FINANCE DIRECTOR’S Financial year ending 31 December 2017 … · 2019-07-14 · 5 Finance...

This message covers the expected operational performance of the Exxaro group for FYE17.

While we acknowledge and recognise the diverse stakeholders for our group, this message is targeted primarily at the

financial and investor community with a distinct focus on operational matters, as well as progress on some of our strategic

initiatives, without undermining the importance of other sustainability matters.

Dear stakeholder,

Below is an update on the group’s operational performance for FYE17. Unless otherwise indicated, all comparisons are against

the financial year ended 31 December 2016 (FY16).

We recorded a year-to-date lost-time injury frequency rate (LTIFR) of 0,13 compared to 0,09 reported in FY16. No high potential

incidents and fatalities were reported during 2H17. Exxaro remains committed to the Zero Harm Vision and efforts to reduce

incidents through the Safety Improvement Plans are under way.

A significant uptick in commodity prices was recorded during the third quarter of 2017, supported by favourable economic data

from China and fears of supply disruptions, amongst others. However, the momentum was not sustained through to the last

quarter. For Exxaro’s key commodities, the API4 coal export price index is expected to average US$88 per tonne and iron ore

fines US$67 per dry metric tonne, Cost and Freight (CFR) China, for 2H17.

On the production front our coal business continued to be resilient with an increase of 8%, in production volumes forecast

(excluding buy-ins). We expect Coal capex to increase by 50% compared to FY16, mainly due to the timing of sustaining and

expansion capex at Grootegeluk. The expenditure for FYE17 is expected to be 4% lower than that guided in August 2017,

primarily as a result of the timing in capex spending.

We sold 22,425 million shares in Tronox Limited (Tronox) in October 2017, realising net proceeds of $474m (R6,5bn). The disposal

reduces Exxaro’s ownership of Tronox’s total outstanding voting shares from approximately 51,2 million to approximately

28,8 million, representing 24% of Tronox’s total outstanding voting shares.

On 20 November shareholders approved the terms of the Replacement BEE transaction. Implementation is expected before

31 December 2017.

We will provide a detailed account of FYE17 operational and financial performances when we announce our financial results

on the 8th March 2018.

Yours sincerely,

Riaan Koppeschaar

Finance Director

FINANCE DIRECTOR’S Pre-close message

Financial year ending 31 December 2017 (FYE17)

TABLE 1:

Production Sales

FY(E) 31 December FY(E) 31 December2017

Forecast1 2016 Actual % Change2017

Forecast1 2016 Actual % Change

Thermal 44 083 40 811 8 43 554 42 489 3

Tied2 7 376 7 900 (7) 7 374 7 893 (7)

Commercial: domestic 36 707 32 911 12 28 530 26 738 7

Commercial: export 7 650 7 858 (3)

Metallurgical 2 174 1 985 10 1 177 1 298 (9)

Commercial: domestic 2 174 1 985 10 1 177 1 298 (9)

Total Coal 46 257 42 796 8 44 731 43 787 2

Semi-coke 94 54 74 93 65 43

Total (excluding buy-ins) 46 351 42 850 8 44 824 43 852 2

Thermal coal buy-ins 218 606 (64)

Total (including buy-ins) 46 569 43 456 7 44 824 43 852 2

1 Based on latest internal management forecast assumptions and estimates.2 Mines managed on behalf of and supplying their entire production to Eskom.

COAL PRODUCTION AND SALES VOLUMES (‘000 tonnes)

2 Finance Director’s FYE17 Pre-close message


GLOBAL ECONOMY AND COMMODITY PRICES

COAL COMMODITY UPDATE

During 2H17, global economic activity remains on track to record the

strongest annual growth rate since 2011. Accelerations in global industrial

production as well as trade and fixed investment underpin levels of real

Gross Domestic Product (GDP) growth of around 3,1% for 2017, compared

to 2,5% in 2016. The strong economic activity and the return of cost

inflation in key commodity producing countries remain supportive to

commodity markets, however, political and policy uncertainty have the

potential to limit and/or delay further investment in the sector.

China’s supply-side reform initiatives and slow domestic output response,

mainly due to stricter safety and environmental inspections, global

supply pressures together with strong demand, contributed to thermal

coal prices holding up during 2H17. Although Chinese steel production

remains strong, softer economic data with relatively solid supply growth

from the majors started to weigh negatively on iron ore fines seaborne

prices towards the end of 2H17. The iron ore lump premium reached

record levels during the latter half of 2H17.

The improving and strong titanium dioxide (TiO2) pigment market

fundamentals continued during 2H17.

The return of geopolitical risks in the Middle East was reflected in the

higher brent crude oil price during 2H17.

PRODUCTION AND SALES VOLUMES

Commercial minesDespite a strike in September, thermal coal production from commercial

mines is expected to increase by 12%, primarily due to the power station

coal ramp-up at the Medupi power station, in line with Addendum 9 to the

coal supply agreement (CSA) and strategic stockpiling at Grootegeluk.

Coal buy-ins are expected to decrease by 64% due to the availability of

sufficient own coal to fulfill contracts.

Export sales volumes are expected to decrease by 3% mainly as a result

of the congestion at Richards Bay Coal Terminal (RBCT) in 1H17, driven

by adverse weather conditions. Total local sales tonnes are expected to

increase by 6%, mainly due to Eskom sales being 8% higher, mostly from

Grootegeluk, as well as increased demand in the domestic market.

Tied minesThermal coal production and sales from tied mines are expected to

decrease by 7% resulting from a five month stoppage of Mine 3 short

wall, requested by Eskom, to manage qualities at Matla.


MAJOR CONTRACTS UPDATE: TIED MINES

COAL MARKETS

Exxaro and Eskom are engaging, through the arbitration process, to

resolve contractual arrangements at Arnot and this will be continuing

into 2018.

Large capital projects at Matla remain unfunded by Eskom, with Mine 1

on care-and-maintenance. The remaining mine shafts (Mine 2 and Mine

3) are forecasted to produce 7,4 million tonnes (Mt) for FYE17 against

contractual volumes of 10,1Mt. Exxaro continues to engage with Eskom

to provide the required capital funding, through an arbitration process,

as per the tied mine Coal Supply Agreement (CSA), which will enable the

achievement of contractual production and sales volumes.

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International thermal coal prices remained favourable in 2H17 as we saw

good demand from Asian markets, including India. However, there is some

sentiment that prices are expected to soften a bit during 2018.

Domestic coal markets remained strong in 2H17 amidst higher demand for

product as exporters attempted to maximise returns. The strong demand

in all the domestic sectors is expected to continue into 1H18.

Exxaro expects Coal capex to increase by 50% compared to FY16 mainly

due to timing of sustaining and expansion capex at Grootegeluk. The

expenditure for FYE17 is expected to be 4% lower than guided in August

2017, primarily as a result of the timing in capex spending.

GrootegelukGrootegeluk capex is expected to be 48% higher than that reported

for FY16. FY17 Grootegeluk capex is expected to be 5% lower than that

reported in August 2017 largely due to the timing on GG6 expansion,

Load Out Station, Trucks & Shovels and Backfill capex.

CAPEX AND PROJECTS


TABLE 2:

FYE17 Current Forecast1

FYE17 Previous Forecast2 FY16 Actual

Sustaining 3 345 3 717 2 380

Waterberg 2 657 3 017 1 940

Mpumalanga 688 700 440

Expansion 762 578 367

Waterberg 677 494 312

Mpumalanga 85 84 55

Total 4 107 4 295 2 747

1 Based on latest internal management forecast assumptions and estimates, excluding tied operations.2 Provided in 30 June 2017 results presentation during August 2017.

Thabametsi Exxaro and Marubeni / Kepco (the lead developers of the Thabametsi

Independent Power Producer (IPP)) are engaging on the definitive CSA

and associated infrastructure agreements. Financial close is expected

during 1H18 due to the IPP awaiting environmental authorisation (EA).

Marubeni has submitted its integrated water use license application

(IWULA). Exxaro has requested the Department of Water and Sanitation

(DWS) to consent to Exxaro ceding 720 000 m3 of its water allocation.

Eskom has indicated that the temporary supply of electricity of 3 mega-

volt ampere (MVA) to the IPP requires Exxaro Coal (Pty) Ltd to sign a new

electricity supply agreement (ESA) to be in line with current electricity

demand.

Construction of the bulk water pipeline and powerline is in process, with

the handover expected in December 2017. The project is proceeding on

schedule and on budget.

BelfastAll licenses for the mining and plant areas construction were authorised

at the beginning of September 2017. Construction activities commenced

during October 2017. The project is proceeding on schedule and on budget

with first production expected in 1H20.

LeeuwpanThe Leeuwpan expansion environmental licenses and the wayleave

permit were also granted, and during this period, similarly, construction

has commenced.

COAL CAPEX (R’million)


LOGISTICS AND INFRASTRUCTURE

TFR railed 56,03Mt to RBCT from January to September 2017, equivalent

to an annualised rail tempo of 73,21Mt. The annual coal line shutdown

took place in July for 7 days, with rail services restored successfully

afterwards.

The Waterberg LTA was approved and signed by Exxaro and Transnet. This

LTA guarantees rail capacity at affordable tariffs to enable Grootegeluk

Complex’s export growth projects.

TFR’s performance on the North West Corridor has remained at

satisfactory levels with a year-to-date (Jan – Oct 2017) total strike rate of

93% being achieved (96% strike rate for export).

Sishen Iron Ore Company Proprietary Limited (SIOC)Guidance on SIOC’s equity-accounted contribution will be provided when

we have reasonable certainty on its FYE17 financial results.

FERROUS COMMODITY UPDATE

TronoxExxaro sold 22,425 million shares in Tronox in October, realising net

proceeds of $474m (R6,5bn). The disposal reduces Exxaro’s ownership

of Tronox’s total outstanding voting shares from approximately

51,2 million to approximately 28,8 million, representing 24% of Tronox’s

total outstanding voting shares.

Exxaro intends to use the proceeds to fund operations, repay debt and

distributions to shareholders. As previously communicated, it is the

intention that the majority of the proceeds received from the disposal

of the first tranche, will be returned to shareholders. The method, the

amount and the timing of any distribution will be announced with our

FYE17 results, at the latest.

Exxaro will continue to assess market conditions going forward for

further possible sell downs of its remaining Tronox investment. The

remaining investment was classified as a non-current asset held-for-sale

on 30 September 2017, and equity accounting ceased from the date of

classification.

TITANIUM DIOXIDE (TIO2) AND ALKALI CHEMICALS


ENERGY

Cennergi Proprietary Limited (Cennergi)The two wind-farm projects, Amakhala Emoyeni (AE) and Tsitsikamma

Community Wind Farm (TCWF), are running at planned capacity.

The group’s interests in Black Mountain Mining Proprietary Limited and

the Chifeng Kumba Hongye Corporation Limited’s refinery remain non-

core and Exxaro intends to divest from these investments.

As previously communicated, Exxaro intends to dispose of its interests in

Arnot and North Block Complex (NBC). The divestment process for NBC

is well advanced and it is anticipated that a transaction agreement will be

concluded by the end of the financial year.

In respect of the divestment process for Moranbah South coking coal

project in Australia, Exxaro did not receive viable offers for its 50%

shareholding and will reassess its position in due course.

SALE OF NON-CORE ASSETS AND INVESTMENTS

OTHER CONSIDERATIONS

Mining and Prospecting RightsMuch of the progress obtained in 2H17 revolves around the successful

submissions or amendments to existing rights, with the intent to either

protect, or ensuring greater Life of Mine potential to operations. These

include 1) the addition of associated minerals to the Thabametsi Mining

right; 2) additional mining methods at Matla for greater extraction;

and 3) the inclusion of environmental and infrastructure liabilities in

the Grootegeluk mining right area. The Arnot South Prospecting right

renewal was successfully concluded during the period.

REPLACEMENT BEE TRANSACTION

On 20 November shareholders approved the terms of the Replacement

BEE transaction. Implementation is expected before 31 December 2017.


Outlook for 1H18We expect an improvement in the operational results of the coal business

for 1H18 driven primarily by:

• Ongoing good demand in the domestic market underpinning prices;

• Stable seaborne demand internationally;

• Our operational excellence process delivering sustainable improved

results; and

• Technology and innovation improvements starting to contribute

positively with the establishment of the innovation project office.

During 1H18, the performance of our SIOC investment will be influenced

by an anticipated softer iron ore market. The iron ore lump premium

is expected to revert to its long term historic average after the winter

heating season in China.

Relative stable commodity prices with global industrial production,

trade and real fixed investment momentum, together with successful

international mediation efforts in Middle East, will continue to support

world economic activity over the next six months. The Rand Dollar

exchange rate remains extremely volatile, and subject to ongoing event

risk as the economic and political environment in South Africa remains a

challenge.

Review of the UpdateThe information in this update is the responsibility of the directors of

Exxaro and has not been reviewed or reported on by Exxaro’s external

auditors.


Participant Telephone Numbers(Assisted):Johannesburg (Telkom): 010 201 6800

South Africa (Toll Free): 0 800 200 648

Johannesburg (Neotel): 011 535 3600

USA and Canada (Toll Free): 1 855 481 5362

UK (Toll Free): 0 808 162 4061

Please instruct Participants to ask to be joined into the Exxaro Resources call.

Participant Telephone Numbers (Press *0 for operator assistance):Hong Kong (Toll Free): 800 966 117

Australia (Toll Free): 1 800 350 102

France (Toll Free): 0 800 902 688

Please instruct Participants to ask to be joined into the Exxaro Resources call.

TELECONFERENCE CALL DETAILS

PlaybackA playback will be available until Wednesday,

6 December 2017. To access the playback, dial one of the

following numbers using the playback code 19127#:

South Africa: 011 305 2030

UK Toll Free: 0 808 234 6771

Australia Toll Free: 1 800 091 250

USA and Canada Toll Free: 1 855 481 5363

International Toll: +27 11 305 2030

SponsorAbsa Bank Limited (acting through its corporate and

Investment banking division).

Editor’s NoteExxaro is one of the largest South Africa-based diversified

resources companies, with interests in the coal, titanium

dioxide, iron ore and energy commodities. www.exxaro.com

A dial-in teleconference call on the details of this announcement will be held on Friday, 24 November 2017 at 12h00 (GMT+2:00).

EnquiriesMzila Mthenjane, Executive Head:

Strategy & Stakeholder Affairs

Tel: + 27 12 307 7393

Mobile: +27 83 417 6375

Email: [email protected]

Pretoria 24 November 2017

Exxaro Resources Limited(Incorporated in the Republic of South Africa)

Registration number: 2000/011076/06

JSE Share code: EXX

ISIN: ZAE000084992

ADR code: EXXAY

(“Exxaro” or the “company” or the “group”)

Legend1H17 – Six-months period ending 30 June 2017

1H18 – Six-months period ending 30 June 2018

FY16 – Financial year ended 31 December 2016

FYE17 – Financial year ending 31 December 2017

2H17 – Six-months period ending 31 December 2017

2H16 – Six-months period ended 31 December 2016

1H20 - Six-months period ending 30 June 2020

Commodity Prices SourceCoal – IHS Energy

Iron ore – MB Online

Mineral sands and pigments – TZMI

DisclaimerThe financial information on which any outlook statements are based have not been reviewed nor reported on by Exxaro’s

external auditors. These forward-looking statements are based on management’s current beliefs and expectations and are

subject to uncertainty and changes in circumstances. The forward-looking statements involve risks that may affect the group’s

operations, markets, products, services and prices. Exxaro undertakes no obligation to update or reverse the forward-looking

statements, whether as a result of new information or future developments.

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