power hungry”

THANK YOU

RSV ENCO Consulting (Pty) Ltd & EHL Consulting Engineers (Pty) Ltd

20 Anderson Street, JohannesburgP.O. Box 61511, Marshalltown, 2107, South Africa

Tel: (+27) 11 498 6010Fax: (+27) 11 498 6210www.rsvenco.com