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Exxaro sets sights on coal to revive earnings

Exxaro CEO Sipho Nkosi discusses the company's plans to ride out the currently challenging commodities environment. Camerawork and videoediting: Nicholas Boyd.

20th August 2015

By: Natasha Odendaal

Creamer Media Senior Deputy Editor

  

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JOHANNESBURG (miningweekly.com) – Diversified miner Exxaro is placing its bets on coal as the South African mining industry battles the “stormy waters” that have “pushed it into trouble”.

Outgoing CEO Sipho Nkosi on Thursday said that amid challenging market conditions, declining commodity prices and extensive financial strain that battered the share prices of many mining companies in South Africa, Exxaro planned to divert capital expenditure (capex) from other operations into the newly named carbon division to ride out the difficult market.

“You will not find much [of Exxaro’s] capital [being] spent on the other sectors [over the next three to five years],” he told investors during a presentation of the company’s interim results, adding that the company would also move to minimise costs, maximise operational output and optimise its investment portfolio.

Exxaro planned to delve into the operations of its latest acquisition Total Coal South Africa, which complemented Exxaro’s existing coal portfolio and which provided access to primary Richards Bay Coal Terminal entitlement.

The R3.3-billion buy-out netted Exxaro a large-scale coal operator with a majority interest in two operating complexes, Dorstfontein and Forzando, located in the Witbank coal basin, in Mpumalanga.

This was in line with the group’s top short- to medium-term aim of remaining cash flow positive while preserving growth opportunities.

“We expect [overall] market oversupply, coupled with low demand in our commodity portfolio, to persist in the near term, which will demand more rigorous efforts to ensure short-term survival and sustainable long-term profitability,” he explained.

The company planned to inject the bulk of the next five years’ capex into its coal operations, which were more poised to sustain some growth in the short term, despite volatile coal prices.

The API4 RB1 coal price was expected to remain within the current $60/t, with Exxaro expecting to export around four-million tonnes of coal for the full 2015 financial year.

API4 export prices had averaged about $63/t at the start of 2015, declining to lows of $59/t in June.

Meanwhile, iron-ore fines prices plummeted more than 20% over the same period, averaging $60/t during the six months to June 30, compared with the $112/t recorded in the corresponding period the year before, with lows of $47/t reported in April this year.

Further, the continued oversupply in the titanium dioxide market kept pigment prices at historically low levels.

“We will maintain our investment portfolio at current levels and consider our options as market conditions evolve … [but the company will] reprioritise and stagger projects to preserve cash, given the poor price outlook,” Nkosi noted, pointing out that growth projects would be critically assessed to ensure capital was prioritised accordingly.

This comes as Exxaro cuts its interim dividend payments to 65c a share amid a 62% plunge in earnings for the first half of the year.

Headline earnings fell from R2.8-billion in the six months to June 2014 to R1-billion in the period under review, with headline earnings a share dropping to 303c from 793c.

The carbon business pushed group revenue 12% higher to R8.3-billion for the six months to June.

The group swung to a net operating profit of R1.8-billion for the period under review, from an operating loss of R4-billion in the prior period.

The 2014 operating loss was mainly attributed to the pretax impairment of the carrying value of the Mayoko iron-ore project assets totalling R5.8-billion and the R202-million pretax impairment of the carrying value of intellectual property.

Exxaro cut capex by 37% to R1-billion during the first half of the current financial year, while its net debt position improved from R2.6-billion in the corresponding period last year to net cash of R55-million as at June 30.

During the six months to June, the carbon segment reported export volumes of 2.39-million tonnes, a decline against the 2.73-million tonnes achieved in the prior corresponding period, as Exxaro replenished its stockpiles as a prestrike preparation measure.

Coal miners were currently engaged in wage talks with labour unions for a new wage agreement; however, Nkosi assured that stockpiling was precautionary rather than an anticipation of strike action.

Coal production volumes for the six-month period reached 19-million tonnes, from the 18.7-million in the prior corresponding period.

Overall sales ticked up to 20-million tonnes in the half-year under review, from the 19.8-million tonnes of coal sold in the six months to June 2014.

Edited by Creamer Media Reporter

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