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Xstrata fully empowered in S.Africa
Allan Seccombe
Posted: Tue, 09 Jan 2007
[miningmx.com] -- ALL Xstrata’s South African operations are empowered after a traditional community agreed a R575m transaction to take a 26% stake in the Rhovan vanadium operation.
The Bakwena Ba Mogopa community is exchanging its royalty payments for 26% of earnings before interest, tax, depreciation and amortisation (EBITDA) or cash flow.
“Going forward we estimate the order of US$110m of annual EBITDA for this asset implying an EV (enterprise value) /EBITDA of 2.8 times for this acquisition,” said Simon Toyne, an analyst with Numis Securities in London.
“Whilst this is less than half the EV/EBITDA of the sector in 2007 on our estimates, the asset's profitability is highly volatile - the EV/EBITDA on 2004 profitability would have been 9 times,” he said in a note.
The community is bringing a proportion of cash to the transaction and Xstrata is providing vendor
finance for the remainder. Xstrata spokeswoman Claire Divver declined to give any details on the size of the company’s obligation or the time frame over which the community will repay the loan.
The community will receive a guaranteed minimum cash payment that will equal the royalties it used to receive from Xstrata.
The Bakwena have a 26% stake in African Platinum's Leeuwkop project. African Platinum increased its stake in Leeuwkop to 74% in October last year and will pay the community R60m to do so.
The community is buying into the operation on the cusp of an expansion. Again, Divver declined to give a cost estimate for raising production to slightly more than 30 million pounds of vanadium pentoxide from the current 23 million pounds.
“The transaction also
enables the community to participate in any expansions on competitive terms,” Divver said.
Xstrata has nearly completed an environmental management performance report and the low-cost brownfields expansion project was expected to come before the company’s board before the end of 2006.
"It wasn't submitted to the board for approval. It still remains a potential expansion and it's still on the drawing board. I'm not sure there's any potential reason. It's not scheduled for the next month or two so I'm not sure there's a time line for it," Divver said.
World consumption of vanadium, which is used as an alloying agent in steel production and other alloys, tops 200 million pounds a year.
The empowerment transaction clears the way for Xstrata to apply for new-order mining licences from the Department of Minerals and Energy. It has completed empowerment transactions in its South African coal, platinum and chrome businesses.
“New order mining
licences are yet to be received but this process is ongoing and we do not anticipate any significant issues. Xstrata remains our top pick of the UK large cap mining sector,” said Toyne, who sees earnings driven by Xstrata’s exposure to zinc and nickel.
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