Exxaro braces for uncertainty

• Demand for export coal sales likely to fall in second six months of year

Diversified miner Exxaro Resources, Eskom’s largest coal supplier, expects export sales to fall in the second half of 2020 after weathering the Covid-19 storm remarkably well in the first six months of the year. An uncertain outlook follows on what Exxaro describes as a “surprisingly great” first half with record coal export volumes.

Diversified miner Exxaro Resources, Eskom’s largest coal supplier, expects export sales to fall in the second half of 2020 year after weathering the Covid19 storm remarkably well in the first six months of the year.

An uncertain outlook follows on what Exxaro describes as a “surprisingly great” first half with record coal export volumes in spite of the pandemic.

The group reported an 18% jump in revenue to R14.1bn — with exports accounting for R4.8bn — while core earnings before interest, taxes, depreciation and amortisation (ebitda) was 40% higher.

The strong performance by the coal business was further boosted by returns relating to its stake in the Sishen Iron Ore Company, and the group declared an interim dividend of R6.43 a share.

As an essential services provider Exxaro was permitted to operate during the first weeks of SA’s nationwide lockdown. Though domestic sales to other customers were down, Exxaro benefited from a 39% uptick in export sales volumes as coalimporting countries, Vietnam in particular, stocked up amid low dollar coal prices. Coal exports further benefited from the weak rand.

Nombasa Tsengwa, Exxaro’s head of coal, said Exxaro did not expect annual growth in the second half of the year.

“In fact, we are expecting a decrease from a sales point of view in terms of exports.”

Exports in the third quarter of the year are typically affected by the monsoon season in India, traditionally Exxaro’s largest coal export market. Added to that is uncertainty about demand in India due to prolonged Covid-19 shutdowns affecting power generation in the Asian nation.

“That is really going to dampen demand,” said Tsengwa.

The seaborne coal market is estimated to be oversupplied by about 30-million tonnes.

Exxaro does, however, benefit from a diversified customer base. Apart from exports, it has long-term contracts to supply Eskom with coal and also services industrial customers in the domestic market.

In reference to multiple media reports suggesting President

Cyril Ramaphosa is about to relax the nationwide Covid-19 lockdown to level two and possibly also lift the ban on tobacco and alcohol sales, Tsengwa said Exxaro could see its domestic coal sales recover.

“If at level two we can get the distilleries in the Western Cape back and have recovery of construction like Amsa [ArcelorMittal SA], we’ll probably see a very good market recovery. If not, we are going to remain flat.”

Beyond that, Exxaro expects its production to be affected by a four-month shutdown of its Grootegeluk 6 plant from September. The plant produces high-quality export coal and power station coal. Other plants at Grootegeluk will also undergo planned maintenance in the second half of the year.

Mandi Dungwa, a portfolio manager at Kagiso Asset Management, said the results showcase the strength of Exxaro’s business model,

“In a period when the export or seaborne market is in surplus and prices are weak, Exxaro grew profits from coal significantly. If you compare their thermal coal business to other listed players that have recently reported, their generation of free cash flow [R4.7bn compared with R3.2bn in the earlier comparative period] in a tough operating environment stands out considerably.”

Exxaro’s share price closed 2.68% down at R136.15. The company has a market capitalisation of R48.8bn.

EXXARO BENEFITED FROM A 39% UPTICK IN EXPORT SALES VOLUMES AS COAL-IMPORTING COUNTRIES STOCKED UP