Reviewed condendsed group interim financial statements and unreviewed production and sales volumes information for the six-month period ended 30 June 2017

Exxaro, a public company incorporated in South Africa, is a diversified resources group with interests in the coal (controlled and non-controlled), TiO₂ and Alkali chemicals (non-controlled), ferrous (controlled and non-controlled) and energy (non-controlled) markets. These reviewed condensed group interim financial statements as at and for the six-month period ended 30 June 2017 comprise the company and its subsidiaries (together referred to as the group) and the group’s interest in associates and joint ventures.

2.1 Statement of compliance

The reviewed condensed group interim financial statements as at and for the six-month period ended 30 June 2017 have been prepared in accordance with IFRS, IAS 34 Interim Financial Reporting, the SAICA Financial Reporting Guides as issued by the Accounting Practices Committee and Financial Pronouncements as issued by the Financial Reporting Standards Council and the requirements of the Companies Act of South Africa.

The reviewed condensed group interim financial statements as at and for the six-month period ended 30 June 2017 have been prepared under the supervision of PA Koppeschaar CA(SA), SAICA registration number: 00038621.

The reviewed condensed group interim financial statements should be read in conjunction with the group annual financial statements as at and for the year ended 31 December 2016, which have been prepared in accordance with IFRS as issued by the IASB. The reviewed condensed group interim financial statements have been prepared on the historical cost basis, excluding financial instruments and biological assets, which are at fair value.

The reviewed condensed group interim financial statements of Exxaro and its subsidiaries as at and for the six-month period ended 30 June 2017 were authorised for issue by the board of directors on 15 August 2017.

2.2 Judgements and estimates

In preparing these reviewed condensed group interim financial statements, management made judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expense. Actual results may differ from these estimates. The significant judgements made by management in applying the group’s accounting policies and the key source of estimation uncertainty were similar to those applied to the group annual financial statements as at and for the year ended 31 December 2016.

The accounting policies adopted in the preparation of the reviewed condensed group interim financial statements are consistent with those followed in the preparation of the group annual financial statements as at and for the year ended 31 December 2016. A number of new or amended standards became effective for the current reporting period. However, the group did not have to change its accounting policies or make retrospective adjustments as a result of adopting these standards. Additional disclosures required under the amended IAS 7 Statement of Cash Flows have not been provided by the group as it is not required for condensed group interim financial statements. The group will disclose the additional information in the group annual financial statements for the year ended 31 December 2017.

Taxes on income in the interim period are accrued using the tax rate that would be applicable to expected total annual profit or loss.

New accounting standards and amendments issued to accounting standards and interpretations which are relevant to the group, but not yet effective on 30 June 2017, have not been adopted. The group continuously evaluates the impact of these standards and amendments. In summary the following are the current expectations in relation to IFRS 9 Financial Instruments, IFRS 15 Revenue from Contracts with Customers and IFRS 16 Leases.

IFRS 9
The group has decided not to adopt IFRS 9 until it becomes mandatory on 1 January 2018.

The actual impact of adopting IFRS 9 on the group’s financial statements in 2018 is not known and cannot be reliably estimated because it is dependent on the financial instruments that the group holds and economic conditions at that time as well as accounting elections and judgements which the group will make in the future. The new standard will require the group to revise its accounting processes and internal controls related to reporting financial instruments and these changes are not yet complete.

However, the group has performed a preliminary assessment of the potential impact of the adoption of IFRS 9 based on its position at 30 June 2017.

Based on its preliminary assessment, the group does not believe that the new classification requirements, if they had been applied at 30 June 2017, would have had a material impact on its accounting for trade receivables, loans and investments in equity securities that are managed on a fair value basis. At 30 June 2017, the group had equity investments classified as available-for-sale with a fair value of R177 million. If these investments continue to be held for the same purpose at initial application of IFRS 9, then the group may elect to classify them as at fair value through other comprehensive income or fair value through profit or loss. The group has not yet made a decision in this regard. In the former case, all fair value gains and losses would be reported in other comprehensive income, no impairment losses would be recognised in profit or loss and no gains or losses would be reclassified to profit or loss on disposal. In the latter case, all fair value gains and losses would be recognised in profit or loss as they arise, increasing volatility in the group’s profits.

The group has embarked on the process of determining the impact that the new impairment model, on the basis of expected credit losses, will have on the impairment provisions. As part of this process the group will finalise the impairment methodologies that it will apply under IFRS 9.

Disclosure requirements and changes in presentation are expected to change the nature and extent of the group’s disclosures about its financial instruments particularly in the year of the adoption of the new standard. The group is in the process of identifying changes to systems and controls which will be necessary to capture the required data.

IFRS 15
The standard is effective for annual periods beginning on or after 1 January 2018. Exxaro assessed significant contracts with customers in line with the IFRS 15 five-step model. While the group is still considering the impact, no material impact is expected on the measurement and timing of revenue recognition.

The group must still take a decision on the transition method to be applied as well as the practical expedients to be used, if elected.

IFRS 16
The standard is effective for annual periods beginning on or after 1 January 2019. Early adoption is permitted provided that IFRS 15 is adopted at or before the date of initial application of IFRS 16. The group made progress on the initial assessment of the potential impact of this standard on the group’s financial statements but has not yet reached a conclusion if this standard will be early adopted with the implementation of IFRS 15. This initial assessment included the identification of material lease transactions within the group. The group must still make a decision on the transition method to be applied as well as the practical expedients to be used, if elected.

Operating segments are reported on in a manner consistent with the internal reporting provided to the chief operating decision-maker, who is responsible for allocating resources and assessing performance of the reportable operating segments. The chief operating decision-maker has been identified as the group executive committee. Segments reported are based on the group’s different products and operations.

The corporate transactions during 2016 necessitated a change in the segmental reporting structures and the manner in which operating results are reported to the chief operating decision-maker. Changes to segmental reporting which resulted in the re-presentation of comparative periods’ segmental information, included:

– the iron ore operating segment is now included within the other operating segment which forms part of the other reportable segment;
– an energy segment was added as an additional reportable segment.

The re-presentation resulted in five reportable operating segments compared to the four reportable operating segments in prior periods.

Total operating segment revenue, which excludes VAT, represents the gross value of goods invoiced, services rendered and includes operating revenues directly and reasonably allocatable to the segments. Segment net operating profit or loss equals segment revenue less segment expenses, impairment charges, plus impairment reversals. Segment operating expenses, assets and liabilities represent direct or reasonably allocatable operating expenses, assets and liabilities.

The reportable operating segments, as described below, offer different products and services, and are managed separately based on commodity, location and support function grouping. The group executive committee reviews internal management reports on these divisions at least quarterly.

Coal
The coal operations are mainly situated in the Waterberg and Mpumalanga regions and are split between coal commercial operations and coal tied operations. Coal commercial operations include a 50% (30 June 2016: 50%; 31 December 2016: 50%) investment in Mafube (a joint venture with Anglo), as well as a 10,82% (30 June 2016: 10,82%; 31 December 2016: 10,82%) effective equity interest in RBCT. The coal operations produce thermal coal, metallurgical coal and SSCC.

Ferrous
The ferrous segment comprises a 20,62% (30 June 2016: 19,98%; 31 December 2016: 20,62%) equity interest in SIOC (located in the Northern Cape province) reported within the other ferrous operating segment as well as the FerroAlloys operations (referred to as Alloys).

TiO₂ and Alkali chemicals
Exxaro holds a 42,97% (30 June 2016: 43,71%; 31 December 2016: 43,66%) equity interest in Tronox Limited and a 26% (30 June 2016: 26%; 31 December 2016: 26%) equity interest in Tronox SA (both South African-based operations), as well as a 26% (30 June 2016: 26%; 31 December 2016: 26%) member’s interest in Tronox UK.

Energy
The energy segment comprises a 50% (30 June 2016: 50%; 31 December 2016: 50%) investment in Cennergi (a South African joint venture with Tata Power Company Limited) which operates two windfarms.

Other
This reportable segment comprises the 26% (30 June 2016: 26%; 31 December 2016: 26%) equity interest in Black Mountain (located in the Northern Cape province), an effective investment of 11,7% (30 June 2016: 11,7%; 31 December 2016: 11,7%) in Chifeng (located in the PRC), the Mayoko iron ore project (and related subsidiaries) which was classified as a discontinued operation in 2016 and sold on 23 September 2016, as well as the corporate office which renders services to operations and other customers.

The following table presents a summary of the group’s segmental information:

¹ Excluding deferred tax, investments in associates and joint ventures and non-current assets held-for-sale.
² Offset per legal entity and tax authority.

¹ Excluding deferred tax, investments in associates and joint ventures and non-current assets held-for-sale.
² Offset per legal entity and tax authority.

¹ Excluding deferred tax, investments in associates and joint ventures and non-current assets held-for-sale.
² Offset per legal entity and tax authority.

During 2016 Exxaro entered into a sale of shares agreement for the sale of the Mayoko iron ore project and related subsidiaries for a purchase consideration of US$2 million which became effective on 23 September 2016. The disposal group represented a major geographical area of operation and was disclosed as part of the iron ore operating segment which has now been re-presented to form part of the other operating segment within the other reportable segment. Financial information relating to discontinued operations for the period to the date of disposal is set out below:

¹ Sale of the Inyanda operation in 2016.
² Relating to the ECC acquisition.

Total dividends paid in 2016 amounted to R625 million, made up of a final dividend of R304 million which related to the year ended 31 December 2015, paid in April 2016, as well as an interim dividend of R321 million, paid in September 2016. A final dividend relating to the 2016 year of 410 cents per share (amounting to R1 284 million) was paid to shareholders in April 2017.

An interim cash dividend, number 29, for 2017 of 300 cents per share (2016: 90 cents per share) was approved by the board of directors on 15 August 2017. The dividend is payable on 18 September 2017 to shareholders who will be on the register at 15 September 2017. This interim dividend, amounting to approximately R943 million (2016: R321 million), has not been recognised as a liability in these reviewed condensed group interim financial statements. It will be recognised in shareholders’ equity in the year ending 31 December 2017.

The dividend declared will be subject to a dividend withholding tax of 20% for all shareholders who are not exempt from or do not qualify for a reduced rate of dividend withholding tax. The net local dividend payable to shareholders, subject to dividend withholding tax at a rate of 20% amounts to 240 cents per share. The dividend withholding tax amounts to 60,00000 cents per share (30 June 2016: 13,50000 cents per share; 31 December 2016: 82,00000 cents per share). The number of ordinary shares in issue at the date of this declaration is 314 171 761 (2016: 358 115 505). Exxaro company’s tax reference number is 9218/098/14/4.

¹ 43 943 744 shares were repurchased and cancelled on 20 January 2017.

¹ The loan granted to Cennergi in 2016 is interest free, unsecured and repayable on termination date in 2026, unless otherwise agreed by the parties.
² The indemnification asset arose on the ECC business combination transaction.
³ During January 2017 Main Street 333 settled its interest-bearing loan with Exxaro.

Moranbah coal project
Exxaro holds a 50% interest in the Moranbah coal project joint operation with Anglo American Metallurgical Coal Proprietary Limited reported within the coal commercial operating segment which forms part of the coal reportable segment. The project is based in Queensland, Australia.

As part of Exxaro’s strategic decision to focus on its current pipeline of South African coal projects and due to the size of the project, the group’s executive committee approved a divestment plan for this asset. The sale will be managed through a controlled market tender process, envisaged to be concluded towards the end of 2017.

The Moranbah coal project does not meet the criteria to be classified as a discontinued operation since it does not represent a separate major line of business, nor does it represent a major geographical area of operation.

EMJV
Exxaro concluded the purchase of ECC in 2015, and as part of this acquisition Exxaro acquired non-current liabilities held-for-sale relating to the EMJV. The sale of the EMJV is conditional on section 11 approval required in terms of the MPRDA for transfer of the new-order mining right to the new owners, Scinta Energy Proprietary Limited, as well as section 43(2) approval for the transfer of environmental liabilities and responsibilities. The EMJV remains a non-current liability held-for-sale for the Exxaro group on 30 June 2017 as the required approvals are still pending.

The EMJV does not meet the criteria to be classified as a discontinued operation since it does not represent a separate major line of business, nor does it represent a major geographical area of operation.

Corporate centre building
The land and buildings situated at corporate centre were classified as a non-current asset held-for-sale on 31 December 2015. The sale was subject to the fulfilment of suspensive conditions which were not met and the sales agreement subsequently lapsed.

A new agreement was entered into with a property consortium in June 2016. These agreements have been amended and finalised during May 2017. All conditions precedent to this sale agreement have not yet been met. The land and buildings situated at corporate centre remains classified as a non-current asset held-for-sale on 30 June 2017.

The major classes of assets and liabilities classified as non-current assets and liabilities held-for-sale are as follows:

Loans
Refinanced loan facility
Exxaro refinanced the previous senior loan facility by entering into a new facility agreement during July 2016.

The refinanced loan facility comprises a:
– R3 250 million bullet term loan facility with a term of five years (term loans)
– R2 000 million amortised term loan facility with a term of seven years (term loans)
– R2 750 million revolving credit facility with a term of five years (revolving facility).

Interest is based on JIBAR plus a margin of 3,25% for the bullet term loan facility (R3 250 million), JIBAR plus a margin of 3,60% for the amortised term loan facility (R2 000 million) and JIBAR plus a margin of 3,25% for the revolving credit facility (R2 750 million). The effective interest rate for the transaction costs on the term loans is 0,24%. Interest is paid on a quarterly basis for the term loans, and on a monthly basis for the revolving credit facility.

The undrawn portion relating to the term loan facilities amounts to R1 750 million. The undrawn portion of the revolving credit facility amounts to R1 250 million.

Bond issue
In terms of Exxaro’s R5 000 million DMTN programme, a senior unsecured floating rate note (bond) of R1 000 million was raised during May 2014. The bond comprises a:
– R480 million senior unsecured floating rate note, repaid on 19 May 2017
– R520 million senior unsecured floating rate note due 19 May 2019.

Interest on the R480 million bond was based on JIBAR plus a margin of 1,70% while interest on the R520 million bond is based on JIBAR plus a margin of 1,95%. The effective interest rate for the transaction costs was 0,13% for the R480 million bond and 0,08% for the R520 million bond. Interest is paid on a quarterly basis for both bonds.

Finance leases
Included in the interest-bearing borrowings are obligations relating to finance leases for mining equipment.

The bank overdraft is repayable on demand and interest payable is based on current South Africa money market rates.

There were no defaults or breaches in terms of interest-bearing borrowings during the reporting periods.

The timing and occurrence of any possible outflows of the contingent liabilities above are uncertain.

SARS
On 18 January 2016, Exxaro received a letter of intent from SARS following an international income tax audit for the 2009 to 2013 years of assessment. According to the letter, SARS proposed that certain international Exxaro companies would be subject to South African Income Tax under Section 9D of the Income Tax Act. Assessments to the amount of R442 million were issued on 30 March 2016 and Exxaro formally objected against these assessments. SARS partially allowed Exxaro’s objection but R234 million remained due. Exxaro appealed against the portion not allowed and an alternative dispute resolution hearing with SARS is scheduled for 22 August 2017.

These assessments have been considered in consultation with external tax and legal advisers and senior counsel. Exxaro believes this matter has been treated appropriately by disclosing a contingent liability.

Financial provision for prospecting, exploration, mining and production operation
On 20 November 2015 the FPR were promulgated by the Minister of Environmental Affairs for South Africa as replacement of financial provisioning and rehabilitation legislation contained in the MPRDA and the NEMA. The FPR will change the requirements for making financial provision for the management, rehabilitation and remediation of environmental impacts arising from mining operations. The FPR are currently valid and in force after interaction between the DEA, stakeholders and industry on 26 October 2016. The submission of the first financial provision reporting to the DMR according to the FPR has been extended to February 2019.

Following promulgation of the FPR, the DEA met with various stakeholders who sought clarification on a number of issues. A final stakeholder meeting was held on 10 February 2017 after which an amended version of the regulations would have been gazetted for public comment. This amended version was expected in March 2017 but has not yet been issued at reporting date.

Although the FPR are currently valid and in force, Exxaro is not yet able to determine a reliable estimate of the impact that the new regulations will have on Exxaro’s environmental rehabilitation liability until the clarification awaited from the DEA is issued. Therefore the environmental rehabilitation liability, operational guarantees and the rehabilitation trust fund have been accounted for in accordance with the requirements of the MPRDA and the NEMA.

The group entered into various sale and purchase transactions with associates and joint ventures during the ordinary course of business. These transactions were subject to terms that are no less, nor more favourable than those arranged with independent third parties.

Exxaro’s majority BEE shareholder, Main Street 333, settled its loan with Exxaro and accrued interest thereon in January 2017.

Based on the latest results for the six-month period ended 30 June 2017, the latest board approved budget for 2017, as well as the available bank facilities and cash generating capability, Exxaro satisfies the criteria of a going concern.

The reviewed condensed group interim financial statements have been prepared in accordance with the Listings Requirements of the JSE.

Details of the interim dividend are provided in note 9.

Exxaro is still exploring alternatives for the monetisation of its shareholding in Tronox through an efficient staged sales approach.

On 2 August 2017, Tronox Limited announced the signing of a definitive agreement with Genesis Energy L.P. for the sale of its Alkali chemicals business for US$1,325 billion in cash. When the sale is concluded, Tronox is expected to realise a loss of approximately US$200 million during 2H17. Based on the shareholding and exchange rate as at 30 June 2017, Exxaro’s share of the expected loss is approximately R1,118 billion.

The directors are not aware of any other significant matter or circumstance arising after the reporting period up to the date of this report, not otherwise dealt with in this report.

These reviewed condensed group interim financial statements for the six-month period ended 30 June 2017, on pages 2 to 30, have been reviewed by the company’s external auditors, PricewaterhouseCoopers Inc., who expressed an unmodified review conclusion. A copy of the auditor’s review report on the condensed group interim financial statements is available for inspection at the company’s registered office together, with the financial statements identified in the auditor’s report.

Detailed disclosure of the company’s application of the principles contained in the King Report on Governance for South Africa 2009 (King III) were made in the 2016 integrated report and is, in accordance with the JSE Listings Requirements, available on the company’s website. The company has completed a gap analysis against the principles, detailed practices and general philosophies contained in the King Report on Corporate Governance for South Africa 2016 (King IV) and more detailed information on the status and action plans will be published in the 2017 integrated report or earlier on the company’s website. As previously communicated, Mrs Carina Wessels, group company secretary and legal since June 2011 will be leaving the company’s employment at the end of September 2017. Please contact the corporate secretariat and legal office for any additional information in this regard.

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