JOHANNESBURG (miningweekly.com) – Coal and heavy minerals miner Exxaro expects coal production and sales volumes for the 2015 financial year to top that of the prior 12 months, noting in a market update this week that the scheduled ramp-up of the Medupi power station and the inclusion of coal output from Exxaro Coal Central (ECC) – formerly Total Coal South Africa – from September 1 had partially offset production slumps at the group’s tiered operations.

Domestic sales were expected to increase 6% year-on-year to 2.3-million tons, while export sales were likely to see an 11% rise to 5.5-million tons.

Commenting on the markets, Exxaro described domestic coal demand in the power-generation and steam coal markets as “stagnant, but stable”, while the dollar price of coal in international markets continued to test new lows.

International prices had dropped below $50/t free-on-board for coal shipped from Richards Bay, in KwaZulu-Natal, with prices likely to remain at these levels in the short- to medium-term.

“The continuing global oversupply of commodities is reflected in a reduction of the average dollar coal, iron-ore and titanium dioxide prices by 20%, 32% and 14% respectively, since the beginning of January.

“To weather these difficult times, our short- to medium-term focus remains on track, with specific attention on productivity improvement, profitability maximisation and cash conservation,” commented FD Wim de Klerk.

The company added that there remained strong demand for its higher- and lower-quality coal, despite the local metals sector – a key market for Exxaro coal – struggling to compete with cheap Chinese exports, weak demand and low international metal prices.

In the reductants markets, Exxaro held that various companies in the ferroalloy sector continued to face financial difficulty as they struggled to compete globally owing to low ferroalloy prices and high local electricity prices, subduing the offtake of semicoke from the group’s reductants business unit.

Emphasising the company’s focus on prudent capital management amid a period of depressed demand and prices, De Klerk noted that the group planned to reduce its expansion capital expenditure (capex) by 13% over the next five years, while evaluating sustaining capex to preserve cash flow over the period.

These cuts had yielded a further R744-million reduction for the 2015 financial year, against an August guidance of R2.95-million for the coal business.

This translated into a total full-year cut of around 50% of its estimated capex as guided at the beginning of this year.

“With every growth and sustaining project considered, we have a disciplined decision-making approach to allocate capital and we take into account the expected investment rate of return, net present value, cost curve position, payback period, risk and mitigation balance, as well as overall impact on shareholder returns.

“We expect to maintain our dividend policy of between 2.5 and 3.5 times core attributable earnings cover in the 2015 financial year,” he remarked.

Ensuring that Exxaro was able to raise financing at competitive rates, De Klerk added, remained “critical”, as the miner moved closer to refinancing its existing R8-billion loan facility in the second quarter of 2016.
This would take place amid an increasing trend toward a culture of activism against coal as a source of energy owing to the environmental impact of carbon dioxide emissions, he said.

“Given the current and expected outlook for South Africa’s electricity requirements, Exxaro believes coal remains a relevant source of affordable electricity generation for the economy and, thus, remains well positioned to supply this energy source to Eskom.

“Therefore, the coal business is, to a great extent, hedged against falling dollar-denominated coal export prices through the exchange rate, as well as domestic Eskom prices remaining stable,” he maintained.

Exxaro remained in discussion with Eskom over the utility’s proposed intention to convert the captive mines’ coal-supply agreements to commercial arrangements.

This was likely to affect the Matla and Arnot operations, in Mpumalanga, the company cautioned.

Looking ahead, the miner said strategic priorities in the next financial year included integrating and optimising ECC assets, developing Exxaro’s future black economic-empowerment shareholding strategy, evaluating its current shareholding in key investments and growing investor confidence in Exxaro’s prospects for the coal business.

The company expected the global economy to remain subdued, as emerging markets continued to battle with low economic growth rates and commodity markets faced oversupply, particularly in iron-ore and coal.

“Markets could also be impacted by the expected interest rate hikes in the US, as well as other global geopolitical events,” the group stated.

Exxaro would announce its full-year financial results on March 3, 2016.