Exxaro cuts mineral sands for coal

David McKay | Tue, 01 Dec 2009 17:44
[miningmx.com] -- SHARES in Exxaro Resources, a diversified mining group, gained 3.5% on the JSE on Tuesday as it unveiled plans to shut its KwaZulu-Natal province mineral sands project, a development that sees it attract up to R1.5bn in impairment charges.

Exxaro, valued on the JSE at R32.5bn, also said it would sell its zinc mining and smelting assets after having first examined the possibility of buying zinc assets Anglo American said it was to sell.

“Shareholders said they ignored our zinc assets because they would be profitable one year and then unprofitable for several years thereafter,” said Wim de Klerk, Exxaro financial director, in an interview. “Zinc doesn’t add to our defensiveness as a stock.”

He added that Exxaro was faced with investing a further R1bn in expanding its KZN mineral sands assets, an outlay it couldn’t justify. The KZN assets consist of the Hillendale mine, which has about two years life remaining, and expansion potential into the Fairbreeze project.

Hillendale could be reconfigured such that a furnace remained open to smelt imported feedstock, said De Klerk. A ferro-alloys plant could also be developed from the asset. The company would keep its west coast mineral sands business – Namakwa Sands - open, however.

In essence, Exxaro was preparing its balance sheet to support a focus on coal and ferrous developments, including the possibility of future acquisitions. “We can’t say more on potential businesses we are looking at,” said De Klerk. “But as we mentioned, they are in the ferrous, energy and reductants markets.”

According to one analyst, Exxaro had decided to “become a proper coal business”.

“I think the market will view these developments positively despite the apparent bad news,” he said.

Exxaro could spend R9bn developing coal for South African electricity utility Eskom’s planned Medupi power station, and a further R10bn on its planned Thabametsi greenfields development, as well as investing in Moranbah South, a project Exxaro owns with Anglo Coal.

Financial impact

The impact of closing the KZN mineral sands business was an estimated R1.5bn in impairments, and the possible reversal of a deferred tax loss inherited from the asset. Share earnings would also be affected although Exxaro said this could not yet been quantified.

It makes sense to invest in coal. The outlook over the next five years is pretty good

“It’s an accounting charge and what it does is free up a further R1bn for future investment. Investors look at future earnings,” De Klerk said.

Exxaro said at its last financial results that it was prepared to increase debt:equity gearing to about 44% from its current 28% level. “If we continue to fund Medupi, gearing could increase to 44%, but we’re working on less than 50%,” said De Klerk. “We’re a mining company and need to remain pretty conservative with out balance sheet.”

Mineral sands, such as titanium oxide, are used in the manufacture of paint pigments and are therefore tied to the construction market. “The market’s in a bit of a mess because of the recession,” an analyst said.

The Gamsberg and Black Mountain zinc assets were bought from Anglo American for about $22m – a deal that was first forged when Exxaro was created using assets vended in by Anglo in 2006. This aspect of the deal was criticised at the time, however, as Gamsberg and Black Mountain were considered to be low-grade.

Said Peter Major of Cadiz Financial Strategy Group: “It makes sense to invest in coal. The outlook over the next five years is pretty good. There’s also not a lot of coal options for us to invest in.”