Exxaro Resources

Powering possibilities in South African coal

About This Project

 

Having a market capitalisation of US$1.65 billion, a coal portfolio comprising a number of significant resources, several long term contracts with a national utility and having just registered record profits in a global commodity price slump is a unique position to be in for a black-owned South African mining company – namely Exxaro Resources (JSE:EXX). Having formed out of a merger between Kumba Resources and Eyesizwe Coal, Exxaro now holds the position as one of the major players in the South Africa coal industry.

 

RGN spoke to Exxaro Executive Head of Coal Operations Nombasa Tsengwa to discuss the Exxaro journey, how it has been so successful in the challenging environment, where the focus lies for the company and the strategy to continue to build on recent success both on a domestic and global level.

 

Exxaro currently has six operating coal mines which form the base structure of the business. However, Tsengwa explains, it also has diversified interests in other commodities as well as energy sector. On the minerals side, Exxaro has a 20% interest in the Sishen Iron Ore company, a 44% stake in Tronox and holds 26% of the Black Mountain zinc mine. On the energy side, Exxaro has a joint venture with Tata in Cennergi to deliver 290MW of electricity into the grid from wind and solar.

 

Thanks partly to the long term contractual agreements signed with Eskom but mainly because of the operational excellence programme that the company has been driving across the board, Exxaro has year-on-year since 2013 reduced cost-per-tonne and increased earnings to register consecutive increased profits. The company has shown resilience and agility through innovative solutions, process efficiencies and future planning to demonstrate how a company formed only in 2006 can become a best in class for global coal mining.

 

The mining downturn

 

The mining industry has seen dwindling commodity prices across the board. One factor that remains the same across all businesses is if the price of your product goes down, profits drop and the only way to stay afloat is to drive down costs. Exxaro has handled the global price downturn expertly.

 

“We had to go back to basics because there was nothing we could do about the price,” says Tsengwa. “We had to look at what levers we had and focus on operational excellence interventions. It was basically looking at productivity improvements and efficiencies.”

 

Firstly, Exxaro focused on increasing throughput at the operations to push down the costs of production. The company then ran a programme of cost optimisations at its mines, renegotiated existing contracts and optimise maintenance costs.

 

Exxaro’s agility in a low coal price environment was critical as it decreased cost-per-tonne production by 2% every year since 2013 and increased earnings before interest and tax (EBIT) by 8% to continue to outperform the market. However, Tsengwa clarifies that Exxaro is not as exposed to the volatile international coal prices as other players as two thirds of its product is already tied up in offtake contracts with Eskom.

 

“The continued operational excellence and back-to-basics programme has really given us a lot of benefits in the company and discipline at the operations. The programme is integrated into our business planning and is well monitored,” says Tsengwa.

 

“69% of Exxaro product goes to Eskom, so we are cushioned against international market volatility because most of the product goes into a very stable domestic market.”

 

While Tsengwa believes the downturn has ‘bottomed out’ she does not expect the market to return to the prices seen in the past. Exxaro’s head of coal takes a level approach and understands that the market competitors, those who are still in any shape, will have implemented similar optimisation programmes and will be equally well-positioned for the future.

 

Grootegeluk

 

The Grootegeluk coal mine is located in the vastly coal-rich Waterberg region and is Exxaro’s flagship mining operation. The huge resource is an open-pit mine employing 3,200 people and producing 26 million tonnes per annum (mtpa) of final coal products.

 

“We are very proud of this mine. It is a massive resource base for our portfolio – it is part of the Waterberg coal field in South Africa with about 4.7 billion tonnes of inferred resources and more than 50 years’ life of mine,” notes Tsengwa.

 

Grootegeluk is a multi-product mine and operates in the lowest quartile of the cost curve. The mine produces different types of coal for both the domestic and export markets.

 

Grootegeluk’s principal production sees 22mtpa of power station coal transported directly to Eskom’s Matimba and Medupi power stations via a 7km conveyor belt as part of an existing supply contract. The reserve also produces 1.5mtpa of metallurgical coal sold domestically for metals and other industries on short-term contracts. In addition, the mine produces 2.5mtpa of semi-soft coking coal which, through a long-term supply agreement, is predominantly railed directly to ArcelorMittal SA. Then finally, around 1mtpa of semi-soft coking coal and thermal coal is exported through Richards Bay Coal Terminal or sold domestically.

 

Eskom’s purchase of the power station coal is fundamental to continued operations at Grootegeluk. The power station or lower grade coal sits in bulk in the top mineral benches while the higher grade/low volume coal sits in the lower benches. Tsengwa says it is important to mention that without the power station coal agreement with Eskom, Exxaro would have a challenge mining Grootegeluk optimally, “Eskom is critical in us getting access to the higher grade products.”

 

Eskom

 

Exxaro’s relationship with the state-owned utility Eskom stems back to its formation as a company. Exxaro has had longstanding contracts on the commercial mines where they have commercial coal-supply agreements and also long-term contracts on ‘Captive mines’.

 

Tsengwa explains that the relationship is in good health on the commercial side, it is both mutually-beneficial and mutually-dependent. For the commercial mines Exxaro are guaranteed long term purchase of the product and Eskom are guaranteed long term offtake. They both need one another according to Tsengwa.

 

However, the Exxaro executive indicates that there are some challenges between the two companies on the Captive side of the business. Exxaro has one mine left supplying Eskom on a cost-plus-agreement which is the large Matla mine – It supplies 10mtpa directly into Eskom’s Matla power station.

 

Because it is a different contract model Exxaro relies on Eskom to fund the capital for the mine and Tsengwa says since Eskom suffered cash flow problems they have noticed a delay in capital funding.

 

“They struggled to provide us, for example: a major capital item being the shaft that we needed for Matla at a cost of around R1.8 billion. They delayed that and that really impacts on our ability to perform as the contract dictates. We do get a few conflicts in that regard – the delay of capital funding.”

 

Eskom are also currently trying to open up the market to allow junior miners to enter the fray. Tsengwa says that is a policy Exxaro supports as long as Eskom continue to operate according to the contractual agreements already in place.

 

2020 vision

 

Exxaro has a robust pipeline of expansion programmes at existing mines and new greenfield developments to reinforce its market position all due to come online by 2018. Tsengwa says the mega projects the company has planned need to be tackled in conjunction with three operational process upgrades: optimisation, digitalisation and marketing excellence.

 

“We believe our coal portfolio has to be optimised in terms of making sure that we keep only those assets that are robust enough in terms of NPV and those with an adequate margin,” Exxaro has analysed its business and identified assets it needs to divest or upscale by acquisition. “We are looking at the coal portfolio optimisation as something very critical and it needs to be achieved in the next three years.”

 

Tsengwa also wants to pursue the operational excellence programme to not only continue to see results but to embed the philosophy behind it so it becomes part of Exxaro’s DNA.

 

While driving down costs and improving efficiencies are necessary in a declining market, they can only produce incremental growth. Exxaro is looking at innovation to create exponential growth.

 

“To continue driving ourselves down the cost curve we identified the ‘digitalisation’ of our operations to make sure we can manage the big data burden. We are using the ‘internet of things’ as a pilot to see what benefits we can achieve in our operations through digitalisation and a sophisticated analytics platform. It is early days for us, but that is a priority.”

 

Of Exxaro’s export sales less than a third go to European markets. Tsengwa says the company needs to develop a quality marketing strategy and remain flexible in terms of how it approaches new and emerging markets.

 

With India already accounting for more than 33% of export sales Tsengwa says, “We need to be flexible in India in terms of the product mix and in terms of the market segments. We need to be flexible in how we manage those markets and also have flexibility between markets.

 

“There is a lot of growth in South East Asia and we need to improve our understanding in those new markets.”

 

So the management strategy is clear. Optimise, innovate and then distribute to a very high standard to ensure Exxaro is positioned to capitalise on a potential market upswing. The company has also developed a plan to deliver on mega projects in the next couple of years, due to come online in 2018.

 

Looking to the future Tsengwa is assured that Exxaro’s coal business is very well-positioned to prosper in the domestic market with its defensive portfolio, diversified product and sitting low on the cost curve.

 

Tsengwa adds, “We are also well-positioned to continue with growth in the Indian market and in South East Asia where there is growth. I think the coal business looks quite robust. The cash flow from the coal business will unlock whatever Exxaro wants to do going forward.”

Phone

+27 12 307 5000

Company

Exxaro Resources

Category
Featured, Mining
Tags
Coal, commodities, mining