In a distressed environment, companies that want to avoid facing financial distress need to reassess the viability of their core assets or pivot toward new businesses that will be profitable in the future.
The South African mining industry is at a critical turning point in its history with declining commodity demand, rising costs of doing business, and a logistics crisis that makes transporting commodities rapidly to port impossible. It is no surprise that mining companies are assessing their options away from core assets. Exxaro Resources is one of South Africa’s largest coal miners; however, the company took a significant knock during the height of the energy crisis, which first planted the seed of moving away from coal. The final nail in the coffin regarding this decision was Eskom’s announcement that it would be decommissioning certain power plants over a period of time. The company is now nearing a deal which will see it pivot towards future-facing commodities within the next six months.
First signs of diversification
The article points out that the group first announced plans to diversify out of coal and iron ore into future-facing commodities in 2021, with hopes to finalise a deal by 2024, but it noted on Thursday that the coal business is excelling amid “strangely enduring” demand.
In addition, the miner has found the merger and acquisitions environment more complex than it imagined when targeting commodities like copper, manganese, and even bauxite.
But some positive news may be on the horizon, said Richard Lilleike, Exxaro’s chief growth officer.
“I can confirm that there has been very positive progress. In the course of this year, we have scaled up the growth team within Exxaro.
“We are actively involved in a number of detailed due diligences. We are engaging with principals and owners of assets across a number of commodities, and … we are confident that we will progress a deal in the next six months,” he said.
The article adds that Exxaro has not exactly been spoiled for choice, with Lilleike saying: There are now far fewer sales projects globally than in previous years, which means we are having to engage far more on a bilateral basis, on encouraging sellers to interact with us. And when you get into that environment, you have to entice them to sell.
He added that offering a “strategic premium” is one-way Exxaro might do that, although it still must be a responsible deal for the group.
Image By: WBHO
Cash considerations
The article points out that an acquisition in copper has proved especially elusive, as valuations are ratcheted up by long-term metal price assumptions that are potentially too optimistic, especially now that demand has eased.
“Another play for us, which is becoming more and more interesting, is looking at some of these commodities with a long-term view of going in and saying that, for a type of commodity like copper, maybe you need to look at being more exploratory and diversify through manganese and other commodities that can complement those [other] energy transition minerals,” said Exxaro CEO Nombasa Tsengwa.
The article adds that Lilleike said many of the options under consideration are outside of South Africa, as the group is keeping an open mind about various possible geographies. The company is keeping aside between R12 billion and R15 billion in cash in preparation for an acquisition.
Asked how long it realistically expects it can sit on this cash for, Exxaro’s director of finance, Riaan Koppeschaar, said he was confident the group would not retain the cash for much longer.
“But remember, we also told the market that we have got that range of cash retention. To the extent that we exceed that range, there will be special distributions to shareholders – that was the case in March when we paid a special dividend of R2 billion,” Koppeschaar said.
The article points out that earlier in August, Exxaro reported a 1% uptick in revenue to R19 billion for the half-year ended in June, but a 37% decline in headline earnings to R3.7 billion as the group was hit by lower coal and iron ore prices. Pressure on its biggest customer, Eskom, also had an impact as coal sales declined 11.7%.
The group cut its interim dividend by 30% to R7.96 per share for a payout of around R1.9 billion.
The article adds that Tsengwa said demand for coal had been “strangely enduring” at over a billion tons per annum globally and offers an opportunity to continue to “build value” out of the coal business.
While the average benchmark price for export coal of $101 per tonne was 20% lower than $130 per tonne in the comparative half, coal prices remain significantly higher than they were historically when, prior to 2022, $80 was considered a decent price in a balanced market.
“I think the distress in the industry comes where TFR [Transnet Freight Rail] is not giving that rail capacity, and other routes have to be taken to go to market. Then $100 does not go very far,” said Sakkie Swanepoel, Exxaro’s head of marketing and logistics.
Rail hopes
The article points out that Exxaro saw half-year export volumes grow by 22% as it moved coal through alternative routes, largely by truck, as Transnet’s poor railing performance continues to hamstring the industry.
Exxaro said it believed the worst of the logistics crisis is over.
Said Swanepoel: “We’re pretty certain that we’ve seen the lows.”
The article adds that this half-year, volumes railed to the Richards Bay Coal Terminal has regressed on an annualised basis to 47 million tonnes, compared with a theoretical capacity of 78 million.
“I think what we’re missing is where we may have been as an industry if the level of collaboration between TFR and the industry and even at the National Logistics Crisis Committee did not happen. We could easily have gone down to a 45 million tonnes and lower annualised performance.
“I think the fact that we averted that was already something very positive for us,” he said.
Though encouraged by the approach and openness of new Transnet management, Tsengwa said she still believed restoration of railing capacity would be slow.
Image By: Philip Reynaers / Photonews ©PRE
The race is on
It is no secret that South Africa has the potential and ambition to become a net exporter of green hydrogen. However, we are not alone. Namibia is similarly placed and has begun a race reminiscent of Roger Bannister and John Landy’s rivalry to see who would be the first to run a four-minute mile.
This is important because whoever is first to market will capitalise on growing international demand.
An article points out that, early in May, King Philippe of Belgium was on the edge of the Namib desert to inaugurate a project that aims to help decarbonise European industry, and which might just enable one of Africa’s smallest economies to hit the clean-energy big time.
It was a humble start for such grand designs, as Namibian President Nangolo Mbumba hosted the king at an unfinished site near the port of Walvis Bay on the southern Atlantic Ocean, the baking rust-coloured dunescape silent except for an occasional truck passing on the new roadway.
But Philippe was just the latest in a string of European dignitaries to buy into Namibia’s grandiose plans to become a hub for what’s known as green hydrogen. It’s a technology whose critics say is a commercial illusion, but whose political and corporate backers believe may be the answer to cleaner shipping and heavy industry.
The article adds that Belgian Energy Minister Tinne Van der Straeten, at the Cleanergy site, said: We are really very committed in this hydrogen and green hydrogen journey
From modest beginnings, Namibia is banking on a whole new supply chain taking shape – from the production of hydrogen that’s turned into ammonia for transportation to associated “green” products – that would place it at the forefront of a developing clean technology and finally put it on the map.
Just the start
The article points out that, Europe, for its part, sees a means of furthering its green transition and bolstering energy security after it lost natural gas from Russia.
The European Investment Bank has pledged a R9.3 billion loan toward developing green hydrogen in Namibia, with the Netherlands’ Invest International contributing to a planned R19 billion Namibian hydrogen fund.
Cleanergy, a venture between Antwerp-based shipping company Compagnie Maritime Belge and local firm Ohlthaver & List Group, will be Namibia’s first commercial green hydrogen plant.
The article adds that, built at a cost of $30 million, partly funded by a $10 million loan from the German government, it’s just the start: CMB intends to raise $3.5 billion to build an ammonia plant that would connect to a new storage and export facility planned by the Port of Antwerp-Bruges.
Alexander Saverys, CMB’s chief executive officer, explaining the nearly 130-year-old company’s decision to get into green hydrogen., said: “Our customers are asking us to clean up our act to make sure that we don’t emit CO2 anymore, so we need to find an alternative for diesel.”
Moving ahead
Given what is at stake, it is essential to get the gravitation towards future-facing commodities right from the outset.
Granted, there is value in competition regarding supply and demand. But in the high-stakes game of energy supply, in a world where geopolitical tensions mean that a slight deviation from the norm may stabilise a country, being first to market means you will gain a loyal and eager customer base. And if you can show value, they will be reticent to rock the boat.
The Mystery Practitioner is an industry commentator focusing on the shifting dynamics and innovative thinking that BRPs and turnaround professionals must embrace to achieve business success.
