Global slowdown weighs on Exxaro's heavy minerals unit
August 21, 2009
By Justin Brown
Exxaro Resources' heavy minerals division crashed back into an operating loss in the first half of the year as demand for its heavy minerals products, which are mainly used to make pigments, fell off in the second quarter of the year.
Since 2006, when Exxaro was formed, the division has vacillated between profit and loss. It reported an operating profit in 2006 and last year but sustained a loss in 2007.
In the first half of this year, the heavy minerals section sustained an operating loss of R67 million mainly because of losses at the group's KwaZulu-Natal Sands division.
The losses in KwaZulu-Natal were partly offset by profits generated at the group's Namakwa Sands and Australian Sands operations.
Wim de Klerk, the Exxaro financial director, said that unfortunately the market's demand for Exxaro's heavy minerals products had not been "very favourable".
He said: "We are cautiously optimistic about demand during the second half."
As a result of the slowdown in demand, Exxaro had built up R300m in extra heavy minerals stocks. De Klerk said the value of these stocks had not been written down.
Kieran Daly, an Investec Securities analyst, said during Exxaro's results presentation that the heavy minerals division was "unviable".
The Hillendale mine south-west of Richards Bay is set to close in either 2011 or 2012. De Klerk said Exxaro would make a decision about replacing the mine next year.
He explained that Exxaro could develop the Fairbreeze deposit into a mine at a cost of about R1 billion.
Exxaro was looking to achieve a return on capital employed of between 25 percent and 30 percent across all its operations.
The heavy minerals businesses were new operations and it would take some time to achieve this return.
Exxaro's revenue rose 23 percent to R7.1bn during the half-year to June on the back of higher sales from its coal and iron ore interests as well as a weaker rand.
Net operating profit had increased 18 percent to R953m.
The group's coal production rose 3 percent to 22.6 million tons during the half-year.
De Klerk said Exxaro delayed R1bn in spending this year on projects due to the slowdown.
Despite the postponements, Exxaro still planned to spend almost R4.5bn in capital over the two years to December next year, he said.
Exxaro declared an interim dividend of R356bn, down 43 percent from last year.
Exxaro shares rose 1.9 percent to R88.70 yesterday.
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