PwC's latest report on mining trends - the 10th review of global trends in the mining industry by the multinational professional services firm – has revealed that the industry has entered a period where there is a "crisis in confidence" about cost controls, delivery and resource nationalisation.
In a survey of the world's top 40 mining companies, PwC said the net profits fell 49 percent last year, while market capitalisation had been severely battered in the first four months of this year.
"2013 will be all about asset rationalisation and deal activity will be driven mainly by senior miners looking to divest non-core assets and looking to de-risk projects through joint ventures," Tim Goldsmith, PwC's global mining leader, said, adding, "Given how far the mining industry has fallen in the first four months of this year, it will be challenging for the industry to fully rebound in the remainder of 2013."
PwC also warned that companies with financial constraints have been "forced to get creative" when it comes to raising money to fund acquisitions or advance projects.
"We're very aware of what we need to do as a business to remain sustainable into the future," says Ernst Venter, Exxaro's Executive Head - Growth, Technology & Services. "Generally, the business is looking satisfactory, except that last year was very challenging, apart from the things that we are doing like merging businesses and putting it all together and restructuring. The coal markets were challenging."
During 2012 Exxaro saw prices of iron ore and coal, pigments and slag go down.
Coal production was stable at 40 million tons but exports fell slightly, although it still exported four million tons which is higher than its entitlement at Richards Bay Coal Terminal.
Of course there was also the fallout and effects from the Marikana tragedy - a watershed for South Africa's mining industry - and a three-week strike earlier this year at Exxaro's coal operations.
"The commodity price was the big challenge," says Venter. "On the coal side, the average price of coal decreased to $84 per ton, free-on-board at the Richards Bay coal export port. We export thermal coal as opposed to metallurgical coking coal for steel production and infrastructure and we think thermal coal prices will stay where they are for the next few months."
Exxaro Resources is South Africa's second-largest coal producer. It has been, says Venter, focused on "diversifying" and "optimising the portfolio", ensuring Exxaro's "future, sustainability and achieving operational excellence". When the company was formed six years ago through the merger of Kumba Resources and Eyesizwe, it committed to "creating a company that would make a sustainable difference," he explains.
"We are conscious to look beyond current commodities. We have also been optimising our portfolio and cost management has been a priority: reducing exposure to base metals, merging our minerals sands interests with Tronox, expanding our presence in the ferrous market and completing a major expansion in the coal market.
"We've a strong balance sheet, excellent project pipeline and plenty of motivation."
"MR WATERBERG" ON THE GROOTEGELUK EXPANSION
A big focus for Exxaro is the ramp-up strategy for the Grootegeluk Medupi Expansion Project (GMEP) which lies in the Waterberg region of Limpopo, 400km north of Johannesburg.
The region has "massive coal deposits".
"South Africa's principal remaining coal reserves lay in the Waterberg region of Limpopo," says Venter, dubbed "Mr Waterberg" by Mining MX. "Medupi, one of the biggest coal-fired, air-cooled power stations in the world, is being built there because of the vast deposits. Our Grootegeluk open-cast coal mine feeds the Matimba power station and has been expanded to supply Medupi."
The Waterberg coalfield's importance in terms of Exxaro's future cannot be understated, he says.
Over 50 percent of South Africa's remaining reserves lie there.
"Waterberg is very important. Medupi will consume in excess of 14Mtpa of coal which gives us the latitude to, out of that complex, produce higher value coal products and even go downstream.
"We are looking at the economic viability of moving into higher-value market coke which is used as reductants in steelmaking and ferro-alloy businesses. We have already commissioned a 160 000 tonne per annum char facility, and are busy investigating expansion opportunities."
Exxaro's Grootegeluk mine is one of the most-efficient mining operations in the world, and operates the world's largest coal beneﬁciation complex, where 9,000 tonnes per hour of run-of-mine coal is upgraded in six different plants.
"With the Medupi expansion we will treat 12000tph ROM in eight beneficiation plants," Venter says.
Exxaro is "going downstream in coal beneficiation, with opportunities such as reductants and energy being evaluated, due to shortage of energy supply in the region," he explains.
"There is fundamentally a strong demand for reductants in South Africa due to its ferro-alloy businesses. In the recent past the demand has however slowed down due to Eskom buying back power from these players. Eskom's buyback programme ends in July. They will then be re-commissioning smelters and it will lead to us supplying more reductants."
The 96 percent-complete GMEP is set to cost a total of R10.2 billion for the ramp-up to 14.6-million tons of coal a year for State-owned power utility Eskom's Medupi power station by the second half of 2016.
"We have a coal supply agreement with Eskom where they have deferred taking coal from March to November this year. Consequently, we have re-phased some of our expenditure on our expansion project. We will supply the Medupi generators with about 14,6Mtpa of power station-grade coal annually for the next 40 years. The expansion will create about 600 permanent jobs at Grootegeluk."
There have been some delays.
"Medupi is behind in terms of construction and because of the delays with Medupi, we had to delay some of the latter phases of the development without demobilising costly contractors on site," Venter says. "We did some optimisation and we decided not to spend money now on items such as the truck fleet and the second pit backfill system, and only get the benefits later. We re-phased our project without compromising our expected benefits while Eskom maintains its focus on completing the project."
At the same time Exxaro is busy developing its Mayoko iron ore project in the Republic of Congo (RoC). The GMEP re-phasing has helped with respect to Exxaro's Mayoko project resource requirement and support in the RoC (a project we will learn more about later).
"We have funds available to aggressively push Mayoko forward in the Congo. Capital allocation is a big success factor for us. We have been putting our bucks where there is value and that'll be even more important in the future. The world is still recovering at the moment and fortunately we are getting good signs from China from a coal perspective; even from a thermal coal perspective from India as well. So, on the coal front, we are happy we have a good pipeline of organic opportunities. We are also looking at in-organic opportunities. We will be looking further at our current portfolio to see how we can further optimise that by actually combining assets and acquiring assets that make sense in a domestic environment here in South Africa and also further afield."
Exxaro's eight managed coal mines produce over 40Mtpa of power station, steam and coking coal, as well as char and related products for the local ferroalloys industry. The company is the largest supplier of power station coal to South Africa's national power utility, Eskom.
A robust pipeline of greenfield and expansion projects mean this is an exciting time, says Venter.
"We believe coal will be around a long time. You will see we have just entered into a clean coal Joint Venture with Australian-listed Linc Energy. It will be a game changer not only for Exxaro but the whole coal industry and we believe we can be the leaders in sub-Saharan Africa with that. We are pushing forward with it and are excited by it.
"We are also moving ahead with our Waterberg expansion, the Grootegeluk expansion - because of its importance in terms of supplying Medupi - and we are planning the Thabametsi mine which is adjacent to that."
The Thabametsi mine is a greenfields development, an open-pit coal mine and beneficiation complex supplying independent power producers.
With an estimated timeframe of 2015-2025, it will supply 17Mtpa to power stations and 2.8Mtpa to other markets.
"Thabametsi is phase two of our Waterberg expansion. We think it is the right thing to enter into and press ahead with developing the mine. We will soon announce our independent power producer partner for that project. We will start by producing 600 megawatts of power and push it into the grid and it is exciting because we know there is an energy issue in South Africa and there is a growing market for coal reductants, which is largely used in high energy-intensive industries like ferrochrome and steel making, so by facilitating more power generating capacity in South Africa we are benefitting both Exxaro and the country.
"In coal we will look at diversifying more from a geographical footprint, cross border, by pushing harder on the Moranbah South mine in Australia, a JV with Anglo Coal, and new geographical areas.
"Downstream opportunities for Waterberg include a char plant, coke and electricity generation.
"That, on the whole, is coal. It is a strong backbone and it will remain so."
Venter is equally excited about the Tronox business.
"In the past year we did a big deal where we merged assets with Tronox to create the current Tronox Limited, the world's first and largest vertically integrated mineral sands processing and pigment company. We have high hopes for it in the medium to long term," he explains.
Tronox has a strong platform for future growth, uniquely positioned to serve the needs of the global pigment and zircon market, he says.
Its operations include South Africa's KZN Sands and Namakwa Sands and the previous Tiwest mineral sands operations in western Australia, with three pigment plants situated in the U.S., Europe and Australia.
The company employs approximately 3'500 workers in 16 locations worldwide.
"In the first half of 2012 that business did very well," Venter says. "It had a 24 percent increase in revenue. But the pigment prices came off in the second half which meant that our integrated business didn't do as well as expected – it was a historically poor year for the pigment segment during the second half of 2012. We were disappointed with the results. We thought it could have been better but that's the supply and demand situation with some destocking happening in the second half of the year, continuing into 2013."
He anticipates the global market for pigment to strengthen in the second half of this year and feels that markets are beginning to reflect increasing demand.
This demand increase will predominantly happen in Asia.
"In the first half of this year we've seen some destocking. In the second half of we'll see a pickup which should lead to a better performance from the Tronox business. That is a great business for the future: I'm talking the long and medium term not now in the short term. It isn't doing what it is supposed to do at the moment."
Exxaro has a 44.6 percent equity share in Tronox.
"We haven't made the call yet as to when to make a bid to control it," Venter says. "We will weigh it up against other opportunities we have in our pipeline at the time to make that decision. Looking at the way the world is going, there are good fundamentals for that business. The pigment production in Asia is picking up, specifically in China and you have to position yourself favourably towards the Asian market if you want a sustainable business. We are looking deeply at that, deciding on the right time. We need to balance and rigorously rank our projects and focus on those that deliver value.
"We're focused on optimising what we have and making sure we are set and ready for action going forward."
MINING IRON ORE IN THE CONGO: MAYOKO
Exxaro is also energised by its Republic of Congo-based Mayoko iron-ore project.
Venter says it will be developed in phases to produce and export ten million tons of iron ore a year by 2017.
He says Exxaro is prioritising its 2014 target of "two-million-ton-a-year in the initial phase", while developing access to critical rail and port infrastructure.
"In terms of our portfolio we have secured an entry into the iron ore space – through the project we acquired in the republic of Congo, the Mayoko iron ore project. It is a strategic fit and we are already busy with construction and developing it in a phased way. Phase one will see us prioritise our 2014 target of the two million ton a year in the initial phase, while developing access to critical rail and port infrastructure, and then going up to between 10 and 17Mtpa, and that is a subject of a feasibility study currently underway.
"There are about 400-500 people onsite already and we are now busy finalising the mining convention and setting up agreements with the government of the Republic of the Congo. We hope that all goes ahead no later than August this year and we should then be in a position to produce the first iron ore before the end of this calendar year. It is positive for us. The RoC is a good place to do business in as well. It is of course a new territory for us but the support we get from government is just amazing. That project is going quite well."
Exxaro acquired the project as part of its multi-million dollar takeover of African Iron in an effort to diversify from coal.
It plans to spend up to $320 million in the initial ramp up of the mine, this being Phase 1.
Venter says Exxaro is investing in upgrading a railway line leading to the deep-water port at Pointe Noire to transport two million tonnes of cargo per year and will manage the line jointly with the government.
"We call Mayoko our Waterberg of iron ore. It has massive potential. We have done a lot of work on characterising that ore in the market and in which parts of the world it will be used. We are very positive about the quality of products we can produce and are certain we will be able to place it in the market fairly easily.
"Two million tonnes per annum is small but the positive is the quality, plus it is the first ore you mine," Venter adds. "It needs a minimal amount of washing to produce the final product. You can export it easily. We can position ourselves well on the cost curve with Mayoko. Phase two is ten million tonnes per annum, up to 17 million tonnes per annum. It will be even better for us.
"We will be producing by end of this year and we are excited. Encouragingly the government in the Congo has announced they will develop the new port at Port Indienne. We need that export port for the bigger tonnages. It is good news for us. We have secured our position in that. We are involved with the government to develop a multi-user iron ore export hub. We will make sure we have sufficient interest in that."
Exxaro has also been linked with a bid for Equatorial Resources, which has a project adjacent to Mayoko, but that's unlikely says Venter.
"We will not, in the short term, look at any new iron ore acquisitions. We are focused on optimising what we have at Mayoko and will focus on making it a success.
"We believe the fundamentals of iron ore are positive in the medium to long term and we are drawing on in house experience and expertise in mining bulk commodities to unlock this potential"
On the alloy side of the business, he has confidence in Alloystream, a proprietary technology development in cooperation with Assmang to produce high-carbon ferromanganese. "We know, of course, that the local ferro-manganese alloy industry is going through a difficult time, but believe that this new technology will assist to make ferro-manganese even more competitive and robust going forward."
The development of innovative technologies like this has been a key part of Exxaro's strategy of identifying growth opportunities and adding value.
"We are commercialising a new smelting process with a manganese partner using coal fines," Venter explains. "It's the first new manganese smelting process innovation in the industry in nearly 80 years. It has taken many years of testing but the benefits are worth the wait. They include a 1-step smelting process, life of mine extensions and energy savings of up to half the costs of a traditional smelter, with co-generation."
Exxaro has been working on a programme to make blue sky innovation part of the group's DNA, he says.
"We've defined exactly what innovation means and we have a number of breakthrough innovations about to become commercial realities. We believe they'll contribute significantly to the group's future goals."
DIVERSIFYING OUTSIDE THE MINING INDUSTRY: CENNERGI
Exxaro's diversification strategy has extended outside the mining industry to the field of cleaner energy and it recently completed a R7 billion of funding programme for two wind farms in the country's Eastern Cape province with Tata Power of India, the company's 50:50 JV partner.
Cennergi has received finance from Standard Bank, Nedbank Capital and the International Finance Corporation for the wind projects.
Exxaro said it will fund the remaining R1.8 billion equity portion with Tata Power.
"In an attempt to meet rising power demand, the government (Eskom) plans to add 3,725 megawatts of capacity from renewable sources by 2016 through a programme of five tenders," Venter says. "Cennergi's two projects, which will produce 229MW, were awarded in the second round, where more than a third of the allocation went to wind power."
The 95MW Tsitsikamma Community wind farm near Clarkson in the Eastern Cape is expected to achieve commercial operation from its 31 turbines in 2016.
The Amakhala Emoyeni wind farm, also located in the Eastern Cape, near Bedford, would produce 134MW from 56 turbines.
"As a coal producer, and intensive energy user, we play a significant role in the energy environment in South Africa. Cennergi, which was launched in April 2012, is a major achievement in our energy strategy, through which we want to contribute towards energy security and a cleaner environment in Southern Africa."
Of course sustainability has played a part in Exxaro's past and present success.
That will continue.
"Mining can and should benefit economies," says Venter. "If you look at the factors that have rocked investor confidence in both the mining industry and South Africa generally I think it is interesting. In my view, operational efficiency and long-term sustainability in mining companies is absolutely essential in terms of making the most out of the mineral deposits in the ground and the ability to contribute to the economy. Also the export of South African minerals and downstream beneficiated products is valuable in that it brings much-needed foreign exchange reserves into the country."
The South African mining industry has seen a substantial upheaval in the past year including the tragic events at Marikana to a draft amendment of the Mineral and Petroleum Resources Development Act.
"All of us were worried about Marikana," Venter continues. "That should never have happened – let me make that point. It was a lack of communication and totally unacceptable. Yes, since then we have had our own strike, but it was quickly resolved and it comes down to the way you treat your people and taking them with you – not leaving them behind. You need to uplift them. In South Africa there are specific challenges but we must ensure that everyone benefits from the minerals we mine, not just shareholders. Amongst other things, we put lots into education and educating our people and invest a lot in the communities close to the mines, through employment. We want to empower local people and businesses and have them benefit from the local procurement and enterprise development. That is how we will be doing it in the Congo too. In Mayoko we have already employed locals during our construction phase. We will conduct artisan training which is what we are doing in Waterberg too, where we have a major training centre.
"At Exxaro we have the Exxaro Tomorrow Programme where we have painted a picture of how mining could look in 2050. In terms of sustainability, we won't create mines, we will create resources hubs. Waste will be retreated and the communities around the mines will be sustainable. We see a mine as an organism.
"Zero waste, zero effluent, wash-to-zero and sustainable engineering would be among the ideals targeted.
"You have probably also read about our 2020 aspirations. Just to put it in context, when we formulated – i.e., to become a $20-billion company by market capitalisation by 2020 - it sounded good but remember it is a vision and at that point our market cap was about $9.8 billion and now the share prices are right down. So we are not fixated on the absolute numbers. Rather, we are pushing forward with our portfolio to get to at least a number that is double the market cap we see now."
Mining is a significant provider of jobs, makes a huge direct contribution to GDP - around eight percent - and South Africa's wellbeing depends on the industry's success.
But it is at a cross-road.
Although the Government has clearly stated that nationalisation is off the table, a number of regulatory uncertainties remain.
Taxation of mining companies is currently at the forefront of the debate as to whether the State derives sufficient economic benefit.
Tax is government's participation in resource development and tax revenue is re-invested for the development of the greater society. It is how the rest of the country benefits.
The current message is loud and clear – government intends to increase its share of tax collection from mining companies.
The big question is how does government intend to do so?
A carbon tax and/or resources rent tax is one possibility.
"We are concerned about the level of tax (as a whole) being proposed and in particular we are engaging with government to find an equitable share of the benefits of mining. In the end I think common sense will prevail," says Venter. "We create a lot of jobs and bring in much-needed foreign exchange and you don't want to comprise that. We want people from outside to view South Africa as a viable investment.
"I refer back to the talk of nationalisation which in the end was a non-event. I think this will go the same way. There are healthy discussions going on - and to be had - between the Chamber or Mines, government and the Department of Mineral Resources in terms of the resource tax. The outcome will be such that we will still be a competitive mining industry in this country going forward."
A JOB WELL DONE?
Exxaro's future mine programme kicked off in 2012 and it has put in place a commodity strategy for 2020, 2030 and 2050 horizons.
A lot of work has gone into identifying innovative opportunities and development initiatives which Exxaro could pursue in the future.
"The focus has been about sustainability and, we believe, it will give us a competitive advantage in the future with regard to our environmental performance, technology use, and employee development opportunities," says Venter, who is optimistic about a bright future. "There is so much potential," he adds, "so much more value to be gained. If we focus and we really invest in the right areas there is no limit to what we can achieve. We can help South Africa realise its potential and help the economy grow – and we can make a positive social contribution. Mining has a big role. The quality of resources in the ground is strong enough. I think we need to be positive.
"Yes it is challenging," he continues. "The regulatory environment is changing all the time and presents certain challenges for us. It can take time for approvals and that is a frustration. Slowly but surely reality is dawning and people realise we need to put our act together in South Africa and make the country positioned for the future in the African continent.
"In a nutshell, if you look at it from an operational perspective, at Exxaro we have improved the quality of our assets and we still made a profit in 2012 despite the challenges, and paid a dividend to our shareholders. We will continue to pay a dividend. It is going satisfactorily, all things considered, and this year will be a bit better so we've made solid progress on our strategy.
"Besides continuing to strive for operation excellence, we will continue to invest in our people because people make it happen!"
Exxaro's brand promise is "Powering Possibility". Everything it does and delivers "today will allow others to realise their vision tomorrow".
To learn more visit www.exxaro.com.
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