EXXARO RESOURCES LIMITED - Finance Director's 1H15 pre-close messageRelease 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
ADR code: EXXAY
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.
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.
- 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
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
until a safe access solution has been identified.
2. COAL COMMODITy uPDATE
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
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
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.
2.4. 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
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
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:
republic of south africa toll-free: 0800 200 648
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
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
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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