Managing Director’s Review of Operations


OVERVIEW

Highlights for the year under review are summarised below:
• Open pit mining increased to a peak of 300 000 metric tonnes per month
• Resuscitation of No 2 wet screening plant;
• Resumption of underground mining, producing 12 000 metric tonnes of coking coal;
• Medical Services division revenue grew by 19% to $0.67 million compared to the previous year.;
• Estates division revenue grew by 34% to $9,5 million compared to the previous year.

I have pleasure in submitting my report on the Company’s operations for the year ended 31 December 2017.

THE STRATEGIC DIRECTION
The Company adopted a five year strategic plan aimed at stopping the bleeding and least cost production. This five year strategic plan was a culmination of a company-wide approach involving and incorporating inputs from staff in all departments. From this strategic plan, an operating plan for the financial year 2017 was drawn up. The key elements of the
strategic plan are as follows:

Creation of the operating space
The company’s Creditors Scheme of Arrangement was overwhelmingly supported by the creditors both by number and value. Subsequently, the High Court sanctioned the scheme in May 2017. In accordance with the scheme, employee creditors were paid an initial deposit of 7% in June 2017 and the balance payable over 36 months beginning December 2017.
Trade creditors were paid an initial deposit of 5% and the balance payable over 10 years including a grace period of 2 years. Statutory creditors will be paid over 15 years with a grace period of 2 years.
Through the scheme of arrangement, the company’s debts were restructured to long term thereby protecting Company assets from execution in fulfilment of creditor claims. This created a balance between the Company’s turnaround initiatives and the competing creditor interests as funds would be channelled towards operations while also paying creditors in a structured and affordable manner.

Company brand
During the period under review, the Company’s brand improved after the Scheme of Arrangement approval and as a result of the increase in production. Media publications carried the positive news about the company’s turnaround implementation. Coal deliveries for electricity generation improved and the resuscitation of underground mining operations made more traction. The company reported a gross profit compared to a gross loss which had been reported for more than 5 years. Development of the new concessions will position the Company’s brand for new progress and developments associated with the anticipated growth of the national economy.

Increase and realignment of production

With the operating space afforded by the scheme of arrangement, the Company focussed its efforts and resources on increasing production. The Rapid Results approach, known as Project Gijima, was implemented to fast track productivity and efficiencies across all operations. Interventions into the repairs and maintenance of its own mining equipment improved reliability, availability and utilisation of the company’s assets. Under Project Gijima, three buses for transportation of employees were resuscitated thus ensuring punctuality of staff and productivity improvement.

Open pit mining increased from an average of 30 000 metric tonnes per month in the first quarter and peaked at 300 000 metric tonnes per month in the third quarter. The steep increase in production exposed bottlenecks in the processing plants and deliveries of coal. The bottlenecks ranged from logistical constraints and aging plant and equipment to process coal. As a result, production in the fourth quarter had to be rescheduled to prevent further accumulation of coal stocks.

To manage logistics, continuous engagement and coordination with the National Railways of Zimbabwe continued with the result being improved wagons screening plant was resuscitated in the fourth quarter and contributed to the improvement in quality of coal, reduction of duff generation and regain of lost industrial customers. Production for 2017 was 1.2 million metric tonnes compared to 921 000 tonnes in the previous year. The major mining contractor contributed 53% to the overall production for the period under review.

The takeover of the Hwange Coal Gasification Company (HCGC) coke oven battery will take into account the remaining economic life of the asset. Coking coal sales to HCGC are done on a prepayment basis. Further discussions to takeover the coke oven battery will be done in the best interests of the Company to avoid taking over risks and liabilities.

Resuscitation of underground mining
During the period under review, the Company implemented actions to resuscitate its underground mining operations which were strategic to the Company’s profitability and forex generation. This project had a budget of $6.2 million which included exchange of the Company’s Continuous Miner with an OEM (Original Equipment Manufacturer) recommended pre-owned machine with an economic life of approximately 3 years before the next major service, refurbishment of two pre-owned shuttle cars plus the Company’s own shuttle car, purchase of new roof bolter, feeder breaker, MPV, underground carrier, dewatering pumps, conveyor structure, electrical switchgear and communication system. The pre-owned Continuous Miner was delivered in the third quarter of the year. The remaining equipment could not be delivered due to the acute shortage of foreign currency. Underground mining resumed in December 2017 using the delivered Continuous Miner and the old support equipment such as the single shuttle car, roof bolter and feeder breaker. Approximately 12 000 metric tonnes of coking coal was mined in December 2017.

Customer retention and diversification
The increased production and sales enabled the company to retain key customers and grow its market share. Sales for 2017 were 1.2 million metric tonnes which represented a 41% increase compared to the previous year. Thermal coal still contributed the largest portion of sales while industrial coal sales to the industrial customers and the tobacco sector also grew. Coking coal sales will be a major area of focus and growth as the production from 3 Main underground increases. The ultimate strategy will be coke production which is hinged on the takeover of the coke oven battery from Hwange Coal Gasification Company.

Increase in export sales
The Company’s largest export market was Zambia. Export of industrial coal and coke to this market contributed to the export revenue. Trial orders of industrial coal to new blue chip customers in Zambia and South Africa were also undertaken. These new customers will be a source of market share growth for the export business. Export sales only contributed only 1% compared to the target of 25% contribution.

Focus on least cost reduction
Given the increasing competition in the coal mining sector, the Company implemented a series of cost reduction measures such as reduction of employment costs by 18% through the review the Company’s human resources policies, short time working arrangements, reduction in the number sub-contractors by resuscitating its own equipment and reduction of fees for subcontracted services. A voluntary retrenchment programme was implemented in which approximately 227 staff took up the offer. At the end of 2017, the Company’s headcount was 2 052 compared to 2 299 in the previous year. In order to stop the bleeding, a Closed Circuit TV system was introduced at high risk points especially the stores, coal and coke yards as well as security entry and exit points. A breathalyser unit was also introduced at security checkpoints to prevent entry to work by employees under the influence of alcohol.

New concessions

Western Areas

Special Grant 5950 was awarded to the Company in July 2015. The Environmental Impact Assessment was completed. The 25 years’ coal supply agreement was signed with Zimbabwe Power Company to supply Hwange Power Station Stage 3 Expansion. In November 2017, the contract for exploration and drilling was signed with Fugro Earth Resources. The exploration and drilling programme will commence in 2018 and culminate in a resource statement by the end of the year. The Company engaged KPMG as its financial adviser to seek an investor or joint venture partner for the mine planning and development of this concession. In terms of the coal supply agreement, coal delivery to Hwange Power Station units 7 and 8 must commence within 3 years and expected to be sourced from this concession.

Lubimbi West
The Company was also awarded Special Grant 4764 in July 2015. The Environmental Impact Assessment was underway. The 25 years’ coal supply agreement was signed with PER (Pan African Energy Resources) Lusulu Power. While PER Lusulu take steps to reach financial close for the project, both Hwange Colliery and PER Lusulu Power are seeking funding and joint venture partnerships for the mine planning and development of this coal concession. Coal supply is planned for 36 months from the date of financial close.

Lubimbi East
Special Grant 4364 was awarded to Hwange Colliery in July 2015. The Environmental Impact Assessment is in progress. This concession area has coal bed methane gas reserves. The Company has invited tenders for joint venture partnership for the feasibility studies, development and financing for this concession. The potential products that can be realised from this development are electricity, domestic gas, petroleum and fertiliser.

Capital Expenditure Projects

Second underground mining section
Given the firm coking coal prices and envisaged increase in domestic demand for coke, the Company invited tenders for development of a second underground mining section. This development will double coking coal production in approximately 12 months. The tender will include upgrade of the infrastructure to cater for the second and third underground sections. The Company’s laboratory equipment will also be upgraded so that complete tests for phosphorus and sulphur will be carried locally. Most of the coking coal will be earmarked for exports.

Resuscitation of Hwange Colliery’s coke oven battery
To increase the contribution to sales and margin of high value products, the Company invited tenders for the replacement or refurbishment of its coke oven battery. The tender enquiry will include funding for the project. Most of the coke will be earmarked for the domestic market and exports to Zambia and South Africa.

SAFETY, HEALTH, ENVIRONMENT AND QUALITY

The Company’s objective is zero harm to the environment, people and equipment. During the period under review, the milestone of 1.5 million fatality free hours was reached. Unfortunately the Company had a fatality in the last month of the year. This tragedy was investigated and further actions to learn and prevent the incident were recorded and disseminated. Pneumoconiosis coverage for the Company was more than 90% which is above the industry’s average. Run-off water and storm water causes seasonal acid mine water drainage into the nearby Deka River. Monitoring of water pollution to the Deka River continued and stakeholder meetings were held to appraise coal mining companies and the community about the level of pollution into the river.

The Company has a Corporate Social Responsibility programme to install boreholes in the community which extract clean water for the community and livestock. The Company’s certification for ISO 9001:2008 was approved by the Standards Association of Zimbabwe.

 

Period Non Lost
Shift
Accidents
Lost
Shift
Accidents
Fatalities Total
Year to
Date
2017
5 22 1 27
Year to
Date
2016
5 25 0 30

 

ESTATES DIVISION PERFORMANCE

Revenue grew by 34% to $9,5 million compared to the previous year. The revenue was generated from the following segments: real estate, retail, hospitality and education. It posted a profit of $1,4million compared to an operating profit $1,2million in the previous year. However, even though the division was profitable it was in a negative cash position due to offset arrangements with debtors especially former employees. The division commenced initiatives to register a community trust which will administer recreational and sporting activities in the community with funding from the beerhalls and the sports facilities. During the financial period 2017, the division also embarked on a project to re-paint houses. The rehabilitation of the aerodrome was 90% complete at the end of the year. An Enterprise Resource Planning system suitable for a municipality is being considered for implementation. Valuation of the town infrastructure and the houses will be done in order to understand the underlying value of the assets that are generating the income.

MEDICAL SERVICES DIVISION PERFORMANCE

Revenue grew by 19% to $0.67 million compared to the previous year. However, this division still reported a loss of $2 194 143 compared to an operating loss of $1,4million in the previous year. The Company contracted Cellmed to provide a medical aid service through a tender process. This service improved the division’s cash flow and therefore availability of drugs and medication improved significantly by the end of the year. In addition, the Company contracted Nyaradzo funeral services to provide funeral cover to employees and their dependants through a tender process. The cash position of the division improved with the introduction of the medical aid for the company. It could not fund the patient management system which is still required to run the operations efficiently.

 

LEGAL AND REGULATORY

As a good corporate citizen the company endeavours to meet national and regional laws and regulations. The areas of interest are safety, competition, corporate governance, listing and disclosures, environment, labour and taxation. The Company’s reputation is exposed if compliance with laws and regulations are not adhered to. The Company and or its officers have to be protected from penalties or criminal sanctions by conducting its business within the confines of the laws and regulations. During the year under review, the Company did not record any material penalties and/ or litigations owing to the restructuring of its debts under the scheme.

The new government has made investor friendly changes in the indigenisation laws and more changes are expected when the Mines and Minerals Act is promulgated.

TRAINING AND SKILLS DEVELOPMENT

Hwange Colliery has always taken pride in its capacity and capability to provide training to youths. The following training statistics bear testimony to this fact:

POST REPORTING DATE UPDATE

Coal fines

The Company invited tenders for beneficiation of the coal fines or purchase of bulk quantities on a prepaid basis as a way to raise capital. A number of customers have offered to purchase bulk quantities on a prepaid basis. Other offers that are being considered are for the manufacture of briquettes from the coal fines and also electricity generation and gasification of the coal fines.

Industrial relations

The Company’s Scheme of Arrangement provided an initial deposit of 7% of the outstanding salary arrears to each employee. The creditors’ balance was calculated as at 31st January 2017. This payment resulted in renewed optimism in the turnaround of the company. However the company was only able to pay 50% to each employee due to low cash receipts emanating from production and sales below break-even point. Approximately $24 million was carried over from 2017 as outstanding payments. Scheme of Arrangement instalments to employee creditors commenced in December 2017. Concurrent payment of scheme instalments to employee creditors and current salaries is envisaged when 3 Main underground mining production will be at full capacity, planned for May 2018. The industrial relations atmosphere deteriorated shortly after the close of the year resulting in demonstrations by the spouses of employees outside the company’s main offices. This issue is being closely monitored while scheme instalments to employees are being paid monthly in accordance with the scheme provisions.

CONCLUSION

Despite the many challenges faced by the Company in 2017, many achievements were made which provide the foundation and impetus for the turnaround plan. The Scheme of Arrangement provided the broad space in which the company can implement its turnaround plans. The scheme is anchored on increased cash generation from increased production and sales. However increased production requires that the Company allocates more funding to its operations which means that it will have to focus on its core business of mining and reduce non-mining costs in line with industry best practises. Innovative ways to deal with the scheme obligations will be explored while production of high margin and value coking coal will be increased. The Board Management and staff showed resilience and remained focussed on its turnaround plan implementation. I would like to thank our former Board Chairman, now Minister of Mines and Mining Development, Honourable W. Chitando for his leadership during the year. I also thank the Acting Chairperson, Mrs J. Muskwe and the entire Board, management and staff for their support, dedication and relentless commitment during the year. The Company’s turnaround is real and continues to gather momentum.