[miningmx.com] – Exxaro Resources would not abandon its efforts to diversify despite suffering a R5.7bn write-down of its Mayoko iron ore project in the Republic of Congo (RoC).
“We still strive to become diversified player although some of you want us to become a focused coal player,’ said Exxaro CEO, Sipho Nkosi. “We hope to prove the value in that,” he said.
Nkosi was speaking at Exxaro’s half-year results presentation in which the group posted a 22% increase in core net operating profit of R1.8bn. Including the non-cash impairment of Mayoko, however, the company reported a R2.4bn loss for the period.
“We got hammered for that for two months,’ said Wim de Klerk, Exxaro CFO after the presentation. “We need to move on from that,’ he said.
There was still housekeeping to tie up in respect of Mayoko, however.
A further R300m would be spent on tying up business in the RoC including convening meetings with the Congolese government and contractor terminations. De Klerk said the company had a 24 month permit for Mayoko so it was possible to recoup some of its investment by selling the permit, hence the importance of possibly attaching cost of port and rail infrastructure to the permit.
The R300m would be expensed in the second half of the financial year.
Diversification, however, has come to mean a different thing for Exxaro more recently. Given that the four to five year capital expenditure plans are predominantly in enhancing its coal production, diversification can also mean accessing different markets for coal.
Nkosi said Exxaro would consider investing in coal production closer to Asian markets, such as Indonesia, if the opportunity arose. Certainly the group has earmarked more investment in export coal.
De Klerk said there was pressure on the coal team to push exports this year to five million tonnes a year (mtpa) which is a 25% improvement on typical annual volumes.
And in July it captured Total Coal South Africa (TCSA), a company with some 4mtpa of export coal for an acquisition fee of R4.9bn, and would spend another R3.8bn building an export coal mine at Belfast in Mpumalanga province.
Exxaro had also agreed last night (August 20) an adjusted in-principle coal supply deal from its Grootegeluk Medupi Expansion Project (GMEP) with Eskom which sees it deliver some 15mtpa less coal.
The agreement with Eskom keeps the shortfall income, through a take-or-pay agreement with the power utility, at R1.5bn but means it has to supply less coal for four to five years until the Medupi power station ramps up.
Mxolisi Ngojo, head of Exxaro’s coal business, said having less coal to deliver to Eskom meant it could blend coal qualities to produce different grades of coal, such as metallurgical or PCI coal, and some coals that could be exported.
Building flexibility into its coal products, which will also be extended to Grootegeluk so it exports more coal, is part of Exxaro’s strategy of buying in TCSA 4mtpa of export entitlement through Richards Bay Coal Terminal (RBCT).
This strategy is yet to be articulated by Exxaro but De Klerk promised that it would explain the rationale for buying TCSA at a price the market thought was a premium especially as TCSA made a R55m loss in the 2013 financial year.
De Klerk said TCSA’s numbers included R270m of once-off costs including rehabilitation charges on closed production, the loss on the sale of assets and exchange movements. Without them, TCSA’s pretax earnings would have been about R600m rather than R347m.
The acquisition of TCSA will start to test Exxaro’s balance sheet, however.
Had the TCSA acquisition been included in Exxaro’s current numbers, net debt would have been 36% of equity compared to the published 8% debt: equity ratio. “This is still within guidelines,’ said De Klerk.
In any event, Exxaro was confident enough to declare an 11% year-on-year increase in the interim dividend of some 260 cents per share. “When we made the decision to pay the dividend we took our aspirations and the market into account,” said De Klerk.
Net debt also fell to R2.65 from R3.38bn which Exxaro CFO, Wim de Klerk was by dint of R2bn worth of dividends paid by the group’s 20% stake in Kumba Iron Ore and 44% share in Tronox, a New York listed mineral sands producer.
Tronox was one of the disappointments of Exxaro’s half-year, however, which delivered an equity accounted loss of R304m, nearly double the loss of R168m in the previous half-year. Exxaro said it thought the titanium oxide market had bottomed out.
