Exxaro shrugs off big Congo write-down

EXXARO will continue its diversification strategy despite suffering a R5.8-billion write-down on an iron-ore project in the Republic of Congo and pressure from some analysts to focus purely on coal.

EXXARO will continue its diversification strategy despite suffering a R5.8-billion write-down on an iron-ore project in the Republic of Congo and pressure from some analysts to focus purely on coal.

Speaking at the release of interim results this week, CEO Sipho Nkosi said Exxaro "hopes to prove the value" in becoming a more diversified player. The bulk of its earnings come from its 20% stake in the Sishen Iron Ore Company, which is controlled by Kumba Iron Ore and owns the Sishen mine.

Exxaro has interests in mineral sands and renewable energy, and is investing to diversify its coal business, the other main contributor to earnings. It is the biggest supplier to Eskom, with more than 90% of its coal business geared towards the electricity utility.

This includes a major expansion at its Grootegeluk mine in the Waterberg, developed to supply coal to the Medupi power station.

While it is usually more profitable for local producers to export coal, rail constraints hamper shipments. Transnet Freight Rail's coal line to Richards Bay moves 68million tons a year, based on July statistics, well below the port's design capacity of 91million tons.

In order to help increase coal exports, Exxaro announced last month that it would buy Total Coal SA's operations, which will add 4.1million tons a year to its export allocation of 7million tons, based on Richards Bay coal terminal operating at design capacity. Export sales were up 7% in the six months to June, while average prices were down 7% to R728 a ton.

"When rail capacity is at 91million tons, Exxaro will be the country's fourth-largest coal exporter. Investment spend by Transnet is happening, and we are very confident of Transnet Freight Rail's performance," Nkosi said.

The shale-gas boom in the US was having an effect on coal prices in Europe, Nkosi said. Slowing Chinese growth had also depressed commodity prices. South Africa would have shale gas in the years to come, which would have an impact on the coal business, he said.

With hydraulic fracturing, or fracking, US producers can access major gas resources trapped in shale-rock formations. The shale boom has reduced natural gas prices in the US to the lowest levels in 15 years, making it harder for the country's coal-fired power stations to compete and prompting US coal producers to find other markets abroad.

Last year, coal shipments from the US to Europe totalled 47.2million tons, up from 13.6million tons in 2003.

Exxaro continued to engage with the Congolese government about the Mayoko iron-ore project, Nkosi said.

The Mayoko write-down led the company to report its worst half-year financial performance since it was founded in 2006, suffering a loss of R2.4-billion for the six months to June.

Excluding the Congolese misfortune, its headline earnings were up 8% to R2.9-billion.

Exxaro expected to shed more light on the future of Mayoko later this year, finance chief Wim de Klerk said this week.

The company decided in June to impair all costs incurred on Mayoko, which it bought for R2.9-billion in 2012, after it failed to conclude rail and port agreements with the Congolese government.

In addition, a study showed the mine was likely to deliver lower ore grades than Exxaro initially expected.