South African coal miner Exxaro Resources (EXXJ.J) has disclosed that it is planning to build up a cash balance of up to 15 billion rand ($788.34 million), partly to fund acquisitions as it widens its search for clean energy minerals.
Finance Director Riaan Koppeschaar noted that Exxaro would maintain a cash pile between 12 billion and 15 billion rand “taking into account the possible size of future acquisitions” of which he said its net cash balance was 7.2 billion rand at the end of June.
As part of the initial efforts, Exxaro also announced plans to acquire critical mineral assets two years ago to diversify its business and reduce its reliance on coal as the world shifts towards cleaner sources of energy, but it has yet to make any acquisitions.
However, Morgan Stanley analysts warned that a high cash balance suggested Exxaro is concerned it might not be able to access debt and capital markets to fund acquisitions, and is likely to disappoint investors. “It suggests a potential acquisition will be larger than many in the market thought,” the analysts added in a statement.
Meanwhile, the Chief Executive Officer (CEO) of Exxaro, Nombasa Tsengwa, noted that the group is looking at “additional commodities that would really increase our chances” of acquisitions.
“There’s a recognition that this could really impact our success, to go out into the market and look at other minerals that align with our investment criteria but still contribute to the energy transition,” Tsengwa said.
Tsengwa, however, did not state which additional minerals Exxaro is targeting, but said it remains “active on the market” for copper and manganese assets.
Exxaro’s attempts to diversify are all the more urgent because of increased difficulties in hauling coal and other bulky minerals to ports due to problems at South Africa’s freight rail utility Transnet.
The group, moreover, reported a 29% drop in profits in the six months to June 30, citing lower coal prices and persistent problems with rail logistics. Exxaro’s headline earnings per share (HEPS) were 24.43 rand ($1.27), down from 34.26 rand during the same period last year.
Exxaro’s Revenue In the First Half of 2023
Coal accounted for 95% of Exxaro’s revenue in the first half of 2023, with renewable energy and iron ore investments providing the rest. It indicated that it expects that non-coal mineral assets will from 2026 generate the equivalent of 30% of its 2021 coal earnings of 10.7 billion rand.
Exxaro declared an interim dividend of 11.43 rand per share, down from 15.93 rand a year ago. Exxaro shares as at today 18th August, 2023 stands at 153.36 rand.
Exxaro said it remained prudent in its capital allocation framework, in terms of returning cash to shareholders, managing debt, and selectively reinvesting for the growth of the business.
The company’s performance was hit by declining coal prices, which slipped by over 60% from the highs of 2022, and lower production volumes due to sub-par rail performance and lower offtake from Eskom arising from equipment unavailability.