Exxaro Resources

Exxaro Resources is South Africa’s largest listed empowerment enterprise by a long way, a position it has consolidated in just five years of operations; and its mid to long term strategy is nothing short of visionary.

Exxaro owes its very existence to a vision following the 2006 restructuring of the former Kumba Resources with the specific objective of increasing the spread of shareholders to include employees and people from ‘previously disadvantaged backgrounds’. The plan was to create a company to exploit the mineral resources that drive South Africa’s economic wealth for the benefit of all sections of the community. In five years it has grown to become by far the largest of such companies, completely dominating the strategically vital coal extraction and beneficiation sector and with a strong global position in heavy minerals and, through its 20 per cent interest in Sishen Iron Ore Company (SIOC), iron ore. Its turnover for the six months to 30 June 2011 was R9.6 billion, a 22 per cent increase over the same period in 2010.

In this short time Exxaro has expanded its portfolio of world-class assets in Africa and Australia, and withits joint venture Tiwest it is the world’s third largest titaniumfeedstockproduction company,poisedtobecome a prominent force in its key commodities, and a respected global participant for its governance standards and business approach based on sustainable development.

If there is a temptation to think of coal and iron ore mining as industries belonging to the 19th century industrial revolution, then talking to Exxaro’s business development director Ernst Venter soon dispels that view. “We wanted to demonstrate that with the right skills mix and diversity, and commitment to your shareholders, you can also align yourself to the goals of this country and its economic growth. We want to be seen as a champion of change across Africa and globally.”

When Exxaro was formed it had a large coal portfolio and was the world’s third largest producer of heavy minerals, principally chloride slag for the pigment market. But rather than allow the shape of the existing business to lead its future development, it has decided to take a global view in deciding what sort of a company it aims to be 15 years on, in 2025, says Venter. “We looked at the way economic power is shifting from the West to the East, and decided that in future, commodities would fall into three tiers.”

Tier one would include minerals such as coal, iron ore, mineral sands andcopper—the focus for Exxaro over the next 10 years. Tier two minerals—a priority 10 to 15 years down the line—are those for which industrial demand (from the aerospace and energy industries, for example) is increasing rapidly. This includes titanium and some of the rare earths, as well as titanium in Exxaro’s KwaZulu Natal and Namakwa Sands deposits in South Africa, and its Australian deposits. And Exxaro is already looking beyond that to its third tier—materials the world will require in 30 years’ time to enable industry to address economic megatrends like climate change and population growth.

This roadmap is designed to position Exxaro as a global player. When it was first listed five years ago, Venter points out, the company was capitalised at around $4 billion; today it stands at $9 billion, but its target is to achieve a $20 billion market cap by 2020. The starting point for this has to be coal and the strong position Exxaro has in the energy market, since it is the largest supplier of thermal coal to South Africa’s power generation entity Eskom. “We will build on our coal portfolio, since we are very strong in bulk mining; and specifically in beneficiation and downstream through the value chain right through to the end use by our customers.”

Exxaro wants to play a greater part, though, in addressing Africa’s energy demand/supply gap than just by supplying coal for thermal power stations. “We decided there should be a place for us to play in the energy market and create an energy company that could thrive in a low-carbon economy. This will be a cleanerenergy company with its focus on wind, solar, renewable energy and co-generation.” Realistically, even though these solutions are expanding fast, massive amounts of coal will still have to be burnt; but Exxaro intends to make sure it uses clean coal technology such as CCTS (clean coal technology and storage), Venter asserts.

For the present, the principal revenues continue to come from coal extracted from mines like Grootegeluk in Limpopo province. Grootegeluk has a massive beneficiation complex where 9,000 tonnes per hour of run-of-mine coal is upgraded in six different plants. This is already the world’s largest coal beneficiation complex; but such are the demands from the industry, particularly the new Medupi power station that Eskom is building nearby, that its capacity is being doubled. The $1.3 billion Grootegeluk Medupi Expansion Project (GMEP) will increase throughput to 14,000 tonnes per hour, and supply Medupi with 14.6 million tonnes per annum of coal for 40 years.

GMEP is much more than a feeder plant for Eskom, though. The deposit lends itself to a variety of different coal products for niche markets, principally related to metallurgical coal, says Venter. “We need to beneficiate and wash the coal to produce specific graded metallurgical coals for the iron and steel reduction industry and also the PGM (platinum group metals) industry in South Africa.” The project will start delivering coal in May 2012, increasing over the subsequent two-and-a-half years as Medupi ramps up. “The plant has been designed on a modular basis to spread the capital investment.”

The new plant represents Exxaro’s accumulated expertise in coal treatment and it creates an opportunity by investing more capital in beneficiation facilities to produce more metallurgical coal, increasing its shareof the metallurgical coal market in South Africa, in which it is already the biggest player. It also plans to increase its coal footprint in Australia, and to extend its activities to other parts of Africa, such as Mozambique and Botswana where the resources are immense, though some of the infrastructure like water supply and rail freight are wanting. Even in South Africa, rail capacity is holding back Exxaro’s ability to export, he says. “The Richards Bay terminal has a throughput capacity of 91 million tonnes, with currently only 68 million tonnes going through. We are busy de-bottlenecking that and we will be partnering with the government to invest in our own rolling stock to get the coal out.”

In the next 10 years Exxaro will turn its attention to other tier one markets. It wants to establish its own iron ore operations in Africa and Australia and get involved with ferromanganese production. “We are in a joint venture with Assmang, testing new technology that will enable us to treat low grade manganese ore and convert it in a more energy efficient way at nearly half the cost of the current technology.” If the demonstration plant under construction is successful, Venter hopes to see Exxaro entering the ferromanganese market by mid-2012.

To complete the tier one picture, Exxaro wants a presence in copper too. Joint ventures and acquisitions are probably the route to expansion in these non-core but strategic commodities; and in the case of copper, Exxaro will look for a company with assets close to production in Zambia or the DRC.

The mineral sands business has strengthened since Exxaro listed, at which time it was performing poorly. “We believed that if we took a long-term view, the fundamentals would change; and indeed, prices for chloride slag and pigment feedstock that we produce have risen up to 40 per cent.” The business produces monazitethat containsrare earth minerals andtitanium-rich rutile, ilmenite and other minerals used downstream in the white goods industries that are booming with demand from India and China. “We are currently the world’s third largest producer of pigment feedstock, and we plan to be the largest by 2025.”

Exxaro’s foundations rest on dirty old coal—but it aspires to thrive in a low-carbon economy, so the business will have to look very different in 15 years’ time. That’s less of a paradox than it appears. “To de-risk your launch into unknown territories like nanotechnology and nuclear power you need to relate your future strategy to your existing business,” says Venter. “We must create our own future—not wait for it to create us—and build today the skills we will need tomorrow. If we stand on the hill and look back in 2025 to where we started, Exxaro must be unique. It must have the look and feel of an innovative company,” he concludes. www.exxaro.com