Exxaro looking strong
Coal is unfashionable but Exxaro has lots of it and the low-carbon economy is not going to happen overnight
The world is moving away from fossil fuels, especially dirty coal.
Increasingly, funding for coal-related projects is drying up and major miners continue to divest from their coal assets.
But the growing negative sentiment around coal presents a window of opportunity for a company like Exxaro, whose core revenue generation is from coal mining.
"This whole sentiment, and what some banks have done, has caused a very interesting positive in the sector," says Nombasa Tsengwa, executive head for coal operations at Exxaro, following the release of the company’s annual results last week. "Different players are selling off their assets and not putting up new capacity in the market. Those with availability of coal have the advantage."
Exxaro has R20bn budgeted to invest in new coal operations over the next few years. This is funded from a combination of its own cash and financing from major banks, says FD Riaan Koppeschaar.
And now it wants to push forward investments to expand on two coal projects as part of what Tsengwa calls an "early harvest" initiative.
Globally, about 1,600 new coal-fired power stations are being developed. Luvuyo Booi, analyst at Noah Capital, says the outlook on coal demand is still positive.
"In China, they are still building coal-fired power stations and using tech which enables them to reduce emissions," he says.
"Meanwhile, coal miners are not spending much capex. So production is expected to decline and if demand remains strong, coal prices are going to increase."
Exxaro plans to spend more capital to realise good-quality coal production in the hope of maximising revenue generation upfront, Booi says. Although Exxaro is the largest supplier to Eskom, it is disadvantaged by its limited exposure to export markets and is looking for opportunities to increase it.
At its results briefing last week, Exxaro would not comment on its possible acquisition of South32 SA Energy Coal assets, which come with a sizeable export allocation at the Richards Bay Coal Terminal.
Although the Guptas’ Optimum mine is up for sale and has an export entitlement at Richards Bay, Exxaro CEO Mxolisi Mgojo says the company has decided against acquiring these assets.
"We had the option to look at Optimum again. But it comes as a package deal. For us that would have been more value-destructive than accretive."
Even so, Exxaro will be able to use some of Optimum’s export entitlement at Richards Bay while the mine’s business rescue remains stalled. Operations have been standing idle since December.
Tsengwa says Exxaro will look for opportunities to get further export entitlements, and will consider using alternative ports. It could also sell coal to local players that are able to export the product.
Exxaro delivered record coal production, sales and export volumes for the year ended December 2018, having benefited from higher coal prices for the period.
Revenues jumped 12% to R25.5bn and net profit grew to R7.1bn, up more than 15% from R6bn in the year before. Operating profit increased from R5.2bn to R5.7bn. In 2018, Exxaro returned R10.85 a share to investors.
Matthew Shields, analyst at Avior Capital Markets, says the results were softer than he expected due to a few one-off costs which came through the business in 2018.
He says that while Exxaro’s journey has been impressive, exposure to thermal coal is coming under pressure due to its negative effect on the environment.
There are two kinds of investors when it comes to coal miners like Exxaro: those that want them to diversify into other commodities and those that want them to stick with what they know — thermal coal, he says.
It must be said that Exxaro, an established coal business with a good record, is not yet struggling to secure financing.
However, "over the longer term it may become increasingly difficult to obtain funding for any major thermal coal projects", Shields says.
The Exxaro share traded at over R165 this week and is up over 20% in the year to date.
Even so, Booi says: "It shouldn’t be trading at these levels. The company has huge potential."
He believes the market is applying a discount to Exxaro because of its management, rather than because it is a coal company.
"The transition to a low-carbon economy is not going to happen overnight and does not pose an imminent threat to Exxaro’s business model," Booi says.