Exxaro’s decision to almost double its dividend might have improved shareholder optimism on coal’s prospects, but it is in fact a passive investment in iron ore that provided the fillip for investors.
The dividend of R5.30 a share, as announced by the company in its interim results on Thursday, caused the share price to close almost 8% higher.
The generous payout, R2.30 higher than the last interim dividend, is because of Exxaro’s new policy to pass on returns from the coal miner’s 21% black empowerment stake in Kumba’s Sishen Iron Ore Company.
The Sishen dividend contributed more than R1.2bn, 63%, to the R1.9bn interim dividend.
Previously, Exxaro’s dividend was based on a cover ratio of 2.5 to 3.5 times core attributable group earnings. But now it passes on the dividend from Sishen as well as a dividend based on a targeted cover ratio of 2.5 to 3.5 times core attributable earnings from the coal business.
"Exxaro previously reinvested the cash in the business, but now we are in a position where we can grow and still give money back to shareholders", said FD Riaan Koppeschaar.
Apart from the Sishen boon, Exxaro’s business performed well in the first half of the year, supported by an uptick in coal prices. Revenues were up 14% to R12.3bn for the six months ended June 30. Net operating profit grew 7% to R3.1bn in the period.
The "pleasing" results came despite three business units coming to end of life, said Nombasa Tsengwa, executive head of coal operations.
Exxaro’s interims reported the price per ton for exports was $79, compared with $65 in the first half of last year, although offset by a stronger average spot exchange rate of R12.30/$ recorded for the first half, compared with R13.20/$ in the comparative period.
"Coal has done better than expected this year," said Stephen Meintjes, head of research at Momentum Securities.
Tsengwa said the performance was improved by coal sales due to a ramp-up at Eskom’s Medupi power station, which required higher commercial volumes at Exxaro’s Grootegeluk operation.
Exxaro said it would continue pursuing a possible "flip up" in its shareholding in Sishen, to convert this to equity in the listed holding company, Kumba Iron Ore.
Exxaro expects to expand thermal coal production in SA from about 45Mt in 2018 to more than 60Mt in 2022.