Bul­let­proof Exxaro full of holes

Finweek English Edition - - INSIDE - BY DAVID MCKAY

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

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