Exxaro

Zero Harm remains Exxaro’s key safety objective. During 1H19, the group recorded a LTIFR of 0.13 (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 ongoing safety initiatives. We are pleased to report zero fatalities for 28 consecutive months as at 30 June 2019 and zero HPIs during 1H19 (1H18: five HPIs).

Core EBITDA of R2 813 million (1H18: R3 954 million) was 29% lower from our managed operations (after adjusting for non-core items) due to a significant decline in the benchmark API4 price negatively impacting revenue, as well as cost pressures which are further explained under financial and operational results.

Our share of core equity-accounted income of associates and joint ventures increased to R2 930 million (1H18: R1 036 million), mainly as a result of SIOC.

Core headline earnings rose 20% to R3 988 million (1H18: R3 322 million), despite the lower core EBITDA, which was more than offset by the net increase in our core equity-accounted income.

The key transactions shown in the table below should be considered for a better understanding of the comparability of results between the different reporting periods. EBITDA is calculated by adjusting net operating profit before interest, tax, depreciation, amortisation, impairment charges and net loss or gain 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)

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

Change in commodity prices

Group segment results (Rm)

Group financial results

Revenue and core EBITDA

Consolidated group revenue was down 2% to R11 961 million (1H18: R12 260 million). While coal export volumes increased by 9%, there was a significant decline in the benchmark API4 price resulting in a 32% lower average price per tonne achieved of US$54 (1H18: US$79). This impact was cushioned somewhat by a weaker average spot exchange rate of R14.19 to the US dollar (1H18: R12.30). On the domestic front, lower than contracted volumes were taken by Eskom for the Medupi Power Station, however, commercially there was no impact on revenue. The previous period also included revenue from our NBC operation, which was disposed of in 2H18.

Consolidated group core EBITDA decreased by 29% to R2 813 million (1H18: R3 954 million), mostly due to lower revenue, inflationary pressure on costs, higher distribution costs driven by higher export volumes and higher rehabilitation costs resulting from revised cost estimates.

Earnings

Headline earnings were 42% higher at R4 342 million (1H18: R3 067 million) or 1 730 cents per share (1H18: 1 222 cents per share). This was mainly driven by an increase in Exxaro’s share of equity-accounted income of R1 878 million to R2 924 million (1H18: R1 046 million).

After adjusting for non-core items, core headline earnings rose 20% to R3 988 million (1H18: R3 322 million) or 1 201 cents per share (1H18: 1 001 cents per share). The core WANOS for both periods was 332 million. Exxaro’s share of core equity-accounted income increased by R1 894 million as shown in the table below.

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

Cash flow and funding

Cash flow generated by operations of R3 228 million (1H18: R3 941 million) and dividend income from investments of R1 460 million (1H18: R1 338 million), together with an opening balance of cash and cash equivalents of R549 million was sufficient to cover our capital expenditure and ordinary dividends paid.

Deploying cash generated by operations (Rm)

Total capital expenditure for 1H19 increased by R661 million when compared to the corresponding period last year, consisting of R62 million decrease in spend on sustaining and environmental capital (stay-in-business capital) and R723 million increase in spend on new capacity (expansion capital).

A final dividend of R1 369 million was received from our investment in SIOC (1H18: R1 306 million). SIOC has declared an interim dividend to its shareholders in July 2019, amounting to R2 680 million for Exxaro’s 20.62% shareholding. The dividend will be accounted for in 2H19.

Debt exposure

Net debt at 30 June 2019 was R758 million compared to R3 867 million at 31 December 2018. Net debt includes the preference share liability of R186 million (FY18: R609 million) for Eyesizwe.

On 15 February 2019, Exxaro received total cash of R2 057 million from Tronox UK for the redemption of Exxaro’s 26% membership interest, of which R460 million was a members’ distribution.

On 9 May 2019, Tronox Holdings plc repurchased 14 000 000 shares from Exxaro at a share price of US$14.32 per share amounting to R2 889 million cash received.

Coal business performance

Unreviewed coal production and sales volumes (’000 tonnes)

Good demand for sized product in the domestic market continued. As more domestic supply was available due to weak export prices, domestic pricing remained flat in real terms.

The export sales prices came under severe pressure, trading at levels last seen in 2016. The lack of import demand from China continues to put pressure on Pacific coal prices. European stock levels are at record levels amidst very high levels of renewable energy generation and very low gas prices leading to coal-to-gas switching. India continues to import South African coal. However, the demand has switched to higher calorific value coal which is favourable to Exxaro’s strategy. The benchmark API4 RBCT export price averaged US$74 per tonne in 1H19 compared to US$97 per tonne in 1H18. Our export volumes increased by 9% from 3.9Mt in 1H18 to 4.3Mt in 1H19. The group realised an average export price of US$54 per tonne in 1H19 against US$79 in 1H18.

Production and sales volumes

Coal production volumes (excluding buy-ins and semi-coke) were down 1 411kt (-6%), thereby impacting sales volumes by -8%. The decrease can mainly be attributed to the divestment of NBC at end of October 2018, lower production at Matla as well as lower production at Grootegeluk due to the lower demand from Eskom for the Medupi Power Station.

Thermal coal

Commercial: Waterberg

Production at Grootegeluk declined by 794kt (-6%) due to the lower demand from Eskom for the Medupi Power Station. This also resulted in a decrease in sales volumes of 686kt (-6%) and an increase in the strategic stock pile levels.

Commercial: Mpumalanga

The commercial Mpumalanga mines’ thermal coal production was 324kt (+6%) higher compared to 1H18 driven by:

• Higher production at Mafube of 731kt as Nooitgedacht ramps up
• Higher production at Leeuwpan of 208kt due to the change in production specifications resulting in higher yields and improved throughput
• Higher production at ECC of 165kt following the start-up of FZON and increased yield and product achieved at DCME by producing an Eskom product
• Belfast ramping up earlier than expected and producing 164kt.

The increase was partly offset by no volume from NBC (-945kt) as a result of our divestment in 2H18.

The commercial Mpumalanga mines’ thermal coal sales were down 309kt (-14%), mainly due to our divestment of NBC (-994kt) in 2H18. The decrease was partly offset by higher sales at Leeuwpan of 437kt (+45%) and ECC of 284kt (+82%) due to a change in market from export to Eskom in 1H19.

Exports commercial

Export sales increased by 343kt (+9%) as a result of more coal being available from Mafube, ECC, Grootegeluk and Belfast. This was partly offset by lower buy-ins and Leeuwpan supplying coal to Eskom.

Tied

Coal production and sales from Matla mine were down 929t (-26%), mainly due to the shortwall start-up delay at Mine 2 where 569kt was lost, the shortwall stop at Mine 3 and other production challenges.

Metallurgical coal

Grootegeluk’s metallurgical coal production was in line with the comparative period. Sales volumes were slightly lower by 34kt (-6%) mainly due to the unavailability of trains to dispatch coal to the domestic market.

Capex and projects

Exxaro’s capital for its coal business increased by 28% compared to 1H18. This is mainly due to an increase in our expansion capital in Mpumalanga. We are pleased to report that 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 projected to remain ahead of schedule with commissioning and ramp up taking place in 4Q19. At Mafube, ramping up of the Nooitgedacht reserve to name plate capacity remains on track for 4Q19, as this mine continues to exceed its 1H19 expectations.

Coal Capex (Rm)

Revenue and core EBITDA

Coal revenue of R11 927 million was 3% lower (1H18: R12 240 million). The lower revenue was mainly due to lower export prices, lower domestic and Eskom off-take, partly offset by higher export sales volumes and a favourable ZAR/USD exchange rate.

Coal core EBITDA of R2 829 million (1H18: R3 980 million) decreased by 29%, mainly driven by:

• Lower commercial revenue (-R451 million)
• Inflation (-R414 million)
• Higher rehabilitation costs (-R276 million)
• Higher distribution costs due to increased exports (-R197 million)

The decrease was partly offset by:

• Higher stock levels (+R188 million)

Equity-accounted investment

Mafube, a 50% joint venture with Anglo, recorded core equity-accounted income of R105 million (1H18: core equity-accounted loss of R31 million) mainly due to the ramping up of the Nooitgedacht reserve.

Ferrous business

Equity-accounted investment

The increase in core equity-accounted income from SIOC of R1 943 million to R2 727 million in 1H19, is primarily driven by the effect of the higher iron-ore prices realised and a weaker exchange rate.

Titanium dioxide

Equity-accounted investment

Core equity-accounted income from Tronox SA and UK operations decreased by R113 million to R111 million compared to 1H18. The decrease is mainly as a result of the cessation of applying the equity method to Tronox UK, which was classified as a non-current asset held-for-sale on 30 November 2018.

Energy business

Equity-accounted investment

Cennergi, a 50% joint venture with Tata Power, recorded core equity-accounted losses of R13 million for 1H19 (1H18: core equity-accounted income of R20 million). The results were negatively impacted by hedge ineffectiveness due to forecast interest rates being lower than the fixed interest rate. Cash flow generation remains positive and in addition to the R58 million dividend received in 2H18, Exxaro received a further dividend of R73 million in 1H19.

The two windfarm projects are running at slightly lower than planned capacity due to lower than expected wind speeds, which was offset by better than contracted equipment availability. Electricity generation approximated planned numbers for the first six months, which exceeded expectations, considering that two turbines were destroyed in separate fire incidents. The claims for physical damage and loss of business are in progress. Replacement turbines are scheduled for delivery and installation during this 3Q19, with commissioning planned for 4Q19.

Exxaro is proud to have achieved a Level 2 B-BBEE recognition status for FY18 compared to a Level 5 for FY17, one year earlier than we had planned. This is attributable to significant improvements in the ownership, enterprise and supplier development and socio-economic development elements. This milestone is testament to Exxaro’s unwavering commitment to transformation. We will continue to strive to improve and solidify our BEE recognition status, including assessing the implications of the new Mining Charter.

With the conclusion of Exxaro’s new empowerment shareholding transaction in December 2017, 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 prevailing legislative uncertainty led to the delay in the implementation of the employee and community schemes until after the publication of the Mining Charter in September 2018 and the implementation guidelines in December 2018. With the gazetting of these documents Exxaro commenced with a process of investigating the impact on the proposed structuring of the employee and community schemes.

It is anticipated that implementation will be concluded in 2H19.

Other than normal LOM depletion, there are no material changes to the Mineral Resources and Mineral Reserves as disclosed in the 2018 integrated report.

Exxaro has experienced a noticeable improvement in communication and feedback regarding outstanding applications for amendments and registration of mining rights from the Mpumalanga DMR office after it had been temporarily closed. The following are notable achievements for the period:

• The ministerial consent to transfer Arnot mining right to a consortium consisting of mostly former employees
• The granting of the Tumelo mining right renewal
• The registration of the Paardeplaats mining right.

Increasing geopolitical risks and aggressive trade policies are anticipated to weigh on global economic activity during 2H19. In terms of the global coal market, we do not see a recovery from the current pricing and demand balance. China will continue to influence the supply/demand balance in the Pacific with related price volatility. With the oversupply of coal in the Atlantic Basin, coupled with gas price forecasts remaining low, the market remains bearish for the remainder of the year. We therefore expect the API4 price index to remain under pressure.

The weak South African growth outcome has raised the risk of a sovereign rating downgrade towards the end of 2H19. The rand/dollar exchange rate is expected to remain volatile. We expect domestic coal demand and pricing to remain stable for the remainder of the year. The Medupi Power Station offtake from Grootegeluk is expected to remain as per the offtake plan for the remainder of 2019. We welcome government’s commitments in the short term towards Eskom; however, much more structural and sustainable reforms are required to inject the confidence required that will build the economy and create the employment opportunities so desperately required.

As we roll out the integrated operations centres (IOCs) at all our operations, in terms of our digitalisation plan, the increased visualisation of the mining value chain will highlight inefficiencies that will be addressed through improved decision-making relating to safety, productivity and cost performance.

During 2H19, the performance of our SIOC investment will be well supported by the momentum from 1H19, a tight iron ore market, strong fines price with above average lump premium and continued stable demand for higher-grade products. However, an expected recovery in seaborne supply, with moderation of Chinese demand may dampen current market enthusiasm.

Exxaro’s stake in Tronox Holdings plc has been reduced to approximately 14.7 million shares, representing about 10% of the total outstanding shares at 30 June 2019. We remain committed to monetising our remaining stake in Tronox Holdings plc over time and in the best possible manner, taking into account prevailing market conditions.

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.

Our response to climate change requires much more definitive and structural changes to our business model. We are feeling the impact of increasing societal demand for proactive response and action to climate change:

• Firstly, through enquiry from shareholders about our climate risk response
• Secondly, we are experiencing higher insurance premiums in the renewal of our insurance policies and will be incurring increased costs resulting from the recently introduced Carbon Tax Bill
• Lastly, the continuing delay in the granting of an operating licence for the Thabametsi Coal IPP, impacting on the development of the Thabametsi coal mine.

Therefore, the impact of climate change on our business is systemic and requires a response that will ensure a sustainable Exxaro in a carbon constrained environment. The migration to a lower carbon environment has to be JUST and conscious to potentially negative impacts on our stakeholders, especially the poor and needy in South Africa.

We will present to you, in due course, 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.

We are pleased with the progress made in optimising our asset portfolio. Cash generated from the sale of non-core assets (disposal of our 26% membership interest in Tronox UK and partial disposal of our investment in Tronox Holdings plc), was taken into account by the board in approving a special dividend of 897 cents per share.

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 has declared a cash dividend comprising:

• 3.3 times core attributable coal earnings and
• Pass through of SIOC dividend of R2 680 million.

Notice is hereby given that a gross interim cash dividend, number 33 of 864 cents per share, for the six-month period ended 30 June 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 interim financial statements for the six-month period ended 30 June 2019.

Salient dates for payment of the interim dividend are:

No share certificates may be dematerialised or re-materialised between Wednesday, 9 October 2019 and Friday, 11 October 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, 14 October 2019.

Additional information on financial and operational results for the six-month period ended 30 June 2019, and the accompanying presentation can be accessed on our website on www.exxaro.com.

On behalf of the board