- Diversification will be key to maximise shareholder value
CAPE TOWN, South Africa, April 15, 2013 /PRNewswire/ -- While the world's leading economies such as the United States, Great Britain and Germany slipped into recession during the global financial crisis; sub-Saharan Africa had the world's fastest growing economies. Within the mining industry, there is a strong sentiment that the major companies should turn away from acquisitions and focus on improving operating performance of existing portfolios and preserving cash.
Mining giants are seeing a "new breed" of CEOs who are diverting the attention of mining conglomerates away from acquisitions using expensive debt, to increasing shareholder value through healthy profit margins. For instance, Anglo American Corporation recently backtracked on its intended purchase of a controlling stake in the Revuboe metallurgical coal project in Mozambique in order to preserve cash. While the large conglomerates may have done their part in the last few decades to develop sub-Saharan Africa's mining industry, the time has come for South African mining companies to take up this role.
"For an industry such as mining, where commodity prices are cyclical, diversification is one of the key instruments utilised by companies to offset low revenue earnings in certain commodity markets and maximise shareholder value," comments Frost & Sullivan's Mining Research Analyst, Yeukayi Kadzere. With regards to African owned mining concerns, Exxaro is an example of an African-owned mining company leading from the front, with its acquisition of Africa Iron Ore Mining Ltd in the Republic of Congo for US$328 million. An investment of US$320 million will go into increasing the mine's annual iron ore output to 2 million tonnes by the end of 2014.
In addition, Exxaro is also investing in infrastructure development, a key success factor for most mining ventures developed in Africa. The company intends to upgrade the railway line leading to the Pointe Noire port, which it will use to export its output. The acquisition of African Iron Ore Mining Ltd bolsters Exxaro's current exposure to iron ore, its 20% shareholding in Kumba Iron Ore Ltd. Diversification of Exxaro's commodity portfolio will enable the company to grow its business throughout commodity cycles thereby delivering superior long term value to shareholders.
"Challenges faced by coal miners in South Africa, such as railway and port infrastructure capacity constraints, depleting coal grades, difficult geological conditions, water shortages and declining domestic and global coal prices, have motivated Exxaro to invest into another commodity group and a different part of the continent," notes Kadzere. "The company has been particularly strategic in selecting the commodity it has chosen to add to its portfolio. Rising international iron ore prices, as well as strong iron ore demand from steel manufacturing plants in China and India, are expected to influence exploration, investment and production of iron ore in Africa going forward."
The world's largest mining companies such as BHP Billiton, Rio Tinto and Vale are extensively diversified by commodity, markets and geography. Emerging mining companies have to decide on the scope and extent of diversification in order to grow and deliver shareholder value. Through its expansion into iron ore mining, Exxaro is taking the necessary steps that will see it survive any economic and commodity cycles. South African mining companies, not only in coal mining, should consider this set strategy to enable growth of revenues, and ultimately improve shareholder value.
South Africa has vast experience in mineral extraction and processing, and this knowledge can be successfully channeled into other African territories whose mining industries are still within their infancy. While we cannot turn a blind eye to the challenges associated with investing in new markets, it is time for black-owned South African miners to heed the call of expanding northwards into Africa. As South Africa works towards growth in industrialisation, through mineral beneficiation, resource security will become critical and it is these "acquisitions" that will increase resource security going forward.
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