Depressed commodity prices put strain on Exxaro

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In its operational update ahead of the release of its interim results in August, Exxaro said on Thursday, 25 June, it expected market oversupply conditions and low demand in its commodity portfolio to persist in the near term

Exxaro did not provide consolidated earnings guidance, saying it will do so once it has reasonable certainty on the first-half financial and operational performance results.

The diversified mining group also said it continued to experience increases in labour and electricity costs.

But Exxaro was quick to point out that it sought to remain profitable in the short-term. "With the weakened commodity price outlook for longer, we remain focused on operational efficiencies and cost management," it said.

"This is partially offset by the lower crude oil price, which offers some cost pressure relief in the form of lower diesel costs and lower transport costs," the company said.

Capital expenditure for the financial year 2015 is expected to be around R3.1bn, 11% below the previous guidance of R3.5 billion. Exxaro said much of its capital expenditure was mainly made up of Grootegeluk's replacement of trucks and shovels.

The miner said the current unfavourable economic climate and subdued outlook had resulted in delays in the execution of some of its coal projects, notably Semi-coke retort, Moranbah South and Mafube Nooitgedacht.

However, it said it continued to forecast significant capital expenditure in the Waterberg, with about R15 billion planned over the next five years to 2020.

Exxaro said it had taken a strategic decision to focus short- to medium-term capital allocation on coal.

The first-half coal production and sales volumes were expected to be slightly higher than the same period in 2014, mainly due to the ramp-up of the Medupi power station, but marginally below the second-half 2014 volumes as a result of lower production.

Conversely, coal export sales for the first-half 2015 were expected to be on par with the second-half 2014 sales, but lower than the first-half 2014 volumes mainly due to Inyanda mine nearing closure, coupled with lower volumes from Grootegeluk due to production reprioritisation in order to deliver power station coal for Eskom's Medupi and Matimba power stations.

In the metals markets, Exxaro have seen producers experience increased cost pressures coupled with international commodity prices that continued to struggle to gain momentum.

In the reductants markets, the miner have witnessed the shut and closure of some furnaces in the ferroalloy industry as it struggles to compete globally amidst high electricity prices and low ferroalloy prices.

Regarding the ferrous commodity, Exxaro said it closed the AlloyStream test plant in the second quarter 2015.

Exxaro also said it continued to critically assess growth projects, taking cognisance of the timing of cash flow in order to prioritise capital accordingly.

It will provide a detailed account of its first-half performance when it announces its interim financial results on August 20.

Source: INET BFA