Exxaro Mayoko failure due to governance lapse

[miningmx.com] – A STUDY into events that led to the R5.8bn write-down of Exxaro Resources’ Mayoko iron ore project found the group failed to observe internal governance procedures as it rushed to secure “first mover advantages”.

Wim de Klerk, CFO of Exxaro, said in a ‘pre-close message’ to the second half of the group’s financial year that findings from the study, conducted by KPMG, were being implemented.

Exxaro bought Mayoko, which is situated in the Republic of Congo (RoC), after successfully bidding R2.8bn for Australian-listed African Iron in January 2012. Exxaro then spent a further R3bn on the project which it believed could produce 12 million tonnes a year (mtpa) of iron ore.

However, delays in signing a mining convention, as well as uncertainty over port and rail tariff agreements, frustrated the project’s progress. Analysts said the quality of the ore at Mayoko was also over-estimated affecting the project’s dynamics.

Exxaro also announced some 49 people had accepted voluntary retrenchment at Exxaro’s corporate office which would save R80m in one-off costs and R50m in annual costs starting from the group’s 2015 financial year.

De Klerk’s comments were part of a predominantly sombre outlook for 2015 in which export thermal coal prices were expected to remain below $65 per tonne for the year having dipped beneath $63/t in the second half of 2014.

There was market consensus that volumes on the Richards Bay coal line would reach 74 million tonnes (mt) in the fiscal year ended March 30 (Transnet’s year-end), but De Klerk said Exxaro would nonetheless be in “a long entitlement” position at Richards Bay Coal Terminal (RBCT) of some 900,000 tonnes.

This was owing to lower demand for coal from the export markets. Exxaro has total export entitlement at RBCT of about 4mtpa. “Plans are afoot to lease entitlement and buy-in additional coal,” said De Klerk.

Dividends from Kumba Iron Ore’s Sishen Iron Ore Company, in which Exxaro has a 19.98%, would also be lower in future with the iron ore price forecast to stay below $80/t, De Klerk said.

Shares in Exxaro Resources slid 5.5% by about midday on the Johannesburg Stock Exchange in a generally grim opening session for the whole resources board with gold and platinum stocks also taking a panelling.

De Klerk said Exxaro had received an objection to the rezoning of its proposed R3.8bn Belfast thermal coal project with appeals due to be heard in the second half of the 2015 financial year. He added, however, that mining had to begin in one year from award of the project’s integrated water use licence (IWUL), granted in October.

On the upside, De Klerk said the RoC had extended the mining convention governing Mayoko by two years and that a port and tariff agreement for transporting iron ore from the project to RoC’s Pointe Noire would be received by the year-end.

Supply of coal to Eskom’s Medupi power station from Grootegeluk was also ramping up to the newly agreed target of 3.1mt for 2014 following delays in the power utility’s project.

“Exxaro has proven resilient in the past and will rely on the same to endure the challenges presented by these tough trading conditions,” said De Klerk.

CORRECTION

In this article, Miningmx linked the resignation of Ernst Venter, an Exxaro executive, to the internal review saying one of its recommendations was his dismissal.

Exxaro announced today that there was “no correlation” with the findings of a review which found the group had circumvented internal governance procedures when scoping out Mayoko, an iron ore project in the Republic of Congo (RoC).

Venter, who was head of growth, technology, projects, services and ferrous, will be leaving at the end of February. He had served Exxaro “with distinction”, the company said in an announcement today.

Before Exxaro, Venter worked at Kumba and Iscor representing a total period of some 40 years. “The executive committee and the board of directors of Exxaro expressed their sincere appreciation for his contribution during his 40 years,” the company said.

Miningmx apologies for the error.