Sasol’s silence on the possible sale of its local coal assets has stoked speculation that its balance sheet is in worse shape than feared.
Recent Bloomberg reports, citing sources familiar with the matter, say Sasol will soon begin a formal sales process to dispose of its SA coal mines. That comes as it grapples with a surge in debt, incurred largely to fund its delayed and vastly over-budget Lake Charles ethane cracker plant in Louisiana in the US.
Lake Charles, which is set to cost $12.9bn, is the reason Sasol’s debt is now well above its own internal target, at more than 49%, and, equally worrying, now 85% dollar-denominated.
Rising debt was one of the reasons Sasol committed to sell $2bn worth of assets two years ago. That was well before the full extent of its Lake Charles missteps became known.
To date, it’s offloaded only $200m in noncore businesses.
And the coal sale is a real head-scratcher.
The production of fuel from coal was the whole point of Sasol’s existence in apartheid SA.
Its highly profitable Secunda plant is the world’s largest of its kind by many orders of magnitude and produces about 60-million barrels of liquid fuels each year.
Sasol Mining, meanwhile, produces over 40Mt of coal annually, making it SA’s third-largest coal producer, though more than 90% of the coal is used as feedstock for the production of synfuels and a range of chemicals.
Sasol also recently completed a R14bn mine replacement programme which began a decade ago and which will support Sasol’s SA operations until 2050.
It’s hard to see why the coal mines, as an integral part of Sasol’s supply chain, would be on the chopping block.
But Casparus Treurnicht of Gryphon Asset Management says: "From my point of view, it makes sense. Why would anyone [want] to deal with labour and the government?"
Still, he adds: "I’m concerned that they want to go this route. They are sending the message that their balance sheet is under pressure."
The problem is that coal assets aren’t exactly in high demand.
"I am curious as to what price this might fetch. It sounds more like a desperate attempt to raise cash than a strategic move," he says.
Sasol isn’t giving anything away, only confirming that it’s embarking on an extensive asset review across its portfolio.
"The outcome of the process will determine the viability of a divestment, if at all, for a final decision to be made at the appropriate time," it said in an e-mailed statement.
Abdul Davids, head of research at Kagiso Asset Management, says that, superficially, the move does not make sense, as "Sasol’s vast coal reserves are key to its Secunda Synfuels business and a key competitive advantage compared to big oil majors that have shorter reserve lives".
JPMorgan analysts Alex Comer and Catherine Cunningham agree.
"The mining business has a book value of around $1.5bn, but strategically this looks an odd move," they wrote recently.
"A disposal would only make sense, in our view, if an alternate purchaser could run the business more efficiently."
Terence Craig, director and chief investment officer at Element Investment Managers, says the sale would make sense "if Sasol’s debt problems are more material than the market has estimated previously — in other words, if it needs to sell assets to repay debt as the Lake Charles Chemicals Project cash flow is not early or sufficient enough to pay off the debt on its own".
Zaid Paruk, portfolio manager at Aeon Investment Management, feels anything could be on the cards as investors apply pressure and Sasol scrambles to raise capital to reduce its high debt levels. A rights issue would probably not go down well, given the drubbing Sasol’s share price has received. At about R270, Sasol is trading at a nine-year low.
But, says Paruk, "if they have a view coal prices are going to be lower for longer, and are able to achieve a good price for these assets now, it might be something they have explored".
If the mines were sold, supply of coal could still be guaranteed by Sasol through long-term off-take agreements, says Paruk. "This could be at the expense of margin, but could lead to a strengthened Sasol balance sheet if a fair market price is reached."
Exxaro Resources could be a potential bidder following its failed bid for South32’s coal assets earlier this year, he says, though this would be subject to regulatory approval.
Labour may also oppose such a sale, say Comer and Cunningham. "A miner working for Sasol with leverage over the entire value chain is in a much better position to negotiate salary, something we doubt would be lost on the unions."
Davids thinks it possible that only those Sasol mines that export surplus coal might be sold. Sasol exports about 2.8Mt a year from its Twistdraai colliery and export plant.
Looking through the Sasol portfolio, Comer and Cunningham see a possible disposal of its 49% holding in the Oryx gas-to-liquids plant, which has a book value of $600m, particularly as Oryx is not integrated into Sasol’s other businesses. "But," they say, "it would mean Sasol drawing a line under the Fischer-Tropsch [oil-from-coal technology] heritage of the company."
All will become clear when Sasol finally releases its now twice-delayed results at the end of this month.
In the meantime, it’s an anxious wait.
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