[miningmx.com] – WITH export coal prices around a two-year low of
$81/t, you can see the logic behind Exxaro Resources’ wish to diversify itself more
fully. The company derived more than three-quarters of last year’s net operating
profit from coal sales. It has a 20% stake in Sishen Iron Ore Company, which adds a
bit of vim to the share, but analysts say the group is heavily undervalued and
represents significant value to a patient investor. Here’s why.
Outside of its putative iron ore exploration strategy and a difficult-to-cast energy
joint venture called Cennergi, Exxaro’s only other source of additional profit is from
its 38.5% in the newly created Tronox. A New York-listed mineral sands business,
Tronox is the result of Exxaro vending its titanium ore and titanium dioxide assets
into a US business with a similar asset spread – a deal that Trevor Arran, President
of Tronox Mineral Sands, said represented “a once-in-a-lifetime opportunity’.
Minerals sands is “the anorak’ of the mining world; finicky minerals like zircon,
rutile, pig iron (as a by-product) and titanium dioxide. All that can be said about
mineral sands to the general reader is that it’s the stuff that goes into making
plastics, paint pigment and tiles. For your newly painted office or gleaming bathroom
finish, thank mineral sands. But the mineral sands market is closely knit; its players
almost neurotically proprietary about technology and, owing to the existence of
long-term contracts, unimpressive on the revenue front.
That, however, is changing. Says Goldman Sachs in a recent report: “After the best
part of two decades under long-term contracts [of three to five years], the minerals
sands producers over the past 12 to 18 months have realised a significant increase
in prices as downstream companies look to secure supply’.
Investment in the industry has been low especially over the course of the global
recession. Coupled, however, with strong demand from downstream players in
emerging markets, Goldman Sachs said it expected the titanium dioxide market, in
particular, to remain in deficit until at least 2015. A strong pricing environment is
expected even though titanium prices have already tripled lately.
Tronox’s New York debut, however, recorded an 8.6% fall to $148/share. Arran says
the performance is deceiving. “Quite simply, we went ex-dividend. We paid out
$12,50/share [which approximates to the first day’s fall],’ he says. Since then the
share has slipped to $144/t, but Arran has high hopes. “This has been a long
journey for Exxaro’s mineral sands business. We always wanted a fully integrated
business,’ he says.
Clearly, China’s slowing GDP growth, sluggishness in the US economy and the
obvious distress in Eurozone is a concern, but mineral sands is a highly specialised,
niche business. Take, for instance, the fact that rutile ultimately feeds into the gas
business which, globally, has become an energy phenomenon. Rutile is used to make
a flux for welding rods that go into making ships. According to Arran, demand for
liquefied natural gas (LNG) carriers is huge. Vale, the Brazilian iron ore company, is
building 400,000 tonne panamaxes which, he says, is a “quite frightening notion’,
but the demand is there.
So what of shares in Exxaro? The value of Exxaro’s stake in Tronox is R11bn.
Assuming the Sishen Iron Ore stake is worth R46.5bn, Exxaro’s rump – the coal and
Cennergi business – is worth R17bn. But at a target price of $243/share for Tronox,
which some analysts have, the value of the Exxaro rump is only R12bn. Set against
valuations of the coal business at R27.6bn, it’s clear there’s significant value in
Exxaro’s share. The listing of Tronox should support the notion that Exxaro is an
extremely cheap stock, especially as it has already incurred the capital for supply of
coal to Eskom’s Medupi power station, without yet the cash flow.
There’s also another dimension to Exxaro’s Tronox stake, and that’s the potential for
establishing a pigment plant in SA; a development that would provide an enormous
boon to the country’s beneficiation thrust. Says Arran: “That would be the holy grail,
but the conditions have to be right’. In its favour, Tronox’s SA assets are based in
Empangeni, near Richards Bay, and Saldanha Bay. That means all the infrastructure is
there; an ideal prerequisite for beneficiation.
