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FACTS: Exxaro, a South African mining company, has released a trading update.
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Exxaro has South African mineral sands operations at KZN Sands on the Eastern Cape and at Namakwa Sands on the Western Cape. It also is a partner in the TiWest mineral sands and pigment manufacturing joint venture in Australia. It is currently merging its minerals sands operations (c.7% of the global market) with pigment producer Tronox.
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ANALYSIS: For FY2011, Exxaro expects that its mineral sands business will report a higher operating profit than the corresponding period in 2010 due to a general increase in selling prices of its products. By exclusion, it can be inferred that Exxaro did not manage to grow production or sales volumes.
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Exxaro's profits in 2011 will also be boosted by the partial reversal of some R869m of the carrying value of the KZN Sands operations. In 2009, Exxaro reported a R1,435m impairment of the carrying value of the assets of KZN Sands after the decision not to proceed with the development of the Fairbreeze mine. Management has reversed this decision. Fairbreeze is not due on-stream until 2014 and will replace (not supplement) the Hillendale deposit at which mining is expected to cease this year. We understand environmental permits are delaying construction of Fairbreeze.
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DAVY VIEW: Exxaro's result underscores a theme in the mineral sands sector: new supply is costly and prices must stay stronger for longer despite the three-to-fourfold growth in prices of certain minerals sands products in 2011.
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