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Nov 18, 2010

Illovo says drought and strong rand impacting on output and earnings

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JSE-listed sugar producer Illovo expects its sugar output for the 2011 financial year to be similar to the 1,7-million tons of sugar produced in the year ended March 31, 2010, but warned that its earnings would be lower, owing to foreign exchange impacts.

Sugar output at its South African operations has, in the first half of the 2011 financial year, been negatively impacted on by drought in KwaZulu-Natal, while unseasonal rain in Swaziland has also led to lower production in that country.

Illovo, led by MD Graham Clark, on Thursday highlighted the strong rand and the drought in KwaZulu-Natal as two of its biggest challenges.

Fellow South African sugar producer Tongaat-Hulett on Monday also reported that its full-year sugar output would be impacted on by the drought, while export revenues were being impacted on by foreign exchange translations.

Illovo reported drastically reduced cane yields and cane availability at its South African operations, which resulted in the early closure of its Umzimkulu and Eston factories.

For the full-year, the local operations were expected to produce about 90 000 t less sugar than the 663 000 t produced in the 2010 financial year.

The company indicated that, even with a good summer rainfall, cane production on the south coast of KwaZulu-Natal in the 2011 calendar year would likely remain lower than that of the current year.

Illovo has, therefore, decided not to operate its Umzimkulu factory in the 2011/12 financial year, and will instead divert cane supplies to its other factories to enable these to run closer to their capacity.

Meanwhile, unseasonal rain in Malawi, Mozambique and Swaziland impacted on the cane quality in these three countries during the first half of the current financial year.

Nevertheless, the company has continued to make progress with regard to the expansion programme at the Ubombo factory, in Swaziland, with the upgraded facilities, capable of producing 300 000 t/y of sugar, to be commissioned in time for the start of the next season.

The R1,5-billion project would be completed by April next year.

Ubombo produced about 210 000 t/y of sugar in the 2010 financial year.

Additional cane development was being completed, while bagasse and biomass cogeneration facilities, which would allow the plant to be self-sufficient, would start up once the expansion project was complete.

Further, Illovo also reported a favourable season for its Zambian and Tanzanian operations.

Its Zambian operation, which was regularly exceeding its design capacity, crushing more than 100 000 t a week of cane, was expected to produce “significantly” higher volumes in the 2011 financial year.

About 315 000 t of sugar was produced at this operation in the 2010 financial year.

The Tanzanian operation was also expected to increase its output marginally on the 121 000 t produced in the previous financial year.

EXPORT EARNINGS AND SALES

Despite improved world sugar prices, the local industry has been unable to take full advantage of the opportunity, owing to the lower local sugar production, Illovo stated.

Therefore, its world market sugar exports were not expected to exceed 355 000 t this year, compared with the 742 281 t exported in the previous financial year.

Further, the weaker euro and lower-than-expected European sugar price realisations has also impacted negatively on downstream revenue and sugar export earnings from sales to the European Union during the first half of the financial year.

In addition, the continued strength of the rand and the weakness of the dollar were expected to further negatively impact on the company’s export earnings, as well as on the conversion of foreign subsidiary profits for the full-year

This would likely result in headline earnings a share (HEPS) for the full-year falling by between 30% and 40% on the HEPS of 171,2c a share recorded in the 2010 financial year.

Earnings a share (EPS) were also expected to be between 35% and 45% lower than the EPS of 161,4c a share recorded in the previous financial year.

Illovo’s headline earnings of R574,2-million for the six months ended September 30, 2010, was already down 14% on the headline earnings of R668,1-million reported for the six months ended September 2009.

Edited by: Mariaan Webb
Creamer Media Senior Researcher and Deputy Editor Online
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