Coal of Africa: Funding model that works

Ex-CE emphasises the importance of finding a balance between NGOs' cause and economic development

Do a thorough due diligence so you know what you are getting into and never forget commodity markets can go down - that's the advice from former Coal of Africa (CoAL) CE John Wallington to executives running junior mining and exploration companies.

Wallington has now stepped down after three years doing what was described as "the worst job in SA mining" - running CoAL, where all hell broke loose the minute he walked through the door in May 2010.

In short order the company's flagship project, the Vele coking coal mine near Musina in Limpopo, was shut down by the department of environmental affairs and a string of operating and corporate problems emerged at the group's Nucoal and Mooiplaats thermal coal mines in Mpumalanga. Both mines are now closed and the litigation continues.

Wallington - one of the country's top coal mining executives, with about 30 years of experience, including running Anglo American's coal division - says the deteriorating situation at CoAL resembled the classic management quip that "when you are up to your arse in crocodiles it can be difficult to remember the original objective was to drain the swamp".

He took over from previous MD Simon Farrell."What attracted me to the job," he says, "was the incredible potential of the coking coal deposits that CoAL controlled in Limpopo - and that potential remains. I believe at least three world-class coking coal mines will be developed in Limpopo over the next 10-20 years on the resources that CoAL owns. Those mines will create massive wealth for the company and the nation.

"But with the closure of Vele I was pushed into a continuous fire-fighting role. I was in the media in one way or another every day during my first six months in the job. We got into so much trouble so quickly there was no time to think. That situation and the growing litigation were huge distractions for the management team."

Wallington adds: "With hindsight, I clearly did not carry out a good enough due diligence. But a lot of the issues at Mooiplaats were not immediately apparent. The skeletons came rattling out of the closets only in the course of the next year." Wallington eventually got Vele back on track. The mine's environmental permits were restored after 17 months of what he describes as "doing everything by the book".

"That was our commitment to the department - that we would do everything by the book to comply with the National Environmental Management Act. That was a positive outcome because it shows what can be achieved by sticking to the regulations. You can create good relationships by working through the proper channels. "Looking at the bigger picture, I think government needs to decide clearly where companies can mine and where they cannot. I think the Vele saga has been a catalyst in focusing attention on this and moving developments in the right direction, if you look at the biodiversity guidelines that have now come out."

By contrast, Wallington is critical of a number of the environmental nongovernmental organisations making up the Save Mapungubwe Coalition with which he dealt over Vele. "I went right out of my way to engage with them," he says, "which has not been the conventional approach from the mining industry to such organisations. I was disappointed because, in my view, the path these NGOs followed is not sustainable. If they do not find a way to engage honestly in finding a balance between their cause and economic development then I believe they will become increasingly irrelevant."

It was while all this was going on that the commodity markets starting turning down, landing Wallington with the additional challenges of keeping CoAL financially afloat and dealing with increasingly irate shareholders.

He says the fundamental problem is that the funding model for juniors and exploration companies works only in a rising market. "Investors are happy to put money in when the market is going up but, when it's going down, that's another story.

"When Vele started out, the coking coal price was above US$200/t and there was an investment hunger to find coking coal mines outside Australia. Had the price stayed at $250/t I think CoAL would have been okay, but at $150/t it's a different picture," he says. With Vele delayed and the Woestalleen and Mooiplaats mines not generating the cash they were supposed to, CoAL had to go back to its shareholders and bankers repeatedly for more funds.

One criticism of Wallington voiced by an industry insider is that he did not handle dealing with the shareholders that well. "That was a nightmare," Wallington says. "The key problems were the original overpromotion of the project and the plethora of litigation issues as a consequence of the poor execution of the acquisition of the thermal coal assets.

"CoAL has not been alone in this, as you can see by the recent rash of big writedowns on projects by nearly all the world's major resource groups. As they say, even turkeys can fly in a strong wind but, when the wind stops, they come crashing down.

"There's a huge problem in going back to your financial backers because they do not like being told that they overpaid in the first place for the assets." The end result was that the company was continually starved of capital, with its backers putting up just enough to keep it going but not prepared to kick in sufficient funds to allow substantial changes and getting increasingly irritated by the situation.

Former chairman Richard Linnell sent out an e-mail in August last year after his resignation in which he attributed his departure to "frustration" by the major shareholders. Linnell said this was "demonstrated by their coupling of this recent fundraising to a call for significant board changes".

Wallington points out that his initial focus on CoAL's potential, coupled with overoptimism on the commodity markets, also hit him personally because nonperforming share options and bonuses did not measure up to expectation."After the first six months I seriously contemplated leaving but decided to stay and see through my contract because of my commitment to the CoAL team, which was as good as any I have worked with in my 30 years in the industry.

"I decided not to renew the contract because I had lost some of the desire and passion for the job and it was in the best interests of both parties to move on."The company is now being run by chairman David Brown while an executive search for a new CE is carried out. Wallington is looking at various options and could soon be back in a full-time CE role. That's a very different position from 2009, when, after leaving Anglo American, he said he was happy "dabbling in various projects" and famously commented that "you can never say never but it seems highly unlikely I will be back in a full-time role".