SHARES in Exxaro Resources ran to a three year high this week and were not far short of their five-year high, reached in 2022. That was shortly after Russia’s invasion of Ukraine, an event that sent thermal coal prices to highs of $450/t.
The South African export benchmark API prices are about 27% higher at the time of writing, amid the Iran oil crisis. Yet at $110/t, this is well off the panic of four years ago.
So why is Exxaro performing so well?
Three factors are behind it, says CEO Ben Magara. One is the finalisation of the R10.6bn acquisition of manganese assets in terms of Exxaro’s diversification strategy. Another is that the group changed its dividend cover to allow for improved payouts. (It declared a R10 per share dividend for the 2025 financial year.)
The third factor is that noncore assets were divested, while the firm’s Cennergi renewable energy business announced acquisitions and plans to grow further without huge cash outflows. Exxaro will rely on debt to fund 75% of the business, even after paying out the cash buffer of recent years.
“I think we have stabilised the business in the past year,” Magara said in an interview. “We have also been very clear in our operational delivery plans,” he adds.
Among these plans is an increase in export coal volumes to more than eight million ton, potentially capitalising on the improved export prices. It’s worth noting that Exxaro achieved an average export price of $86 per ton against $90/t API for the year — itself well down on last year’s $105/t average.
One major unknown, other than the future coal price, is the ability of the state to deliver. Exxaro supplies most of its coal to Eskom. It remains to be seen if Eskom will continue to buy Exxaro’s coal at the same rate if it experiences a major fall in demand. This could be caused by the closure of the Mozal aluminium smelter in Mozambique, a major buyer, and the possible permanent shuttering of the Glencore-Merafe Chrome venture’s ferrochrome smelters.
There’s also risk on the rail line. Magara notes an improvement in the performance of the Richards Bay line last year. An industry total of nearly 57Mt was delivered to Richards Bay, in another sign that Transnet is recovering operationally. But these are fragile gains.
Investec’s Nkateko Mathonsi says in a note to clients: “Coal line performance gains were particularly evident in the Mpumalanga region, where operational stability improved considerably. However, performance in the Waterberg region did not experience a similar uplift and continues to operate below capacity.”
This article first appeared in the Financial Mail.
