TerraCom buys into Universal thermal coal assets for $35m

Universal Coal ASX UNV TerraCom acquisition
Queensland-based TerraCom has acquired a 19.9% shareholding in South Africa-focused thermal coal miner Universal Coal.

Queensland-based coal miner TerraCom (ASX: TER) has acquired a large chunk of fellow ASX miner Universal Coal (ASX: UNV), giving it exposure to thermal coal assets in South Africa.

In an announcement today, TerraCom said it has reached a binding agreement to purchase about 19.99% of the issued share capital of Universal from Coal Development Holding BV.

Consideration for the deal is a combination of cash and TerraCom shares totalling $34.6 million.

South African thermal coal

TerraCom’s substantial investment gives it exposure to Universal’s thermal coal assets across South Africa’s major coalfields including Kangala, New Clydesdale, North Block Complex, Ubuntu and the Eloff project.

Universal holds a 70.5% interest in the Kangala colliery and 49% stakes in the other assets.

The company is focused on bringing new assets on stream to boost production volumes and recently reported construction of its fourth operation, the Ubuntu colliery, was “progressing according to plan”.

A highlight of the last quarter was Universal’s inking of a coal supply deal with South African power utility provider Eskom for 1.2Mt per annum of coal output from Ubuntu, which is 100% of the colliery’s capacity. Delivery of first coal is expected in November.

Universal chief executive officer Tony Weber said steady-state production is anticipated from the Ubuntu colliery “in the last quarter of FY 2020”.

Strong outlook

Earlier this week, Universal posted strong September quarter results including a 51% boost in run-of-mine coal production to 2.8Mt and a 58% jump in group coal sales to 1.9Mt.

The company reported earnings before interest, tax, depreciation and amortisation of $12 million and forecast an EBITDA of $73 million for the full 2020 financial year.

Universal is anticipating group sales to increase by a quarter to reach 8.4Mt by fiscal year end, with attributable sales expected to lift 21% to 4.6Mt.

Geographic diversification

TerraCom, which also holds operating assets in Mongolia and Queensland, said the acquisition aligns with the company’s ongoing corporate strategy by enabling it to enter an emerging market while also reducing its sovereign risk with new investments in South Africa.

“Universal’s asset portfolio provides the company with greater geographic diversification and an expanded production footprint,” TerraCom chairman Wal King said.

“The growth achieved under the guidance of [Universal chief executive officer] Tony Weber throughout the last few years has been exceptional. TerraCom is excited to become a substantial shareholder and looks forward to being associated with Universal’s long-term profitable growth,” he added.

The agreement is expected to be settled on or around 30 October.