[miningmx.com] – ONE of the features informing Exxaro Resources’ lofty
ambition to double its market value to $20bn by 2020 is the need for the Chinese to
tile their bathrooms and kitchens, and for US homeowners to repaint their houses
with more enthusiastic application than in recent summers. (Pigment and ceramic
sales spike in the northern hemisphere summer because it’s less fun to renovate in a
snow drift.)
These are the markets that Exxaro Resources’ mineral sands businesses – zircon and
ilmenite – ultimately supply. About 55% of global zircon demand is from the ceramics
industry, of which 90% is used to make tiles. The largest market for tiles is China.
Ilmenite slag is used in paint pigments, with a big market in the US. These are two
obscure minerals that actually have common household applications.
Obscure as they may be, the highly protected secrets of ilmenite smelting may play
a central role in Exxaro Resources CEO, Sipho Nkosi’s growth blueprint; in fact, more
of a role than might at first be imagined. That’s because, looking at the other growth-
related assets in the Exxaro stable, there’s a lot of untested opportunities.
Nkosi set out a four-pronged strategy to grow over the next eight years which, in
addition to mineral sands, embraces the firm’s existing coal assets and two new
divisions. These are primary iron ore production, and an energy business that seeks
to develop alternative energy sources, including solar and wind, and which speaks to
Government’s independent power producer (IPP) procurement programme.
The primary iron ore foray is currently embodied in the successful R2.8bn takeover of
African Iron, an Australian-listed company. But African Iron’s business case is based
on the speculative delights and dramas of exploration. For instance, the project is
located in the Republic of Congo’s (RoC’s) interior, with limited infrastructure and a
long road of negotiations leading to consolidation with neighbouring exploration firms,
including Zanaga Iron Ore and Equatorial Resources.
Exxaro’s other revenue stream is the sumptuous dividend flow from its 20% stake in
Kumba Iron Ore. But this could dry up by 2016, when Kumba’s 64% shareholder,
Anglo American, could unravel its BEE deal with Exxaro. It has the contractual ability
to do so.
That means mineral sands has to perform. Given that this was a business Exxaro
nearly exited a year ago, you can see why there’s a lot of attention on its market
fundamentals. “My worry with Exxaro is that it’s selling dreams,’ said an analyst. “It
has set R1.6bn aside for capital expenditure on African Iron, but hasn’t explained
what this is for. I’m not sure how they are going to get away with this,’ he added.
Exxaro’s plan is to consolidate its mineral sands investments into New Tronox, a deal
with its US counterpart in which Tronox adds its Australian business and Exxaro adds
its zircon and ilmenite slag businesses in South Africa, and a stake in Australia’s
TiWest. Exxaro takes a 38.5% stake in the New Tronox, which while a minority
holding is worth more, it hopes. New Tronox will list overseas just in time for a surge
in the mineral sands business, it also hopes.
Certainly, the short-term prognosis is good for the mineral sands business. A study
among Chinese tiles companies by Macquarie Securities shows that 50% of its
respondents anticipated an increase in tile sales over the next three months.
Macquarie Securities is also bullish over the longer term. “We continue to believe
that the structural drivers of strong growth remain in place, and this should be
enough to underpin robust commodity demand in the coming years,’ Macquarie said.
But risks abound. One is that Exxaro fails to win regulatory approval for its Fairbreeze
mineral sands project situated in the ecologically sensitive peninsula of KwaZulu-
Natal, 45 km south of Richards Bay. Fairbreeze is important because its Hillendale
operation is nearly mined out.
Says Trevor Arran, GM of Exxaro’s mineral sands division: “In my opinion, the mine
[Fairbreeze] will be approved. Any problem is to do with its timing. We’re hoping to
start construction in the second half of this financial year but first production won’t
be until the middle of 2014.’
He believes the mineral sands business is due for a structural repricing that will make
it a solid contributor to Exxaro’s growth plans. “There was a complete lack of money
going into the global industry because margins were so low. But by the end of 2010,
the market sort of said “no more’. We either had to get a change in the pricing
mechanism for we would have pulled the plug on the business,’ he says.
