Acquisition of a 50% indirect interest in the Arnot Mine
WESCOAL HOLDINGS LIMITED
Incorporated in the Republic of South Africa
(Registration number 2005/006913/06)
Share code: WSL
(“Wescoal” or the “Company”)
ACQUISITION OF A 50% INDIRECT INTEREST IN THE ARNOT MINE
1. Introduction and background
Wescoal shareholders are hereby advised that the Company, through its wholly-owned subsidiary Wescoal
Mining Proprietary Limited (“Wescoal Mining”), has entered into agreements (the “Transaction Agreements”)
to partner with Innovators Resources Proprietary Limited (“IR”) to acquire from Exxaro Coal Mpumalanga
Proprietary Limited (“ECM”), for no consideration and on a voetstoots basis, the business operated out of the
Arnot coal mine in Mpumalanga (the “Arnot Mine” or the “Business”) (the “Transaction”).
The shareholders of IR are, amongst others, erstwhile employees of ECM who were previously retrenched
during December 2015 and the Transaction was originated by these employees when they took the initiative to
engage with ECM, with the intention of pursuing business operations in relation to the Arnot Mine to unlock
The Transaction is a broad-based empowerment transaction which will not only secure employment for
previously retrenched employees but will also provide employees and affected communities around the Arnot
Mine with equity participation as outlined in the Mining Charter III.
2. Structure of Wescoal’s participation in the Transaction
Wescoal Mining and IR have concluded the following material agreements to give effect to the Transaction and
Wescoal’s participation therein:
2.1 Subscription Agreement
Wescoal Mining, Arnot InvestCo Proprietary Limited (“Arnot InvestCo”), a company representing the
interests of previously retrenched employees of ECM, and Arnot HoldCo Proprietary Limited (“Arnot
HoldCo”) have entered into a subscription and shareholders agreement (the “Subscription Agreement”)
to cater for:
- the creation of the vehicles, Arnot HoldCo and its wholly owned subsidiary Arnot OpCo Proprietary
Limited (“Arnot OpCo”), through which they will invest in, and operate, the Arnot Mine. Arnot OpCo’s
shareholder will initially be Arnot HoldCo, with subsequent shareholder participation by employees and
affected communities, through trusts in the process of being established, according to the requirements
of Mining Charter III; and
- the subscription by Wescoal Mining of a 50% interest in Arnot HoldCo (“Wescoal’s Subscription”) for
up to R75 million in several tranches (the “Subscription Consideration”), with the remaining
shareholding being held by Arnot InvestCo.
In addition, and as part of the Transaction, Wescoal Mining and Arnot OpCo have concluded agreements
to give effect to the provision by Wescoal Mining to Arnot OpCo of:
- operational skills transfer, management, and the provision of support and administrative services, for a
market-related management fee, relating to the Business; and
- a working capital facility, in the aggregate amount of R25 million.
2.2 Option Agreement
Wescoal, Wescoal Mining, Arnot InvestCo and Arnot HoldCo have entered into an agreement (the “Option
Agreement”) to grant, Wescoal, on the one hand, a call option, and Arnot InvestCo, on the other hand, a
put option, to facilitate the potential acquisition by Wescoal of Arnot InvestCo’s 50% shareholding in Arnot
HoldCo, as detailed in paragraph 4.3 below.
The Subscription Agreement and the Option Agreement contain warranties and undertakings which are normal
for a transaction of this nature.
3. The Transaction, rationale for Wescoal’s Subscription and the strategy for the Arnot Mine
3.1 The Transaction
Arnot OpCo has entered into an agreement with ECM (the “Transfer of Business Agreement”) to acquire
the Business for no consideration with effect from the date of fulfilment of the suspensive conditions set
out in paragraph Error! Reference source not found. below (the “Business Transfer Effective Date”).
Based on the mine closure plan, the rehabilitation and closure activities are scheduled to continue until
In terms of the Transfer of Business Agreement, Arnot OpCo will acquire the Business including, inter alia:
- the mining right granted to ECM in terms of section 23(1) of the Mineral and Petroleum Resources
Development Act, No. 28 of 2002, as amended from time to time (the “MPRDA”) pertaining to the Arnot
- the existing “cost-plus” coal supply agreement between Eskom Holdings SOC Limited (“Eskom”) and
ECM (the “pre-2015 Eskom CSA”) which expired on 31 December 2015 (i.e. Arnot OpCo will assume
the surviving provisions thereof);
- ECM’s movable assets, as well as certain immovable properties required for mining operations;
- contracts, being mainly those with service providers involved in the rehabilitation and closure activities;
- employees currently involved in the rehabilitation and closure activities; and
- the assumption by Arnot OpCo of all rehabilitation obligations, environmental and environmental
closure liabilities, social and labour plan obligations and health and safety responsibilities related to the
Business, by law, as the new owner of the Arnot Mine and as prescribed in terms of the MPRDA and
other applicable laws, subject to Eskom’s obligations relating to the payment of all financial and closure
obligations in relation to the Arnot Mine.
Wescoal’s strategy focuses on securing additional resources and strategic interests in coal and key
logistics infrastructure, as well as disposing of non-core assets and the Company has actively sought out
acquisitive value-enhancing opportunities. The Company took a significant step in this growth strategy by
concluding the acquisition of Keaton Energy Holdings Limited in June 2017.
Over the last year, the Company achieved its objective of moving from operating day-to-day, to being in a
position to focus on growth, diversify into new markets and optimise its operations. Wescoal’s participation
in the Transaction is aligned with this strategy of generating value for Wescoal shareholders and with
building a scalable, sustainable business with the key objective of becoming an 8–10 million tonnes per
annum (“Mtpa”) producer over the medium term.
3.3 Strategy for the Arnot Mine
The supply and off-take of coal from the Arnot Mine, as per the pre-2015 Eskom CSA, came to an end on
31 December 2015. Pursuant to the pre-2015 Eskom CSA, Eskom will be involved in the Business to
enable it, inter alia, to fulfil its closure and rehabilitation obligations previously assumed. The Transaction
will enable the development of coal reserves that would have otherwise been sterilised by the mine closure
The strategy for the Arnot Mine is thus as follows:
- It will remain focused to produce coal exclusively for Eskom, as per the terms of the pre-2015 Eskom
- The immediate objective is to prepare for production from the open-cast section. Arnot OpCo, with the
assistance of ECM (to the extent required), intends to respond to an Eskom-issued request for coal
supply to the Eskom Arnot Power Station, which is due for submission by 2 April 2019. The Arnot Mine
is adjacent to the Eskom Arnot Power Station and it is intended that coal will be delivered to the power
station through a conveyer belt system, resulting in a notable cost-competitive advantage;
- The project target is for production to commence during the latter half of 2019; and
- In addition to the initial development opportunities identified during the technical due diligence
investigation, conducted by The MSA Group Proprietary Limited, there are additional coal resources
within the Arnot Mine mining right area which could potentially be mined in future subject to, inter alia,
securing surface access rights and relevant legal permissions and engaging Eskom.
4. Salient terms of the Transaction Agreements
4.1 Transfer of Business Agreement
The Transaction is subject to the fulfilment of the following suspensive conditions on or before 365 days
from the signature date of the Transfer of Business Agreement:
- The consent of the Minister of Mineral Resources, in terms of section 11 of the MPRDA, to the cession
of the mining right by ECM in favour of Arnot OpCo;
- Written approval for the implementation of the Transaction by the Competition Authorities; and
- Written consent of Eskom, obtained by ECM, for the cession and assignment of all the rights and
obligations of ECM under the pre-2015 Eskom CSA to Arnot OpCo.
4.2 Subscription Agreement
Wescoal Mining shall subscribe for shares in Arnot HoldCo, in several tranches, and up to a maximum of
R75 million, to be utilised towards the initial funding requirements of Arnot HoldCo and Arnot OpCo, such
that Wescoal Mining’s shareholding in Arnot HoldCo shall be equivalent to 50%. Further funding
requirements of Arnot HoldCo shall be provided (i) firstly, from retained earnings; (ii) secondly, through
loans and/or dividends from Arnot OpCo; (iii) thirdly, by way of loan funding from Wescoal Mining on
market-related terms; (iv) fourthly, by way of bank loans; and (v) fifthly, shareholder funding.
Arnot InvestCo shall not be entitled to dispose of its shares in Arnot HoldCo for 5 years from the signature
date of the Transfer of Business Agreement (the “Lock-in Period”) and each of Wescoal Mining and Arnot
InvestCo have granted each other pre-emptive rights in respect of their shareholdings in Arnot HoldCo.
Each of Wescoal Mining and Arnot InvestCo shall be entitled to appoint 2 directors to the board of Arnot
4.3 Option Agreement
In terms of the Option Agreement:
- Arnot InvestCo has granted Wescoal the right and option to require Arnot InvestCo to dispose of the
shares held by Arnot InvestCo in Arnot HoldCo (the “Call Option Shares”) to Wescoal (the “Call
- Wescoal has granted Arnot InvestCo the right and option to dispose of the shares held by Arnot
InvestCo in Arnot HoldCo (the “Put Option Shares”) to Wescoal (the “Put Option”),
for a period of 12 months from the second anniversary of the Business Transfer Effective Date (the “Option
Period”). In exchange for the disposal of the Call Option Shares / Put Option Shares, the purchase
consideration will be settled through means of Arnot InvestCo subscribing for, and Wescoal allocating and
issuing, such number of Wescoal ordinary shares (“Wescoal Shares”) as shall, in value, be equivalent to
the value of the Call Option Shares / Put Option Shares (the “Option Shares Value”) on the basis that off-
set will apply.
The exercise of the Call Option and the Put Option are subject to regulatory approval/s and/or Wescoal
5. Value of, and profits attributable to, the net assets of the Arnot Mine
In terms of the JSE Limited Listings Requirements (“JSE Listings Requirements”), the subject of the
transaction is Wescoal’s 50% interest subscribed for in Arnot HoldCo. Arnot HoldCo’s only asset will be its
shareholding in Arnot OpCo, whose only asset will be the Arnot Mine. The value of the net assets of the Arnot
Mine, which is in closure at present, is reported by ECM as R15 million (with Wescoal’s 50% indirect interest
being equivalent to R7.5 million), and the profits attributable to the net assets of the Arnot Mine being R500 000
(with Wescoal’s 50% indirect interest being equivalent to R250 000). These figures have been extracted from
the unaudited management accounts of ECM for the year ended 31 December 2018, which results have been
prepared in accordance with International Financial Reporting Standards. Wescoal is satisfied with the quality
of these management accounts. Shareholders should note that the numbers disclosed herein are reflective of
the Arnot Mine in its current state of rehabilitation and closure.
6. Categorisation of Wescoal’s Subscription and the Option
In terms of the JSE Listings Requirements, Wescoal’s Subscription is classified as a Category 2 transaction for
Wescoal and accordingly does not require Wescoal shareholder approval. The Call/Put Option has not been
categorised at this point and will be categorised if and when exercised by the relevant party. If it results in a
Category 1 transaction for Wescoal, Wescoal shareholder approval will be sought at that time.
28 February 2019
Investment Bank, Corporate Advisor and Sponsor to Wescoal
Nedbank Corporate and Investment Banking, a division of Nedbank Limited
Legal Advisor to Arnot HoldCo
Mkhabela Huntley Attorneys Inc.
Corporate Finance Advisor to Innovators Resources Proprietary Limited
PricewaterhouseCoopers Corporate Finance Proprietary Limited
Legal Advisor to Innovators Resources Proprietary Limited
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