Commentary

As at 30 June 2023, Exxaro recorded six lost-time injuries resulting in an LTIFR of 0.08 against the set target of 0.05. The current LTIFR indicates a 50% decline in performance when compared to the same period last year. Exxaro has recorded two high-potential incidents across the group, compared to five for the full year ended 31 December 2022. To prevent potential incidents, various safety initiatives have been deployed across all our business units.

 

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 adjusted earnings. The non-core adjustments in both 1H23 and 1H22 are the same as the headline earnings adjustments.

Group revenue and EBITDA

There were no non-core adjustments for revenue and EBITDA.

	Revenue				EBITDA1
	1H23  Rm	1H22  Rm	2H22  Rm		1H23  Rm	1H22  Rm	2H22  Rm
Coal	18 125	21 692	23 279		6 922	10 525	8 498
Energy	610	523	636		476	362	466
Ferrous	205	108	116		52	26	30
Other2	3	7	8		211	(310)	(595)
Total	18 943	22 330	24 039		7 661	10 603	8 399

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 5 for key numbers used in the calculation of EBITDA.
2	Relates mainly to the corporate office and smaller operations (refer to note 5).

Group revenue decreased by 15% to R18 943 million (1H22: R22 330 million), driven by lower sales prices, lower sales volumes, and ongoing logistical challenges, offset by a slightly weaker exchange rate at our coal business.

The revenue contribution from our energy business was 17% higher than 1H22. Energy generation from the Cennergi wind assets was higher, driven by an improvement in wind conditions from the prior year despite an energy generation loss due to an Eskom line fault.

Group EBITDA decreased by 28% to R7 661 million (1H22: R10 603 million), mainly attributable to the 34% 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
	1H23  Rm	1H22  Rm	2H22  Rm		1H23  Rm	1H22  Rm	2H22  Rm
Coal: Mafube	276	756	1 146		375	375	375
Coal: RBCT	2		(9)
Ferrous: SIOC	2 631	3 119	1 783		1 419	2 655	2 498
Other: Black Mountain	256	299	279
Other: LightApp		(32)	(38)
Total	3 165	4 142	3 161		1 794	3 030	2 873

Group earnings

Headline earnings decreased by 29% to R5 912 million (1H22: R8 290 million). The decrease in headline earnings is mainly due to the 28% decrease in group EBITDA, as well as a 24% decrease in adjusted equity-accounted income. SIOC's adjusted equity-accounted income decreased by 16% due to lower iron ore prices and higher operating expenses, partially offset by a weaker currency.

The weighted average number of shares of 242 million remained unchanged translating into headline earnings per share of 2 443 cents per share (1H22: 3 426 cents per share).

Cash flow and funding

Cash flow generated by our operations decreased by 34% to R6 252 million (1H22: R9 433 million) and, together with the dividends received from our equity-accounted investments of R1 794 million (1H22: R3 030 million), were sufficient to fund capital expenditure and ordinary dividends paid.

Total capex increased to R801 million (1H22: R744 million), comprising R788 million sustaining capex and R13 million expansion capex.

Debt exposure

Our cash generation resulted in a net cash position of R11 588 million (excluding Cennergi's net debt of R4 363 million) at 30 June 2023, compared to a net cash position of R9 653 million (excluding Cennergi's net debt of R4 412 million) at 31 December 2022.

 

Unreviewed coal production and sales volumes

	Production				Sales
	1H23 '000 tonnes	1H22 '000 tonnes	2H22 '000 tonnes		1H23 '000 tonnes	1H22 '000 tonnes	2H22 '000 tonnes
Thermal	18 819	20 640	20 496		18 791	20 723	20 679
Commercial – Waterberg	12 706	13 905	13 944		12 162	13 531	13 269
Commercial – Mpumalanga	3 460	3 649	3 481		1 523	1 566	1 665
Exports					2 448	2 542	2 672
Tied1	2 653	3 086	3 071		2 658	3 084	3 073
Metallurgical	1 388	1 084	904		340	403	288
Commercial – Waterberg	1 388	1 084	904		340	403	288
Total coal (excl buy-ins)	20 207	21 724	21 400		19 131	21 126	20 967
Thermal coal buy-ins	175	16	4
Total coal (incl buy-ins)	20 382	21 740	21 404		19 131	21 126	20 967
1  Matla mine supplying its entire production to Eskom.

The bearish market sentiment in 1H23 is attributable to price declines arising from sufficient gas and coal stocks in Europe, exacerbated by warmer than usual winter temperatures, strong renewables performance and materially lower gas prices. The lower coal prices resulted in an increase in demand for South African coal from India. Demand from India retreated in 2022 due to the soaring prices.

Changes in global trade flows were evident as Australia resumed supply into China and Russian supplies to Europe and Japan reduced materially. Europe's reassessment of coal-fired power capacity for the upcoming winter is continuing, with mixed decisions from different governments, as the drive to phase out coal gains momentum in that region.

The domestic market remained stable in 1H23, despite a depressed export pricing environment. The decline in export prices, however, impacted on the economics of exporting through alternative ports. Demand for low calorific value coal remained resilient as domestic end-users continued to offtake power station coal from various Exxaro mines.

Lacklustre rail performance due to locomotive availability, cable theft, derailments and vandalism remained a challenge. The collaboration by the TFR-Industry Recovery Team realised some benefits and service levels did not deteriorate further. Exxaro railed 2.45 Mt of export coal to RBCT in 1H23, compared to 2.54 Mt for the same period last year. The poor rail performance also negatively impacted AMSA's offtake for the period.

The average benchmark API4 RBCT export price of US$130 per tonne was 53% lower (1H22: US$277 per tonne) resulting in an 52% decrease in the average realised export price for Exxaro of US$127 per tonne (1H22: US$262 per tonne). Despite this price decline, Exxaro was able to realise 98% of the average API index price based on its sales mix.

Production and sales volumes

Overall coal production volumes (excluding buy-ins) decreased by 1 517 kt (-7%). The decrease was mainly at Grootegeluk, Belfast and Mafube, partly offset by higher production at Leeuwpan. Overall sales volumes were 9% lower, (1 994kt) mainly on sales to Eskom.

Thermal Coal

Commercial Waterberg

Production at Grootegeluk decreased by 1 199 kt (-9%) and sales by 1 369 kt (-10%) to match the lower demand plan from Eskom as a result of the Unit 6 shut at the Medupi power station and the stacker-reclaimer availability at the Matimba power station, partly offset by higher demand from local customers.

Commercial Mpumalanga

The Mpumalanga commercial mines' thermal coal production decreased by 189 kt (-5%) due to:

• Production at Belfast that decreased by 436 kt (-29%), as we transitioned to a new mining contractor resulting in no mining activities in the first two months of the financial year and a slow ramp-up in March
• Production at Mafube that was 313 kt lower (-32%), as we experienced lower equipment availability and poor blast fragmentation

The decrease was partly offset by:

• Higher production at Leeuwpan of 561 kt (+48%) as we increased production at the crush and screen plant

The Mpumalanga commercial mines' thermal coal sales decreased by 43 kt (-3%) due to:

• Lower sales at Mafube of 188 kt (-67%), due to lower production and TFR logistical constraints
• Lower sales at Belfast of 32 kt (-8%), due to lower product availability caused by the transitioning of the new mining contractor

The decrease was partly offset by higher domestic sales at Leeuwpan of 177 kt (+20%).

Export commercial

Export sales decreased by 94 kt (-4%) as the logistical challenges continued.

Tied

Coal production and sales at Matla were 433 kt and 426 kt (-14%) lower respectively, compared to 1H22. The lower production was mainly due to unfavourable geological conditions at the shortwall at Mine 2 and Mine 3.

Metallurgical Coal

Grootegeluk's metallurgical coal production increased by 304 kt (+28%), with the GG6 plant now being fully operational.

Sales decreased by 63 kt (-16%) as the poor rail performance continued.

Coal revenue and EBITDA

	Revenue				EBITDA
	1H23 Rm	1H22 Rm	2H22 Rm		1H23 Rm	1H22 Rm	2H22 Rm
Commercial – Waterberg	11 384	11 692	11 921		6 452	7 122	6 107
Commercial – Mpumalanga	4 000	7 334	8 463		508	3 395	2 611
Tied1	2 741	2 666	2 895		88	81	84
Other					(126)	(73)	(304)
Coal	18 125	21 692	23 279		6 922	10 525	8 498
1  Matla mine supplying its entire production.

Coal revenue decreased by 16% to R18 125 million (1H22: R21 692 million), driven mainly by lower export prices, lower sales volumes for both domestic and export sales, partly offset by higher domestic prices.

Coal EBITDA of R6 922 million at a healthy operating margin of 32% (1H22: R10 525 million) decreased by 34% mainly due to:

• Lower commercial revenue (-R3 642 million)
• Higher inflation (-R505 million), driven by diesel prices and electricity tariff increases significantly above the PPI inflation rate
• Higher selling and distribution costs (-R348 million)
• Higher operational costs (-R327 million)
• Net realised and unrealised currency exchange differences (-R156 million)

The decrease was partly offset by:

• Net stock movements and buy-ins at lower prices (+R1 029 million)
• Lower environmental rehabilitation provision movement (+R229 million)
• Royalties (+R198 million)

Equity-accounted investments

Adjusted equity-accounted income from Mafube JV decreased by 63% from 1H22, as a result of lower export prices and sales volumes, partly offset by lower royalties.

Coal capex and projects

Coal capex

	1H23 Rm	1H22 Rm	2H22 Rm	% Change 1H23 vs 1H22
Sustaining	777	696	678	12
Commercial – Waterberg	706	610	507	16
Commercial – Mpumalanga	69	86	166	(20)
Other	2		5	100
Expansion		29	202	(100)
Commercial – Waterberg		29	202	(100)
Total coal capex	777	725	880	7

The coal business's capex increased by 7% in 1H23 compared to 1H22. Sustaining capital increased by 12%, driven mainly by higher spend at Grootegeluk and Belfast, partially offset by lower spend at Leeuwpan. Expansion capital decreased as we have now completed the construction of the GG6 plant.

Cennergi's operating wind assets generated 335 GWh of electricity in the first six months of 2023 (1H22: 307 GWh), a 5% increase compared to the June 2023 guidance of 318 GWh, 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. Wind conditions continue to be variable but improved in the current period compared to 1H22.

Cennergi's operating EBITDA margin was 80% (1H22: 80%) underpinned by the long-term offtake agreements with Eskom.

Cennergi's project financing of R4 460 million (1H22: R4 637 million) will be settled by the end of 2031.The project financing has no recourse to the Exxaro balance sheet and is hedged through interest rate swaps achieving an effective rate of 12.7% (1H22 12.0%).

The 68 MW LSP project at the Grootegeluk Mine reached financial close on 29 June 2023. The total investment cost of R1 561 million will be funded through limited recourse project finance debt by South African lenders at a gearing ratio of 75%. Construction will commence during 2H23 and commercial operation is expected in 2025.

Equity-accounted investment

The 16% decrease in adjusted equity-accounted income from SIOC to R2 631 million (1H22: R3 119 million) was due to lower market prices and higher operating expenses, partially offset by a weaker currency.

Exxaro received a final dividend of R1 419 million from SIOC in February 2023 (1H22: R2 655 million). SIOC declared an interim dividend of R9 657 million to its shareholders in July 2023. Exxaro's share of the dividend amounts to R1 967 million and will be accounted for in 2H23.

Sale of non-core assets and investments

As part of the broader Exxaro strategic review, the company continuously seeks opportunities to unlock value to support its Sustainable Growth and Impact strategy. Exxaro has identified that the FerroAlloys business is no longer a strategic fit within our envisaged Minerals business portfolio. We do, however, believe that there is still significant value to be unlocked in the hands of a potential buyer and have therefore decided to commence a sales process to dispose of our entire shareholding in FerroAlloys. We are still in the early stages of the sales process.

Climate change response strategy implementation

Our draft 2050 carbon neutrality decarbonisation roadmap reflecting the short-term, medium-term and long-term targets, was completed and is currently being socialised with internal stakeholders for refinement and alignment purposes. Our revised short-term scope 1 and scope 2 emissions reduction targets of 40% by 2026, which is based on our FY22 emissions, remains relevant and applicable.

Social investment and development

Despite a challenging business environment for the six-month period ended 30 June 2023, Exxaro invested R896.2 million through the coal and energy operations. This includes over R660 million spent on local procurement, R42.1 million on various community development initiatives (including social and labour plans), and R75 million on various skills development initiatives. Combined, the small enterprise support initiatives benefited 73 SMMEs and sustained 638 jobs, and the skills development initiatives supported 1 517 beneficiaries.

The coal operations established and managed various pipelines and feeder schemes to develop the youth, with a strong focus on our communities, to create opportunities towards a variety of qualifications to improve marketability within Exxaro and the market. During 1H23, Exxaro's spend was R64.7 million on bursaries, professionals in training, internships, learnerships and skills programmes. This includes creating pipelines for people with disabilities as intern sponsorships and awarding full-time bursaries which benefited 977 Black people. With the support of Youth Employment Service partners, the year-to-date spend is R8.1 million for developing our youth from our communities in two approved initiatives benefiting 307 Black people. The coal operations also spent R2.2 million in offering other training such as portable skills benefiting 233 Black people

The energy operations in the Eastern Cape, have spent R11.8 million in terms of the Renewable Independent Power Producer Programme commitments. The investment focused on socio-economic development and enterprise development initiatives, which created approximately 298 job opportunities and supported 60 SMMEs.

Matla mine is currently engaging in several renewal applications with the authorities. The water use licence renewal is in process and is expected to be approved in 4Q23, and its renewal application for its waste management licence for the brine pond was also submitted to the Department of Forestry, Fisheries, and the Environment. Lastly, the process to renew Matla's mining right has commenced and is proceeding well.

As part of our normal licence to operate process, Belfast mine is in the final stages in the licensing process to extend the life of the mine with the approval of the environmental impact assessment report submitted to the DMRE. Approval is expected in 4Q23.

The DMRE remains constrained in its ability to address application backlogs. With no proper functioning cadastral system, conflicting applications continue to be a challenge for the company. We have therefore implemented a manual system to check MPRDA section 10 notices published at DMRE regional offices.

There is no material change in Exxaro's total or attributable Coal Resources and Coal Reserves for the first six-month period ended 30 June 2023, other than normal life of mine 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: 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 in advance of this publication.

On 29 June 2023 financial close for the LSP project was achieved. On 24 July 2023 the deferred conditions precedent for utilisation were met making the facility available for utilisation. The first utilisation occurred on 31 July 2023. The project financing has no recourse to the Exxaro balance sheet.

Economic context

Although global inflation is on a downward path, underlying inflationary pressures persist. Policy interest rates are at or near their peak, although a further tightening of bank lending standards may contribute to more restrictive financial conditions, affecting both global investment sentiment and economic activity.

Following a 1.1% contraction of GDP in the fourth quarter of 2022, South Africa avoided a technical recession during the first quarter of 2023, with a modest 0.4% expansion.

During 1H23, the rand lost significant value against major global currencies. Intensified load shedding with the perceived risk of a potential grid collapse, a widening current-account deficit with prospects of a widening fiscal deficit, US dollar strength and loss in investor interest following a diplomatic dispute between South Africa and the United States of America, relating to South Africa's relations with Russia, were the main reasons attributed to the rand weakness.

Rand volatility is expected to remain elevated during the second half of 2023.

Commodity markets and price

Rising industrial activity and hot northern hemisphere summer weather have the potential to support energy demand during 2H23. Despite Europe's adequate energy supply currently, risks for the winter energy supply remain and are dependent on a range of uncertain and uncontrollable factors, including weather, the availability of liquefied natural gas and the risk of further gas cuts from Russia.

Rising iron ore supply and exports will be a limiting factor for iron ore prices during 2H23. Supply increases from major miners are expected, with a flat Chinese demand. Seaborne price volatility around the marginal cost level is likely to see marginal supply exit, rebalancing the market and providing limited price support.

Operational performance

We expect the logistical challenges to persist for the remainder of the year. We will continue exploring all available avenues to evacuate our coal. 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 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.

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 remains the same and 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 R1 967 million

Notice is hereby given that a gross interim cash dividend, number 41 of 1 143 cents per share, for the six-month period ended 30 June 2023 was declared, and is payable to shareholders of ordinary shares. The interim dividend was declared from profits generated during the period ended 30 June 2023 and has been declared from income reserves.

For details of the interim dividend, please refer note 6 of the reviewed group interim financial statements for the six-month period ended 30 June 2023. The details will also be published on our website at www.exxaro.com.

Salient dates for payment of the interim dividend are:

• Last day to trade cum dividend on the JSE

  Tuesday, 26 September 2023
• First trading day ex dividend on the JSE

  Wednesday, 27 September 2023
• Record date

  Friday, 29 September 2023
• Payment date

  Monday, 2 October 2023

No share certificates may be dematerialised or re-materialised between Wednesday, 27 September 2023 and Friday, 29 September 2023, 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, 2 October 2023.

Additional information on financial and operational results for the six-month period ended 30 June 2023, and the accompanying presentation can be accessed on our website on www.exxaro.com.

On behalf of the board of directors

17 August 2023