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Seed Weekly - EXXARO ? interim results

South Africa’s second largest coal producer Exxaro (EXX) released its interim results on Thursday 21 August. It was a good opportunity for the Exxaro executives to reflect on the recent acquisition of Total Coal South Africa as well as review their outlook for the year ahead.

History & Operations

Exxaro is the result of an empowerment transaction which involved the unbundling of Kumba Iron Ore in 2006, making it the largest BEE mining company in South Africa. As can be seen by the group structure below, they are a well-diversified company with interests in coal, titanium dioxide, ferrous (iron ore & steel) and energy with current operations in SA, Botswana, Congo, Inner Mongolia, and Australia.

TCSA Deal

Exxaro acquired Total Coal South Africa last month for R 5bn ($ 472m) and together with the interim results announced that the company had secured a bank guarantee from Absa.

The deal will be financed through cash and debt as well as a combination of dollar and rand funding. Almost all of Exxaro’s coal is currently sold to Eskom on contract but it is keen to increase coal exports, at better margins. One of the constraints has been limited access to the Richards Bay Coal Terminal (RBCT). The TCSA deal will give Exxaro access to an extra 4.09 million tons of coal through the Richards Bay terminal. There are still some concerns by analysts as to whether the high price paid for the asset is justified, given that there may still be some capital expenditure needed.

Grootgeluk

Exxaro has committed R 10.2bn to the Grootegeluk Medupi Expansion Project to supply Medupi, Eskom’s newest power station, which is at least three years behind schedule. The first unit is due to come on line only by the end of this year.

Though Medupi has started to take delivery of coal from Grootegeluk, it is taking far less than originally agreed (3.1 million tons compared to 6.2 million contracted).

Exxaro will be paid its fixed costs (but not its variable costs) resulting from this, with some analysts saying that not producing Eskom coal may even free Grootgeluk’s capacity to produce more coal for export resulting in a bigger profit margin.

Interim Results – for six months ended 30 June

Highlights include:
• Headline Earnings per Share: Up 11% to 793 cents – better than expected.
• Interim dividend of 260 cents declared. Up 11% compared to last year.
• Revenue increased by 19% to R 7.4bn on the back of an increase in exports.
• Capex decreased to R 1.6bn.
• Operating profit climbed 48% - again the coal business contributed the most.
• Earnings per share (EPS) were negatively affected by the R 5.8bn impairment of the Mayoko iron ore project. EPS fell 209% to a loss of R6.88.
• Market Cap R 50 825 million
• Share Price at 25 Aug R 147.99 (-6.03% 1 year return)

With the current economic outlook for SA being on the negative side with prolonged strikes, electricity supply constraints, and higher consumer debt levels, there are not a lot of opportunities on the JSE. The biggest risks for miners in general, and Exxaro in particular, are commodity price and currency risks and we will be looking forward to the next 6 months to see how the company positions itself during this challenging time.

Exxaro currently constitutes 2.9% of the Seed Equity Fund and is held as a result of its attractive valuation metrics.

Kind regards,

Renier Hugo

www.seedinvestments.co.za
info@seedinvestments.co.za
021 914 4966

Tue, 26 Aug 2014- 08:56



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