Exxaro

Finweek English Edition - - NEWS -

Pre­dom­i­nantly thought of as one of the ma­jor coal min­ers in South Africa, many are sur­prised t hat t he ma­jor­ity of Exxaro’s earn­ings are de­rived from iron ore. Exxaro’s 20% in­ter­est in the Sishen Iron Ore mine re­mains its core as­set, how­ever, a large num­ber of projects are un­der­way, with the end goal be­ing di­ver­sif ica­tion across a num­ber of re­sources, in­clud­ing re­new­able en­ergy. De­spite this, coal re­mains im­por­tant to Exxaro, given that the in­sa­tiable ap­petite for the min­eral is ex­pected to con­tinue both lo­cally and abroad, par­tic­u­larly from Asia.

The in­vest­ment case for Exxaro is built around a sum-of-the-parts val­u­a­tion that val­ues each of Exxaro’s as­sets based on their cur­rent mar­ket val­u­a­tion. Th­ese as­sets in­clude a 20% hold­ing in the Sishen Iron Ore Com­pany (SIOC), a 44% own­er­ship in Tronox, a global chem­i­cal busi­ness listed in the US, and 26% in SA Min­eral Sands. Given that the ma­jor­ity share­holder of SIOC is Kumba Iron Ore, and that SIOC is essen­tially Kumba’s only as­set, the value placed on Exxaro’s stake in the com­pany is about R42bn. Like­wise, Tronox is a listed busi­ness in the US with a mar­ket cap of $2.8bn, al­low­ing a value of R12.4bn to be placed on Exxaro’s share­hold­ing in that ven­ture. The last non-coal as­set is the SA Min­eral Sands busi­ness, which Exxaro has the op­tion to con­vert into a fur­ther 4% of Tronox. There­fore, valu­ing the stake in the Min­eral Sands busi­ness on this op­tion, re­sults in a val­u­a­tion of R1.1bn. The sum-of-the-mar­ket val­u­a­tions of Exxaro’s non-coal as­sets equal R55.5bn.

Cur­rently, Exxaro has a mar­ket cap of R59bn. By adding back the debt and strip­ping out the cash on the bal­ance sheet, I ar­rive at an en­ter­prise value of R68bn for Exxaro. This im­plies that the South African coal as­sets are val­ued at R9bn. At their lat­est in­terim re­sults the coal as­sets pro­duced earn­ings of about R800m which, when an­nu­alised, puts the coal as­sets on a P/E ra­tio of 5.6 times, which com­pares very favourably with the global av­er­age of 12.5 times.

Exxaro’s iron ore ex­po­sure through SIOC is the ma­jor con­trib­u­tor to Exxaro’s earn­ings and, there­fore, mar­ket value. As a re­sult, since list­ing in 2006, Exxaro has of­fered in­vestors a near iden­ti­cal cap­i­tal re­turn to that of Kumba Iron Ore. How­ever, re­cent years have seen man­age­ment mak­ing a deliberate ef­fort to di­ver­sify Exxaro’s earn­ings away from SIOC. The Groot­geluk Medupi Ex­pan­sion Project (GMEP) is one such ef­fort, which will sup­ply Eskom’s Medupi power sta­tion with 14.6m tons of coal per an­num, in­creas­ing coal pro­duc­tion by 36%. GMEP is 96% com­plete, and is ex­pected to be fin­ished in the sec­ond half of their fi­nan­cial year.

A sec­ond po­ten­tial game-changer is the Mayoko iron ore project, lo­cated in the south­east­ern re­gion of the Repub­lic of Congo, with rail ac­cess to the port of Pointe Noire, which is cru­cial in get­ting the ore to mar­ket. The pro­duc­tion of the first ore is sched­uled to com­mence dur­ing the lat­ter part of 2013, pend­ing the fi­nal­i­sa­tion of the Min­ing Con­ven­tion, which in­cludes rail and port agree­ments. The mine has a min­eral re­source of 730m tons, which will be able to sus­tain an es­ti­mated life of mine of over 60 years.

Along­side t he t wo ex­cit­ing projects men­tioned above, Exxaro has also teamed up with Tat Power in a joint ven­ture called Cen­nergi, which aims to be the lead­ing cleaner en­ergy In­de­pen­dent Power Pro­ducer (IPP) in South­ern Africa. And lastly, there is the Thabametsi project, a prospec­tive green­fields open­cast mine, which is ex­pected to co­in­cide with the 600MW coal-f ired baseload IPP power sta­tion in the Water­berg. The Thabametsi mine will sup­ply ap­prox­i­mately 3.8m tons per an­num of coal to the 600MW Water­berg IPP post ram­pup.

Given the neg­a­tive sen­ti­ment sur­round­ing the re­sources sec­tor in gen­eral, the at­trac­tive val­u­a­tions, the on­go­ing de­mand for coal glob­ally, and the con­tin­ued di­ver­si­fi­ca­tion ef­forts from Exxaro, we be­lieve this presents an at­trac­tive in­vest­ment op­por­tu­nity.

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