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.

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

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.

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