Accelerating Net-Zero Mandates Will Erode Coal Revenues

Key Takeaways

• Reliance on coal exposes Exxaro to long-term demand decline, margin compression, and asset write-downs amid slow renewable diversification and accelerating global energy transition.
  
• Heightened ESG pressures, rising compliance costs, and tightening financing conditions threaten investment, profitability, and earnings stability.
  
• Diversification into renewables, strong cash flow, logistics innovation, and operational efficiency position the company for resilient growth as energy and infrastructure demand rises globally.

Catalysts

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

• Accelerating global decarbonization policies and net-zero targets by major economies are likely to structurally erode long-term demand for coal, threatening Exxaro's primary revenue stream and exposing the company to significant and sustained declines in coal sales volumes, which risks prolonged revenue and EBITDA contraction.
  
• Intensifying ESG restrictions and investor divestment are set to increase Exxaro's cost of capital and limit access to financing, which will constrain future growth investments and put continuous pressure on shareholder returns and long-term earnings growth.
  
• Exxaro's slow transition away from coal leaves it acutely exposed to an accelerating energy transition, with diversification into renewables not happening at a pace sufficient to offset inevitable coal-related asset write-downs and ongoing margin compression as fixed costs are spread over shrinking volumes.
  
• Technological advancements in renewable energy, coupled with continuing decreases in energy storage costs, are expected to hasten substitution away from coal-fired energy globally, resulting in structurally weak pricing for thermal coal and thus compressing Exxaro's net margins and cash generation capability.
  
• Increasing regulatory and environmental compliance costs in South Africa, as well as mounting long-term mine rehabilitation liabilities and the operational risks posed by climate-related water scarcity, will drive higher input costs and lower profitability, ultimately threatening earnings stability and free cash flow.

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 3.6% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 19.0% today to 12.5% in 3 years time.
• The bearish analysts expect earnings to reach ZAR 5.6 billion (and earnings per share of ZAR 23.58) by about July 2028, down from ZAR 7.7 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 5.1x today. This future PE is greater than the current PE for the ZA Oil and Gas industry at 4.3x.
• Analysts expect the number of shares outstanding to decline by 0.19% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 16.75%, as per the Simply Wall St company report.

Exxaro Resources Future Earnings Per Share Growth

Risks

• The company is strategically diversifying into renewable energy and transition minerals, with operational wind and solar assets (Cennergi) already delivering stable, high-margin EBITDA and a clear roadmap to exceed 1.6 gigawatts of clean energy capacity by 2030, which is likely to stabilize and grow long-term revenues and net earnings as demand for renewables increases.
  
• Exxaro maintains a strong balance sheet and robust cash generation, with net cash exceeding ZAR 16 billion, allowing for continued dividend payouts and a share repurchase program, both of which support shareholder returns and can underpin share price resilience and appreciation.
  
• Despite logistics constraints, Exxaro has successfully developed and integrated strategic alternative export routes (notably Maputo), mitigating rail risks and maintaining high export volumes, which has helped preserve revenue streams and financial flexibility even as domestic demand fluctuates.
  
• The company's ongoing investments in operational efficiency, digitalization, and cost optimization, alongside a disciplined capital allocation policy, are expected to enhance EBITDA margins and overall profitability in the medium to long term.
  
• Long-term global trends, such as rising energy demand in Asia and Sub-Saharan Africa, ongoing infrastructure and urbanization booms, and the resilience of metallurgical coal demand for steel production, are likely to support baseline coal demand, sustaining Exxaro's core revenue streams even as the company transitions its business model.

Valuation

• The assumed bearish price target for Exxaro Resources is ZAR145.0, which represents the lowest price target estimate amongst analysts. 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 ZAR220.0, 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 ZAR45.3 billion, earnings will come to ZAR5.6 billion, and it would be trading on a PE ratio of 9.8x, assuming you use a discount rate of 16.7%.
  
• Given the current share price of ZAR162.03, the bearish analyst price target of ZAR145.0 is 11.7% 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.