Commentary

The health and safety of our employees and communities continues to be our priority, as South Africa experiences a third wave of COVID-19 infections. In line with our Health and Wellness Strategy, which focuses on diagnosis, management and prevention of diseases, our response to the COVID-19 pandemic (the pandemic) has prioritised avoiding, reducing and managing COVID-19 infections. As at 31 July 2021, the group had 5 078 confirmed cases (187 active cases) and a recovery rate of 96%. We remain committed in our fight to prevent further loss of life and continue to implement COVID-19 preventive measures in line with government regulations and recommendations.

The Grootegeluk and Matla occupational health centres have been registered and approved as primary vaccination sites with the National Department of Health. We have successfully vaccinated 100% of our healthcare workers and have commenced with the vaccination of employees over 35 years of age. A total of 2 460 (14%) employees/ contractors received vaccines at Exxaro sites. Once we have vaccinated employees, these sites will be opened to the community thereby improving vaccination rates in the areas in which we operate.

Amid the backdrop of the pandemic, it is pleasing to be able to report on our record year-to-date safety performance as at 30 June 2021. We have achieved a total of 52 months without a work-related fatality and a lost-time injury frequency rate (LTIFR) of 0.07, 12.5% lower than our set target of 0.08. This is, however, 40% higher than the 0.05 reported for FY20. Zero Harm remains Exxaro's key business objective.

Commodity prices
The movement in the main commodity prices impacting Exxaro's performance is summarised in the table below:

Comparability of results
For a better understanding of the comparability of the results between the two reporting periods, we have adjusted our earnings for non-recurring items (referred to as non-core adjustments) to derive our core earnings. The table below summarises these adjustments:

Group revenue and core EBITDA
EBITDA is calculated by adjusting net operating profit before tax with depreciation, amortisation, impairment charges or reversals and net losses or gains on disposal of assets and investments (including translation differences recycled to profit or loss). 1H20 segment results were re-presented to exclude the allocation of indirect corporate costs from the coal and ferrous reportable segments and including it in the Other reportable segment.

Group revenue increased by 8% mainly due to the increase in coal revenue and the inclusion of renewable energy revenue from Cennergi for a full six-month period compared to only three months in 1H20.

Whilst coal production and sales volumes were 12% and 10% lower, respectively, than 1H20, a 47% increase in the average benchmark API4 export price provided a positive offset to the impact of the pandemic and TFR challenges experienced.

Group core EBITDA increased by 10%, mainly attributable to the inclusion of Cennergi results for the full six-month period compared to only three months in 1H20.

Earnings
Headline earnings increased by 105% to R6 804 million (1H20: R3 315 million). The increase is mainly driven by the R4 062 million (180%) increase in equity-accounted income from SIOC, due to the high iron ore export prices and price premia. This equates to basic headline earnings per share (HEPS) of 2 722 cents per share (1H20: 1 321 cents per share). There was a slight decrease in the WANOS to 250 million (1H20: 251 million) as a result of shares repurchased and cancelled in terms of the R1.5 billion announced share repurchase programme.

After adjusting for non-core adjustments, core headline earnings increased by 103% to R6 804 million (1H20: R3 360 million), resulting in core headline earnings per share of 2 722 cents per share (1H20: 1 339 cents per share).

Core income from equity-accounted investments

Cash flow and funding
Cash flow generated by operations of R3 973 million (1H20: R4 732 million) and dividends received from investments of R3 684 million (1H20: R1 594 million) were sufficient to cover our capital expenditure and ordinary dividends paid.

Following the disposal of Exxaro's shareholding in Tronox Holdings plc and receipt of the R5 763 million proceeds, a special dividend amounting to R1 947 million was paid to shareholders and a share repurchase programme of R1.5 billion was launched in 2Q21. As at 30 June 2021, approximately R956 million (64% of the planned amount) was paid to repurchase and cancel 6 080 823 shares.

Total capital expenditure decreased by 7% to R1 174 million (1H20: R1 264 million), comprising sustaining capex of R686 million and expansion capex of R488 million.

Debt exposure
Our balance sheet has been further strengthened by the monetisation of our investment in Tronox Holdings plc resulting in net debt (excluding Cennergi's net debt of R4 699 million) of R2 431 million at 30 June 2021, compared to R6 335 million (excluding Cennergi's net debt of R4 632 million) at 31 December 2020.

On 26 April 2021, Exxaro also implemented and effected a drawdown on a new facility agreement entered into with various financial institutions as a combined facility to refinance the term loans and revolving credit facility. The new facility, amounting to R8 billion in total, is comprised of a bullet term loan facility of R2.5 billion (with a term of five years); an amortising term loan facility of R2.25 billion (with a term of five years); and a revolving credit facility (RCF) of R3.25 billion (with a term of five years). Exxaro may, at any time during the accordion availability period, increase the RCF commitment to an amount which, when aggregated with the amount of any previous accordion increases, does not exceed R2 billion, increasing the facility to R10 billion.

As a result, the group has sufficient liquidity to navigate through the current uncertain operating environment.

Unreviewed coal production and sales volumes

The domestic demand for sized product was relatively stable in 1H21 as economic activity improved following the pandemic lockdown restrictions observed in 2020. However, the third wave of the pandemic and subsequent restrictions will impact some of Exxaro's customers for sized material. Eskom's demand remains below pre-pandemic levels, while unsized product prices are under pressure as a result of TFR's poor performance and more unsized product being available in the domestic market.

The ongoing tension between Australia and China has seen Australia placing large amounts of coal in traditional South African markets, in particular India and other Asian markets. This situation has also provided an opportunity for South African coal to be exported to China, with China now being the third biggest export destination for South African exporters, following India and Pakistan. Due to the second wave of the pandemic in India, demand was still subdued. Oxygen supply was re-directed from industries to hospitals as the number of infections increased. There was some demand recovery in India in late 1H21 but as the monsoon season approaches, demand is still low and only expected to increase in late September 2021.

1H21 saw the benchmark API4 thermal coal price index exceed US$100 per tonne, supported by robust global demand and various supply disruptions. South African exporters have lost about 9Mt of coal exports during 1H21, being constrained by a lack of export rail capacity from TFR. Locomotive unavailability, coal line shutdown disruptions, derailments, and other operational challenges combined with vandalism and sabotage of rail infrastructure and rampant cable theft have resulted in one of the worst export rail performances for the industry.

The average benchmark API4 RBCT export price of US$98 per tonne was 47% higher (1H20: US$66 per tonne), resulting in a 50% increase in the average realised export price of US$78 per tonne (1H20: US$52 per tonne).

Production and sales volumes

Overall coal production volumes (excluding buy-ins) decreased by 2 812kt (-12%) across all our mines with the exception of the ECC operation.

Similarly, total sales volumes decreased by 2 419kt (-10%), due to lower sales volumes across all our mines.

Thermal coal

Commercial: Waterberg

Production at Grootegeluk decreased by 1 490kt (-11%), impacted by increased COVID-19 infections and poor weather conditions. This resulted in lower sales volumes of 400kt (-3%) mainly due to TFR constraints and lower sales to Eskom in line with lower energy demand, but still in line with contractual volumes. This was partly offset by higher domestic demand as our customers increased production following the impact of the pandemic lockdown restrictions in 2020.

Commercial: Mpumalanga

The commercial Mpumalanga mines' thermal coal production decreased by 661kt (-12%), due to:

• Lower production at Leeuwpan of 539kt (-30%), as production was cut back to manage stock levels to reduce the risk of spontaneous combustion
• Lower offtake of coal from Mafube of 243kt (-27%), due to TFR constraints
• Lower production at Belfast of 50kt (-4%), mainly due to the production of higher quality coal resulting in lower volumes of power station coal.

This decrease was partly offset by higher production at ECC of 171kt (+10%), as production volumes returned to normal levels after the pandemic restrictions in 1H20.

The commercial Mpumalanga mines' domestic thermal coal sales increased by 119kt (+13%), due to:

• Higher sales at ECC of 419kt (+352%), as sales volumes returned to normal levels after the pandemic restrictions in 1H20, as well as selling additional coal into the domestic market due to TFR constraints for exports
• Higher sales at Belfast of 52kt (100%), as volumes intended for export were sold to local customers as a result of TFR constraints.

This increase was partly offset by lower domestic sales at Leeuwpan of 352kt (-46%) due to market and TFR constraints.

Exports commercial
Export sales decreased by 1 821kt (-31%), due to TFR constraints as a result of poor locomotive availability, increased incidences of cable theft, as well as increased vandalism of rail infrastructure. All mines railed lower volumes than in 1H20.

Tied
Coal production and sales at Matla decreased by 352kt (-12%). The lower production was mainly impacted by pit room limitations, equipment breakdowns, unfavourable geological conditions and lost time/capacity due to increased COVID-19 infections although coal qualities were not affected.

Metallurgical coal
Grootegeluk's metallurgical coal production was 26% lower (-309kt), impacted by adverse weather conditions and a higher number of COVID-19 infections.

Sales volumes increased 36kt (+8%), mainly as our customers' operations started to normalise following the pandemic lockdown restrictions in 1H20.

Coal revenue and core EBITDA

Coal revenue was 6% higher, driven by higher revenue from our commercial mines due to higher prices, offset partly by lower sales volumes and a stronger exchange rate.

Coal core EBITDA increased by 3%, at an operating margin of 23%. The increase in coal core EBITDA is driven by:

• Higher commercial revenue (+R437 million)
• Lower distribution costs (+R417 million), mainly due to lower export volumes
• Positive inventory movements and lower buy-ins (+R341 million), due to higher stock levels.

The increase was partly offset by:

• Higher inflation (-R433 million)
• Higher provision for rehabilitation costs (-R292 million), mainly impacted by a lower discount rate used for longer dated liabilities
• Realised and unrealised exchange rate losses (-R296 million)
• Higher royalties and carbon taxes (-R34 million).

Equity-accounted investment
Mafube, a 50% joint venture with SACO (previously known as Anglo), recorded core equity-accounted income of R98 million (1H20: R35 million) due to higher export prices realised, partly offset by a stronger exchange rate and lower sales volumes due to TFR constraints.

Coal Capex and projects
Our focus remains on optimising and implementing our portfolio of growth and sustaining capital.

Coal Capex

Exxaro's capital expenditure for its coal business decreased by 3% compared to 1H20, driven mainly by the completion of the Belfast project in 2020. This was partly offset by higher GG6 expansion capital spend due to project delays in 2020 linked to the pandemic, as well as higher sustaining capex due to delays in the same period.

Energy core EBITDA increased by 76% to R419 million (1H20: R238 million), as 1H21 includes Cennergi for the full six-month period compared to three months in 1H20. Cash flow generation remains positive.

The two windfarms were running at slightly lower than planned capacity due to lower than expected wind speeds as well as increased maintenance in low wind periods together with the end of 5-year warranty inspections, which impacted energy generation. Combined electricity generation was 331GWh for the six-month period ended 30 June 2021.

Equity-accounted investment
The 180% increase in core equity-accounted income from SIOC to R6 317 million (1H20: R 2 257 million), is primarily driven by favourable iron ore prices and price premia.

A final dividend of R3 663 million was received in February 2021 (1H20: R1 412 million). SIOC has declared an interim dividend to its shareholders in July 2021, amounting to R6 329 million for Exxaro's 20.62% shareholding. The dividend will be accounted for in 2H21.

Equity-accounted investment
Exxaro concluded its strategy to monetise its investment in Tronox Holdings plc in March 2021. Core equity-accounted income from Tronox SA for the two-month period to the date of disposal was R54 million (1H20: R95 million).

As previously disclosed, Exxaro undertook a strategic review of its portfolio of coal assets and projects. Leeuwpan and ECC were identified as non-core to the future objectives of Exxaro, and a decision was taken to dispose of them. On 31 December 2020, the ECC operation was classified as a non-current asset held-for-sale.

On 2 August 2021, all conditions precedent to the ECC transaction were fulfilled. The conditions precedent included the approval of the South African competition authorities and the DMRE. The ECC transaction will now proceed to closure with a closing date of 31 August 2021 and will be accounted for in 2H21.

The disposal process for Leeuwpan continues with definitive legal agreements envisaged to be signed in 2H21 and regulatory approvals obtained thereafter.

We are pleased to have maintained our level 2 B-BBEE recognition status for 2021 following the assessment of our performance during the financial year ended 31 December 2020. Exxaro will continue to look for opportunities to improve its BEE contribution status.

We have continued to maintain our leading performance in the FTSE Russell ESG Index, with a mid-year score of 3.7 compared to 4.0 for FY20. Key areas of improvement include disclosure in several areas, such as human rights and targets in relation to climate change.

Climate Change Response strategy implementation
Following the publication of our Climate Change Response strategy and TCFD independent alignment report, we have established a decarbonisation programme office to guide the development of resilience strategies for the business by coordinating operational, supply chain, technology acquisition, land management and capacity building to identify both opportunities and risks identified. The first outcome expected at the end of 2021 will be a detailed baseline assessment of the risk and opportunity landscape, with a clear plan on which business processes should be enhanced to transition the organisation to scope 1 and scope 2 carbon neutrality by 2050.

The process to align our 2021 reporting to the TCFD recommendation is underway. The identified gaps are being addressed with a review of our reporting structure to highlight key performance indicators required by the TCFD recommendations.

Social investment
Our social investment activities continued to gather momentum, following the disruption from lockdowns during FY20, with a primary focus on Enterprise and Supplier Development (ESD) and community infrastructure projects.

• We provided total ESD funding of R105 million to seven SMMEs, whilst also prioritising non-financial support, through a contractor development programme with the Gordon Institute of Business Science (GIBS) and a financial excellence programme with SAICA Enterprise Development.
• A total of R25 million was spent on schools, building an Enterprise and Supplier Development Hub and water infrastructure projects through our Social and Labour Plans (SLP), in both Mpumalanga and the Waterberg. An estimated 1 446 community members will benefit from services to be provided from these projects. A total of 151 jobs were created during the construction period.
• In our continuing efforts to protect livelihoods in response to the effects of the pandemic, we have partnered with World Vision South Africa to assist 703 households with hygiene and food packs in Limpopo, Eastern Cape and KwaZulu-Natal and Mpumalanga.

The geological models at the Mafube and Leeuwpan mines were updated with new information. The update at Mafube incorporates a significant amount of drilling information from our 2019 and 2020 drilling campaigns, providing a higher resolution of geological information of the total Coal Resource area, benefiting our future mine planning options. Execution of exploration plans at our Belfast, Leeuwpan, Grootegeluk and Matla operations is in progress.

Other than the normal LoM depletion, there were no material changes to the Coal Resources and Reserves estimates as disclosed in the 2020 integrated report.

As reported in June 2021, following the announcement of Exxaro's divestment from ECC, the section 11 application was successfully submitted to the DMRE and approved on 2 August 2021.

However, our interactions with the DMRE, DHSWS and other state Departments continue to be impacted by the pandemic. The following applications are in process at the DMRE and DHSWS:

• Section 102 application to amend the Matla mining right to swap Coal Reserves as part of a commercial transaction
• The execution of the consolidation of two Leeuwpan mining rights into a single mining right
• The execution of a section 102 application at Grootegeluk to incorporate the two farms on which we have operating mining infrastructure
• Environmental authorisation and integrated water use licence for the Dorstfontein West discard dump expansion project.

The group compliance to valid licences or authorisations for our current operations is at 97%. Where rights and other licences are nearing expiry dates, renewal applications are submitted timeously.

Economic context
For 2H21, the progress of vaccination campaigns will be pivotal to global economic activity and recovery. Consumer spending is expected to be resilient as economies reopen, travel picks up, and social activities resume.

The shift in energy transition policy will continue to intensify towards a global move for carbon neutrality/Net Zero by 2050 in the run-up to COP26 scheduled for November 2021.

The South African economy has been hit hard by the pandemic as it further exposed the growing lack of fiscal capacity, reinforced by a worsening debt trajectory, rising gross borrowing requirements, and a high level of contingent liabilities granted by the government. Although the recent civil unrest could have lasting effects on investor confidence and job creation, initial estimates indicate this may have fully negated the better growth results in 1H21. All these fiscal and socioeconomic imbalances will have a knock-on effect on the economic reconstruction and recovery path for South Africa into 2H21.

During 1H21, the South African Rand (ZAR) strengthened remarkably on the back of strong global appetite for risky assets, a weaker US dollar, robust commodity prices, better-than-expected domestic fiscal outcomes and encouraging signs that the governing political party started to act decisively against corruption allegations within its ranks. The rand/dollar exchange rate is expected to hold within current levels, but to remain volatile, during 2H21.

Commodity markets and price
We expect that both the seaborne and domestic thermal coal market will remain stable to strong during 2H21. Strong thermal coal demand from the northern hemisphere summer, rising gas prices, together with the slow recovery of both seaborne and China domestic supply will support the seaborne price. In addition, with the continued poor domestic and export rail performance and the recent civil unrest being experienced in South Africa, the API4 index has increased on the expectation of medium-term constrained coal supply from South Africa. However, towards the latter part of 2H21, prices are expected to gradually soften as supply is anticipated to recover whilst demand weakens as temperatures cool. The possibility exists that China could relax restrictions on imports during 2H21.

Turning to the iron ore market, tight market conditions are expected to persist during 2H21. Strong steel mill profitability, ongoing stimulus, and multi-year highs on leading indicators such as PMI reinforce the likelihood of further acceleration in steel production and iron ore demand.

We anticipate the demand and pricing for sized coal domestically to remain relatively stable, as economic activity improves from levels observed in 2020 because of the pandemic. The domestic unsized market will continue to experience tremendous pressure on the back of TFR's performance, as domestic mining operations continue to struggle with the evacuation of coal destined for export. On the international front, we expect that the impacts of the pandemic on coal markets will continue into 3Q21 as the second and third waves of COVID-19 infections grip different parts of the world.

The changes in product demand and TFR performance has put a strain on our ability to produce coal at optimal levels, putting pressure on our unit cost in the Mpumalanga region. This has compelled us to think innovatively about how we can respond quickly to the value chain interruptions. Our integrated operations centres (IOC's), coupled with our Market to Resource (M2R) optimisation programme, have enabled speedy decision-making in our business, enabling quick responses to fluctuations in the value chain, whether resulting from rail performance or product demand.

Our Operational Excellence and digital programmes are now focusing on specific projects to manage stock levels and production costs. This will allow us to continue with our efforts to land our product competitively across various markets.

The pre-feasibility study on determining the way forward for the Moranbah South hard coking coal project is on track to commence in 2H21.

Although our operating and sales performances have been hampered during 1H21 as indicated above, Exxaro is ready to deliver and geared to send coal to our customers as soon as the TFR challenges have been resolved.

In terms of our capital allocation framework and given the impact of the pandemic on the current economic climate and our operations, we will remain prudent in returning cash to shareholders, managing debt, and selectively reinvesting for the growth of our business.

As stated previously, our strategic approach to build our renewable energy business necessitated a change in our dividend policy, which was approved by the board of directors in March 2021. The targeted cover ratios will be applied to the Exxaro group earnings and not only coal earnings.

The revised dividend policy is still based on two components:

• a targeted cover ratio of 2.5 times to 3.5 times adjusted group earnings and
• a pass-through of the SIOC dividend.

Additionally, Exxaro is targeting a gearing ratio 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 R6 329 million.

The net debt (excluding Cennergi's net debt) to EBITDA at 30 June 2021 is 0.4 times, well within our targeted gearing ratio.

Notice is hereby given that a gross interim cash dividend, number 37 of 2 077 cents per share, for the six-month period ended 30 June 2021 was declared, and is payable to shareholders of ordinary shares. For details of the dividend, please refer note 6 of the reviewed condensed group interim financial statements as at and for the six-month period ended 30 June 2021.

Salient dates for payment of the interim dividend are:

No share certificates may be dematerialised or re-materialised between Wednesday, 29 September 2021 and Friday, 01 October 2021, 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, 04 October 2021.

In compliance with paragraph 3.59 of the JSE Limited dashed-listings Requirements and paragraph 6.39 of the Debt dashed-listings Requirements, shareholders were advised of the changes to the board of directors during the six-month period ended 30 June 2021.

The company welcomed Ms Chanda Joanne Nxumalo (Chanda) to the board of directors as an independent non-executive director, with effect from 1 February 2021; Ms Mandlesilo Lambase Bavumile Msimang (Mandla) to the board of directors as a non-executive director, with effect from 15 March 2021; Mr Mvuleni Geoffrey Qhena (Geoffrey) to the board of directors as an independent non-executive director and the chairperson designate, with effect from 19 April 2021 and Mr Isaac Nkululeko Malevu (Isaac) to the board of directors as a non-executive director, with effect from 22 June 2021.

With thanks for their years of service to the company, Mr Jeff van Rooyen, who has been an independent non-executive director since August 2008 and also served as chairman of the board, retired at the annual general meeting on 27 May 2021 and Mr Mark Moffett, who resigned as independent non-executive director of the company and member of the Exxaro audit committee, effective 11 May 2021.

In accordance with a clear leadership succession plan, Dr Nombasa Tsengwa was appointed as an executive director to the company's board of directors with the designation
CEO-designate, effective 16 March 2021.

In respect of the office of the group company secretary, Ms SE van Loggerenberg, the group company secretary of the company, resigned with effect from 18 February 2021, following which Inlexso Proprietary Limited was appointed as the interim group company secretary. The board of directors has approved the appointment of Ms Andiswa Ndoni as the group company secretary with effect from 1 November 2021.

Additional information on financial and operational results for the six-month period ended 30 June 2021, and the accompanying presentation can be accessed on our website on www.exxaro.com.

On behalf of the board

12 August 2021