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Profitable days for Exxaro investors
Exxaro shareholders are enjoying generous distributions on firm coal prices and delivery from operations.

Exxaro Resources shareholders, now enjoying an interim dividend three times higher than last year’s, are also likely to benefit from either a special cash dividend or a share buyback in the next few months when the energy company sells the first tranche of its stake in mineral sands company Tronox.

Exxaro holds 42.97% of Tronox, a stake worth about R12bn, which it will start to sell in the second half of this year. It has also earmarked several other assets for disposal, including its stakes in Black Mountain, the Moranbah coal project in Australia, Arnot and the North Block Complex.
CEO Mxolisi Mgojo says Exxaro’s priorities for surplus cash are repaying debt, allocating funds to sustaining operations, investing in expansions around existing operations, returning cash to shareholders and taking advantage of merger and acquisition opportunities.

Mgojo’s predecessor, Sipho Nkosi, had plans to diversify Exxaro beyond coal and beyond SA, but some of those ventures — such as the purchase of the Mayoko iron ore deposit in the Central African Republic — proved to be costly mistakes. Mayoko was impaired by R5.8bn when iron ore prices plummeted and it proved impossible to develop the mine. Exxaro sold out for about $2m last year.

Under Mgojo, Exxaro’s focus is on energy, including coal and renewables. He says no specific acquisitions are under consideration but Exxaro constantly seeks opportunities to increase its coal resources through buying adjacent blocks. It is also looking for opportunities in renewable energy that are not capital intensive, such as microgrids.

Expansion projects already under way include further phases at Grootegeluk and the first phase of development at Thabametsi, which is intended partly to supply a new independent coal-fired power station, as well as a new mine at Belfast.

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Environmental appeals against the Thabametsi power station and Belfast have delayed development. Exxaro’s head of coal, Nombasa Tsengwa, says early works have begun at Thabametsi to ensure the mine retains its licence. Supplying the power station is not an immediate option, but will occur later in the life of the mine.

An analyst has questioned the R4.8bn of capex allocated to the sixth phase of Grootegeluk’s expansion, as the output was revised down to 1.7Mt/year of semisoft coking coal, from 2.7Mt/year under previous plans.

Tsengwa says that as a result of the change, Grootegeluk Phase 6 will deliver a higher-priced product, and the other 1Mt of production has been deferred to phases seven and eight of the mine’s development.

Exxaro’s strategic emphasis is on producing coal that can be blended with coal from the ageing Mpumalanga mines to feed the power stations in that province, as well as premium-priced products that can be exported to different markets. The group’s main market in the past six months was India, which took 63% of Exxaro’s exports, but it is in the process of diversifying, Mgojo says.

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By the end of this year Exxaro plans to have a new black empowerment structure in place. This will replace the Main Street 333 consortium, holding more than 50% of shares, where the 10-year lock-in expired late last year. In the next few months the number of Main Street 333 shareholders and new black investors will be known, as will the reference price for the transaction. Exxaro’s shareholders will be asked to vote on the detailed proposals in the fourth quarter of this year.

Momentum SP Reid Securities analyst Percy Takunda says the results are in line with expectations and at current prices, he expects Exxaro will have a "robust" second half.

"Following the allocation of resources for the BEE share buyback we expect a greater windfall for shareholders in the second half," he says. "The company dividend policy is to pay 2.5-3.5 times cover and with limited obvious cash requirements in the short term we maintain our bullish dividend outlook."

Takunda says Momentum SP Reid retains a "buy" recommendation on the shares, despite their recent strong price gains.

Exxaro’s shares, at about R108, have gained about a third over the past year but were as high as R131.50 in April.

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