[miningmx.com] – Exxaro expects to have to pay just $8m (about R104m) in total out of the potential $120m (R1.6 bn) in deferred payments due which form part of the deal struck to acquire Total Coal South Africa (TCSA) according to CFO Wim de Klerk.
Presenting the group’s interim results for the six months to end-June in Sandton today de Klerk said that was the current “fair value’ estimate of the outstanding liability which is linked to movements in the AP14 coal price at Richards Bay.
The price originally struck when the acquisition was announced in July last year was $472m in cash payable up-front but that was re-negotiated to a $262m payment up-front with a balance of $120m to be paid in annual tranches through to 2019.
The future payments will be calculated on movements in the AP14 coal price set in a range between $60/t and $90/t through to 2019 but a key proviso is that no payment will be due if the average AP14 coal price in any of these years is below $60/t.
The current AP14 price out of Richards Bay sits below $60/t and Exxaro management clearly expects little improvement over the next few years given CEO-designate Mxolisi Mgojo’s pessimistic view on the coal export markets.
Mgojo said price recovery in the seaborne thermal coal market was being delayed and quoted analysis by consultants Wood McKenzie showing there was a current “overcapacity’ of 200 million tonnes (mt) in the seaborne market while there were similar volumes present as oversupply in the internal Chinese market.
He pointed out there had been no exports of coal to China from Richards Bay for four consecutive months and India was now South Africa’s biggest customer taking up 60% of total coal export volumes.
“International prices have continued to decline and we expect the FOB (free-on-board) Richards Bay price for RB1 coal to sit between $54/t and $59/t. Wood McKenzie’s latest forecast is that a meaningful recovery is unlikely in the near term’
Despite this , Exxaro expects to make good profits from its rising export volumes on top of the booming domestic demand from the Eskom power stations it supplies which is why the group will focus on its coal business over the next few years to pull through the current slump according to CEO Sipho Nkosi.
Sakkie Swanepoel, manager marketing and logistics for Exxaro’s coal business commented, ” Exxaro is fortunate in that we are very competitive and able to export profitably at current (export price) levels. Even if the price drops further I expect us to remain profitable on the export side.’
The TCSA acquisition gives Exxaro a total stake of 11.7% stake in the Richards Bay Coal Terminal (RBCT) making it the fourth largest shareholder and giving the company a nominal export entitlement of 8.8mt out of the 74mt that the RBCT is forecasting it will export this year.
Swanepoel commented Exxaro expected to export at levels between seven and eight million tonnes annually over the next two years but added those volumes could change dramatically depending on possible coal quality changes made at the operations acquired from TCSA. He said it was too early to go into details on those possible changes.
