COMMENTARY

Comparability of results

For a better understanding of the comparability of results between the two reporting periods, we normally adjust our earnings for non-recurring items (referred to as non-core adjustments) to derive our core earnings. The non-core adjustments in both 1H22 and 1H21 are the same as the headline earnings adjustments, resulting in no change in EBITDA and headline earnings, respectively.

Group revenue and EBITDA

Group revenue increased 48% to R22 330 million (1H21: R15 144 million), mainly due to the exceptional performance of our coal business driven by higher sales prices and higher sales volumes, despite logistical challenges.

The revenue contribution from our energy business was 3% lower. Energy generation from the Cennergi windfarms has been impacted more than expected by poor wind speeds.

Group EBITDA increased by 145% to R10 603 million (1H21: R4 331 million), mainly attributable to the 142% increase in Coal EBITDA (discussed in more detail under the coal business performance).

Group earnings

Headline earnings increased 22% to R8 290 million (1H21: R6 804 million). The increase in headline earnings is mainly due to a 145% increase in group EBITDA, which was partially offset by a 51% decrease in equity-accounted income from SIOC as a result of lower iron ore prices and higher operating expenses, partially offset by a weaker currency.

There was a decrease in the WANOS to 242 million (1H21: 250 million), due to the shares that were bought back in 2021 as part of the share repurchase programme.

The increase in earnings together with the lower WANOS equates to basic HEPS of 3 426 cents per share (1H21: 2 722 cents per share).

Core equity-accounted income

Cash flow and funding

Cash flow generated by our operations increased 137% to R9 433 million (1H21: R3 973 million) and, together with the dividends received from our equity-accounted investments of R3 030 million (1H21: R3 663 million), were sufficient to fund capital expenditure and ordinary dividends paid.

Total capex decreased to R744 million (1H21: R1 174 million), comprising R710 million sustaining capex and R34 million expansion capex.

Debt exposure

Our strong cash generation resulted in a net cash position of R5 679 million (excluding Cennergi’s net debt of R4 547 million) at 30 June 2022, compared to a net cash position of R764 million (excluding Cennergi’s net debt of R4 482 million) at 31 December 2021.

 

Unreviewed coal production and sales volumes

 

During 1H22, international coal prices reached a record high driven by the Russian-Ukraine conflict and the ban on Indonesian coal exports. Global trade flows were affected, increasing demand from Europe for South African high-quality coal to reduce the dependency on Russian coal.

In stark contrast to the increased demand from Europe, the higher coal prices reduced demand from Asia, especially from India and Pakistan, due to affordability factors. This also eroded demand for low CV coal as they opted for cheaper sources of supply, widening the discounts across all low CV products.

The domestic market has also been impacted by higher export prices as the improved attractiveness of alternative export distribution channels allows for domestic volumes to be sold in the international markets. Domestic supply tightness is contributing to a higher domestic price outlook.

Locomotive unavailability remains a huge challenge, which combined with cable theft, vandalism and sabotage of rail infrastructure, is impacting our logistics chain. There were three derailments in 2Q22 negatively impacting the Mpumalanga region’s performance. Exxaro railed 2.5 Mt of export coal to RBCT in 1H22, compared to 4.1 Mt for the same period last year. The poor rail performance also negatively impacted AMSA’s offtake for 1H22.

Discussions by Exxaro and the industry are continuing with TFR to resolve contractual challenges and to improve rail performance.

The average benchmark API4 RBCT export price of US$277 per tonne was 183% higher (1H21: US$98 per tonne), resulting in a 236% increase in the average realised export price for Exxaro of US$262 per tonne (1H22: US$78 per tonne). In addition to the favourable price, we achieved a lower average discount of 5% (1H21: 20%) to the average benchmark API4 export price, based on our product mix.

Coal production volumes (excluding buy-ins) increased by 911 kt (+4%), despite the lower buy-ins and the divestment of ECC on 3 September 2021.

Sales volumes increased by 261 kt (+1%) despite the divestment of ECC.

Thermal coal

Commercial Waterberg

Production at Grootegeluk increased by 1 722 kt (+14%) due to the commissioning of the GG6 plant in 1H22.

Sales increased by 961 kt (+8%) due to higher demand from local customers and Eskom.

Commercial Mpumalanga

The commercial Mpumalanga mines' thermal coal production decreased by 1 417 kt (-28%) due to:

• ECC 1 917 kt (-100%), due to the divestment in 2H21.
• Leeuwpan 78 kt (-6%) mainly due to overburden challenges as a result of excessive rainfall, poor underfoot conditions and the availability of contractor equipment.

The decrease was partly offset by:

• Higher production at Mafube (299 kt) (+45%), as we implemented alternate road transport to mitigate TFR constraints.
• Increased production at Belfast 280 kt (+23%), by increasing sales in the local market.

The commercial Mpumalanga mines’ thermal coal sales increased 559 kt (+56%) as we developed alternative local markets to mitigate TFR constraints and higher demand from local customers. The increased contribution was as follows:

• Leeuwpan 464 kt (+111%)
• Belfast 354 kt (681%)
• Mafube 279 kt (+100%).

The increase was partly offset by a decrease of 538 kt (-100%) due to the ECC divestment.

Export commercial

Export sales decreased by 1 558 kt (-38%) due to lower TFR performance. We are pursuing alternative markets and logistical channels to mitigate this negative impact.

Tied

Coal production and sales at Matla increased by 385 kt and 389 kt, respectively (+14%), mainly due to good performance in Mine 2 and Mine 3.

Metallurgical coal

Grootegeluk’s metallurgical coal production increased by 221 kt (+26%), mainly due to higher production in the GG1 plant with improved yields, and the positive impact from the commissioning of the GG6 plant.

Sales decreased by 90 kt (-18%) mainly due to poor rail performance.

Coal revenue and EBITDA

Coal revenue increased 49%, driven by higher revenue from our commercial mines as we realised higher sales prices in all markets. Higher domestic sales volumes were offset by lower export volumes.

Coal EBITDA of R10 525 million (1H21: R4 355 million) increased 142%, at an operating margin of 44% due to:

• Higher commercial revenue (excluding ECC) (+R8 094 million), driven mainly by higher sales prices
• Realised and unrealised foreign exchange rate gains (+R450 million)
• Positive inventory movements and lower external buy-ins (+R257 million)
• Lower environmental rehabilitation provision (+R74 million).

The increase was partly offset by:

• Higher operational costs (-R1 309 million), mainly attributable to the higher buy-in cost of R834 million from Mafube linked to the API 4 benchmark price
• Higher inflation (-R960 million), driven by diesel and electricity tariff increases significantly above the PPI inflation rate
• Higher royalties (-R260 million), in line with higher profitability
• ECC divestment (-R114 million).

Equity-accounted investments

Mafube, our 50% joint venture with Thungela, recorded core equity-accounted income of R756 million (1H21: R98 million) due to higher export prices on higher sales volumes. This was partially offset by higher royalties and inflationary increases on diesel and other costs.

Coal capex and projects

Coal capex

 

The coal business’s capex decreased by 37%, attributable to expansion capital decreasing by 94% as we completed the construction of the GG6 plant; and sustaining capital increasing by 5%, driven mainly by higher spend at Grootegeluk and Belfast, partially offset by the savings on ECC due to the divestment.

For 1H22 Cennergi generated 307 GWh electricity (1H21: 331 GWh). Overall performance is below our guidance due to poor wind conditions. In the South African context (and other regions such as Europe), windfarms experienced their worst wind conditions for a six-month period.

Our average equipment plant availability of 97.4% has been marginally better than contracted and in line with normalised levels.

Cennergi’s EBITDA margin was 80%, demonstrating the consistency of earnings underpinned by the long-term offtake agreements.

The Cennergi project financing of R4 637 million at 30 June 2022, compared to R4 700 million at 31 December 2021, will mature over time and be fully settled by 2031. It has no recourse to the Exxaro balance sheet and is hedged through interest rate swaps achieving an effective rate of 12.0% (30 June 2021: 11.2%).

Equity-accounted investment

The 51% decrease in core equity-accounted income from SIOC to R3 119 million (1H21: R6 317 million) was due to lower market prices and higher operating expenses, partially offset by a weaker currency.

A final dividend of R2 655 million was received from SIOC in February 2022 (1H21: R3 663 million).

SIOC declared an interim dividend to its shareholders in July 2022. Exxaro’s share of the dividend amounts to R2 498 million. The dividend will be accounted for in 2H22.

SIOC implemented a new hybrid employee share ownership plan in July 2022. The impact of this new scheme on Exxaro will be assessed and accounted for in 2H22.

Due to the ongoing logistical challenges, the disposal of Leeuwpan is progressing slower than expected.

Exxaro continues to evaluate its options to dispose of its 26% shareholding in Black Mountain.

Our latest B-BBEE scorecard for the period 2022/2023 reflects a recognition Level 3 for this period, compared to Level 2 in the previous period.

The reduced rating is attributable largely to our lower performance in the ESD category. We will continue to look for opportunities to improve our BEE contribution status.

Climate change response strategy implementation

To strengthen our GHG mitigation and business resilience efforts, water security, energy and water efficiency targets have been included as part of the group-wide short-term incentive scheme in 2022. The energy efficiency targets relate to diesel and electricity usage. Diesel accounts for over 95% of our scope 1 GHG emissions, while coal-based electricity is 100% of our scope 2 emissions. The inclusion of these two key performance indicators in our incentive scheme is a progression of our climate change response strategy, our carbon neutrality 2050 target and further alignment with the Task Force on Climate-related Financial Disclosures.

Community investment and development

We continue with our efforts of community development and investment to alleviate the strain of poverty and unemployment, which continues to weigh heavily on local communities, resulting in community protests at our business units, with demands for employment and procurement opportunities. However, community protests are peaceful, and we have ensured timely responses and engagements, thus preventing escalation and eliminating negative impacts on people and production.

Consequently, our community investment has focused on procurement and enterprise development opportunities, education and skills development, as well as the provision of infrastructure projects.

For the year to date, we have embarked on and progressed with the following initiatives:

Coal business:

• We achieved a local procurement spend of 14%, equal to R564 million, compared to our target of 10% which empowered over 209 local black women-owned and black youth-owned SMMEs.
• We approved ESD funding of R112 million to 10 SMMEs employing 255 people
• A total of R6.7 million was spent on infrastructure development through our social and labour plans’ initiatives, including a road rehabilitation project in the town of Belfast, Mpumalanga, which will improve road safety. This expenditure will increase as project schedules gain momentum
• Exxaro entered into a relationship with implementation partners, who are recognised by the Youth Employment
  Service ecosystem as providers of high-impact skills development and social entrepreneurship training. There are currently 100 learners and this number will increase as recruitment initiatives are rolled out. To date, we have spent R3.6 million
• In all, 10 learners were recruited from the community areas that the business operates in and enrolled at Edumap College to complete the 12-month bridging programme. So far, 29 learners have completed the programme.

Energy business:

• Support was provided to eight enterprises on a financial excellence programme with the SAICA-Enterprise Development and the Hope Factory at a cost of R0.4 million an amount of R3.4 million was spent in the first half of 2022 on enterprise development initiatives
• A total of R7.3 million was spent on infrastructure development initiatives, including a water solution project. A total of 186 temporary jobs have been created and nine local SMMEs benefited from our infrastructure development projects
• To develop a pipeline of future talents, R1.3 million was invested in a bursary programme, which currently has 34 students from the host communities.

The environmental authorisation application and water use licence (Phase 1) applications for the Belfast expansion project have been submitted. We hope to receive these licences in 1Q23.

The following applications are in process at the DMRE:

• The execution of Grootegeluk’s section 102 application amending the mining right boundary
• The execution of Leeuwpan’s section 102 application consolidating the two mining rights into a single mining right
• A section 102 application amending Matla’s mining right to swap Coal Reserves with Seriti Resources as part of a commercial transaction.

In December 2021, the DMRE issued a directive to Exxaro in relation to the failure to commence mining at Thabametsi. A formal response has been submitted to the DMRE.

An internal investigation to incorporate Thabametsi into the Grootegeluk mining right is underway.

The group’s compliance to valid licences or authorisations is at 96%. Where rights and other licences are nearing expiry dates, renewal applications are submitted timeously.

Other than normal LoM depletion, no material changes are reported on the Coal Resources and Coal Reserves estimates at our operations.

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: geosciences 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, advance of this publication.

The 80 MW Lephalale solar project has been registered with the National Energy Regulator of South Africa and the Regulator Executive Committee on 6 June 2022.

Economic context

Global inflation picked up significantly during 1H22 and is expected to moderate, albeit slowly, towards the end of 2H22. The process of unwinding the sticky global cost pressures built up over the past two years will take some time. The evolving global economic environment of rising interest rates, slower economic growth, and improving supply conditions are expected to bring some price pressure relief.

South Africa's real GDP rose above pre-COVID-19 pandemic levels in 1Q22. However, it is expected to come under renewed pressure in 2Q22 due to electricity supply disruption, business disruptions due to the KwaZulu-Natal floods and the impact of the COVID-19 lockdown measures in China. Furthermore, continued inflationary pressures, tightening monetary policy and the increasing risk of a further global economic slowdown limit domestic growth prospects during 2H22.

The rand/US$ exchange rate is expected to remain volatile during 2H22.

Commodity markets and price

European demand for South Africa's high CV coal is expected to increase in 2H22, mainly due to the European ban of Russian coal and intermittent and unstable gas supply from Russia into Europe. Indian demand is also expected to be higher as the government is now mandating all importing coal-based plants to resume full scale operations. However, it is expected that Russia will account for most of the imports due to lower pricing.

On the supply side, supply from Australia is expected to remain tight as heavy rains curtail production and there are growing concerns over supply from Colombia. Increased demand for South African coal is expected from Japan, Korea and Taiwan due to the tight supply from Australia.

We expect the API4 coal price index to remain strong, given the overall higher pricing of the energy complex.

Supply of domestic high CV and power station coal is expected to remain tight as market participants continue to truck coal to alternative ports as a result of the favourable pricing environment. This is expected to continue putting upward pressure on domestic coal prices.

Despite improving supply conditions, the global iron ore market is expected to be supported by strong Chinese steel production into 2H22. However, recent weak sentiment on recession risks will continue to weigh on prices.

Operational performance

We expect the logistical challenges to persist for the remainder of the year and will continue deploying all available avenues to evacuate coal in the current high pricing environment. We are targeting to build on our logistical solutions that we have successfully developed in 1H22.

To remain competitive across various markets, our digitalisation programme remains focused on the visibility of the full value chain enabling our market to resource (M2R) optimisation strategy through timeous and insights-driven decision making. Our data science initiatives are making good progress focusing on enhancing these insights using data and advanced analytics in critical areas of the business.

In 2H22, Cennergi's electricity generation is anticipated to increase due to seasonality, however, still below the average historical generation as a result of the lower wind condition trends experienced this year.

The prefeasibility study to determine the way forward for the Moranbah South hard coking coal project started during 3Q21 and is expected to be completed by 1Q23.

We remain prudent in our capital allocation framework, balancing returns to shareholders, managing debt and selectively reinvesting for the growth of our business.

Our dividend policy is based on the following two components:

• A targeted cover ratio of 2.5 times to 3.5 times Adjusted Group Earnings; and
• Pass-through of the SIOC dividend.

Exxaro continues to target a gearing ratio of below 1.5 times net debt (excluding ring-fenced project financing) to EBITDA.

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

• 2.5 times Adjusted Group Earnings; and
• Pass through of SIOC dividend of R2 498 million.

Notice is hereby given that a gross interim cash dividend, number 39 of 1 593 cents per share, for the six-month period ended 30 June 2022 was declared from income reserves, and is payable to shareholders of ordinary shares.

For details of the final dividend, please refer note 5 of the reviewed condensed group interim financial statements for the six-month period ended 30 June 2022. The details will also be published on our website at www.exxaro.com. Salient dates for payment of the final dividend are:

No share certificates may be dematerialised or re-materialised between Wednesday, 28 September 2022 and Friday, 30 September 2022, 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, 3 October 2022.

In compliance with paragraph 3.59 of the JSE Listings Requirements and paragraph 6.39 of the Debt Listings Requirements, shareholders were advised of the changes to the board of directors during the six-month period ended 30 June 2022.

The company welcomed Dr Pumla Mnganga, Ms Karin Ireton, Mr Billy Mawasha and Mr Ben Magara to the board of directors as independent non-executive directors, with effect from 7 February 2022.

The company also welcomed Dr Nombasa Tsengwa as the chief executive officer 1 August 2022.

Mr Ras Myburgh retired as a non-executive director effective 25 May 2022 and Mr Mxolisi Mgojo retired as the chief executive officer and executive director on 31 July 2022. The board thanked Ras and Mxolisi for their invaluable contribution to Exxaro.

Additional information on financial and operational results for the six-month period ended 30 June 2022, and the accompanying presentation can be accessed on our website on www.exxaro.com.

On behalf of the board of directors

18 August 2022