Bulletproof Exxaro full of holes
Adecision by Ex xaro Resources to write down up to R5.36bn on its Mayoko i ron ore project i n t he Republic of Congo (RoC) is perhaps the thin end of the wedge for the coal, mineral sands and iron ore company in terms of a strategic re-think currently underway.
Analysts believe the company – which once targeted a market capitalisation of $20bn by 2020 – is in the throes of a restructuring that may see it liquidate its 44% stake in New York-listed mineral sands company Tronox.
It has already confirmed that it is in negotiations to retrench some 1 980 employees, which would in the estimation of Standard Bank Group Securities analyst Heidi Steinberg take a quarter off Exxaro’s labour costs, which account for 32% of all group cash costs. An asset manager who was recently asked by Exxaro Resources to give his view on strategic direction said t hat t he c ompany should focus on becoming a pure-play coal producer, which is the f irm’s traditional strength, and its origin.
It produced 38.7m tons of its own coal in the 2013 f inancial year with 77% its coal coming from the Grootegeluk mine in the Waterberg region of SA’s Limpopo province. In terms of
however, Grootegeluk accounts for 29% of total with the so-called Grootegeluk West – known as Thabametsi – containing about 30% of total resources.
Is then Exxaro Resources mulling a back-to-basics strategy? One of the assets it is unlikely to hand away is its near25% stake in Kumba Iron Ore which is solid annuity income, but the prospect of developing its own iron ore prospect in Mayoko is looking increasingly bleak. Wim de Klerk, Exxaro CFO, said last week the company would give itself six months to finalise a portand-rail framework agreement with the RoC government, having completed the mining convention in February. Yet there was much to complete for Exxaro to stay in the Mayoko project despite having committed R2.5bn in capital goods and with R300m still to spend.
“We need to negotiate the outstanding agreement, followed by a pre-feasibility and then a bankable study, and then an investment decision. However, we are not even on the first page,” said De Klerk.
The group wants to build a 12m-ton- a-year (mtpa) iron ore mine but the rail line from Mayoko to Pointe Noire, RoC’s main port which is situated some 465km away, only has a capacity of 5mtpa
to 6mtpa today. The RoC government also wants an open access, multi-user approach on the line, whereas the Exxaro plan seems to demand rail use exclusivity.
De Klerk acknowledges the RoC wants to have a rail route from which the broader economy can benefit, but it means finding a way to finance the capital expansion, probably a tripling in rail capacity, to allow that to happen. In the end, it all boils down to whether Exxaro can extract the tariffs on the rail and port to compensate it for the capital outlay.
The outcome is that at current rail and port conditions, the project is not viable. De Klerk insists the drop in the iron ore price from $140/ton when Exxaro f irst invested in Mayoko to $90/ton today is not a factor as the project was modelled on $80/ton. Nonetheless, the impairment is to be suffered while the sale of unused assets for the project, such as locomotives, will proceed regardless of whether a port and rail deal can be forged with the Congolese.
Exxaro is certainly not the only company to feel it was bullet-proof following the benefits of supercycle, which had its executive dreaming of a $20bn market value (compared to $4.7bn today), but its decision to rush into the RoC and spend over R2bn in capital seems rash. Said De Klerk: “We realised there would be risk and the board took an informed decision to put some capital to that risk.”
Perhaps the company will now focus on growth opportunities closer to home.
Grootegeluk expansion project, Limpopo
Wim de Klerk