Illovo to spend R6bn on Africa expansion

At the same time, it is rationalising its South African operations as the local area under sugar cane declines because of urbanisation, the use of cane land for other purposes and land claims.

Extendion plans

MD Graham Clark said on Friday, 5 February 2010, that Illovo, which is already Africa's largest sugar producer, had set a target of a minimum 20% return on its investments in order to achieve its expansion.

The recent expansion drive started in Zambia, where Illovo negotiated secure investment conditions with the government before starting the project.

“We entered into an agreement with the Zambian government in March 2007 to secure an investment of R1,6bn in a major project to expand the existing sugar cane growing area by 10500ha to 27000ha,” Clark said. The project involved both Illovo and its supplying growers, and entailed increasing milling capacity of the Nakambala factory from about 200000 tons of sugar a year to 450000 tons a year.

Powerhouse

The expansion created one of the biggest sugar factories in Africa, which is also self-sufficient in its power requirements and could in future supply excess power to the national grid. The newly expanded plant became fully operational last year.

Clark said while the Zambian expansion was under way, Illovo saw an opportunity for a smaller project in Mozambique that would double output from 75000 tons to 150000 tons of sugar a year.

The phased expansion of the factory began in 2008 and the final leg was expected to be commissioned in April, he said.

Illovo has also announced an expansion at its Ubombo operation where the Swazi government, with support from the European Union, had recently completed a large dam and canal system — the Lower Usuthu Smallholder Irrigation Project — which would supply water for 12000ha of irrigated agriculture.

The first 900ha of land are being planted with cane and it is expected that another 5000ha would be planted over the next three years. To handle this, the Ubombo factory's milling capacity will be increased from about 200 000 tons to more than 300 000 tons of sugar a year. This will be available from April next year.

To the west

Another big future project is the greenfields investment in Mali, west Africa.

“Mali fits all of Illovo's investment criteria, but is one of the poorest countries in the world,” Clark said. “In addition to an attractive investment regime, the region is also short of sugar, which makes it a good market.

“In quite a unique project, Illovo is partnering with the government to develop 14500ha of sugar cane to embrace the local community.”

Sugar SA

The group has a clear plan for its sugar and downstream operations in SA which have limited sugar expansion prospects, although SA remains a good contributor to group profit and a cash generator.

Illovo has disposed of its sugar operations on the KwaZulu-Natal north coast, driven by the surplus factory capacity and a general decline in the total area under sugar cane, with industry production from the country's mills declining from a high of 2,7-million tons in 2003 to about 2,2-million tons of sugar a year. In the past this dropped further in drought years to less than 2-million tons.

Stand-alone SA subsidiary

The group started its South African rationalisation with the sale of its Gledhow mill in Stanger to a black economic empowerment consortium. In a newly formed company, Illovo continues to provide technical services and owns 30% of the business. Other shareholders include Ushukela Milling, controlled by Patrick Sokhela, who owns 35%, the growers, who own 25%, and Sappi Manufacturing, which makes paper and board products from the mill's bagasse, which owns 10%. The Umfolozi Mill was sold to a grower consortium followed by the Pongola mill in the north to TSB. Illovo's remaining mills at Sezela, Umzimkulu, Eston and Noodsberg operated at higher than industry average capacity utilisation.

“We have done what we had to in SA to consolidate the available cane supply and our final task will be to create a stand-alone South African subsidiary to give the South African business its own identity,” he said.

The Illovo share price has risen since last year's rights offer. But in November it expected headline earnings per share to dip by 10% 20% for the financial year to March because of the dilutive effect of the rights offer and the 45% strengthening in the rand.

Source: Business Day