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Exxaro Resources Limited - Finance Directors 1h15 Pre-close Message

Release Date: 25/06/2015 09:15:00      Code(s): EXX     
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?)


FINANCE DIRECTOR?S 1H15 PRE-CLOSE MESSAGE

DEAR STAKEHOLDERS,                                      The continuing downward pressure on commodity
                                                        prices across the industry (particularly relating
As we approach our interim results reporting period
                                                        to the commodities we are exposed to - iron ore,
I?ve provided you below with an update of the
                                                        mineral sands/pigment and coal) during 1H15, has
operational performance of the group and I discuss
                                                        put a considerable strain on the group. We seek to
certain emerging issues prior to the financial closed
                                                        remain profitable in the short-term while preserving
period commencing at the close of business on           growth opportunities and ensuring an acceptable
30 June 2015. Included in the update is a               return on capital for our shareholders. With the
description of the expected operational                 weakened commodity price outlook for longer,
performance for the six-month period ending             we remain focused on operational efficiencies and
30 June 2015 (1H15).                                    cost management. We expect market oversupply
                                                        conditions, coupled with low demand in our
An outstanding performance has been achieved on
                                                        commodity portfolio, to persist in the near term
our safety record as we have recorded 11 months         which will demand more rigorous efforts at ensuring
without a fatality. The year-to-date Lost Time          short-term survival and long-term profitability. In
Injury Frequency Rate (LTIFR) is at 0,17 (FY14:         the meantime, we continue to experience increases
0,19), moving towards our internal target of 0,15.      in labour and electricity costs. This is partially offset
Continued efforts through visible felt leadership       by the lower crude oil price, which offers some cost
and implementing lessons learnt from long-term          pressure relief in the form of lower diesel costs and
incidents are amongst some of the key initiatives       lower transport costs. A weaker Rand against the
used to create a safe working environment.              USD supports export sales.

                                                                                                                    1
      The group?s capital expenditure (capex) outlay for         Some of the key emerging issues that we discuss in
      FY15 is expected to be at around R3,1 billion (11%         more detail include our strategic focus, Thabametsi
      below the previous guidance of R3,5 billion) with          and the coal-fired base load Independent Power
      the overall ratio of sustaining to expansion capex         Producer (IPP) in the Waterberg, the Tronox
      expected to be approximately 70:30. The majority           investment post the expiry of the standstill period
      of the sustaining capex is mainly made up of               as well as the impending unwinding of Exxaro?s
      Grootegeluk?s replacement of trucks and shovels.           Black Economic Empowerment (BEE) shareholding
      We continue to critically assess growth projects,          in 2016. The socio-political environment remains a
      taking cognisance of the timing of cash flow in order      fundamental pillar to Exxaro?s way of doing business.
      to prioritise capital accordingly. As far as practically   In this regard we continue to evaluate the impact of
                                                                 our operations on the surrounding communities and
      possible, we will continue to strategically influence
                                                                 on our sustainability strategy.
      and actively participate in the development and
      enablement of key infrastructure in order to unlock        We will provide a detailed account of the 1H15
      the Waterberg?s full potential, to which our capital       performance when we announce our interim
      allocation programme is currently aligned.                 financial results on 20 August 2015.

      We await the approval of the transfer of mineral rights    Yours sincerely
      in terms of Section 11 of the Mineral and Petroleum
      Resources Development Act (MPRDA) in relation
      to the Total Coal South Africa Proprietary Limited
      (TCSA) acquisition. This is the last remaining condition
      precedent (CP) for the transaction to be effective.        Wim de Klerk, Finance Director




Finance Director?s 1H15 Pre-close Message                                                                                2
      1. GROuP FINANCIAL uPDATE                                 Domestic sales are expected to be lower than both
                                                                1H14 and 2H14 mainly due to less product available
      Consolidated earnings guidance will be provided once
                                                                from Inyanda and lower steam coal production at
      we have reasonable certainty on the 1H15 financial
                                                                Leeuwpan as a result of the lower quality of run-of-
      and operational performance results, taking into
                                                                mine (ROM) coal available and Majuba breakdown.
      account:

      - the remaining June 2015 month results,                  In 2Q15 we closed Matla Mine 1 following an
                                                                internal review of the safety conditions around the
      - the performance of equity-accounted investments,
                                                                underground travelling road. There are efforts to
        and
                                                                make up the lost volumes through Mines 2&3, where
      - any adjustments required from the financial closure     some of the Mine 1 employees have been redeployed
        process.
                                                                until a safe access solution has been identified.
      2. COAL COMMODITy uPDATE
                                                                2.2. markets
      The coal business is the primary driver of future
                                                                Demand in the domestic market has remained at
      growth for Exxaro. As a result, we have taken
                                                                2014 levels in the Power generation and Steam coal
      a strategic decision to focus short- to medium-
                                                                markets. The integrity of coal handling infrastructure
      term capital allocation on coal, thus continuing
                                                                at the Majuba power station remains a key risk to
      our alignment with the country?s need for secure
                                                                Exxaro and this situation has resulted in reduced
      electricity supply.
                                                                off-take from Eskom in 1H15, impacting negatively on
      2.1. Production and sales volumes                         our Leeuwpan operation. The existing coal supply
      1H15 production and sales volumes are expected to         agreement for the supply of coal to Majuba power
      be slightly higher than 1H14 mainly due to the ramp-      station from Leeuwpan expired at the end of 1Q15
      up of the Medupi power station but marginally below       but supply continues under a temporary agreement.
      the 2H14 volumes mainly due to lower production at        Negotiations on a new supply agreement for a
      our tied operations.                                      further three years are currently underway.

      Export sales for 1H15 are expected to be on par           In the Metals markets we have seen producers
      with 2H14 but lower than 1H14 volumes mainly              experience increased cost pressures coupled with
      due to Inyanda mine nearing closure, coupled with         international commodity prices that continue
      lower volumes from Grootegeluk due to production          to struggle to gain momentum. We expect that
      reprioritisation in order to deliver power station coal   demand for volumes will reduce due to poor market
      for Eskom?s Medupi and Matimba power stations.            conditions especially in the steel industry in 2H15.




Finance Director?s 1H15 Pre-close Message                                                                                3
      In the Reductants markets we have witnessed the         The Exxaro Board has recently approved capex for
      shut and closure of some furnaces in the ferroalloy     the GG10 expansion, Phase 1 of the load-out station
      industry as it struggles to compete globally amidst     project, as well as the detailed engineering costs
      high electricity prices and low ferroalloy prices.      for the expansion of the GG6 plant at a combined
      This, with an inflow of cheap coke from China and       estimated cost of approximately R1,9 billion, which
      a rebalancing of reductants blends by ferroalloy        was included in the March group guidance of
      producers, has had a negative impact on the off-take    R3,5 billion. This expansion is mainly to cater for
      of semi-coke from our Reductants business unit.         increased exports from the Grootegeluk Complex.
      Exxaro also experienced downward pressure on
                                                              Thabametsi
      prices in the Metals and Reductants markets.
                                                              The timing of this project remains highly dependent
      In the context of a global oversupply in thermal        on the infrastructure (rail, water and roads) progress
      coal, international prices have continued to decline    in the Waterberg. The bankable feasibility study
      compared to previous periods and traded for most        (BFS) of Phase 1 which commenced in 3Q14 is
      of 1H15 around the $60 per tonne free-on-board          scheduled for completion by 1Q16.
      (FOB) Richards Bay Coal Terminal (RBCT) level for
      RB1 (6 000kcal/kg Net as Received (NAR)) coal.          The Thabametsi mining right application approvals
      Exxaro experienced robust demand for its high           are still expected during FY15 and the first run-of-
      quality RB1 coal from a wide array of markets as well   mine coal production to the Grootegeluk beneficiation
      as its lower quality coals, which are predominantly     complex could be achieved by FY17 where after
      exported to India.                                      the rate of production ramp-up will depend on the
                                                              Baseload Independent Power Producer Procurement
      2.3. caPex                                              Programme (BIPPPP) and Waterberg water supply
      The current unfavourable economic climate and           infrastructure development schedules, respectively.
      subdued outlook has resulted in delays in the
                                                              Thabametsi IPP project
      execution of some of the coal projects, notably:
                                                              The Thabametsi IPP project was a joint development
      - Semi-coke retort (Phase 5&6),                         between ENGIE (formerly known as GDF SUEZ) and
      - Moranbah South, and                                   Marubeni Corporation. ENGIE has recently withdrawn
                                                              from the project resulting from the decision by
      - Mafube Nooitgedacht.
                                                              its board not to proceed with the development.
      However, we continue to forecast significant capital    Pressure from Non-Governmental Organisations
      expenditure in the Waterberg, with approximately        (NGOs) and the impact on climate change made
      R15 billion planned over the next five years to 2020.   it a challenge to continue with the development.
                                                              However, the development of the Thabametsi IPP
      Grootegeluk                                             project will continue with Marubeni Corporation as
      To date, the ramp-up of coal supply to the Medupi       the lead developer.
      power station has progressed as planned while
                                                              Exxaro and the IPP project company intend
      Unit 6 is being commissioned and stockpiles are
                                                              concluding a coal supply and off-take agreement
      being built up.
                                                              from Thabametsi mine prior to the IPP submitting
      We continue to engage with Eskom regarding the          a bid under the Department of Energy?s (DoE) Coal
      announced later dates for the remaining units to        Baseload Independent Power Producer Procurement
      understand any impact this may have on the coal         Programme (CBIPPPP). The request for proposals by
      supply and off-take agreement.                          the DoE detailing the CBIPPPP was delayed until the
                                                              end of August 2015.


Finance Director?s 1H15 Pre-close Message                                                                              4
      Belfast                                                     2.6. logistics and infrastructure
      The project?s estimated construction commencement
                                                                  Overall Transnet Freight Rail (TFR) performance
      date has been delayed by up to 12 months mainly due
                                                                  continues to increase, with funding for the Stage 2
      to the environmental appeals. The appeals are being
                                                                  development of the North West Corridor approved in
      dealt with in terms of the applicable legal processes.
                                                                  April 2015, for completion in 2017. It is expected that
      Mafube                                                      this will increase rail infrastructure capacity by an
                                                                  additional 4,2Mtpa to 10,8Mtpa from the Waterberg.
      The Nooitgedacht project has been delayed by
                                                                  For the year ended 30 March 2015, TFR had achieved
      another 12 months, mainly due to environmental
                                                                  76Mt of railings to RBCT.
      permits obtained to mine the Springboklaagte pans.
                                                                  2.7. Water
      2.4. disPosals and mines in closure
                                                                  With an allocation of 7,6 million cubic metres per
      The last production at Tshikondeni was in September
      2014. We continue to partner with ArcelorMittal             annum from the Mokolo and Crocodile (West) Water
      South Africa Limited and engage with community              Augmentation Project 1 (MCWAP), Exxaro will have
      leaders and local government in an effort to achieve        sufficient raw water allocation for all our current-
      a mine closure programme that is in the best interest       and medium-term Waterberg expansion plans.
      of all stakeholders, including the local community.         MCWAP-2 is expected to be implemented by 2021/22,
                                                                  after which it is expected that sufficient water will
      The Section 11 transfer of mineral rights approval on       be available for our long-term Waterberg expansion
      the New Clydesdale Colliery (NCC) sale, which was           plans as well.
      originally announced in 1Q14, remains outstanding
      from the Department of Mineral Resources (DMR).             3. FERROuS COMMODITy uPDATE
      The closure of the Inyanda mine is planned for 4Q15.        3.1. alloystream
      To this end, we have initiated a sale process for the       We have closed the AlloyStream test plant in 2Q15.
      operation?s assets and liabilities during 1Q15. Potential   Most of the AlloyStream employees were deployed
      buyers have been identified and we are currently            elsewhere in the group.
      in the process of evaluating the ?expressions of
                                                                  3.2. caPex
      interests? received. No potential related party issues
      have been identified in the process. The size of the        The capex programme remains as previously guided
      consideration to be received for the disposal of this       and only caters for FerroAlloys capex.
      operation?s assets and liabilities has not yet been         3.3. mayoko Project
      established.
                                                                  We are still not spending any further capital on the
      2.5. acquisitions                                           Mayoko project until such time that positive changes
      We continue to assist Total Societe Anonyme, the            in the prospects for the iron ore market become
      French holding company of TCSA, in obtaining the            visible. We expect that our presence in the Republic
      Section 11 transfer of mineral rights approval from         of the Congo (RoC) will result in approximately
      the DMR, which will fulfil the remaining CP for the         R100 million in net operating expenses for 1H15.
      transaction to become effective.




Finance Director?s 1H15 Pre-close Message                                                                                   5
      We, however, continue to discuss long-term port          (COD) in 1Q16 whereas Amakhala Emoyeni is planned
      and rail solutions with the government of the RoC        to achieve COD in 2Q16. The two wind projects will
      and other stakeholders. To date, the rail and port       have a combined output of 239 Mega-watts.
      agreements have not been finalised. To recover some
      of the previous expenditure, we have also sold seven
                                                               6. CHANGES TO THE BOARD
      locomotives to the government of the RoC.                The Exxaro Board is proud to welcome Mr Mxolisi
                                                               Mgojo and Ms Monhla Hlahla as additional Executive
      3.4. sishen iron ore comPany (sioc)                      and independent Non-executive Directors respectively,
      The significant decline in the iron ore price during     with effect from 4 June 2015. Mr Mgojo was appointed
      this reporting period is expected to translate into      as the Chief Executive Officer (designate) on 1 May
      significantly lower equity-accounted income and          2015, and will be replacing Mr Sipho Nkosi at the end
      dividends from SIOC. This has a direct impact on         of his term in the first half of 2016.
      our cash flows, our ability to comply with financing
      covenants, as well as to continue to pay dividends.      7. EMERGING ISSuES
                                                               Following the latest integrated report 2014:
      4. TITANIuM DIOxIDE (TIO2)
                                                               - In terms of the revised targets of the new Code of
      The performance of Tronox over the past five months
                                                                 Good Practice of the Broad-based black economic
      has been characterised by ilmenite stock write-downs
                                                                 empowerment (BBBEE) requirements of the
      to the lower of cost and net realisable value.
                                                                 Department of Trade and Industry (DTI), Exxaro
      Continued high levels of debt financing costs are          will regress from Level 2 to Level 6 if all else
      expected to put a strain on earnings, which has a          remains equal. However, initiatives are in place to
      direct impact on the contribution of this investment       enhance our compliance with all elements, most
      to Exxaro?s attributable and headline earnings.            notably the challenges with enterprise and supplier
                                                                 development, as soon as practically possible.
      The interim financial results that we will present
      in August will also include the Alkali division?s        - Exxaro performed well against the 2014 targets of
      performance for 2Q15. We are optimistic that this          the Mining Charter across all operational mining
      business will contribute positively to the overall         rights. We submitted our performance against
      Tronox business, as well as Exxaro?s earnings.             the Mining Charter scorecard for the period 2012
      Earnings guidance on this equity-accounted                 to 2014 to the DMR which indicated improved
      investment will be provided once we have reasonable        compliance each year. The only target not achieved
      certainty on the interim financial results.                was capital goods procurement at Grootegeluk
                                                                 which was due to the slowdown in capital projects
      Despite the three-year standstill period having come
                                                                 once GMEP was completed.
      to an end on 15 June 2015, Exxaro is still considering
      the best options in respect of the future of this        - Exxaro?s BEE shareholding in terms of the
      investment.                                                MPRDA and Mining Charter will vest in November
                                                                 2016, following 10 years since inception. In this
      5. CENNERGI                                                regard, we have started a consultative process,
      Construction of the two wind projects being                in association with our advisors (Rand Merchant
      developed by Cennergi Proprietary Limited                  Bank), towards this event in order to ensure an
      (Cennergi) (a 50% joint venture with Tata Power)           orderly vesting of value to BEE Holdco shareholders
      in the Eastern Cape are continuing on schedule and         and seamless transition without any disruption to
      within budget. Tsitsikamma Community Wind Farm             minority shareholders.
      is scheduled to achieve Commercial Operation Date

Finance Director?s 1H15 Pre-close Message                                                                              6
      - We have identified the following five material risks      Mpumalanga was completed at Matla and is in
        to which we are giving our attention to:                  its commissioning phase. Once fully operational
                                                                  the water treatment plant will optimise the use of
         - Exposure to Eskom, both as a customer for
                                                                  recycled water and reduce the intake of fresh water.
           steam coal and a supplier of electricity.
           To mitigate this risk we have established a mutual    - Over the period FY11 to FY14 we have reduced
                                                                   our Scope 1 &2 carbon emissions by 48% and
           relationship of trust and ongoing communication
                                                                   73%, respectively, while Scope 3 emissions have
           with Eskom to ensure reliable coal supply and
                                                                   remained constant. Exxaro?s Scope 3 emissions
           off take. In addition, we have also looked into
                                                                   are driven over 96% by the burning of steam coal
           broadening our customer base and running
                                                                   supplied to Eskom.
           energy efficiency and co-generation projects to
           reduce our consumption of electricity.                - The HIV/Aids prevalence rate has dropped to 7%
                                                                   since FY11, which is 46% better than the mining
         - Licence to operate. As reflected in the business        industry average rate.
           philosophy, Exxaro is a responsible organisation
           that understands its roles and responsibilities and   9. MACRO-ECONOMIC ENvIRONMENT
           desires to make society a better place. As such,      AND OuTLOOk
           delivering on a socio-economic and environmental      The RB1 coal price averaged US$60 per tonne FOB
           stewardship agenda, alongside our compliance          RBCT during the past six months, down from US$68
           requirements, are the foundational tiers of our       per tonne in 1H14. It is expected to remain around
           sustainability.                                       US$60 per tonne, FOB RBCT for calendar 2015, at a
         - Employees. We are continuously working on             weaker Rand/USD exchange rate.
           remaining a world-class employer of choice by
                                                                 Despite different views on China?s future steam coal
           addressing the skills requirements, the employee
                                                                 demand profile (its import profile in particular), there
           value proposition, cultivating relationships with
                                                                 is broad consensus that this decade will continue to
           the unions and ensuring zero tolerance against
                                                                 see rising Asian demand. While the global steam coal
           fraud and corruption. We continue to review our
                                                                 production is expected to increase, the South African
           remuneration philosophy to attract and retain the
                                                                 share of global seaborne coal is anticipated to shrink.
           best skills in the market and thereby remain in
           line with best practice and the policy as approved    We expect the current oversupply in the metallurgical
           by the shareholders.                                  coal market to continue in the short- to medium-term.

         - Capital projects and operating efficiencies.          The volatility of the Rand against major currencies is
           Various initiatives have been launched to optimise    expected to remain for the rest of the year.
           the operations while spending minimal capital.
                                                                 10. REvIEw OF THE uPDATE
      8. MILESTONE ACHIEvEMENTS
                                                                 The information appearing in this message is the
      - Our water management strategy consists of                responsibility of the Directors of Exxaro and has not
        pollution prevention, minimising environmental           been reviewed nor reported on by Exxaro?s external
        impacts, maximising water reuse, responsible water       auditors.
        discharging and water treatment. The construction
        of the first of three water treatment plants in




Finance Director?s 1H15 Pre-close Message                                                                                   7
       TELECONFERENCE CALL DETAILS:                             ENquIRIES:
       A dial-in teleconference call regarding the details of   Wim de Klerk
       this announcement will be held on Thursday,              Finance Director
       25 June 2015, at 12:15 (GMT+2:00).                       tel: + 27 12 307 4848
                                                                mobile: +27 82 652 5145
       Dial-in teleconference numbers:
                                                                email: wim.deklerk@exxaro.com
       republic of south africa toll-free: 0800 200 648
                                                                Pretoria
       johannesburg: 011 535 3600 or 010 201 6800
                                                                25 june 2015
       cape town: 021 819 0900
       australia toll-free: 1 800 350 100                       SPONSOR:
       uk toll-free: 0808 162 4061                              Deutsche Securities (SA) Proprietary Limited

       usa and canada toll-free: 1 855 481 5362                 DISCLAIMER:
       conference id: Exxaro FD?s Pre-Close Teleconference      The financial information on which any outlook
       A playback will be available until 1 July 2015.          statements are based have not been reviewed
       To access the playback dial one of the following         nor reported on by Exxaro?s external auditors.
       numbers, using the playback code 35835:                  These forward-looking statements are based on
                                                                management?s current beliefs and expectations
       south africa: 011 305 2030
                                                                and are subject to uncertainty and changes in
       uk (toll-free): 0 808 234 6771
                                                                circumstances. The forward-looking statements
       usa & canada: 1 855 481 5363                             involve risks that may affect the group?s operations,
       australia (toll-free): 1 800 091 250                     markets, products, services and prices. Exxaro
                                                                undertakes no obligation to update or reverse the
       EDITOR?S NOTE:
                                                                forward-looking statements, whether as a result of
       Exxaro is one of the largest South African based
                                                                new information or future developments.
       diversified resources companies, with interests
       in the coal, titanium dioxide, iron ore and energy
       commodities. www.exxaro.com




Finance Director?s 1H15 Pre-close Message                                                                               8

Date: 25/06/2015 09:15:00 Supplied by www.sharenet.co.za                     
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