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Exxaro Resources Limited - The Expected Financial And Operational Performance Of The Exxaro Group For The Fye 31 December 2015.

Release Date: 19/11/2015 16:32:00      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

Date: 19 November 2015

FINANCE DIRECTOR?S
FYE 31 December 2015 pre-close message

ABSTRACT
This message covers the expected financial and operational performance of the Exxaro group for the FYE
31 December 2015. Whilst there are several key stakeholders for the group, the message is targeting
primarily the investor community and has a distinct focus on financial and operational matters, without
undermining the importance of other sustainability matters.


Dear stakeholders
Further to the group?s 1H15 financial and operational performance, this is an update for the year to date
as we approach the full-year financial results for the reporting period ending
31 December 2015. The update focuses on the group?s operational performance, as well as some of our
strategic initiatives.
A significant achievement in the company?s history is the lowest lost-time injury frequency rate (LTIFR) of
0,15 year to date, which is a 21% improvement compared to the LTIFR reported for the prior full year in
2014. While we are proud of this milestone, our efforts to achieve zero harm shall not stop.
We continue to operate in a challenging environment, characterised by low commodity prices and higher
input costs. However, our operational excellence programme is delivering efficiency improvements and
sustainable cost reduction at our operations. We expect to reap the full benefits of this over the next 12-
18 months. In addition, we are reducing overhead costs through a group-wide voluntary separation
package offer.
The continuing global oversupply of commodities is reflected in a reduction of the average US$ coal, iron
ore and titanium dioxide prices by 20%, 32% and 14% respectively, since the beginning of January 2015. In
order to weather these difficult times, our short to medium-term focus remains on track, with specific
attention on:
   Productivity improvement ? we have improved production tonnes per full time employee by 18% to
     maximise profitability
   cash conservation ? we are preserving the group?s free cash flow by reducing capital expenditure
     (capex) and focusing on cost savings.
We are pleased that our coal business? wage negotiations were settled without unrest.
We remain prudent with our capital management by striking a balance between returning cash to
shareholders, debt management, and selectively re-investing into the business for growth. We have
reduced (through cutbacks and deferrals) our expansion capex by 13% over the next five years while
critically evaluating sustaining capex to preserve cash flow in this period. These cuts have yielded a
further R744 million reduction for FY15, against our guidance in August 2015 for FY15 total capex of R2
950 million for the coal business, without compromising business sustainability and safety. This translates
into a total FY15 cut of around 50% of our estimated capex as guided at the beginning of this year. The
Waterberg capex programme to FY20 has also been revised to R15 billion (sustaining and expansion).
With every growth and sustaining project considered, we have a disciplined decision-making approach to
allocate capital and we take into account the expected investment rate of return; net present value; cost
curve position; payback period; risk and mitigation balance; as well as overall impact on shareholder
returns.
We expect to maintain our dividend policy between 2,5 to 3,5 times core attributable earnings cover in
FY15.
Our international credit rating was placed on a negative watch in 2015 and our SA credit rating was
downgraded in 1H15 by Standard & Poor's Ratings Services from A- to BBB+, mainly due to lower global
commodity prices (particularly in relation to our exposure to iron ore). The impact of the downgrade is
that our cost of borrowings may increase. Ensuring that Exxaro is able to raise financing at competitive
rates remains critical as we move closer to refinancing our existing R8 billion facility in 2Q16.
There has recently been much activism against coal as a source of energy due to the environmental
impact from carbon dioxide (CO2) emissions. Exxaro?s efforts at reducing its emissions are well regarded
by the CDP (?formerly "Carbon Disclosure Project"). Given the current and expected outlook for South
Africa?s electricity requirements, Exxaro believes coal remains a relevant source of affordable electricity
generation for the economy and thus Exxaro remains well positioned to supply this energy source to
Eskom. Therefore, the coal business is to a great extent hedged against falling US$ denominated coal
export prices through the exchange rate as well as domestic Eskom prices remaining stable.
Strategic priorities for the Exxaro group during the next financial year include:
  integrating and optimising Exxaro Coal Central Proprietary Limited (ECC) (previously Total Coal South
   Africa Proprietary Limited) assets
   developing Exxaro?s future black economic empowerment (BEE) shareholding strategy amid regulatory
   uncertainty and ensuring the current BEE structure unwinds efficiently with minimal impact on
   stakeholders
   evaluating our current shareholding in key investments: mainly Sishen Iron Ore Company Proprietary
   Limited (Sishen) and Tronox Limited (Tronox)
   growing investor confidence in Exxaro?s prospects for the coal business through increased
   communication of the coal strategy.
We expect the global economy to remain subdued as emerging markets continue to battle with low
economic growth rates and commodity markets face oversupply, particularly in iron ore and coal. Markets
could also be impacted by the expected interest rate hikes in the United States, as well as other global
geo-political events.
We will provide a detailed account of the FY15 performance when we announce our annual financial
results on 3 March 2016.

Yours sincerely

Wim de Klerk
Finance director
1. Global      economy                          and      options. The outcome will be communicated once
                                                         finalised. This does not impact the inclusion of ECC
commodity prices                                         production volumes from 1 September 2015.
FY15 started with some positive sentiment towards
the global economy. However, global economic             Strategic intent and outlook
growth divergence has become even more                   Our rationale for the acquisition was to gain access
pronounced in 2H15 as uncertainty in global              to long-term primary export entitlement.
financial and commodity markets continues. As a          In reaction to lower US$ export prices, various
result, the emerging markets are negatively              optimisation opportunities are being pursued to
affected, whilst growth in developed economies           improve profitability and cash flow on the ECC
continues to show some signs of strength, albeit still   assets, which are currently mainly focused on the
modest.                                                  lower-quality grade export markets. Interventions
In addition, in 2H15, downgrades were confirmed          include optimising sales based on grades, supplying
for the FY15/16 global economic growth outlook,          the domestic market instead of the export market
including that of South Africa.                          as well as reducing overhead costs.

API#4 RB1 coal export US$ prices for 1H15 averaged       Capex at ECC operations is expected to be limited to
                                                         essential sustaining capital.
US$61 per tonne, with the consensus forecast
average for 2H15 at US$53 per tonne.                     2.3. Major contracts
                                                         Eskom and Exxaro have initiated discussions on
2. Coal commodity update                                 Eskom?s proposed intention to convert the captive
As the average API#4 coal US$ price remains low,         mines? coal-supply agreements to commercial
the coal business is accelerating its focus on           arrangements. Operations likely to be affected are
reducing costs, improving operating efficiencies and     Matla and Arnot. The two parties are also in
implementing relevant initiatives under a fit-for-       discussions regarding the financial viability of future
purpose model.                                           supply of coal from Arnot mine.
2.1. Production                  and          sales      2.4. Markets
  volumes                                                Domestic coal demand remains stagnant, but
FY15 production and sales volumes are expected to        stable, in the power-generation and steam coal
be higher than FY14 mainly due to the scheduled          markets. As the US$ price of coal in international
ramp-up of Medupi power station and inclusion of         market continues to test new lows, supply to the
ECC production from 1 September 2015, partially          domestic steam coal market has increased
offset by lower production at our tied operations.       markedly, resulting in downward pressure on
                                                         prices. International prices have dropped below
Domestic sales are expected to be 6% (2,3Mt)             US$50 per tonne free-on-board (FOB) for Richards
higher while export sales are expected to be up 11%      Bay RB1 coal (basis 6 000kcal/kg net). International
(0,6Mt). We expect our export sales volumes for          thermal coal prices are expected to remain at these
FY15 to be around 5,5Mtpa, including ECC.                levels for the short to medium term.
2.2. ECC                                                 There is however still good demand for Exxaro?s
Progress in implementing Department of                   higher-quality RB1 as well as its lower-quality coal.
Mineral Resources (DMR) approval                         The local metals market is struggling to compete
conditions                                               with cheap Chinese imports, very weak demand and
As part of the DMR?s conditions for approving the        low international metals prices. We expect demand
transfer of ECC?s mineral rights to Exxaro (and          for coal from the local metals market to remain
granting a section 11 transfer of the mining rights in   subdued in the short to medium term.
terms of the Mineral and Petroleum Resources             In the reductants markets, various companies in the
Development Act 28 2002 (MPRDA)), Exxaro was             ferroalloy industry face financial difficulty as they
required to include additional broad-based black         struggle to compete globally due to low ferroalloy
economic empowerment (BBBEE) participation in            prices and high local electricity prices. Poor demand
the shareholding of ECC assets.                          has affected the offtake of semi-coke from our
Exxaro is committed to create a structure that           reductants business unit.
meets these requirements at arm?s-length and on
commercial terms, and is considering various
                                                       this project. Preferred bidders are expected to be
2.5. Capex and projects                                announced in 1Q16.
Given the current unfavourable economic climate
and subdued price outlook, we have delayed the         Belfast
execution of certain of our coal projects, notably:    The project?s construction start date has been
   Semi-coke retort (phase 5 and 6)                    delayed by up to 12 months from 3Q15 to 3Q16,
   Moranbah South                                      mainly due to environmental appeals, with first coal
   Mafube Nooitgedacht                                 now expected in 3Q18. The appeals are being dealt
   Belfast                                             with in terms of applicable environmental
   Grootegeluk 6                                       legislation.
   Grootegeluk load-out station.                       Mafube Nooitgedacht
The impact of the delays on production growth and      This project has been delayed by 12 months from
the resulting operating profit is expected to be       the originally announced 1Q17 date with first coal
mainly on projects that have been already approved     now forecast in 1Q18, mainly due to environmental
for implementation (i.e. mainly Belfast).              permits required to mine the Springboklaagte pans.
We continue to forecast significant sustaining and     2.6. Disposals            and       mines        in
expansion capex in the Waterberg, with some R15
billion (previous guidance (August 2015): R16,9        closure
billion to FY17) planned over the next five years to   Arnot South
FY20.                                                  Exxaro entered into a binding sales agreement with
Grootegeluk                                            Universal Coal plc (Universal Coal) in FY12, in terms
To date, the ramp-up of coal supply to Medupi          of which Exxaro would sell the associated
power station has progressed as scheduled, with        prospecting right over Arnot South to Universal
unit 6 commissioned and coal stockpiles being built.   Coal, pending the conclusion of certain conditions
We continue to engage with Eskom on its                precedent.
announcement of commissioning dates for the            The last condition precedent to the sales
remaining units to understand and reach agreement      agreement, in respect of the section 11 transfer of
on the potential impact on coal supply and our         mining rights, remains outstanding.
offtake agreement.                                     Inyanda mine
Thabametsi                                             The coal reserves of Inyanda mine will be depleted
The timing of certain future phases of this project    by the end of November 2015. A sales process for
depends largely on progress with infrastructure        the mine?s assets (including the Blackhill private
(rail, water and roads) developments in the            siding) and liabilities was initiated in 1Q15. We
Waterberg. The bankable feasibility study (BFS) of     expect this sales transaction to be concluded before
phase 1 was completed in 4Q15 to supply 3,9            the end of FY15, subject to conditions precedent
million tonnes per annum (Mtpa) of coal to the         which include a section 11 transfer.
Thabametsi independent power producer (IPP).           2.7. Logistics and infrastructure
The Thabametsi mining right approval is imminent       Exxaro was forced to cancel trains in 3Q15, due to
and first run-of-mine coal production to the           full stockpiles at Richards Bay Coal Terminal (RBCT)
Grootegeluk beneficiation complex could therefore      as a result of low coal demand from the markets.
be achieved by FY18. The rate of production ramp-      We are beginning to see some improvement in the
up thereafter will depend on the coal baseload IPP     Leeuwpan supply to Eskom as we continue with the
procurement programme and the Waterberg                rail-to-road migration for the Eskom Majuba plant.
infrastructure development schedules.                  Eskom?s rail offtake has not been consistent due to
Thabametsi IPP project                                 commercial and operational issues, forcing
A bid was submitted by the Thabametsi IPP in the       Leeuwpan to institute road dispatches to Eskom
first bid window under the Department of Energy?s      from June 2015.
coal baseload IPP procurement programme on             Engagement with Transnet Freight Rail (TFR) has
2 November 2015 for a 630 megawatt fluidised bed       confirmed their commitment to ensuring that
combustion coal-fired power station. Marubeni          adequate rail performance levels are reached and
Corporation is the lead developer and Korea Electric   maintained. Exxaro will align its Waterberg
Power Corporation (KEPCO) the co-developer on          production with TFR?s rail ramp-up schedule.
3. Ferrous commodity update                             7.2. Progress on unwinding Main
3.1. Mayoko project                                     Street 333
The group?s focus in 2H15 has been to secure a          Exxaro, in conjunction with its advisors, continue to
ratified mining convention and the associated           review options to unwind the current BEE structure
agreements from the government of the Republic of       and to possibly implement a replacement BEE
the Congo. Exxaro has submitted all documentation       structure. The outcome will be communicated once
for the mining convention. The process of               finalised.
ratification includes approval by the Supreme Court,
the Council of Ministers and then Parliament for        8.      Outlook
final ratification. As previously communicated, we      We expect the current commodity (coal, iron ore,
expect this process to be finalised before the end of   mineral sands and pigment) market oversupply,
FY15.                                                   coupled with low demand, to persist in the short- to
                                                        medium term. The impact of low coal prices is
We remain committed to our strategy of reducing         expected to be partially offset by a weaker rand in
operating costs including reducing labour cost and      2H15. Due to this challenging environment, Exxaro?s
remaining cash neutral, while protecting the mining     focus in the short- to medium term will be to:
rights.                                                    continue to concentrate financial and people
3.2. Sishen                                                 resources to the coal business
The continued decline in the iron ore US$ price in         Integrate and optimise ECC assets
2H15 is expected to result in lower equity income          prioritise and stagger projects (mainly
and dividends from Sishen, which in turn has a              expansion capex) to preserve cash to ensure
direct impact on Exxaro?s cash resources.                   that our debt levels remain within acceptable
                                                            levels
4. Titanium dioxide (TiO2)                                 continue the drive to reduce input and
TiO2 US$ prices have declined by around 14% since           overhead costs
January 2015. We expect this will have a negative          develop Exxaro?s future BEE shareholding
contribution to our share of Tronox?s financial             strategy amid regulatory uncertainty and
results for FY15.                                           ensure the current BEE structure unwinds
                                                            efficiently
Guidance     on      Tronox?s       equity-accounted
                                                           evaluate our current shareholding in key
contribution will be provided when we have
                                                            investments (mainly Sishen Iron Ore Company
reasonable certainty on its FY15 financial results.
                                                            Proprietary Limited (Sishen) and Tronox
5. Cennergi                                                 Limited (Tronox)) and assess the ability of
We expect financial performance from this                   these investments to contribute to the group?s
investment to remain in line with the FY14 results.         future earnings and cash flow
                                                           grow investor confidence in Exxaro?s prospects
6. Sale of non-core assets and                              for the coal business through increased
investments                                                 communication of the coal business strategy.
The group?s interest in Black Mountain and Chifeng      9. Group financial update
remains non-core and the group will consider            Consolidated earnings guidance will be provided
divestment when market conditions improve.              when we have reasonable certainty on financial and
7. BEE shareholder                                      operational performance results for the year ending
                                                        31 December 2015, taking into account:
7.1. Financial assistance                                  outstanding November and December 2015
As published on the Stock Exchange News Services           results
(SENS) on 24 July 2015 and 23 October 2015,                performance of equity-accounted investments
additional funding to support Exxaro?s controlling         any adjustments required from the financial
BEE shareholder, Main Street 333 Proprietary               closure process.
Limited (Main Street 333), has been secured and
provides a longer-term solution to Exxaro?s BEE         10. Review of the update
status until the structure unwinds in FY16.             The information in this message is the responsibility
                                                        of the directors of Exxaro and has not been
reviewed nor reported on by Exxaro?s external                                      auditors.

Teleconference call details:

A dial-in teleconference call on the details of this announcement will be held on Friday, 20 November 2015, at 09h30 (GMT+2:00)


Internet broadcast: http://www.exxaro.com/
Dial-in teleconference numbers:

             Republic of South Africa toll-free: 0800 200 648

             Johannesburg: 011 535 3600 or 010 201 6800

             Cape Town: 021 819 0900

             UK toll-free: 0808 162 4061

             USA and Canada toll-free: 1 855 481 5362

             Conference ID: Exxaro FD?s pre-close teleconference


A playback will be available until 27 November 2015. To access the playback, dial one of the following numbers using the playback code 41186#:

             South Africa:         011 305 2030

             UK (Toll-free):       0 808 234 6771

             USA & Canada:         1 855 481 5363

             Australia (Toll-free): 1 800 091 250


Editor?s note:
Exxaro 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


Enquiries:
Wim de Klerk
Finance director
Tel: + 27 12 307 4848
Mobile: +27 82 652 5145
Email: wim.deklerk@exxaro.com


Pretoria
19 November 2015


Sponsor:
Absa Bank Limited (acting through its corporate and investment banking division)




Disclaimer:
The 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.

Date: 19/11/2015 04:32:00 Supplied by www.sharenet.co.za                     
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