JOHANNESBURG (miningweekly.com) – The star performance in the last six months of JSE-listed Exxaro’s once-troubled mineral sands interests is sustainable, says Tronox chairperson and CEO Tom Casey.
South African diversified miner Exxaro concluded a transaction with US-based pigment firm Tronox, which involved the listing of New Tronox on the New York Stock Exchange and an agreement that allows Exxaro to increase its shareholding in the combined entity over time from the current nigh-40% to 45%.
Reporting a 24% increase in revenue to R3.5-billion and a 51% operating margin in the six months to June 30, Exxaro's minerals sands business was the star performer within the heavily coal-weighted Exxaro group, which is exiting zinc and upping its game in iron-ore.
Prices for pigment, an ingredient of paint and plastics, rose by 45% in 2011, but mineral sands producers had many fixed price contracts over that period, which prevented their performance from tracking as quickly as the pigment price improved.
But those contracts are now coming to an end for all the mineral sands producers.
“And therefore their performance is now catching up,” Casey tells Mining Weekly Online in an exclusive video interview (see attached access).
Even if today’s prices fall slightly, which is what Tronox believes is likely to happen, the difference between the contract prices signed in 2009 and the new prices that mineral sands producers will obtain in 2012 will still be very positive.
Casey, who expects the emerging markets to drive growth, points out that while per capita consumption in the developed world ranges from 3 kg a person to 5 kg a person, per capita consumption in the emerging markets that are growing so much faster than the rest of the world are still registering less than one kilogram a person.
“As these countries move their people up the economic development ladder and as they move from the countryside and agricultural work into the cities and do other kinds of work, that will boost residential and commercial real estate construction and that in turn will require more tiles, more paint and more plastics, which is what we sell into, so we’re very optimistic,” Casey tells Mining Weekly Online.
With the transaction entailing the combination of Exxaro’s mineral sands operations with the operations of Tronox under the new Australian holding company, New Tronox, the new entity has assumed responsibility for Exxaro’s Namakwa Sands and KZN Sands mines and smelters.
The teams that have run the Exxaro operations under Trevor Arran remain, which means little day-to-day operational change.
Tronox is confident of moving purchase of mineral sands material to the South African operations rather than to competitors and the South African operations now have an anchor customer for their material.
“Each of us is in a stronger position in a soft market and when the market turns again and becomes strong, we’ll be in an even better position, because we can always optimise our use of material from our own mineral sands business.
“We feel very optimistic that this will be a win-win for both parties and that we’ll create real value,” he says.
Knowing that it has 750 000 t of pigment feedstock and about 250 000 t of zircon, the combined entity is also in a position to grow the business globally.
“We know we have the supply to be able to feed our pigment production and therefore we have more confidence in growing, which again will increase value for all of us,” Casey adds.
With the addition of the 50% Tiwest joint venture in Australia, Tronox’s production capacity increases to some 465 000 t of titanium dioxide pigment a year for backward integration with production capacity of 95 000 t of natural rutile, 380 000 t of slag and 220 000 t of synthetic rutile, all of which are materials that can be used in the production of titanium dioxide.
Tronox also now has the capacity to produce a number of other minerals including 265 000 t of zircon and 220 000 t of pig iron.
New Tronox employs 3 500 workers in 16 countries, including the US, South Africa, Australia and the Netherlands.
Exxaro group consolidated revenue increased 3% to R9.8-billion, mainly as a result of higher mineral sands prices at lower volumes, a weaker relative local currency realised, as well as lower coal volumes at lower export prices.
Production volumes at the KZN Sands mine continued to decline significantly owing to lower grades as the mine comes to end of life in 2013.
Furnace 1 was back on line at the end of February 2012 and the deficit in furnace feedstock requirements owing to the declining production from Hillendale was supplemented by existing ilmenite stockpiles.
Namakwa Sands’ zircon production was managed against full stockpiles and weak customer demand, while slag production increased mainly because of increased furnace uptime.
The proactive management of pigment stockpiles in a softening market at Australia Sands led to pigment production being 41% lower than the corresponding period in 2011.
The slowdown in the market continued to have a negative impact on the demand for zircon. As such, sales tons were 59% lower than the corresponding period in 2011.
Pig iron and pigment sales declined by 16.45% and 53%, while demand for slag products remained strong.
Capital of R51-million was spent on the Fairbreeze project, bringing the total cost capitalised to the project to date to R75-million.
Group consolidated net operating profit was R1.06-billion higher at R3.02-billion and attributable earnings, inclusive of Exxaro’s equity accounted investment in associates, amounted to R9.05-billion or 2 555c a share, up 177% from 2011’s 921c a share.
Headline earnings were R4.12-billion or 1 162c a share, which represents an 11% increase on the corresponding 2011 earnings of R3.64 billion or 1 045c a share.
Cash retained from operations was R2.49-billion, which was primarily used to fund net financing charges of R80-million, taxation payments of R164-million and the final dividend for the 2011 financial year of R1.77-billion.
A total of R1.68-billion of the capital expenditure was invested in new capacity with R675-million applied towards sustaining and environmental capital.
A total of R1.56-billion of the capital investment in new capacity was for the expansion of Grootegeluk’s expansion to supply Eskom’s Medupi power station.
After receiving R1.96-billion in dividends from Sishen Iron Ore Company, Exxaro had a net cash outflow before financing activities of R2.46-billion for the period.