Con Fauconnier, outgoing CEO, Exxaro Resources
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» No losers in Kumba unbundling
» We are bullish on coal - Exxaro CEO-designate Con Fauconnier
» Exxaro sets out 2012 coal strategy
» Exxaro to step up SA zinc search
» Exxaro to protect empowerment status

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Exxaro may face funding dilemma
Allan Seccombe
Posted: Mon, 27 Nov 2006

[miningmx.com] -- EXXARO’S board will meet this week to decide whether to follow an option to buy into two Anglo American assets, said CEO Con Fauconnier, who is concerned that retaining its empowerment equity levels could act as a constraint on Exxaro’s future growth.

Exxaro, which houses the non-iron ore assets of Kumba Resources that was unbundled a week ago, will have total debt of R3.4bn if it decides to acquire 100% of Anglo’s mineral sands venture Namakwa Sands for just over R2bn and 26% of its Black Mountain zinc project for R180m.

Fauconnier, the former head of Kumba Resources and now Exxaro CEO, said the debt level is manageable and debt- financing structures are already in place.

“If you look at the debt level relative to the market capitalisation of Exxaro, it’s not a hugely onerous amount,” Fauconnier told Miningmx.
It may be a constraint in the longer term
Exxaro’s share began trading at R58.50, giving it a market capitalisation of R18bn when it first traded under its own name on Monday. However, the share price just after midday South African time was down to R55.20, giving it a R17bn market capitalisation.

“In our modelling we took this debt fully into account and the need for dividend flow to our constituent shareholders, particularly our empowerment and servicing debt. We are quite comfortable with the cash generation capability of the company to service the debt sensibly,” Fauconnier said.

One of Fauconnier’s concerns is retaining the ownership of 56% of Exxaro’s shares by empowerment entities when it comes to doing deals in the future. If, for example, Exxaro, issues shares for an acquisition, it will dilute the stake of the empowerment holding.

Exxaro has a substantial growth projects pipeline in coal and heavy minerals and won’t need to look for new projects for a number of years, he said.

Funding any new transactions in the future may be difficult and would narrow the project selection down to those that have cash-generating capability and that can be dovetailed into existing operations, Fauconnier said.

“We can’t go to the market and dilute because if we dilute the empowerment shareholding below 50% it will make some elements of this deal come unstuck,” he said, referring to the transaction to unbundle Kumba Resources to create South Africa’s largest black-owned mining company.

“In the longer term I think it may be a constraint, but in the shorter term, we’ve certainly for the next few years got our future planned out with growth projects funded from internal cash sources,” he said.

The internal growth projects in coal and mineral sands can be funded from cash flows, he said.

A time would need to come in South Africa when empowerment companies need to operate as normal companies, including being able to access the market when it comes to raising capital, he said.

“Unless the law changes whereby you can dilute below that level without endangering our empowerment status, we will rely on internally generated cash for our growth projects for the foreseeable future.”
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Fauconnier said Exxaro has not discussed the possible purchase of BHP Billiton’s Optimum Colliery, which is the subject of preliminary sale talks.

A strategy meeting early next year is likely to hear proposals on Exxaro becoming more involved in power generation. Exxaro plans to be South Africa’s largest coal producer.

Kumba is expecting a decision before year-end from South African power utility Eskom on whether to build a 4,400 MW power plant near its Grootegeluk coal mine in the Waterberg, which is a virtually untapped coal deposit that accounts for 40% of the country’s coal resources.

One of the major constraints to developing the Waterberg coal deposits apart from the need for another power station to take off the poorer quality coal, is an upgraded rail link to the coast to bring capacity to more than 3.5m tonnes/year. The railway is shared with Kumba Iron Ore’s Thabazimbi iron ore.

Water is in short supply and water management systems are in place that have halved water usage by the Matimba power station and Grootegeluk from a decade ago.

“In the longer term, you’d have to import water into the area. If we were given the next-generation power station we’ve done studies with Eskom on just that,” Fauconnier said.

Exxaro’s board will meet this week to decide on whether to follow the option on acquiring the zircon-rich Namakwa Sands operation and Black Mountain, which currently supplies Exxaro with zinc concentrate.

“Management’s recommendation is that we go ahead with exercising the option and the board will have to consider that,” he said

Documentation outlining the transaction could be sent to shareholders before the year-end holiday break and a shareholders’ meeting to give the transaction approval could be held at the end of January or early February, he said.