Exxaro Resource limited Report Selector 2018

Report Selector

Exxaro Resources Limited Integrated report 2018

Chairman's statement

Jeff van RooyenThe past financial year was eventful, but positively so, for Exxaro. Almost in line with the message from the president of both the governing political party and Republic of South Africa, Cyril Ramaphosa, the beginning of 2018 was a new dawn for Exxaro after the successful completion of our replacement BEE transaction in December 2017, while the country entered the year with renewed spirits after the ANC election conference brought new political leadership.

The new dawn and theme of Thuma mina (send me) are welcome messages to power the country's citizens into a new socio-political era for South Africa. One where government and business place the interests of society above all else and form collaborative relationships with labour and civil society to build a sustainable economy that will create dignifying and empowering employment opportunities and enable ordinary people to build wealth so that we begin to see a real narrowing in inequality and reduction of poverty in South Africa.

We started on this mission in a global context, appropriately referred to as D-VUCAD (prevalence of disruption in technology and socio-politics; volatility; uncertainty; complexity; ambiguity; and lastly the dawning reality of diversity, including gender, cross-cultural and intergenerational). The continued trade war between China and the USA as well as Brexit (Britain exiting the European Union) are among major events that have caused volatility in capital markets. All these regions are important trading partners for South Africa and thus critical to our plans for an economic renewal. Accordingly, implementing the outcomes of president Ramaphosa's jobs and investment summits become urgent to realising national objectives.

In addition, the intensifying sentiment against coal was noted during the year and reaffirmed at the COP24 meeting in Poland. This has had a direct impact on Exxaro through the continued delay of the Thabametsi independent power producer (IPP) project, which Exxaro is contracted to supply with coal.

Equal and urgent action is required to manage carbon emissions and prevent global temperatures from rising above the historical average of 1.5°C. We keenly understand this imperative and its potential disruption to our business. We have submitted annual emissions data to CDP (the global benchmark on carbon disclosure) for a decade and are focused on reducing emissions produced through our operations. However, in 2012 and in reference to South Africa's integrated resource plan and participating in the renewable energy investment power purchasing programme, we invested in 239MW of renewable (wind) energy through a 50/50 joint venture with Tata Power in the Eastern Cape - this project is now delivering into the grid.

Coal remains South Africa's primary energy input, generating 95% of the country's electricity. Exxaro is the largest supplier of coal to Eskom, the national electricity utility, and our volumes are estimated to grow to around 33% (when Medupi power station reaches full generation capacity) of Eskom's total coal requirement. Therefore, our response to climate change will, to a large degree, be influenced by the evolving changes to South Africa's energy generation and policy structure, and due consideration for the social implications of such changes.

We are responding to investor concerns for a sustainable development approach to our business, as expressed through the ESG (environmental, social and governance) concept. While we place emphasis on strengthening our coal business in terms of performance efficiency, safety and return on investment, we have begun to seek and invest in new opportunities (taking advantage of disruptive technologies) to build a possible future beyond coal, where we will continue to meet the energy needs of society, as we do today - the CEO will elaborate further.

Given these contextual issues, as a board, we had to address several priority issues. I will focus on just two of the material priorities in this review: governance and strategy.

The first priority for Exxaro was establishing a governance structure that would ensure the continued resilience of the company and sustainable returns for its stakeholders. This was critical in a socio-political and business environment characterised by several high-profile corruption scandals, prevailing uncertainty in the policy and economic climate domestically and globally, as well as the opportunities emerging ahead of us.

The replacement BEE transaction presented an opportunity to restructure the board and address some shortcomings. We increased the diversity of the board in terms of skills: appointing Ms Anu Sing and Mr Isaac Mophatlane, both with backgrounds in innovation and technology as well as deal-making to support our strategy in the business of tomorrow and operational excellence in the coal business. These new directors also respectively chair the social and ethics committee and investment committee. We further strengthened board skills by appointing Ms Geraldine Fraser-Moleketi as lead independent director, as well as Ms Daphne Mashile-Nkosi and Ms Likhapha Mbatha. They add specific expertise to stakeholder management and understanding the socio-economic context, particularly as the role of business in society comes under intensified scrutiny. Ms Fraser-Moleketi adds considerable experience of business in Africa as well as a global perspective after various United Nations' roles. The board restructuring also increased the proportion of female directors to 36%, outperforming targets under the previous mining charter and the Department of Trade and Industry's codes of good practice. Overall, black representation on the board is now 64%. Leveraging this diversity will position Exxaro well as it pursues its strategy and purpose of powering better lives in Africa and beyond.

Delivering on our strategy was a critical second priority. For the past three years, we have shared with you our progress on some of the strategic drivers of our business, including the completion of the replacement BEE transaction. What remains is including employee and community ownership in the structure, now that we have had resolution on the latest mining charter. We aim to complete this in 2019.

We are pleased with our progress in optimising our investment portfolio. Cash generated from the sale of non-core assets (to date part of the Tronox investment and some coal assets), will be appropriately allocated under our capital allocation framework. Investor expectations of cash returns were fulfilled, with the R12.55 per share special dividend from the proceeds of the initial Tronox sale, in addition to which we paid a total dividend for the year of R10.85 per share (an interim dividend of R5.30 per share plus final dividend of R5.55 per share, with the latter being 55% higher year on year). At the same time, we were investing in sustaining existing operations to ensure safe production and operational excellence as well as expanding for future growth through our R20-billion capital programme over the medium term. This is an enviable position for a company to be in.

We look forward to the future with anticipation. Domestically, for the 2019 financial year, our democracy will evolve further with the sixth national general elections on 8 May – a pivotal event in our political history. Given that all South Africans have a role in building our democracy, Exxaro's board agreed to make a political donation of R20 million proportionately split among the top seven parties as recommended by the Independent Electoral Commission and after considering the country's political funding legislation. We are hoping for a favourable outcome for the country.

The financial strain Eskom face remains concerning: the R69 billion extended from the fiscus, while minimal in the context of Eskom's total debt of over R420 billion, will certainly provide some temporary relief. Eskom remains a strategic partner for Exxaro and has been a reliable customer in terms of our coal supply. Our relationship has improved considerably since new leadership was appointed to the utility, and we will continue to partner and assist Eskom in this difficult period.

Globally, it may be more of the same in terms of the trade war and Brexit. Any attempt at predicting the outcome would be folly, but we are mindful of the potential impact of these events on our business environment. China's policy decisions affect global commodity prices, given the size of its demand. To date, prices have been favourable to our strategy. Our climate response strategy will also evolve to strengthen the resilience of the business for sustainable stakeholder returns from our capital allocation strategy.

Lastly, I assumed the role of chairman during the year under review, having been an independent board member and chairman of the audit committee in prior years. I sincerely thank our retired board members who served the company so ably during their tenure: Dr Len Konar, Dr Con Fauconnier, Dr Faizel Randera, Mr Rain Zihlangu, Mr Saleh Mayet and Ms Salukazi Dakile-Hlongwane. On behalf of the board, we are grateful for their role in guiding the company to where it is today.

Jeff van Rooyen

24 April 2019