Mak­ing it through a tough time

Step­ping into the po­si­tion of CEO of Exxaro Re­sources al­most two years ago, Mx­olisi Mgojo has had to steer the com­pany through a vi­cious com­mod­ity down­turn.

Finweek English Edition - - THE WEEK - By David McKay editorial@fin­

CEO of Exxaro Re­sources

iits been nearly two years since Mx­olisi Mgojo stepped into the for­mi­da­ble shoes of Sipho Nkosi, the for­mer CEO of Exxaro Re­sources. Af­ter a tricky start, it’s been a case of so far, so good. Mgojo in­her­ited a com­pany with a fun­da­men­tally strong as­set suite, but one gripped by the vi­cious com­mod­ity down­turn. Per­haps pre­cip­i­tated by mar­ket con­di­tions, there was also the ques­tion of Exxaro’s iden­tity: was it an op­er­at­ing or an in­vest­ment firm?

Apart from its coal mines, Exxaro has a stake in Kumba Iron Ore through a 19% hold­ing in Sishen Iron Ore Com­pany (SIOC). SIOC had stopped pay­ing div­i­dends while a 44% stake in Tronox, a US-listed ti­ta­nium diox­ide and al­kali chem­i­cals busi­ness, was pay­ing div­i­dends out of losses. The group also had mi­nor in­vest­ments that were be­gin­ning to look nei­ther here nor there: an 11% stake in Chifeng, for in­stance, a zinc busi­ness in Mon­go­lia.

Mean­while, an at­tempt to add a sub­stan­tial fer­rous arm was on the rocks af­ter the col­lapse of the Mayoko project, a risky gam­bit on iron ore in the Repub­lic of Congo. By 2015 Exxaro had writ­ten down the as­set for R5.3bn. The project was sold last year for R650m.

As if this was not enough, Exxaro ran into trou­ble with its largest South African cus­tomer, Eskom. The two bat­tled over li­a­bil­ity for the re­ha­bil­i­ta­tion costs of Arnot, a col­liery Eskom no longer wanted to fund. It was the first such long-stand­ing coal sales agree­ment with a pri­vate com­pany and Eskom to have reached a nat­u­ral end.

Saw it com­ing

Act­ing CEO of Eskom Mgojo says he saw the change with Eskom com­ing: “We had al­ways had a good re­la­tion­ship with Eskom. It was only when it in­tro­duced ju­niors into the coal min­ing space and had trou­ble on its bal­ance sheet that we came into con­flict and we had to re­sort to legals.”

Un­der Mgojo, there­fore, the strat­egy at Exxaro has been to de-risk its ex­po­sure to Eskom as well as ad­dress the over-arch­ing is­sue of re­fo­cus­ing the busi­ness on its core coal min­ing ac­tiv­ity, and dis­pens­ing with the in­vest­ments, of which the SIOC is a ma­jor piece of un­fin­ished busi­ness.

The stake in Tronox is al­most cer­tainly to be sold, with the pro­ceeds ei­ther be­ing dis­trib­uted to share­hold­ers or used to fund cap­i­tal in the coal space which will be­come in­creas­ingly fo­cused on an ex­port strat­egy.

“Given a neg­a­tive earn­ings con­tri­bu­tion from Tronox, we ac­tu­ally be­lieve that the mar­ket could be at­tribut­ing a neg­a­tive value for Tronox in Exxaro,” said Mac­quarie an­a­lyst James Ober­holzer. “Un­lock­ing this value through a cash sale could be R20 to R30 ac­cre­tive to our val­u­a­tion for Exxaro.” Mac­quarie has a 12-month tar­get price of R140 a share on the stock. Al­ready, Exxaro’s ex­po­sure to the so-called “tied mines”, where it sup­plies coal on a fixed-cost ba­sis to Eskom, which pro­vides de­vel­op­ment cap­i­tal, has fallen to about 7.9m tonnes (Mt) from 13Mt in its 2012 fi­nan­cial year. In its place is growth in ex­port tonnes in­creas­ing to 7.9Mt in 2016 from 3.9Mt in 2012.

The fi­nal leg of Exxaro’s re­struc­tur­ing is to tackle its black eco­nomic em­pow­er­ment (BEE) sta­tus af­ter the 10-year con­tract with its ex­ist­ing part­ner, Main Street 333, of which Mgojo is a mem­ber, came to an end. The re­place­ment deal has proved con­tro­ver­sial. Share­hold­ers will have to ac­cept some di­lu­tion as Exxaro buys back Main Street’s shares and is­sues new ones to the re­place­ment struc­ture which, in turn, will own only 36% of Exxaro in­stead of the pre­vi­ous more than 50% stake.

Eskom in­terim CEO Mat­shela Koko de­cried the low­er­ing of Exxaro’s BEE shares, say­ing it de­fied Eskom’s pol­icy to only buy new coal from black-con­trolled com­pa­nies. It’s an in­di­ca­tion of the evolving re­la­tion­ship be­tween Exxaro and Eskom, how­ever, that the mat­ter was waved away by Mgojo.

“We had an en­gage­ment with Mat­shela on Jan­uary 30 and he hasn’t said any­thing about us af­ter that meet­ing. The mere fact he is not say­ing any­thing says some­thing about how we ad­dressed the is­sues at that par­tic­u­lar time,” said Mgojo.

Mx­olisi Mgojo

Mat­shela Koko

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