MACIG Connect Series
Exxaro is experimenting with the ‘Internet of Things’, and it will probably be embedded throughout the business in two to three years.
What have been the major developments for Exxaro in the last year?
2016 has been characterized by our continued response to the downturn in commodity prices. Exxaro is largely invested in coal, which makes up almost all its revenue, but also has significant minority investments in iron ore, titanium, ferro-silicon and zinc. In iron ore, we have a 20% interest in SIOC, and recently disposed of a project in the Republic of Congo, Brazzaville. We also have a ca44% equity interest in Tronox, as well as a 26% interest in its local operations, which provide the feedstock for manufacturing pigment. We have a 26% interest in Black Mountain Mining, a zinc operation based in the Northern Cape. Each of these operations has faced historically low prices – in iron they have even come down to less than a third of their peakDuring the boom, operating costs increased, so when prices turned downwards we had to respond accordingly, through, amongst others, headcount reduction, efficiency improvements in our use of utilities like water and electricity and overall operational excellence. Exxaro has also interrogated the way it allocates capital for growth for strategic projects and equipment.
In April 2016, we announcement a formal retrenchment program. At the time we estimated between 300 and 600 people could lose their jobs, but after a process of employee consultation, ending in November 2016, we now foresee we will not lose so many people; some employees have taken on voluntary separation packages, and others have successfully applied for new roles created from the restructuring.
Under the new conditions, mining needs to be smarter. Can you elaborate on innovations you have adopted to improve efficiency?
One of the most significant efficiency improvements came in association with the acquisition of the Total coal assets. When we acquired these assets, the operation was designed for a relatively high quality of coal, but we have optimized the coal products by finding new markets for slightly lower qualities, but at higher volumes. Further, a key development in the mining industry is the Internet of Things (IoT); its most important application is coordinating blasting with loading, hauling (coal resource extraction) and beneficiation, with the elimination of idle time and inefficiencies in truck (equipment) utilization throughout the mining value chain. The process generates large volumes of information (big data) which, when effectively analysed through information analytics, can be used to improve efficiency performance even further. Exxaro is beginning to experiment with this innovation, and it will probably be embedded throughout the whole business in two to three years. The greatest potential benefits are using existing enterprise systems and integrating these technologies across the total value chain.
These developments require investment, at a time when little money is available. How is Exxaro balancing its strategy between investing in efficiency improvements and keeping spending low?
Capital allocation is a big concern for our investors – for every rand invested, we must achieve a return of at least 1.5 times our cost of capital. Our strategy is to start with simplifying operations Surveying, calculating and reconciling monthly production figures can take up to a week to complete, through utilizing the IoT, we can cut down this time to a few of hours. This is a low-cost experiment, and once we really understand this application we will be in a better position to scale it up. The Internet of Things allows the user to test small and scale fast.
Exxaro has recently announced it will buy back shares, which will result in a decrease to 30 from 50% of its BEE ownership. How has this affected your relationship with shareholders?
The end of November 2016 marks the tenth anniversary of the BEE transaction, which will unwind and the shares will vest in the individual shareholders of the consortium holding the interest in Exxaro. The past few weeks have been an intense period of communicating to the market the broad terms of the restructuring. The reception so far has been positive. The market being faced with 50% of Exxaro’s shares would create an overhang and potentially a share price depression. With the share buy-back, we have partially, but significantly, addressed the overhang and reduced the number of shares that could find their way to the market. We have bought back about 12% of Exxaro’s market-cap, so we have managed a huge risk to the share price. The impact on minority shareholders in relation to this proposed new BEE transaction has been limited to a dilution to shareholders of less than 7% of Exxaro’s market-cap, including a facilitation to the funding and creation of the 30% BEE shareholding structure.
There is uncertainty in the South African market, with concerns over the way the new legislation will affect mining. How has this affected Exxaro?
The uncertainty over the mining legislation relates to, amongst others, the question of ‘once empowered, always empowered’ and other aspects of the MPRDA. The industry is managing these issues in unison through the Chamber of Mines, which has been engaging the Department of Mineral Resources. The length of time the resolution is taking is frustrating for everyone – investors are sitting on the sidelines waiting to see what happens, and with the market starting to improve the continued uncertainty could mean lost opportunity.
Does a weak Rand affect or benefit your operations?
The weakened rand is a double-edged sword. It is positive on the revenue line, but a company like Exxaro, which wants to grow, gets caught out on importing. Really, we just want a rand which has a market-based value and is not volatile.
The latest figures show Exxaro’s production has increased 9% year-on-year. Do you expect this trend to continue?
Exxaro expects further improvement in production next year, as we account for a full year of production from ECC (previously Total SA) acquisition. In addition, production will increase despite some mines, such as Inyanda, coming to an end. The supply of coal to Medupi, which has not yet reached its peak, will continue to increase as this power station ramps up to full capacity, which will be a huge production growth-driver for Exxaro over the next three to five years. We are also planning additional projects, such as Belfast, whose 2.2 million Mt, by 2019, will be destined for exports. The Thabametsi coal IPP, for the generation of 600MW of electricity, is another source of medium to long-term growth. In the short term, Leeuwpan in Mpumalanga will be developing a new project which will contribute to increased production. We therefore foresee growth over at least the next five years. The future looks very good for Exxaro; we are also exploring further opportunities in energy and related services.
What efforts has Exxaro made to improve its environmental record?
Exxaro recognizes that there may be a declining long-term trend in the use of coal. Climate risk is real, and we are not challenging the science; coal is a major contributor to this risk. We have a responsibility to South Africa’s supply of electricity to continue producing coal, but we have to question whether we should expand any further, in a significant way, in this commodity. This is where our investment in Cennergi – a wind-based electricity-generating company, jointly owned with Tata Power – comes in. Internally, Exxaro has succeeded in growing production without significantly increasing emissions, and its use of water is increasingly efficient. Future business opportunities will be based on how we can improve the use and availability of energy, water and land assets.