Analysts were left baff led after Exxaro Resources disclosed this week it had paid $ 472m ( R5bn) for French group Total’s South African coal assets which are held in subsidiary Total Coal South Africa ( TCSA), especially as the assets had booked a R55m loss in the 2013 f inancial year.
“You would have to bet on a longterm t hermal coal export price of $100/t to justify the price, and I don’t think you can bank on that price, not in the long term,” said one analyst. The acquisition price could also increase.
That’s because Total’s empowerment partner on its SA assets – mining entrepreneur Bridgette Radebe’s Mmakau Mining – may want to be bought out by Exxaro as well, which would inf late the acquisition cost to $594m, assuming they were on the same terms.
The acquisition cost comprises $386.5m i n equit y and $ 86.5m i n debt, a sum described by Macquarie Research analyst, Kieran Daly, as “expensive for a business that lost R55m”.
However, Daly said this was on par with the multiple Glencore paid for Optimum Coal in 2012, although the export coal price that year averaged around $120/t compared to the $70 to $75 being paid per ton of export-quality thermal coal today.
The acquisition, were it to be included in Exxaro’s last full-year results, would have diluted headline earnings 5% while it takes net debt to R9bn from R4bn currently, which is at the upper end of where Exxaro CFO Wim de Klerk last said he preferred debt to be. THE QUESTION IS WHY IS EXXARO PAYING SUCH A HEFTY SUM FOR LOSSMAKING ASSETS? For t he t i me being, t he company can’t say owing to conf identialit y agreements with Total, although De Klerk alluded to the fact that in buying TCSA, Exxaro also takes possession of the company’s 4m tons a year (mtpa) of export entitlement through Richards Bay Coal Terminal (RBCT), doubling then Exxaro’s total entitlement to about 8mtpa.
In so doing, it gives Exxaro the opportunity to reshuff le its assets in the Waterberg coalfields in Limpopo, converting some mines to so-called multiproduct operations so that they produce both Eskom coal and coal for the higher-margin export market. If this is the strategy behind the acquisition, then it’s a case of paying a premium for building operational and strategic f lex into the group’s coal assets, which are clearly earmarked as a core business strategy.
Wim de Klerk