Exxaro may sell Eskom-dedicated Matla coal mine in asset review

Arnot Power Station

Exxaro Resources is to sell its Arnot coal mine as well as North Block Complex (NBC), both situated in Mpumalanga province, in terms of a portfolio restructuring proposal the group is due to implement from the fourth quarter.

The company was also considering the sale of Matla, the 7.7 million tonnes a year (Mtpa) colliery that supplies Eskom’s power station of the same name. Were Exxaro to sell these mines, it would reduce its exposure to Eskom-dedicated business by between 10Mtpa to 12Mtpa compared to a couple of years ago when Arnot and Matla were operating at higher mine run-rates.

Exxaro Resources announced earlier today in its finance director’s interim pre-close statement that it had made progress on mines that it deemed non-core. It didn’t name mines identified in the review, but said it planned to take action from the fourth quarter.

Asked in a conference call about whether it could provide specifics, Riaan Koppeschaar, Exxaro finance director, said: “We are in the process to start looking at those assets. NBC could be in that bucket.”

Nombasa Tsengwa, who heads Exxaro’s coal division, added that the review “… could also include Matla” whilst confirming that NBC and Arnot were earmarked for sale”. “NBC and Arnot is where we have made a decision,” she said adding, however that Eskom had to be consulted as part of the process, along with employees.

“We have been through the process with employees [at Arnot and NBC], but we are not sharing [information on other mines] as we haven’t spoken to stakeholders. We hope to have more clarity in August,” she said.

The decision to dispose of certain assets is based on Exxaro’s assessment that it needs a profit margin of 25% and a return on equity employed of 20%. “We don’t want to mine an asset right to the end of its life and sell it,” said Koppeschaar. “So our strategy is to identify assets that don’t meet targets and then sell it to give the buyer a chance to mine it.”

A factor in the disposal of Matla may be whether Eskom makes good on a commitment last June that it invest R1.8bn accessing new resources of coal at Mine 1 shaft.

Tsengwa said that capital investments by Eskom above R1bn required the support of Public Enterprises, the government department to which Eskom reports.

She was unsure whether this was the reason for the delay in the investment. Representations had been made and government officials had visited Matla. “We are looking at Eskom for that funding. Whether it will take long or not; we are not privy to those processes,” said Tsengwa.

The apparent delay in funding approval after Eskom had given a verbal promise a year ago points to the logjam in the coal procurement at the power utility which have been subject to public scrutiny following reports of malfeasance and lapses in governance.

Matla’s Mine 1 was currently on care and maintenance while the remaining mine shafts – Mine 2 and Mine 3 – were forecast to produce 7.7Mt in the 2017 financial year against Eskom’s contracted volumes of 10.1Mt. It was Eskom’s responsibility to buy-in the balance of the supply deficit in terms of its coal sales agreement with Exxaro.

Total capital required for Matla, the contract for which expires in 2023, is up to R3bn in the long-term. Deterioration of production volumes is evident: the mine produced 8.2Mt in the 2016 financial year.