[miningmx.com] – EXXARO Resources blamed the 24% decline in its share price since the beginning on April on “volatile market conditions” and the view that any firm with exposure to iron ore was being sold down.
“The whole market has been volatile and sentiment towards resources stocks has been very negative,” said Mzila Mthenjane, head of strategy and corporate affairs for Exxaro in a telephonic interview.
He declined to comment on whether investors were anticipating another impairment in the business, possibly related to its proposed acquisition of Total Coal South Africa (TCSA), or if concerns about the firm’s balance sheet were at root.
He also did not believe that the recent announcement of the retirement of long-standing CEO, Sipho Nkosi, in favour of CEO-designate, Mxolisi Mgojo was a factor as that had been announced in March.
Exxaro has just under a 20% stake Sishen Iron Ore Company (SIOC), the operating subsidiary of Kumba Iron Ore which today posted strong first quarter production figures and said it was on track to produce 47 to 48 million tonnes this year as guided.
An analyst suggested that there may have been some selling pressure after Exxaro’s CFO, Wim de Klerk, cashed in 62,000 shares, but the weakness is somewhat mystifying when set against the firm’s recent year-end results.
Headline earnings were only 6% weaker year-on-year, the balance sheet was in reasonable shape with net debt actually falling to R1.1bn from the R2.7bn reported end-June 2014, while its losses from its investment in Tronox, a UK-listed industrial minerals producer, wasn’t as bad as feared.
“We are trying to make the business more defensive,’ said Nkosi at the time, adding that the company still had “a lot of faith in SIOC’.
“Overall this was a decent result from Exxaro,’ said Kieran Daly, an analyst for Macquarie Research in a recent note. “Earnings were at the high end of expectations, the dividend was OK, and the balance sheet is in good shape.
“The emergence of coal as a key profit contributor as iron ore earnings fall is very apparent from these results,’ he added. Exxaro has been rated as an outperform by Macquarie with a target price of about R125/share.
If there is concern about TCSA, it would be the acquisition price which, at R4.9bn, may be rich given the fact that much of the value is based on 4 million tonnes/year access to Richards Bay Coal Terminal.
The problem, however, is that Glencore has just removed 5mtpy of coal from the export market following the closure of part of its Optimum Coal Mines which makes the strategic cost of buying entitlement through RBCT “almost like nothing,’ an analyst said.
“You also need to bear in mind that if Total Coal’s assets were making a loss a year ago (they booked a R55m loss in their 2013 financial year), they are making many more losses now,’ the analyst said. This is owing to the decline in the thermal coal price since 2013 when it was trading above $70/t versus between $60/ to $65/t today.
There is also some uncertainty regarding the role of Mmakau Mining which is a minority shareholder in TCSA. It has been speculated that the company is opposing the takeover of the firm by Exxaro which is, at any rate, taking a long time to conclude.
