Possible end to bear trend
Diversified mining group Exxaro Resources has come under fire about its new proposed BEE deal, which will see the group’s black shareholding decline from more than 50% to a level of 30% of total share capital. Eskom, a major client of Exxaro’s coal business, has been extremely critical of the proposal, and has stated that the group will need a 50% black shareholding to continue supplying coal to Eskom.
The proposed transaction in essence requires Exxaro to repurchase shares in it by its BEE partner Main Street 333, a company in which former CEO Sipho Nkosi and current boss Mxolisi Mgojo are shareholders, Miningmx reported. It will pay R3.04bn to buy back these shares, allowing existing shareholders to pay off debt (including a R486m loan from Exxaro itself) and then either take cash or reinvest in the new BEE structure, it reported. The new deal, which will have a lock-in period of seven years, is expected to be completed by the end of April.
In order to reduce its reliance on Eskom, Exxaro is planning to invest R18.5bn in new coal mines in the coming years to increase its revenue from coal exports. The group is looking for new markets in Pakistan, the Philippines, Vietnam, Malaysia and Egypt, and sees opportunity to further increase sales in India, City Press reported late last year. The positive performance in the coal price in 2016 was one of the biggest surprises of the year, which triggered a gradual recovery in Exxaro’s share price from 3 700c/ share to current prices at 11 300c/ share. Exxaro said in a trading statement on 2 March that it expects headline earnings per share (HEPS) for the year ended December of between 1 173c and 1 365c, compared with 457c reported in 2015. The group’s results will be released on 9 March, after this issue of finweek went to print. How to trade it: Exxaro is retesting the resistance trendline of its long-term bear trend. A positive breakout would be confirmed above 11 800c/share – presenting a good medium-term buy opportunity with potential upside to 15 335c/share. Initiate a neutral long above 11 800c/ share at first, with a stop-loss at key support at 10 300c/share. Increase positions on continued upside above 13 500c/share. Alternatively, refrain from going long on a reversal below 11 800c/ share, and downside through 10 300c/share.
Sipho Nkosi Former CEO of Exxaro
Mxolisi Mgojo CEO of Exxaro