Exxaro Resources Ltd announcement of acquisition of Total Coal Proprietary Limited Conference Call
Jul 28, 2014 AM CEST
FP.PA - Total SA
Exxaro Resources Ltd announcement of acquisition of Total Coal Proprietary Limited Conference Call
Jul 28, 2014 / 02:00PM GMT
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Corporate Participants
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* Sipho Nkosi
Exxaro Resources Ltd - CEO
* Wim de Klerk
Exxaro Resources Ltd - Finance Director
* Mzila Mthenjane
Exxaro Resources Ltd - Executive Head of Strategy & Corporate Affairs
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Conference Call Participants
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* Caroline Learmonth
Barclays Africa - Analyst
* Kieran Daly
Macquarie - Analyst
* Brandon Ryan
McCloskey - Analyst
* Charlotte Mathews
Business Day - Media
* Tim Clarke
Standard Bank - Analyst
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Presentation
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Operator [1]
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Good day, ladies and gentlemen, and welcome to the Exxaro conference call. (Operator Instructions). I would now like to hand the conference over to Sipho Nkosi. Please go ahead, sir.
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Sipho Nkosi, Exxaro Resources Ltd - CEO [2]
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Good afternoon, ladies and gentlemen. It is indeed a great privilege for us to talk to you this afternoon, particularly after this announcement. So, we thought we would just have a little conversation with you and share some of the thoughts and the (inaudible) behind this acquisition that we've been working on.
Of course, we are in a very (inaudible) seeing that we'll be coming up with the results in the next few weeks. So, we won't go and elaborate on quite a lot of issues. But, we will attempt to answer as many questions as possible around what you are asking.
As I said, at Exxaro, we're very much delighted that we've closed this transaction or we're doing this transaction with Total. Of course, before I start, amongst many people, this table is full. So, the whole of Exxaro team is here. And you've met Wim and Mzila and everyone around here. So, (inaudible) I'm not going to finish everyone. So, all of us are here to answer your questions. So, I think that is very important.
You would by now have read the [famed] announcement. And it contains quite a lot of stuff. And you won't miss a thing. So, I suppose the questions will be very much limited because we've given full detail on the [famed] announcement. So, everything is covered. But, we will give some color if you have some issues.
Of course, this whole thing talks about us acquiring Total Coal South Africa and a total purchase consideration of $472 million and also to acknowledge that Total Coal South Africa is large-scale operating asset in South Africa with a combined sales of approximately 4.5 million tons per annum in the year ended 31 December 2012.
And it also includes an export allocation of 4 million tons per annum. And it has an estimated remaining life or life of mine in excess of 20 years.
So, the implementation of the acquisition is subject to certain conditions precedent and indicated in item three of the announcement. So, if you went to the [same], it will show you all those, amongst those Section 11 and certain other requirements.
So, the conditions precedent need to be fulfilled within six months. And we will continue to work with Total Coal South Africa relevant authorities and affected stakeholders to fulfill the conditions precedent in order for the acquisition to be effective within the shortest time possible.
And you may say six months is a very short time, but we've had extensive engagement with the DMR. And we are very confident that these can be addressed. In fact, before starting -- before releasing all these things that you see, we had a long conversation with the minister just to ensure that everything is in place for the announcement.
Now, maybe just a few highlights in terms of why we decided strategically to do this acquisition. You know that Exxaro has been around and is an established coal producer in South Africa. Therefore, the acquisition significantly increases the scale of Exxaro's coal portfolio by about 12% based on 2013 production.
Further (inaudible) Exxaro is a black-owned and South African premier coal producer. And what is very significant here is that, through this transaction, Total Coal assets now will belong to South Africa once this has been concluded, which I think is very positive for the country.
Exxaro also supplies into the export market through the Richards Bay Coal Terminal. With an allocation of 3.9 million tons at the current capacity of the terminal, this acquisition talks to our stated strategy to increase our export allocation.
Therefore, the biggest opportunity with this acquisition is the additional export allocation that we will be obtaining and owning, which will double our total allocation to 8 million tons immediately and to 10.3 million tons once export capacity reaches the 91 million tons level at the Richards Bay Coal Terminal.
This increase in export allocations further supports our portfolio optimization and the development of some of the projects we have been planning, such as the increase in tonnages from Grootegeluk and the [Eloff] and Thabametsi projects, which will also produce significant volumes of exportable coal. We are making progress with the BFS studies for both those projects.
Therefore, we are delighted with our success with this acquisition and for the growth opportunities it will provide Exxaro as well as the contribution to the South African economy in terms of continuing employment and foreign earnings.
The consolidation of ownership of coal assets within South Africa is a welcome opportunity. But, there are people behind the scenes that have worked tirelessly for this acquisition at strategic level and also hitting the ground, burning the candles day in and day out, working hard on this one. And I just want to acknowledge them from the Exxaro side and Total Coal South Africa side. Really, we've worked very hard as a team on this one.
Of course, (inaudible) to also point out that our Board has been phenomenal in supporting us as well as the (inaudible) in executing this project.
So, on behalf of the Board and management team, I'm very upbeat about this development, which we anticipate will provide considerable benefits to the company and its stakeholders.
Okay. It's question time.
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Questions and Answers
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Operator [1]
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(Operator Instructions). Caroline Learmonth, Barclays Africa.
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Caroline Learmonth, Barclays Africa - Analyst [2]
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Thank you. A couple of questions, please. So, you talk about in the announcement how Exxaro envisages adding value to these assets. So, maybe can you talk a little bit about what your plans might involve?
And then also, you talk about optimization reconfiguration of your assets and projects if you proceed with this acquisition. So, again, can you give us a little bit more flavor on that?
And then perhaps, also, how would the management of these assets work going forward? What are the implications for the rest of your group's strategy? So, for example, you have your Tronox. So, do we read from this that the coal now is very much a core focus and will receive the majority of your attention going forward?
And then maybe just finally, on financial impacts of the transaction, was this essentially a competitive auction process? And maybe you can talk a bit about the acquisition price versus the fact that this was a loss-making business in 2013. And where do you see your gearing getting to as a result of this transaction? Where -- at what level will it peak and when? Thanks very much.
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Sipho Nkosi, Exxaro Resources Ltd - CEO [3]
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You asked a mouthful. So, we'll try and spread the responses to various experts that are sitting across the table. Wim, I don't know whether you want to give it your [first step] and then Mzila if Wim hasn't covered it.
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Wim de Klerk, Exxaro Resources Ltd - Finance Director [4]
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I can do so, too. Caroline, afternoon. On the four questions, I think what's important is we have a day in September at GG where we plan to historically share with you the whole Waterberg strategy. I think what we will do accordingly is we will inform you guys as well about the detail, about all the optimization and the management of these assets.
Needless to say, it's early days. And I think it's just not appropriate to at this stage share with you guys all those without sketching the detail of how Waterberg (inaudible). So, if you could hold your horses for -- until September for all these issues.
Regarding the rest of the strategy and the fundability of other opportunities, needless to say, this was one of the opportunities that we have considered for quite a while. And it fitted perfectly into the strategy of one of the pillars of our goal future, which is more export allocation. So, that's a nice stick. And therefore, the Board has considered over a long period of time the cost associated with an acquisition like this. And it doesn't take away from the funding of other opportunities that also talk to the strategy.
Regarding your three questions on financial impact, isn't $472 million too much for a business that during 2013 made a loss of 55 million? Fair question. We are very comfortable with the $472 million that we paid. I think, unfortunately, the 55 million that you would've seen in our results, it is distorted with various one-line items.
I cannot explain and/or give you that info today because of the confidentiality that we have with Total. As soon as we come to the end of this closing period, needless to say, we will share with you guys the detail of why the 55 million appears to be a strange number.
On the gearing, I think it's easy, Caroline. You know that, historically, we've been at 3 billion. You can add 5 billion, and you can just do that sum and find whatever we will add up. I haven't got my calculator with me currently, but that's the easiest way because our forecast was that we will be at 3 billion by the end of the year. And on that, you can add 5 billion.
I think that addressed all those items.
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Caroline Learmonth, Barclays Africa - Analyst [5]
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Thank you. And also, was it a -- there was quite a bit of speculation in the press I suppose about who might've been interested in these assets. But was it effectively a competitive auction, or were you in fact the only serious bidder?
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Wim de Klerk, Exxaro Resources Ltd - Finance Director [6]
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No, there was a process in place. We can't talk to you guys about all the other potential speculation of parties. But there was a specific competitive process in place, absolutely.
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Caroline Learmonth, Barclays Africa - Analyst [7]
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Thank you.
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Operator [8]
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Kieran Daly, Macquarie.
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Kieran Daly, Macquarie - Analyst [9]
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Thank you. Afternoon, everyone. Two questions. Where -- can you give us an idea of where you see these assets fitting on the export cost curve? Obviously, we've just made a loss at the bottom line in 2013 as you've advised. Just wondering more of an operating level, say, where they sit on the cash curve and whether they actually -- the cost curve, and whether they're actually generating cash.
And then the second question is I think that Total had a marketing agreement in place for its coal exports with its -- another part of its parent company. I just wonder whether that marketing agreement is still going to be in place or whether that's part of the deal where you effectively buy them out and do your own marketing of the coal. Thank you.
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Wim de Klerk, Exxaro Resources Ltd - Finance Director [10]
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On the first part, as I just indicated to Caroline, the 100 and -- the 55 million loss is a number that includes a lot of once-offs and therefore is not at all an indication of the profitability and/or the EBITDA of this business. And therefore, I assume that, if you pay 5 billion for a business, that it is cash accretive. And I think that's the only assumption I can give you at this stage until we are in a position to share with you guys this detail.
On the marketing agreement, again, it is specific to the agreement that is currently under confidentiality. And hopefully, as we -- this was only signed on Friday afternoon. Hopefully, by the time that we meet in September, we'll be able to get the approval of Total to share with you guys some of the important indicators on this deal. And as soon as we have that in place, we will be able to then share that with you.
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Kieran Daly, Macquarie - Analyst [11]
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Okay. Thanks then.
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Operator [12]
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[Brandon Ryan], [McCloskey].
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Brandon Ryan, McCloskey - Analyst [13]
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Hi, Sipho and Wim. I'd like to come back to some of the first questions you were asked and in particular the one about how access to additional allocation can enable Exxaro to configure its development plans for the Waterberg.
I know you're saying wait until September. But, on the face of it, I don't understand this. You're buying two mines on the Witbank field. And you're saying this can help with your production out of the Waterberg, where you haven't got (inaudible) to get the production out. Are you saying you might cut back on the production of these mines to get more production coal out of your Waterberg mines?
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Wim de Klerk, Exxaro Resources Ltd - Finance Director [14]
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Brandon, you ask extremely valid questions. And needless to say, that is where the story is. And needless to say that we are going to frustrate you by giving you the same answer that we cannot share with you the details regarding that because it then informs you about the way that we look at some of these assets, which currently we do not own and we do not have the approval of Total to share that detail with you.
We did say in the past that we have option to significantly increase exports from Grootegeluk or from the Waterberg. But, it talked to and it still talks to development of the Richards Bay Coal Terminal, the TFR line.
Once we share that info with you during September, will we be able to put all these pieces of the puzzle together. Unfortunately, we are also in a closed period today, which exacerbates the position of disclosure on some of these items.
So, I do know that you will be frustrated, guys. And my sincere apology. But, we never planned to make this deal two weeks before our results presentations. So, if you can just wait a bit, and then you can still write all those nice story, Brandon, once we give you that info in the Waterberg.
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Brandon Ryan, McCloskey - Analyst [15]
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Okay. But, Wim, your strategy -- and correct me if I'm wrong -- your strategy's always been to develop your coal assets that you already own. And those are in the Waterberg. Isn't there some extensive work going about that you're buying and paying a premium for somebody else's assets, which as has been pointed out are loss making, in order to get more export coal out of the Waterberg, or am I wrong here?
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Wim de Klerk, Exxaro Resources Ltd - Finance Director [16]
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We will answer those questions in detail in September.
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Brandon Ryan, McCloskey - Analyst [17]
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Okay. Wim, and then final question, you -- as you pointed out, it doubles your borrowings, and you can afford it, and you have the -- you had the approval to go up to I think ZAR40 billion. But, the last time you had ZAR8 billion in debt, you were a very nervous executive, as I recall. You didn't like that one little bit. So, what are your feelings now about going back up to those kind of debt levels?
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Wim de Klerk, Exxaro Resources Ltd - Finance Director [18]
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I'm a conservative bean counter. And my job is never to like debt. So, I don't know when we were talking about ZAR10 billion debt. But, what we did say is our Board gave us the mandate of 40% debt to equities, not ZAR40 billion of debt. I would love to have ZAR40 billion of debt. Then I need to get the business to ZAR100 billion level, and we're not there. So, the 40% off to the debt equity, under which we will easily fall with after this deal.
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Brandon Ryan, McCloskey - Analyst [19]
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Hello?
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Wim de Klerk, Exxaro Resources Ltd - Finance Director [20]
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Yes.
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Brandon Ryan, McCloskey - Analyst [21]
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Yes. So, what then is the total amount of debt that you can take on in rand?
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Wim de Klerk, Exxaro Resources Ltd - Finance Director [22]
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Well, we take 40% debt to equity. I don't know at this stage what's our equity because, during a closed period, you can understand that our debt will change. I can't remember what was our debt in our previous period, was end of February. [Erica], you maybe recall at the top of your head.
So, let's say ZAR25 billion is on best recollection. But, I can't stand behind that number at this stage. I expect 40% of that number, you'll get the maximum equity, which is, let's say, close to ZAR10 billion.
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Brandon Ryan, McCloskey - Analyst [23]
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Okay. Thanks so much.
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Operator [24]
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Charlotte Mathews, Business Day.
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Charlotte Mathews, Business Day - Media [25]
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Good afternoon. Just a couple of questions. Are you going to have to invest any money in these mines? So, are you more likely to shut them down? That's some of the questions (inaudible).
And are you -- is it possible you might raise some money by sitting out your state in Tronox? I think you might've referred to that earlier.
And what are the chances of the competition commission approving this because I think that it would make you possibly the biggest coal producer in the country, which (inaudible) position?
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Wim de Klerk, Exxaro Resources Ltd - Finance Director [26]
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Charlotte, on investing, we have a long-term vision. And of course, we will continue to invest into businesses that justify putting your dollar there.
On the Tronox side, we don't need to sell Tronox in order to be able to afford this transaction. We will, as we said in the results or in the announcement, we will be able to fund that out of our existing facilities that we already have in place. And then if you look at the number, we will only earn after this transaction 13% of the allocation. So, we don't foresee any issues on the competitions side.
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Sipho Nkosi, Exxaro Resources Ltd - CEO [27]
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Remember, we are not as huge as Total. And so, the part of the coal that Total are involved in is only export side. So, that should not be a problem for us on the -- with competitions commission.
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Charlotte Mathews, Business Day - Media [28]
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Thank you.
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Operator [29]
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(inaudible), RMB Morgan Stanley.
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Unidentified Participant [30]
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Good afternoon. I think the answer to my question will probably be similar to the others. But, I want to understand the rehabilitation liabilities of the assets that you're buying. Was that included as part of the sale? And secondly, the assets that are sitting in the rehab trust, would that also have been part of the sale, or would that have been excluded? Thank you.
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Wim de Klerk, Exxaro Resources Ltd - Finance Director [31]
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The rehab, you're quite correct. You expected that answer, but let me give you that answer. We cannot share that detail with you as it's obviously privy to Total. Needless to say, when we did our due diligence, it took a few weeks. There was some information available on the due diligence room.
When you buy assets in Mpumalanga, it comes with environmental issues. And living in that industry for many, many years, we know exactly what those are. And we took the necessary diligence to ensure that we do the detailed case regarding all those liabilities. And we were happy and comfortable with the price that we paid that it includes all the necessary rehab provisions that you would expect a company like ourselves to continue with in future.
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Unidentified Participant [32]
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Thank you.
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Operator [33]
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(Operator Instructions). Tim Clarke, Standard Bank.
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Tim Clarke, Standard Bank - Analyst [34]
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Yes, thanks. Good afternoon, everybody. Just a quick question, it's a very easy one. Just I think it might've been in the announcement, but I'm traveling. Is there a hedge against the dollar amount?
And then perhaps just the second one, can you just -- is there any limitation to closure timing? Do you have to close at a certain point? I thought there's a 3% escalation number as time goes by.
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Wim de Klerk, Exxaro Resources Ltd - Finance Director [35]
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Tim, just repeat that first question about the dollar, please?
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Tim Clarke, Standard Bank - Analyst [36]
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Have you got any hedges in place? Are there derivatives involved? Have you signed a derivative contract?
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Wim de Klerk, Exxaro Resources Ltd - Finance Director [37]
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Tim, we will put some hedges in place in order to hedge ourselves against the dollar. And the second questions was something about the closure.
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Tim Clarke, Standard Bank - Analyst [38]
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Just some timing, just timing of the transaction, just how long -- are there any limitations if you don't close by a certain period?
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Wim de Klerk, Exxaro Resources Ltd - Finance Director [39]
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Yes, you will see we have that detail in the announcement, Tim. It's six months and then another six-month period. So, you will just be able to pick it up in the announcement.
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Tim Clarke, Standard Bank - Analyst [40]
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Thank you.
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Operator [41]
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(Operator Instructions). Gentlemen, it would appear we have no further questions. Do you have any closing comments?
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Sipho Nkosi, Exxaro Resources Ltd - CEO [42]
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Yes, I will ask Mzila to make closing comments on this one as Head of Strategy and as the man who led us to do this transaction.
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Mzila Mthenjane, Exxaro Resources Ltd - Executive Head of Strategy & Corporate Affairs [43]
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Thank you very much [to the Board], Sipho. But, just to say the word of thanks to everyone who's participated, and I presume there'll probably be more questions at the results presentation planned for the 21st of August at [Summerplace]. So, we look forward to see you there. Thank you very much to everyone. Cheers.
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Operator [44]
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Thank you. On behalf of Exxaro, that concludes this conference. Thank you for joining us. You may now disconnect your lines.
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