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Keh - Keaton Energy Holdings Limited - Summarised Consolidated Statement Of

Release Date: 01/06/2010 10:00:03      Code(s): KEH
KEH - Keaton Energy Holdings Limited - Summarised consolidated statement of     
comprehensive income for the year ended 31 March 2010                           
Keaton Energy Holdings Limited                                                  
Preliminary summarised audited group results                                    
for the year ended 31 March 2010                                                
Keaton Energy Holdings Limited                                                  
(Incorporated in the Republic of South Africa)                                  
(Registration number: 2006/011090/06)                                           
JES share code: KEH ISIN: ZAE000117420                                          
(Keaton Energy) or (the company) or (the group)                                 
Summarised Consolidated Statement of Comprehensive Income                       
for the year ended 31 March 2010                                                
R`000                                               Note Year to    Year to     
                                                       31 March   31 March      
                                                         2010       2009        

Revenue                                             3    21 957     5 424       
Cost of sales                                            (21 191)   (1 874)     
Gross profit                                             766        3 550       
Other income                                        4    2 023      677         
Administrative and other operating expenses         5    (13 219)   (13 623)    
Mining and related expenses                         5    (11 453)   (10 078)    
Share appreciation rights income / (expense)        6    4 346      (4 126)     
Impairment and net realisable value losses          7    (7 813)    (4 214)     
Operating loss before net finance income                 (25 350)   (27 814)    
Net finance income                                  8    29 107     44 509      
Net profit before taxation                               3 757      16 695      
Income taxation expense                             9    (7 279)    (11 853)    
(Loss) / Profit for the year                             (3 522)    4 842       
Total comprehensive income for the year                  (3 522)    4 842       
(Loss) / Profit and total comprehensive income                                  
attributable to:                                                                
Owners of the company                                    5 974      4 842       
Non-controlling interest                                 (9 496)    -           
(Loss) / Profit for the year                             (3 522)    4 842       

Weighted average number of shares (`000)                                        
Basic                                                    144 173    142 248     
Diluted                                                  144 173    145 783     

Earnings per share (cents)                                                      
Basic                                               10   4.1        3.4         
Headline                                            10   5.6        6.4         
Diluted                                             10   4.1        3.3         
Headline diluted                                    10   5.6        6.2         
Summarised Consolidated Statement of Financial Position                         
at 31 March 2010                                                                
Not  31 March  31 March                   
R`000                                  e    2010      2009                      
                                                                                
Assets                                                                          
Non-current assets                     11   129 698   59 112                    
Current assets                         12   343 710   386 237                   
Total assets                                473 408   445 349                   
Equity and liabilities                                                          
Shareholder`s equity                        456 117   437 189                   
Non-controlling interest                    (1 768)   -                         
Total equity                                454 349   437 189                   
Current liabilities                    13   19 059    8 160                     
Total equity and liabilities                473 408   445 349                   
                                                                                
Summarised Consolidated Statement of Cash Flows                                 
for the year ended 31 March 2010                                                
R`000                                          Year to   Year to                
                                            31 March  31 March                  
                                            2010      2009                      
                                                                                
Cash flows from operating activities           9 916     7 390                  
Cash flows from investing activities           (48 533)  (31 411)               
Cash flows from financing activities           -         90 483                 
Net (decrease) / increase in cash and          (38 617)  66 462                 
cash equivalents                                                                
Cash and cash equivalents at the               373 698   307 236                
beginning of the year                                                           
Cash and cash equivalents at the end of        335 081   373 698                
the year                                                                        
Summarised Consolidated Statement of Changes in Equity                          
for the year ended 31 March 2010                                                
R`000       Share    Share-   Retaine  Total     Non-     Total                 
capital  based    d                  control  equity                
            and      payment  earning            ling                           
            premium  reserve  s /                interes                        
                              (Accumu-           t                              
lated                                             
                              loss)                                             
                                                                                
Balance at  341 297  424      (4 982)  336 739   -        336 739               
31 March                                                                        
2008                                                                            
Total       -        -        4 841    4 841     -        4 841                 
comprehensi                                                                     
ve income                                                                       
for  the                                                                        
year                                                                            
Issue of    100 000  -        -        100 000   -        100 000               
ordinary                                                                        
shares                                                                          
Share-based 1 000    4 126    -        5 126     -        5 126                 
payments                                                                        
Share issue (9 517)  -        -        (9 517)   -        (9 517)               
expenses                                                                        
                                                                                
Balance at  432 780  4 550    (141)    437 189   -        437 189               
31 March                                                                        
2009                                                                            
Total       -        -        5 974    5 974     (9 496)  (3 522)               
comprehensi                                                                     
ve income                                                                       
for the                                                                         
year                                                                            
Share-based 17 300   (4 346)  -        12 954    -        12 954                
payments                                                                        
Non-        -        -        -        -         7 728    7 728                 
controlling                                                                     
interest                                                                        
resulting                                                                       
from                                                                            
acquisition                                                                     
of a                                                                            
subsidiary                                                                      
Balance at  450 080  204      5 833    456 117   (1 768)  454 349               
31 March                                                                        
2010                                                                            
Notes                                                                           
1    The financial results are presented for the year ended 31 March 2010. Prior
    period figures represent the year ended 31 March 2009.                      
2    The preliminary summarised consolidated results for the year ended 31 March
2010 incorporate extracts of the group`s unqualified audited financial      
    statements. The group`s financial statements are prepared in accordance     
    with International Financial Reporting Standards (IFRS), AC500 Standards,   
    the Listings Requirements of the JSE Limited (JSE) and the South African    
Companies Act, 61 of 1973 (as amended). These summarised consolidated       
    financial statements are prepared in accordance with IAS 34: Interim        
    Financial Reporting. The accounting policies applied are consistent with    
    those applied in the annual financial statements for the year ended 31      
March 2009, except for :                                                    
    *    early adoption of IAS 27: Consolidated and Separate Financial          
         Statements (revised);                                                  
    *    early adoption of IFRS 3: Business Combinations (2008) and IAS 27      
Consolidated and Separate Financial Statements (2008); and             
    *    applying IAS 1: Presentation of Financial Statements (revised).        
    For a better understanding of the group`s financial position and results of 
    operations, these summarised consolidated results are to be read in         
conjunction with the group`s audited annual financial statements for the    
    year ended 31 March 2010, which include all disclosures required by IFRS,   
    and which are expected to be posted on or about 18 June 2010.               
3    During the year the group`s Klip Colliery generated mining revenue of R21.8
million (2009 : R5.4 million), resulting in a gross profit of R0.8 million  
    (2009 : R3.6 million).  The Colliery sold all its coal during the year and  
    rehabilitation of the Colliery is nearing completion. Included in cost of   
    sales is an accrual for Royalty Tax as a result of new legislation which    
became effective on 1 March 2010.                                           
4    Other income includes an amount of R1.6 million representing a damages     
    claim in terms of the default by the original coal buyer at Klip Colliery.  
5    The total administration, other operational, mining and related expenses   
amounted to R24.7 million (2009: R23.7 million) and include (prior year     
    figures in brackets):                                                       
    *    employee benefit costs (excluding the share appreciation rights        
         income) of R9.8 million (R9.0 million). As at 31 March 2010, the group 
had nine (10) permanent employees/contractors;                         
    *    consulting, legal, audit and professional fees of R4.2 million (R5.6   
         million);                                                              
    *    non-executive directors` fees of the company of R2.0 million (R1.6     
million);                                                              
    *    listing and investor relations costs of R1.6 million (R2.0 million);   
         head office lease costs of R0.7 million (R0.7 million); and            
    *    depreciation charges not included in cost of sales of R0.7 million     
(R0.7 million).                                                        
    Note: Mining and related expenses mainly include that portion of management 
    and employees` time spent directly on exploration and production            
    subsidiaries, direct consulting fees by mining and exploration contractors  
and compensation paid to surface right holders. Administration and other    
    operating expenses mainly include the remainder of the employee benefit     
    costs, non-executive directors` fees, listing and investor relations costs. 
6    Share appreciation rights income - one of the main participants of the     
share incentive scheme resigned during the year. The net positive           
    adjustment of R4.3 million is as a result of the reversal of a majority of  
    the share appreciation right expenses recognised in previous periods.       
7    Impairment and net realisable value losses - operations at Klip Colliery   
have been downscaled during the period (refer to commentary) resulting in a 
    sharp decrease in the remaining life of mine tonnages. This decrease        
    resulted in the weighted average cost per ton increasing significantly, and 
    low quality stockpiles having to be written down by R4.9 million to their   
net realisable value. An additional impairment of R1.1 million resulted     
    from capitalised mine development cost at Klip Colliery. As a result of the 
    regulatory uncertainty regarding the two remaining prospects in Amalahle    
    Exploration (Pty) Limited (74% subsidiary of Keaton Energy), an impairment  
loss of R1.8 million was raised during the year to fully impair the         
    associated exploration and evaluation expenditure.                          
8    The income for the year from the group`s externally invested funds was     
    R29.1 million (2009: R44.5 million). The decrease is mainly as a result of  
the drop in interest rates during the year.                                 
9    Income taxation expense mainly comprises current taxation expense of R5.7  
    million (2009: R10.2 million) and a secondary tax on companies (STC) of     
    R1.6 million (2009: R1.1 million). It should be noted that the total STC    
accrual to date of R2.9 million will be reassessed in future years pending  
    new taxation legislation.                                                   
10   Earnings per share - the calculation of basic earnings per share is based  
    on the profit for the year (attributable to owners of the company) of R6.0  
million (2009: profit of R4.8 million) and a weighted average number of 144 
    172 800 (2009: 142 248 143) ordinary shares in issue during the year.       
The reconciliation to headline earnings is as follows:                          
    R`000                                            Year to    Year to         
31 March   31 March          
                                                   2010       2009              
                                                     Gross /    Gross /         
                                                   Net        Net               
Profit for the year (attributable to owners   5 974      4 842           
      of the company)                                                           
       - Add back : Impairment losses attributable   2 163      4 213           
      to owners of the company                                                  
Headline earnings for the year                8 137       9 055          
    The calculation of diluted earnings per share is based on the same profit   
    of R6.0 million and headline earnings of R8.1 million, with the weighted    
    average number of ordinary shares not being adjusted as the granted         
notional shares are anti-dilutive.                                          
    IAS 27: Consolidated and Separate Financial Statements (revised) prohibits  
    the retrospective adjustment of losses attributable to non-controlling      
    interests. The loss/total comprehensive income attributable to owners of    
the company would have been R3 521 661 million had IAS 27 revised not been  
    applied for the year ended 31 March 2010, resulting in the basic and        
    diluted loss per share being 2.4 cents.                                     
11   The increase in non-current assets includes the fair value of R30.1 million
relating to the acquisition of prospecting rights. The acquisition of this  
    right co-incided with the acquisition of a 74% interest in Labohlano        
    Trading 46 (Pty) Limited. The 74% Labohlano acquisition involved a cash     
    payment (R5.0 million) and a share-based payment of 2 000 000 ordinary      
shares of the company (valued at R17.3 million) to the existing shareholder 
    of Labohlano, the same day that Labohlano acquired the prospecting right    
    (its only asset) at a significant discount. The final recognition of the    
    fair value of the prospecting right was determined by grossing up the 74%   
acquisition price of Labohlano (R22.3 million) to 100% (R30.1 million),     
    with the difference being attributed to the non-controlling shareholder     
    (Money Box Investments 156 (Pty) Limited). The group will consolidate the   
    contiguous prospecting rights at its Sterkfontein Project as soon as        
sufficient geological data are available.                                   
12   Current assets include:                                                    
    *    cash of R335.1 million;                                                
    *    trade receivables (March 2010 coal sales) of R2.2 million;             
*    interest receivable R3.5 million; and                                  
    *    value-added tax recoverable of R2.3 million.                           
13   Current liabilities include:                                               
    *    amounts payable to exploration service vendors of R1.3 million;        
*    amounts payable to plant and equipment vendors of R10.2 million;       
    *    other trade payables of R3.8 million; and                              
    *    taxation of R3.4 million.                                              
14   Issues of equity during the year:                                          
31 March  31 March               
                                              2010      2009                    
                                               Number of shares                 
                                              (000)                             

    Issued share capital                                                        
    At beginning of year                       142 841   132 741                
    Issued for cash during the year            -         10 000                 
Share-based payments (refer note 11 above) 2 000     100                    
    At end of year                             144 841   142 841                
15   No dividends for the year ended 31 March 2010 (year ended 31 March 2009:   
    Rnil) have been declared nor are any proposed.                              
16   The group`s net asset value per share is R3.14 (2009: R3.06).              
17   Segment information                                                        
    Refer to the commentary below for a description of the projects (segments)  
    of the group. The group is segmented as follows:                            
R`000                                   31 March   31 March                 
                                            2010       2009                     
    Total segment assets                                                        
    Keaton Mining (Pty) Limited -           63 472     22 672                   
Vanggatfontein Project                                                      
    Keaton Mining (Pty) Limited / Labohlano 62 374     23 288                   
    Trading 46 (Pty) Limited - Sterkfontein                                     
    Project                                                                     
Keaton Mining (Pty) Limited - Klip      3 286      16 653                   
    Colliery                                                                    
    Amalahle Exploration (Pty) Limited -    -          1 379                    
    Projects                                                                    
Keaton Energy Holdings Limited -        474 773    450                      
    Investments and cash resources                     277(1)                   
    Total operating segments` assets        603 905    514 269                  
    Assets not allocated to segments        5 172      5 538                    
Consolidation adjustments - investments (135 669)  (74 458)                 
    in subsidiaries                                                             
    Total assets                            473 408    445 349                  
    (1)  Restated to conform with current                                       
year`s amount which includes                                                
    investments in subsidiaries.                                                
                                                                                
    R`000                                   Year to    Year to                  
31 March   31 March                 
                                            2010       2009                     
                                                                                
    Segment revenue                                                             
Keaton Mining (Pty) Limited - Klip      23 401     5 424                    
    Colliery (all external coal sales) (1)                                      
    Keaton Administrative and Technical     10 639     10 033                   
    Services (Pty) Limited (intersegment                                        
revenues)                                                                   
    Total operating segments` revenue       34 040     15 457                   
    Klip Colliery - damages claim disclosed (1 594)    -                        
    under other income                                                          
Consolidation adjustments               (10 489)   (10 033)                 
    Revenue                                 21 957     5 424                    
                                                                                
    (1) Coal sales to major customer as     89%        100%                     
percentage of total sales                                                   
                                                                                
    Segment profit or loss                                                      
    Keaton Energy Holdings Limited (1)      (9 302)    (26 005)                 
Keaton Administrative and Technical     (118)      (6 452)                  
    Services (Pty) Limited                                                      
    Keaton Mining (Pty) Limited (2)         (14 704)   (4 859)                  
    Amalahle Exploration (Pty) Limited (3)  (3 231)    (4 217)                  
Labohlano Trading 46 (Pty) Limited      (1 159)    -                        
    Other subsidiaries                      (335)      (3 946)                  
    Total operating segments` loss          (28 849)   (45 479)                 
    Non-cash flow items                     (179)      -                        
Consolidation adjustments               3 679      17 665                   
    Operating loss before net finance       (25 349)   (27 814)                 
    income and taxation                                                         
                                                                                
(1) Excludes finance income of R28.9                                        
    million (2009: R44.7 million)                                               
    (2) Includes depreciation of R12.1 million (2009: R0.8                      
    million) and an impairment loss / net realisable value loss                 
of R6.0 million (2009: Rnil)                                                
    (3) Includes an impairment loss of R1.8                                     
    million (2009: R2.5 million)                                                
18   The group`s capital commitments are:                                       
R`000                                   31 March   31 March                 
                                            2010       2009                     
                                                                                
    Guarantees issued to the DMR            19 592     1 260                    
Guarantees issued in terms of farm      50 000     -                        
    acquisitions                                                                
    Authorised but not contracted           58 829     38 155                   
    Authorised and contracted               31 539     2 263                    
All contracted amounts will be funded through the existing                  
    funding mechanisms between the company and its subsidiaries.                
19   Significant events after 31 March 2010 up to the date of this report:      
    On 6 April 2010 Keaton Energy announced that it had doubled the total Coal  
Resource at its Sterkfontein Project in South Africa`s Mpumalanga Province  
    to 69 million mineable tonnes in situ, following the conclusion of the      
    first phase of its current drilling campaign. On 4 May 2010 Keaton Mining   
    (Pty) Limited (Keaton Mining), reached an amicable settlement with local    
landowners, in terms of which Keaton Mining will acquire four properties    
    totalling 850 hectares relating to its Vanggatfontein Project, in the       
    Delmas district of Mpumalanga.                                              
20   KPMG Inc`s unqualified auditors` reports included in the annual financial  
statements and in the summarised financial statements contained in this     
    summarised report are available for inspection at the company`s registered  
    office.                                                                     
21   Coal Reserve and Resource Statements                                       
The group released an updated Coal Resource Statement for its Sterkfontein  
    Project during April 2010. This is available for inspection on the group`s  
    website www.keatonenergy.co.za. There was no change to the Coal Reserve and 
    Resource Statements at the group`s Vanggatfontein and Leeuwfontein Projects 
(released May 2009).                                                        
Commentary                                                                      
The 2010 results are being issued at a very important time in Keaton Energy`s   
development. Klip Colliery, our small, `starter` operation, reached the end of  
its economic life during the period under review. It weathered an extremely     
volatile time in the domestic coal market, opening just months before the crash 
of October 2008. The lessons learned with this operation are being put to good  
effect in the development of our second, much larger, longer-life Vanggatfontein
Project. The construction of this mine started in earnest after the close of the
review period, following amicable settlement of a land access dispute between   
ourselves and the landowners concerned.                                         
Safety, health and the environment                                              
The safety, health and environmental performance of the group in the period     
under review has been acceptable, with 81 749 hours worked on-site with no lost 
time injuries recorded. We continue to work to implement fully the safety and   
health statement and policy adopted in 2009. The closure phase of Klip Colliery 
will be monitored carefully to ensure that there is no complacency regarding    
safety, health and the environment. The codes of practice developed for Klip    
Colliery will be revised and supplemented for the Vanggatfontein Project, and   
significant effort will be made to ensure that safety, health and environmental 
policies and procedures are properly developed and implemented at the new       
operations.                                                                     
Corporate governance                                                            
The Board and its committees have continued to function well during the period. 
During the year, our technical director Dr. Steven Rupprecht resigned from the  
Board to pursue other opportunities, and we were very pleased that Mr. Peet     
Snyders, a 29-year veteran of the South African mining industry - many of those 
years spent in coal mining - accepted an appointment to the Board in the        
executive role of operations director. Mr. John Wallington resigned from the    
Board with effect from 1 June 2010 and the Board acknowledges with thanks his   
contribution to the group.                                                      
We acknowledge the company`s responsibility to report timeously and meaningfully
to all of its stakeholders - shareholders, employees, communities in which it   
operates, and the country`s citizens as a whole - on its activities. As a       
consequence, we embarked on a process to adopt sustainable development reporting
in 2009. The 2010 Annual Report is the company`s second to include this         
important element, and it takes us closer to applying the recommendations of    
King III. We expect to apply all recommendations (and seek external assurance)  
with our 2011 Annual Report.  Keaton Energy has self-certified its              
Sustainability Report, which is included in the Annual Report.                  
Cash position and forecast                                                      
The group`s available cash as at 31 March 2010 amounted to R335 million with a  
further R20 million pledged against the group`s future environmental            
liabilities. R158 million of the available cash is committed towards the first  
phase of the group`s Vanggatfontein Project development and surface right       
acquisitions. The remaining cash of R177 million is set aside to fund the       
development of Phase 2 of the Vanggatfontein Project and further resource       
exploration/evaluation on existing and new prospecting rights. It is the group`s
intention to explore raising project finance for the second phase of the        
Vanggatfontein Project, with a view to, in part, reducing the overall cost of   
capital for the project.                                                        
Project review: large, long-life projects                                       
Vanggatfontein Project (previously the Delmas Project)                          
The Vanggatfontein mining right is held by Keaton Energy`s 74%-held subsidiary, 
Keaton Mining (Pty) Limited (Keaton Mining).  Bulk earthworks began on this     
project subsequent to the end of the reporting period, with first coal from the 
project expected before the end of the 2010 calendar year.                      
The original plan to bring the Vanggatfontein Project into operation by late    
2009 was delayed in part due to market conditions and in part as a consequence  
of the decision by the Department of Mineral Resources (DMR) in mid-2009 to no  
longer accept rehabilitation guarantees underwritten by insurance companies.    
This change increased the amount of upfront capital required for the development
of the project materially.  As a consequence both of this and the general       
adverse economic environment, management revised the development schedule of the
project.  Working within the existing approved Mine Works Programme, a phased   
approach was determined, in terms of which a stand-alone 5-Seam metallurgical   
coal operation would first be developed, followed by a second phase in which a  
larger (by volume) 2 and 4-Seam domestic power station coal project would be    
developed.  This plan reduced the upfront capital required to cover first-year  
closure costs and allowed short-term development of a project to meet a physical
shortage of 5-Seam metallurgical coal in the domestic market. It also allowed   
the company to participate in Eskom`s medium-term coal procurement programme,   
our engagement in which has not yet concluded.                                  
The Board approved the first phase development of the 5-Seam operation in       
November 2009 and fabrication of the plant began in January 2010.  The mining   
right became effective on 23 February 2010.  Subsequent to the afore-mentioned  
amicable resolution of the dispute over land access, construction has begun in  
earnest.                                                                        
The Board has approved total capital expenditure of R172 million, with land     
acquisition costs and the plant construction costs making up most of the early  
investment. SNC Lavalin South Africa is the managing contractor on the project, 
with DRA Mineral Projects responsible for plant design and construction and     
Epoch Resources for residue facility design. Minopex has been selected as       
preferred plant operator and Megacube Mining, a subsidiary of Sentula Mining    
Limited, as the preferred opencast mining contractor.                           
The design of the second phase of the project is now being optimised as a       
consequence of the engagement with Eskom.  This may result in this phase being  
larger than originally anticipated in order to further reduce the per tonne     
costs of production, and provides a further motivation for the group to explore 
raising project finance for the second phase of the project                     
Sterkfontein Project                                                            
The Sterkfontein Project prospecting rights are held by Keaton Mining and       
Labohlano Trading 46 (Pty) Limited.  Limited exploration was done on the project
in the 2008/09 financial year, following the declaration of a 34 million tonne  
Coal Resource in May 2008. Exploration drilling resumed in earnest in mid-2009  
following the successful conclusion of the transaction to acquire a 74% interest
in a 3 271 hectare prospecting right over properties intermingled with the      
existing 4 009 hectares of prospecting rights.  The transaction resulted in a   
consolidated project area of 7 280 hectares with the potential for establishing 
a large-scale underground mine.                                                 
An updated resource estimate was declared following the conclusion of a 31-hole 
drilling programme and inclusion of the data from the 25 holes drilled by the   
previous holder of the prospecting right.  Further details are contained in the 
March 2010 Coal Resource Statement (published in April 2010); however, what is  
most significant is that the resource estimate has been doubled to 69 million   
tonnes of coal (mineable in situ).                                              
It was anticipated that the second phase of the drilling programme would be     
completed by June 2010, although the unseasonably wet weather has negatively    
affected drilling progress.                                                     
Once drilling and geological modelling has been completed over the consolidated 
area, a full feasibility study is planned with the view to determining the      
economics of an underground mine producing both export and domestic coal.       
Project review:  smaller, short-life project portfolio and the exploration      
pipeline                                                                        
Klip Colliery                                                                   
The Klip Colliery mining permit is held by Keaton Mining.  Klip Colliery has    
reached the end of its economic life and the mine site will be rehabilitated    
during 2010.  Although opencast mining is complete, some surface operations are 
still being undertaken on site.  All remaining coal has been sold. Keaton Mining
intends to make application for a closure certificate prior to the end of the   
2011 financial year.                                                            
Amalahle prospects                                                              
Amalahle Exploration (Pty) Limited, a 74%-held subsidiary of Keaton Energy, was 
granted four separate prospecting rights by the DMR in April 2008.  The         
prospecting rights covered six discrete properties totalling       1 597        
hectares.  Only two of the properties were found to be of economic interest and 
were added to the group`s small projects portfolio.  There is some regulatory   
uncertainty relating to both the Leeuwfontein and Braamspruit Projects and, as a
consequence, the Board felt it prudent to impair the associated exploration     
expenditure.                                                                    
Other prospects                                                                 
The group awaits granting and/or execution of three pending prospecting rights  
for relatively small properties contiguous to both the Vanggatfontein and       
Sterkfontein Projects. Once these prospecting rights have been executed,        
suitable announcements will be made to shareholders.                            
Markets                                                                         
The period under review has been characterised by the gradual recovery from the 
market crash of late 2008. Keaton Energy is well positioned to benefit from this
recovery, having carefully husbanded its cash resources, which are sufficient   
for the group to proceed with the development of the first phase of the         
Vanggatfontein Project at a time of increasing coal demand and better pricing.  
It has been said in some quarters that our conservative cash preservation plans 
and the matching of our development and growth to that of the global recovery - 
effectively a risk averse, "batten down the hatches" approach - was detrimental 
to our share price performance during the year. This may have been so. We       
believe, however, that our approach was correct as we have emerged extremely    
well positioned to leverage off strengthening coal markets. Export coal prices  
have recovered from their lows of 2009 and appear to have stabilised above US$80
per tonne, ex-Richards Bay Coal Terminal. Domestically, Eskom has embarked on a 
programme to contract 20 million tonnes a year of medium-term supplies for its  
existing power stations, and there are signs of recovery in the domestic demand 
for coal by industrial consumers.                                               
Most significantly, it appears that a genuine shortage of low-phosphorous, high 
vitrinite, metallurgical coal - the product from Phase 1 of our Vanggatfontein  
Project - has occurred in the local market, forcing furnace operators to turn to
more expensive substitutes such as coking coal, creating an immediate market for
our Vangattfontein 5-Seam product.                                              
Strategy                                                                        
The group`s previously-stated intention to produce two million tonnes of        
saleable coal a year in the medium-term is now likely to be achieved within the 
next two years from the Vanggatfontein Project alone, subject to the suitable   
conclusion of contract negotiations with Eskom.  In spite of the immediate      
challenges of negotiating such a contract, and then building and commissioning  
Phase 2 of the Vanggatfontein Project, the Board has reiterated the mandate     
given to executive management to develop the strategy to grow Keaton Energy into
a mid-tier coal producer in the longer term.                                    
The group`s two-tiered approach to pursue both a limited number of large,       
longlife, resource-intensive projects and a portfolio of smaller, quick-to      
cashflow projects to provide the group with operational flexibility will now    
change in emphasis as the first of the larger projects comes on stream. While   
we will continue to pursue smaller projects such as the Klip Colliery, the      
larger projects will enjoy priority for at least the next 12 months.            
The experience gained from opening, running and subsequently de-commissioning   
the Klip Colliery was invaluable, Sadly, one of the most salutary lessons       
learned related to security. The mine experienced no fewer than nine armed      
robberies in its 20 months of operation. We recognise the priority we will have 
to attach to this aspect of our business in the future.                         
The challenges we face now, as the group grows, are: to ensure that we remain   
lean, particularly in the face of the burdens of regulatory compliance; to avoid
bureaucracy; retain quick decision-making; and to keep fixed costs to a minimum.
Outlook                                                                         
Keaton Energy ended the financial year in a strong financial position, in an    
excellent project development position, with a positive market outlook and with 
a small, young executive team that has grown through weathering and succeeding  
in difficult circumstances. We start the new year enthusiastically with the     
Vanggatfontein Project in construction and with prospects for concluding an     
Eskom supply contract. The outlook is very positive.                            
On behalf of the Board                                                          
David Salter             Paul Miller                                            
Chairman                 Managing Director                                      
28 May 2010                                                                     
Registered office                                                               
Ground floor, Eland House, The Braes, 3 Eaton Avenue,                           
Bryanston, Johannesburg, South Africa                                           
(Postnet Suite 464, Private Bag X51, Bryanston, 2021)                           
Transfer secretaries                                                            
Computershare Investor Services                                                 
Registration number: 2004/003647/07                                             
Ground floor, 70 Marshall Street                                                
Johannesburg, South Africa, 2001                                                
Auditors:                                                                       
KPMG Inc.                                                                       
1226 Schoeman Street, Hatfield, Pretoria                                        
Directors:                                                                      
Dr JD Salter (chairman)*++, PBM Miller (managing director),                     
AB Glad, Z Mostert++, LX Mtumtum++, P Pouroulis**+,                             
JG Schonfeldt, APE Sedibe+, PCCH Snyders, JN Wallington++                       
*British **South African / Cypriot                                              
+non-executive, ++independent non-executive                                     
Telephone: +27 11 317 1700                                                      
Telefax: +27 11 463 4759                                                        
Email: info@keatonenergy.co.za                                                  
Website: www.keatonenergy.co.za                                                 
Sponsor                                                                         
Nedbank Capital                                                                 
Date: 01/06/2010 10:00:02 Supplied by www.sharenet.co.za                     
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