Sable Mining Africa Ld Charges Higher On Power Station Agreement

Mining minnow Sable Mining Africa (LSE: SBLM) is charging higher today after the company announced that it had signed a memorandum of understanding with CITIC Construction Co., Ltd,  with a view to developing a 600MW coal-fired power plant. 

At time of writing, Sable’s shares have jumped 80% on the day, and it’s easy to see why, the signing of this deal is a landmark agreement for the company. 

Under the terms of the memorandum, Sable and CITIC will explore the opportunities of using their respective expertise to work together to develop a commercial coal-fired power station at the Lubu Coal Project. The 19,236 hectare Lubu project is owned by Sable and is located in north-western Zimbabwe. The project has a modelled in-situ seam tonnage of 786m tonnes.

Sable’s management intends to use coal mined at Lubu to supply the power station when it’s constructed, as part of the group’s plan to unlock value from its south African coal assets.

The memorandum of understanding is supported by the Republic of Zimbabwe and the Ministry of Energy and Power Development. When completed, Sable’s management believes that the coal-fired plant can supply not just the domestic market, but also the regional market, which includes South Africa.

A long way to go 

There’s no denying that today’s news is game-changing for Sable Mining. However, like all early-stage miners, Sable is still a high-risk investment. The company still has a long way to go before it can be considered to be suitable for all investors. 

Indeed, for the year ended 31 March 2015, Sable didn’t generate any revenue and an operating loss of $12.6m was reported for the full-year. Cash and cash equivalents amounted to $6.3m, so it’s clear that the company’s options are limited. 

Still, at the end of August Sable raised $2m via the sale of non-core assets. As part of this deal, the company was able to negotiate the repayment of $18.6m in debt attached to one of its projects, on a priority quasi-royalty basis from the project’s operations.

So, Sable has been able to agree several income generating deals within the past few months, which should buy the company some time. 

Nevertheless, over the long term it’s difficult to tell what the future holds for Sable. The company has spent years acquiring a portfolio of potentially world class iron ore assets, but the iron ore market is in turmoil. After years of ramping up supply to meet demand from China, the market is now oversupplied and Chinese demand is falling.

As a result, iron ore prices are expected to remain flat over the next two years and it’s unlikely that banks will want to provide the financing for new iron ore mines with such a dismal outlook for the sector. 

The bottom line

Overall, it's difficult to place a value on Sable's shares at present. Although the company has plenty of potential, it's almost impossible to value the shares with so many risks ahead. 

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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.