Global ratings agency S&P has raised South Africa-based coal miner Exxaro Resources’ national scale ratings to ‘zaA/zaA-1’, from ‘zaA-/zaA-2’, based on the miner continuing to deliver stable operational and financial performances.
However, while the miner has maintained its earnings before interest, taxes, depreciation and amortisation (Ebitda) to 1.3x, S&P remains concerned about lingering risks of payment delays or nonpayment from State-owned power utility Eskom, which remains Exxaro’s largest customer and represents more than 60% of its revenue.
While S&P continues to see this as Exxaro's largest risk, it recognises that the coal miner has delivered a stable performance over the past three years and has benefited from reliable and timely payments from Eskom, underscoring its importance to the power utility and to South Africa's energy supply.
Exxaro's relationship with Eskom was tested in 2020, when the utility declared a force majeure event on its contractual obligations, following reduced energy demand owing to the pandemic-related lockdown.
Exxaro did not, however, experience payment delays nor a reduction in offtake below contractual minimums in 2020.
Further, S&P said Exxaro's liquidity position and ability to manage high-impact events have strengthened following the April 2021 refinancing of its syndicated bank facilities.
The company extended maturities on its South African R2.5-billion bullet loan, its R2.25-billion amortising loan and its R3.25-billion to 2026. Exxaro's debt metrics over the coming three years should stay supportive of its current credit quality, S&P said.
S&P forecasts that the debt-to-Ebitda ratio and funds from operations (FFO) to debt will remain between 1x and 2x, and 50% to 60%, respectively, on average.
Long-term take-or-pay contracts with Eskom give pricing visibility, while strong export spot prices (accounting for about 20% of production) are likely to boost Exxaro's margins over the short term, S&P said, noting that it expects Exxaro’s coal sales volume to remain flat at about 46-million tonnes a year over the medium term given long-term take-or-pay contracts already in place and constrained rail capacity availability for increasing export volumes.
The company's capital expenditure (capex) cycle is, meanwhile, expected to normalise below R2-billion a year by 2023, following a heavy investment cycle between 2017 and 2020, leading the agency to forecast stronger free operating cash flow.
“We think Exxaro will focus on mine-level portfolio optimisation and diversifying exposure away from coal in the coming years,” S&P said.
Exxaro declared its higher-cost ECC and Leeuwpan mines, which do not have long-term offtaker agreements in place, as noncore assets. The company is in the final stages of concluding the sale of ECC and S&P believes that it will look to divest from Leeuwpan in the coming quarters as it manages the long-term energy transition from coal.
“We assume the company is likely to focus on capital investment projects and acquisitions in early-stage renewable energy projects. However, uncertainty over the timing and size of these investments remains high,” S&P warned, noting that liquidity and debt metrics will continue to be key considerations in its assessment of Exxaro's creditworthiness.
S&P’s rating on Exxaro reflects its track record in delivering solid operational and financial performances, despite its concentration to Eskom.
“We expect Exxaro to maintain adequate liquidity with debt to Ebitda of between 1.3x to 1.7x and FFO to debt close to 50%. We could lower the rating if we expect Exxaro's FFO/debt will fall below 30% or if we expect Exxaro's liquidity position were likely to weaken,” S&P said.
It noted that this could result from Exxaro experiencing payment delays or nonpayment on sales to Eskom, lower-than-expected export market prices and volumes, or a large debt-funded acquisition.
While S&P sees a limited rating upside given Exxaro's concentration to Eskom, which remains in a weak liquidity position, it said on June 15 that it would consider raising its rating on Exxaro if liquidity improvements at Eskom prompt an upgrade of the utility, or if there is broader certainty that Eskom's suppliers would be paid in a timely manner in the event of an adverse funding gap at Eskom.