By: Brindaveni Naidoo
26th September 2011

JOHANNESBURG (miningweekly.com) - South African diversified miner Exxaro would combine its mineral sands operations with the operations of US-based pigment firm Tronox to create an integrated mine-to-processing-to-pigment producer, it announced on Monday.

The establishment of New Tronox, would see Exxaro disposing of its Namakwa Sands and KZN Sands mines and smelters, as well as its 50% stake in the Tiwest joint venture (JV) in Australia, for about 38.5% of the shares in the new company.

Tronox is Exxaro's JV partner in Tiwest. The company filed for Chapter 11 bankruptcy protection in the US in 2009, but has since emerged from bankruptcy proceedings with an enterprise value of $1.1-billion.

Exxaro would be the largest single shareholder in New Tronox, a newly formed Australian holding company, which it intends to list on a major exchange, such as the NYSE.

The benefits of being an integrated mine-to-processing-to-pigment producer included creating further efficiencies, reducing risk arising from involvement in two key value-creating segments of the mineral sands value chain, and providing a consistent grade of quality feedstock supply to the New Tronox pigment plants.

Exxaro CEO Sipho Nkosi said the transaction would improve the likelihood of South Africa being chosen as a site for a potential new greenfield pigment plant as demand increases and growth strategies are formulated.

Exxaro finance director Willem de Klerk added that the transaction would bring significant cost benefits, as well as security to employees.

The combined entity will have about 3 500 employees in 16 locations around the world.

With the addition of the 50% interest in Tiwest, Tronox's production capacity would increase to about 465 000 t of titanium dioxide pigment and would be backward integrated with production capacity of about 95 000 t of natural rutile, about 380 000 t of slag and about 220 000 t of synthetic rutile. All of which were materials that could be used in the production of titanium dioxide.

Further, Tronox would have the capacity to produce a number of other minerals including about 265 000 t of zircon and 220 000 t of pig iron.

Exxaro's mineral sands businesses will be contributed on a debt-free and cash-free basis, resulting in a conservative pro forma capital structure with significant financial flexibility to fund growth.

"The combined entity will benefit from synergies and an accelerated growth profile. Operational synergies are estimated to amount to approximately $30-million annually, primarily through the rationalisation of administrative and ore logistics costs, as well as ore in-use optimisation," Tronox said in a statement.

Further it would provide a stable earnings base that mitigates the cyclical nature of feedstock demand.
"The proposed transaction will create a global leader in this industry with a significant asset base that is expandable and low on the cost curve, " Exxaro explained.

Tronox CEO Dennis Wanlass said that the transaction speaks to an enabling business environment in South Africa.

Despite international fears of doing business in South Africa, sparked by the controversial nationalisation debate, Wanlass told Mining Weekly Online the South African government played a key role in ensuring an enabling business environment.

"We considered the political risk, which is a normal consideration for any business. Given our confidence in, and the 20-year relationship we have shared with Exxaro, we comfortably moved forward with this decision and are keen to expand our footprint into South Africa," he explained.

To comply with the requirements of the Mineral and Petroleum Resources Development Act and the Mining Charter, Exxaro will retain a direct 26% interest in the South African mineral sands operations until the end of the empowerment period, after which it could exchange the shares for an additional 3.2% stake in New Tronox.

The pro forma equity value of New Tronox is estimated at R27.8-billion based on the volume-weighted average price at which Tronox's shares traded for the 30 trading days to September 23.

This implies Exxaro's mineral sands operations has an equity value of R10.7- billion.

Edited by: Mariaan Webb

Source: Engineering News (http://www.miningweekly.com/article/exxaro-and-tronox-to-combine-mineral-sands-operations-2011-09-26)