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.
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.