Exxaro

Exxaro has been a constituent of the JSE’s FTSE Russell ESG Ratings (previously JSE SRI Index) since 2008. These ratings are a measure of our business sustainability practices in relation to environmental stewardship, social responsibility as well as governance and ethical leadership of the business and are key indicators of progress in our response to socio-economic and environmental challenges where we operate.

During the financial year ended 31 December 2018, our overall ESG rating was a score of 3.7 out of a total of 5, attributable to a score of 3.5 for environmental performance, 3.3 for social responsibility and 4.6 for governance and ethical leadership. These were leading scores compared to peers in both the coal sector and the mining industry. These non-financial metrics are integrated into our business decision-making process, thus enhancing our stakeholder value creation through reduced risk to the business.

One of the key highlights during the financial year was the completion of the restructuring of the board of directors (Board) following the implementation of the Replacement BEE Transaction. Through this process we were able to increase the Board gender diversity (among others) with black representation of 64% (against a target of 50%) and black female representation of 36% (against a target of 30%).

While we are pleased with this leading performance, we are conscious of the challenges that remain in the environmental and social elements, including the systemic climate risk to our business. Our response to these challenges are addressed in detail in our 2018 Integrated Report, which will be published in April 2019.

Exxaro delivered a solid financial performance for FY18, achieving core EBITDA¹ of R7 281 million (FY17: R7 207 million), while unadjusted EBITDA² rose to R6 924 million (FY17: R2 487 million). Reconciliation from EBITDA to core EBITDA is provided in the table below. We believe these adjustments should be excluded to enable a more meaningful year-on-year comparison.

Table 1: Difference between unadjusted EBITDA and core EBITDA

The prior year results for income from equity-accounted investments included several headline earnings adjustments. After taking these into consideration, core income from equity-accounted investments increased by 22% to R3 271 million (FY17: R2 688 million).

Table 2: Adjustments impacting income from equity-accounted investments

We have revised the way in which our coal operations are reported to provide stakeholders with more useful and relevant information. The coal operations have been disaggregated based on the nature of the operation – commercial, tied and other – as well as geographical location between the Waterberg and Mpumalanga regions in South Africa.

The key changes to the coal reportable segments are:

• The commercial coal operations have been split by region into Waterberg and Mpumalanga
• The tied coal operation includes the Matla mine
• Coal other operations have been added which include the remaining coal operations not reported on under the commercial or tied coal operations as well as Arnot and Tshikondeni (mines in closure).

Coal export revenue and related export cost items have been allocated to the coal operating segments based on the origin of the initial coal production.

FY17 numbers have been re-presented to reflect these changes.

The key transactions shown below should be considered for a better understanding of the comparability of results between the two years.

Key transactions impacting on comparability (non-core adjustments) (Rm)

Commodity price movements impacting Exxaro’s performance are summarised below.

Change in commodity prices

Group segment results (Rm)

Group financial results

Revenue

Group revenue rose 12% to R25 491 million (FY17: R22 813 million), mainly due to higher coal selling prices and higher Eskom commercial volumes at Grootegeluk, based on demand from Medupi power station, partially offset by a lower quality product mix. The average price per tonne achieved on exports was US$77 (FY17: US$69). The average spot exchange rate realised was marginally stronger at R13.24 to the US dollar (FY17: R13.30).

Earnings

Headline earnings increased to R6 707 million (FY17: R1 560 million) or 2 672 cents per share (FY17: 502 cents per share), driven by the following non-recurring costs in the prior year:

• BEE credential expense and transaction costs of R4 339 million for the Replacement BEE Transaction, which were not adjusted for in headline earnings
• Cessation of the equity method of accounting for Tronox Limited on 30 September 2017.

After adjusting for non-core transactions on table 3, core headline earnings rose 14% to R7 167 million (FY17: R6 295 million) or 2 159 cents per share (FY17: 2 011 cents per share) based on a WANOS of 332 million (FY17: 313 million).

Similarly, core equity-accounted income/(loss) is shown below.

Core equity-accounted income/(loss) (Rm)

Cash flow and funding

Cash flow generated by operations of R7 024 million (FY17: R6 826 million) plus dividends received from investments of R2 695 million was sufficient to cover our capital expenditure and ordinary dividends as shown below.

Deploying cash generated by operations (Rm)

Total capital expenditure increased by R1 869 million mainly for investments in Grootegeluk’s GG6 phase 2 expansion and Belfast projects.

SIOC declared a final dividend to shareholders on 14 February 2019, totalling R1 369 million for Exxaro’s 20.62% shareholding. This will be reflected in our 1H19 results.

Debt exposure

The group had net debt of R3 867 million at 31 December 2018 compared to net cash of R69 million at 31 December 2017.

Net debt includes the preference share liability of R609 million (FY17: R2 478 million) for Eyesizwe.

In addition to cash flow items noted above, a gross special dividend of R4 502 million (R3 149 million paid to external shareholders) was paid to shareholders on 5 March 2018 after the partial disposal of our shareholding in Tronox Limited in October 2017.

Coal business performance

Unreviewed coal production and sales volumes ('000 tonnes)

Trading conditions in the domestic market were strong in FY18, resulting in all premium product being sold at stable prices. Our supply to Eskom increased in line with contractual commitments while all other markets remained stable.

The international export market recorded strong demand for most of 2018. India increased its demand for South African lower-grade material up to 3Q18, when the market became oversupplied with coal from Indonesia and Australia after the ban on coal imports by China. Demand from South Korea slowed in 2018 as South African coal could not compete with Colombian material, but new opportunities came from Japan after Exxaro shipped a trial cargo to a power plant and received a new order for 2019. In Pakistan, new coal-fired power plants were commissioned in 2018, increasing annual coal demand to 6Mtpa from the traditional 4Mtpa. We made further inroads into the Pakistan market, supplying both the power plant and cement industries.

China has recently relaxed the ban on coal imports. However, there is still a strong indication that it will continue to protect its domestic market by limiting coal imports. If China imposes a further ban on imports, this will have a negative impact on coal pricing, especially into India.

In addition to favourable domestic and international trading conditions, we realised year-on-year operational excellence improvements and successfully implemented two key initiatives, namely visualisation of our mining value chain and the integrated operations centre at some of our major mines, focused on eliminating systemic waste.

Production and sales volumes

Overall coal production volumes (excluding buy-ins and semi-coke) were up 1 765kt (4%), mainly attributable to higher production at Grootegeluk due to the ramp-up of Medupi. Sales were only 716kt (2%) higher due to strategic stock-building at Grootegeluk to compensate for disrupted production while constructing the GG6 expansion project.

Thermal coal

Commercial: Waterberg

Production at Grootegeluk rose 3 969kt (17%), mainly due to the ramp-up of Medupi. This also resulted in an increase in sales of 2 898kt (13%).

Commercial: Mpumalanga

The commercial Mpumalanga mines’ thermal coal production was 1 604kt (13%) lower, driven by:

• Community actions as well as the subsequent disposal of certain assets and liabilities of NBC to North Block Complex Proprietary Limited at the end of October 2018 (-1 538kt or -52%)
• A labour strike by the contractor, geological challenges at Forzando South, as well as the timing of coal seams mined at Dorstfontein Complex East affecting production at ECC (-263kt or -6%)
• Ramping down Springboklaagte reserve and ramping up Nooitgedacht reserve at Mafube (-669kt or -40%).

The decrease was partly offset by:

• Higher ramp-up in overburden tonnes enabling higher production at Leeuwpan, as well as the decision to increase power station coal to the export market (+865kt or +26%).

The commercial Mpumalanga mines’ thermal coal sales were down 1 744kt (30%), driven by:

• Community actions preventing Eskom from collecting coal and the subsequent disposal of certain assets and liabilities of NBC (-1 317kt or -47%)
• A change in sales strategy at Leeuwpan aimed at maximising export sales to capitalise on strong market prices and demand (-317kt or -14%)
• Product availability driven by lower production at ECC (-110kt or -16%).

Exports commercial

Export sales increased by 5% to 7 965kt as buy-ins more than doubled.

Tied

Coal production and sales from Matla were 11% lower. Lower production of 792kt was largely affected by the Mine 2 wall halting production mid-March (-1 393kt), partly offset by Mine 3 (+601kt ) after implementing an additional section in the review period.

Metallurgical coal

Grootegeluk’s metallurgical coal production increased by 191kt (9%), resulting in higher export sales. Our operational excellence initiatives (focusing on the seven-day work week, plant throughput, plant discard and coal fragmentation) contributed to higher production. Sales were in line with FY17.

Semi-coke

Semi-coke production was 63kt (73%) lower due to a fire in March 2018 at the reductant plant, resulting in lower sales of 55kt (63%).

Capex and projects

Exxaro’s capital for its coal business increased by 50% compared to FY17. This is mainly due to:

• the GG6 Phase 2 expansion project in the Waterberg region
• the Belfast project, Leeuwpan Lifex project and higher sustaining capex at ECC, in the Mpumalanga region.

The higher capex is partly offset by:

• optimisation on sustaining capital at Grootegeluk (trucks, stacker and reclaimers as well as discard and backfill phase 2 project).

Coal Capex (Rm)

Revenue and core EBITDA

Coal revenue of R25 302 million rose by 12% higher (FY17: R22 553 million). Higher revenue from our commercial mines reflects higher selling prices, an increase in Eskom sales volumes and higher exports. This was partly offset by lower domestic sales and a lower product quality mix.

Coal EBITDA of R7 617 million (FY17: R7 374 million) rose 3%, driven by:

• Higher commercial revenue (+R1 920 million)
• Higher stock movement (+R281 million)
• Savings on distribution costs (+R396 million).

The increase was partly offset by:

• Higher inflation (-R962 million)
• Higher mining costs (-R437 million)
• Higher maintenance (-R362 million)
• Higher general costs (-R402 million) (includes cost relating to digital strategy, grants in respect of our enterprise and supply development strategy and fair value on Trust investments)
• Higher royalties (-R281 million)
• Higher employee costs (-R121 million).

Equity-accounted investment

Mafube, a 50% joint venture with Anglo, recorded lower core equity-accounted income of R113 million (FY17: R259 million), mainly due to ramping down at Springboklaagte and ramping up at the Nooitgedacht reserve.

Ferrous business

Equity-accounted investments

After adjusting for non-core transactions, equity-accounted income from SIOC was R2 605 million (FY17: R2 598 million).

An interim dividend of R1 263 million was received from SIOC in FY18 (FY17: R1 390 million). A final dividend,of which Exxaro’s share will be R1 369 million, was declared on 14 February 2019.

Titanium dioxide

Equity-accounted investment

After adjusting for non-core transactions, core equity-accounted income from Tronox SA and Tronox UK increased by R305 million to R491 million compared to FY17. This is mainly due to improved operating performance and foreign currency exchange gains.

We are committed to monetising our remaining 23.4% interest in Tronox Limited to focus on core activities, repay debt, fund capital commitments and make distributions to shareholders by applying our capital allocation framework. In this regard, on 26 November 2018, Exxaro and Tronox Limited agreed to address the following key matters:

• The terms of our support for Tronox Limited’s intention to redomicile from Australia, where it is currently incorporated, to the United Kingdom
• Exxaro’s accelerated disposal of its 26% member’s interest in Tronox UK for R2 billion in cash, representing our indirect share of loan accounts in Tronox SA at 30 September 2018
• Further clarification of terms and conditions agreed between Exxaro and Tronox Limited in 2012, when Tronox Limited was formed, by which Exxaro can dispose of its 26% equity interest in Tronox SA in exchange for 7.2 million Tronox Limited shares or the cash equivalent (the disposal). In addition to existing triggers, Exxaro and Tronox Limited have agreed that the disposal can be triggered on the occurrence of certain events, including confirmation or agreement that Tronox SA has met the relevant ownership requirements for its existing mining rights, in the context of the new mining charter
• The terms on which Exxaro can begin a staged process to monetise its remaining Tronox Limited stake of 28.7 million shares in 2019, subject to market conditions, including Exxaro's grant to Tronox Limited of a right to acquire such shares at a market-related price in lieu of selling them in the market or to any third parties.

The investment in Tronox Limited continues to meet the criteria to be classified as a non-current asset held-for-sale. In addition, Exxaro’s membership interest in Tronox UK was classified as a non-current asset held-for-sale as of 30 November 2018, when all the requirements in terms of IFRS 5 were met, and application of the equity method ceased.

On 15 February 2019, Tronox Limited confirmed the completion of the first stage of its redomiciliation, in which it has acquired Exxaro’s 26% ownership interest in Tronox UK for R2.1 billion.

On 8 March 2019, Tronox Limited announced that the shareholders of Tronox Limited approved the transaction to redomicile to the United Kingdom to Australia.

Energy business

Equity-accounted investments – Cennergi

Core equity-accounted income from Cennergi, a 50% joint venture with Tata Power, increased from R2 million in FY17 to R65 million in FY18.

Financial results were boosted by fair value adjustments on derivative instruments, as well as a change in the useful life (from 20 years to 30 years) of property, plant and equipment at the two wind farms which reduced the depreciation charge.

In FY18, Exxaro received dividends of R58 million as well as R186 million for the settlement of shareholder loans.

Equity-accounted investments – Other

On 31 May 2018, Exxaro entered into a share-purchase agreement to obtain an equity interest in AgriProtein, incorporated in the UK. The purchase price of US$52.5 million comprises initial cash of US$14.5 million (R184.2 million) paid on 1 June 2018 and a deferred consideration of US$38 million (R482.8 million), which will be paid over the next two years. The timing of the deferred consideration depends on AgriProtein’s capital expenditure requirements. Transaction costs of R6.6 million were capitalised to the cost of the investment. AgriProtein develops municipal organic waste-conversion plants to generate high-quality, natural protein sold for use in animal feed and agriculture.

On 18 September 2018, Exxaro finalised a share purchase agreement to obtain an equity interest in LightApp. The purchase price of US$10 million comprises initial cash of US$5 million (R71.9 million), paid on 27 September 2018, and a deferred consideration of US$5 million (R70.7 million) which will be paid over the next two years. Transaction costs of R0.6 million were capitalised to the cost of the investment. LightApp is one of the leading start-ups in industrial energy analytics. It is a software company that develops and deploys an energy management system for industrial customers. The LightApp solution enables continuous collection and analysis of energy consumption data together with production indicators from sensors on the production floor. This analysis leads to improved energy management and efficiency through deeper insights and alerts. While LightApp is a global business, Exxaro will also use the LightApp platform to improve energy management at its own operations, with the first deployment already commencing at the FerroAlloys facility in Pretoria.

To optimise Exxaro’s coal portfolio, we concluded a sale-of-shares agreement with Universal Coal for the 100% shareholding in Manyeka, including the 51% interest in Eloff. The transaction closed on 31 July 2018. Exxaro received net cash of R75 million, resulting in a gain on disposal of R69 million.

On 2 March 2018, Exxaro concluded a sale-of-asset agreement with North Block Complex Proprietary Limited to dispose of certain assets and liabilities of NBC. Given the composition of the assets, two section 11 applications were submitted to the DMR to transfer the mineral rights. Although the section 11 for the Paardeplaats mining right has not yet been granted, it was agreed with the buyer to close the transaction on 31 October 2018. Exxaro received proceeds of R17 million for the Glisa and Eerstelingsfontein reserves, resulting in a gain on disposal of R102 million.

The sale of Paardeplaats will be concluded once the section 11 approval has been obtained.

Exxaro achieved level 5 B-BEEE recognition (FY17: level 6) and is on track to achieve level 3 recognition for FY19. This reflects implementation of our ESD strategy through a combination of loans and grants amounting to R180 million, which was fully operationalised in 2018. We support the principles of transformation and will use regulatory mechanisms as a minimum to advance national aspirations for transformation.

Material changes in Coal Reserve estimates are reported at two of our operations for FY18.

At ECC, there was an increase of 56% in ROM reserves by incorporating the 2017 geological model to update the LOM and Coal Reserve classification for the Dorstfontein West and Dorstfontein East operations. This resulted in a material amount of seam 2 and 4 lower to be included in the underground reserve at Dorstfontein East.

At Matla mine, the update of the geological model and subsequent review of the resource classification resulted in a 5.7% decrease in the ROM Coal Reserve. In addition, a reduction of the pillar-extraction recovery based on reviewing the extraction process to enhance ventilation and safety, as well as considering actual extraction figures in the reporting period, resulted in an additional 13% decrease of the Coal Reserve.

For all other operations, other than normal LOM depletion, no material changes to Mineral Resources and Mineral Reserves estimates are reported.

Exxaro faced several challenges over the period, due to the temporary closure of DMR offices in Limpopo and Mpumalanga and continued delays in registering rights and amendments to existing rights. Despite these, notable achievements included ministerial consent to transfer NBC’s Glisa and Eerstelingsfontein mining rights, the grant and execution of the Paardeplaats mining right and renewal of two Waterberg prospecting rights.

We expect sustainable improvement in the physical operating results for the coal business by embedding our business optimisation and operational excellence initiatives across all operations, and unlocking value through data analytics and value-chain integration.

We are proud to report that we are on track and within budget to deliver value on our coal capital projects, spending more that R20 billion over the next five years to increase sales volumes from 45Mtpa in FY18 to more that 60Mtpa by FY23. The Belfast and Leeuwpan Lifex projects are ahead of schedule, while the GG6 expansion and Grootgeluk rapid loan out station projects are impacted by community and labour related activities in the Lephalale area. We continue to engage with contractors faced with labour unrest and corporate uncertainty.

A stable domestic market is anticipated for 1H19, supported by healthy prices due to tight supply in premium quality sized coal.

In Mpumalanga Eskom has, due to the termination of several coal supply agreements, requested industry participants for expressions of interest to supply coal on a short-term basis while it is looking to enter into longer-term contracts. This is positive for Exxaro as it provides more flexibility between various markets.

We remain positive that the outcome of the national elections on 8 May 2019 will put South Africa on a renewed investment and economic growth path urgently needed to address the socioeconomic challenges the country is facing. Exxaro is fully supportive of the investment drive spearheaded by the Presidency.

The international market remains largely bearish owing to possible market oversupply, which hinges on China and its ban on coal imports. An increase in coal demand is expected in India, a market that is likely to remain our main export destination.

Market conditions are expected to be supportive in 2019. We remain confident that through our well-diversified coal portfolio, we will continue to explore more opportunities in emerging markets where coal-fired power plants are being commissioned.

In 1H19, the performance of our SIOC investment will be boosted by higher iron ore prices after supply disruptions in Brazil, a relative high global lump premium and a weak rand/US dollar exchange rate.

Although global economic activity is edging down and market sentiment is challenging, commodity price support in 2H18 is expected to continue into 1H19. However, global policy tensions, especially on trade, remain the biggest threat to global growth. The rand/US dollar exchange rate is expected to remain volatile during the period.

Exxaro’s dividend policy is based on two components: a pass-through of the SIOC dividend received and a targeted cover ratio of 2.5 times to 3.5 times core attributable coal earnings.

Additionally, we are targeting a gearing ratio below 1.5 times net debt to EBITDA.

The board has declared a cash dividend comprising:

• 3.3 times core attributable coal earnings
• Pass-through of SIOC dividend of R1 369 million.

Notice is given that a gross final cash dividend, number 32 of 555 cents per share, for the financial year ended 31 December 2018 was declared, payable to shareholders of ordinary shares. For details of the dividend, please refer note 11 of the reviewed condensed group annual financial statements for the year ended 31 December 2018.

Salient dates for payment of the final dividend are:

No share certificates may be dematerialised or rematerialised between Tuesday, 7 May 2019 and Friday, 10 May 2019, both days inclusive. Dividends for certificated shareholders will be transferred electronically to their bank accounts on payment date. Shareholders who hold dematerialised shares will have their accounts at their central securities depository participant or broker credited on Monday, 13 May 2019.

Additional information on financial and operational results for the financial year ended 31 December 2018, and the accompanying presentation can be accessed on our website on www.exxaro.com.

On behalf of the board

12 March 2019