Exxaro profit drops over 30%, cuts dividend

Exxaro’s net operating profit for the first half of this year decreased by 32% due to a bearish coal market, price declines, and lacklustre rail performance in South Africa.

Exxaro released its results for the six-month period ended 30 June 2023 today.

Before releasing the company’s results, Exxaro informed shareholders that it expected a significant decline in earnings for the period.

The company’s headline earnings for H1 2023 decreased by 29% to R5.91 billion (H1 2022: R8.29 billion). 

The decrease in headline earnings is mainly due to the 28% decrease in group EBITDA and a 24% decrease in adjusted equity-accounted income, Exxaro said.

The company’s weighted average number of shares of 242 million remained unchanged, translating into headline earnings per share of 2,443 cents per share (H1 2022: 3,426 cents per share).

This saw the company’s net operating profit decline from R9.20 billion in H1 2022 to R6.32 billion in H1 2023.

The cash flow generated by Exxaro’s operations also decreased by 34% to R6.25 billion (H1 2022: R9.43 billion).

However, this cash flow and the dividends received from its equity-accounted investments of R1.79 billion (H1 2022: R3.03 billion) were sufficient to fund the company’s capital expenditure and ordinary dividends paid. 

Exxaro’s total capex increased to R801 million (H1 2022: R744 million), comprising R788 million sustaining capex and R13 million expansion capex.

Exxaro said the bearish market sentiment in the first half of this year is attributable to price declines arising from sufficient gas and coal stocks in Europe, exacerbated by warmer-than-usual winter temperatures, strong renewables performance and materially lower gas prices. 

It said the lower coal prices increased demand for South African coal from India. However, demand from India retreated in 2022 due to soaring prices. 

“Changes in global trade flows were evident as Australia resumed supply into China and Russian supplies to Europe and Japan reduced materially,” the company said.

“Europe’s reassessment of coal-fired power capacity for the upcoming winter is continuing, with mixed decisions from different governments, as the drive to phase out coal gains momentum in that region.”

However, it said South Africa’s market remained stable in the first half of 2023 “despite a depressed export pricing environment”. 

“The decline in export prices, however, impacted the economics of exporting through alternative ports,” the company said.

“Demand for low calorific value coal remained resilient as domestic end-users continued to offtake power station coal from various Exxaro mines.” 

Exxaro also pointed to the lacklustre rail performance in South Africa due to locomotive availability, cable theft, derailments and vandalism as an ongoing challenge for the company. 

However, it said the collaboration by the Trasnet Freight Rail-Industry Recovery Team realised some benefits and service levels did not deteriorate further. 

Despite these efforts, Exxaro railed only 2.45 Mt of export coal to the Richards Bay Coal Terminal (RBCT) in H1 2023, compared to 2.54 Mt for the same period last year. 

The poor rail performance also negatively impacted Arcelor Mittal SA’s offtake for the period, the company said. 

In addition, the average benchmark All publications index (API) 4 RBCT export price of $130 per tonne was 53% lower in H1 2023 compared to the previous period.

This resulted in a 52% decrease in the average realised export price for Exxaro of $127 per tonne (H1 2022: $262 per tonne). 

However, the company said that despite this price decline, Exxaro realised 98% of the average API price based on its sales mix.

Looking forward, Exxaro said it expects rand volatility, inflationary pressures, and the country’s logistical challenges to persist in 2023.

Exxaro said rising industrial activity and hot northern hemisphere summer weather have the potential to support energy demand during 2H23.

In addition, despite Europe’s adequate energy supply currently, risks for the winter energy supply remain and are dependent on a range of uncertain and uncontrollable factors, including weather, the availability of liquefied natural gas and the risk of further gas cuts from Russia.

Rising iron ore supply and exports will be a limiting factor for iron ore prices during H2 2023.

Supply increases from major miners are expected, with a flat Chinese demand. Seaborne price volatility around the marginal cost level is likely to see marginal supply exit, rebalancing the market and providing limited price support.

Exxaro declared an interim dividend of 1,143 cents per share, down 450 cents per share from its previous interim dividend.