Rail critical in Exxaro’s coal plans

[miningmx.com] — “PERHAPS it’s because I’m a great CEO?’ So jokes Sipho Nkosi, CEO of Exxaro Resources when asked why he thought Exxaro had gained nearly a third of its market value since February. “People see a lot of value on the coal side,’ he said. “We’ve given them a good story about where we’re taking the company.’

Where Exxaro believes it’s going is none other than becoming the country’s largest coal producer. That’s according to a statement in its recently issued annual report, a growth trajectory Nkosi said was a function of expanding its Grootegeluk coal mine and building another mine in the Waterberg, the Thabametsi project.

It currently produces about 45 million tonnes and hopes another 15 to 18 million tonnes from the Grootegeluk expansion and a further 12 million from Thabametsi. All in all, that’s up to 75 million tonnes/year. Against the backdrop that Anglo American sees coal production growth outside of the country, and BHP Billiton has long been short (if you see what I mean) on South African coal, there may be some merit in that.

Exxaro has it good at the moment. It holds 20% of Sishen Iron Ore Company producing a mineral that will now be negotiated on a quarterly basis rather than annually. This must surely have much to do with the pricemaking ability iron ore producers now have.

As mentioned, there is the 45.2 million tonnes of coal it produced last finanical year, equal to 65% of total revenue. These two minerals combined are a powerful commodity mix currently, the kind of mineral cocktail that has sent the likes of Anglo American divesting of its industrial minerals so it can have some of the same sexiness.

Analysts love the so-called “bulk products’ at the moment. “While we have been bullish on the outlook for pricing on bulk commodities for some time, the extent of the ramp up in global steel output has surprised even us,’ said Macquarie in a recent note.

Coal is a major part of this bullishness. Says Nedbank Securities: “We expect the thermal coal market to remain robust over the next quarter of 2010; price gains to date have proven this to be the case.’ And then again, in a Merrill Lynch report: “The outlook for Pacific thermal coal contract prices remains robust and we are upgrading our forecasts.’

Inevitably, there is a but.

Exxaro’s investment case is compromised by regulatory and infrastructural deficits in South Africa. Nkosi says he’s satisfied now that Eskom has successfully reviewed the phasing of its Medupi power plant to which the expansion of Grootegeluk was dedicated.

But granting of the World Bank loan to Eskom must have been a period of deep anxiety for Nkosi. Had Eskom been left seeking alternative funding, its already altered contract to supply Medupi with coal would have been changed again.

“We’re now delivering coal (from Grootegeluk to Medupi) in the second quarter of 2012 compared to the last quarter of 2011,’ said Nkosi of Eskom’s recent decision to review the coal supply contract, due to run for 40 years.

“It made us adjust the development of the mine but now we’re going full steam ahead. We’ve started placing long lead items for development of the mine and plant. There could be some issues in regard to escalation of costs on placing items, but this has been factored in.’

Thabametsi is a mine that will supply the independent power producers (IPPs) in South Africa, but Nkosi confirms it can’t proceed until protocols governing how the IPPs are to operate are finalised. IPPs, such as Ipsa and CIC Energy, have been left standing for years waiting on Eskom to provide a framework for their integration into the power grid.

Nkosi claims to be satisfied with progress lately: “We’re pleased with advances between the mineral resources department and ourselves. So in next two years that one will be close, and we will move to Thabametsi. That is ready to go.’

The other problem is infrastructural. As more coal producers relocate to the Waterberg from Mpumalanga province, where South Africa’s coal has been historically located, improved rail facilities will be required.

Says Nkosi: “The country needs to deal with the issue of logistics and rail. If we can’t do this will have some serious challenges. The whole thing will collapse.’ He alludes to the possibility of private-public initiatives to help fund rail and freight developments.

Exxaro has other minerals in its offering including mineral sands and base metals. But these are clearly taking a backseat. Fact of the matter is that Exxaro is a coal proxy. There aren’t many mineral pure plays left on the JSE, let alone coal ones, and Exxaro is it.

As for the company’s zinc assets, Nkosi says the dataroom will soon be open ahead of divestment of the assets. “In due course will announce the data room is open and some players will be invited to come have a look at it,’ he says.