[miningmx.com] – EXXARO Resources, the R60bn diversified mining
company, said Eskom’s board was today considering approval of a fresh coal supply
contract for its Medupi power station, with Exxaro’s Grootegeluk Medupi Expansion
Project (GMEP) scheduled to deliver a lower than previously agreed 160,000 tonnes
of steam coal this calendar year.
Exxaro was commenting on the fraught coal supply contract in its interim results in
which it posted an 11% increase in headline share earnings of 1,162 cents year-on-
year. The results were heavily skewed by the sale of Exxaro’s mineral sands assets
into the newly created New York-listed Tronox, and divestment from its base metals
operations. All in all, Exxaro earned R4.1bn from these transactions.
Shares in Exxaro Resources were some 2% lower in mid-afternoon trade at
R165.10. The stock had fallen 21% from when it traded at R209/share on June 17, a
decline partly informed by an 18% year-on-year decline in dividends from Kumba
Iron Ore, in which Exxaro has a 25% stake.
Amid expectations that the second half of the year would be “solid’, despite lower
coal and zircon prices, the company paid an interim dividend of 350c; 17% higher
than the comparable period of the previous financial year.
From a cash-flow perspective, some R1.1bn flew out of the business, leaving cash on
hand and equivalents at R2.1bn and net debt of R1.29bn. This was owing to the
purchase of Australian-listed business African Iron, which owns the iron ore prospect
Moyoko in the Republic of Congo (RoC), described by Exxaro as the group’s single
largest acquisition to date.
Gearing was only 4%, leaving significant headroom for additional investment
although Exxaro CFO, Wim de Klerk, said fresh investments would be considered
carefully. The group was “… actively aware funds were scarce and that vagaries of
the market had put huge pressure on new projects,’ he said. From a capital
expenditure perspective, the expansion of the mineral sands business would fall to
its new owner Tronox, in which Exxaro has a 39.2% stake.
GMEP, which is on target to come in at R9.5bn total committed capex, is designed to
supply 14.6 million tonnes/year (Mtpa) of steam coal to Medupi, the 4,800MW power
station in the Limpopo province that has been delayed, partly owing to boiler
construction slippages.
Exxaro CEO, Sipho Nkosi, said the company had delivered its first coal, some 6,000
tonnes, from GMEP to Medupi in the period on a revised ramp-up schedule. “The new
agreement is still subject to the approval of the Eskom board in early August 2012,
failing which the terms of the current coal supply agreement will apply,’ he said.
“In terms of the revised agreement, 160kt of coal will be delivered during 2012 for
the commissioning of the respective coal handling systems, while the coal supply
ramp-up up will commence during March 2013 and endure until mid-2016,’ he
added.
Nkosi said the deal with Eskom is an understanding that Exxaro should be in the
same cash position, just timed differently. A market source added that Exxaro and
Eskom had come to an agreement in which penalties related to under-delivery from
Eskom-tied mines at Matla and Arnot in the six months under review were relaxed
while Eskom only paid for actual tonnages received from GMEP.
Commenting on the coal market, Exxaro said export coal prices would remain under
pressure for the remainder of the financial year while domestic prices would be at
“marginally higher’ levels. “Overall coal production volumes are expected to be
higher in the second half, but are likely to be offset by weaker international coal
prices,’ Exxaro said following a first six months in which production interrupted at its
Eskom-dedicated Matla and Arnot mines, while Grootegeluk also experienced
problems.
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Exxaro said that its Thabametsi coal project had become “more exciting’ in the
interim period and could result in the build of a 4Mtpa to 30Mtpa mine supplying
Eskom. Ernst Venter, Exxaro’s new business director, said on the sidelines of the
interim results presentation that capital expenditure of such a mine could be
anywhere between R900m (4Mtpa) to R9.5bn (30Mtpa).
Exxaro’s approach was that it would cut its cloth to suit Eskom’s needs. “If Eskom
asked for less coal, we would look at supplying a 300MW independent power
producer with coal from Thabametsi,’ he said.
Meanwhile, Exxaro’s De Klerk said that Exxaro had set aside R1.7bn in capital spend
to 2013 to fast track development of the Moyoko iron ore prospect, which was the
primary asset of the R2.7bn acquisition of African Iron completed last year.
“We are assessing the project scope that we first bought into, which includes a
2Mtpa iron ore mine with associated infrastructure spend,’ said De Klerk. A bankable
feasibility study would be presented to Exxaro’s board in the current second half of
the financial year. Venter added that Exxaro was also looking at the feasibility of
building a 10Mtpa iron ore mine, or possibly exceeding that production.
Production of new mineral sands facilities at Fairbreeze in South Africa’s KwaZulu-
Natal province continued to be held up by regulatory obstacles, although a Nema
(National Environmental Management Authority)-compliant licence had been
awarded to the operation which was still due for commissioning in 2015.
