Exxaro

Safety

Zero Harm remains one of Exxaro’s key objectives. In the reporting period, the lost-time injury frequency rate (LTIFR) was 0.07 (36% better than the set target of 0.11 and 42% better than 0.12 recorded in FY19). We are pleased to report a three-year milestone and a record of 41 consecutive months of fatality-free shifts, as at 1 August 2020. Regrettably, two (2) “High Potential Incidents” (HPIs) were reported at Grootegeluk Mine during 1H20 (1H19: nil HPIs).

Response to COVID-19

In line with our Zero Harm vision, measures implemented across our operations and corporate centre to manage the COVID-19 risks include work from home practice, social distancing, wearing of masks and constant washing of hands or sanitising. We will be providing two testing facilities for employees, one each in Limpopo and Mpumalanga, in partnership with Eskom and Seriti Resources, respectively. As at 12 August 2020, a total of 474 COVID-19 positive cases were recorded, of which 332 have fully recovered and 140 remain active cases. It is with great sadness that we have to report the passing away of two contract colleagues as a result of complications brought about by COVID-19. Our sincerest condolences go to their families,
co-workers and friends.

Exxaro has donated R20 million to the Solidarity Fund at the start of the COVID-19 lockdown. Further, we have been working with both provincial and local government as well as through the Minerals Council of South Africa to provide required accessories to our host communities to maintain safety and health and prevent infections. Food parcels have also been provided to destitute families.

Climate change policy

We remain committed to the implementation of the Task Force on Climate-related Financial Disclosures’ recommendations across Exxaro in line with our energy development strategy. We started with an assessment process prior to the COVID-19 lockdown and due to this delay, the publication of the recommendation report will now be in the second half of this year.

ESG scorecard performance

Exxaro has maintained its performance score of 4/5 in terms of its overall mid-year rating in the FTSE Russell ESG index. In addition, and as a result of this consistent performance, Exxaro has been accepted in the FTSE4Good index.

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

	Average US$ per tonne
Commodity price	1H20		1H19		%  change
API4 coal	66		84		(11)
Iron ore fines 62% Fe ((CFR) China	92		91		No change

While Exxaro’s operations were declared an “essential service” during the lockdown period, and hence able to operate, the environment remained challenging. However, our managed operations were able to show strength and resilience.

We delivered core EBITDA of R3 929 million (1H19: R2 813 million), which was 40% higher, due to higher commercial coal revenue supported by record coal export volumes, albeit at lower US dollar prices, but benefiting from a weaker exchange rate during the period. This is discussed in more detail under coal business performance.

Our core income from equity-accounted investments decreased by 20% to R2 353 million (1H19: R2 930 million) primarily due to the negative impact of the COVID-19 lockdown on SIOC’s operations.

Core headline earnings decreased by 16% to R3 360 million (1H19: R3 988 million), while core headline earnings per share (CHEPS) increased by 11% to 1 339 cents per share (1H19: 1 201 cents per share). Core headline earnings decreased mainly due to the recognition of non-controlling interest (NCI) from 1 November 2019 for external shareholders of Eyesizwe RF. To ensure a consistent comparison on CHEPS basis, the core weighted average number of shares (WANOS) used in 1H19 was 332 million shares (when no NCI was recognised) compared to 251 million shares from 1 November 2019 (when NCI was recognised).

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 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.

Description	1H20  Rm		1H19  Rm	2H19  Rm
Gross headline earnings adjustments	(1 316)		(2 253)	(104)
Other adjustments
– Insurance claim recovery from external parties1	(14)			(99)
– Targeted voluntary packages2				396
– Indemnification asset movement relating to the tax implications of the partial disposal of Tronox Holdings plc			(86)	21
– Fair-value adjustment on the ECC contingent consideration			(232)	(64)
– Fair-value adjustment on Lebonix debt			(58)
– Recycling of our share of cash flow hedge at deemed disposal of previously held 50% in Cennergi	59
– Other			1	(1)
Total impact on net operating income	(1 271)		(2 628)	149
Post-tax share of equity-accounted income adjustments	(2)		6	51
Eyesizwe preference dividend accrued (consolidation impact)			21	4
Tax on non-core adjustments (excluding tax on post tax equity-accounted income adjustments)	2		90	(14)
Non-controlling interest on non-core adjustments	297			(86)
Total attributable earnings impact	(974)		(2 511)	104

¹ Relates to compensation for business interruption.
² Excluding Matla.

Group financial results

Group segment results (Rm)

	Revenue					Core EBITDA1
	1H20		1H19	2H19		1H20		1H19	2H19
Coal	13 730		11 927	13 655		3 548		2 829	3 073
Energy2	283					238
Ferrous	60		27	103		8		5	(2)
Other	5		7	7		135		(21)	(52)
Total	14 078		11 961	13 765		3 929		2 813	3 019

¹ Core EBITDA is calculated after adjusting for non-core adjustments.
² Three months since acquisition of Cennergi on 1 April 2020.

Revenue and core EBITDA

Consolidated group revenue was up 18% mainly due to a 15% increase in coal revenue and the consolidation of energy revenue relating to Cennergi from 1 April 2020.

The higher coal revenue was mainly driven by 3% higher local volumes and 39% higher export volumes. This average, together with the weaker exchange rate, more than offset the lower export and local price impact. The average API4 index price of US$66 per tonne was 11% lower (1H19: US$74) which resulted in a slightly lower average price per tonne achieved of US$52 (1H19: US$54). The average spot exchange rate was R16.65 to the US dollar (1H19: R14.19), resulting in a 13% increase in the average ZAR export price realised of R862 per tonne (1H19: R764).

Consolidated group core EBITDA increased by 40%, mainly as a result of the higher revenue, which was partly offset by inflationary pressure on costs, additional distribution costs relating to higher export volumes, higher buy-ins and higher costs due to the ramp-up at Belfast.

Earnings

Headline earnings were down 24% to R3 315 million (1H19: R4 342 million). The decrease in headline earnings is mainly due to the accounting of non-controlling interest of R1 224 million. This equates to basic headline earnings per share (HEPS) of 1 321 cents per share (1H19: 1 730 cents per share). The WANOS for both financial periods were 251 million.

Although core headline earnings (after adjusting for non-core adjustments) decreased 16% to R3 360 million (1H19: R3 988 million), core HEPS increased by 11% to 1 339 cents per share (1H19: 1 201 cents per share). The core WANOS for 1H20 was 251 million shares compared to the core WANOS of 332 million shares for 1H19, for reasons already explained.

Core income from equity-accounted investments decreased by 20% as shown in the table below.

Core equity-accounted income (Rm)

	Core equity-accounted income/(loss)					Dividend income
	1H20		1H19	2H19		1H20		1H19	2H19
Coal: Mafube	35		105	22
Coal: RBCT	10		4	(1)
Energy: Cennergi1	13		(13)	58		145		73	22
Energy: LightApp	(9)		(15)	(13)
Ferrous: SIOC	2 257		2 727	1 696		1 412		1 369	2 682
TiO2: Tronox SA	95		111	125
Other: Black Mountain2			54	(3)
Other: Insect Technology
Group	(48)		(43)	(60)
Other: Curapipe				(4)
Total	2 353		2 930	1 820		1 557		1 442	2 704

¹ Application of the equity method ceased on 31 March 2020 after which Cennergi was fully consolidated.
² Application of the equity method ceased when the investment in Black Mountain was classified as a non-current asset held-for-sale on 30 November 2019.

Cash flow and funding

Cash flow generated by operations of R4 732 million (1H19: R3 228 million) and dividends received from investments of R1 557 million (1H19: R1 442 million) were sufficient to cover our capital expenditure and ordinary dividends paid.

Deploying cash generated by operations (Rm)

	1H20		1H19	2H19
Cash generated by operations	4 732		3 228	2 045
Dividends received from investments	1 557		1 442	2 704
Net finance costs paid	(557)		(116)	(153)
Capital expenditure	(1 264)		(2 698)	(3 378)
Purchase consideration paid for the acquisition of additional
50% interest in Cennergi (including working capital adjustments)	(1 641)
Tax paid	(438)		(674)	(503)
Final/interim ordinary dividend paid	(1 420)		(1 393)	(2 168)
Net surplus/(deficit) after operating activities and capital expenditure	969		(211)1	(1 453)2

¹ 1H19 shows a surplus of R338 million after applying the opening cash balance of R549 million.
² 2H19 shows a surplus of R2 762 million after applying the opening cash balance of R4 215 million.

Total capital expenditure for 1H20 decreased by R1 434 million when compared to the corresponding period last year, mainly due to delays on the GG6 expansion project, delayed sustaining capex spend mainly due to the COVID-19 lockdown and cash flow preservation and optimisation measures implemented as part of the capital excellence strategy initiatives to mitigate the impact of the lockdown.

Debt exposure

Net debt was managed at R5 819 million (excluding Cennergi project finance debt of R4 715 million) at 30 June 2020 compared to R5 810 million at 31 December 2019.

In March 2020, all the conditions precedent were met for the purchase of the additional 50% shareholding in Cennergi resulting in a cash outflow of R1 641 million (including working capital adjustments).

To manage the current COVID-19 uncertainty, Exxaro put in place a further short-term overdraft facility of R1 750 million, of which R1 000 million was repaid in July 2020 and R750 million payable on or before 29 October 2020. Exxaro further activated the last R2 billion, which is available under its R10 billion facility available with a consortium of banks.

Coal business performance

Unreviewed coal production and sales volumes (’000 tonnes)

	Production					Sales
	1H20		1H19	2H19		1H20		1H19	2H19
Thermal	22 309		20 819	22 384		22 827		20 552	22 951
Commercial – Waterberg	13 673		12 857	12 826		12 970		11 702	12 741
Commercial – Mpumalanga	5 583		5 353	6 176		888		1 968	2 007
Exports						5 921		4 265	4 822
Tied	3 053		2 609	3 382		3 048		2 617	3 381
Metallurgical	1 172		1 167	907		457		550	480
Commercial – Waterberg	1 172		1 167	907		457		550	480
Total coal (excluding buy-ins)	23 481		21 986	23 291		23 284		21 102	23 431
Thermal coal buy-ins	429		61	244
Total coal (including buy-ins)	23 910		22 047	23 535		23 284		21 102	23 431

During the first quarter, stable demand and offtake were experienced in the domestic market. Due to the impact of COVID-19 and the subsequent lockdown, many local industrial customers reduced their offtake during the second quarter. In addition, producers made sized product available into the local markets amid very low export pricing. This resulted in an oversupply negatively impacting prices.

It is estimated that the seaborne market is currently oversupplied by around 30Mt and that it will contract by between 70Mt to 100Mt in 2020 compared to 2019. International lockdowns impacted negatively on the whole energy complex, with the prices of oil, gas and coal decreasing sharply. The API4 index price dropped to historically low levels of US$40 per tonne. Demand from some of our largest markets was negatively impacted due to COVID-19, while others such as Vietnam have been buying aggressively, assisting South African exporters when other markets were not available.

Production and sales volumes

Coal production volumes (excluding buy-ins) were up 1 495kt (+7%). The increase can mainly be attributed to Belfast ramping up and higher offtake from Eskom at Grootegeluk and Matla, resulting in 10% higher sales of 2 182kt.

Thermal coal

Commercial: Waterberg

Production at Grootegeluk increased by 816kt (+6%) due to the increased offtake from Eskom for the Medupi Power Station as well as increased production at GG4/5. This also resulted in higher sales volumes of 1 268kt (+11%) mainly to Eskom, partly offset by lower domestic sales due to the AMSA Saldanha plant closure and the impact of the COVID-19 lockdown.

Eskom and Exxaro are still engaging on the Force Majeure notification by Eskom. The impact thus far has been minimal, with offtake currently in line with contractual volumes.

Commercial: Mpumalanga

The commercial Mpumalanga mines’ thermal coal production was up 230kt (+4%) compared to 1H19, driven by higher production at Belfast of 1 122kt mainly due to ramping up of production.

This increase was partly offset by lower production mainly due to the COVID-19 lockdown at Leeuwpan (-400kt), ECC (-400kt) and Mafube (-92kt).

The commercial Mpumalanga mines’ thermal coal sales were down 1 080kt (-55%), mainly due to lower domestic sales to Eskom at Leeuwpan (-647kt) and ECC (-344kt) due to the agreement with Eskom still being negotiated as well as lower domestic demand due to the COVID-19 lockdown.

Exports commercial

Export sales increased by 1 656kt (+39%) as a result of more coal being available from Belfast, ECC and Grootegeluk as well as higher buy-ins. This was partly offset by lower sales by Leeuwpan and Mafube.

Tied

Coal production increased by 444kt (+17%) and sales increased by 431kt (+16%), mainly due to the shortwall at Mine 2 running at full production as well as good performance at Mine 3. Production was also negatively impacted by the COVID-19 lockdown.

Metallurgical coal

Grootegeluk’s metallurgical coal production was in line with the comparative period. Sales volumes were slightly lower by 93kt (-17%) mainly due to the impact of the lockdown restrictions.

Coal capex (Rm)

	1H20		1H19	2H19	% change  1H20 vs 1H19
Sustaining	597		958	1 287	(38)
– Waterberg commercial	456		753	1 000	(39)
– Mpumalanga commercial	141		205	270	(31)
– Other				17
Expansion	592		1 584	1 989	(63)
– Waterberg commercial	341		477	721	(29)
– Mpumalanga commercial	251		1 106	1 195	(77)
– Other				73
Total coal capex	1 189		2 541	3 276	(53)

Exxaro’s capital expenditure for its coal business decreased by 53% compared to 1H19. This is mainly driven by:

• Completion of the majority of the Belfast project in 2019.
• Impact from the pandemic resulting in delays, firstly, on the GG6 project (hence a lower expenditure) and secondly, delays and optimisation in sustaining capital expenditure at the Grootegeluk mine.
• Efficiency improvements in terms of timing and optimisation in equipment replacements at Leeuwpan.

Revenue and core EBITDA

Coal revenue of R13 730 million was 15% higher (1H19: R11 927 million) mainly driven by higher volumes to Eskom as well as higher export volumes. This, together with the weaker exchange rate, more than offset the lower export price impact.

Coal core EBITDA of R3 548 million (1H19: R2 829 million) increased by 25%. The increase in core EBITDA is mainly driven by:

• Higher commercial revenue (R1 567 million)
• Lower provision for rehabilitation costs (R382 million)
• Higher foreign exchange gains (R248 million).

The increase was partly offset by:

• Higher selling and distribution costs (R470 million)
• Negative inventory movements and higher buy-ins (R350 million)
• Higher inflation (R211 million)
• Lower capitalisation of costs at Belfast and Grootegeluk due to the timing of construction activities (R164 million)
• Higher mining costs (R109 million), mainly due to overburden removal at Leeuwpan as well as at Belfast due to the ramp up
• Higher employee costs (R68 million).

Equity-accounted investments

Mafube, a 50% joint venture with Anglo, recorded a core equity-accounted profit of R35 million (1H19: R105 million) due to lower sales volumes and prices impacted by the COVID-19 lockdown.

Energy business

The effective date of consolidation of Cennergi into the Exxaro group is 1 April 2020, reporting core EBITDA of R238 million for the three-month period ended 30 June 2020. Cash flow generation remains positive evidenced by the R95 million dividend received in FY19 and a further dividend of R145 million received in 1H20.

The two windfarms were running at slightly lower than planned capacity due to lower than expected wind speeds, which was offset by better than contracted equipment availability. Combined electricity generation was 176GWh for the three-month period ended 30 June 2020.

Both the Cennergi windfarms received Eskom Force Majeure notices under the respective Power Purchase Agreements on 31 March 2020. The farms were curtailed eight (8) times. Eskom subsequently issued notices on 1 June 2020 indicating that energy demand in the country was increasing and they would therefore cease to apply curtailment.

Ferrous business

Equity-accounted investment

The 17% decrease in core equity-accounted income from SIOC to R2 257 million (1H19: R 2 727 million), is primarily driven by lower exports and local demand due to COVID-19 lockdown measures.

A final dividend of R1 412 million was received (1H19: R1 369 million). SIOC has declared an interim dividend to its shareholders in July 2020. Exxaro’s 20.62% share of the dividend amounts to R1 706 million. The dividend will be accounted for in 2H20.

Titanium dioxide

Equity-accounted investment

Core equity-accounted income from Tronox SA decreased by R16 million to R95 million compared to 1H19.

Exxaro is in the final stages of concluding an agreement for the sale of its 26% shareholding 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.

As mentioned previously, Exxaro announced its intention to divest from the ECC and Leeuwpan operations. These divestments 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 remain committed to monetise our remaining shareholding in Tronox Holdings plc in the best possible manner, taking into account prevailing market conditions.

We are proud to have maintained our level 2 B-BBEE recognition status for 2020 following the assessment of our performance during the financial year ended 31 December 2019. There has been notable improvement in enterprise and supplier development (ESD) performance, but weaker performance in skills development attributed to retrospective regulatory changes in the Department of Trade and Industry (DTI) codes during 2019. Exxaro will continue to improve its BEE contribution status.

On 10 March 2020 all the transaction agreements giving effect to phase II of the Replacement BEE transaction were signed. On 27 March 2020 the sale of 5% of Exxaro’s shareholding in Eyesizwe RF to the Exxaro ESOP SPV was implemented and the ESOP Trust subscribed to the shares in the ESOP SPV, establishing a structure for qualifying employees to benefit from the performance of Exxaro.

The group expense is recognised only when the dividend distribution is declared by the ESOP trust. The first dividend from Exxaro to the qualifying employees has been executed with employees paid in June 2020.

On 11 May 2020 the transfer of another 5% of Exxaro’s shareholding in Eyesizwe RF to the Exxaro Community NPC was implemented establishing a structure for which communities will benefit from the performance of Exxaro. The group expense will occur when the Community NPC starts to execute its community projects.

Phase II of the Replacement BEE transaction has therefore been fully implemented.

Other than the normal life-of-mine (LOM) depletion, there were no material changes to the Coal Resources and Coal Reserves estimates as disclosed in the 2019 integrated report.

The COVID-19 lockdown had a significant impact on the execution of the 2020 exploration plans at the various operations. We have therefore used the months of April and May to update the 2020 exploration plans by prioritising exploration activities to address the most critical aspects required for short and medium-term mine planning.

New scheduling models are currently being tested with the intent of shortening development time to enable faster generation and evaluation of different mine planning scenarios.

The LOM plans at all Exxaro operations have been reviewed in 2019/20 and optimised plans which focus on the extraction of early value are being implemented at the Grootegeluk, Belfast and Mafube operations.

Exxaro continued to interact with the Department of Mineral Resources and Energy (DMRE) to ensure that Exxaro’s rights remain compliant and valid. However, due to COVID-19 the DMRE has been constrained in its ability to fully function and in particular, process applications. This has resulted in the delay in processing of previously submitted applications. However, we are confident that the DMRE will address the backlog once it is fully functional.

The COVID-19 challenges are still in effect and there has been limited change to the status quo. However, Exxaro is proactively liaising with the authorities to safeguard its interests.

Economic context

For 2H20, the re-starting of the global economy is anticipated to bring economic growth recovery. However, the uncertainty about the impact of the COVID-19 virus makes any assessment of the global economic outlook challenging.

The impact of the COVID-19 lockdown on South Africa’s fragile public finances has been devastating, with gross government debt as a percentage of GDP likely to rise significantly together with debt service costs. These fiscal imbalances will have a knock-on effect on the economic recovery path for South Africa into 2H20.

During 1H20, the ZAR depreciated to an all-time low in March, before it retracted significantly in June. The reversion to a risk-on environment, as a result of the easing of global COVID-19 lockdown restrictions, supported the ZAR; however, the rand/dollar exchange rate is expected to remain volatile during 2H20.

Commodity markets and price

The API4 index price is expected to be supported as activity in the key seaborne market resumes and a greater supply/demand balance is achieved. However, weak demand and flat pricing is anticipated into the early part of 2H20, as the speed at which coal demand reduced as a result of the lockdown measures far outpaced any supply response. Global seaborne thermal coal trade levels for 2020 are also expected to decline compared to 2019.

Despite steady Chinese iron ore demand, a recovery in seaborne trade is anticipated to offset a modest rebound in ex-China steel output. In addition, as China’s iron ore port inventories rise towards the end of 2H20, a softening iron ore market is expected.

Operational performance

It is expected that domestic coal demand and pricing will remain relatively stable in consideration of lockdown protocols and the gradual return of industrial customers to full operations. We expect Eskom offtake to meet the contractual volumes for the year.

On the international front, we expect the full impact of the pandemic on coal markets to sustain well into the first half of 2021.

In line with our digitalisation programme, we continue to roll out the integrated operations centres across all our operations to enable the visualisation of the value chain. The increased visualisation of the overall value chain, as well as data driven insights gained from our operations, will highlight inefficiencies and will enable improved in-time decision making relating to safety, productivity improvements as well as cost performance.

Regarding the Moranbah South hard coking coal project, Exxaro and Anglo Coal continue their endeavours to agree on a mutually beneficial development plan and timeline.

In terms of our capital allocation framework and given the impact of COVID-19 on the current economic climate, we will remain prudent in returning cash to shareholders, managing debt, and selectively reinvesting for the growth of our business. We maintain our dividend policy, which 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:

• 3.0 times core attributable coal earnings
• Pass through of SIOC dividend of R1 706 million.

The net debt to EBITDA at 30 June is 1.9 times, well within our targeted gearing ratio.

Notice is hereby given that a gross interim cash dividend, number 35, of 643 cents per share, for the six-month period ended 30 June 2020 was declared, and is payable to shareholders of ordinary shares. For details of the dividend, please refer to note 11 of the reviewed condensed group interim financial statements as at and for the six-month period ended 30 June 2020.

Salient dates for payment of the interim dividend are:

– Last day to trade cum dividend on the JSE	Monday, 21 September 2020
– First trading day ex dividend on the JSE	Tuesday, 22 September 2020
– Record date	Friday, 25 September 2020
– Payment date	Monday, 28 September 2020

No share certificates may be dematerialised or rematerialised between Tuesday, 22 September 2020 and Friday, 25 September 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 Monday, 28 September 2020.

Additional information on financial and operational results for the six-month period ended 30 June 2020, and the accompanying presentation can be accessed on our website on www.exxaro.com.

On behalf of the board

Jeffrey van Rooyen	Mxolisi Mgojo	Riaan Koppeschaar
Chairman	Chief executive officer	Finance director

13 August 2020