Pos­si­ble end to bear trend

Finweek English Edition - - MARKET PLACE - ed­i­to­rial@fin­week.co.za By Mox­ima Gama

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

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