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Exxaro pays heavy price

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World Coal,

Exxaro, South Africa’s second-largest coal producer, has learned the hard lesson that it has internal governance procedures in place for a reason, the company’s finance director Wim de Klerk said.

The group was forced to write down the entire value of its investments in its Mayoko mine in the Republic of Congo worth about R5.76 billion, pushing the group deep into the red in its year to end 31 December.

The company reported a net loss of R884 million for the 2014 financial year, from a profit of R6.2 billion in 2013.

"We have taken note as a board (of the misstep in the Congo). There is a reason we have a process … and retrospectively it maybe would have been better to follow the process," he said.

All investments in the Congo project are on hold and the group’s handling of the iron asset development has been the subject of two reviews. The first of which was done by KPMG.

An analyst said the mishandling of the Congo investment would count against the company for some time as a "management discount".

However, with the size and the effect of the Congo misadventure it was unlikely the board would be tempted to make a similar decision on the same scale again in future.

"I think it’s been an expensive lesson for them, and that, if there is any upside to Mayoko, (it) has to be the best thing that came from that," he said.

Apart from this, the analyst said, the company was well positioned to grow and was protected from outside shocks to the coal price, which has been under pressure from poor global demand.

KPMG found that the group had not followed its own governance processes on mine development.

The second was that the assumptions that the company had relied on for the ramp-up in production of the mine kept being pushed out because of delays in reaching agreement on logistics and the mining conventions.

Last week Exxaro received an independent technical review from consultants Hatch, which had revealed that the "tonnages are there and there are no fatal flaws" in the project.

The reason, Mr De Klerk said, the company had ignored its own processes was because of the competition in that country to sign an agreement with Brazzaville for the supporting rail and port infrastructure for the project.

Mzila Mthenjane, head of strategy and corporate affairs at Exxaro, said there were a number of iron-ore projects in the Republic of Congo which were in different stages of development, all of which required export logistics investment support from the government.

The group had circumvented its own procedures to run a fast-track process that would have given Exxaro the first-mover advantage in terms of being able to secure the agreements for logistics and transport.

The problems in the Congo aside, the group showed resilience in a weak coal market by growing revenue last year by exporting higher coal volumes and benefiting from weaker rand prices. Revenue for the group rose to R16.4 billion from R13.6 billion the year before.

Mr De Klerk said the year had held low lights for the company and some important highlights.

One of the highlights was a strong performance locally at its coal business where revenue increased 21% to R3.3 billion compared with 2013.

The coal business’s operating margins remained stable at 20% compared with 21% in 2013. Coal accounts for more than half of Exxaro’s revenue.

Edited from source by Joe Green

Source: BDlive

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