Wrap Text
Finance Director's pre-close message: Six-month period ending 30 June 2021
EEXXARO RESOURCES LIMITED
Incorporated in the Republic of South Africa
(Registration Number: 2000/011076/06)
JSE share code: EXX
ISIN: ZAE000084992
ADR code: EXXAY
Bond Code: EXX04
ISIN No: ZAG000160326
Bond Code: EXX05
ISIN No: ZAG000160334
(“Exxaro” or the “Company”)
FINANCE DIRECTOR’S PRE-CLOSE MESSAGE
Six-month period ending 30 June 2021 (1H21) (“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 2020 (2H20).
The health and safety of our employees and communities continues to be our priority, as South Africa experiences a
third wave of COVID-19 infections. In line with our Health and Wellness Strategy, which focuses on diagnosis,
management and prevention of diseases, our response to the COVID-19 pandemic (the pandemic) has prioritised
avoiding, reducing and managing COVID-19 infections. As at 20 June 2021, the infection rate of the group
is 0.51% (93 active cases) and our recovery rate is 96%. We remain committed in our fight to prevent further
loss of life and continue to implement COVID-19 preventative measures in line with Government regulations
and recommendations.
We have successfully vaccinated 100% of our health care workers and have commenced with the vaccination of employees
over 60 years of age. The Grootegeluk and Matla occupational health centers have been registered and approved as
primary vaccination sites with the National Department of Health. These sites have commenced with the procurement
processes of vaccines for the innoculation of our employees.
Amid the backdrop of the pandemic, it is pleasing to be able to report on our record year-to-date safety performance
as at 31 May 2021. We have achieved a total of 51 months without a work-related fatality and a lost-time injury
frequency rate (LTIFR) of 0.08, the same as the set target. This is, however, 40% worse than the 0.05 reported
for FY20. Zero Harm remains Exxaro’s key business objective.
World economic recovery from the pandemic and associated restrictions which induced recession, continued into 2021.
After a temporary pause during 1Q21, the global economic expansion resumed in the second quarter, lifting global
economic output above pre-pandemic levels. However, increased commodity prices, poorly functioning supply chains
and some labour supply challenges increased global inflationary pressures during the period under review. In respect
of Exxaro’s key commodities for 1H21, the API4 coal export price index is expected to average US$95 (2H20: US$64)
per tonne, free on board (FOB), and the iron ore fines price US$183 (2H20: US$122) per dry metric tonne, cost and
freight (CFR) China.
Total coal production (excluding buy-ins) and sales volumes are expected to decrease by 11% and 9% respectively,
mainly due to logistical constraints linked to Transnet Freight Rail (TFR) performance, the impact of the
pandemic on our operations and some adverse weather conditions, further explained under operational performance.
In terms of our capital allocation framework, we expect the capital expenditure for 1H21 in our coal business
to decrease by 39% compared to 2H20, mainly due to timing in sustaining capital expenditure and some projects
nearing completion, offset slightly by the roll-over of GG6 expansion spend from FY20 due to the pandemic. As at
31 May 2021, the group’s net debt (excluding Cennergi’s net debt of R4.6 billion) was R1.4 billion
(FY20: R6.3 billion). As previously mentioned, Exxaro concluded its stated strategy to monetise its investments
in Tronox during March 2021 receiving proceeds of R5 763 million from the disposal.
Following the release of the Annual Results for the year ended 31 December 2020, Exxaro has continued its
strategy to reward shareholder investment. In May 2021 approximately R1 950 million was paid to shareholders
as a special dividend. Exxaro has also implemented a share repurchase program of R1.5 billion. This is being
executed in terms of the general authority granted by shareholders at the company’s annual general meeting
held on 28 May 2020 and again on 27 May 2021. The share repurchase program will continue after the commencement
of the prohibited period on 30 June 2021. Shares that may be repurchased during the prohibited period will be
done so in accordance with a repurchase program put in place by Exxaro prior to the prohibited period pursuant
to paragraph 5.72 of the JSE Listing Requirements.
On 26 April 2021, Exxaro implemented and effected a drawdown on a new facility agreement with various
financial institutions as a combined facility to refinance the term loans and revolving credit facility.
The new facility, amounting to R8 billion in total, is comprised of a bullet term loan facility of R2.5 billion
(with a term of five years); an amortising term loan facility of R2.25 billion (with a term of five years);
and a Revolving Credit Facility (RCF) of R3.25 billion (with a term of five years). Exxaro may, at any time
during the accordion availability period, increase the RCF commitment in an amount which, when aggregated
with the amount of any previous accordion increases, does not exceed R2 billion.
From a solvency and liquidity perspective, in addition to operational measures implemented to combat the
spread of COVID-19 and the drawdown on the new facility, further downside scenarios have been used to stress
test our 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 1H21 business performance and an outlook on the subsequent six months
to year-end (2H21), when we announce our interim financial results on 12 August 2021.
Yours sincerely
Riaan Koppeschaar
Finance Director
MACRO ECONOMIC ENVIRONMENT
GLOBAL ECONOMY AND COMMODITY PRICES
During 1H21, the pandemic continued to shape global and regional economic activity. A tightening of virus
containment measures in late 2020 and early 2021 has stalled global real GDP growth in some countries and
regions during 1Q21. Robust growth in the United States of America (USA) and China continued to lead the
recovery, supported by fiscal stimuli and accelerating vaccination campaigns. After a contraction of 3.5%
in 2020, global real GDP is projected to increase by 6% in 2021, its strongest advance since 1973.
Chinese steel production remained strong, also supported by the rest of the world’s (excluding China)
robust demand conditions. The global purchasing managers’ index (PMI) continued to rise together with a
very strong global GDP outlook for 2021. Additionally, Brazil iron ore exports remained soft, keeping the
global iron ore market very tight and resulted in spot prices hitting all-time highs.
Strong brent crude oil demand was evident across most countries and regions, notably in the USA, Europe
and China. This is partly offset by weakness in India as a result of the surge in new COVID-19 cases,
especially during 1Q21. Overall, the recovery of the brent crude market is well underway with the price
back at pre-pandemic levels and OPEC continuing to increase supply levels, albeit cautiously, both being
indicative of improving global demand conditions. Additional supply, once an agreement is reached on the
Iran nuclear deal, will limit the potential upside in prices.
OPERATIONAL PERFORMANCE
COVID-19 PANDEMIC IMPACT ON OPERATIONS
Our coal operations continued operating at various capacities, while complying with the Disaster
Management Act regulations on COVID-19 as implemented by National Government. To reduce downtime brought
on by the COVID-19 testing of our employees, an optimised strategy was implemented. It included the
use of antigen testing for screening and polymerase chain reaction (PCR) testing at our laboratories,
only as confirmatory testing. Ongoing COVID-19 preventative protocols have been implemented in response
to the current third wave of infections.
COAL: MARKETS
India experienced a severe second COVID-19 wave which has substantially impacted the economy amid
provincial lockdowns, resulting in constrained production and, subsequently, reduced coal demand.
We still see Australian coal competing head-on in traditional South African export markets, resulting
in wider than normal discounts on coal subgrades. In the midst of various supply issues, the API4 index
price has reached $118 per tonne in June 2021. It is expected that with the continuing poor performance
of TFR in South Africa, the index price will continue to gain momentum as supply wanes.
In the domestic market, demand for sized products remains stable following the easing of COVID-19
lockdown restrictions and increased economic activity coming back online. However, the demand for
unsized coal continues to be subdued because of TFR’s poor performance and lower demand for Power
Station Coal due to Eskom currently having sufficient stock.
COAL: PRODUCTION AND SALES VOLUMES
The table below shows a comparison of production and sales performance between 1H21 and 2H20.
TABLE 1: COAL PRODUCTION AND SALES VOLUMES (‘000 tonnes)
Production Sales
1H21 2H120 % FY20 1H21 2H20 % FY20
Forecast(1) Actual change Actual Forecast(1) Actual change Actual
Thermal 20 053 22 482 (11) 44 933 20 747 22 898 (9) 45 723
Commercial:
Waterberg 12 120 12 882 (6) 26 554
- Eskom 12 048 12 150 (1) 24 704
- domestic 583 509 15 925
Commercial:
Mpumalanga 5 193 6 500 (20) 12 226
- Eskom 20 100
- domestic 1 048 880 19 1 767
Exports: commercial 4 315 6 250 (31) 12 170
Tied(2) 2 740 3 100 (12) 6 153 2 733 3 109 (12) 6 157
Metallurgical 911 1 050 (13) 2 222 529 579 (9) 1 036
Commercial:
- domestic 911 1 050 (13) 2 222 529 579 (9) 1 036
Total(excluding
buy-ins) 20 964 23 532 (11) 47 155 21 276 23 477 (9) 46 759
Thermal coal
buy-ins 138 6 100 291
Total (including
buy-ins) 21 102 23 538 (10) 47 446 21 276 23 477 (9) 46 759
(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%, mainly due to increased rainfall,
compulsory COVID-19 testing following the December holiday break and poor TFR performance. Production
at the Mpumalanga commercial mines is expected to be 20% lower due to Leeuwpan having been impacted by
market constraints and poor TFR performance, and at Belfast due to logistical constraints linked to TFR
performance. Exxaro Coal Central Proprietary Limited (ECC) experienced geological challenges and Mafube
was impacted by the pandemic and equipment challenges.
Metallurgical coal production is anticipated to decrease by 13% due to increased rainfall and decreased
TFR performance, impacting on stockpile levels.
Coal buy-ins are expected to be 132kt higher, to comply with existing sales commitments and to avoid
demurrage costs due to the poor TFR performance.
Sales
The expected 31% decrease in export sales volumes is driven by logistical constraints linked to TFR
performance. Sales to Eskom are expected to decrease by 1% mainly due to higher energy value of the
offtake at Grootegeluk resulting in slightly lower volumes.
Domestic thermal coal sales are expected to be 17% higher, mainly due to export product at ECC being
diverted to the domestic market, as well as some of the Grootegeluk customers increasing offtake as
they recover from the COVID-19 lockdown impact, partly offset by lower demand at Leeuwpan.
Tied mines (Matla)
Thermal coal production and sales are both expected to decrease by 12%, mainly due to difficult
geological conditions at the Mine 2 short-wall, as well as pit room limitations in Mine 2 and Mine 3.
COAL: MAJOR CONTRACTS UPDATE
Matla Mine 1
The Matla Mine 1 relocation project commenced construction in August 2020. Exxaro continues to engage
Eskom on additional funding to complete the full scope of the project. Approval is estimated to be
received in 3Q21.
COAL: LOGISTICS AND INFRASTRUCTURE
TFR railed 24.3Mt to Richards Bay Coal Terminal (RBCT) for the period January to the end of May 2021,
which is equivalent to an annualised tempo of 58Mtpa. The performance from Grootegeluk dropped from
6.9 trains per week on average in 2020 to 5.1 trains per week. The Mpumalanga export rail performance
dropped from 25.3 trains per week in 2020 to 14.9 for the period January to the end of May 2021.
The alarmingly low TFR performance is due to poor locomotive availability, increased incidences of
cable theft as well as increased vandalism of rail infrastructure. This matter has been extensively
discussed with TFR by both Exxaro and the Coal Industry Forum through the Minerals Council South Africa.
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 1H21 financial results.
ENERGY: CENNERGI PROPRIETARY LIMITED (CENNERGI)
Electricity generation at the Amakhala windfarm is expected to be in line with planned numbers,
while equipment availability and the capacity factor for the six-month period ending 30 June 2021
are forecasted to be slightly lower than planned levels due to the five-year warranty inspections
resulting in increased downtime.
Electricity generation at the Tsitsikamma windfarm is expected to be below planned numbers due to
lower wind conditions. Equipment availability and the capacity factor for the six-month period ending
30 June 2021 are forecasted to be slightly lower than planned levels, also impacted by the five-year
warranty inspections.
CAPITAL ALLOCATION
Exxaro’s focus still remains on optimising and implementing our portfolio of growth and sustaining
capital.
TABLE 2: COAL CAPEX (R’million)
1H21 2H20 % FY21 FY21 % FY20
Forecast(1) Actual change Forecast(1) Previous change Actual
Guidance(2)
Sustaining 695 1 513 (54) 2 071 2 332 (11) 2 110
Waterberg 528 1 227 (57) 1 529 1 740 (12) 1 683
Mpumalanga 164 270 (39) 519 569 (9) 411
Other 3 16 (81) 23 23 16
Expansion 446 358 25 909 969 (6) 950
Waterberg 424 303 40 843 805 5 643
Mpumalanga 22 55 (60) 66 164 (60) 307
Total 1 141 1 871 (39) 2 980 3 301 (10) 3 060
(1) Based on latest internal management forecast assumptions and estimates, excluding tied operations.
Final numbers may differ by ±5%.
(2) Provided in 31 December 2020 results presentation in March 2021.
Exxaro expects coal capital expenditure for 1H21 to decrease by 39% compared to 2H20. This is driven by:
* timing in sustaining capital projects at Grootegeluk, Leeuwpan and ECC;
* the ECC expansion project nearing completion;
Partially offset by:
* higher GG6 expansion spend due to project delays in FY20 linked to the pandemic.
FY21 total capex is expected to be 10% lower than the guidance provided in March 2021. An 11% decrease
in sustaining capex is expected, primarily due to cash preservation initiatives at Grootegeluk and Leeuwpan.
The decrease of 6% on expansion capex is due to lower planned spending at ECC due to project delays in 1H21,
partly offset by higher spend on the GG6 expansion project.
WATERBERG
GG6 expansion
The GG6 expansion project is still being forecast to complete cold commissioning during 4Q21 with project
close-out expected in 1H22. The current estimated capital overrun of approximately 10% for the GG6 project
is still as per previous guidance provided. The forecasted final cost to completion remains R5.3 billion.
Thabametsi Mine
We are finalising our options regarding the future of this resource. This is because the utilisation of
this resource will not continue in its current form as key funders have withdrawn from the independent
power producer (IPP) project.
PORTFOLIO OPTIMISATION
SALE OF NON-CORE ASSETS AND INVESTMENTS
As previously noted, Exxaro undertook a strategic review of its portfolio of coal assets and projects.
Leeuwpan and ECC were identified as non-core to the future objectives of Exxaro, and a decision was taken
to dispose of them. The completion of ECC disposal is anticipated in 2H21 following receipt of the
Section 11 approval by the Department of Mineral Resources and Energy (DMRE). On 31 December 2020, the
ECC operation was classified as a non-current asset held for sale.
The disposal process for Leeuwpan continues with definitive legal agreements envisaged to be signed in
2H21 and regulatory approvals obtained after that.
PERFORMANCE AGAINST NEW B-BBEE CODES AND MINING CHARTER
While the FY20 audit is still in progress, we are expected to maintain our level 2 B-BBEE status.
The certificate will be published as soon as the audit is concluded.
SUSTAINABLE DEVELOPMENT
SOCIAL INVESTMENT
Our social investment activities continued to gather momentum, following the disruption from lockdowns
during the FY20, with a primary focus on Enterprise and Supplier Development (ESD) and community
infrastructure projects.
* We provided funding, totalling R105.1 million, to seven SMMEs during the period under review
through our ESD programme, whilst also prioritising non-financial support, through a contractor
development programme with the Gordon Institute of Business Science (GIBS) and a financial excellence
programme with SAICA Enterprise Development.
* A total of R25 million was spent on schools, building an Enterprise and Supplier Development Hub and
water infrastructure projects through our Social and Labour Plans (SLP), in both Mpumalanga and the
Waterberg. We estimate that 1 446 community members will benefit from services to be provided from
these projects. A total of 151 jobs were created during the construction period.
* In our continuing efforts to protect livelihoods in response to the effects of COVID-19, we have
partnered with World Vision South Africa to assist 703 households with hygiene and food packs in Limpopo,
Eastern Cape and KwaZulu Natal. In Mpumalanga, we will approach this intervention through schools in Emalahleni,
which will be assisted with food gardens. This project will commence at the beginning of July 2021.
MINING AND PROSPECTING RIGHTS
Following the announcement of Exxaro’s divestment from ECC, the Section 11 application was successfully
submitted to the DMRE. A Section 102 was also submitted to conclude the agreement between Exxaro and Arnot Opco.
However, our interactions with the DMRE, Department of Human Settlements, Water and Sanitation (DHSWS)
and other state Departments continue to be impacted by the pandemic. The following applications remain
in process at the DMRE and DHSWS:
* Section 102 application amending Matla mining right to swap Coal Reserves as part of a commercial deal
* The execution of the consolidation of two Leeuwpan mining rights into a single mining right
* The execution of a Section 102 application at Grootegeluk to incorporate the two farms on which we
have mining infrastructure
* Environmental authorisation and integrated water use licence for the Dorstfontein West discard dump
expansion project.
The group compliance to valid licences or authorisations for current operations for 2021 is at 97%.
Where rights and other licences are nearing expiry dates, renewal applications are submitted timeously.
OUTLOOK FOR 2H21
ECONOMIC CONTEXT
For 2H21, the progress of vaccination campaigns will be pivotal to global economic activity and
recovery. Consumer spending is expected to be resilient as economies reopen, travel picks up, and
social activities resume.
The shift in energy transition policy will continue to intensify towards a global move for carbon
neutrality/Net Zero by 2050 in the run-up to COP26 scheduled for November 2021.
The South African economy has been hit hard by the pandemic as it further exposed the growing
lack of fiscal capacity, reinforced by a worsening debt trajectory, rising gross borrowing requirements,
and a high level of contingent liabilities granted by the government. These fiscal imbalances will
have a knock-on effect on the economic reconstruction and recovery path for South Africa into 2H21.
During 1H21, the South African rand (ZAR) strengthened remarkably on the back of strong global appetite
for risky assets, a weaker US dollar, robust commodity prices, better-than-expected domestic fiscal
outcomes and encouraging signs that the governing political party started to act decisively against
corruption allegations within its ranks.
The rand/dollar exchange rate is expected to hold within current fair value levels, but to remain
volatile, during 2H21.
COMMODITY MARKETS AND PRICE
The API4 index price is expected to be supported into the early part of 2H21 by strong demand
from the northern hemisphere summer and rising gas prices, together with the slow recovery of
supply. However, towards the latter part of 2H21, prices are expected to soften as supply is
anticipated to recover whilst demand weakens as temperatures cool. The possibility exists that
China could relax restrictions on imports during 2H21.
Turning to the iron ore market, tight market conditions are expected to persist during 2H21.
Strong steel mill profitability, ongoing stimulus, and multi-year highs on leading
indicators such as PMI reinforce the likelihood of further acceleration in steel production
and iron ore demand.
OPERATIONAL PERFORMANCE
We anticipate the demand and pricing for sized coal domestically to remain relatively
stable, as economic activity improves from levels observed in 2020 because of the pandemic.
The domestic unsized market will continue to experience tremendous pressure on the back of
TFR’s performance, as domestic mining operations continue to struggle with the evacuation
of coal destined for export. On the international front, we expect that the impacts of
the pandemic on coal markets will continue into 3Q21 as the second and third waves grip
different parts of the world.
TFR’s poor performance on domestic and export flows is most concerning and we expect this
situation to continue to impact very negatively on our ability to move coal to customers
and ports, resulting in lower than previously guided sales volumes. Further impacts on
production and sales will be reviewed and communicated during our next market guidance in August.
The changes in product demand and TFR performance has put a strain on our ability to
produce coal at optimal levels, putting pressure on our unit cost in the Mpumalanga region.
This has compelled us to think innovatively about how we can respond quickly to the value
chain interruptions. Our integrated operations centers (IOC’s), coupled with our Market
to Resource (M2R) optimisation programme, have enabled speedy decision making in our
business, enabling quick responses to fluctuations in the value chain, whether resulting
from rail performance or product demand.
Our Operational Excellence and digital programmes are now focusing on specific projects
to manage stock levels and production costs. This will allow us to continue with our
efforts to land our product competitively across various markets.
The pre-feasibility study on determining the way forward for the Moranbah South hard
coking coal project is on track to commence in 2H21.
Although our operating and sales performances have been hampered during 1H21 as
indicated above, Exxaro is ready to deliver and geared to send coal to our customers
as soon as the TFR challenges have been resolved.
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 participate in the FD’s pre-close message must pre-register
through this link: www.diamondpass.net/1794457 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 Tuesday, 29 June 2021 at 12h00 (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
8 July 2021. To access the playback, dial one of the following numbers using the playback code 39846#:
* South Africa 010 500 4108
* UK 0 203 608 8021
* Australia 073 911 1378
* USA 1 412 317 0088
* International +27 10 500 4108
LEAD EQUITY SPONSOR AND DEBT SPONSOR
Absa Bank Limited (acting through its corporate and Investment banking division).
JOINT EQUITY SPONSOR
Tamela Holdings Proprietary Limited.
EDITOR’S NOTE
Exxaro is one of the largest South Africa-based diversified resources companies, with main interests
being in the coal, energy and iron ore commodities. www.exxaro.com
Interim results for the six-month period ending 30 June 2020 will be announced on (or around)
12 August 2021.
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
1Q21 – First quarter ended 31 March 2021
3Q21 – Third quarter ending 30 September 2021
4Q21 – Fourth quarter ending 31 December 2021
1H21 – Six-month period ending 30 June 2021
1H22 – Six-month period ending 30 June 2022
2H20 – Six-month period ended 31 December 2020
2H21 – Six-month period ending 31 December 2021
FY20 – Financial year ended 31 December 2020
FY21 – Financial year ending 31 December 2021
COMMODITY PRICES SOURCE
Coal – IHS Energy
Iron ore – MB Online
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.
29 June 2021
Date: 29-06-2021 07:05:00
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