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Exxaro Among Mineral Sands Top Three

Demand and prices for mineral sands have held up well to date, and Exxaro Resources has bedded down its just under R2.8 billion purchase of Namakwa Sands to ensure this commodity group will be an important contributor to the company.

If one includes the annual contribution from Namakwa Sands, Exxaro’s South African operations effectively produced some 275,000 tonnes of titanium dioxide (TiO2) slag in 2008, and some 160,000 tonnes of zircon. These figures make Exxaro the world’s third largest producer of both high grade TiO2 and zircon, after Rio Tinto, which is building the 750,000 tonne a year QMM project in Madagascar, and Australia’s Iluka Resources.

Including Namakwa Sands’ contribution for the full year, mineral sands in South Africa would have accounted for over R500 million of Exxaro’s R2.8 billion earnings before interest and tax for 2008. The purchase of the formerly Anglo American owned Namakwa Sands operation, which took effect in October 2008, has at last given Exxaro the critical mass it was searching for as a mineral sands producer.

Prior to the purchase of Namakwa Sands, Exxaro’s South African mineral sands operation, referred to as KwaZulu-Natal Sands (KZN Sands), and supplied by the Hillendale mine which uses hydraulic mining, made Exxaro predominantly a high grade TiO2 producer. However, the addition of the Namakwa Sands operation supplied by the Brand se Baai mine which uses dry (excavator and haul truck) mining has made Exxaro not only a larger producer of mineral sands, but a more balanced one.

While only 15% of KZN Sands output is zircon, this industrial mineral constitutes about 30% of Namakwa Sands’ output. “Namakwa Sands produces some 120,000 tonnes a year of zircon credits whereas the Hillendale KZN operation produces less than 30,000 tonnes a year,” Wim de Klerk, Exxaro’s financial director, who until earlier this year headed the company’s mineral sands division, says.

Zircon, which has recently traded at US$900/tonne, is less costly to produce and is the main contributor to the annualised Namakwa Sands operation’s figures which, in turn, is the dominant contributor to Exxaro’s 2008 mineral sands’ earnings.

Originally, Exxaro, in the form of its predecessor Kumba, had built up a mineral sands presence beginning with a 35% share in the Ticor operation in Australia, which includes a pigment plant. However, this only gave Exxaro a small share of the world’s feedstock market. “If you want to be a significant global player you need to service at least around 20% of a specific sector. We started with the KwaZulu-Natal operation in 2001, bought 100% of Australia Sands in 2005 (which owns 50% of Ticor) and in 2008 we’ve added Namakwa Sands to our portfolio.”

The new Exxaro group lowers the risks for customers, as it now has four furnaces in South Africa; two at Namakwa Sands added to its two at the KZN Sands operations. The two furnaces at KZN Sands are 35 MW units, each with a nameplate capacity of about 100,000 tonnes per annum (tpa). The two Namakwa furnaces provide a total of 185,000 tpa of capacity with a 107,000 tpa unit and a 78,000 tpa unit.

However, more importantly, the acquisition has boosted the technological strength of the group in the mineral sands sector. The Namakwa Sands furnace technology presents a stable platform and learning opportunity for the KwaZulu-Natal operation. “The biggest challenge our KZN Sands operation faced over the years was stability in the field of the anode technology applied on the two furnaces,” de Klerk says.

The adoption of the Namakwa technology at KZN has helped. “For example, the roof of the furnace previously had to have its centre piece replaced every seven to nine days; after the Namakwa technology was installed we have gone three months or longer without having to replace it.” The KZN furnaces have also applied some lessons from the Namakwa technology around the tapholes.

Namakwa Sands is a long life operation and on the current view has resources for at least the next 20 years. “There are some additional resources available in that region which present us with interesting prospects for the future,” he adds.

Prior to the purchase of Namakwa, Exxaro was planning to commence with the construction of Fairbreeze, the replacement mine for the current Hillendale mine, which is located approximately 20 km south of Richards Bay. Fairbreeze is the next potential capital investment on the cards for Exxaro’s mineral sands division.

Although conditional approval to proceed with construction was granted by the Kumba board (prior to the unbundling of Kumba Resources into Exxaro Resources and Kumba Iron Ore Company), actual construction of Fairbreeze has been delayed due to delays in the finalisation of mining rights for the Fairbreeze C Extension orebody. Meanwhile a pre-feasibility study on another orebody, Port Durnford, located to the immediate south-west of Hillendale was undertaken. The Port Durnford project, if viable, could potentially supply the current KZN Sands furnaces for over 20 years.

In the interim, Exxaro was granted the rights to another small deposit, Braeburn, which forms an extension to the Hillendale orebody. The additional run-of-mine extends the Hillendale life of mine until 2012.

Overall the KZN Sands operation consists of the mine, the mineral separation plant at Empangeni and the two DC furnaces previously mentioned.

At the end of 2008 de Klerk said the market for mineral sands had shown no sign of a downturn due to consistent pigment demand. This year de Klerk reiterates with only a few provisos that the long term market outlook for mineral sands continues to remain positive. “For one thing the mineral sands market did not see the huge escalation in prices that other commodities did. I remain optimistic, but of course the market may change within the space of a month. It is a market dominated by a few major producers, and I still believe there is balance on supply/demand. It is a sector where there has been little capital expenditure on expansion over a long period.”

Exxaro’s South African mineral sands operations produce titanium dioxide slag and zircon with pig iron as a co-product. TiO2 is the feedstock for the pigment market, which in turn supplies its product to plastics, paint, coatings and paper industries. About 92% of TiO2 feedstock gets consumed in the pigment industry with the remainder, amongst others, used in the titanium metal and welding industries.

Zircon is used in the ceramic tiles sector and thus performs well during periods of high construction demand. “The Zircon market is driven by different fundamentals. Most zircon production originates as a by-product from TiO2 production, and because of this profile people have not invested in new zircon production over the past eight years, except for the huge Douglas mine of Iluka in Australia. Currently we are experiencing increased zircon prices over levels achieved last year.”

Exxaro also produces synthetic rutile at its Australia Sands operation, with the pigment industry being the off-takers of this product. “We are increasing the pigment plant’s capacity to about 150,000 tpa after the current pigment plant expansion project, but we remain a very small player in the bigger pigment market,” de Klerk says.

“Overall, the outlook will be lower reflecting the global mood, but we are well situated with the plant in Perth to sell to the Asia Pacific market, and the signs do remain positive that the market for output from our plant will hold up. The outlook would be different if we predominantly sold from that plant into the European and North American markets. China is still a huge market for our product. However, if we have another two quarters of downturn, in six months we could well start to see weakness. Over the long term the growth in the mineral sands sector will be linked to the growth in global economic growth.”

The only major mineral sands project ramping up at the moment is Rio Tinto subsidiary QIT Madagascar Minerals’ (QMM) mineral sands mining project, in the Fort- Dauphin region, coupled with an upgrade of the Rio Tinto’s ilmenite facilities at Sorel in Quebec, Canada where the ilmenite will be processed. Iluka in Australia, a country that has traditionally dominated the mineral sands sector, has just spent capital on what is only a zircon mine. However, many of mineral sands projects planned around the world have suffered setbacks, including Sierra Rutile in Sierra Leone where a dredge capsized.

De Klerk is also happy based on his knowledge of where Exxaro’s operations are on the cost and revenue curve of mineral sands producers. The profitability of the various producers are influenced by their currency differentials with key markets, with the main producers such as South Africa, Australia, and Canada and soon Madagascar all having currencies that have depreciated against the benchmark currency, the dollar.

However, unlike ferrochrome, it is not a market that has much balance in incorporating such factors. Prices are quoted in dollars and this pricing stays in place for a price cycle. However, for Exxaro, which is the largest supplier of coal to South Africa’s domestic market with some export coal to sweeten its income, the mineral sands gives it some natural upside benefit when there is a softer South African (and Australian) currency. “We do undertake some hedging of the rand/dollar rate on a three to six month roll over,” de Klerk says.