[miningmx.com] — THERE has been a lot of talk lately from Exxaro
Resources about it diversifying its revenue streams.
Currently, the company is heavily exposed to the domestic (Eskom supplied) and
thermal export coal industry.
In fact, as the country’s second largest coal producer, it derived about 60% of total
revenue in the financial year ended 31 December from coal production alone.
So it’s no surprise to see the stock down 10% from highs earlier this year given that
international coal prices have been heading downwards. The good news is that Exxaro
presents a buying opportunity, because economists and traders don’t think the
internationally traded thermal coal market will be under pressure, at least not for too
long.
According to Reuters, coal ex Richards Bay has been leaving the shores at about
R98/t, a significant decline from the R125/t reported last year. The reason for the
slump is partly to do with the excess production in the US, while Chinese economic
growth has also been in question.
Bevan Jones, GM of London Commodity Brokers’ Johannesburg office, thinks a recovery
is on the cards, but not before prices head down further to as low as $85/t, a forecast
that an unnamed coal industry trader with a big market presence confirms as
accurate.
“Prices at $85/t in South Africa is the equivalent of $70/t in the US,’ said Jones. “At
those levels, a lot of US production will be knocked out,’ he said.
Chinese stockpiles were also coming down from about 8Mt to 5Mt at Qinhuangdao
with the summer months looking like they might be fairly mild, he said.
A report by Macquarie Research dated 16 May observed that supply discipline was now
likely.
“We think prices are not at a level, which will induce some supply discipline
The current level of US exports is unsustainable at API#4 of $90/t, with marginal
Russian coal also under pressure at these prices,’ the stockbrokerage said.
“There is uncertainty how quickly the supply adjustment will take place, given excess
US inventory may be dumped at loss making prices.’
Commenting on Exxaro in a note to clients, Shihepo Kavambi, an analyst for Imara SP
Reid, said: “This price action [Exxaro’s share price decline] is partly due to the 9%
decline in the API#4 coal price since 29 February to date [$105/t to $95/t]’.
“Another contributing factor has been the sell-off in resource stocks partly due to soft
Chinese data and what is happening in Europe. Fundamentally, we still see value in
Exxaro and rate it a buy,’ Kavambi added.
– Finweek
