Exxaro

Zero harm remains Exxaro's key safety objective. The group recorded an LTIFR of 0.12 (FY18: 0.12), which is higher than the set target of 0.11. We have done better in previous years and remain confident that we will improve on this through our safety campaign, "khetha ukuphepha", which we launched in November 2019. We are pleased to report zero fatalities for 33 consecutive months at 31 December 2019.

Group revenue was up 1% to R25 726 million (FY18: R25 491 million), while group core EBITDA (after adjusting for non-core items) decreased 20% to R5 832 million (FY18: R7 281 million). The main contributors were the lower benchmark API4 export price negatively impacting revenue, as well as cost pressures which are further explained under financial and operational results.

Core equity-accounted income from associates and joint ventures increased to R4 750 million (FY18: R3 271 million) mainly as a result of SIOC.

Core headline earnings rose 3% to R7 402 million (FY18: R7 167 million), despite the lower core EBITDA, which was more than offset by the net increase in our core equity-accounted income.

The key items (non-core adjustments) shown below should be considered for a better understanding of the comparability of the results between the different reporting periods. EBITDA is calculated by adjusting net operating profit before tax with depreciation, amortisation, impairment charges/reversals and net losses or gains on disposal of assets and investments (including translation differences recycled to profit or loss). This term is not defined under IFRS and may not be comparable with similarly titled measures reported by other companies.

Key items impacting on comparability of results (non-core adjustments)

Segment		Description	FY19  Rm		FY18  Rm
Coal	–	Insurance claim recovery from external parties	(99)
	–	Targeted voluntary packages1	393
Ferrous	–	Targeted voluntary packages1	3
TiO2	–	Indemnification asset movement relating to the tax implications of the partial Tronox Holdings plc divestment	(65)
Other	–	Fair value adjustment on debt	(58)
	–	Fair value adjustment on the ECC contingent consideration	(296)		357
Group		Total EBITDA impact	(122)		357
Coal	–	Insurance claim recovery from external parties2	(49)		(57)
	–	Gain on disposal of non-core investments2,3	(76)		(171)
	–	Loss on loss of control of Tumelo2	35
	–	Net gains on disposal of property, plant and equipment2, 4	(18)		(121)
	–	Impairment reversal of property, plant and equipment2	(23)
	–	Tax on non-core adjustments2	11		29
Ferrous	–	Post-tax share of SIOC’s loss on disposal of property, plant and equipment2	10		13
TiO2	–	Net gains on partial disposal of investment in Tronox, including net gain on translation differences recycled to profit and loss2, 5	(2 336)
	–	Tax on partial disposal of investment in Tronox Holdings plc2	65
Energy	–	Impairment of associate (GAM)2	58
Other	–	Net gain on translation differences recycled to profit or loss on foreign subsidiaries2	(7)		(14)
	–	Net loss on disposal of property, plant and equipment2	18
	–	Losses on dilution of investments in associates2	42
	–	Post-tax share of Insect Technology’s loss on disposal of intangible assets and impairment of goodwill2	42
Various	–	Other items individually less than R10 million2	4		1
Net financing cost	–	Eyesizwe preference dividend accrued (consolidation impact)	25		100
Non-controlling interest	–	Non-controlling interests on non-core adjustments	(86)
Group	Total attributable earnings impact		(2 407)		137

1	Exxaro is committed to comply with the employment equity targets prescribed by the Mining Charter and DTI codes and as such approved various mechanisms that will support the achievement of the 2022 targets.
2	Excluded from headline earnings.
3	Relates to a gain on disposal of Paardeplaats mining right; FY18 comprises a gain on disposal of Manyeka (R69 million) and a gain on disposal of NBC (R102 million).
4	FY18 includes R115 million gain on disposal of mineral properties by Matla.
5	Includes a gain of R1 234 million on the partial disposal of Tronox Holdings plc, a gain of R832 million on translation differences recycled to profit or loss on partial disposal of Tronox Holdings plc and a gain of R270 million on the redemption of the Tronox UK membership interest.

The movement in the main commodity prices impacting on Exxaro's performance are summarised in the table below.

Change in commodity prices

	Average US$ per tonne
Commodity price	FY19		FY18	% change
API4 coal	72		98	-27
Iron ore fines 62% Fe (CFR China)	94		70	+34

Group financial results

Group segment results (Rm)

	Revenue				Core EBITDA1
	FY19		FY18		FY19		FY18
Coal	25 582		25 302		5 902		7 617
Ferrous	130		169		3		15
Other	14		20		(73)		(351)
Total	25 726		25 491		5 832		7 281

1	Core EBITDA is calculated after adjusting for non-core adjustments.

Revenue and core EBITDA

Group revenue was up 1% to R25 726 million (FY18: R25 491 million). While coal export volumes increased by 14%, there was a significant decline in the API4 price resulting in a 30% lower average price per tonne achieved of US$54 (FY18: US$77). This negative impact was cushioned somewhat by a weaker average spot exchange rate of R14.44 to the US dollar (FY18: R13.24). On the domestic front, while higher prices from commercial mines had a positive revenue impact, this was offset by lower production volumes when compared to the previous year.

Group core EBITDA decreased by 20% to R5 832 million (FY18: R7 281 million), mostly due to lower export prices, inflationary pressure on costs, higher selling and distribution costs directly attributed to our higher export volumes and higher rehabilitation costs at our closed operations resulting from revised cost estimates in line with the latest NEMA regulations.

Earnings

Headline earnings were 13% higher at R7 599 million (FY18: R6 707 million) or 3 027 cents per share (FY18:  2 672 cents per share). This was mainly driven by an increase of R1  434 million in Exxaro's share of income of equity-accounted investments to R4 693 million (FY18: R3 259 million) which more than offset the drop in coal earnings.

After adjusting for non-core items, core headline earnings rose 3% to R7 402 million (FY18: R7 167 million) or 2 354¹ cents per share (FY18: 2 159¹ cents per share).

1	Based on a core WANOS of 332 million shares from January to October 2019 and core WANOS of 251 million shares for November and December 2019 (FY18: 332 million shares).

Core equity-accounted income (Rm)

		Core equity-accounted income/(loss)				Dividend income
		FY19		FY18		FY19		FY18
Coal: Mafube		127		113
Coal: RBCT		3		(34)
Ferrous: SIOC		4 423		2 605		4 051		2 569
TiO2: Tronox SA		236		381
	Tronox UK1			110
	Tronox Holdings plc2					47		69
Energy3		17		60		95		58
Other: Other4		(56)		36
Total		4 750		3 271		4 193		2 696

1	Application of the equity method ceased when the investment was classified as a non-current asset held-for-sale on 30 November 2018. On 15 February 2019, the 26% Tronox UK membership interest was redeemed.
2	Application of the equity method ceased when the investment was classified as a non-current asset held-for-sale on 30 September 2017.
3	Includes equity-accounted income for Cennergi of R45 million (FY18: R65 million) and equity-accounted loss for LightApp of R28 million (FY18: R5 million). The dividend received for both periods is from Cennergi.
4	Includes an equity-accounted income for Black Mountain of R51 million (FY18: R70 million), an equity-accounted loss for Insect Technology of R103 million (FY18: R31 million) and an equity-accounted loss for Curapipe of R4 million (FY18: R3 million).

Cash flow and funding

Cash flow generated by operations of R5 273 million (FY18: R7 024 million) and dividends received from investments of R4 193 million (FY18: R2 696 million) were sufficient to cover ordinary dividends paid, after paying taxes and net finance costs.

Total capital expenditure of R6 076 million increased by R286 million, when compared to the corresponding period last year, consisting of R345 million decrease on sustaining and environmental capital (stay-in-business capital) and R631 million increase on new capacity (expansion capital).

Debt exposure

Net debt for the year ended 31 December 2019 increased by R1 943 million to R5 810 million (FY18: R3 867 million). The main cash outflow items during 2019 include the funding of our capital expenditure programme of R6 076 million, R344 million cash payment in respect of the ECC contingent consideration, R678 million for the acquisition of shares in the market to settle share-based payments and R263 million being the deferred consideration paid to Insect Technology (previously known as AgriProtein).

In addition to the cash generated by our own operations and dividends received, we also received cash of R2 057 million from Tronox UK for the redemption of Exxaro's 26% membership interest and R2 889 million from Tronox Holdings plc for the repurchase of 14 million shares from Exxaro. Of the cash received, 65% was returned to shareholders as a special dividend of R3 218 million.

The dividends received by Eyesizwe resulted in the full settlement of the preference share liability in October 2019.

Coal business performance

Unreviewed coal production and sales volumes ('000 tonnes)

	Production				Sales
	FY19		FY18		FY19		FY18
Thermal	43 203		44 417		43 503		43 967
Commercial – Waterberg	25 683		27 375		24 443		25 364
Commercial – Mpumalanga	11 529		10 433		3 975		4 033
Exports					9 087		7 965
Tied	5 991		6 609		5 998		6 605
Metallurgical	2 074		2 323		1 030		1 197
Commercial – Waterberg	2 074		2 323		1 030		1 197
Total coal	45 277		46 740		44 533		45 164
Semi-coke			23				33
Total coal (excluding buy-ins)	45 277		46 763		44 533		45 197
Thermal coal buy-ins	305		1 049
Total coal (including buy-ins)	45 582		47 812		44 533		45 197

In the domestic market, steam coal demand remained stable with Eskom demand varying due to lower offtake from Medupi power station offset by additional offtake from Leeuwpan and ECC. AMSA demand varied due to fluctuations in kiln operations as well as the steel plant in Saldanha being placed on care and maintenance. Exxaro has successfully placed the AMSA material in the market with other customers.

Overall, the thermal coal seaborne market remained in oversupply. However, price support for the API4 was evident towards the end of 2019 but the sharp increase in API4 priced South African producers out of their natural markets. The competition in our markets is intensifying, with traditional Atlantic Ocean suppliers competing aggressively. The API4 averaged US$72 per tonne compared to US$98 per tonne in 2018. Export volumes increased 14% from 8.0Mt in FY18 to 9.1Mt in FY19.

Production and sales volumes

Coal production volumes (excluding buy-ins) were down 1 463kt (-3%). The lower production volumes are mainly attributed to the divestment of NBC at the end of October 2018 as well as lower production at Grootegeluk due to the lower demand from Eskom for the Medupi power station. This was partially offset by the early tonnes from Belfast and ramp-up of Mafube. Sales volumes were only 1% (-632kt) down due to belt failure and ash handling problems experienced at the Medupi power station resulting in lower offtake.

Thermal coal

Commercial: Waterberg

Production at Grootegeluk declined by 1 692kt (-6%) due to the lower offtake from the Medupi power station. This also resulted in a decrease in sales volumes of 921kt (-4%).

Commercial: Mpumalanga

The commercial Mpumalanga mines’ thermal coal production was 1 096kt (11%) higher compared to FY18 mainly driven by:

• Belfast ramping up earlier than expected and producing 1 029kt
• Higher production at Mafube of 878kt, mainly due to the ramping down of Springboklaagte in FY18 and the ramping up of Nooitgedacht in FY19
• Higher production at ECC of 438kt following the ramp-up of FZON, the first production of 4 seam coal at DCMW and increased yield and product achieved at DCME
• Higher production at Leeuwpan of 176kt due to the change in production specifications resulting in higher yields and improved throughput, partly offset by lower tempos to meet the contracted quality requirement on the Eskom contract at the crush and screening plant.

The increase was partly offset by no volume from NBC (-1 425kt) as a result of our divestment in 2H18.

The commercial Mpumalanga mines’ thermal coal sales were marginally down by 58kt (-1%), mainly due to our divestment of NBC (-1 478kt) in 2H18. The decrease was partly offset by higher sales at Leeuwpan (706kt) and ECC (655kt) due to our strategy to divert coal from the export market to Eskom.

Exports commercial

Export sales increased by 1 122kt (+14%) mainly because of more coal being available from Mafube, ECC and Belfast.

Tied

Coal production and sales from Matla mine decreased by 9%, mainly due to the shortwall-stop at Mine 3.

Metallurgical coal

Grootegeluk’s metallurgical coal production decreased by 249kt (-11%) as a result of TFR performance and full stockpiles. Sales volumes were lower by 167kt (-14%) mainly due to lower demand from AMSA.

	Revenue			Core EBITDA1
	FY19		FY18	FY19		FY18
Commercial – Waterberg	14 012		13 289	7 146		6 882
Commercial – Mpumalanga	7 240		7 984	71		1 558
Tied2	4 038		3 665	159		144
Other	292		364	(1 474)		(967)
Total coal	25 582		25 302	5 902		7 617

1	Core EBITDA is calculated after adjusting for non-core adjustments.
2	Matla mine supplying its entire production to Eskom.

Coal revenue was 1% higher at R25 582 million (FY18: R25 302 million). The higher revenue was mainly driven by an increase in domestic sales due to price escalations and new contracts, partly offset by other lower domestic volumes. Although export volumes were 14% higher than the previous year, the average realised rand price per tonne was 24% lower at R774 compared to R1  013 in FY18.

Coal core EBITDA of R5 902 million (FY18: R7 617 million) decreased by 23%, mainly driven by:

• Inflation (-R676 million)
• Higher distribution costs due to increased exports (-R514 million)
• Higher rehabilitation costs (-R336 million), mainly at our closed operations
• Higher operational costs (contract mining and mining consumables) mainly at ECC (-R184 million).

The decrease was partly offset by:

• Lower royalties (+R151 million).

Equity-accounted investment

Mafube, a 50% joint venture with Anglo, recorded a core equity-accounted income of R127 million (FY18: R113 million) mainly due to the ramping up of the Nooitgedacht reserve.

Capex and projects

Exxaro’s coal capital expenditure of R5 817 million increased by 2% compared to R5 722 million in FY18. While our expansion capital in the Mpumalanga region increased by R1  345 million, this was partly offset by a lower capex spend of R789 million in the Waterberg region. Our sustaining capital decreased by R534 million, mainly in the Mpumalanga region.

As reported previously, first coal from our greenfield Belfast mine was produced in March 2019 and first product sales took place in May 2019. Completion of the beneficiation plant is close to commissioning with ramp up expected in 1Q20. At Mafube, ramping up of the Nooitgedacht reserve to name plate capacity was achieved in 4Q19 and continues to exceed expectations.

Coal Capex (Rm)

	FY19		FY18	% change FY19 vs FY18
Sustaining	2 245		2 779	-19
Commercial – Waterberg	1 753		1 904	-8
Commercial – Mpumalanga	475		875	-46
Other	17
Expansion	3 572		2 943	+21
Commercial – Waterberg	1 198		1 987	-40
Commercial – Mpumalanga	2 301		956	+141
Other	73
Total coal capex	5 817		5 722	+2

Ferrous business

Equity-accounted investment

The core equity-accounted income from SIOC increased by R1 818 million to R4 423 million (FY18: R2 605 million). The increase is primarily driven by the effect of the higher iron-ore prices realised and a weaker exchange rate.

An interim dividend of R2 680 million was received from our investment in SIOC (2H18: R1 263 million). SIOC has declared a final dividend to its shareholders in February 2020. Exxaro’s 20.62% share of the dividend amounts to R1 412 million. The dividend will be accounted for in 2020.

Titanium dioxide

Equity-accounted investment

Core equity-accounted income from Tronox SA decreased by R145 million to R236 million compared to FY18. The decrease is mainly as a result of increased costs (royalties and allocated head office costs), inventory revaluation adjustments and foreign currency exchange losses.

Our investment in Tronox Holdings plc continues to meet the criteria to be classified as a non-current asset held-for-sale.

Energy business

Equity-accounted investment

Cennergi, a 50% joint venture with Tata Power, recorded core equity-accounted income of R45 million for FY19 (FY18: R65 million). The results were negatively impacted by the ineffective portion of interest rate swaps and fair value adjustments on share-based payment liabilities offset by improved operational performance. Cash flow generation remains positive as Exxaro received dividends of R95 million in FY19 compared to R58 million in FY18.

Despite the loss of two turbines due to fire incidents, for a significant period of the year, generation output to date at the two windfarms is better than planned given favourable wind conditions. The replacement turbines have been commissioned in November 2019 and are in full production.

As announced on 17 September 2019, Exxaro has concluded an agreement with Khopoli, a wholly owned subsidiary of Tata Power, to acquire Khopoli's 50% shareholding in Cennergi for an amount of R1 550 million, subject to normal working capital adjustments. Post the conclusion of the agreement, Exxaro will have 100% ownership of Cennergi. The last condition precedent was met in March 2020.

During the second half of 2019, the Exxaro board approved a decision to divest from its 26% interest in Black Mountain. On 30 November 2019, the investment was classified as a non-current asset held-for-sale and the application of the equity method ceased.

On 31 January 2020, the Arnot operation was transferred to Arnot OpCo Proprietary Limited Consortium. The accounting of the transfer will be accounted for in 2020.

On 20 February 2020, Exxaro announced our intention to divest our entire interest in ECC and the Leeuwpan operations. The divestment will be executed through a formal disposal process. The proposed transaction is a category two transaction in terms of the JSE Listings Requirements and is therefore not regarded as material.

We are proud to report that Eyesizwe, our BEE shareholder, has fully settled its acquisition debt in October 2019, three years earlier than anticipated. The early settlement was funded from dividends received from Exxaro. From an accounting perspective this resulted in the outside shareholders of Eyesizwe being treated as non-controlling interests for the Exxaro group from 1 November 2019.

Furthermore, we undertook to transfer at least 10% of our 24.9% shareholding in Eyesizwe into structures for the benefit of Exxaro's employees and communities adjacent to our operations. The transaction agreements are expected to be concluded in 1Q20 with implementation of the employee scheme expected in April 2020 and the implementation of the community scheme dependent on the registration of the company as a public benefit organisation in terms of s18A of the Income tax Act.

As mentioned previously, Exxaro is proud to have achieved a level 2 BBBEE recognition status for FY18, two years earlier than planned. While the FY19 audit is still in progress, we expect to maintain our level 2 BBBEE status. The certificate will be published as soon as the audit is concluded.

During 2018, Exxaro indicated that it was considering options relating to four prospecting rights grouped into two projects, namely Waterberg North and South. The projects are located approximately 30km north of Grootegeluk, and consist of Inferred Coal Resources of 2 147Mt and 869Mt, respectively.

Following a strategic review, a decision was taken to relinquish these prospecting rights, resulting in the Exxaro total attributable Coal Resources decreasing by approximately 22%. We are conducting all activities to ensure we fulfil the necessary closure requirements.

Furthermore, Exxaro total attributable Coal Reserves decreased by approximately 3%. The Coal Reserves for ECC’s Forzando operation decreased by approximately 37% for the reporting year. The most significant contributors to the decrease are mining depletion, the review of macro-economic assumptions and certain areas excluded due to unfavourable floor gradients. Changes in Coal Reserves larger than 10% (material) are also reported at our Matla and Leeuwpan operations. The approximate 13% decrease at Leeuwpan is primarily due to mining depletion and the approximate 14% decrease at Matla is mainly due to mining depletion and the disposal of mining areas due to unfavourable stoping conditions in close proximity to surface infrastructure.

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

Matla's mining right lapsed in November 2019. A compliant mining right renewal application was submitted in August 2019.

For 1H20, global economic growth stabilisation is anticipated. However, depending on the duration and speed of the coronavirus in China, the recovery in the thermal coal import demand in China might support the seaborne market somewhat.

We expect domestic thermal coal demand and pricing to remain relatively stable during 2020.

The API4 is expected to be under pressure as a similar liquefied natural gas (LNG) supply wave, as was evident in 2019, is anticipated to continue into 2020, together with low gas prices globally. However, a potential increase in thermal coal import demand in China might support the seaborne market somewhat.

South Africa’s fiscal imbalance is set to remain a huge constraint in addressing the increasing socio-economic challenges with the risk of a sovereign rating downgrade increasing. As a result, the rand/dollar exchange rate is expected to remain volatile.

As we roll out the integrated operations centres (IOCs) at all our operations, according to our digitalisation plan, the increased visualisation of the mining value chain will highlight embedded inefficiencies that will be addressed through in-time decision making relating to safety, productivity and cost performance. At an enterprise level, we are on schedule to implement our integrated management platform allowing us to access strategic insights across our operations, enabling future looking value add conversations.

The expected recovery in iron ore seaborne supply with narrowing steel margins will soften the iron ore market.

Our shareholding in Tronox Holdings plc has been reduced to approximately 14.7 million shares, representing about 10% of the total outstanding shares as at 31 December 2019. We remain committed to monetising our stake in Tronox Holdings plc over time and in the best possible manner, taking into account prevailing market conditions.

In 2017 Exxaro adopted a strategy to explore new investment opportunities based on three pillars, namely water security, food security and energy security. Based on our experience since then, we have now changed that strategy to focus solely on new opportunities in the energy security space. As we pursue these opportunities, our approach continues to be measured with a view to mitigating potential risks and ensuring that the capital allocation decisions are in line with appropriate metrics.

In respect of the Moranbah South hard coking coal project, Exxaro, together with Anglo Coal, is in the process of reassessing the potential development plan for the project.

In August 2019, we reported that we will share our climate response strategy, including our progress with incorporating the recommendations from the FSB’s Taskteam on Climate-related Financial Disclosures (TCFD) which highlight climate change transitional and physical risks confronting our business and the related financial impacts of these risks. Our Climate Change Position Statement contains details on our approach to climate change mitigation and adaption. The document also includes our aspirational target of carbon neutrality by 2050. We have developed climate change scenarios that take into account the 2°C world as per the recommendation of the TCFD. We will be using these scenarios to conduct a detailed analysis to quantify the financial risks and opportunities in our operations.

In terms of our capital allocation framework, we will remain prudent in returning cash to shareholders, managing debt, and selectively reinvesting for the growth of our business. Exxaro’s declared 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, Exxaro is targeting a gearing ratio below 1.5 times net debt to EBITDA.

The board of directors has declared a cash dividend comprising:

• 3 times core attributable coal earnings and
• Pass through of SIOC dividend of R1 412 million.

Notice is hereby given that a gross final cash dividend, number 34 of 566 cents per share, for the year ended 31 December 2019 was declared, and is 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 2019.

Salient dates for payment of the interim dividend are:

– Last day to trade cum dividend on the JSE	Tuesday, 21 April 2020
– First trading day ex dividend on the JSE	Wednesday, 22 April 2020
– Record date	Friday, 24 April 2020
– Payment date	Monday, 28 April 2020

No share certificates may be dematerialised or re-materialised between Wednesday, 22 April 2020 and Friday, 24 April 2020, 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 Tuesday, 28 April 2020.

Additional information on financial and operational results for the year ended 31 December 2019, and the accompanying presentation can be accessed on our website on www.exxaro.com.

On behalf of the board

• Jeff van Rooyen
  Chairman

• Mxolisi Mgojo
  Chief executive officer

• Riaan Koppeschaar
  Finance director

12 March 2020