JOHANNESBURG (miningweekly.com) – Black-controlled Exxaro Resources has an interesting interplay with the media after each of its results presentations, involving Exxaro CEO Sipho Nkosi and his team sitting cheek by jowl with the media for as long as there are questions – and not ducking the questions.
While the next six months are going to be tough for Exxaro, they are probably going to be even tougher for less-placed mining peers, which could see even greater branching out arising from the six-year-old JSE-listed Exxaro stable.
While it is expanding its well-founded coal business, launching a new foray into iron-ore, rolling out an innovative mineral sands partnership and exiting zinc, unexpected new oppor-tunities are being intensely studied, not the least of them being an entry into platinum-group metals (PGMs) from an innovative angle of embracing the entire PGMs value chain.
“We may not look like a seriously diversified organisation today, but watch this space,” Nkosi comments.
Late-stage PGM targets have been identified and the company would like to make a move on the metals before year-end, as just one new part of its journey towards achieving a market capitalisation of $20-billion by 2020.
With only three integrated producers and many juniors, Exxaro has developed criteria to guide its potential entry into the PGMs space – while not compromising its growth of all the assets where it already has a footprint.
The foray into copper mooted earlier may even take a back seat to PGMs, where the window of opportunity is set to close in a matter of six to nine months.
But besides the markets getting tougher and the world demanding business ‘unusual’, Exxaro and also the rest of the South African mining industry are at the same time being confronted by documents like the ‘State Intervention in the Minerals Sector’ (Sims) report of South Africa’s ruling African National Congress (ANC).
Nkosi is one of many in the sector who is hoping that the South African mining industry, through the Chamber of Mines, and the South African government will have achieved some alignment, ahead of the Mangaung conference in December, on Sims, which wants to introduce resources rent tax and declare coal a strategic asset and looks to mining to provide added industrialisation.
Declaring coal a strategic resource is not yet a resolution but a Sims recommendation.
“That’s why it is important for all of us to use this time to engage with the ruling party,” Nkosi says.
He concedes that it would be problematic if Exxaro were forced to supply coal at prices lower than those obtainable on the open market.
What needs to be clarified is whether those receiving the discounted coal would in turn pass on the discount.
It would be unfair to penalise the mining industry alone and not insist that those using the discounted mined products pass on the savings to downstream consumers.
The volumes of coal being exported are small in relation to the volumes supplied to Eskom and the issue is the opportunity to sell lower calorific-value coal normally reserved for Eskom on the export markets.
Stopping exports would lower the amount of tax the coal-exporting industry currently pays to government.
Nkosi calculates, like many others, that South Africa has ample coal to meet the country’s needs and also to export.
Five-a-side teams – five from industry and five from the ANC – have to thrash out issues ahead of Mangaung.
The domestic coal market is a stable one that continues to grow and continues to be supplied by Exxaro, which will be developing the Moranbah South coking coal project with Anglo American in Australia and the Thabametsi project in South Africa, near its existing Grootegeluk mine, in Limpopo province, along with downstream businesses.
The Moranbah South prefeasibility study is due this year and the Thabametsi bankable feasibility study is due by 2013.
Thabametsi, in the Waterberg, where Exxaro has decades of successful coal-mining exper-ience, is coming into clearer focus as a result of Eskom going out on a request for inform-ation on the volume of coal that the Waterberg can provide its Mpumalanga power stations with.
From 2016/17, the first phase of Thabametsi is expected to deliver four-million tons a year to an on-site independent power producer, which Exxaro executive GM for new business Ernst Venter says has been narrowed down to one of two partners.
Based on Eskom’s request for tonnages to Mpumalanga, Exxaro has pledged between 20-million tons and 30-million tons a year from the second phase of Thabametsi, which will be rail dependent and which could be realised by 2018. Current rail capacity from the Waterberg is a mere five-million tons.
Contracts to supply State-owned Eskom from the Waterberg will have to go hand in hand with the provision of matching rail capacity by State-owned Transnet Freight Rail (TFR).
Exxaro is a major domestic coal supplier with growing export ambitions and is hoping that TFR will be able to transport all the coal it has available for export in the second half 2012.
Exxaro’s coal business, under executive GM Mxolisi Mgojo, did not export as much coal as it had available for export in the first half of 2012.
Mgojo says that, owing to rain and other production issues, there is always going to be a slight mismatch between the timing of coal production and the volume of rail delivery, and trying to match TFR’s ramp-up curve towards the close of its financial year has proved difficult.
“We’re hoping TFR will up its game,” is how Nkosi put it.
Exxaro’s aspiration is to export more than ten-million tons of coal a year, which means that it must also look to port capacity, where there appears to be a host of possibilities.
While the Richards Bay Coal Terminal (RBCT), where Exxaro is already a shareholder, has been mulling a sixth growth phase, Exxaro has also been studying various port suggestions beyond the RBCT, ranging from the proposed Trans-Kalahari route to Namibia, a route through Zimbabwe to Maputo and another through Mpumalanga to Maputo.
More ports in Richards Bay have been suggested and TFR has spoken of the potential reopening of an old closed terminal.
While Sasol’s proposed but now delayed Mafutha coal-to-liquids project was an early awakener of the need to better water and rail infrastructure in and from the Waterberg, Eskom is now adopting that mantle and has provided the chairperson for the strategic integrated projects programme in the area.
On the project front, Exxaro has successfully developed the Grootegeluk Medupi Expansion Project (GMEP) scheme within budget and on schedule and the new agreement it has just struck with Eskom places it in the same position as before in terms of cash, margins and returns.
The cash of R2.5-billion that Exxaro generated in the six months to June 30 was sufficient to pay for all its capital expenditure, including the GMEP.
Not all the capital has been spent on the GMEP because the company does not need to deliver at high volume and another R1.9-billion is earmarked for GMEP this year and the final R1.1-billion in 2013.
It has delivered its first 6 000 t of power station coal to Eskom and will continue to provide coal monthly to allow the State power utility to use it in its precommissioning testing phases.
Exxaro’s coal price to Eskom rises with the general industry cost increases and the company received R135-million more for the same volume of coal it sold to the State electricity utility in the first half of 2012 than in the first half of 2011.
Exxaro believes that it can treble its annual operating profit in coal, which remains its strong base.
Beneficiation will feature in that trebling, which involves the production of char and market coke and the Waterberg’s coal-bed methane opportunities also need to be taken up or will be lost.
Exxaro’s 20% of Sishen Iron Ore Company (SIOC) – flagship of the Anglo American-controlled Kumba Iron Ore – has for years dominated Exxaro’s headline earnings per share by more than 70% since listing in 2006.
With its diversification drive, however, SIOC’s contribution has now moderated down to some 50% of the business, an indication that the branch-out is gaining traction.
Keen for a long time to do its own thing in iron-ore, Exxaro is in the process of a phased fast-tracking of the development of the Mayoko iron-ore project, in the Republic of Congo, which is targeting ten-million tons of iron-ore a year from 2016.
The capital that will be required to develop Mayoko – part of the acquisition of the ASX-listed African Iron for RZ2.7-billion – in the next 18 months is calculated at R1.7-billion.
The delivery of Mayoko’s bankable feasibility study to the board is expected in the last quarter of this year.
Exxaro’s mineral sands future is now in the hands of Tronox, one of the world’s largest integrated mineral sands and pigment businesses.
Tronox chairperson and CEO Tom Casey was on hand at the latest presentation of results to hear CFO Wim de Klerk refer to the once-troubled mineral sands business as the “star performer” of the six months to June 30, with prices at least remaining stable for the first time in 20 years.
After not performing for many years, the mineral sands business represented 30% of headline earnings per share and, as of July 1, there are no mineral sands hedges in place.
Tronox will develop the Fairbreeze project, which still has outstanding water-use licences and environmental authorisations, as well as take charge of the R250-milllion Exxaro-Cennergi cogeneration project, at Namakwa Sands, which is due to produce from May next year at a capacity of 13.6 MW from offgases that are currently flared.
Despite slightly softening mineral sands prices and flat volumes, Tronox expects to deliver between $875-million and $960- million in earnings before interest, taxes, depreciation and amortisation for the second half of the year, of which more than $500- million will be free cash flow.
The dividends that Exxaro hopes to receive from its nigh-40% interest in Tronox are likely to go wholly into Exxaro’s three-times-covered and attributable-earnings-driven dividends.
The teams that have run the Exxaro oper-ations under Trevor Arran remain, which means little day-to-day operational change.
Cennergi, Exxaro’s joint venture with Tata Power, of India, has been awarded two wind projects at Tsitsikama and Amakhala Emoyeni with a combined capacity of 235 MW.
Work is progressing on coal-bed methane exploration in Botswana with Sekaname.
The Letaba alloys joint venture Exxaro has with Assmang is aiming for 50 000 t of alloy production a year from 2016, using the trademarked AlloyStream technology. Testing for commercial viability is due before the end of this year.
While Exxaro is no longer refining zinc at Zincor, which has been closed, the site’s old tailings dumps contain 0.4 g/t of gold, as well as lead and silver.
Also in the region is considerable contami-nated water decantation and the company is working with the Department of Water Affairs to convert the old Zincor plant into a water treatment facility.
Fourteen parties have expressed interest in buying the Zincor property and Exxaro will have completed its study of the business plans of each by year-end.
In parallel, the company is developing its own rehabilitation plan.
It is divesting out of zinc at Namibia’s Rosh Pinah mine, which has been sold to Glencore for R931-million, and the company has closed the Zincor refinery.
That leaves two zinc interests, the 26% of Black Mountain and the 11.9% of Chifeng, in China, still to be exited.
Nkosi sees environmental management as being a key factor for Exxaro, which operates the Zeeland water treatment works that supplies 21 000 people in Limpopo.
Near-mine community members have also been roped into the company’s mountain biking initiative, which gives riders the potential access to the yearly Absa Cape Epic mountain biking race.
The company spends 5.5% of its payroll on training and the company employs double the average of women employed in South African mining.
It is going into the second five-year phase of its Mpower employee ownership programme, which assigns notionally linked shares to all below-management employees.
Last year, 9 694 employees shared R1 044 821 876, with those with five years’ membership receiving R135 000 each.
Nkosi believes that it is important for every employee to participate in the growth and development of the company and Mpower will vest once more in 2017.
The company started 2012 with R300-million in cash and ended the six months to June 30 with debt of R1.2-billion.
The R1.9-billion SIOC dividend received was sufficient to pay Exxaro’s own dividend of R1.7-billion plus tax and financing costs.