Commentary

Comments below are based on a comparison between the six-month periods ended 30 June 2017 and 2016 (1H17 and 1H16), respectively.

1. SAFETY

During the first half of 2017 Exxaro recorded an LTIFR of 0,16 (1H16: 0,08) against a target of 0,11.

Regrettably, an employee at Matla Mine 2 in Mpumalanga, Mr Sibongiseni Sihle Majozi, was fatally injured on 1 March 2017 following an underground accident. Exxaro continues to strive for a consistent, fatality-free environment and continuously improves all aspects of safety for all employees. Exxaro remains committed to the Zero Harm Vision. Efforts to reduce incidents through the safety improvement plans are under way.

2. ROBUST FINANCIAL PERFORMANCE

Exxaro delivered a strong performance for 1H17, achieving a net operating profit of R2 910 million, up 35% from R2 159 million recorded in 1H16. This was mainly driven by increased revenue coupled with only a 1% increase in operating expenses. The income from equity-accounted investments increased to R1 125 million (1H16: R9 million equity-accounted loss), primarily due to R492 million improvement from SIOC as a result of a recovery in iron ore export selling prices, as well as a decrease of R635 million in losses recorded from our investments in Tronox.

3. COMPARABILITY OF RESULTS

The corporate transactions during 2016 necessitated a change in the segmental reporting structures and the manner in which operating results are reported. Changes to segmental reporting, which resulted in the re-presentation of comparative periods’ segmental information. Refer note 4 to the reviewed condensed group interim financial statements.

The key transactions shown in table 1 below should be taken into account to gain a better understanding of the comparability of the results for the two periods.

Table 1: Key transactions impacting on comparability

   Reporting
segment 		 Description     1H17 
Rm 		    1H16 
Re- 
presented 
Rm 		    2H16 
Re- 
presented 
Rm 		   
   Coal 
  • Termination and voluntary severance packages
                (10)   
     
  • Gain on disposal of Inyanda operation1
                100    
     
  • Gain on disposal of SDCT1
          203          
     
  • Loss on disposal of property, plant and equipment1
    (22)    (15)    (30)   
   Ferrous 
  • Impairment of property, plant and equipment (FerroAlloys)1
                (100)   
   Other 
  • Termination and voluntary severance packages and other
          (26)    (62)   
     
  • Gain on disposal of property, plant and equipment1
          1     9    
     
  • Gain on disposal of the Mayoko iron ore project1 and related receivable written off
    (27)          670    
     
  • Loss on dilution of shareholding in Tronox Limited1
    (75)    (29)    (7)   
     
  • Fair value adjustment on contingent consideration relating to the acquisition of ECC
    (37)    38     (483)   
   Group  Total net operating profit impact     (161)    172     87    
   Coal 
  • Tax on disposal of property, plant and equipment1
    6     1     12    
     
  • Excess of fair value over cost of investment in RBCT1
          35          
     
  • Post-tax share of Mafube impairment of property, plant and equipment1
                (16)   
     
  • Post-tax share of Mafube gain on disposal of property, plant and equipment1
                1    
   Ferrous 
  • Tax on impairment of property, plant and equipment1
                27    
     
  • Excess of fair value over cost of investment in SIOC1
                221    
     
  • Post-tax share of SIOC loss on disposal of property, plant and equipment1
    (4)    (9)    (19)   
     
  • Post-tax share of SIOC impairment of property, plant and equipment1
                (1)   
   TiO2 and
Alkali chemicals 
  • Post-tax share of Tronox restructuring costs
          (9)         
  • Post-tax share of Tronox gain on disposal of property, plant and equipment1
                4    
   Group  Total attributable earnings impact     (159)    190     316    
  1 Excluded from headline earnings.

4. COMMODITY PRICE PERFORMANCE AND GROUP SEGMENT RESULTS

The movement in the main commodity prices impacting on Exxaro’s performance are summarised in table 2 below:

Table 2: Change in commodity prices

    Average US$ per tonne   Change  
Commodity price   1H17   1H16   %  
API4 coal   79   53   49  
Iron ore fines 62% Fe (cost and freight (CFR) China)   74   52   42  
TiO2 pigment (cost, insurance and freight (CIF), US)1   2 376   2 201   8  
1 Includes forecast for June 2017.

Table 3: Group segment results (Rm)

      Revenue     Net operating profit/(loss)   
      1H17 

Reviewed 		    1H16 

Reviewed 		    2H16

 		    1H17 

Reviewed 		    1H16 
Re- 
presented 		    2H16 
Re- 
presented 		   
Coal     10 670     9 718     10 955     3 014     2 232     2 934    
– Tied1     1 591     1 659     1 824     149     122     104    
– Commercial     9 079     8 059     9 131     2 865     2 110     2 830    
Ferrous     56     13     157           (7)    (40)   
– Alloys     56     13     157           (7)    (68)   
– Other                                   28    
Other     10     31     23     (104)    (66)    147    
Total     10 736     9 762     11 135     2 910     2 159     3 041    
1 Mines managed on behalf of and supplying their entire production to Eskom in terms of contractual agreements.

5. FINANCIAL AND OPERATIONAL RESULTS

5.1. Group financial results
5.1.1. Revenue and net operating profit
 

Group revenue increased by 10% to R10 736 million (1H16: R9 762 million), while group net operating profit increased by 35% to R2 910 million (1H16: R2 159 million), mainly due to a higher contribution from the coal operations driven by improved coal sales prices as well as higher Eskom commercial volumes at Grootegeluk (GG) based on demand from the Medupi Power Station. The average price per tonne achieved on exports was US$65 (1H16: US$42). This was offset by a stronger average spot exchange rate of R13,20 to the US dollar recorded for the period ended 30 June 2017 (1H16: R15,39) and lower export and domestic volumes.

Group operating expenses of R7 826 million for 1H17 remained almost flat compared to 1H16 as a result of the ongoing Exxaro improvement project (EIP) to reduce costs and improve efficiencies.

However, the 1H17 group’s net operating profit was negatively impacted by:

  • R37 million loss on the fair value adjustment (1H16: R38 million gain) relating to the contingent consideration which arose on the acquisition of ECC
  • R75 million loss (1H16: R29 million loss) on dilution of our shareholding in Tronox Limited
  • R27 million write-off of the receivables associated with the Mayoko iron ore project.
5.1.2. Earnings
 

Earnings, which include Exxaro’s equity-accounted investments in associates and joint ventures, were R2 692 million (1H16: R1 285 million) or 852 cents per share (1H16: 362 cents per share).

Headline earnings were 154% higher at R2 787 million (1H16: R1 096 million) or 882 cents per share (1H16: 309 cents per share).

Table 4: Equity-accounted investments (Rm)

      Equity-accounted income/(loss)    Dividends received    
     1H17 
Reviewed 		    1H16 
Reviewed 		    2H16 
 		    1H17 
Reviewed 		    1H16 
Reviewed 		    2H16 
 		   
SIOC1     1 228     736     1 680                      
Tronox     (295)    (930)    546     59     233     65    
Mafube     118     84     154           450          
Black Mountain     99     39     61                      
Cennergi     (11)    37     (34)                     
RBCT2     (14)    25     (25)                     
Total     1 125     (9)    2 382     59     683     65    
1 2H16 includes R221 million excess of fair value over the cost of the investment which arose on the 0,64% increase in Exxaro’s shareholding in SIOC.
2 1H16 includes R35 million excess of fair value over the cost of the investment which arose on the increase in Exxaro’s shareholding in RBCT.
5.1.3. Cash flow and funding
 

Cash flow generated by operations increased by R1 477 million to R3 660 million (1H16: R2 183 million) and was sufficient to cover capital expenditure of R1 314 million, dividends paid of R1 284 million, net financing charges of R273 million and tax of R575 million.

In January 2017, Exxaro repurchased 43 943 744 ordinary shares from Main Street 333 for a consideration of R3 524 million. Main Street 333 used a portion of the proceeds to settle a loan and accrued interest of R484 million with Exxaro, which was advanced to Main Street 333 in July 2015.

Total capital expenditure for 1H17 increased by 12% or R142 million when compared to the corresponding period last year, consisting of a R112 million increase in expenditure on sustaining and environmental capital (stay-in-business capital) and R30 million on new capacity (expansion capital).

Dividends of R59 million were received from our investment in Tronox Limited (1H16: R233 million). SIOC has declared a dividend to its shareholders in July 2017, Exxaro’s share amounting to R1 390 million. The dividend will be accounted for in 2H17.
5.1.4. Debt exposure
 

Net debt at 30 June 2017 was R4 349 million compared to R2 278 million at 30 June 2016. This equates to a net debt to equity ratio of 12% (1H16: 6,5%), well below Exxaro’s internal target of 40%.

In January 2017, the specific repurchase by Exxaro of Exxaro ordinary shares to the value of R3 524 million from Main Street 333, was effected using cash generated from Exxaro’s own operations. The repurchase consideration was funded with available contributed tax capital and the remaining portion from reserves.

Exxaro’s balance sheet structure remains strong despite the increase in the net debt.
5.2. Coal business performance
 

Table 5: Coal production and sales volumes (’000 tonnes) (Unreviewed)

    Production   Sales  
    1H17   1H16   2H16   1H17   1H16   2H16  
Thermal   20 823   20 431   20 380   20 911   21 161   21 328  
– Tied   3 542   3 966   3 934   3 542   3 961   3 932  
– Commercial: domestic   17 281   16 465   16 446   13 973   13 116   13 622  
– Commercial: export               3 396   4 084   3 774  
Metallurgical   1 069   970   1 015   566   738   560  
– Commercial: domestic   1 069   970   1 015   566   738   560  
Total coal   21 892   21 401   21 395   21 477   21 899   21 888  
Semi-coke   46   1   53   47   12   53  
Total coal (excluding buy-ins)   21 938   21 402   21 448   21 524   21 911   21 941  
Thermal coal buy-ins   105   577   29              
Total coal (including buy-ins)   22 043   21 979   21 477   21 524   21 911   21 941  

Domestic trading conditions were favourable in 1H17 as producers experienced strong demand for higher quality product. The metals and reductants markets also recovered well, amidst increasing international commodity prices, specifically ferrochrome.

Despite an oversupplied coal export market, Exxaro experienced consistent demand. Export volumes in 1H17 dropped by 17% to 3,4Mt compared to 1H16 mainly due to congestion at RBCT, which experienced adverse weather conditions.

The average API4 price for 1H17 was US$79, up from the US$53 for the corresponding period in 2016.
5.2.1. Production and sales volumes
 

Overall coal production volumes (excluding buy-ins and semi-coke) increased by 2% or 491kt compared to 1H16. This increase can be attributed mainly to the higher production volumes at GG in line with Addendum 9 to the Medupi Coal Supply Agreement. Sales were 2% lower (422kt) as a result of lower exports.
5.2.1.1. Metallurgical coal
 
GG’s metallurgical coal production was 99kt (10%) higher mainly due to the ramp-up of GG plant 10 (GG10) in 1H17. Sales decreased by 172kt (23%), mainly due to reduced offtake by ArcelorMittal as certain coke batteries are not yet operational.
5.2.1.2. Thermal coal
 

Tied mines
Power station coal production from the tied mines was 424kt (11%) lower compared to 1H16, due to the shortwall stop at Matla Mine 3 from December 2016 to May 2017 and unfavourable geological conditions.

Commercial mines
The commercial mines’ power station coal production increased by 932kt (8%) compared to 1H16 mainly due to:

  • Increased production at the GG plants (GG7 and GG8) of 1 068kt (11%)
  • Increased production at Leeuwpan of 76kt (6%) as a result of higher production in the crush and screen plant.

This increase was offset by:

  • Lower production at NBC’s Blesbok pit of 212kt (15%) due to lower coal exposure, longer hauling distances and high rainfall.


Domestic power station coal sales for the commercial mines were 176kt (2%) higher mainly as a result of:

  • An increase of 909kt (10%) in line with Addendum 9 to the Medupi Coal Supply Agreement.

This increase was partly offset by:

  • Lower sales at Leeuwpan of 416kt (100%) where the Eskom supply was terminated at the end of March 2016 and is now sold in the local and export markets
  • Lower NBC sales of 317kt (21%) due to lower production. The extension of the NBC Eskom Coal Supply Agreement was completed mid-June 2017.


Steam coal production decreased by 116kt (3%) mainly as a result of:

  • Lower production at ECC 165kt (8%) at Dorstfontein East due to community unrest and excessive rainfall and Forzando South due to lower yields and geological conditions
  • Lower production at Leeuwpan of 44kt as a result of lower production through the Dense Medium Separation (DMS) plant.


The lower production was partly offset by:

  • Higher production at NBC’s Eerstelingsfontein pit of 54kt (68%) due to good coal and equipment availability
  • Slightly higher buy-ins from Mafube JV of 20kt (2%) due to the inclusion of product previously sold to Eskom and briquettes
  • Higher production at GG of 19kt (2%) as a result of production through the new GG10 beneficiation plant.


Domestic steam sales increased by 682kt (37%) mainly as a result of:

  • Higher sales at Leeuwpan of 627kt (83%) due to higher demand and stock availability arising from Eskom product placed in the local market after the termination of the contract
  • Higher sales at ECC of 158kt (84%)
  • Higher sales at NBC of 61kt (94%).


The increase in sales was partly offset by:

  • Lower sales at GG of 152kt (18%) due to lower stock available from the GG4 and GG5 plants
  • Lower steam coal export sales of 421kt (13%) mainly due to congestion experienced at RBCT as a result of adverse weather conditions.


The semi-coke production increased by 45kt mainly due to the plant shutdown in 1H16 as a result of depressed market conditions in the ferrochrome industry. Sales were 35kt higher due to higher demand and more stable market conditions.
5.2.2. Revenue and net operating profit
 

Coal revenue of R10 670 million was 10% higher than 1H16 (R9 718 million). Higher revenue from the commercial mines was attributable to the higher selling prices as well as an increase in Eskom volumes. This was partially offset by exports and domestic sales.

Increased net operating profit of R3 014 million compared to R2 232 million in 1H16, mainly due to:

  • Higher sales prices (+R1 543 million)
  • Scope changes of environmental provisions (+R171 million)
  • Volume variances (+R162 million)
  • Capitalisation of project related costs (+R102 million)

Partly offset by:

  • Exchange rate variance due to stronger local currency against the US dollar (-R293 million)
  • Inflation (-R277 million)
  • Disposal of SDCT shareholding in 1H16 (-R203 million)
  • Higher depreciation (-R112 million)
  • Mafube coal buy-ins from Mafube JV (-R111 million).
5.3. Titanium dioxide and Alkali chemicals
 

Equity-accounted investment
Equity-accounted losses from the Tronox investments decreased from R930 million in 1H16 to R295 million for 1H17, mainly due to increased pigment selling volumes and prices, as well as a more favourable product mix.

As previously communicated to the market, Exxaro is exploring alternatives for the monetisation of its shareholding in Tronox Limited through an efficient and staged sales process. This process is likely to commence in 2H17.
5.4. Energy business
 

Equity-accounted investment
Cennergi, a 50% joint venture with Tata Power, recorded an equity-accounted loss of R11 million for 1H17 (1H16: profit of R37 million). The variance of R48 million is mainly due to the cessation of the capitalisation of interest in 2H16 and the inclusion of deemed revenue of R32 million in 1H16, which was reversed in 2H16 as a result of delays with the grid connection. The two windfarm projects were brought into commercial operation during the 3Q16.

6. PERFORMANCE AGAINST NEW BBBEE CODES AND MINING CHARTER

Exxaro has been audited against the amended codes. The primary focus area to raise the BBBEE level is Enterprise and Supplier Development (ESD). Exxaro has constituted an ESD forum to specifically lift the company’s performance in this area. We anticipate significant positive socio-economic impacts from the impending ESD initiatives.

Exxaro, through the Chamber of Mines, participated with the mining industry to provide inputs to the DMR to revise the mining charter elements and targets. Exxaro supports the strategic intention of transforming the mining industry. The Mining Charter III was gazetted on 15 June 2017 and subsequently suspended by the DMR Minister pending an urgent court interdict submitted by the Chamber of Mines.

Exxaro is analysing the impact of the Mining Charter III on the organisation and will continue to engage through the Chamber of Mines and through other appropriate channels with the DMR to address its concerns and submit new transformation targets and content proposals for the Mining Charter III.

7. BROAD BASED BLACK ECONOMIC EMPOWERMENT

On 17 January 2017, Exxaro concluded the repurchase of shares transaction pursuant to the unwinding of the existing BEE transaction (refer paragraph 5.1.4). On 25 June 2017 Exxaro, Main Street 333 and the Industrial Development Corporation (IDC) agreed on the formation of a special purpose vehicle, incorporated for the purpose of holding ordinary shares in Exxaro pursuant to the replacement BEE transaction, entered into the following agreements:

  • A framework agreement setting out the framework within which the Main Street 333 unwind and the consequential implementation of the replacement BEE transaction will take place
  • A relationship agreement detailing the terms and restrictions of the replacement BEE transaction over the transaction term.


The implementation of the replacement BEE transaction remains subject to various conditions precedent, which include the finalisation and agreement of the remaining suite of agreements required to implement the replacement BEE transaction and the Main Street 333 unwind.

It is expected that Exxaro will seek shareholder approval in 2H17 for the replacement BEE transaction.

8. MPOWER 2012

Exxaro implemented Mpower 2012, an employee share ownership plan, in July 2012 which held a shareholding of 0,8% in Exxaro. The shares held by Mpower 2012 vested on 31 May 2017 and were sold, upon the instructions of the participants, during June 2017 and paid to employees in July 2017. The distribution to participants varied depending on their years of service. Employees that participated for the full term received a pre-tax benefit of R43 384, consisting of R8 399 of dividends over the five-year period and R34 985 of proceeds when the shares were sold.

9. MINERAL RESOURCES AND MINERAL RESERVES

Other than the normal life of mine depletion, there have been no material changes to the mineral resources and reserves as disclosed in the 2016 integrated report.

10. MINING AND PROSPECTING RIGHTS

The Waterberg area remains an exciting mining prospect for Exxaro as the Thabametsi project has now started early works, and the Thabametsi Coal IPP, operated by Marubeni Middle-East & Africa Power Limited, has embarked on its licensing processes with financial close envisaged in 2Q18. Exxaro also holds a 100% ownership in the Waterberg North and South prospecting rights areas. The project areas consist of four prospecting rights for which applications for renewals were submitted and the first two were granted last year and executed in March 2017. For the last two rights, granting is still pending. Exxaro has a reasonable expectation that the remaining renewals will be granted in 2017.

The Leeuwpan mining right consolidation (to include Leeuwpan extension) and mining right registration were finalised in March 2017. The mining right registrations of Matla, Arnot, Forzando South and Glisa (at the NBC operation) are pending. Exxaro has a reasonable expectation that registrations will be concluded during 2017.

11. OUTLOOK

Exxaro expects that 2H17 domestic thermal volumes will remain at current levels. Volumes in the metals markets will reduce based on expected lower off take from ArcelorMittal. This is expected to persist until 2Q18.

Export markets are still reliant on demand from India for lower quality coal. However, Exxaro is actively diversifying its markets for lower quality coal in order not to be overly dependent on the Indian market. Pricing is expected to remain relatively flat. Growth is expected from the South-East Asian markets for RB1 and RB3 material.

Exxaro has a positive outlook for the coal business in 2H17 based on:

  • Stable trading conditions in domestic markets
  • Stable international coal prices
  • Our operational excellence process delivering further results
  • Technology and innovation improvements.

The rand exchange rate against the US dollar is expected to remain volatile during 2H17 due to the combination of significant event risks and volatility in the US dollar.

The performance of the investment portfolio (SIOC and Tronox) is expected to be positively influenced by the current favourable market conditions, anticipated to continue into 2H17.

12. INTERIM DIVIDEND

Exxaro’s dividend policy is based on a cover ratio of between 2,5 and 3,5 times core attributable earnings.

Notice is hereby given that a gross interim cash dividend, number 29 of 300 cents (1H16: 90 cents) per share, for the six-month period ended 30 June 2017 was declared, payable to shareholders of ordinary shares. For details of the dividend, please refer note 9 of the reviewed condensed group interim financial statements.

Salient dates for payment of the interim dividend are:

• Last day to trade cum dividend on the JSE Tuesday, 12 September 2017
• First trading day ex dividend on the JSE Wednesday, 13 September 2017
• Record date Friday, 15 September 2017
• Payment date Monday, 18 September 2017

13. GENERAL

Additional information on financial and operational results for the six-month period ended 30 June 2017, and the accompanying presentation can be accessed on our website on www.exxaro.com.

On behalf of the board

Len Konar
Chairman
Mxolisi Mgojo
Chief executive officer
Riaan Koppeschaar
Finance director

17 August 2017