Commentary For the year ended 31 December 2023

For the year ended 31 December 2023, the group observed zero fatalities but recorded 11 lost time injuries resulting in an LTIFR of 0.07 against the set target of 0.05 (FY22: 0.05). Exxaro has recorded four high potential incidents across the group, compared to five for the year ended 31 December 2022. To improve on our performance and prevent future incidents, our 2024 objective is to reinvigorate Exxaro’s five Key Safety Focus Areas.

Comparability of results

For a better understanding of the comparability of results between the two reporting years, we have adjusted our earnings for non-recurring items (referred to as non-core adjustments) to derive our adjusted earnings. The non-core adjustments in both FY23 and FY22 are the same as the headline earnings adjustments (refer note 4 ).

Group revenue and EBITDA

	Revenue				EBITDA 1
	FY23	FY22	Change		FY23	FY22	Change
	Rm	Rm	%		Rm	Rm	%
Coal	36 945	44 971	(18)		12 213	19 023	(36)
Energy	1 345	1 159	16		1 023	828	24
Ferrous	398	224	78		83	55	51
Other 2	10	15	(33)		80	(905)	>100
Total	38 698	46 369	(17)		13 399	19 001	(29)

1	EBITDA is calculated by adjusting net operating profit before tax with depreciation, amortisation, impairment charges or impairment reversals and net losses or gains on disposal of assets and investments (including translation differences recycled to profit or loss). Refer note 6 for key numbers used in the calculation of EBITDA.
2	Relates mainly to the corporate office and smaller operations (refer note 6).

Group revenue decreased by 17% to R38 698 million (FY22: R46 369 million), mainly driven by significantly lower export sales prices achieved as a result of the steep decline in the API4 index price, partially offset by a weaker exchange rate and higher prices achieved on domestic sales at our coal operations.

The revenue contribution from our energy operations was 16% higher than FY22. Energy generation from the Cennergi operating wind assets was higher, driven by improved wind conditions compared to the prior year.

Group EBITDA decreased by 29% to R13 399 million (FY22: R19 001 million), mainly attributable to the 36% decrease in Coal EBITDA, which is discussed in more detail under the coal business performance.

Adjusted equity-accounted income

	Adjusted equity-accounted income/(loss)				Dividends received
	FY23	FY22	Change		FY23	FY22	Change
	Rm	Rm	%		Rm	Rm	%
Coal: Mafube	510	1 902	(73)		1 525	750	103
Coal: RBCT	(8)	(9)	11
Ferrous: SIOC	6 157	4 902	26		3 386	5 153	(34)
Other: Black Mountain	332	578	(43)
Other: LightApp		(70)
Total	6 991	7 303	(4)		4 911	5 903	(17)

Group earnings

Headline earnings decreased by 22% to R11 327 million (FY22: R14 558 million), driven by the 29% decrease in group EBITDA and 4% decrease in adjusted equity-accounted income. SIOC’s adjusted equity-accounted income was 26% higher due to higher iron ore prices and sales volumes as well as cost optimisation initiatives, offset by a 73% decrease in Mafube’s adjusted equity-accounted income, mainly due to lower export prices.

The weighted average number of shares of 242 million remained unchanged translating into headline earnings per share of 4 681 cents per share (FY22: 6 016 cents per share).

Cash flow and funding

Cash generated by our operations of R13 307 million (FY22: R18 863 million), together with the dividends received from our equity-accounted investments of R4 911 million (FY22: R5 903 million), were sufficient to fund capital expenditure, taxation, and ordinary dividends paid.

Total capex increased by 63% to R2 699 million (FY22: R1 652 million). The capex for FY23 comprised R2 455 million sustaining capital and R244 million expansion capital.

Debt exposure

Our strong cash generation resulted in an increase in our net cash position to R14 834 million (excluding energy’s net debt) compared to a net cash position of R9 645 million (excluding energy’s net debt) on 31 December 2022.

Unreviewed coal production and sales volumes

	Production				Sales
	FY23	FY22	Change		FY23	FY22	Change
	‘000 tonnes	‘000 tonnes	%		‘000 tonnes	‘000 tonnes	%
Thermal	39 824	41 136	(3)		39 842	41 402	(4)
Commercial – Waterberg	26 099	27 849	(6)		24 924	26 800	(7)
Commercial – Mpumalanga	7 715	7 130	8		3 794	3 231	17
Exports					5 109	5 214	(2)
Tied 1	6 010	6 157	(2)		6 015	6 157	(2)
Metallurgical	2 465	1 988	24		684	691	(1)
Commercial – Waterberg	2 465	1 988	24		684	691	(1)
Total coal (excluding buy-ins)	42 289	43 124	(2)		40 526	42 093	(4)
Thermal coal buy-ins	175	20	>100
Total coal (including buy-ins)	42 464	43 144	(2)		40 526	42 093	(4)

1 Matla mine supplying its entire production to Eskom.

FY23 has been characterised by declining coal prices due to a decrease in high Calorific Value coal demand, driven by sufficient gas and coal stocks in Europe, Japan, Korea, and Taiwan. The reduction in coal demand was exacerbated by warmer than usual winter temperatures, robust performance in renewable and nuclear energy generation, and significantly lower gas prices.

We also saw a resurgence in Indian demand compared to FY22, due to lower coal prices. There were visible changes in global trade flows as Australia resumed supply into China from a previous trade ban, and Russian supplies to Europe and Japan reduced drastically, with Korea adopting a gradual approach of weaning itself off Russian coal.

China and India’s economic growth and buoyant power demand were the main demand drivers for coal.

Domestically, operational challenges and equipment failures at Eskom’s power stations impacted on the offtake of power station coal in the Waterberg region. The operating environment for domestic coal end-users was challenging in FY23 as a result of loadshedding, logistical challenges, slowing growth and inflationary pressures.

The benchmark API4 RBCT export price averaged US$121 per tonne (FY22: US$271 per tonne). The group realised an average export price of US$117 per tonne (FY22: US$251 per tonne). Despite this price decline, Exxaro was able to realise 97% of the average API4 index price based on its sales mix. Export volumes decreased slightly to 5.1 Mt (FY22: 5.2 Mt).

Production and sales volumes

Overall coal production volumes (excluding buy-ins) were 2% lower (-835 kt). The decrease is attributable to lower production at Grootegeluk, Mafube and Matla, offset by the higher production at Leeuwpan and Belfast. Overall sales volumes were 4% lower (-1 567 kt), mainly due to lower Eskom demand. There was a slight decrease in export sales which was partly offset by higher domestic sales, as exports were diverted to the domestic market.

Thermal coal

Commercial Waterberg

Production and sales at Grootegeluk decreased by 6% (-1 750 kt) and 7% (-1 876kt), respectively due to the lower demand mainly from Eskom.

Commercial Mpumalanga

Thermal coal production at Mpumalanga commercial mines increased by 8% (+ 585 kt), attributable to:

• Higher production at Leeuwpan of 23% (+598 kt), as we saw higher demand from domestic customers
• Higher production at Belfast of 19% (+470 kt), as we transitioned to a new mining contractor.

The increase was partly offset by:

• Lower production at Mafube of 24% (-485kt) due to equipment delivery delays and unplanned maintenance.

Thermal coal sales from Mpumalanga commercial mines increased by 17% (+563 kt), due to increased sales to domestic customers to counter the logistical constraints to export.

Exports commercial

Export sales decreased by 2% (-105 kt), driven by the logistical constraints linked to the lower rail performance of TFR. To mitigate the poor rail performance, export coal was transported to alternative export ports using road transport and some coal was sold in the domestic market.

Tied

Coal production and sales at Matla decreased by 2% (-147 kt and -142 kt), respectively. The lower production was due to unfavourable geological conditions at Mine 3 offset by higher tonnages at the shortwall at Mine 2.

Metallurgical coal

Grootegeluk’s metallurgical coal production increased by 24% (477 kt) to match its offtake plan.

Sales decreased by 1% (-7kt) due to lower demand in the domestic market.

Coal revenue and EBITDA
	Revenue				EBITDA
	FY23	FY22	Change		FY23	FY22	Change
	Rm	Rm	%		Rm	Rm	%
Commercial – Waterberg	22 496	23 613	(5)		11 702	13 229	(12)
Commercial – Mpumalanga	8 666	15 797	(45)		997	6 006	(83)
Tied 1	5 783	5 561	4		179	165	8
Other					(665)	(377)	(76)
Coal	36 945	44 971	(18)		12 213	19 023	(36)

1 Matla mine supplying its entire production to Eskom.

Coal revenue decreased by 18%, driven by a decrease in revenue from our commercial mines due to lower export prices and volumes. Higher domestic prices were offset by lower domestic volumes. (Refer to production and sales volumes for the main drivers.)

Coal EBITDA decreased by 36%, due to:

• Lower commercial revenue (-R8 248 million)
• Higher operational costs (-R1 170 million), mainly as a result of higher overburden removal at Leeuwpan and Belfast
• Inflationary pressures (-R922 million), driven mainly by electricity tariff increases above the PPI inflation rate
• Realised and unrealised currency exchange differences (-R545 million).

The decrease was partly offset by:

• Lower buy-in costs from Mafube due to the lower prices (+R2 693 million)
• Lower royalties (+R795 million)
• More favourable fair value adjustments realised on investments (+R208 million).

Equity-accounted investments

Adjusted equity-accounted income from Mafube JV decreased by 73% to R510 million (FY22: R1 902 million) mainly due to lower export prices.

Coal Capex and projects

	FY23	FY22	Change
	Rm	Rm	%
Sustaining	2 433	1 374	77
Commercial – Waterberg	2 217	1 117	98
Commercial – Mpumalanga	201	252	(20)
Other	15	5	>100
Expansion		231	(100)
Commercial – Waterberg		231	(100)
Total coal capex	2 433	1 605	52

The coal business’s capex increased by 52%, driven by higher sustaining capital spend at Grootegeluk for the Backfill phase 3 and the equipment replacement strategy.

Cennergi’s operating wind assets generated 727 GWh of electricity for FY23 (FY22: 671 GWh) which is in line with the December guidance of 720 GWh. This is an 8% increase from the prior year due to improved wind conditions, despite the 15 GWh generation loss at one of the wind assets due to an Eskom distribution line fault that occurred earlier in the year.

Cennergi’s EBITDA margin on the operating wind assets was consistent at 80% (FY22: 80%) underpinned by the long-term offtake agreements with Eskom.

The 68 MW LSP Project at Grootegeluk Mine reached financial close on 29 June 2023 under a 25-year Power Purchase Agreement with Exxaro Coal Proprietary Limited.

Construction commenced during 2H23 and commercial operation is expected in early 2025.

Cennergi’s operating wind assets project financing of R 4 348 million (FY22: R4 554 million) will mature and be fully settled by the end of 2031. Cennergi’s solar assets project financing will mature and be fully settled by the end of 2042. The project financing has no recourse to the Exxaro balance sheet and is hedged through interest rate swaps.

Equity-accounted investment

The 26% increase in adjusted equity-accounted income from SIOC to R6 157 million (FY22: R4 902 million), was driven by higher iron ore prices and sales volumes as well as cost optimisation initiatives.

We received an interim dividend of R1 967 million from our investment in SIOC in August 2023. SIOC declared a final dividend to its shareholders in February 2024. Exxaro’s share of the dividend amounts to R2 107 million, which is 7% higher than the interim dividend received. The dividend will be accounted for in 1H24.

As part of the broader Exxaro strategic review, the company continuously seeks opportunities to unlock value to support its Sustainable Growth and Impact strategy. As previously reported, Exxaro has identified that the FerroAlloys business is no longer a strategic fit within our envisaged Minerals business portfolio and a sales process has commenced to dispose of our entire shareholding in Exxaro FerroAlloys Proprietary Limited. Exxaro aims to enhance the economic participation of Black-owned companies in the South African economy. In line with this intent, Exxaro has earmarked the FerroAlloys disposal process to target Black ownership.

As we are still in the initial stages of the sales process, the investment did not meet all the criteria in terms of IFRS 5  Non-current Assets Held for Sale and Discontinued Operations to be classified as a non-current asset held-for-sale on 31 December 2023.

Our current B-BBEE scorecard reflects a recognition Level 2. The FY23 audit is still in progress and the certificate will be published as soon as the audit is concluded.

Climate change response strategy implementation

Our decarbonisation strategy aims for an integrated, multi-stakeholder approach to position the business for a resilient and sustainable future. Exxaro realises that it cannot act alone to achieve its carbon neutrality objective by 2050, Scope 3 emission reductions and ESG objectives. In 4Q23, we formed a strategic partnership with the Council of Geoscience with the intent to collaborate on carbon capture, utilisation, and storage (CCUS), a technology which is key in reducing greenhouse gas emissions. Developments in the CCUS space are a key consideration in our decarbonisation strategy.

With regards to the draft decarbonisation roadmap, we have refined inputs based on internal stakeholder comments and are currently addressing the costs associated with the implementation of the roadmap.

Social investment and development

Social investments at 31 December 2023 amounted to R1 897 million (FY22: R1 620 million), building on the FY22 trend and commitment to creating socio-economic impact in host communities. The local procurement spend on Black SMME’s constitutes 71% of the social investment. Combined, these initiatives supported 277 SMME’s, through local procurement as well as enterprise and supplier development and provided 29 employment opportunities, through social and labour plans.

We invested R22 million (FY22: R10 million) in Youth Employment Service (YES) programmes that provide training to youth from our host communities as follows:

• Lularides recruited and trained 400 Black youth from Exxaro communities as licensed motorbike drivers with 186 beneficiaries completing the programme and placed at various companies; and
• SME Tax recruited and trained 50 Black youth with finance qualifications to improve their employability.

Matla mine is undertaking several renewal applications of its authorisations and the extension of the existing mining right. Exxaro received the renewal of the Matla waste management license for the brine ponds in 2H23. Exxaro is engaging the DWS on the Matla water use license renewal. The DMRE has granted Exxaro permission to submit the Matla mining right renewal application earlier and Exxaro is now finalising the application and supporting documentation for submission by the end of 1H24.

The environmental authorisation for the Belfast expansion project is still with the DMRE and the DWS for comments. We expect the granting of the authorisation in 1H24. The related integrated water use license application is also undergoing consultation with DWS.

The change in Exxaro’s total or attributable Coal Resources and Coal Reserves for the reporting year was immaterial, as the change was below 10%.

A material decrease in Coal Reserves was only noted at our Leeuwpan mine (~14%), as a result of new drillhole information received as well as layout losses that occurred during the execution of the mine plan.

There has been no material changes to total or attributable estimates at our other coal operations and projects, other than normal LoM depletion.

Both Coal Resource and Coal Reserve lead Competent Persons are in the full-time employment of Exxaro: Henk Lingenfelder (Bachelor of Science: geology (Honours), Certified Professional Natural Scientist,
Pr Sci Nat: 400038/11) as the group manager: mineral asset management (MAM) and Chris Ballot (Bachelor of Engineering (mining), Engineering Council of South Africa (ECSA), 20060040) as the group manager: mining. Both persons have approved the information, in writing in advance of this publication.

Economic context

Global inflation is expected to continue its downward path, although towards the end of 2023, energy-related pressures temporarily stalled this trajectory. As a result, policy interest rates are predicted to remain restrictive for longer, affecting both global investment sentiment and economic activity.

Despite unprecedented rolling load shedding, South Africa’s real GDP grew by 0.9% year-on-year in the first six months of 2023.The modest upside reflected higher investment in machinery and other equipment and a better-than-expected response to load shedding. However, GDP decreased by 0.2% in the third quarter of 2023. The ongoing constraints of inadequate electricity and logistic challenges limit the local economy’s future productive potential.

During 2023, the South African rand lost significant value against major global currencies. This is attributable to intensified load shedding with the perceived risk of a potential grid collapse, the country’s grey listing by the Financial Action Task Force, widening current-account and fiscal deficits, US dollar strength, global recessionary risk, and widespread geopolitical tensions. We expect the USD/ZAR exchange rate to improve in 2024 due to an expected improvement in both global economic sentiment and investor confidence.

Commodity markets and price

Despite the uncertainty of the severity of the northern hemisphere’s winter and potential risks around natural gas availability and prices, continued strong Chinese thermal coal imports are expected to provide some support to seaborne thermal coal prices. However, the easing of global supply risks in both the thermal coal and natural gas (including liquefied natural gas) markets are expected to filter through to market pricing.

Continuous rising iron ore supply and exports remain the limiting factor for iron ore prices. Supply increases from major miners, a flat Chinese demand, with the rest of the world demand recovering, are expected in 2024. A stronger pricing environment is expected to prevail, supported by higher marginal cost levels.

Operational performance

TFR railed 47.92 Mt of coal to the Richards Bay Coal Terminal from January to December 2023. The export rail performance remains below expectations due to the impact of security, vandalism, and locomotive shortages.

The group has consistently maintained, that when determining the level of dividend pay-out and therefore the dividend cover, cognisance needs to be taken of the current state of the industry, Exxaro’s capital expenditure requirements and other relevant commitments. This is particularly relevant in the challenging economic environment, including, amongst other, the impact of the logistical challenges.

The board of directors has declared a cash dividend, comprising:

• 2.5 times Adjusted Group Earnings; and
• Pass through of SIOC dividend of R2 107 million.

Notice is hereby given that a gross final cash dividend, number 42 of 1 010 cents per share, for the year ended 31 December 2023, was declared from income reserves and is payable to shareholders of ordinary shares.

Given the net cash position at 31 December 2023 of R14 834 million (excluding energy’s net debt), in addition to the final dividend declared, the board of directors has resolved to pay a special dividend of 572 cents per share (approximately R2 billion) from income reserves. The special dividend is subject to SARB approval. A further announcement will be released once SARB approval has been obtained.

For details of the final and special dividends, please refer note 5 of the reviewed condensed group financial statements for the year ended 31 December 2023. The details will also be published on our website at www.exxaro.com.

Salient dates for payment of the final and special dividends are:

• Finalisation date for the special dividend

  Monday, 29 April 2024
• Last day to trade cum dividend on the JSE

  Tuesday, 7 May 2024
• First trading day ex dividend on the JSE

  Wednesday, 8 May 2024
• Record date

  Friday, 10 May 2024
• Payment date

  Monday, 13 May 2024

No share certificates may be dematerialised or re-materialised between Wednesday, 8 May 2024 and Friday, 10 May 2024, 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 2024.

Additional information on financial and operational results for the year ended 31 December 2023, and the accompanying presentation can be accessed on our website on www.exxaro.com.

On behalf of the board of directors.

 

14 March 2024