Waterberg rail supply disappoints Exxaro


Waterberg rail supply disappoints Exxaro

29 Jun, 2016 Michael Peters   ,

Rail supply in the Waterberg region since the beginning of the year has been disappointing, Exxaro Resources said on Tuesday. The JSE-listed company reported receiving only 3.5 trains a week from Transnet Freight Rail instead of the required five, a situation likely to persist until the culmination in July of the coal line shutdown.

Overall, however, the company said it expected the operational and financial results of its coal business to improve in the remainder of 2016, owing to stable trading conditions in domestic markets, the inclusion of Exxaro Coal Central for the whole of the financial year, and higher coal sales from the Grootegeluk and Matla collieries. Thermal coal production from commercial mines was poised to increase by 12% and metallurgical coal output would also be slightly higher than in the first half of last year. Coal buy-ins were expected to rise 20% owing to an export coal shortage in the period between Inyanda’s closure and Belfast’s opening. In a pre-close update on operational performance from January to June 30, the company, headed by CEO Mxolisi Mgojo, added that export sales volumes would soar by 81%, driven by growing demand from Africa, Pakistan and South East-Asia. First-half coal prices averaged $53/t, down from last year’s $56/t. Capital expenditure on coal had been kept at R2.8-billion to adhere to a dividend cover of 2,5 to 3,5 times core attributable earnings. Refinancing of the R8-billion facility was being carried out at competitive rates. Thermal coal production from tied mines would likely fall 4% on the closure of the Arnot mine, where the coal supply to State electricity utility Eskom ceased at the end of last year, and lower offtake from Leeuwpan mine. An Exxaro-Eskom closure committee has reclaimed mining equipment from Arnot’s underground sections and begun a section 189 process involving 1 800 employees and contractors. Discussion with Eskom was under way on rehabilitation funds and mine closure costs under the National Environmental Management Act (Nema) are under way. The Department of Environmental Affairs, Water and Sanitation and the Department of Mineral Resources (DMR) had determined that requirements for making financial provision to manage, rehabilitate and remediate environmental impacts from mining operations would be regulated under Nema and no longer under the Minerals and Petroleum Resources Development Act (MPRDA). This agreement has been formalised by amending the relevant environmental, water and mining legislation. Exxaro noted that the financial provisioning regulations were published in November last year contained more onerous requirements than previously required by the MPRDA. For example, financial provision has to be made for yearly rehabilitation, final rehabilitation, decommissioning and closure, as well as latent or residual impacts. Large capital projects at Matla remained unfunded by Eskom, with mine 1 on care-and-maintenance and mine 2 and 3 shafts under-producing at 8.5-million tonnes against contractual volumes of 10.1-million tonnes. Engagement with Eskom on the provision of the required capital funding might require recourse to the coal supply agreement. Engagement with Eskom at Medupi included consideration of options to reduce future take-or-pay obligations, which could be done through coal storage or movement of coal to the Mpumalanga region. While domestic thermal volumes would likely remain at current healthy levels, volumes in the metals markets would reduce on steelmaking company ArcelorMittal halting production for emergency maintenance at its market coke battery in Newcastle, which was expected to persist in 2017. The Thabametsi mining right had been awarded and the first run-of-mine coal to Grootegeluk’s beneficiation complex was poised for delivery in 2019, provided rail, water and roads were built in the Waterberg, where the rate of production ramp-up would ultimately hinge on the Department of Energy’s coal baseload independent power producer procurement programme. The preferred bidders for the Thabametsi independent power producer bid were expected in the third quarter of this year. The tender process had begun for the bulk earthworks, civils and processing plant at the Belfast coal project, for which detailed engineering designs had been completed and where construction was scheduled to begin before year end. Exxaro anticipated that the suspension of the water-use licence would be lifted and the rezoning licence authorised before the end of September. An investment decision on the Mafube Nooitgedacht coal project, where a bankable feasibility study was under way, was expected before year-end.

The first-half titanium dioxide (TiO2) pigment price increase announced was poised to support improvements in net operating profit margins in this industry. While pigment prices had improved, feedstock prices remained sluggish for chloride grade slag and zircon. The alkali chemicals business continued to  deliver stable margins and contribute to Tronox’s bottom line. Although the first-half’s TiO2 price rises would boost Exxaro’s share of Tronox’s financial results, the weaker rand-dollar exchange rate would lessen the contribution. WIND FARMS The two wind-farm projects, Amakhala Emoyeni and Tsitsikamma Community Wind Farm would deliver 229 MW to the national electricity grid by year-end, on time and within budget. Both wind farms would reach commercial operation before year-end. Guidance on Cennergi’s equity-accounted contribution would be provided when there was reasonable certainty of its first-half financial results.

Once the lock-in periods expired in the last quarter of this year, Exxaro would dispose of its interests in Black Mountain zinc mine in the Northern Cape and Chifeng Kumba Hongye zinc in China. Following the R202-million impairment in 2014 of the underground coal gasification (UCG) intellectual property licence, Exxaro had decided to discontinue with the current UCG project, while keeping its options open to consider alternate projects in future.

No further financial assistance had been given to Exxaro’s controlling black economic empowerment (BEE) shareholder, Main Street 333, and progress was being made on a replacement transaction. Exxaro made the point that replacement transaction needed to balance the requirement for continuous BEE shareholding and cost of implementation to minority shareholders. As a result, Exxaro was exploring various alternatives for the replacement transaction, including potentially implementing a transaction that would be less than 50% BEE. The company reported achieving level four broad-based BEE recognition level and said all of its business units had attained all the mining charter targets. Through the Chamber of Mines, it was committed to constructive engagement with the DMR on Mining Charter Three and was awaiting the outcome of the High Court ruling on the interpretation of BEE ownership transactions carried out by the industry between 2004 and 2014.