Exxaro may distribute $850m stake in Tronox to shareholders

Tronox

EXXARO Resources is to exit its 43.66% stake in Tronox, a titanium dioxide and alkali chemicals business, in order to focus on its core investment in its South African coal assets which helped returned the group to winning form in 2016.

As part of the possible disposal of Tronox, Exxaro may consider a special disbursement to shareholders as well as funding new capital projects in coal and clean energy.

“We will consider all options for Tronox,” said Riaan Koppeschaar, CFO of Exxaro, in the group’s year-end results presentation today. “It could be a return to shareholders or put into capital projects; it is something that the board will consider,” he said.

It would also divest of its stake in the Moranbah South joint venture in Queensland, Australia, a coal project that it shares with Anglo American, and has approved the R4.8bn expansion of its Grootegeluk mine (GG6 Phase 1 project) – a clear indication of one of the ways Exxaro intended to reallocate its capital.

Coal seems to be the thrust of its new business strategy, especially given the strong showing of the fuel in the group’s full-year figures.

Attributable earnings per share for the year came in at R16, far in excess of the 83 cents per share recorded in the 2015 financial year. Headline earnings per share were 185% higher at R13.02. Exxaro maintained its dividend through previous financial years, despite its under performance, but today it declared a final dividend of 410 cents/share equal to a payout of R1.29bn (2015: R304m).

An improvement in the coal price where international prices averaged $64/t compared to $57/t in 2015, a lower loss from Tronox, and a 15% depreciation of the rand to an average of R14.69 to the dollar were behind the figures.

There was also some R2.4bn in post-tax equity-accounted income from Exxaro’s 20.66% (19.98%) stake in Sishen Iron Ore Company (SIOC) which is controlled by Kumba Iron Ore. Kumba’s board elected not to pay a dividend, however.

The 2016 financial year also did not have the negative non-recurring items of 2015 which included a R1.5bn impairment on Exxaro’s investment in the Mayoko iron ore project in the Republic of Congo.

The improvement in commodity prices boosted cash flow by R1bn to R5.5bn and assisted in Exxaro reducing net debt to R1.3bn as of December 31 compared to R3bn twelve months earlier. However, this net debt figure did not include some R3.5bn for which the group will account after buying back shares in its empowerment vehicle, Main Street 333.

Mxolisi Mgojo, CEO of Exxaro, said in a presentation today that the improvement in commodity prices provided “a good backdrop to the restructuring that we are going through”.

He added, however, that the recovery in the commodity markets was “fragile and vulnerable to shocks”, and was critical of the business environment in South Africa, especially the delay in promulgating the Minerals & Petroleum Resources Development Act (MPRDA) which was “a deterrent to investment” in the country.

Commenting on its decision to exit Tronox, which unveiled earlier this year a $1.67bn cash and shares bid for Cristal (The National Titanium Dioxide Company Limited), Exxaro said it would seek an orderly sell-down process.

“Exxaro’s board has determined that it will explore available alternatives to sell its Tronox shares in a thoughtful, efficient and staged process over time to focus on its core activities,” it said in commentary to its full-year figures.

Black Economic Empowerment

Exxaro is also to press ahead with a plan to re-empower its shares at the listed level – rather than directly through the assets which some shareholders had suggested as an alternative strategy – saying this was provided the best flexibility for black economic empowerment (BEE) investors.

Said Mgojo: “We have customers that measure us not only the MPRDA compliance, but also on the Broad-Based Black Economic Empowerment (BBBEE). We would lose points in terms of our customers which would be very negative to us”.

It added that the cost of the BEE exercise was “below market norms”, but that it could potentially implement “… a further specific share repurchase from Main Street 333 to act as a further anti-dilutive measure” and to reduce the share overhang.

Exxaro in November announced a proposal to unwind its 50.19% BEE structure which would be replaced with a new structure that would own 30% of the company. The first step in this process – the R3.5bn buy-back of the BEE shares – was completed earlier in the year.

The restructuring was criticised by Eskom, one of Exxaro’s main customers for its domestic coal, with the utility’s interim CEO, Matshela Koko, saying it fell foul of a contractual requirement to be 50% plus one share empowered.

Said Mgojo today: “We will continue to meet requirements in terms of mining sector regulations and we are compliant in our contractual obligations to Eskom”.