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EXX - Finance Director's Pre-Close Message for the six months ending 30 June 2020
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”)
FINANCE DIRECTOR’S PRE-CLOSE MESSAGE
Six-months ending 30 June 2020 (1H20) (“the period”)
Dear stakeholder,
We have provided an overview of the group’s expected business performance for the period,
encompassing strategic, operational and financial information. Unless otherwise indicated,
all comparisons are against the six-month period ended 31 December 2019 (2H19).
Zero Harm remains Exxaro’s key business objective. In the reporting period the lost-time
injury frequency rate (LTIFR) was 0.10 (9% better than the set target of 0.11) and 16% better
than 0.12 recorded in FY19. We are pleased to report that Exxaro achieved a milestone of 3 years,
and a record of 38 consecutive months as at 31 May 2020 without a fatal incident. Regrettably two (2)
“High Potential Incidents” (HPI’s) have been reported at Grootegeluk Mine during 1H20 (1H19: 0HPI’s).
In line with our Zero Harm vision, measures have been implemented across our operations to manage
the COVID-19 risks. To date a total of 8 COVID-19 positive cases were recorded, of which 1 (one)
has fully recovered and 7 (seven) remain active cases. We are pleased that Exxaro has not recorded
any loss of life on account of COVID-19.
Disruptions to supply chains, demand, international trade flows and travel, along with lockdowns,
collapsing currencies and stock prices, resulting from measures related to COVID-19 (“the pandemic”),
have dealt a heavy blow to the global economy. A deeper recession in 2020 compared to 2008/09 is
anticipated. However, commodity markets recorded mixed results over the period under review. In
respect of Exxaro’s key commodities for 1H20, the API4 coal export price index is expected to average
US$66 (2H19: US$69) per tonne, free on board (FOB), and the iron ore fines price US$90 (2H19: US$96)
per dry metric tonne, cost and freight (CFR) China.
Total coal production (excluding buy-ins) and sales volumes are both expected to decrease by 1%
and 2% respectively, mainly due to the impact of the pandemic on market demand and the lockdown
measures impacting our Mpumalanga operations. While we expect to achieve higher export volumes,
this is offset by lower commercial domestic sales volumes. We expect a weaker US$ sales price per
tonne will be realised, in line with the weaker API4 coal export price index, cushioned somewhat by
a weaker rand/dollar exchange rate.
In terms of our capital allocation programme, we expect the capital expenditure for 1H20 in our
coal business to decrease by 61% compared to 2H19, mainly due to project delays linked to the
pandemic and timing in equipment replacements. At 31 May 2020, the group’s net debt (excluding
Cennergi’s net debt of R4.7 billion) was R5.3 billion (FY19: R5.8 billion). In addition to
operational measures implemented by us to combat the spread of the virus, further downside
scenarios have been used to stress test our solvency and liquidity position. As a result,
management and our board of directors believe that the group has sufficient liquidity to withstand
an interruption to our operations and will remain a going concern for the foreseeable future.
We will provide a detailed account of our 1H20 business performance and an outlook on the subsequent
six months to year-end (2H20), when we announce our financial results on 13 August 2020.
Yours sincerely
Riaan Koppeschaar
Finance Director
MACRO ECONOMIC ENVIRONMENT
GLOBAL ECONOMY AND COMMODITY PRICES
During 1H20, the global economy recorded the worst downturn since the 1930s. As a result, global real
GDP for 2020 is expected to contract by 6%, compared to a growth of 2.6% in 2019. Aggressive fiscal
and monetary stimulus by Governments and Central Banks, respectively, were injected into the global
economy to soften the downturn and, in turn, support economic recovery.
Chinese steel production remained strong and, together with continued low iron ore inventory levels
and high steel margins, supported the iron ore price during the period under review. Additionally,
constrained Brazilian supply, as a result of COVID-19 related disruptions, have kept the global iron
ore market balance very tight.
The titanium dioxide (TiO2) pigment market fundamentals softened with high supply, most notably from
China, and weakened global demand especially during the second quarter of 2020. The willingness to
spend by a weakened consumer base, and behavioral changes to end markets for which TiO2 is most exposed
to, have negatively influenced overall demand levels during 1H20.
During 1H20, the Brent crude oil market was characterised by the significant impact of COVID-19 measures,
collapsing demand and the Saudi Arabia and Russia price war. In addition, there was a major milestone
in oil market history, as for the first time ever, the United States, Russia and Saudi Arabia - the
world’s three largest oil producers – cooperated to boost oil prices from historically very low levels.
OPERATIONAL PERFORMANCE
COVID-19 IMPACT ON OPERATIONS
As defined an essential service for providing coal to Eskom for electricity generation, as well as
being an exporter, our coal operations continued operating at various capacities, while complying
with the COVID-19 lockdown restrictions as implemented by the national government.
COAL: MARKETS
Due to the impact of COVID-19 and the subsequent lockdown, many industrial customers in the domestic
market have either reduced demand or stopped coal offtake during April and May. In addition, coal
exporters produced a sized coal product for the local markets due to very low export pricing. This
resulted in an oversupply, negatively impacting domestic prices.
It is estimated that the seaborne market is oversupplied by at least 40Mt. We have seen the worst
of the lockdowns, with negative impacts on the energy complex. The prices of both oil and gas have
dropped to record levels and the API4 index price dropped to historically low levels of $40/t.
Markets like Vietnam and Pakistan took advantage during this period of low prices to buy more South
African coal whilst the Indian demand fell below the normal offtake. As governments across the globe
try to revive their economies we do see a gradual uptick in demand in some markets.
COAL: PRODUCTION AND SALES VOLUMES
The table below shows a comparison of production and sales performance between 1H20 and 2H19.
TABLE 1: COAL PRODUCTION AND SALES VOLUMES (‘000 tonnes)
Production Sales
1H20 2H19 % FY19 1H20 2H19 % FY19
Forecast(1) Actual change Actual Forecast(1) Actual change Actual
Thermal 21 912 22 384 (2) 43 203 22 486 22 951 (2) 43 503
Commercial:
Waterberg 13 302 12 826 4 25 683
- Eskom 12 347 12 089 2 23 157
- domestic 403 652 (38) 1 286
Commercial:
Mpumalanga 5 518 6 176 (11) 11 529
- Eskom 1 250 (100) 2 241
- domestic 890 757 18 1 734
Exports: commercial 5 760 4 822 16 9 087
Tied(2) 3 092 3 382 (9) 5 991 3 086 3 381 (9) 5 998
Metallurgical 1 211 907 34 2 074 483 480 1 030
Commercial:
- domestic 1 211 907 34 2 074 483 480 1 1 030
Total(excluding
buy-ins) 23 123 23 291 (1) 45 277 22 969 23 431 (2) 44 533
Thermal coal
buy-ins 417 244 71 305
Total (including
buy-ins) 23 540 23 535 45 582 22 969 23 431 (2) 44 533
(1) Based on latest internal management forecast assumptions. Final numbers may differ by ±5%.
(2) Matla Mine supplying its entire production to Eskom.
Commercial mines
Production
Thermal Coal product from Waterberg is expected to increase by 4% in line with improved production and
Eskom offtake. Production at the Mpumalanga commercial mines is expected to be 11% lower, mainly at ECC
and Leeuwpan due to the impact of the pandemic on market demand and the lockdown impacting operations
as well as a 10-day shut at Leeuwpan, Belfast and ECC over the Easter period to mitigate the risk of
full stockpiles at RBCT and to preserve cash and costs. This was partly offset by Belfast ramping up
to full production in 1H20.
Metallurgical coal production is anticipated to increase by 34% due to our high value strategy being
implemented and enabled by improved value chain visualisation.
Coal buy-ins are expected to be 173kt higher, mainly to fulfill supply commitments in 1Q20.
Sales
The expected 16% increase in export sales volumes is driven by the availability of export product from
our own operations, as markets return to normality, as well as good demand in alternative markets.
Total sales to Eskom are expected to decrease by 8% as the supply agreements at ECC and Leeuwpan are
still being negotiated, partly offset by higher offtake from Grootegeluk.
Domestic thermal coal sales are also expected to be 8% lower, mainly due to the impact of the pandemic
on key customers resulting in lower offtake, which is countered by slightly higher offtake by other local customers at Leeuwpan.
Tied mines (Matla)
Thermal coal production and sales are both expected to decrease by 9%, mainly due to the impact of the
pandemic on operating protocols and difficult geological conditions in Mine 3.
COAL: MAJOR CONTRACTS UPDATE
Matla mine 1
A revised capital estimate has been submitted to Eskom to fulfill the full scope of the project, with
construction planned to commence in 2H20.
Arnot
Although the arbitration process on contractual matters has been finalised in Exxaro’s favour, there
is continuing action to resolve outstanding payments from Eskom as per the order of the court.
Eskom Force Majeure
Exxaro, through a SENS announcement on 21 April 2020, has communicated Eskom’s calling of a force
majeure on coal supply agreements at Matimba and Medupi. We have also communicated that the company
is of the view that this event does not constitute a force majeure as stipulated in the coal supply
agreements and that the company will vigorously defend its position in this matter and take the necessary action.
Eskom and Exxaro are still engaging on this matter, with offtake currently in line with contractual
volumes.
COAL: LOGISTICS AND INFRASTRUCTURE
Transnet Freight Rail (TFR) railed 29Mt from January to end May 2020 which equates to a 66Mt on an
annualised basis. This compares to 30.5Mt for the same period during 2019 and is reflective of the impact
of lockdowns on production in the coal export industry.
The TFR North-West Corridor Expansion Project remained on schedule until the beginning of the lockdown
period. The performance at Grootegeluk was an improvement on the 1Q19 performance of 4.8 trains per
week to 7.2 trains per week from January to May 2020, including a peak of 12 trains per week.
FERROUS OTHER: SISHEN IRON ORE COMPANY PROPRIETARY LIMITED (SIOC)
Guidance on SIOC’s equity-accounted contribution will be provided when we have reasonable certainty
on its 1H20 financial results.
ENERGY: CENNERGI PROPRIETARY LIMITED (CENNERGI)
The effective date of the consolidation of Cennergi results into the Exxaro group is 1 April 2020.
Total generation output for the year to date is marginally below (-1.5%) planned numbers.
Eskom issued a Force Majeure notice to Cennergi in March 2020 indicating that they may curtail
generation from all windfarms. This notice was lifted by Eskom at the end of May 2020. Cennergi is
engaging with Eskom on this notice as they are in disagreement regarding the contractual
interpretation. Curtailment, although not material, occurred at both windfarms during the Force
Majeure period.
CAPITAL ALLOCATION
Exxaro’s focus still remains on optimising and implementing our portfolio of growth and sustaining
capital.
TABLE 2: COAL CAPEX (R’million)
1H20 2H19 % FY20 FY20 % FY19
Forecast(1) Actual change Forecast(1) Previous change Actual
Guidance(2)
Sustaining 725 1 287 (44) 2 080 2 292 (9) 2 245
Waterberg 533 1 000 (47) 1 470 1 554 (5) 1 753
Mpumalanga 192 270 (29) 588 712 (17) 475
Other 17 (100) 22 26 (15) 17
Expansion 543 1 989 (73) 1 359 1 744 (22) 3 572
Waterberg 363 721 (50) 984 1 653 (40) 1 198
Mpumalanga 180 1 195 (85) 375 91 312 2 301
Other 73 (100) 73
Total 1 268 3 276 (61) 3 439 4 036 (15) 5 817
(1) Based on latest internal management forecast assumptions and estimates, excluding tied operations.
Final numbers may differ by ±5%.
(2) Provided in 31 December 2019 results presentation in March 2020.
Exxaro expects coal capital expenditure for 1H20 to decrease by 61% compared to 2H19. This is driven by:
* lower GG6 expansion spend due to project delays linked to the pandemic;
* the Belfast project nearing completion;
* sustaining capital projects delayed at Grootegeluk due to the lockdown; and
* timing in equipment replacements at Leeuwpan.
FY20 capex is expected to be 15% lower than the guidance provided in March 2020, primarily due to delays
in the GG6 expansion project and delays on the Thabametsi approvals, partly offset by additional net
cost capitalised on the Belfast project resulting from the low export prices experienced in 1H20.
Sustaining capital is expected to be 9% lower due to capex and cash flow preservation initiatives to
mitigate the impact of the pandemic.
WATERBERG
GG6 expansion
All construction activities on the new Small Coal Plant have commenced. We are preparing ‘return to work’
plans to commence construction as per Level 3 lockdown regulations. The estimated impact of the pandemic
on the project timeline is approximately a further three-month delay bringing the total shift in the
project timeline to approximately six to nine months. The mine is continuously working with the projects
team to mitigate the impact of the delay on the business plan.
New Rail Load Out Station
Grootegeluk’s Rapid Load Out Station project is aligned with TFR’s North-West Corridor Expansion Project.
The project completed cold commissioning during 4Q19. The hot commissioning and ramp up has been delayed
due to the lockdown and are expected to be completed in 3Q20. Forecast final costs are expected to be
within the allocated project budget and the delay will not affect the TFR ramp-up schedule.
Thabametsi Mine
The conclusion of the Thabametsi IPP power plant has been impacted by the delay in finalisation of all
regulatory approvals as well as lenders withdrawing their support of financing greenfield coal-fired
power stations. Exxaro has completed all its Thabametsi mine studies and has obtained all the necessary
licenses and permits to operate the mine but will not proceed further until the IPP can achieve financial
close.
MPUMALANGA
Belfast
We are pleased to report that the plant acceptance test was completed on 24 February 2020. The project
is now in the close-out phase and will be completed within budget and schedule.
PORTFOLIO OPTIMISATION
TITANIUM DIOXIDE (TiO2): TRONOX LIMITED (TRONOX)
We remain committed to monetise our remaining shareholding in Tronox plc Holdings in the best possible
manner, taking into account prevailing market conditions.
SALE OF NON-CORE ASSETS AND INVESTMENTS
Exxaro is in the final stages of concluding an agreement for the sale of its 26% shareholding in Black
Mountain Mining (Pty) Ltd. It is anticipated that the agreements will be concluded before the end of June.
On 30 November 2019 the investment was classified as a non-current asset held-for-sale and the application
of the equity accounting method ceased.
As mentioned previously, Exxaro announced its intention to divest from ECC and the Leeuwpan operations.
These divestments will be executed through a formal disposal process which is currently well underway.
It is expected that a transaction can be concluded towards the end of the year. The proposed transaction
is a category two transaction in terms of the JSE Listing Requirements and is therefore not regarded
as material.
SUSTAINABILITY
COVID-19 IMPACT ON EXXARO
Response in relation to our Employees
Safety measures have been reinforced through various technical committees including:
* Established hygiene practices and provision of PPE to all employees (sanitisers, gloves and masks)
and HR guidelines throughout the business:-
* Amended business processes to ensure social distancing and working from home enabled;
* Modified processes at high-risk areas (e.g. vehicles, change rooms and lamp rooms); and modified
high-risk processes (e.g. suspending some Certificate of Fitness (COF) to alleviate pressure on the occupational health centres);
* Tracing system to identity people that could have interacted with infected persons; and
* Ongoing communication through various digital channels to encourage safety practice, de-stigmatising
campaigns, reminder of available resources for mental wellbeing and keeping employees engaged.
Response in relation to our Communities
Exxaro adopted a collaborative approach in mitigating the spread of the virus, through: -
* A contribution of a R20 million donation to the Solidarity Fund;
* Quarantine and isolation facilities have been made available in host communities;
* We are in the process of setting-up two private COVID-19 PCR testing laboratories in Limpopo and
Mpumalanga. A PCR (Polymerise Chain Reaction) test is one of the dominant ways that global healthcare
systems are testing citizens for COVID-19. These testing laboratories would be mainly used by the
Exxaro Group of companies for our employees. We envisage that capacity allowing, these facilities
will support the local public health departments in our host communities. In both locations, the
facilities will be shared - in Limpopo with Eskom and in Mpumalanga with Seriti Coal Operations;
* Closer collaboration with businesses and municipalities in host communities to conduct COVID-19
screening; provide humanitarian relief in the form of food packages and consumables to clinics and
hospitals in host communities;
* Prioritising water-related infrastructure projects in our SLP-LED programme.
MINING AND PROSPECTING RIGHTS
Exxaro has continued to interact with the Department of Mineral Resources and Energy (‘DMRE’) to ensure
that Exxaro’s rights remain compliant and valid. However, due to COVID-19 the DMRE has been constrained
in its ability to fully function and in particular, processing of applications. This has resulted in
the delay of the processing of previously submitted applications. However, we are confident that the
DMRE will address the backlog once it is fully functional.
The following are some of the pending applications lodged with the DMRE:
* The Matla mining right renewal application submitted in August 2019;
* A section 102 application to amend Matla mining right as part of a commercial deal to swop coal
reserves;
* The execution of the consolidation of the two Leeuwpan rights into a single mining right; and
* The execution of a section 102 at Grootegeluk to incorporate the two farms on which Exxaro has
mining infrastructure.
PERFORMANCE AGAINST NEW B-BBEE CODES AND MINING CHARTER
As a result of the national lockdown imposed, we have experienced delays in finalising the BEE
verification process. Preliminary results indicate that Exxaro has broadly sustained its Level 2 BEE
performance overall, with a notable improvement in ESD performance, but a weaker performance in Skills
Development attributed to the retrospective regulatory changes in the DTI codes during 2019. Exxaro
continues to strive to improve its BEE contribution status.
IMPLEMENTATION OF EMPLOYEE AND COMMUNITY EMPOWERMENT SCHEME
On 10 March 2020 all the transaction agreements giving effect to phase II of the Replacement BEE
transaction were signed. On 27 March 2020 the sale of 5% of Exxaro’s shareholding in Eyesizwe RF to
the Exxaro ESOP SPV was implemented, followed by the transfer of another 5% of Exxaro’s shareholding
in Eyesizwe RF to the Community NPC on 11 May. Phase II of the Replacement BEE transaction has therefore
been fully implemented.
CLIMATE CHANGE POLICY
We remain committed to the implementation of the TCFD recommendations across Exxaro in line with our
energy development strategy. We started with an assessment process prior to the lockdowns and due to
the setback from COVID-19, the publication of the recommendation report will be delayed. We expect to
complete the assessment and publication of the report in the second half of this year.
OUTLOOK FOR 2H20
ECONOMIC CONTEXT
For 2H20, the re-starting of the global economy is anticipated to bring economic growth recovery.
However, the uncertainty about the path of the COVID-19 virus makes any assessment of the global economic
outlook challenging.
The impact of COVID-19 on South Africa’s fragile public finances has been devastating, with gross
government debt as a % of GDP likely to rise significantly together with debt service costs. These fiscal
imbalances will have a knock-on effect on the economic recovery path for South Africa into 2H20.
During 1H20, the ZAR depreciated to an all-time low in March, before it retracted significantly in June.
The reversion to a more risky environment, as a result of the easing of global COVID-19 lockdown
restrictions, supported the ZAR.
The rand/dollar exchange rate is expected to remain volatile during 2H20.
COMMODITY MARKETS AND PRICE
The API4 index price is expected to be supported as activity in the key seaborne market resumes and a
greater supply/demand balance is achieved. However, weak demand and flat pricing is anticipated into
the early part of 2H20, as the speed at which coal demand reduced as a result of the lockdown measures,
far outpaced any supply response. Global seaborne thermal coal trade levels for 2020 are also expected
to decline compared to 2019.
Despite steady Chinese iron ore demand, a recovery in seaborne trade is anticipated to offset a modest
rebound in ex-China steel output. In addition, as China’s iron ore port inventories rise towards the
end of 2H20, a softening iron ore market is expected.
OPERATIONAL PERFORMANCE
We expect domestic coal demand to show a gradual recovery amidst the slow return of industrial customers
to full operations. We do not expect to claw back on the sales lost during the past few months. However,
we expect Matimba Power Station to continue meeting their contractual offtake volumes for the year from
Grootegeluk, whilst Medupi Power Station will need to increase their off-take in an effort to catch up on
some volumes not taken in 1H20.
In line with our digitalisation program, we continue to roll out the Integrated Operations Centers across
all our operations to enable the visualisation of the value chain. The increased visualisation of the
overall value chain as well as data driven insights gained from our operations, will highlight inefficiencies
and will enable improved in-time decision making relating to safety, productivity improvements as well as
cost performance.
Regarding the Moranbah South coking coal project, Exxaro and Anglo American continue their endeavours to
agree on a mutually beneficial development plan and timeline.
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.
PRE-REGISTRATION LINK
Guests wishing to attend the FD’s pre-close may pre-register here https://www.diamondpass.net/3860405
and will receive their dial-in number post registration.
TELECONFERENCE CALL DETAILS
A dial-in teleconference call on the details of this announcement will be held on
Thursday, 25 June 2020 at 13h30 (GMT+2:00).
PARTICIPANT TELEPHONE NUMBERS (Assisted):
* Johannesburg (Telkom) 010 201 6800
* Johannesburg (Neotel) 011 535 3600
* UK 0 333 300 1418
* Other countries (Neotel) +27 11 535 3600
* Other countries (Telkom) +27 10 201 6800
* USA and Canada 1 508 924 4326
PLAYBACK
A playback will be available 1 hour after the end of the conference call and will be available until
6 July 2020. To access the playback, dial one of the following numbers using the playback code 35390#:
* South Africa 010 500 4108
* UK 0 203 608 8021
* Australia 073 911 1378
* USA 1 412 317 0088
* International +27 10 500 4108
SPONSOR
Absa Bank Limited (acting through its corporate and Investment banking division).
EDITOR’S NOTE
Exxaro is one of the largest South Africa-based diversified resources companies, with main interests
in the coal, titanium dioxide, iron ore and energy commodities. www.exxaro.com
Interim results will be announced on (or around) 13 August 2020.
ENQUIRIES
Mzila Mthenjane, Executive Head: Stakeholder Affairs
Tel: + 27 12 307 7393
Mobile: +27 83 417 6375
Email: Mzila.mthenjane@exxaro.com
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”)
LEGEND
1Q19 – First quarter ended 31 March 2019
FY19 – Financial year ended 31 December 2019
2H19 – Six-months period ending 31 December 2019
2H20 – Six-months period ending 31 December 2020
COMMODITY PRICES SOURCE
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.
25 June 2020
Date: 25-06-2020 07:05:00
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