Diversified miners rake it in

[miningmx.com] — PARTICULARLY pleasing aspects of the latest financial reporting season were the excellent performances from South Africa’s diversified miners African Rainbow Minerals (ARM) and Exxaro Resources (Exxaro).

Both home-grown mining groups are delivering growth big-time in SA as they reap the benefits of rising demand for their commodities as well as increasing prices, despite revenue offsets caused by the strength of the rand against the US dollar.

In turn, the commodities boom is being driven overwhelmingly by the growth of China – an aspect that worries some analysts and economists. But the mining groups themselves appear more optimistic now than they were a year ago on the sustainability of demand growth from China and other emerging nations.

ARM CEO Andre Wilkens says: “Let’s put it in perspective. There seems to be a lot of concern about whether the Chinese economy can continue to grow at 10% or whether that will fall to 8%. But either way, you’re talking about China adding the equivalent of two SAs each year.’

Wilkens also pointed to the “supply side constraints for almost all commodities in the ARM portfolio’. ARM more than trebled its headline earnings to R1.6bn (previous comparable period: R454m) for the six months to end-December 2010. There’s even better to come in the second half of ARM’s financial year to June, as commodity prices continue to rise while the rand has shown some weakness against the greenback.

ARM invested R13.5bn in new growth projects between 2005 and 2010 and forecasts it will invest another R9,5bn between 2011 and 2012. Its main projects in SA are the expansions at Khumani Iron Ore, Goedgevonden Coal and Nkomati Nickel, while ARM is about to embark on its first mine outside SA. That’s the Konkola North copper mine in Zambia, which it’s developing in partnership with Brazilian resources giant Vale at a total cost of US$380m.

The pick-up in the commodity markets has had a particular benefit for KwaZulu-Natal, where Exxaro has decided to invest R2.4bn in developing the Fairbreeze heavy mineral sands mine, which secures the continued employment of at least 1 050 workers in the Richards Bay area whose jobs would have been lost had Exxaro opted to close down its KZN Sands titanium slag smelting plant.

The plant had been sourcing its feedstock from the nearby Hillendale mine, which will be mined out during first quarter 2012.

Late in 2009 Exxaro announced it was shelving Fairbreeze because low titanium feedstock prices made it uneconomic. The titanium market turned around decisively in second half 2010. Exxaro chief financial officer Wim de Klerk says there’s more to come and the improvements are sustainable. He commented: “It was a no-brainer decision to go ahead with Fairbreeze on the new market fundamentals.’

Both De Klerk and CEO Sipho Nkosi stressed how the booming commodity markets had fundamentally strengthened Exxaro’s financial position despite the group’s ambitious capital expansion programmes. Exxaro spent R2.7bn on capital programmes last year but that’s forecast to soar to R8.2bn this year and R7.7bn in 2012, with the bulk of that earmarked for expansion at the Grootegeluk mine in the Waterberg to supply Eskom’s new Medupi power station.

Exxaro’s net debt dropped to R2.2bn at year-end 2010 from R4.4bn a year previously, lowering the group’s net debt ratio to 13%.

Says De Klerk: “This conservative capital structure will allow Exxaro to fund its huge capital commitments and also go after other growth opportunities in our robust pipeline.’ One of those “growth opportunities’ is a proposed diversification into iron ore, about which Nkosi declined to comment at this stage.

– The article first appeared in Finweek