Exxaro forecasts stable export coal demand in upbeat take on 2018

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EXXARO Resources gave a largely upbeat assessment of its fortunes for its 2018 financial year, saying that the export coal price would be supported by “stable seaborne demand”, although the iron ore price was expected to soften. The rand would remain volatile.

Commenting in its pre-close message, an overview of the business in the final weeks of the financial year which closes on December 31, the group’s CFO, Riaan Koppeschaar, said world economic activity would be supportive of growth.

“Relative stable commodity prices with global industrial production, trade and real fixed investment momentum, together with successful international mediation efforts in Middle East, will continue to support world economic activity over the next six months,” he said. “The rand dollar exchange rate remains extremely volatile, and subject to ongoing event risk as the economic and political environment in South Africa remains a challenge.”

Income from iron ore, however, may fall in 2018. The iron ore market was anticipated to be weaker. “The iron ore lump premium is expected to revert to its long term historic average after the winter heating season in China,” said Koppeschaar. Exxaro has a 19.9% stake in Sishen Iron Ore Company in which Kumba Iron Ore, the listed subsidiary of Anglo American, holds the balance.

Commenting on the performance of its coal division in the current financial year, Exxaro said production from its commercial mines was expected to be 12% higher in line with the ramp up of supply to Eskom’s Medupi power station. There was also some strategic stockpiling at Grootegeluk, the Limpopo province mine that supplies Medupi.

Coal exports would fall 3% for the year owing to congestion at Richards Bay Coal Terminal (RBCT) following at least two major interruptions owing to bad weather conditions. Local sales would be 6% higher partly due to increased domestic coal demand as well as the increase in supply to Eskom.

Production from the so-called ‘tied mines’ – these are operations locked into a set margin, cost plus contract with Eskom, was expected to be 7% lower. There was a five month stoppage at Matla’s Mine 3 section following a request by Eskom that the mine improve qualities.

Matla is becoming a problem child for Exxaro. An undertaking by Eskom last year that it would fund replacement tonnes to the tune of R1.8bn has not been delivered. Exxaro said today the extent sections of the operation – Mine 2 and Mine 3 – were forecast to produce 7.4 million tonnes (Mt) for the 2017 financial year against contractual volumes of 10.1Mt.

“Exxaro continues to engage with Eskom to provide the required capital funding, through an arbitration process, as per the tied mine coal supply agreement (CSA) which will enable the achievement of contractual production and sales volumes.”

ESKOM, BEE, DISPOSALS

Arbitration was also underway with Eskom regarding the responsibility for the closure of Arnot, a mine Eskom refused to finance when it became necessary to pay for replacement tonnes. The CSA governing Arnot was consequently not renewed by Eskom. Exxaro said today the sale of Arnot was progressing.

The disposal of another mine – North Block Complex (NBC) – which has been deemed non-core by Exxaro, was expected to be completed before the end of the calendar year. Negotiations were “well advanced”. A number of companies could be in the race for NBC including Wescoal Holdings and Coal of Africa.

Exxaro’s replacement empowerment deal would also take effect before the year-end. Requiring a majority of 75% of those shareholders who voted (and who were eligible), some 77.6% voted in favour of one particularly controversial leg of the replacement BEE deal on November 20 which was to issue new shares to the new BEE structure at a discounted price.

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