Accelerating Decarbonization Will Erode Coal Revenues And Exports

Key Takeaways

• Shrinking coal demand and slow diversification increase earnings volatility, regulatory risks, and pressure on Exxaro's long-term growth and cash generation.
  
• Rising environmental costs, investor divestment, and operational challenges threaten margins, while expansion outside coal faces high execution and performance risks.
  
• Strategic diversification into renewables and critical minerals, coupled with operational efficiency and financial discipline, strengthens Exxaro's resilience and positions it for sustainable growth.

Catalysts

Engages in coal, pigment manufacturing, and renewable energy businesses in South Africa, Europe, Asia, and internationally.

• Deteriorating long-term demand for thermal coal due to the acceleration of decarbonization policies globally, stricter carbon regulations, and the increasing adoption of renewables is likely to drive a structural decline in Exxaro's core coal revenues and reduce export opportunities, especially as key regions such as Europe and parts of Asia implement coal restrictions and punitive carbon taxes, putting long-term pressure on top-line growth.
  
• The company's heavy reliance on coal, combined with slow and uncertain progress in diversifying into critical minerals and renewable energy, exposes Exxaro to exceptionally high commodity price risk and regulatory disruption, which will intensify earnings volatility and undermine the sustainability of dividends and free cash flow as coal's secular decline accelerates over the coming decade.
  
• Rising environmental compliance costs, mounting ESG financing constraints, and increasingly stringent operational standards for coal mining will drive up production expenses and capital requirements, squeezing net margins and diminishing returns on invested capital, particularly as investors and lenders continue to shift away from fossil fuel exposures.
  
• The risk of project delays, cost overruns, or underperformance in major expansion and transition projects-such as the ramp-up in manganese and renewables-is high given Exxaro's limited track record outside coal, and any execution missteps will hinder the company's ability to offset coal's shrinking contribution to overall earnings.
  
• Global overcapacity, increased competition from low-cost coal exporters, and ongoing logistical bottlenecks-particularly in rail and port infrastructure-threaten both volume growth and pricing power, resulting in structurally weaker export margins and persistent operational challenges that will erode profitability over the long term.

Exxaro Resources Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Exxaro Resources compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Exxaro Resources's revenue will grow by 1.0% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 19.3% today to 13.0% in 3 years time.
• The bearish analysts expect earnings to reach ZAR 5.7 billion (and earnings per share of ZAR 23.12) by about September 2028, down from ZAR 8.2 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 9.8x on those 2028 earnings, up from 5.3x today. This future PE is greater than the current PE for the ZA Oil and Gas industry at 5.0x.
• Analysts expect the number of shares outstanding to decline by 1.07% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 17.24%, as per the Simply Wall St company report.

Exxaro Resources Future Earnings Per Share Growth

Risks

• Exxaro's strategic diversification into renewables and critical minerals-particularly the financial close on the Karreebosch wind farm, progress on its Lephalale solar project, and the large-scale acquisition in manganese-positions the company to benefit from global energy transition trends, supporting future revenue growth and earnings resilience.
  
• The company's significant coal reserves and long-life infrastructure, combined with its leadership in operational efficiency and cost-containment, mean it is well poised to maintain low unit costs and strong operating margins, which can underpin stable or rising net margins even as some peers face declining resource bases.
  
• Robust financial discipline, demonstrated by consistent dividend payments for 19 years since listing, growing net cash positions, and a clear capital allocation framework, indicate that Exxaro remains committed to returning value to shareholders and reducing financial risk, boding well for sustained earnings and dividends.
  
• Improving domestic demand for coal, particularly due to persistent power challenges in South Africa and the return to service of major Eskom power stations, is expected to bolster sales volumes and provide reliable revenue streams from the company's coal division for the foreseeable future.
  
• Product and market diversification-evidenced by increased export sales into Africa and Asia, industry-leading price realizations, and improvements in logistics partnerships-enhances Exxaro's ability to capture upside from commodity cycles and rising global infrastructure demand, potentially driving future revenue and margin expansion.

Valuation

• The assumed bearish price target for Exxaro Resources is ZAR150.02, which represents two standard deviations below the consensus price target of ZAR201.01. This valuation is based on what can be assumed as the expectations of Exxaro Resources's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ZAR230.0, and the most bearish reporting a price target of just ZAR145.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be ZAR43.6 billion, earnings will come to ZAR5.7 billion, and it would be trading on a PE ratio of 9.8x, assuming you use a discount rate of 17.2%.
• Given the current share price of ZAR181.92, the bearish analyst price target of ZAR150.02 is 21.3% lower.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.