A Billion-Ton Coal Miner You’ve Never Heard Of

One thing I've noticed in the resource business: big never goes out of style.

If there's a large in-ground resource, someone will always be eying a way to exploit it. It's the reason the Canadian oil sands got developed. Same with U.S. shale gas. It's also why the massive oceanic reserves of methane hydrates will see huge investments. Even tough nuts like oil shale attracted 20 years of spending from Shell in an attempt to unlock the billions of barrels they hold.

It's not easy today to find any such large resources in the energy space that aren't being crawled over by legions of would-be developers.

Unless you go to South Africa.

The country's Waterberg region in northeastern Limpopo province may hold one of the last untapped energy bounties on the planet-massive, undeveloped coal fields containing billions of tonnes of resource.

But Waterberg may not stay a secret for long. The coal development rush is now starting here. Potentially unleashing a massive new source of thermal coal supply, perfectly-positioned in one of the best markets on the planet. And perhaps meaning billions in profits for the few companies making the first moves here-one in particularly that I think we're going to be hearing a lot about as this play develops.

This Is Where You Need to Be

Part of the reason I believe Limpopo coal is going to be such a big story is its proximity to the Indian Ocean. This region is ground-zero for the thermal coal market today. It touches the world's two major coal exporters-Indonesia and Australia. And lies near to super-consumers China, Japan, South Korea and Taiwan.

But it's also central to a place that's poised to become the most critical driving force in coal-India.

India's thermal coal demand is exploding. Over the last two fiscal years, Indian imports surged by 80% to nearly 89 million tonnes in fiscal 2013.

Those numbers place India as one of the largest coal importers in the world. And the nation's demand continuous to be ravenous. At a recent conference in Mumbai, analysts from coal experts Platts predicted that India will become the world's number one importer of thermal coal during the next three to five years.

This implies that Indian imports will jump by nearly 60 million tonnes over the next few years. Making this the go-to market for coal producers.

Production Woes for a Super-Producer

The problem for Indian coal buyers is: there aren't a lot of coal producers in their vicinity. The bulk of Indonesian and Australian production has been pretty much committed, even after recent expansions of mining operations in these countries.

The only other significant coal-producing nation in India's neighborhood is South Africa. And unfortunately for Indian consumers, South Africa is the only one of the world's top coal exporting nations that's struggling to expand its output. As the chart below shows, South African coal exports (the purple line near the bottom) have been flat for the last decade-during a time when surging prices prompted nearly every other coal-exporting country to significantly raise output.

There's a simple reason why South African coal is stalled: deep, expensive mines that have made producers fearful of high development costs for expansions and new mines.

That sentiment is changing a little as the coal-dominated South African power sector grows edgier about securing feed. New projects like Anglo Coal's 11 million tonne-per-year New Largo mine are getting built-but only after South African power generator Eskom stepped in to bear part of the $2.4 billion price tag for construction.

But there's only so much that can be done in South Africa's main production center-the Witsbank area of Mpumalanga province. Aged mines here are tough to revitalize.

Anglo Coal's New Largo project is by far the biggest production addition in sight in Mpumalanga. Other new mines and expansions on the books will likely add a total of just several million tonnes per year to overall output. And with much of this expansion being funded by local power generators, this new supply will almost certainly be captive to the domestic market-preventing miners from capitalizing on growing demand in India.

50 Billion Tonnes of New Coal

But there's another, less talked-about part of the country that holds much greater promise for increasing supply: the northern province of Limpopo.

Although large coal deposits in Limpopo's Waterberg area have been known for nearly a century, the area has been little developed-with miners favoring more southerly deposits. But the potential in this region in enormous. Waterberg is estimated to hold 50 billion tonnes of coal-about 40% of South Africa's known resources.

Currently there's only one mine here: Grootegeluk, operated by Exxaro Resources (OTC: EXXAY). But tellingly, this mine is the site of the largest production expansion currently underway in South Africa-aimed at delivering 14.6 million tonnes per year by 2016. A testament to the huge potential of coal deposits in this area.

Such a leap is possible because of the massive reserves Exxaro holds at Grootegeluk. All told, the project contains 3.1 billion tonnes of proved and probable coal reserves.

And that's just one of the company's projects in this emerging basin. Across its entire portfolio of five projects in Limpopo, Exarro owns 12.8 billion tonnes of coal resources.

Waterberg basin and transport infrastructure (green) northwest of more-established production in Mpumalanga province (red) in northeast South Africa. From Exxaro Resources 2012 Integrated Report.   

These are truly eye-catching numbers. But despite its massive holdings in Limpopo, Exarro will be unlikely to capitalize on surging export markets around the Indian Ocean. The majority of the company's output is committed to local power generation needs.

So how can investors capitalize on the sublime combination of these massive new coal fields and exploding Asian demand just across the water? By looking at the junior players in the Limpopo story.

Big Investors Are Betting On This Company

One in particular is leading the charge to unlock Limpopo's billion-tonne resources: Resource Generation Ltd. (ASX: RES).

Like Exxaro, Resource Generation has found a lot of coal at its Limpopo projects-the company's Boikarabelo project hosts 6.4 billion tonnes of coal resource.

Of this, nearly 750 million tonnes have been identified as reserves under the current mine plan here. Those are much bigger numbers than other junior developers in South Africa's more-advanced Witsbank coal fields have been able to scrape together. Universal Coal (ASX: UNV) for example, holds reserves of just 21 million tonnes at its flagship Kangala project in this basin.

To be sure, exploiting Resource Generation's massive Limpopo reserves has its challenges-most notably restricted road and rail in this developing project area. But the geological potential more than makes up for the infrastructure issues-Boikarabelo's coal seam 120 metres thick, and lies only 20 metres below surface. Suggesting this will be a lower-cost, open-pit producer.

These benefits have attracted some high-profile help in getting the deposit to production. In April, Hong Kong-based commodity traders Noble Group agreed to provide a $123 million loan facility for the project--part of which will go toward rail construction to hook up Boikarabelo with coastal export terminals.

Noble is also backing the jockey, having bought 7.5% of Resource Generation at a price of $0.40 (an especially interesting price, given that investors today can buy the stock for $0.24 on the open market).

For this investment, Noble will receive 500,000 tonnes per year of offtake from Boikarabelo's initial production. But this will still leave a planned 2.5 to 3.5 million tonnes per year available for export. Giving Resource Generation excellent exposure to growing coal demand in India.

The company still has a ways to go in raising the estimated $530 million it will take to get Boikarabelo into operation. Management is currently pursuing a rights offering, and discussing with banks about arranging funding. The company has also received interest for a financing of up to $25 million with Singapore-listed diversified mining developer Blumont Group.  

All this interest suggests Limpopo coal is starting to creep onto the radar screen of large investors in the commodities world. Expect to hear more soon from this resource frontier.