Exxaro Resources Limited (JSE: EXX) has navigated through a challenging landscape in recent years, with various factors exerting pressure on its share price. The company has faced a formidable array of obstacles, from heightened inflation to pricing fluctuations in the commodity market, coupled with challenges such as load shedding and ongoing issues within South African state-owned entities like Transnet. This has been reflected in its year-to-date share price decline of over 12%, prompting investors to exercise caution.
However, amidst these challenges, there is anticipation building around Exxaro’s upcoming earnings report scheduled for March. This pivotal moment holds the potential to reshape the company’s trajectory. As we stand on the cusp of this significant announcement, the question arises: How does Exxaro’s current positioning compare to its past? It’s worth noting that in its previous report, the company fell short of expectations, missing targets on both its top and bottom lines. With uncertainty lingering in the market, investors eagerly await insights from Exxaro’s upcoming report, seeking clues about its ability to navigate through the turbulence and emerge stronger.
Technical
On the daily chart, a descending channel is in play, with the price action finding support at the Fibonacci midpoint near R175.76. The 25-SMA (green line) has crossed below the 50-SMA (blue line), signalling a bearish tilt, as the price has also fallen below the 100-SMA (orange line).
If support at R175.76 holds, a pivot could occur to send the price back toward the dynamic resistance of the channel in a pattern continuation. A supply zone is established near R184.74, and any breach of this level could trigger a breakout from the channel, potentially setting up a bullish trend reversal. Resistance at R192.87 and R198.37 could then act as pivot points to catalyse a potential retracement, but a lack thereof could result in a test of the psychological resistance at R206.19.
However, the bears could be enticed to pile into a more prolonged selloff if the support at R175.76 fails to initiate a retracement. Lower support is established at R171.63, and an additional breakdown at this level could force the price toward the 61.8% Fibonacci golden ratio at R168.57. This level could be psychological in holding buyers to challenge the momentum. However, the lack of a retracement could trigger another leg down toward R162.12 in the longer term.
Fundamental
In 2023, Exxaro’s share price contracted by nearly 6% despite a recovery in the second half of the year. This return underperformed the JSE Top 40 index, which returned just over 5% in the same period. However, it outperforms its competitors in African Rainbow Minerals and Thungela Resources, which realised share price declines of 31% and 46%, respectively. The declines come as a result of a challenging year in the coal market and logistical issues from Transnet. In the 2017/2018 financial year, Transnet hauled 77 million tons of coal, a number which fell toward 48.7 million tons in 2022/2023. This decline came at a crucial time when prices of fossil fuels ticked up to record highs amid surging demand from Europe in the wake of Russia’s invasion of Ukraine. Transnet now expects to transport approximately 49 million metric tons of coal in the year to end 31 March to the Richard’s Bay port, which remains well below its 60 million ton target, suggesting ongoing headwinds.
A large part of the share price decline was due to coal price decreases over the year, as shown in the chart below. The decline in coal prices was attributed to a decline in demand due to sufficient gas and coal stocks in Europe, Japan, Korea and Taiwan (JKT). Warmer than usual winter temperatures added to the decline. As a result of the lower sales prices, lower sales volumes, and the logistical issues the company faced, its revenue for the six months ended 30 June 2023 declined by 15% to R18.94Bn. Revenue from its coal business declined from R21.69Bn to R18.13Bn, resulting in a 28% decrease in group EBITDA to R7.66Bn.
So, what can we expect from the full-year results to be released in March? Exxaro mentioned in its pre-close message that the continuous and ongoing constraints in the domestic economy relating to load-shedding and logistic supply limit future productive potential. However, there is optimism regarding the strong Chinese thermal coal imports, which could remain supportive of prices despite uncertainty around the severity of Europe’s winter and the potential risk around natural gas availability. In Europe and JKT, winter restocking could also drive prices higher in the first quarter of 2024, likely to be supported by increased economic growth in India and China. However, its coal business will continue to be impacted by low commodity prices and logistical challenges. It will be interesting to see if the company can alleviate the effects of external factors on its business through its optimisation programme that focuses on achieving efficiency across its value chain.
Summary
Exxaro started the new year on the back foot, having already lost close to 12% of its share price. Logistical challenges and macroeconomic headwinds continue to pave a challenging way forward. However, a crucial earnings report awaits one that could alter the share price trajectory in the upcoming months.
Sources: Koyfin, Tradingview, Reuters, Business Day, News24, Exxaro Resources Limited
Piece written by Tiaan van Aswegen, Trive Financial Market Analyst
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