DURBAN – JSE-listed large coal and heavy minerals mining group Exxaro Resources is set to return to the Top40 index as part of the JSE’s quarterly and June 2019 index review after almost five years.
The company, valued at R63.3billion, has seen its share price ramp up 189.77percent in three years as its resources index has outperformed its peers, helped by the weak rand exchange rate and the tailings dam accident in Brazil that has seen a rally in iron ore prices.
Mzila Mthenjane, an executive head: stakeholder affairs at Exxaro, said yesterday that Exxaro was ranked at position 32 on the review cut date, based on net market capitalisation, and as such will be an automatic addition to the Top40 index with a weighting of 0.7percent.
“The reason for Exxaro’s removal from the Top40 in 2014 was due to it being ranked at position 43 and moving to the Mid Cap index. It was a challenging period in our markets then. Rand Merchant and Netcare were automatic additions to the Top40 index and the two smallest constituents had to be removed to maintain a constant number of 40 constituents in the index,” Mthenjane said.
Ron Klipin, a senior analyst at Cratos Asset Management, said the return of Exxaro to the Top40 was due to the major re-rating of the resource sector with a significant increase in its share price as well as the exit of Netcare due its sector downgrade on price weakness.
Exxaro also said yesterday that it expected its total coal production volumes to decline by 5 percent in the six months to end June, mainly driven by reduced demand from Eskom’s Medupi power station.
Mthenjane said the reason for the lower demand for Medupi was that it required less coal to run its units.
“Medupi was running fewer units compared to the operating capacity and, therefore, required less coal,” Mthenjane said.
The group said that commercially, the impact of the reduced Medupi volumes was mitigated due to the contractual agreement in place.
“While we expect to achieve higher export volumes, it is reasonable to assume that a weaker US$ sales price per ton will be realised, in line with the weaker API4 coal export price index, cushioned somewhat by a weaker rand/dollar exchange rate,” the group said.
Exxaro expects its capital expenditure for the first half of 2019 in its coal business to decrease by 26percent compared to the second half of 2018, driven by lower Grootegeluk 6 expansion spend, due to Group Five contract termination resulting in project delays, Leeuwpan OI project reaching completion and the timing of sustaining capex at Grootegeluk and Exxaro Coal Central.
Klipin said the decline in coal production could be an ongoing technical problem at the Medupi power station.
“Presumably, Eskom has contracts with Exxaro to deliver coal accordingly, so the delivery schedule might be flexible.
"Coal is the major base-load for power generation in South Africa and is unlikely to change in the immediate future despite a gradual shift to renewable energy,” Klipin said.
However, Klipin added that a positive aspect for the company was its ability to acquire coal producers that do not have Eskom contracts.
“In addition it could buy export contracts from those producers that do not have the financial muscle of Exxaro to operate in this market,” he said.