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Tuesday, 26th May 2020
12:54:23pm

Business

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South African food producer Tiger Brands said on Monday it is looking at “significant” job cuts and won’t pay an interim dividend as its business is hit by supply disruptions and margin pressures due to the impact of the coronavirus.

The owner of Jungle Oats and Tastic rice said first-half headline earnings fell 35% and it expects coronavirus-related costs of about 500 million rand ($28 million) to hit profit in the second half due to rand weakness, global supply chain disruptions and additional costs incurred during a lockdown in South Africa to curb the spread of the virus.

As a result the company has started looking at cost-cutting measures, including possibly “significant” job cuts, Chief executive Noel Doyle told reporters in a media call.

“Not just in headcount but right across our whole offering and of course we have to look at a couple of the categories where we have been incurring significant losses,” he said.

Tiger Brands employs more than 11,200 people in South Africa, excluding seasonal staff, a company spokesperson said.

Tiger Brands said it had decided not to declare an interim dividend in order to preserve cash, adding that it would re-consider an annual dividend at the end of the year depending on the group’s trading performance.

Headline earnings per share from continuing operations fell to 501 cents in the six months ended March 31, the company said, from 773 cents in the same period last year. Pretax profit from continuing operations fell 65% to 673 million rand.

“The group’s overall performance reflects the difficult trading environment and the challenges faced, particularly within grains, groceries, Value Added Meat Products (VAMP) and exports,” Tiger Brands said in a statement.

Group revenue from continuing operations increased by 2% to 15.7 billion rand. However, group operating income dropped by 29%, with operating profit margins declining to 7%, impacted by lower volumes, raw material and conversion costs rising ahead of inflation and increased marketing investment, it said.

“These costs, together with the effect of government regulations on pricing during the national disaster period, may have an impact in excess of 500 million rand on profitability (in the second half),” the company said.

-Reuters

Exxon Mobil is likely to delay the greenlighting of its $30 billion liquefied natural gas (LNG) project in Mozambique as the coronavirus disrupts early works and a depressed gas market makes investors wary, six sources told Reuters.

Top U.S. oil and gas company Exxon said on Tuesday it was evaluating “significant” cuts to capital spending and operating expenses. Energy firms worldwide have slashed spending this month as oil prices plummeted to 18-year lows after global travel curbs and reduced economic activity destroyed demand.    

The coronavirus pandemic is forcing delays to projects worldwide. Qatar, the world’s largest producer of liquefied natural gas (LNG), is delaying a big expansion in which Exxon is a major partner.

The Rovuma LNG project, which will produce from a deepwater block off Mozambique containing more than 85 trillion cubic feet of natural gas, was expected to get the go-ahead in the first half of 2020.

But three sources familiar with the project told Reuters that Exxon’s partners want to push back a final investment decision (FID).

A further three sources said the pandemic is disrupting work on the project to such a degree that FID before the second half is unlikely. Any delay would leave Exxon’s project further behind rival Total, which took FID last June on its neighbouring project.

Exxon might be left with no choice.

“COVID-19 is affecting guys going into Mozambique, it’s affecting Chinese and Korean financiers, and clearly you’ve had the arse drop out of the oil market,” said a source with knowledge of the project. The pandemic is causing delays to the financing needed for the project, the source added.

Rovuma LNG is managed by Mozambique Rovuma Venture, a joint venture owned 35.7% each by Exxon and Eni with the remaining stake of 28.6% held by China National Petroleum Corporation (CNPC). LNG prices hit a record low of $2.7 per million British thermal units (mmBtu) last month, and Rovuma requires an average price of $7 per mmBtu throughout its life to be profitable, according to Bernstein analysts.

Another source with knowledge of internal discussions said with the energy outlook uncertain and LNG supplies set to rise sharply by 2025, some of the project partners want to “cool Exxon’s heels” and delay. Exxon spokesman Todd Spitler declined to discuss whether partners are seeking to push back the FID.

“This is a complex project that will be developed over several years,” he said. China’s CNPC did not respond to Reuters’ request for comment and Eni declined to comment. Mozambique’s state oil firm ENH, Galp Energia and KOGAS, which each have 10% stakes in the project, either did not provide a comment or referred Reuters to Exxon.

EARLY WORKS HIT

Exxon has already committed to $500 million in initial investment, and FID is the next stage in funding based on which banks can extend lines of credit.

But early works are being disrupted by coronavirus travel restrictions. International workers travel regularly to the project site on the Afungi peninsula in Cabo Delgado province, where they live cheek-by-jowl and share a canteen for six- or eight-week stints.

Many hail from countries that have been hit hard by the coronavirus and have put in place travel restrictions. Mozambique has imposed a 14-day quarantine for those entering the country.

That has left key personnel unable to reach the site. “It seems as though they are electing to postpone some of the early stage works and contracts for now,” another source familiar with the matter said. “I doubt we can expect their FID before the end of 2020.” Exxon’s Spitler said employees’ health and safety was a priority and declined to comment on the day-to-day details of its operations.

-Reuters

The new chief executive of South Africa’s power utility Eskom said on Sunday that a plan to split the loss-making company should not be rushed, because risks associated with the process need to be assessed and managed properly.

President Cyril Ramaphosa announced last year that Eskom would be split into units for generation, transmission and distribution, as part of plans to overhaul of South Africa’s power sector and open the industry up to more competition.

A government paper showed in October that Pretoria plans to set up a transmission unit within Eskom by the end of March 2020 and complete the legal separation of all three units in 2022.

But in an interview with eNCA television on Sunday, Andre de Ruyter said while Eskom was committed to a restructuring of the power industry as set out in the government paper, the utility wanted to carefully manage risks associated with the process. 

“What we are careful of is with a precipitous unbundling to create risks that may end up causing us to have a less stable system,” said de Ruyter, who took charge of Eskom on Jan.6.

“For us to rush into full legal separation from day one creates a number of risks - transfer of assets, our lenders will be concerned about assets that they have loaned us money against, there could be capital gains tax events that could cost us a lot of money,” he added.

The government paper had set out a vision for a restructured electricity supply industry, where Eskom could relinquish its near-monopoly and compete with independent power producers (IPPs) to generate electricity at least cost.

One or more Eskom generation units will be created to compete with IPPs and the distribution model will be reformed so more power can be procured from small-scale producers. 

“There is a lot of planning that needs to go into the unbundling and restructuring of Eskom. We need to be quite careful on how we implement this not to precipitate all of these risks that we first need to understand, assess and manage them properly,” de Ruyter said.

Eskom supplies more than 90% of South Africa’s power, but its creaking fleet of coal-fired plants struggle to meet electricity demand.

The utility implemented severe nationwide power cuts in several bursts last year and sporadically earlier this month. The power cuts have pushed the economy to the brink of recession and piled pressure on Ramaphosa, who came to power with a pledge to revive investor confidence and lift economic growth.

-Reuters

Eskom’s urgent bid for larger electricity tariff increases was rejected by the Pretoria High Court on Monday, in a fresh setback for the cash-strapped South African power utility.

Eskom lodged an urgent application with the court for a tariff increase of 16.6% from April and a rise of 16.7% from April 2021 to compensate for what it said was an error by energy regulator Nersa.

On Monday the court ruled that the utility had failed to prove that its dispute with Nersa was urgent, meaning that Eskom will now likely face months of court hearings as it argues its case with the regulator.

Eskom believes Nersa miscalculated its tariffs for the financial years beginning in 2019 to 2021 by treating 69 billion rand ($4.8 billion) of bailouts which the utility has been promised as revenue.  

Last year Nersa set Eskom’s tariff rises at 9.4% for 2019/20, 8.1% for 2020/21 and 5.2% for 2021/22.

Eskom supplies more than 90% of South Africa’s electricity but is struggling with high debts and power stations in need of refurbishment.

It has been forced to impose several rounds of severe power cuts in the past year that have dented the country’s economic growth.

Eskom said it would respect the court’s judgment but was encouraged that it indicated that there was merit to its case. 

“The judge indicated that ‘Nersa violated the basic principle of accounting by treating an equity injection as revenue’,” Eskom said in a statement regarding the ruling.

Nersa will comment after it has studied the judgment, a spokesman said.

-Reuters

South African stocks rose to near seven-month highs on Friday, underpinned by gains in heavyweight Richemont and mining firms, while the rand fell against a broadly stronger dollar.

Richemont led the To-40 index higher, surging 5.82% after the world’s second-biggest luxury goods group, reported a 4% rise in third quarter sales, helped by double-digit growth in China and South Korea.

Resources continued to do some heavy lifting, with the mining index 2.66% firmer amid gains in gold, platinum and iron ore producers.

Gold edged higher on Friday but was on track to post its first weekly decline in six as solid Chinese data and a preliminary U.S.-China trade deal improved risk appetite.

Palladium jumped over 9% to register a record high as the market grapples with deep supply shortages, while platinum rose 1.01%.

This boosted Sibanye-Stillwater by 5.32%, African Rainbow Minerals by 4.54%, Impala Platinum by 3.11% and Glencore by 1.32%.

The bourse also got a lift from improved global risk appetite following Chinese growth figures that suggested the world’s second-biggest economy was stabilising.

The Johannesburg All-Share index rose 1.35% to 59,001 points, a level last seen on June 24, while the Top 40 index climbed 1.48% to 52,735 points.

In the currency market, the rand gave up morning gains as rate cut momentum gave way to the impact of a broadly stronger dollar. At 1603 GMT, the rand traded at 14.4650 per dollar, 0.4% weaker than its previous close.

Market participants were also cautious as the ruling African National Congress started a four-day National Executive meeting and the party’s Lekgotla gathering.

The ANC is expected to discuss options for struggling state-owned firms such as power utility Eskom and South African Airways, as well as trying to unify dividing voices on proposals to nationalise the central bank.

Finance Minister Tito Mboweni came out against that plan this week on Twitter.

“Policy uncertainty remains the name of the game,” Bianca Botes, Treasury Partner at Peregrine Treasury Solutions, said in a note.

In fixed income, the yield on the benchmark government bond was down 1 basis points at 8.18%.

-Reuters

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