Exxaro - Reviewed condensed group interim financial statements and unreviewed production and sales volumes information for the six-month period ended 30 June 2018

Commentary

1. SAFETY

Exxaro recorded a year-to-date LTIFR of 0.10, an improvement compared to the 0.12 reported in FY17 and reported zero fatalities during 1H18. Exxaro remains committed to the Zero Harm Vision and relentless efforts to reduce incidents through the Safety Improvement Plans continue.

2. ROBUST FINANCIAL PERFORMANCE

The group’s net operating profit for 1H18 increased by 7% to R3 126 million compared to 1H17. This was mainly driven by a 12% increase in the net operating profit of the coal segment to R3 387 million (1H17: R3 014 million), partly offset by a higher net operating loss of R268 million (1H17: R29 million) of the other segment, which includes a R188 million fair value adjustment on the contingent consideration relating to the acquisition of ECC. The income from equityaccounted investments decreased to R1 046 million (1H17: R1 125 million), primarily due to lower equity-accounted income from SIOC due to rail challenges experienced coupled with a stronger rand and lower iron ore export prices. However, this was offset by a positive impact of ceasing equity accounting of the Tronox Limited investment due to the investment being classified as a non-current asset held-for-sale on 30 September 2017 (1H17 included an equity-accounted loss of R363 million).

3. COMPARABILITY OF RESULTS

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

Table 1: Key transactions impacting comparability

Reporting segment	Description	1H18 Rm	1H17 Rm	2H17 Rm
Coal	Insurance claim received by Leeuwpan from external parties¹			3
	Gain/(loss) on disposal of property, plant and equipment¹	117	(22)	(40)
TiO₂	Loss on dilution of shareholding in Tronox Limited¹		(75)	(31)
	Gain on partial disposal of investment in Tronox Limited including the recycling of the foreign currency translation reserve, offset by a loss on the recycling of the financial instruments revaluation reserve to profit and loss^{1; 2}			5 191
Other	Gain/(loss) on disposal of property, plant and equipment¹	1		(2)
	Receivable relating to the Mayoko iron ore project written off		(27)
	Recycling of foreign currency translation reserve on liquidation of foreign entities to profit or loss¹	(14)		(58)
	BEE credentials expense and transaction costs			(4 339)
	Fair value adjustment on contingent consideration relating to the acquisition of ECC	(188)	(37)	(317)
Group	Total net operating profit impact	(84)	(161)	407
Coal	Tax on disposal of property, plant and equipment¹	1	6	12
	Tax on insurance claim received by Leeuwpan			(1)
	Post-tax share of Mafube gain on disposal of property, plant and equipment¹	1
Ferrous	Post-tax share of SIOC gain/(loss) on disposal of property, plant and equipment¹	9	(4)	(7)
	Post-tax share of SIOC reversal of impairment of property, plant and equipment¹			716
TiO₂	Post-tax share of Tronox Limited loss on disposal of Alkali chemical business¹			(1 271)
	Post-tax share of Tronox gain on disposal of property, plant and equipment¹			1
Net financing cost	NewBEECo preference dividend accrued (consolidation impact)	(67)		(11)
Group	Total attributable earnings impact	(140)	(159)	(154)

¹ Excluded from headline earnings.

² Tronox Limited was classified as a non-current asset held-for-sale on 30 September 2017.

4. COMMODITY PRICE PERFORMANCE AND GROUP SEGMENT RESULTS

The movement in the main commodity prices impacting Exxaro’s performance is summarised in table 2 below.

Table 2: Change in commodity prices

	Average US$ per tonne		Change
Commodity price	1H18	1H17	%
API4 coal	97	79	+23
Iron ore fines 62% Fe ((CFR) China)	70	74	-5

The group revenue and net operating profit is summarised in table 3 below.

Table 3: Group segment results (Rm)

	Revenue			Net operating profit/(loss)
	Reviewed 1H18	Reviewed 1H17	2H17	Reviewed 1H18	Reviewed 1H17	2H17
Coal	12 240	10 670	11 883	3 387	3 014	2 995
– Tied¹	1 827	1 591	1 665	192	149	(16)
– Commercial	10 413	9 079	10 218	3 195	2 865	3 011
Ferrous	12	56	187	7		53
TiO₂					(75)	5 160
Other	8	10	7	(268)	(29)	(5 058)
Total	12 260	10 736	12 077	3 126	2 910	3 150

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

Consolidated group revenue increased by 14% to R12 260 million (1H17: R10 736 million), mainly due to a higher contribution from the coal operations driven by improved coal sales prices and higher Eskom commercial volumes at Grootegeluk based on demand from the Medupi Power Station. The average price per tonne achieved on exports was US$79 (1H17: US$65) which was offset by a stronger average spot exchange rate of R12.30 to the US dollar recorded for the period ended 30 June 2018 (1H17: R13.20).

Consolidated group net operating profit increased by 7% to R3 126 million (1H17: R2 910 million), which is discussed further under the relevant segments.

5.1.2.

Earnings

Earnings, which include Exxaro’s share of income or loss of equity-accounted investments in associates and joint ventures, were R3 182 million (1H17: R2 692 million) or 1 268 cents per share (1H17: 852 cents per share).

Headline earnings were 10% higher at R3 067 million (1H17: R2 787 million) or 1 222 cents per share (1H17: 882 cents per share).

Table 4: Income/(loss) from investments in associates and joint ventures (Rm)

	Equity-accounted income/(loss)			Dividends received
	Reviewed 1H18	Reviewed 1H17	2H17	Reviewed 1H18	Reviewed 1H17	2H17
SIOC	793	1 228	2 075	1 306		1 390
Tronox SA and UK
operations¹	224	68	118
Tronox Limited²		(363)	(1 466)	31	59	50
Mafube	(30)	118	141
Black Mountain	57	99	127
Cennergi	20	(11)	13
RBCT	(18)	(14)	(10)
Total	1 046	1 125	998	1 337	59	1 440

¹	Exxaro has a 26% interest in Tronox SA and Tronox UK.
²	Application of the equity method ceased when the investment was classified as a non-current asset heldfor- sale on 30 September 2017.

5.1.3.

Cash flow and funding

Cash flow generated by operations increased by R281 million to R3 941 million (1H17: R3 660 million) and was sufficient to cover operating activities and capital expenditure, as shown in table 5 below.

Table 5: Utilisation of cash generated by operations (Rm)

	Reviewed 1H18	Reviewed 1H17	2H17
Cash generated by operations	3 941	3 660	3 166
Net finance costs	(126)	(273)	(136)
Capital expenditure	(2 037)	(1 314)	(2 607)
Tax paid	(588)	(575)	(215)
Final/interim ordinary dividend paid	(1 004)	(1 284)	(943)
Net surplus/(deficit) after operating activities and capital expenditure	186	214	(735)

Total capital expenditure for 1H18 increased by R723 million when compared to the corresponding period last year, consisting of a R72 million increase in expenditure on sustaining and environmental capital (stay-in-business capital) and R651 million on new capacity (expansion capital).

A gross special dividend of R4 502 million (R3 149 million paid to external shareholders) was paid to shareholders on 5 March 2018 following the partial disposal of Exxaro’s shareholding in Tronox Limited during October 2017.

A dividend of R1 306 million was received from our investment in SIOC (1H17: nil). SIOC has declared a dividend to its shareholders in July 2018, amounting to R1 263 million for Exxaro’s 20.62% shareholding. The dividend will be accounted for in 2H18.

5.1.4. Debt exposure

Net debt at 30 June 2018 was R2 514 million compared to net debt of R4 353 million at 30 June 2017. This equates to a net debt to equity ratio of 6.5% (1H17: 12.0%), well below our internal limit of 40%.

5.2.

Coal business performance

Table 6: Unreviewed coal production and sales volumes (’000 tonnes)

		Production			Sales
	1H18	1H17	2H17	1H18	1H17	2H17
Thermal	22 218	20 823	22 020	22 125	20 911	22 347
Tied	3 538	3 542	3 858	3 538	3 542	3 861
Commercial: domestic	18 680	17 281	18 162	14 666	13 973	14 270
Commercial: export				3 921	3 396	4 216
Metallurgical	1 179	1 069	1 063	584	566	624
Commercial: domestic	1 179	1 069	1 063	584	566	624

Total coal	23 397	21 892	23 083	22 709	21 477	22 971
Semi-coke	23	46	40	33	47	41
Total coal (excluding buy-ins)	23 420	21 938	23 123	22 742	21 524	23 012
Thermal coal buy-ins	868	105	399
Total coal (including buy-ins)	24 288	22 043	23 522	22 742	21 524	23 012

Domestic trading conditions were favourable in 1H18 as producers experienced strong demand for higher-quality product. The metals and reductants markets remained stable amid stable international commodity prices.

The first half of 2018 saw relatively subdued export demand as a result of high international prices. The API4 index remained above US$100 per tonne. This resulted in India, our natural market, sourcing its coal from Russia, United States and Australia.

5.2.1.

Production and sales volumes

Overall coal production volumes (excluding buy-ins and semi-coke) increased by 7% or 1 505kt. This increase can essentially be attributed to the higher production volumes at Grootegeluk (GG) due to continued ramp up at GG7 and GG8 plants to supply the Medupi Power Station. Sales were also 6% higher (1 232kt).

5.2.1.1.

Metallurgical coal

Grootegeluk’s metallurgical coal production was 110kt (10%) higher, mainly due to better yields at GG1 as a result of better geological conditions compared to 2017. Sales increased by 18kt (3%) mainly due to higher demand.

5.2.1.2.

Thermal coal

Tied mines

Power station coal production from Matla mine was in line with 1H17, despite equipment breakdowns and unfavourable geological conditions.

Commercial mines

Power station coal production from the commercial mines was 2 122kt higher mainly due to:

Increased production at the Grootegeluk plants (GG7 and GG8) of 2 329kt
Increased production at Leeuwpan of 155kt as a result of higher plant availability.

This increase was partly offset by:

Lower production at NBC of 362kt due to community actions as well as discontinuing production at Eerstelingsfontein due to the pending divestment to Universal.

Domestic power station coal sales from the commercial mines were 913kt higher than 1H17 mainly as a result of an increase of 1 508kt at Grootegeluk due to higher demand from Medupi Power Station. This was partly offset by lower NBC sales of 595kt due to community actions preventing Eskom from collecting coal.

Steam coal production decreased by 723kt mainly as a result of:

Lower buy-ins from Mafube JV of 616kt due to the ramping down of Springboklaagte and the ramping up of Nooitgedacht reserve.

Domestic steam sales decreased by 225kt mainly as a result of:

Lower sales at Leeuwpan of 407kt due to coal being diverted to the export market
Lower sales at Grootegeluk of 67kt due to lower product availability
Lower sales at ECC of 44kt.

The negative variance was partly offset by:

Higher sales at NBC 293kt due to alternative markets found for the lower Eskom off-take.

The Semi-Coke production was 23kt (50%) lower due to a fire incident in March 2018 at Grootegeluk’s reductant plant. Sales were 14kt (30%) lower and in line with the lower production and stock availability.

5.2.2.

Revenue and net operating profit

Coal revenue of R12 240 million was 15% higher than 1H17 (R10 670 million). Higher revenue from the commercial mines was mainly attributable to the higher selling prices as well as an increase in Eskom volumes.

Net operating profit of R3 387 million (1H17: R3 014 million) at an operating margin of 28% represents an increase of 12%, mainly due to:

Higher sales prices (+R1 195 million)
Volume variances (+R605 million)
Lower distribution cost (+R257 million).

Partly offset by:

Higher cost of buy-ins (-R396 million)
Inflation (-R392 million)
Exchange rate variance on sales due to a stronger rand against the US dollar (-R311 million)
Net scope changes of environmental rehabilitation provisions (-R134 million)
Royalties (-R71 million).

5.2.3.

Equity-accounted investment

Exxaro recorded an equity-accounted loss of R30 million for 1H18 (1H17: profit of R118 million) from Mafube, a 50% joint venture with Anglo, mainly due to the ramping down of Springboklaagte reserve and ramping up of the Nooitgedacht reserve.

5.3.

Ferrous business

Equity-accounted investment

The decrease in equity-accounted income from SIOC of R435 million to R793 million in 1H18 is primarily due to rail challenges experienced coupled with a stronger rand exchange rate and lower iron ore export prices.

5.4.

Titanium dioxide

Equity-accounted investment

Equity-accounted income from Tronox SA and Tronox UK increased by R156 million to R224 million compared to 1H17. This is mainly due to an improved operating performance as well as foreign currency exchange gains.

The Tronox Limited investment was classified as a non-current asset held-for-sale on 30 September 2017, upon which date equity accounting ceased. An equity-accounted loss of R363 million was included in 1H17 for Tronox Limited.

Exxaro obtained shareholder approval to sell the remainder of its shares in Tronox Limited and is exploring alternatives for the monetisation thereof, through an efficient and staged sales process. We are continuing to monitor developments with Tronox Limited, such as the proposed acquisition of Cristal, and its approval by the US and European authorities.

5.5.

Energy business

Equity-accounted investment

Exxaro recorded an equity-accounted income of R20 million for 1H18 (1H17: loss of R11 million) from Cennergi, a 50% joint venture with Tata Power. The two windfarm projects are running at slightly lower than planned capacity due to lower than expected wind speeds, which was offset by better than contracted equipment availability.

The results were also positively influenced by a change in the useful life (from 20 years to 30 years) of the property, plant and equipment at the two windfarms which reduced the depreciation charge.

6. PERFORMANCE AGAINST NEW B-BBEE CODES AND MINING CHARTER

We are pleased with the improvement in our recognition level, from Level Six to Level Five, in terms of the scorecard of the Department of Trade and Industry (DTI) Codes of Good Practice. This improvement is attributable to our initial efforts during 2017 in the Enterprise and Supplier Development category; however, much work remains to achieve our goal of reaching Level Three by 2019. We are confident that, with the plans we have in place, together with our intent to diversify our supply chain, enhance local economic development in the various communities of our operations and innovatively grow our business of tomorrow, we will achieve this goal.

We further note the publication by the DMR of a draft Mining Charter and the invitation for comment by stakeholders. Exxaro has commented on the draft document and is also participating, through the Minerals Council South Africa, regarding key issues that need to be considered to achieve competitiveness, growth and transformation.

7. THE YOUTH EMPLOYMENT SERVICES (YES) INITIATIVE

The YES initiative was pronounced by President Cyril Ramaphosa on 27 March 2018. YES is a partnership between government, business, labour and civil society and aims to see more than one million young South Africans, between the ages of 18 and 35, being offered paid work experience over the next three years. We are committed to this initiative and currently awaiting further clarification and guidelines for participation from the DTI. We will be partnering with service providers to implement and enable the programme of both skills and work experience for the youth.

8. BROAD-BASED BLACK ECONOMIC EMPOWERMENT

As referred to in the announcement released on SENS of the JSE Limited on 20 November 2017 relating to the results of the extraordinary general meeting of shareholders with respect to the implementation of the Replacement BEE Transaction, Exxaro provided certain undertakings:

8.1.	Implementation of Employee and Community Empowerment Schemes
	In order to ensure that the profile of NewBEECo is enhanced to be more broad-based, and include new empowerment beneficiaries, Exxaro undertook to finalise appropriate employee and community empowerment structures by transferring no less than 10% of its equity holding in NewBEECo by 30 June 2018. Exxaro has made meaningful progress with respect to the conceptualisation of relevant employee and community empowerment structures in line with the abovementioned undertaking. In light of the recent developments regarding the revised Mining Charter, the board of directors of Exxaro has resolved that the implementation of the relevant employee and community empowerment structures be delayed to ensure regulatory compliance is achieved and that sustainable ownership structures are optimised in this regard. Exxaro remains fully committed in meeting the undertaking given in a manner which meets the objectives of all stakeholders.
8.2.	Other undertakings
	Exxaro is in discussions with stakeholders in respect of the undertakings relating to the restructuring of the BEE shareholding and the potential listing of NewBEECo on a BEE exchange.

9. MINERAL RESOURCES AND MINERAL RESERVES

Other than the normal LOM depletion, there have been no material changes to the Mineral Resources and Mineral Reserves as disclosed in the 2017 integrated report.

10. MINING AND PROSPECTING RIGHTS

Exxaro has continued with the successful submissions of amendments to existing rights to protect Exxaro’s interests and ensure greater LOM.

In addition to the above, Exxaro has made slow progress with the mining right registrations of Matla, Arnot and Glisa (at the NBC operation). While there are still challenges pertaining to these registrations, Exxaro still expects the registrations to be concluded during 3Q18.

11. CHANGES TO THE BOARD AND BOARD OF DIRECTORS COMMITTEES

The following non-executive directors have been appointed on 23 May 2018:

Ms GJ Fraser-Moleketi
Mr MJ Moffett
Mr LI Mophatlane.

Mr J van Rooyen, who joined the board of directors in August 2008, was appointed as lead independent director on 26 March 2018. Mr van Rooyen resigned as lead independent director and as chairman of the audit committee when he was appointed as chairman of the board of directors on 15 June 2018.

Ms GJ Fraser-Moleketi was appointed as lead independent director on 15 June 2018.

The following independent non-executive directors have been appointed as chairmen of Exxaro’s board committees on 15 June 2018:

Mr V Nkonyeni, has been appointed to chair the audit committee
Mr LI Mophatlane, has been appointed to chair the investment committee (a newly constituted committee of the board)
Mr EJ Myburgh, has been appointed to chair the remuneration committee
Ms A Sing, has been appointed to chair the social and ethics committee
Mr PCCH Snyders, has been appointed to chair the sustainability, risk and compliance committee
Mr J van Rooyen, has been appointed to chair the nomination committee.

12. OUTLOOK

We expect that the domestic market demand for sized product will remain strong as supply remains tight. We are confident that all products will be placed successfully into the market during 2H18.

Export markets are still reliant on demand from India for lower-quality coal. However, Exxaro is actively diversifying its markets for lower quality coal to minimise dependency on the Indian market. Growth is expected from the South-East Asian markets.

Exxaro expects a stable outlook for the coal business in 2H18 based on:

Favourable trading conditions in domestic markets
Strong international coal prices
Our business optimisation strategy driving operational and innovation excellence throughout the business with a strong focus on eliminating systemic waste
Good progress being made on building key technology enabling infrastructure and the visualisation of business constraints, aimed at accelerating our innovation and technology implementation strategy.

During 2H18, the performance of our SIOC investment will be supported by a relatively stable iron ore fines price and lump premium, and continued strong demand for higher-grade products.

Relatively stable commodity prices and global economic growth are anticipated. Over the next six months the US-China trade tension and high oil price are expected to slow global economic growth momentum somewhat. The rand to the US dollar exchange rate is expected to remain volatile and subject to ongoing event risk such as US Federal interest rate normalisation, geopolitical risks and emerging market sentiment.

13. REVISED DIVIDEND POLICY AND INTERIM DIVIDEND

In determining the level of dividend payout Exxaro takes cognisance of the current state of the industry, Exxaro’s capital expenditure and other relevant commitments as well as its ability to generate sustainable cash flows.

Exxaro’s declared dividend policy was based on a cover ratio of between 2.5 and 3.5 times core attributable group earnings.

Given Exxaro’s strong balance sheet, underpinned by strong cash flow generation, the board of directors has approved a revised dividend policy. The revised dividend policy comprises two components; firstly, a pass through of the SIOC dividend received and secondly, a dividend based on a targeted cover ratio of 2.5 to 3.5 core attributable coal earnings.

Additionally, Exxaro is targeting a gearing ratio below 1.5 times net debt to EBITDA.

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

3.3 times core attributable coal earnings
Pass through of SIOC dividend of R1 263 million.

Notice is hereby given that a gross interim cash dividend, number 31 of 530 cents per share, for the six-month period ended 30 June 2018 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 for the six-month period ended 30 June 2018.

Salient dates for payment of the interim dividend are:
Last day to trade cum dividend on the JSE Tuesday	18 September 2018
First trading day ex dividend on the JSE Wednesday	19 September 2018
Record date Friday	21 September 2018
Payment date Tuesday	25 September 2018

No share certificates may be dematerialised or re-materialised between Wednesday, 19 September 2018 and Friday, 21 September 2018, 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 Tuesday, 25 September 2018.

14. GENERAL

Additional information on financial and operational results for the six-month period ended 30 June 2018, and the accompanying presentation can be accessed on our website on www.exxaro.com.

On behalf of the board of directors

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

16 August 2018

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REVIEWED CONDENSED CONSOLIDATED ANNUAL FINANCIAL STATEMENTS AND UNREVIEWED PRODUCTION AND SALES VOLUMES INFORMATION

REVIEWED CONDENSED GROUP INTERIM FINANCIAL STATEMENTS
AND UNREVIEWED PRODUCTION AND SALES VOLUMES INFORMATION
for the six-month period ended 30 June 2018