Sale of Tronox creates opportunities for Exxaro
The coal producer has shareholders excited after announcing plans to sell its stake in US-listed titanium dioxide company Tronox, and investing some of that cash into various capital projects.
exxaro Resources more than halved net debt to about R1.3bn during its 2016 financial year thanks to much-improved coal and iron ore prices, so news that it is intent on selling its 43.66% stake in Tronox, a titanium dioxide company listed in the US, may have shareholders expecting a bumper dividend.
Riaan Koppeschaar, finance director for Exxaro, confirms that is part of the plan; the other plan element is informed by the fact that there are plenty of other uses for the cash, including the raft of capital projects already on the coal producer’s boards, and some that aren’t yet officially announced.
“The coal team is looking at some other opportunities at the mine level, but this is still at early days so we can’t disclose it,” said Koppeschaar. “It’s a combination of new projects in the group and some distribution to shareholders. That is still on the cards.”
Quite how Exxaro intends to sell down its stake is yet to be decided. Koppeschaar said a few options have been lined up, but a final route won’t be decided until the second half of the group’s financial year which begins in July.
He’s certain, however, that divesting of the company is the right thing to do. Shares in Tronox have increased to over $13/share from $4/share a year ago, giving the company a market capitalisation of $1.57bn or R20bn of which 43.66% is a handsome R8.7bn to Exxaro.
Koppeschaar also said Exxaro didn’t favour the volatile nature of the titanium dioxide business – which is produced for end use in paint pigments and the like – although the next 12 to 18 months are promising for the industry. Another reason why now is a good time to sell.
Then there’s the fact that in making a $1.67bn cash and shares bid for Cristal (The National Titanium Dioxide Company), Tronox was prepared to shoulder the kind of debt that Exxaro didn’t fancy, remembering that Exxaro first contemplated an opposite strategy of buying 100% of Tronox.
“We were never able to gain control of Tronox,” said Koppeschaar. “There was first the financial crisis in 2009 and then Tronox did a major transaction in the alkali business. It now has debt of between $2.5bn to $3bn and we don’t want to acquire a business with that kind of debt,” he said.
Set against income from the capital gains of selling Tronox, Exxaro has the cost of its recently announced black economic empowerment (BEE) transaction of some R3bn. This is the price of buying back shares the initial BEE partner wants to redeem. There are also capital projects in the works including a R4.8bn expansion of Grootegeluk, its Limpopo coal mine, and two greenfield coal projects, the R3bn Belfast project and Thabametsi, also estimated to cost R3bn to build, which together add at least 3.5m tonnes to Exxaro’s coal production.
On the plus side, Exxaro is also selling its 50% stake in Moranbah South, a project it owns in joint venture with Anglo American in Australia, as well as other non-core base metal assets, and local coal mines that don’t meet Exxaro’s investment threshold, which Koppeschaar said was a profit margin of 25% and a 20% return on capital employed.
Two of these coal mines are Arnot and North Block Complex, both in Mpumalanga. There are others that can’t be disclosed as yet because employees had not been consulted, but one additional mine may be Matla, the Eskomdedicated colliery.
Again, capital expenses are at the top of Exxaro’s mind. Eskom is pledged to fund a R1.8bn expansion of Matla or buy-in the coal shortfall as Matla’s reserves and mine flexibility start to decrease. As yet, the funds are yet to be placed and if Eskom continues to dither, Exxaro may have no other choice but to sell the coal sales agreement, and the mine, to another party.
Exxaro’s headquarters in Pretoria.