Exxaro shares under pressure as analysts fear loss of focus

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2098

SHARES in Exxaro Resources took some punishment in the first few hours of trade on the Johannesburg Stock Exchange after the company said it was interested in entering into an unspecified partnership in the business of energy and water security. The stock was down about 10% before recovering a touch; it was 7% lower at the time of publication.

Little flesh was put on the bones of the initiatives which CEO, Mxolisi Mgojo, said was in the interests of securing the company long after its coal mines had closed. He also set down plans for ‘digitalisation’ of the business which would strengthen “the spine of the group”.

At the firm’s full-year results presentation on March 8, analysts questioned how much capital might be allocated to such initiatives, and whether the company had an understanding of likely returns from them. Exxaro CFO, Riaan Koppeschaar, responded that the strategy would involve minimal capital outlay: “The capital cost is not nearly close to that of a mine,” he said. Asked if the outlay would be less than R1bn, Koppeschaar said ‘yes’; they would be much lower.

“Exxaro guided to FY18 – 22 cumulative capex of R23.9bn, which is R1.8bn higher than our previous forecast of R22.1bn,” said Renaissance Capital in a report in which it downgraded Exxaro to a ‘sell’, also on the basis of higher-than-expected increases in unit cash costs in its coal business. It added, however: “Management said that around R1.46bn will be spent on digitalisation and innovation projects and R500m will go towards environmental management projects. It is not clear what returns can be expected from these”.

Said Mgojo at the results presentation: “I know that the issue of capital allocation is always raised. But the returns of today had capital allocated to them ten years ago. This is about setting the base and foundation for the future”. One analyst, however, described the move as going “off piste”. “They must be a consultant’s dream,” an asset manager said of Exxaro management’s forward-looking approach.

Asked by Miningmx at a press conference if he thought he might have spooked analysts somewhat given the questioning, Mgojo replied: “When we went into renewables, we didn’t know anything about it. And the strategy there was achieving an understanding, and we were right about that. We saw that early.

“We realised then that, on our own, we couldn’t do it. Hence, we partnered with TataPower to create Cennergi. This is a new place that we are playing in. We are talking to many players in the market; we are all looking to address key critical global issues. What happens, for instance, when energy storage through renewables becomes the new baseload?” he said.

Renaissance Capital worried about Exxaro’s focus. “It appears to us that Exxaro has limited interest to expand its core Eskom and export coal businesses beyond current announced projects. Management is therefore exploring potential ‘Business of Tomorrow’ which includes smart renewables, energy, water and food. We believe a lack of focus may pose a risk of poor capital allocation”.

In 2015, Exxaro impaired its investment in Mayoko, an iron ore development project in Central African Republic, for some R5.3bn. The feeling among some shareholders at the time was that the company had to get back to its core competence of mining and marketing thermal coal to Eskom and the export markets.

Since then, Exxaro has successfully restructured its coal business to take advantage of buoyant export coal prices. Nombasa Tsengwa, who is head of Exxaro’s coal business, said yesterday that the company would be able to export 11 million tonnes or more of thermal coal by its 2019 financial year.

2 COMMENTS

  1. Dear fellow Readers,

    This BEE fronting co. does note cease to amaze , however i take refuge in the following saying ( by Abraham Lincoln):

    “You can fool all the people some of the time, and some of the people all the time, but you cannot fool all the people all the time.”

    I have taken a lot of flak for critiquing this front ( or more appropriately fraught ) committed in the name of noble BEE. We, i urge readers to go and read their FY17 results booklet ( pg 15). Here is the brief analysis of the numbers:

    At end of the 10yr lock-in period the BEE structure ( NOT Groups, because there are none), the forecasted Debt = R2491M. This on the following egregious conditions :
    1. Exxaro funded the NewBEEco for its 30% at R152,25/s after loaning it >67M shares at R73,92/s. So in effect the NewBEECo debt is already R5,25B ! Apparently ( LoL), NewBEECo acquired the Exxaro issued ordinary shares by means of third-party funding ( read Exxaro!!!) raised in terms of the preference share liability and funding from the equity contribution by Exxaro into NewBEECo .

    2. The aforementioned Pref shares will charge 80% x prime rate , and funded by assuming 4,49% divi yield. Therefore for Debt to be stable , Exxaro will need to pay itself through this NewBEEco fronting-scheme R513M/yr in dividends. Therefore , 100% exxaro must declare divi= R1710M/yr anything less then NewBEEco will accumulate debt.

    3. ” Exxaro is able to direct the strategic direction of NewBEECo and as per the Transaction Agreements, NewBEECo’s memorandum of incorporation may not be amended or replaced without Exxaro’s prior written consent. All these points indicate that Exxaro has been involved from the inception of the Replacement BEE Transaction, to ensure that the design and operation of NewBEECo achieves the purpose for which it was created. NewBEECo can also not dispose of Exxaro shares without the prior consent of Exxaro. Exxaro has significant exposure to the variable returns of NewBEECo, through the creation and maintenance of the BEE credentials during the lock-in period as well as through the equity investment held by Exxaro in NewBEECo.”

    The BEE schemes are really getting ridiculous and the whole charade needs to be stopped forthwith. I like this one more :

    ” Even though Exxaro does not have majority voting rights in NewBEECo it still has control over NewBEECo and consolidates the results of NewBEECo in the consolidated results of the Exxaro group of companies.”

    Is that BEE ? What was that ? You mean blacks owning 30% of our equity? Where will they get the princely R14Billion to fund such grandiose ambition?

    So next time when you hear someone referring to Exxaro as a BEE success…. Just burst out laughing and roll on the floor! Poor black South Africans, shame!

    I see that Pan African Resources is also using the same model as Exxaro for its BEE. This scheme has been such a success that it will be replicated across the industry and a few “uncle Toms” will be made man of straw to prop it up!

  2. Some housekeeping on the numbers:

    NewBEEco “owns” 30% of Exxaro , thus >94M shares ( fully diluted 314M shares x 30%).

    The NewBEEco needs funding stream of R1145M/yr ( thus Pref divi = R514M/yr ; Divi tax = R123M ; Finance Costs = R508M). Therefore, Exxaro needs to declare ( to all 314M shares ) some R3,8Bn/yr ( R1145M/30%).

    For FY17 , Exxaro Generated OCF ( before divi) = R5627M. Obviously, now the facade falls off because Exxaro has some SIB-CapEx commitment of ±R3Bn/yr thus cannot afford ±R3,8Bn cash leakage via dividends. Therefore the man-of-straws will be paid some ±R5M/yr each ( i estimate 3-5 persons) to sing praises to this charade and masquerade as 30% owners of Exxaro whilst the real owners of Exxaro will gladly pocket the “real dividends”which are NOT expected to be the unaffordable 4,49%/yr yield. So the Mining Rights and Eskom contracts will keep coming Exxaro’s way in the interim…..

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