Listed coal producer Hwange Colliery Ltd (Hwange) recently commissioned US$31,2 million worth of equipment expected to increase production and improve the company’s efficiency as part of its recovery strategy.
The firm also hopes to clear all its legacy debt in excess of US$160 million. Businessdigest (BD) reporter Taurai Mangudhla this week interviewed Hwange Colliery CEO Thomas Makore (TM). Below are excerpts:
BD: You recently received new equipment from Belarus and India; what does this mean for your company?
TM: The equipment has buttressed the coal supply side of our business, a milestone towards reinstating HCCL as biggest producer of coal in Zimbabwe. Our capacity now stands at producing 6,2 million tonnes of coal per annum.
BD: There are reports that the equipment supplied by BEML Ltd in India is second hand and broken down, what is your response?
TM: The equipment that was supplied is brand new and under warranty and free from of any defect in design, materials or workmanship. The fact of the matter is that we are still in the commissioning phase of the new equipment. This entails that the equipment undergoes load testing in order to identify any snagging issues which the supplier will resolve.
BD: What is your capacity utilisation now and what are your targets going forward?
TM: Capacity utilisation currently averages 40%, and with turnaround initiatives underway, incremental capacity utilisation will reach 70% by the fourth quarter of 2015. New equipment bolsters high machinery availability, and continuous process re-engineering guarantees higher capacity utilisation.
BD: How much is your total debt to government?
TM: We will be going through a rights issue soon and more details will be revealed then.
BD: What possible scenarios may arise from government’s debt-to-equity swap scheme of arrangement?
TM: The debt-to-equity will be done by way of a rights issue. Depending on whether other shareholders follow their rights, government’s shareholding may increase when it converts its debt-to-equity. When other shareholders follow their rights, this will have the effect of injecting cash into the business.
BD: What is the impact of dealing with the government’s debt to the business?
TM: The conversion of debt-to-equity is part of the balance sheet restructuring, one of the strategic pillars of Hwange’s turnaround strategy. Therefore, it will position the company’s balance sheet competitively to continue the recapitalisation process. Going forward, HCCL will continue to play its part as a responsible corporate citizen.
BD: One would argue new equipment alone is not enough to turn around the company’s fortunes given prevailing prices of coal on the international market. what is your take on this?
TM: Coal business is volume business, hence new equipment and other recapitalisation efforts set the strongest foundation in reducing the cost per tonne of production, in-turn giving the business a competitive profit formula. Our turnaround strategy is not premised on new equipment alone, but other strategic pillars such as customer diversification through creating new markets in the export arena, institutionalisation of a new business model through divisionalisation and balance sheet restructuring. All of these initiatives are happening concurrently with commissioning of new equipment.
BD: What is your cost of production per tonne and average selling price?
TM: As you might be aware, Hwange has a full range of coal products which have varied production costs and therefore different selling prices. We have Hwange power station coal, dry and washed products, coke and other by-products of toll coking. With the commissioning of the new equipment and intended doubling of capacity, fixed costs will be spread over large volumes, and therefore see the costs per tonne significantly falling, leveraging our capability to sell at profitable margins. We however have other operations such as underground mining and processing under the mining division also contributing to overall low production costs.
BD: What is your profit margin and how is it comparable to local competitors and international trends?
TM: As you might have seen our published 2014 financial statements, we are turning around from a negative profit margin to a positive margin. Over the past five months, we have seen the gross loss position migrating towards a break-even on a month-to-month analysis. However, cumulatively we expect to have significantly reversed the gross loss performance in the last quarter of 2015. With competition, the profit margins have been varying from company to company and largely depend on the business model, with some companies targeting and achieving margins from 10% to 30%.
BD: What other initiatives do you have in place to turn around the company besides the new equipment and recapitalisation?
TM: Other initiatives include remodelling business processes through divisionalisation, diversification of our markets, augmenting our own production with that of the contract miner (Mota Engil).