To view the PDF file, sign up for a MySharenet subscription.

EXXARO RESOURCES LIMITED - EXX - Finance Director's Pre-close Message: Six-months ending 30 June 2019

Release Date: 26/06/2019 07:05
Code(s): EXX     PDF:  
Wrap Text
EXX - Finance Director's Pre-close Message: Six-months ending 30 June 2019

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 2019 (1H19) (“the period”)

Dear stakeholder,

This is 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 2018 (2H18). 
Zero Harm remains Exxaro’s key business objective. In the period we maintained a year-to-date lost-time injury frequency rate (LTIFR) of 0.12 (FY18: 0.12),
still above our target of 0.11. We have done better in previous years and remain confident that we will improve on this through ongoing safety initiatives. 
We are pleased to report zero (0) fatalities for a period of 27 consecutive months as at 31 May 2019 and zero (0) “High Potential Incidents” (HPI’s) so far during 1H19 (1H18: 5HPI’s).
Towards the end of 1H19 the US-China trade tension continued to escalate and weighed on global market sentiment. Commodity markets recorded mixed results over the period under review. 
In respect of Exxaro’s key commodities for 1H19, the API4 coal export price index is expected to average US$75 (2H18: US$99) per tonne, free on board (FOB), and the iron ore fines 
price US$90 (2H18: US$69) per dry metric tonne, cost and freight (CFR) China.
 
Total coal production volumes are expected to decrease by 5% (excluding buy-ins), mainly driven by reduced demand from Eskom at Medupi power station, directly resulting in 4% lower 
coal sales volumes. Commercially, the impact of the reduced Medupi volumes is mitigated due to the contractual agreement in place. While we expect to achieve higher export volumes, 
it is reasonable to assume that 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. 
We are pleased with the outcome of our capital allocation programme and will maintain a disciplined approach, particularly in delivering on the sustaining and growth capex programmes 
while maintaining a strong balance sheet. We are aware that many of our contractors are experiencing financial difficulties and are intensifying engagement with these contractors 
to minimise any impact on completing our projects. Coal capital expenditure for FY19 is expected to be 9% lower than guided in March 2019, primarily due to Thabametsi and GG6 delays, 
partially offset by Belfast early production. As we proceed with our portfolio optimisation efforts, we will adhere to our capital allocation framework previously communicated.
We are particularly proud to announce that we have improved our B-BBEE recognition status from a level 5 for FY17 to a level 2 for FY18.  This milestone is testament to Exxaro’s 
unwavering commitment to transformation by achieving this milestone two years ahead of schedule.

It is with great pleasure that we announce that Exxaro will move back into the Top 40 index as part of the JSE’s Quarterly and June 2019 index review. The review changes were effective 
from the start of business on Monday, 24 June 2019. Exxaro ranked at position 32 on the review cut date, based on net market cap and as such will be an automatic addition to 
the Top 40 index with a weighting of approximately 0.70%.

We will provide a detailed account of our 1H19 business performance and an outlook on the subsequent six months to year-end (2H19), when we announce our financial results on 22 August 2019.

Yours sincerely
Riaan Koppeschaar
Finance Director

MACRO ECONOMIC ENVIRONMENT

GLOBAL ECONOMY AND COMMODITY PRICES
The slowing and stabilisation of global economic growth was evident during the early part of 1H19, before increased geopolitical risks altered the global economic prospects. As a result, 
global real GDP for 2019 is expected to slow down to 2.8%, compared to 3.2% in 2018. There is an increasing possibility that the Chinese government will ramp up stimulus more aggressively 
to counter the impact of tariffs on the economy and remain supportive for steel-intensive sectors such as infrastructure, which will be positive for metallurgical coal demand.

Chinese steel production has risen considerably during 1H19, and with high iron ore prices and margins well below the 2018 levels, have resulted in steelmakers maintaining low iron ore 
inventories. Additionally, supply disruptions mainly because of events in Northern Brazil and Western Australia, have kept the global iron ore market balance very tight.

The titanium dioxide (TiO2) pigment demand strengthened in most regions, with inventory levels starting to decline for many producers. The period under review was characterized by the 
reversion of destocking to normalised order patterns. In addition, the TiO2 feedstock market fundamentals remained stable.

The brent crude oil price moderated towards the end of 1H19. Concerns about global economic activity, exacerbated by the threat of trade wars and rising tension in the Middle East oil routes, 
continue to weigh on the global oil market.

OPERATIONAL PERFORMANCE

COAL: MARKETS

Good demand for sized product in the domestic market continued. As more domestic supply was available due to weak export prices, domestic pricing remained flat in real terms.  
The export sales prices came under severe pressure, trading at levels last seen in 2016. The lack of import demand from China continues to put pressure on Pacific coal prices. 
European stock levels are at record levels amidst very high levels of renewable energy generation and very low gas prices leading to coal-to-gas switching. India continues to draw 
South African coal, however, the demand has switched to higher calorific value coal. 

COAL: PRODUCTION AND SALES VOLUMES
The table below shows a comparison of production and sales performance between 1H19 and 2H18.

TABLE 1: COAL PRODUCTION AND SALES VOLUMES (‘000 tonnes)
                Production                                           Sales
                1H19           2H18      %          FY18             1H19           2H18       %           FY18
                Forecast(1)    Actual    change     Actual           Forecast(1)    Actual     Change      Actual

Thermal         21 012         22 200    (5)        44 417           20 955         21 841     (4)         43 967
Commercial:     12 914         13 725    (6)        27 375
Waterberg
- Eskom                                                              11 165         12 290     (9)         24 059
- domestic                                                           677            684        (1)         1 296
Commercial:     5 394          5 404                10 433
Mpumalanga
- Eskom                                                              1 004          225        (346)       802
- domestic                                                           961            1 530      (37)        3 240
Exports: commercial                                                  4 441          4 045      10          7 965
Tied(2)         2 704          3 071      (12)       6 609           2 707          3 067      (12)        6 605
Metallurgical   1 190          1 143      4          2 323           586            614        (5)         1 197
Commercial:
- domestic      1 190          1 143      4          2 323           586            614        (5)         1 197
Total Coal      22 202         23 343     (5)        46 740          21 541         22 455     (4)         45 164
Semi-coke                                            23                                                    33
Total(excluding 
buy-ins)        22 202         23 343     (5)        46 763          21 541         22 455     (4)         45 197
Thermal coal 
buy-ins         43             181        (76)       1 049
Total (including 
buy-ins)        22 245         23 524     (5)        47 812          21 541         22 455     (4)         45 197

(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 production from Waterberg is expected to decrease by 6% in line with reduced Eskom demand at Medupi. Production at the Mpumalanga commercial mines is expected to be in line 
with 2H18. The lower production due to  the sale of the North Block Complex (NBC) operation in 2H18 was offset by the ramping up of production at both the Mafube and Belfast mines.

Metallurgical coal production is anticipated to increase by 4% due to higher power station coal stock coupled with lower offtake from Medupi, which has enabled production of more metallurgical coal.
Coal buy-ins are expected to be 76% lower as a result of higher coal availability from Exxaro’s own mines.

Sales
The expected 10% increase in export sales volumes is driven by the availability of export product from our own operations.
Total sales to Eskom are expected to decrease by 3% as a result of lower offtake by Medupi from Grootegeluk and the NBC divestment in 2H18, partially offset by higher sales from Leeuwpan and ECC.
Given our deliberate strategy to divert sales volumes from Leeuwpan to the export and Eskom markets, as well as the NBC divestment in 2H18, our domestic thermal coal sales volumes are expected to 
decrease by around 35%.

Tied mines (Matla mine)
Thermal coal production and sales are both expected to decrease by 12%, mainly due to Mine 3 shortwall ceasing production earlier than anticipated due to safety concerns as well as geological 
challenges experienced during the development of the new Mine 2 shortwall panels causing delays.

COAL: MAJOR CONTRACTS UPDATE
Matla mine
Exxaro is currently optimising the Matla Mine 1 project capital following confirmation from Eskom that a significant portion of the funds for the Mine 1 project are available.

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, including for Eskom to top 
up the environmental trust fund as per the arbitration outcome.

COAL: LOGISTICS AND INFRASTRUCTURE
Transnet Freight Rail (TFR) railed 30.51Mt to RBCT from January 2019 to May 2019 equivalent to an annualised rail tempo of 70.24Mtpa.
TFR’s North-West Corridor expansion project has remained on schedule, with an increased focus on operational readiness, managed by a joint forum together with Exxaro.  This will lead to 
improved operational performance in anticipation of the planned tonnage ramp-up, resulting in a 20% increase in the average weekly export trains dispatched from Grootegeluk, from 4 trains per 
week in 2018 to 4.8 trains per week for January 2019 to May 2019.

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 1H19 financial results.

ENERGY: CENNERGI PROPRIETARY LIMITED (CENNERGI)
The Tsitsikamma Community Wind Farm (TCWF) suffered 2 separate fire incidents, destroying two turbines. The investigations are near final and replacement turbines are scheduled to be delivered in 3Q19, 
with commissioning to be completed early in 4Q19. Good energy generation numbers for the year to date have more than offset the generation loss due to the two fire incidents.

CAPITAL ALLOCATION
Exxaro’s focus remains on implementing our extensive portfolio of growth and sustaining capital within time and budget, despite financial challenges facing many of our project contractors. 
During 1Q19 Exxaro was forced to terminate its contract with Group Five, who was responsible for the silo, small-coal plant and balance of the plant infrastructure as part of the GG6 expansion project.

TABLE 2: COAL CAPEX (R’million)
                                                                               FY19
                         1H19           2H18         %         FY19            Previous            %            FY18
                         Forecast(1)    Actual      change     Forecast(1)     Guidance(2)         change       Actual
Sustaining               1 013          1 657       (39)       2 543           2 689               (5)          2 779
Waterberg                776            1 096       (29)       1 692           1 683               1            1 904
Mpumalanga               233            561         (58)       807             962                 (16)         875
Other                    4                          100        44              44
Expansion                1 740          2 083       (16)       3 281           3 722               (12)         2 943
Waterberg                509            1 365       (63)       1 160           2 004               (42)         1 987
Mpumalanga               1 231          718         71         2 121           1 718               23           956
Total                    2 753          3 740       (26)       5 824           6 411               (9)          5 722

(1)Based on latest internal management forecast assumptions and estimates, excluding tied operations. Final numbers may differ by ±5%.
(2)Provided in 31 December results presentation in March 2019.

Exxaro expects capital expenditure for 1H19 in its coal business to decrease by 26% compared to 2H18. This is driven by:
* lower GG6 expansion spend, due to Group Five contract termination resulting in project delays
* Leeuwpan OI project reaching completion
* timing of sustaining capex at Grootegeluk and ECC.

The expected increase in Mpumalanga expansion capex is mainly due to:
* the acceleration of the Belfast project
* ECC expansion capex on the Dorstfontein West 4 Seam project.

FY19 capex is expected to be 9% lower than the guidance provided in March 2019 primarily because of timing on the GG6 expansion project, as well as delays on the Thabametsi approvals, 
offset by the acceleration of the Belfast project. Sustaining capital is also expected to be lower due to timing differences and further optimisation.

WATERBERG
GG6 expansion
As a result of the Group Five contract being terminated in March 2019, a procurement process for the full Group Five scope of work has been concluded, contracts awarded and full construction 
activities will re-commence in July 2019.

The project team together with operations are working on action plans to minimize any volume and value impact caused by the expected 3-6 months delay.

New Rail Load Out Station
Grootegeluk’s Rapid Load Out Station project is aligned with TFR’s North-West corridor expansion project. The project aims to have cold commissioning concluded by 3Q19. Force Majeure 
events related to contractor strike action have led to a delay on the projected completion date of 3Q19 to 4Q19. Forecasted final costs are within the allocated project budget and 
the delay will not affect the TFR ramp-up schedule.

Thabametsi Mine
There have been various factors influencing the conclusion of the IPP, including, inter alia, the finalisation of the “License to Operate” approvals and lenders withdrawing their support of 
funding to old coal technology coal-fired power stations. Exxaro has completed all its Thabametsi mine studies and has obtained all necessary licenses to operate, but will not progress 
until the IPP can achieve financial close. The relevant capital expenditure has therefore been excluded from the FY19 figures.

MPUMALANGA
Belfast
We are pleased to report that first coal from our greenfield Belfast mine was produced in March 2019 and first product sales took place in May 2019. Completion of the beneficiation plant 
is projected to remain ahead of schedule with commissioning and ramp-up taking place in 4Q19.

Mafube Nooitgedacht
Ramping up of the completed Mafube Nooitgedacht project to name plate capacity by 4Q19 remains on track, as this mine continues to exceed its 1H19 expectations.

PORTFOLIO OPTIMISATION
TITANIUM DIOXIDE (TiO2): TRONOX LIMITED (TRONOX)
As previously reported on 15 February 2019, Tronox Limited acquired Exxaro’s 26% ownership interest in Tronox UK LLP for a total consideration of R2.1 billion.
On 9 May 2019 Tronox Limited repurchased 14.0 million shares from Exxaro at a market-related price of US$14.32 per share, for a total consideration of approximately US$200 million in cash 
(or approximately R2.9 billion). The purchase price per share was based upon a 5% discount to the 10- day volume weighted average price as of the day that Exxaro exercised its sale notice to 
Tronox Limited, determined in accordance with the terms of the Mineral Sands Transaction Completion Agreement announced on 26 November 2018. Consequently, Exxaro's holding in Tronox Limited 
has been reduced to approximately 14.7 million shares, representing 9.9% of the total outstanding shares.

Exxaro’s 26% interest in the Tronox operations in South Africa remains in place.

Due to Exxaro's ownership falling below 10%, in accordance with its shareholder agreement with Tronox Limited, Exxaro's nominee to the Tronox Limited board, Exxaro CEO Mxolisi Mgojo, has resigned 
from the Tronox board.

The above disposals are in line with our stated strategy to monetise our stake in Tronox Limited over time and in the best possible manner, taking into account prevailing market conditions. 
The proceeds from the disposal of Tronox Limited shares will be applied in accordance with Exxaro’s capital allocation framework.

SALE OF NON-CORE ASSETS AND INVESTMENTS
The group’s interests in Black Mountain Mining Proprietary Limited and the Chifeng Kumba Hongye Corporation Limited’s (Chifeng) refinery remain non-core and Exxaro intends to ultimately 
divest from these investments.

In respect of the Moranbah South hard coking coal project, Exxaro together with Anglo American, are in the process of reassessing the potential development plan for the project.
As already announced, on 22 February 2019, Exxaro signed a transfer agreement with the Arnot OpCo Proprietary Limited consortium, whose shareholders are former employees of Arnot and Wescoal, 
for the transfer of the Arnot mine. The divestment from Arnot is in its final stages with two of the three key conditions precedent to be fulfilled. The outstanding conditions are the ceding 
of the current coal supply agreement by Eskom to Arnot OpCo as well as Competition Commission approval.

SUSTAINABILITY
MINING AND PROSPECTING RIGHTS
Regrettably, Exxaro has experienced delays in amendments’ applications due to the temporary closure of Mpumalanga DMR office and persisting delays in registering of rights. However, 
Exxaro has recently noted a clear improvement in communication and feedback in respect of outstanding applications from the same office. The perceived uncertainty within the regulatory 
environment i.e. Mining Charter 3 implementation and interpretation, has fortunately not impacted Exxaro’s rights. Despite the challenges, the following are the notable achievements for 
the period under review: 1) the ministerial consent to transfer Arnot mining right to Arnot OpCo; 2) the granting of the Tumelo mining right renewal; and 3) the registration of the Paardeplaats mining right.

PERFORMANCE AGAINST NEW B-BBEE CODES AND MINING CHARTER
As mentioned earlier, Exxaro is proud to have achieved a level 2 B-BBEE recognition status for FY18 (FY17: level 5), two years earlier than planned. This is attributable to significant 
improvements in the Ownership, Enterprise and Supplier Development and Socio-economic Development elements. We will continue to strive to improve and solidify our transformation objectives, 
including assessing the implications of the new mining charter.

IMPLEMENTATION OF EMPLOYEE AND COMMUNITY EMPOWERMENT SCHEME
With the conclusion of Exxaro’s replacement empowerment shareholding transaction in December 2017, we undertook to transfer at least 10% of our 24.9% shareholding in Eyesizwe RF Proprietary Limited 
into structures for the benefit of Exxaro’s employees and communities adjacent to our operations (“staff and community schemes”).

The prevailing legislative uncertainty led to the delay in the implementation of the staff and community schemes until after the publication of the Mining Charter in September 2018 and the 
Implementation Guidelines in December 2018. With the gazetting of these documents Exxaro commenced with a process of investigating its impact on the proposed structuring of the staff and community schemes.
It is anticipated that final approvals and implementation will be concluded in 2H19.

CLIMATE CHANGE POLICY
The promulgation of carbon tax effective on 1 July 2019 as part of the South Africa’s Climate Change mitigation policy was anticipated and already factored into our accounting process. 
The tax liability impact on our organisation is low given the fact that our Scope 1 emissions are not significant. In the medium- to long-term we continue to follow the development in the 
carbon tax and carbon budget topics given the current alignment discussion between Treasury and the Department of Environmental Affairs.

Climate Change transitional risks continue to increase locally and globally with the changes in policy, legal, technology and information disclosure. We are continuously engaging with various 
governmental and business led forums to ensure that these transitional risks are coordinated and managed adequately. Our response actions in the short- to medium-term (5-10 yrs) include a 
re-configuration of our coal exploitation strategy, continuing our efforts of water and energy conservation and related emissions reduction.

Further details of our climate response strategy will be provided in due course.

OUTLOOK FOR 2H19
We expect domestic coal demand and pricing to remain stable for the remainder of the year. The Medupi offtake from Grootegeluk is expected to remain as per the offtake plan for the rest of the year.
On the international front, we do not see a recovery from the current pricing and demand balance. China will continue to influence the supply/demand balance in the Pacific with related potential 
price volatility. With the huge oversupply of coal in the Atlantic Basin, combined with gas price forecasts remaining low, the market remains bearish for the remainder of the year. We expect the API4 
price index to remain under severe pressure with RB1 continuing to trade at current discounts to the index in the physical markets.

As we roll out the integrated operations centres (IOC’s) at all our operations, in terms of our digitalisation plan, the increased visualisation of the mining value chain will highlight inefficiencies 
and therefore improve decision making relating to safety, productivity and cost performance.

During 2H19, the performance of our SIOC investment will be well supported by the momentum from 1H19, a tight iron ore market, strong fines price with above average lump premium and continued 
stable demand for higher-grade products. However, an expected recovery in seaborne supply, with moderation of Chinese demand may dampen current market enthusiasm.

Increasing geopolitical risks and aggressive trade policies are anticipated to weigh on global economic activity during 2H19. The weak South African growth outcome of 1Q19 has raised the risk of 
a sovereign rating downgrade towards the end of 2H19. The rand/dollar exchange rate is expected to remain volatile.

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,26 June 2019 at 13h00 (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 until 16 August 2019. To access the playback, dial one of the following numbers using the playback code 26142#:
* 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 22 August 2019. The Company’s Capital Markets Day for investors will be held from Monday 14 October to and including Tuesday 15 October 2019.

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
FY17 – Financial year ended 31 December 2017
FY18 – Financial year ended 31 December 2018
1H18 – Six-months period ended 30 June 2018
2H18 – Six-months period ended 31 December 2018
1H19 – Six-months period ending 30 June 2019
2H19 – Six-months period ending 31 December 2019
1Q19 – First quarter ending 31 March 2019
2Q19 – Second quarter ending 30 June 2019
3Q19 – Third quarter ending 30 September 2019
4Q19 – Fourth quarter ending 31 December 2019

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.

26 June 2019
Date: 26/06/2019 07:05:00 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.

Share This Story