As Exxaro enters a new phase in its history, under the leadership of Mxolisi Mgojo following Sipho Nkosi’s retirement, it seems that the strategy will not change and carbon fuels will continue to drive this ambitious business forward.
The South African mining industry has historically been the driving force behind the growth of the country’s wealth, continually developing what is already Africa’s most advanced economy. Modern mining began after the discovery of a diamond in the banks of the Orange River by Erasmus Jacobs in 1867. Today, it’s not just precious stones and metals that are mined.
South Africa remains full of mineral riches. It is the world’s largest producer of chrome, manganese, platinum, vanadium and vermiculite. It is the second largest producer of ilmenite, palladium, rutile and zirconium. The Rainbow Nation also produces huge amounts of iron ore and in 2012 it overtook India to become the world’s third biggest iron ore supplier to China.
South Africa is also the world’s third largest coal exporter and much of the country’s coal is used for power production. Reports suggest that around 77% of the country’s energy needs are provided by coal.
But even with the historical success of the industry, nothing can stop an economic slowdown once it has set in. The 2008 global financial crisis had its impact on the mining industry and recovery has been slow and difficult. Now, the international economy is facing further doubt as problems in the Chinese stock market are having knock on effects in global markets. In August, Economic Development Minister Ebrahim Patel said South Africa’s mining sector is “in trouble” after huge job losses and plummeting commodity prices as a result of Chinese uncertainty. Mineral Resources Minister Ngoako Ramatlhodi entered urgent talks to try and ease the concern over job cuts and stabilise the industry which contributes around 7% to the economy.
The problems have been felt by all the major mining houses with Lonmin, Anglo American and Harmony Gold all reporting difficulties and job cuts. But one of the largest South African-based diversified resources groups, Exxaro, is managing to find reasons to be positive in amongst all the doubt and concern.
Exxaro has interests in the coal, titanium dioxide, ferrous and energy commodities and current operations and projects in South Africa, Botswana, Republic of Congo, China and Australia. The group is the second-largest coal producer in South Africa with current production of 39 million tonnes per annum and it seems that coal will be a market that provides a boost in these difficult times.
In March, the company announced that longstanding CEO, Sipho Nkosi would retire and be replaced by Mxolisi Mgojo who was the executive responsible for carbon operations. But even after Nkosi’s retirement, he has been clear on the strategy that was left behind for his successors to implement and certainly surrounds coal.
CARBON FUTURE
At an investor presentation in August, Nkosi said: “We need to steer this company through these stormy waters and it’s not an easy job. The industry needs to respond to these conditions and we as Exxaro are no exception.
“In the next three to five years, carbon business is key. Our focus is going to be on the coal business. We see a lot of value in that business and we are in control of that business. In terms of capital allocation and growth, our focus will be on coal and you won’t find too much capital spend in other areas.
“We will remain a diversified organisation as that is our long-term aspiration.”
CEO-designate, Mgojo reiterated this when he spoke to CNBC Africa in August saying: “We have a very strong coal story; one which talks of a future of growth. We are seeing many opportunities in domestic and export markets. We have long term contracts in place with Matimba and Medupi power stations. We have short term contracts with commercial mines and we have not had any complaints from Eskom regarding the quality of coal.
“I was part of the Executive Committee with Sipho from the first day that Exxaro was created. We all subscribe to the strategy that he led and we are focussed on building a robust carbon business. It’s a strategy that I fully endorse as I was part of the team that crafted that strategy with the board.”
Nkosi has had a long and successful career in South Africa’s commercial sector. The 60 year-old has a reported private wealth of around R1.4 billion and this has been built up over 30 years. Nkosi and Mgojo co-founded Eyesizwe Coal, which became Exxaro Resources in 2006 with the addition of assets from Kumba Iron Ore, BHP Billiton and Anglo American.
“The Exxaro Board would like to thank Sipho for developing Exxaro into a leading South African resources company and for delivering significant value to stakeholders. The Group has a strong balance sheet, solid growth potential and is poised to move to the next level of growth,” said Dr Len Konar, chairman of the Exxaro Board.
“The appointment of Mxolisi is the culmination of a thorough succession plan that was implemented over several years. The Exxaro Board is pleased to welcome him as our CEO-designate and we look forward to the strategic management, business acumen and operational know-how that he will bring to bear in the roll-out of the Company strategy,” he added.
“Mxolisi will draw on the support of executives who between them have extensive experience in all facets of the business,” added Dr Konar.
Exxaro expects to export around four million tonnes of coal for the full 2015 financial year. API4 export prices had averaged about $63/t at the start of 2015, declining to lows of $59/t in June.
A strategic purchase that was finalised in August was Exxaro’s acquisition of Total SA’s South African coal unit (TCSA). This is in line with the carbon strategy outlined by Nkosi and Mgojo and will bolster sales and production. TCSA is the fifth largest coal producer in South Africa and has a majority interest in two main operating complexes, Dorstfontein and Forzando, located in the Witbank coal basin in South Africa’s Mpumalanga province.
TCSA recorded combined sales of approximately 4.5 million tonnes per annum in 2013. The majority of TCSA’s production is export coal which is shipped through Richards Bay Coal Terminal (RBCT) to international markets, mainly India and China.
However, even with these impressive statistics, the purchase agreement was amended in August reflecting at least a 19% price decrease compared to when first announced amid a slump in prices for coal.
Exxaro said it will pay $262 million in cash and make five annual payments totalling as much as $120 million, depending on average prices at RBCT, the world’s largest single facility for the fuel. When the deal was first announced, Exxaro said it would cost $472 million. “In the 12 month period since the acquisition was announced, commodity-market conditions have deteriorated significantly. As a consequence, Exxaro and Total have agreed to a reduction in the purchase consideration to take into account the change in market circumstances,” the company said.
MATLA COAL & WATER
Significant investment has been made in Exxaro’s Matla coal mine in Mpumalanga and in April, the company announced that it will build a new R250 million water treatment plant at the site to reduce the safety risk posed by large quantities of water that have filled mined-out underground cavities while simultaneously benefiting the environment and local water users.
Exxaro expects the facility to treat 10 mega litres per day and says that it will form part of the organisations holistic group-wide water management strategy which promotes responsible and sustainable water management.
The Matla underground mining operations experience significant water ingress into the workings from surface, leading to flooding risks to the safety of workers and to the surrounding environment which could be impacted by the contaminated water should this water be released back to the surface without prior treatment. The treatment entails underground water being pumped to the surface where it undergoes comprehensive treatment using innovative filtration processes to remove contaminants and purify the water. The water treatment plant will treat 10 mega litres per day and of this some 6.5 mega litres will be discharged to the Olifants River and the remainder will be used in the Matla operations or for potable water needs at the mine.
“Water is a strategic natural resource in South Africa and it is our duty to ensure that we reduce the impact of our mining activities on this precious resource,” said Nkosi. “We are committed to protecting and improving water quality by ensuring the water we discharge is of the same or better quality than the original consumption. The Matla water treatment plant is a prime example of this approach and is one of three water treatment plants in our Mpumalanga region which are part of our long-term water management strategy,” he added.
It is expected that construction of the plant will be completed in 2017.
This is encouraging news for investors, showing that even during the extremely difficult market conditions, Exxaro is still ready and willing to spend.
Many coal optimists say that we are in a cyclical downturn and the price will bounce and Exxaro will share this optimism. When the Chinese drama calms and when the delayed Medupi and Kusile power stations eventually reach full completion, the local and international demand for coal should increase and this will play straight into the hands of Exxaro thanks to the carbon strategy set out by Nkosi and Mgojo.