Is Exxaro winning back followers?

[miningmx.com] – SHARES in Exxaro Resources touched a five-year low earlier this month falling below R100/share before staging a mini-recovery to the current level of R106/share.
The weakness in the price is notwithstanding better-than-expected full-year results on March 5 in which the group pointed to its defensive strategy of capital and cost cuts and optimisation.

This is normal fare for most mining companies in the face of poor commodity prices, especially the ones in which Exxaro deals which are thermal coal and iron ore, the latter through its 20% stake in Kumba Iron Ore.

Headline earnings were only 6% weaker year-on-year, the balance sheet was in reasonable shape with net debt actually falling to R1.1bn from the R2.7bn reported end-June 2014, while its losses from its investment in Tronox, a UK-listed industrial minerals producer, wasn’t as bad as feared.

“We are trying to make the business more defensive,’ said Sipho Nkosi, CEO of Exxaro who added that the company still had “a lot of faith in SIOC’ (Sishen Iron Ore Company through which its stake in Kumba is held).

“Overall this was a decent result from Exxaro,’ said Kieran Daly, an analyst for Macquarie Research in a recent note. “Earnings were at the high end of expectations, the dividend was OK, and the balance sheet is in good shape.

“The emergence of coal as a key profit contributor as iron ore earnings fall is very apparent from these results,’ he added. Exxaro has been rated as an outperform by Macquarie with a target price of about R125/share, roughly 30% above its current level.

So why the share price weakness?

“It’s very difficult with them. You get a good sense they know where they are going but then decisions get made that are surprising,’ said another analyst who wished to remain anonymous.

The company has had its share of criticism for the R5.7bn write-down of its Mayoko iron ore project in the Republic of Congo. It’s also fair to say that all of the central and west African iron ore plays have been hammered by the hefty decline in the price of the mineral in the last nine months.

But now there’s also disquiet regarding the R4.9bn paid for control of Total Coal SA, the local subsidiary of Total. At the time of the deal announcement – which is not yet consummated nearly eight months after its unveiling – Exxaro alluded to the value offered by Total Coal’s four million tonne per year (mtpy) access to Richards Bay Coal Terminal (RBCT).

This, it argued, was strategically important as it would allow it the heft and flexibility to capitalise on the coal export markets although the current price of thermal coal is not yet supportive of expansion.

The problem, however, is that Glencore has just removed 5mtpy of coal from the export market following the closure of part of its Optimum Coal Mines which makes the strategic cost of buying entitlement through RBCT “almost like nothing,’ an analyst said.

“You also need to bear in mind that if Total Coal’s assets were making a loss a year ago (they booked a R55m loss in their 2013 financial year), they are making many more losses now,’ the analyst said. This is owing to the decline in the thermal coal price since 2013 when it was trading above $70/t versus between $60/ to $65/t today.

Perhaps the truest reflection of how the market feels about Exxaro will come from the results of its foray into the bond market where it is hoping to raise capital. A company roadshow was scheduled to begin on March 6 but there has been no news on the results of the finance raising to date.