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Financial Director's FYE 31 December 2016 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” or the “Company” or the “Group”)
FINANCE DIRECTOR’S FYE 31 December 2016
Pre-close message
This message covers the expected financial and operational performance of the Exxaro group for the FYE
31 December 2016.
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 financial and 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 the financial year ending 31 December 2016
(FYE16). Unless otherwise indicated, all comparisons are against FY15.
We achieved a significant milestone of 27 fatality free months during the year (as at 31 October 2016).
We achieved a lost-time injury frequency rate (LTIFR) of 0.08 as at 31 October 2016, which is a 53%
improvement on the LTIFR recorded for FY15 of 0.17.
Following weakness in 1H16, commodity prices started to rebound in 2H16 due to production cuts, weather
disruptions and supply reforms in various producer countries. For Exxaro’s key commodities the API4 export
price is expected to average US$75 per tonne for 2H16 (1H16: US$53) and iron ore fines US$57 per dry metric
tonne, Cost and Freight (CFR) China (1H16: US$52).
On the production front our coal business continued to be resilient with a slight increase in production
forecast (excluding buy-ins) despite the closure of Arnot. We are continuing our cost-saving initiatives
and capital optimisation with total coal capital expenditure (capex) for FYE16 forecast at R2 728 million
compared to R2 313 million in FY15.
We are also in the process of finalising our improvement project to ensure a fit for purpose operating
model. Following the completion of the project we expect to be able to quantify the resulting cost savings
in the 1Q17.
Despite negative sentiment in the capital markets towards mining, we successfully refinanced our R8 billion
loan facility at competitive rates and expect the balance sheet to remain robust in 2017.
We are also pleased that we are now in a position to start implementing the unwinding of our existing Black
Economic Empowerment (BEE) shareholding structure following the expiry of the lock-in period on 28 November
2016. The share repurchase from our controlling shareholder Main Street 333 Proprietary Limited
(Main Street 333) and the replacement BEE transaction will ensure that the structure unwinds in a
coordinated manner which should be supportive of our share price and ensure investor certainty. Interest
received from Exxaro’s BEE shareholder to reinvest in a replacement transaction is testimony of our
BEE shareholders’ confidence in Exxaro’s strategy and quality asset base.
The disposal of our non-core assets is progressing well and we completed the disposal of Inyanda (mainly the
mining right, plant, private rail siding and associated liabilities) and the Mayoko iron ore project in 2H16.
We are continuing to review our portfolio to ensure we have a robust portfolio of assets that can withstand a
low commodity price environment.
We will provide a detailed account of FYE16 operational and financial performance when we announce our
financial results on the 9th of March 2017.
Yours sincerely
Riaan Koppeschaar
Finance director
TABLE 1:
COAL PRODUCTION AND SALES VOLUMES (‘000 tonnes)
Production (Re-presented) Sales (Re-presented)
FY(E) 31 December FY(E) 31 December
2016 2015 % 2016 2015 %
Forecast(1) Actual change Forecast(1) Actual change
Thermal 42 083 41 100 2 43 302 42 146 3
• Tied(2) 8 215 9 260 (11) 8 199 9 270 (12)
• Commercial: domestic(3) 33 868 31 840 6 27 024 26 694 1
• Commercial: export 8 079 6 182 31
Metallurgical 2 016 1 856 9 1 299 1 341 (3)
• Commercial: domestic 2 016 1 856 9 1 299 1 341 (3)
Total coal 44 099 42 956 3 44 601 43 487 3
Semi-coke 54 48 13 66 49 35
Total (excluding buy-ins) 44 153 43 004 3 44 667 43 536 3
Thermal buy-ins(3) 585 1 222 (52)
Total (including buy-ins) 44 738 44 226 1 44 667 43 536 3
(1) Based on latest internal management forecast assumptions and estimates.
(2) Mines managed on behalf of and supplying their entire production to Eskom.
(3) Mafube trading division buy ins of 1 818kt from Mafube JV are included under Thermal coal
production and prior periods have also been recorded as Thermal coal production (FY15: 1 147kt).
GLOBAL ECONOMY AND COMMODITY PRICES
Despite the fragile economic activity in 1H16 and the high levels of political and economic uncertainty, global
economic fundamentals for 2H16 remained positive. Rising commodity prices were supportive to commodity producing
economies such as Brazil, Russia and South Africa to return to positive Gross Domestic Product (GDP) growth
territory.
Following years of weakness, coal markets showed some improvement during 2H16. Globally, weather disruptions,
production cuts, above-average seasonal demand and supply reforms, most notably the 276-operating days per annum
policy implemented by the Chinese government, caused thermal and hard coking coal (HCC) prices to surge
significantly. Iron ore fines prices also traded above US$55 per dry metric tonne, CFR China, for most of 2H16.
For Exxaro’s key commodities, the API4 coal export index price is expected to average US$75 per tonne for 2H16
(1H16: US$53) while 2H16 iron ore fines prices are expected to average US$57 per dry metric tonne, CFR China
(1H16: US$52).
The successful implementation of the 1H16 price increases for titanium dioxide (TiO2) pigment supported
improvements in net operating profit margins for Tronox during 2H16.
COAL COMMODITY UPDATE
PRODUCTION AND SALES VOLUMES
Commercial mines
Thermal coal production from commercial mines is expected to increase by 6% mainly due to the inclusion of Exxaro
Coal Central Proprietary Limited (ECC) for FYE16 compared to 4 months in FY15, partly offset by the sale of the
Inyanda in 2H16. Metallurgical coal production volumes for FYE16 are expected to be 9% higher than FY15.
Coal buy-ins are expected to decrease by 52% due to the availability of sufficient coal to fulfill contracts.
Export sales volumes are expected to increase by 31% mainly due to the inclusion of ECC exports, and exports of
Mafube power station coal, previously supplied to Eskom. Sales to Eskom are expected to decrease by 8% mainly
due to lower offtake from Leeuwpan mine where the contract to supply Eskom was not extended at the end of 1Q16,
coupled with lower offtake from Grootegeluk in line with Addendum 9 to the Medupi Coal Supply Agreement (CSA).
Domestic thermal coal sales, other than sales to Eskom, are expected to increase by 73%, mainly due to higher
demand in the domestic market.
Tied mines
Thermal coal production and sales from tied mines are expected to decrease by 11% and 12% respectively due to
the cessation of the mining activities at the Arnot operation.
MAJOR CONTRACTS UPDATE: TIED MINES
Since the last report on Arnot the following activities have taken place:
• All production has ceased and the mine equipment is being reclaimed from the underground sections;
• Consultation with employees, in terms of section 189 of the Labour Relations Act (section 189) was finalised
at the end of July 2016;
• Continuing our discussions with Eskom to ensure full provision for the rehabilitation funds, mine closure
costs and post mine closure costs in terms of the National Environmental Management Act (NEMA) regulations,
as stipulated in the CSA.
Large capital projects at Matla remain unfunded by Eskom, with mine 1 on care-and-maintenance. In the meantime,
the remaining mine shafts (mine 2 and mine 3) are expected to produce 8.2 million tonnes (Mt) for FYE16 against
contractual volumes of 10,1Mt. We continue to engage Eskom to provide the required capital funding and are
considering available recourse in terms of the CSA.
MARKETS
Demand for our coal remained stable in FYE16 amidst some uncertainty in commodity markets. There was an increase
in semi-coke sales on the back of sustained marketing efforts which are expected to continue into FYE17.
Export markets are still dependent on India for the lower quality coal products. New markets are being explored
in the Middle-East, largely for higher quality coal. Prices increased on the back of renewed buying interest out
of China, and are expected to remain high into the 1Q17. Growth is expected to come from Africa and South East
Asia.
CAPEX AND PROJECTS
We expect Coal capex to increase by 18% on FY15 due to higher sustaining capex resulting from a change in the
timing of the planned capital spend. The expenditure for FYE16 is 4% lower than guided in August 2016, mainly
as a result of timing.
Grootegeluk
Grootegeluk capex is expected to be 10% higher than that reported for 2015. No major changes are expected to
the FYE16 Grootegeluk capex, as reported in August 2016.
All Medupi coal deliveries are in line with Addendum 9 to the Medupi CSA.
TABLE 2:
GROUP CAPEX (R’million)
FYE16 FYE16
Current Previous FY15
Forecast(1) Forecast(1) Actual
Sustaining 2 275 2 201 1 663
Coal 2 232 2 144 1 597
• Waterberg 1 738 1 492 1 362
• Mpumalanga 494 652 235
Other 43 57 66
Expansion 496 764 727
Coal 496 764 716
• Waterberg 439 687 609
• Mpumalanga 57 77 107
Other 11
Total 2 771 2 965 2 390
(1) Based on internal management forecast assumptions and estimates, excluding tied operations.
We continue to engage with Eskom on a possible Addendum 10 to the Medupi CSA. The discussions include
consideration of the options to reduce future take-or-pay obligations through coal storage and/or possible
movement of coal to the Mpumalanga region.
Thabametsi Mine
The Thabametsi Mine has all the required licenses in place. However, the Environmental Authorisation has been
appealed and Exxaro is following due process to get the appeal finalised. The rate of production ramp-up will
ultimately depend on the developments with the coal baseload independent power producer procurement programme
(CBIPPPP). The Thabametsi Mine Phase 1 will be developed at an approximate cost of R3 billion to supply
approximately 3.9Mt of coal per year at full capacity. The Phase 1 mine is scheduled to produce its first coal
in 2020, in line with the development ramp-up schedule of the Thabametsi IPP power station. Commercial operation
of the Thabametsi Independent Power Producer (IPP) Power Station is anticipated to be in 2021. Exxaro will solely
be responsible for the supply of coal for a contractual period of 30 years.
On 10 October 2016 the Department of Energy (DoE) announced the Thabametsi IPP Power Station as a preferred bidder
under Window 1 of its CBIPPPP. The circa 600MW Thabametsi IPP Power Station is being developed by Japan’s Marubeni
Corporation and Korea Electric Power Corporation (KEPCO) together with a local consortium of Broad-Based Black
Economic Empowerment (BBBEE) partners including Royal Bafokeng Holdings, KDI, Tirasano and the Public Investment
Corporation (PIC). Financial Close on the Thabametsi IPP Power Station is anticipated to be in 2H17.
Belfast
Due to an appeal on our rezoning application, a further delay in the start of construction is expected. The
construction is expected to start 2H17. This appeal will be dealt with in terms of the applicable legislations.
The project team is continuing with actions to be ready for construction should the rezoning appeal matter be
dealt with sooner.
DISPOSALS
The sale of Inyanda was completed to a consortium of Burgh Group Holdings Proprietary Limited and Lurco Group
Proprietary Limited on 3 October 2016.
LOGISTICS AND INFRASTRUCTURE
Transnet Freight Rail (TFR) railed 35,49Mt to Richards Bay Coal Terminal (RBCT) during the first half of its
financial year ended 30 September 2016, equivalent to an annualised rail tempo of 72,5Mt. The coal line shut in
July 2016 was completed successfully and performance has stabilised. As indicated by TFR, the performance on the
North West Corridor has improved after the coal line shut, matching the best performance on record since
March 2009 with four consecutive weeks of five trains per week during October 2016.
FERROUS COMMODITY UPDATE
MAYOKO IRON ORE PROJECT
Exxaro is pleased to report that the sale of the Mayoko iron ore project (and related subsidiaries) to a Congolese
Consortium has been completed for an amount of US$2 million.
SISHEN IRON ORE COMPANY PROPRIETARY LIMITED (SIOC)
Guidance on SIOC’s equity-accounted contribution will be provided when we have reasonable certainty on its FYE16
financial results.
TITANIUM DIOXIDE (TiO2) AND ALKALI CHEMICALS
The TiO2 business is generating momentum on the back of higher pigment sales volumes and selling prices as well as
improved operating cost performance. Ilmenite feedstock prices have also increased, driven by reduced supply by
Chinese ilmenite producers.
Alkali Chemicals are expected to deliver a stable performance, which will positively contribute to the Tronox
results.
We expect our equity-accounted results from Tronox for 2H16 to improve on those reported in 1H16.
CENNERGI PROPRIETARY LIMITED (CENNERGI)
The two wind-farm projects, Amakhala Emoyeni (AE) and Tsitsikamma Community Wind Farm (TCWF), have both achieved
Commercial Operation Date during 3Q16 and within the project budget.
SALE OF NON-CORE ASSETS AND INVESTMENTS
The group’s interests in Black Mountain Mining Proprietary Limited and Chifeng Kumba Hongye Corporation Limited
(Chifeng) remain non-core and we intend to divest from these investments through a disposal process once the
lock-in periods expire in 4Q16.
We are also reviewing our coal portfolio as part of our optimisation programme, with specific focus on closure
and/or divesting from assets that do not meet our expectation of net present value, robustness of earnings and
net operating profit margins that can withstand a low commodity price environment. Exxaro envisages to commence
with this process early in FY17.
PROGRESS ON UNWINDING MAIN STREET 333
Refer to the detailed announcement published on the 22nd of November 2016.
OTHER CONSIDERATIONS
NATIONAL ENVIRONMENTAL MANAGEMENT ACT (NEMA) 107 OF 1998
The ministers of Environmental Affairs and Mineral Resources have determined that requirements for making
financial provision to manage, rehabilitate and remediate environmental impacts from mining operations will be
regulated under NEMA and no longer under the Mineral and Petroleum Resources Development Amendment Act, 2008
(MPRDA). This agreement has been formalised by amending the relevant environmental and mining legislation.
The financial provisioning regulations will come into force in February 2019 for implementation and contain
more onerous and detailed requirements than previously required by the MPRDA.
The sum total of closure costs will be covered by actual contributions and guarantees. In terms of our
corporate rehabilitation standards we are assessing the full impact of these developments on our rehabilitation
and decommissioning financial provisions.
PERFORMANCE AGAINST NEW BBBEE CODES AND MINING CHARTER
Exxaro has achieved a commendable level 4 BBBEE recognition level. This performance positions Exxaro amongst the
forerunners in BEE within the mining industry. Our analysis for 2016 and future performance indicate that
enterprise and supplier development (ED) presents a new challenge given the considerable budgets that are required
to achieve the targets. A total of 3% of net profit after tax (NPAT) must be spent to achieve full compliance. An
ED policy and procedure is being put in place to govern and maximize the ED impact on social development and to
ensure that Exxaro an improve its performance in future years.
Exxaro, through the Chamber of Mines, has participated with the mining industry to provide inputs to the Department
of Mineral Resources (DMR) to revise the Mining Charter elements and targets. Exxaro supports the strategic intention
of transforming the mining industry. The Chamber of Mines and the regulator continue to engage to seek alignment in
this regard. The revised Mining Charter is expected to come into force in January 2017. Clarity and certainty of the
requirements of this legislation is critical to our imminent review of the black ownership status, our replacement
BEE transaction and the ongoing investment and development of South Africa’s mining industry.
CARBON DISCLOSURE PROJECT (CDP)
Exxaro has performed exceptionally well in the previous CDP submission for the 2015/2016 year, with a score exceeding
the industry average. The challenge going forward is to reduce our Scope 3 (Other indirect greenhouse gas) emissions,
which are primarily contingent on the downstream use of our end products.
EXXARO IMPROVEMENT INITIATIVE (EIP)
Following the announcement of the section 189 (of the Labour Relations Act) relating to the EIP in April 2016, the
consultation process was concluded at the end of August. It is anticipated that the staffing of the new structures
will be completed at the end of November. The financial impact of the process is expected to be determined during
1Q17.
OUTLOOK FOR 2017
We expect an improvement in the operational results of the coal business for 2017 mainly due to:
• Stable trading conditions in domestic markets;
• Higher international coal prices than 2016;
• Our operational excellence process delivering further results; and
• Technology and innovation improvements expected to contribute positively.
The performance of the investment portfolio (SIOC and Tronox) will be positively influenced by a favourable price
outlook for 2017.
Rising commodity prices, receding deflationary pressures and the slight but continuing improvements in business
sentiment will continue to support global economic activity during 1H17.
REVIEW OF THE UPDATE
The 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.
TELECONFERENCE CALL DETAILS
A dial-in teleconference call on the details of this announcement will be held on Wednesday, 23 November 2016
at 13h00 (GMT+2:00).
Internet broadcast: www.exxaro.com
DIAL-IN TELECONFERENCE NUMBERS:
• Republic of South Africa toll-free: 0800 200 648
• Johannesburg: 011 535 3600 / 010 201 6800
• UK toll-free: 0808 162 4061
• USA and Canada toll-free: 1 855 481 5362
• Conference ID: Exxaro FD’s pre-close teleconference
PLAYBACK
A playback will be available until 30 November 2016. To access the playback, dial one of the following numbers
using the playback code 54072#:
• South Africa: 011 305 2030
• UK (Toll-free): 0808 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
Mzila Mthenjane, Executive Head: Strategy & Stakeholder Engagement
Tel: + 27 12 307 7393
Mobile: +27 83 417 6375
Email: mzila.mthenjane@exxaro.com
Pretoria 23 November 2016
SPONSOR
Absa Bank Limited (acting through its corporate and investment banking division).
LEGEND
1H16 – Six-months period ended 30 June 2016 FY15 – Financial year ended 31 December 2015
1H17 – Six-months period ended 30 June 2017 FYE16 – Financial year ending 31 December 2016
2H15 – Six-months period ended 31 December 2015 FYE17 – Financial year ending 31 December 2017
2H17 – Six-months period ended 31 December 2017 2H16 – Six-months period ended 31 December 2016
1Q17 – First quarter of 2017 2Q16 – Second quarter of 2016
1Q16 – First quarter of 2016 3Q16 – Third quarter of 2016
1Q18 – First quarter of 2018 4Q16 – Fourth quarter of 2016
COMMODITY PRICE SOURCES
Coal – IHS Energy Iron ore – MB Online
Mineral sands and pigments - TZMI
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.
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