Exxaro in an Eskom hole over BEE gap
EXXARO may be safe from being dropped as an Eskom coal supplier due to existing contracts, but the future of the relationship is uncertain, especially after the reduction of its BEE shareholding.
Eskom, which has been vocal about only getting coal from miners with a BEE shareholding, said it would stop sourcing coal from any supplier with less than 50% BEE shares. Exxaro has had a BEE shareholding of 50.2% for the past 10 years, but its agreement with BEE shareholder Main Street 333 expired this week and it is still working on a new deal.
Exxaro will buy the shares held by Main Street 333 for R3.5-billion, which it will use to repay debt, including R487-million owed to Exxaro.
But the group said this meant that when the new BEE deal came in force in April that it would be left with a BEE shareholding of only 30%.
This would make it uncertain whether Exxaro would be allowed to supply coal to Eskom in the future.
Matshela Koko, Eskom’s acting CEO, said it was important to diversify Eskom’s coal suppliers and bring in black miners. Radical transformation was needed and it was unfortunate that Eskom was locked into coal contracts from the past, which limited the process of transformation.
“I have a problem that I have to take R1.8-billion to Exxaro to mine future coal but I can’t give it to a new black miner to mine future coal for Eskom.
“Why must we continue to not diversify and bring in black miners to mine Eskom’s future coal the same way we did with Exxaro and Anglo today for future coal?” Koko said.
Izak van Niekerk, a resources analyst at Mergence Investment Managers, said the issues for Exxaro were whether it would build a new mine in the future and whether Eskom TRANSFORMATION: An Anglo Coal mine in eMalahleni, Mpumalanga would want to sign new coal contracts with it.
“Then there might be uncertainty whether Eskom will accept Exxaro coal, being 30% empowered, so it’s not something that affects them now, it’s more in the future,” he said.
Matthew Shields, an analyst at Avior Capital Markets, said another element of uncertainty was the draft mining charter, the subject of discussions between the Department of Mineral Resources and the industry since early this year.
The department had abruptly released the draft mining charter, which stated that every mining company should always have a 26% BEE shareholder in order to mine, and the industry claimed the department had not consulted all stakeholders. Shields said this was one of the reasons why Exxaro needed to sort out its new BEE deal soon.
Currently Exxaro was not at risk, he said, because of the tied contracts — the latest being the Grootegeluk coal mine contract, which has been put in place.
Following this could be new short-term contracts, but that could present a risk.
“But then a lot is being said that Eskom is going to be short of coal in the next couple of years, so can they really be picky about getting coal from 50% plus 1 BEE guys?”
With Eskom and Tegeta Resources trying to cut ties due to the reputational risk the two companies are facing after the public protector’s release of the state capture report in October, if it does eventually terminate coal contracts, Eskom will have to rely even more on short-term contracts with other miners to offset the shortage of coal.
With thermal coal prices at a high, Exxaro is not entirely dependent on Eskom to keep its sales volumes up.
Last week, the company said its coal business was expected to have improved and export sales volumes were expected to increase by 31% in 2016. In contrast, sales to Eskom are expected to have fallen 8% and domestic thermal coal sales which exclude Eskom to have risen 73%.
Exxaro is also a BEE shareholder in Sishen, which is majority owned by Kumba, and the question is whether Kumba will need to do another BEE deal.
This depends on the final draft of the mining charter, and whether the rules will change to “once empowered, always empowered” or stipulate BEE compliance of 26% at all times.
Many shares need to be sold to new owners, so that creates an overhang
Kumba had already acquired a mining right for Sishen, which means it might be safe from having to forge another BEE deal.
Also this week, Anglo American said it had sold its 9.7% stake in Exxaro Resources for R3-billion, which it will use to repay its debt, bringing it down to the $10-billion target it set for the end of the year.
Given last week’s sale by Exxaro’s BEE partner of its stake along with this week’s sale by Anglo, there is an overhang of Exxaro stock.
“At the moment it means there is a large portion of Exxaro shares that needs to be sold to new owners, so that creates an overhang in the stock, in the sense that if you wanted to sell there is already plenty other stock that needs to be sold as well, and it is unclear at what price.
“It creates uncertainty, too much uncertainty at the moment,” Van Niekerk said.