Business resilience

HOW WE ACHIEVE THIS

To achieve business resilience, we understand that our daily operations must be able to overcome challenges and adapt to change in global and local markets. We do this through efficient project portfolio management and capital allocation, increasing our competencies across mining and renewable energy, and investing in innovation, digitalisation and technology.

Business resilience comprises:

• Capital allocation
• Investments in renewable energy
• Driving innovation and information management
• Stakeholder relationship management

PERFORMANCE AT A GLANCE

Capital allocation

Exxaro continues to focus on the portfolio of growth and sustaining capital projects as we improve our product mix, cost and resource efficiency. In terms of the sustainable Growth Impact strategy, no further capital beyond 2021 will be allocated to grow the coal business.

Salient features

Our coal business is well positioned to maximise good returns. However, we have re-evaluated our Reserves and taken deliberate steps to reduce the risk of stranded assets. We have increased the proportion of high-quality coal in our product mix and we are continually improving our cost and resource efficiency. Due to the need to reduce carbon emissions in our country and the planet's energy mix to manage the dynamic risks presented by climate change and to create value over the long term, our capital allocation is geared towards projects that drive this agenda as well as grow our renewable energy business and prepare to execute on our minerals strategy.

Waterberg (Limpopo)

The GG6 expansion project's new small coal plant has been completed with commissioning of all four modules in progress. The construction work of phase 1 within the Grootegeluk plant is complete and producing coal. Construction for phase 2 is forecast to be completed by the fourth quarter of 2021. The last two product beds have been handed over to the Grootegeluk operations. The project forecast final cost remains in line with the approved project budget.

Mpumalanga

We have implemented a programme of infrastructure projects to support Matla to achieve a 10Mtpa production objective once fully ramped up. Exxaro continues to engage with Eskom to release the required funding to execute the full scope of the programme.

Project	Classification (growth/sustaining)	Product	Focus and performance	Capital expenditure	Outlook
LOCATION: WATERBERG (LIMPOPO)
GG6 expansion	Growth	1.7Mtpa of semi-soft coking coal	Expansion of the existing Grootegeluk plant to enable production of semi-soft coking coal	R5.3 billion	First production through the small coal plant was achieved during the first quarter of 2021, construction was concluded during the fourth quarter of 2021 and the project will close by the second half of 2022.
LOCATION: MPUMALANGA
Leeuwpan life expansion	Growth	2.7Mtpa of thermal coal	Development of the OI reserve to extend the LoM of the Leeuwpan mining complex by seven years with households and graves to be relocated to Botleng township	R0.6 billion	First production was achieved in the second half of 2018, relocation of Rietkuil families was successfully completed in April 2021 and the project closed in November 2021.
Matla LoM programme	Sustaining	10Mtpa of thermal coal	Infrastructure development to support LoM production	R3.3 billion	Construction work and fabrication of equipment began in the third quarter of 2018. Completion of programme deliverables is expected to conclude in the first half of 2025.

 

Coal capital expenditure

Capital expenditure in our coal business was 22% lower compared to 2020, mainly due to the timing of key projects as well as the disposal of ECC*.

Eskom

Eskom continues to be a key customer, but its financial and operational performance remain a concern. The power utility's financial position has improved in 2021 relative to 2020, though it continues to experience operational challenges. The long-term agreements with Eskom at Matimba and Medupi place the coal business in a defensive position. Exxaro continues to engage with Eskom on the conclusion of the coal supply agreement for the coal supply from Leeuwpan and the renegotiation of the Matla cost-plus agreement due to expire in mid-2023.

AMSA

Exxaro continues to supply AMSA with 1.2Mtpa of semi-soft coking coal as per the contractual requirements. AMSA ramped up production and restored stability following production disruptions as a result of COVID-19 in 2020. Increased steel demand and improved steel prices have contributed significantly to AMSA's improved financial performance in 2021. AMSA remains a key customer and continues to transform its business to ensure growth and cost competitiveness.

Exxaro continues to explore additional domestic and international markets for semi-soft coking coal.

Investments in renewable energy

Our investments in renewable energy are a core pillar of our business resilience. We have been deliberate in building our capabilities in renewable energy through our investment in Cennergi, which we acquired full ownership of in April 2020. Scaling our renewable energy business allows us to build on our position as a key anchor of energy security in South Africa, a significant contributor to renewable energy solutions and decarbonisation. Through entry into the renewable energy space, we are exposed to renewable energy industry trends and risks. Cennergi proactively manages its assets and makes business decisions tailored to maximise impact in the short, medium and long term. The company achieves this through executing wind energy and operational energy yield assessments to understand any changes in the performance of assets, or potentially the wind regime.

Cennergi takes all reasonable measures to ensure that the facilities it owns and services are operated in accordance with world-class standards. This is done to ensure that the facilities realise maximum benefits and profitability, and partners in a manner that is fundamentally safe, promotes social development and is environmentally effective. This is achieved through rigorous controls, continuous monitoring, legal and regulatory compliance assessment, effective contract management as well as full-time on-site presence. By following this approach, Cennergi ensures that its business model is consistent with best industry practice and provides a competitive edge to our shareholders – not only for our two current assets but also for our future energy projects.

Windfarms consist of complex electro-mechanical machinery operating in harsh environments and can from time to time suffer technical faults leading to loss of generation. However, the learnings derived from such losses are important, and stringent adaptive monitoring and control measures are implemented to ensure that such events are minimised in the future. This hands-on approach by Cennergi, and the continuous efforts of our wind turbine suppliers Nordex and Vestas, enable our facilities to achieve an availability of approximately 98% over the past five years. Although the wind cannot be controlled, Cennergi perseveres to focus and optimise the aspects of the business that are controllable or partially controllable, and this has allowed us to achieve our availability targets.

Cennergi continues to work closely with its wind turbine suppliers to ensure that the operational boundaries are continually pushed while maintaining a balanced view of current generation targets and future reliability.

Driving innovation and information management

Within Exxaro's context, innovation is defined as the discovery, incubation and implementation of cutting-edge solutions to add value by refining efficiency, increasing effectiveness and enhancing competitive advantage.

Highlights

* Divestment concluded in September 2021.

We further categorise innovation as sustaining, incremental, radical and disruptive. We have an innovation management strategy aimed at identifying areas where innovative solutions will add value to our bottom line, sourcing innovators, technical disruptors or experts to support us in implementing these solutions without losing sight of why we need innovation. This strategy is underpinned by gaining access to an open innovation ecosystem through partnerships and could have a global reach of capabilities to assist in solving business-related challenges. We face many challenges in identifying, sourcing and implementing radical and disruptive innovation because we need to remain mindful of our core business, However, the innovation management team identified open innovation as the best way to source radical and disruptive innovation while not inhibited by their typical constraints, for example search engine algorithms. Open innovation is an innovation management strategy that promotes collaboration with people and organisations outside the company.

The open innovation ecosystem can be accessed through:

• Intracompany collaboration with companies connected to technology disruptors
• Publicly open challenges with companies on open platforms for individuals to participate
• International subject matter experts that companies can communicate with

Open innovation shows that knowledge and creative initiatives outside the company can contribute to achieving strategic goals and that we do not need to own intellectual property to derive value from it.

Data analytics

In the past years, we have put significant effort into maturing our data analytics capabilities to further drive business value. To date, we have delivered comprehensive data collection and analytics-enabled visualisation of value chains at BUs and supported data science enablement to build prediction models. Our focus on taking our current data from operations, external and functions and using the insights to identify new revenue streams that were previously not known will accelerate in coming years, and our immediate focus is on industrialising models that will unlock business value by predicting potential challenges and opportunities through insights-driven decision making.

Cybersecurity

Digitalisation of mining operations has given rise to cybersecurity risks. This has required us to intensify efforts to protect our information and other digital assets to prevent the loss of sensitive data, disruption of operations, financial loss and reputational damage. Cybercrime is ever evolving and requires us to implement robust response plans to mitigate this risk.

To do this effectively, we are focusing on key initiatives that enhance our ability to identify, detect, respond and recover from cyberattacks. These initiatives include understanding our information and operational technology assets and vulnerabilities, deploying solutions that enable us to monitor our threat landscape, system hardening, managing identities, data loss prevention and integrating our security tools with existing information technology service management platforms that enable rapid response to incidents. As most cybersecurity breaches are caused by human error, we remain focused on driving cybersecurity awareness campaigns to educate our users to remain vigilant to existing cyberthreats.

RRODA

Cennergi's vast experience and digital tools, developed by Exxaro, are redefining the way companies select renewable energy sites. By augmenting Exxaro's mining capability, we developed an advanced integrated system that can remotely assess the feasibility of any location, called RRODA. It enables us to identify, screen and select a location that will maximise the company's energy yield and dividend sustainably. Our proprietary algorithmic selection criteria combine inputs of above-surface renewable datasets with our vast subsurface mining databases to provide an unparalleled view of how best to site a company's renewable energy solution.

Beyond the mining community, RRODA provides an overview of a company's land, creating a digital terrain model that allows us to immediately calculate the levelised cost of electricity down to a single pixel. Our five-step process considers multiple variables, including environmental conditions and local wildlife. The consolidated data produces a scale of sustainability that streamlines the site selection process by predicting its viability accurately.

DELIVERING ON OUR STRATEGY AND FUTURE FOCUS

We will be futureproofing Exxaro and enabling a sustainable future for our business. We aim to fast track our decarbonisation and investments to generate predictable long-term cash flows and increase portfolio diversification. As the company matures, we will build on an already successful platform, leveraging our skills and differentiation with a long-term vision to develop a sustainable, growth-orientated, value-driven company, a leading international renewable solutions provider by the end of the decade.

Our capital allocation and project execution remains focused on leveraging the growth investments already made, supporting our early value coal strategy and sustaining our businesses by implementing our portfolio of stay-in-business capital projects. Our early value strategy means we are strategic about our capital allocation. Allocating capital to the coal business will ensure we sustain a robust coal portfolio with strong cash flow generation. We continue disposing of non-core assets. We successfully exited ECC* and our disposal of Leeuwpan is well underway. To ensure our coal business remains resilient, we will continue spending stay-in-business capital. We are targeting average capital of between R2 billion and R2.5 billion annually in real terms. As part of the early value strategy, the GG6 expansion is nearing completion and the last capital will be spent in 2022.

For our energy business, Exxaro is targeting an additional 3 000MW (net) capacity by 2030 with total capital deployment in the region of approximately R45 billion. We estimate that one third will be our equity contributions and two thirds project financing. This could potentially provide approximately R6 billion in EBITDA in real terms. We are aiming to achieve equity returns on a portfolio basis of 15%.

We are assessing new markets for potential entry that meet our investment criteria, building strong foundations for the future and investing in renewable energy assets that enable us to transition to a low-carbon world.

Driving innovation

We are assessing new markets that meet our investment criteria for potential entry, building strong foundations for the future and investing in renewable energy assets that enable us to transition to a low-carbon world.

In the past decade, the South Africa renewable energy industry has developed mostly around the Renewable Energy IPP Procurement Programme; a well-structured programme with standardised process solutions for providing renewable energy to the South African power grid, backed by a sovereign guarantee. Renewable energy supply to private customers was mostly limited to small-scale (<1 MW) embedded generation solutions. The promulgation of the amended Schedule 2 of the Electricity Regulation Act in 2021 served to increase the threshold for embedded generation from the previous 1MW to 100MW without the need for a generation licence. This unlocked the potential for supply to large private customers and multiple customers from a large generation facility.

As each customer has a different load profile and different energy supply needs, there are various options and combinations of generation technologies (eg wind, solar PV and energy storage) and delivery mechanisms which include behind the meter or wheeling solutions through the national and/or municipal grid to serve customer needs. This short-term innovation creates opportunities and is the key to unlocking new approaches and new solutions for affordable and sustainable renewable energy systems, and to optimise the energy system and maximise customer value.

Therefore, our business transformation processes prioritise innovation. Our objective is to drive energy innovation to ensure we deliver innovative solutions to our customers that continuously contribute to achieving Exxaro and our customers' decarbonisation and sustainability objectives, provide more efficient and cost-effective ways of accessing clean energy and meeting rising energy demands, while contributing to economic growth and sustainable livelihoods.

In addition to short-term innovation that focuses on optimisation of our products and services, we continuously assess longer-term opportunities to create a sustained competitive advantage.

To this end, we have adopted a three-horizon model of innovation. In this model:

• Horizon one "Now" refers to our ability to manage and optimise our current business, continuously improving the solutions we provide to our customers
• Horizon two "Next" refers to the innovation that allows us to lead and act on new opportunities
• Horizon three "New" refers to our innovative capacity to envision and learn from current trends, and emergent opportunities arising from significant shifts in market structure or new technologies

Our investments focus on horizon one proven technologies, however, we monitor developments in horizon two and three to enable us to quickly adopt new innovative solutions, technologies and solutions.

We have adopted a systems approach to develop optimised energy solutions and drive energy innovation through identifying priority areas for innovation, skills development, fostering the development of a range of energy options to meet the varying needs of end-users and contributing to the development of comprehensive energy policies which foster innovation. As such, we are embracing open innovation, recognising that innovation is amplified when knowledge and ideas are not isolated within our organisation. Rather, partnerships and collaboration with key stakeholders such as government will also be critical in our drive for innovation. This is because we recognise that a systems approach is required to solve systemic problems. The government stakeholder group is of particular importance since it plays a key role in driving energy innovation and implementing the incentives and regulations needed to stimulate investment in energy innovation and its deployment and uptake.

In addition, we have internally developed innovative processes and tools that differentiate our energy solutions in the market. This includes RRODA, to quickly and efficiently identify appropriate sites and solutions for customers. The combination of the knowledge from our minerals and energy businesses ensures RRODA considers all above and below surface constraints and factors that may impact the levelised cost of energy through risk-based scenario analyses, for the optimisation of site selection and high-level design parameters, and to quantify tariffs and savings to the customer.