The cost of Boikarabelo's planned 45 megawatt power station, for which tenders have been received, has been removed from the capital expenditure estimate for stage one of Boikarabelo's operations.
Instead, Eskom has agreed to commit to the supply of sufficient power for stage one of the mine's operation as early as 2014, after the first generating unit at its new Medupi power station is in commercial operation.
This will meet Resource Generation's target of beginning coal production early in 2015.
Paul Jury, managing director, commented: "This development provides a positive step in simplifying the funding and construction phases of stage 1 of the Boikarabelo mine.
"Importantly, subject to securing debt funding, the capital saving will reduce the amount of equity funds required."
Resource Generation will decide in 2013 whether to proceed with the construction of the power station.
Nearing project finance
The Boikarabelo open-cut coal mine in South Africa has attracted a number of banks interested in potentially providing project finance, with due diligence underway.
If funding is completed by the end of 2012, construction of the mine and its infrastructure is expected to take two years, with stage one saleable production of 6 million tonnes per annum beginning at the start of 2015.
Resource Generation has already secured major regulatory approvals and transport contracts for development of its Boikarabelo mine on one of South Africa's largest remaining coal deposits.
With the Transnet rail contract in place, Resource Generation's plan is to secure project debt first then top up project funding with equity. Based on indicative offers it expects debt package to cover 50% of capital expenditure.
Resource Generation expects that the construction of stage two of the project will be financed from cash flow and is not expected to require a further equity raising.
The Boikarabelo mine has a major 6.4 billion tonne Resource - with current probable Reserves of 745 million tonnes and two long term export contracts already in place to support the funding initiative.
The Reserve represents only 35% of the current Resource area, meaning there are many more years of production possible.
Stage one of the mine development targets saleable coal production of 6 million tonnes per annum, with stage two planned to increase to more than 20 million tonnes per annum.
Importantly, Boikarabelo's sovereign risk has been minimised as a result of Resource Generation overcoming all major regulatory hurdles faced.
A contract to buy 139 million tonnes of coal over 38 years has already been signed with India's RPG Group, which owns an 11.6% stake in Resource Generation.
A second contract has been signed with India's Bhushan Steel to buy 500,000 tonnes per annum for five years and a minimum of 500,000 tonnes per annum for a further 15 years.
Also, negotiations have proceeded further with Eskom, South Africa's power generation company, to supply 3 million tonnes of thermal coal per annum to its Mpumalanga power stations.
Cashed-up ahead of construction
Cash reserves at the end of the June quarter totalled A$12.1 million, which is expected to be sufficient to cover cash requirements prior to the anticipated start of mine construction.
The main focus for the September quarter will be the negotiations for the project finance for the development of the Boikarabelo mine.
The reduction in capex by US$120 million is a significant step in the development of Boikarabelo.
The ability not to have to build a 45 megawatt power station in stage one reduces the amount of equity funds required to develop the project.
This is a positive step in simplifying the funding and construction phases of stage one of the mine.
Resource Generation has already secured regulatory approvals for Boikarabelo and transport contracts, as well as having executed two long term export contracts, with other offtake negotiations well advanced.
Proactive Investors is a market leader in the investment news space, providing ASX "Small and Mid-cap" company news, research reports, StockTube videos and One2One Investor Forums.