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Finance Director’s 1H14 Pre-Close Message
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 1H14 PRE-CLOSE MESSAGE
To our stakeholders
In preparation for the financial closed period commencing on 30 June 2014, the analysis
below applies to the six-month period ending 30 June 2014 compared to the corresponding
period ended 30 June 2013, unless where specifically referred to.
Stable financial and operational results are expected in our Coal business and equity-
accounted investments. The 1H14 Coal business’ net operating profit guidance provided in
the SENS announcement dated 24 June 2014, excludes the impact of the outcome of any
possible settlement with Eskom on the current Medupi Power Station construction delay off-
take engagement discussions.
As communicated on 24 June 2014, the impact of the impairment loss due to the write-down
of Exxaro’s Mayoko Project in the Ferrous business will be a pre-tax write-off of a maximum
amount of the total of the original acquisition cost of the company’s investment in the
Mayoko Project as well as the project related costs capitalised to date amounting to R5 362
million in total. Exxaro will advise on the final number as soon as the final calculations have
been completed.
We will provide a detailed account of the first half’s performance (including guidance on
corporate costs as well as the remaining operations (e.g. Alloys and Zincor)) when we
announce our interim financial results on 21 August 2014. As such, in the report here-in
attached, focus has been placed on our owner-managed coal operations.
Yours sincerely
Wim de Klerk
Finance Director
COAL COMMODITY REVIEW
1 PRODUCTION AND SALES VOLUMES
Production volumes for 1H14 are expected to be marginally lower than 2H13 due to
lower off-take from Matimba resulting in Grootegeluk cutting back production due to full
stockpiles, production interruptions at Matla, lower production at Inyanda and cessation
of production at the New Clydesdale Colliery (NCC). However, in comparison to 1H13,
production volumes are expected to be marginally higher, mainly due to increases at
Matla, Grootegeluk and Leeuwpan.
Local metallurgical coal sales volumes at Grootegeluk are expected to increase
slightly from 2H13, while export sales volumes are expected to increase from both 2H13
and 1H13 due to improved allocation of export trains from TransnetFreightRail (TFR).
Thermal coal export sales volumes are expected to be in line with 2H13 but are higher
than 1H13 due to higher buy-in volumes.
Therefore, total expected FY14 export volumes are estimated to be higher than the
previously guided 4,5 million tonnes (Mt).
Sales to Eskom are expected to be lower than 2H13 mainly due to fewer units running
at Matimba and production difficulties at Matla. However, Eskom sales volumes are
expected to remain stable in comparison to 1H13.
2 LOGISTICS
The TFR rail rate was at 60,6Mt until May 2014, including the force majeure event in
February 2014 and the annual TFR shut in May.
Exxaro is expected to be at 100% of its available RBCT entitlement by the end of
1H14.
3 MARKETS
Demand in international coal markets is generally holding up well amidst the global drive
for energy efficiency and energy mix changes required by various countries. Both global
thermal and metallurgical markets are however oversupplied and some of the supply
side factors are structural. This may even prolong the current imbalance between supply
and demand, and pricing is forecasted to be generally flat for the rest of the year.
Domestic demand for thermal coal in 1H14 is expected to end slightly lower than 1H13.
In the Domestic coal market segment Eskom demand is stable. The demand from the
Metals, Domestic steam and Reductants segments is robust and remains a core focus
area for the Coal business.
4 PROJECTS UPDATE
4.1 GMEP
4.1.1 PROGRESS UPDATE
Following the delay to date in the construction of the Medupi Power Station, Exxaro
and Eskom continue to engage in order to reach an amicable agreement regarding a
new ramp-up profile in terms of the Medupi coal supply agreement (CSA) based on
the principle that Exxaro will remain value neutral:
- During January 2014 Eskom formally notified Exxaro that it would not be able to
commence off-take from 1 February 2014 as agreed in the CSA due to
construction delays.
- Subsequently, due to the excessive rainfall experienced during March 2014, a
force majeure was declared.
- The terms and conditions of the CSA remain in full force and effect, until such
time a revised agreement is reached.
- It is envisaged that such an agreement will be reached in the form of a Term
Sheet which will be submitted for approval by the respective boards of directors
of Exxaro and Eskom during August 2014.
- The 1H14 net operating profit guidance provided in the SENS announcement
dated 24 June 2014 excludes the impact of the outcome of any possible
settlement with Eskom on the current Medupi Power Station construction delay
off-take engagement discussions.
- Coal dispatches to Medupi Power Station commenced on 23 of June 2014.
Total project costs remain estimated at R10,2 billion.
4.1.2 ACCOUNTING
Capitalisation of costs on this project will cease with effect from 30 June 2014 as
management has declared the asset ready for “intended management use”, as such
all costs in 2H14 are expected to go directly to the statement of profit or loss.
The Eskom Shortfall constitutes a penalty as the parties agreed that Eskom would
pay the Eskom Shortfall quantities as a result of the delay in the construction of the
Medupi Power Station. This will continue to be recorded as other income.
The receipt of the Monthly Energy constitutes a take-or-pay transaction due to the
fact that should Eskom in any month during the ramp-up period, take less than the
applicable Monthly Energy, Exxaro shall be entitled to a payment by Eskom at the
end of that month as if the Monthly Energy was supplied during that month. The
resultant income constitutes revenue for Exxaro as the income relates to the sale and
supply of coal. As such it will be recorded as revenue, and this will be capitalised up
until 30 June 2014.
4.2 DEVELOPMENT PROJECTS
4.2.1 THABAMETSI
Thabametsi is a prospective greenfields opencast mine adjacent to Grootegeluk in
the Waterberg, Limpopo province.
- It is expected that the phase 1 development of the mine will coincide with the
600MW coal-fired baseload Independent Power Producer (IPP) power station
(the 600MW Waterberg IPP) project, which is now owned and is being
developed by GDF SUEZ. The Thabametsi mine will supply approximately 3.5
Mtpa of run-of-mine (ROM) coal to the 600MW Waterberg IPP post ramp-up.
- The pre-feasibility study (PFS) for Thabametsi North Phase 1 was completed
during 2Q14 for the first phase development of the Thabametsi mine.
- A bankable feasibility study (BFS) for Thabametsi North Phase 1 will commence
3Q14 and should be completed by mid-2015.
4.2.2 BELFAST PROJECT
The Belfast project is a greenfields opencast mine development in the Mpumalanga
province.
- The project encompasses one of the last high quality reserves in the
Mpumalanga province and presents Exxaro with an opportunity for excellent
returns.
- The estimated annual production of the mine is an average of 2.2Mpta of A-
grade export coal and 0.5Mtpa of Eskom coal over a 16-year period post
commissioning.
- The commissioning of the mine is scheduled for 2H17.
- A mining right was awarded during 2013.
During June 2014 the Exxaro Board approved R3,8 billion for the implementation of
the project with R3,6 billion only to be spent once all required licences and regulatory
approvals are obtained.
4.2.3 REDUCTANTS - CHAR
- The PFS of the two retort expansion (a 50% expansion of the existing Reductant
business) was concluded during 2H14.
- A BFS will commence during 3Q14 and is scheduled for completion by mid
2015.
4.2.4 MORANBAH SOUTH
Moranbah is a prospective greenfields mine (50:50 joint venture with Anglo) in
Queensland Australia
- The potential for this project is production of estimated at 10Mt of hard coking
coal through a dual long wall operation.
- The exact timing of the project is to be determined.
- The environmental impact study is progressing well with the final response to
public submissions submitted during May 2014. The environmental authorisation
is expected to be granted during 2H14.
4.3 POTENTIAL CORPORATE ACTIONS
4.3.1 NCC DISPOSAL
- Exxaro continues to engage with Universal Coal Development VIII Proprietary
Limited (Universal Coal) regarding the fulfilment of the terms and conditions of
the possible sale of NCC, in line with the previous guidance.
5 CAPITAL EXPENDITURE
The revised major capital expenditure guidance will be provided on 21 August 2014.
6 OVERALL GROUP FINANCIAL PERFORMANCE
For the overall group expected performance, please refer to the SENS announcement
dated 24 June 2014.
Earnings guidance will be provided once there is a reasonable degree of certainty on
1H14, taking into account any adjustments arising from interim reporting closure
process.
The forecast financial information appearing in this update is the responsibility of the
directors and has not been reviewed or reported on by Exxaro’s external auditors.
Exxaro will publish its interim results for the 2014 financial year on 21 August 2014.
7 MACRO-ECONOMIC ENVIRONMENT AND OUTLOOK
1H13 2H13 1H14 % change
(1H14
vs 2H13)
Macro-economic indicators
Average ZAR/US$ (spot) 9,20 10,04 10,67 6,3%
Brent crude oil (US$/bbl) 107,95 109,45 108,65 (0,7%)
Product prices
Thermal coal (US$/t, FOB RBCT) 82,78 78,09 76,70 (1,8%)
Hard Coking Coal (US$/t, FOB Australia) 155 142 117 (17,6%)
Prices reflect international commodity reference and not Exxaro Resources specific.
Sources: Reuters, I-Net, SACR, CRU
Global economic growth improved gradually during 1H14, although the performances of
the major world economies were mixed. US economic growth contracted significantly
during 1Q14, mainly due to adverse weather conditions, however, economic activity
bounced back during 2Q14 with expectations to maintain its momentum into 2H14. The
deceleration of Chinese economy growth was evident during 1H14 with the construction
sector one of the mostly affected. However, some measures to cushion the broad
investment slowdown were introduced. In Europe, business and consumer confidence
continued with their improving trend.
South Africa’s economic growth outlook remain subject to a number of headwinds -
prolonged strikes, electricity supply constraints, low business and consumer confidence
and higher consumer debt levels. Furthermore, GDP contracted by 0,6% in 1Q14 with
risks of a tighter monetary policy on the back of a weak currency and accelerated
inflationary pressures. The recent downgrades by credit rating agencies are testimony to
the current economic challenges for South Africa.
The global macro-economic and mineral commodity environment remains challenging.
Against this background, Exxaro is expecting another challenging, but cautiously
optimistic 2H14.
Editor’s note:
Exxaro is one of the largest South African based diversified resources companies, with interests in the Coal, Titanium
Dioxide and Iron ore 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
26 June 2014
Sponsor
Deutsche Securities (SA) Proprietary Limited
Forward-looking statements disclaimer:
The financial information on which any outlook statements are based have not been reviewed or reported on. 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: 26/06/2014 10:30:00 Produced by the JSE SENS Department. The SENS service is an information dissemination service administered by the JSE Limited ('JSE').
The JSE does not, whether expressly, tacitly or implicitly, represent, warrant or in any way guarantee the truth, accuracy or completeness of
the information published on SENS. The JSE, their officers, employees and agents accept no liability for (or in respect of) any direct,
indirect, incidental or consequential loss or damage of any kind or nature, howsoever arising, from the use of SENS or the use of, or reliance on,
information disseminated through SENS.
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