• Exxaro   group CEO Mxolisi Mgojo says the company has developed a new and sustainable   strategy as they continue to embark on a transition to a hybrid renewable   energy business, diversifying away from fossil fuels.

  • This shift, due to climate change, will involve major complexities   as well as opportunities as the company’s two wind farms generating a   combined 229MW in renewable energy will become its second core business. This   follows the completion of the acquisition of Tata Powers’ shareholding of 50%   for around R1.7bn.

  • The operational and financial excellence of Exxaro has resulted in   the S&P Global Ratings Agency upgrading the company’s credit rating   despite the challenges of dealing with the its largest and most unpredictable   customer, Eskom.

  • The company has not experienced major delays in terms of late   payments or a reduction in sales in 2020, despite the pandemic lockdowns.   Simplifications to the business model, with the sales of the Tronox non-core   assets and the pending sale of its Black Mountain operations, should be seen   as positive. This should result in a boost to positive cash flow. They will   utilize the proceeds for investment in core operations. Demand for thermal   coal in SA as a baseload for energy generation is likely to prevail for the   immediate future. This is despite the accelerated growth of renewable energy   following the positive recent announcements of additional offtakes by the   private sector for internal consumption.

  • Buoyant demand in the export market by China, India, and other Asian   markets has resulted in increased seaborne coal prices, aided by China   boycotting Australian coal. The strong balance sheet has resulted in the   S&P expecting Exxaro’s debt metrics to continue to support its   creditworthiness for the next three years, with capex estimated to decline to   R2bn by 2023.

  • This should lead to a boost in free cash flow in the next two years,   enabling a growth in dividends, and or share buybacks. This will be aided by   a robust flow of dividends from its investment in Sishen Iron Ore.

  • The results to December 2020 are a proxy for the interim results to   June 2021. Exxaro had strong cash generation, up 47% to R7.8b, EBIDTA   increasing 22% on the back of robust commodity prices, and a final dividend   of R12.43 per share paid. That is in addition to a special dividend of R5.43,   reflecting robust financial metrics.

  • The current share price of R159.00 mirrors a negative outlook for fossil fuels, particularly in the case of coal, with major global investment into renewables such as solar, wind, and hydro, outpacing dirtier technologies. The share price at R160.00 looks attractive on a PE of 5.8x, a dividend yield in excess of 12% (excluding) special dividends, and estimates of fair value of R200.00 per share.