Chief executive officer's review

Exxaro’s performance in its second full year of operating as a listed, empowered mineral resources group
reflects the benefits of diversification in a volatile global market, with record financial results from our coal business and a significant profit contribution from our mineral sands operations. We recorded several major milestones during the period, particularly in our coal business. These included a 40-year coal-supply agreement for Eskom’s Medupi power station, the full ramp-up of Mafube mine, and our new Inyanda mine exceeding capacity to reach 1,8Mtpa. We also completed the Namakwa Sands acquisition to strengthen our mineral sands portfolio and made good progress on conversion and new mining rights applications.

Business environment

The global economic slowdown accelerated markedly in the second half of the year, impacting on the South African economy as well. Local gross domestic product growth of 3,2% was well below the 5,1% achieved in the prior year and the outlook for 2009 is for further contraction to around 1,9%. The macro-economic review on page 18 details global economic performance during the year and the outlook for 2009. In some commodity markets it was decidedly a year of two halves, characterised by volatile supply and demand levels. Oil and bulk commodities reached record levels in the first half, but prices collapsed in the second half. Base metals and
industrial minerals followed suit. The cycle of rising iron ore and coal prices is expected to reverse in 2009, while zinc prices have come down substantially from high 2007 levels. However, some perhaps unexpected benefits emerged from this gloomy picture: firstly the upward spiral in mining costs and project capital costs was arrested and, secondly, the worldwide shortage of skills and equipment was alleviated by the plethora of announced cutbacks and project deferrals. We expect this trend will continue for much of 2009.

Powering possibility

Individual performances during the year have further entrenched the hallmark of this group to power possibility:
• Exxaro’s North Block Complex was named best-performing coal mine in South Africa by the South African   Colliery Managers’ Association in recognition of 26 years of fatality-free shifts.
• Following the successful rebuild of the no 4 roaster in 2007, Zincor simultaneously rebuilt roasters no 1 and 2   at a cost of some R28 million during the year as part of the drive to ensure plant efficiency, availability and   increased output.
• We concluded the empowerment transaction in which Namibian shareholders acquired a further 43% of Rosh
  Pinah lead-zinc mine. As part of this landmark transaction, the mine’s employees now hold 3% of the share   capital and will share in its growth and prosperity.
• Through strategic focus and innovative thinking, Rosh Pinah has extended its life of mine until 2018, a far cry
  from four years ago when the mine had a life of less than five years and faced closure.
• A groupwide business improvement programme has already identified savings of R190 million as part of our
  process of continuous improvement.
• Exxaro has sponsored a research chair at the Unisa Centre for Corporate Citizenship to develop a core body
  of knowledge on climate change in South Africa.
• We opened a new international office in Switzerland to service the European steam coal market. Market   demand, strong prices and Exxaro’s focus on value-in-use marketing are expected to underpin an increase in   international coal exports to at least 10Mtpa over the next eight years.
• An Exxaro employee made history in July 2008 when he became one of 21 000 torch bearers – and the only   South African – to carry the Olympic flame on its four-month journey around the world to the host city of   Beijing.
The review period however presented some considerable challenges:
• Regrettably, five employees lost their lives, despite ongoing and company-wide initiatives to enhance safety
  awareness. Disappointingly, we also fell far short of our target for lost-time injuries.
• Our base metals division recorded an operating loss for the year, through a combination of production   disruptions, lower revenue, increased operating costs and higher provisions for environmental rehabilitation.
• Limited power supply and a total plant blackout following a transformer failure at Zincor caused major delays
  and plant instability in the second half of the year. Rosh Pinah was similarly affected by equipment failures,   plant availability and the impact of an unstable power supply.

Safety

The group again recorded a poor safety performance, with five fatalities in the review period, while the average lost time injury frequency rate (LTIFR) per 200 000 man-hours worked was 0,39 which is well above the target for 2008 of 0,21 (page 82). We deeply regret the loss of our colleagues and extend our sincere condolences to their families, friends and colleagues. We are determined to meet our target of zero harm in all
our operations and have begun implementing revised safety policy and corporate management standards across the group – detailed on page 82 The South African mining industry as a whole is trying to be
more consistent in how it applies safety standards, and one of the behaviours it encourages is zero tolerance for safety violations. Among other things, this means that safety behaviour needs to be as much part of performance reviews and recognition as it is an individual responsibility.

In November 2007, the former president of South Africa, Thabo Mbeki, announced the implementation of health
and safety audits. All Exxaro mining operations have now been audited, and results indicate the extent to which our operations comply with health and safety requirements. We were particularly pleased with results from our coal operations which, at 73%, exceeded the average Department of Minerals and Energy scores of 70% for coal and 66% for all mines. The outcomes from these audits and our own investigations will form the framework to refine and improve our practices. Externally facilitated, our first CEO’s Safety Summit was
convened in March 2009. A second summit is planned for October 2009 at which progress against targets will be mapped and agreement reached on further improvements. At Exxaro, safety is our foremost priority. Our North Block Complex is a prime example of what can be achieved through diligent application of safety standards. We plan to drive our safety initiatives and programmes aggressively throughout the organisation.

Operational overview

Exxaro’s coal business units recorded good operating performances complemented by additional production from Inyanda and North Block Complex. Total production volumes neared the 45Mt mark. Coal markets continued to benefit from strong local and international demand which translated into favourable coal pricing despite significant softening in international prices as the global economic meltdown in the second half of 2008 took effect. Expansion of Grootegeluk mine to supply power station coal to Eskom’s Medupi power station is underway following the conclusion of a long-term supply agreement on the back of unabated local demand. Discussions continue with Transnet on rail capacity to use Exxaro’s export entitlement of 6,3Mtpa by end 2009. The mineral sands business was complemented by the acquisition of Namakwa Sands from Anglo Operations Limited with effect from 1 October 2008. Feedstock supply levels continued to affect markets while the global economic crisis is expected to compound the negative impact on pigment demand. Exxaro’s 2008 financial results were again negatively influenced by the strength of the Australian currency against the US dollar, despite the weakening of the former in the last quarter of 2008. Zircon enjoyed good global demand and pricing in 2008, resulting in record operating results from Namakwa Sands. Higher production from all operations should benefit this business in 2009.

In base metals, the record high price environment in 2006 and 2007 has been followed by significantly lower local and international demand and resultant unfavourable pricing. The oversupply of concentrate has only partially been offset by higher treatment charges. The business is expected to remain under pressure in 2009 given depressed zinc markets and poor zinc metal prices.

Operational performance

Despite challenges during the year, most notably the extent of the global economic meltdown and unavailability of plant capacity in the mineral sands and base metals businesses, there were a number of notable achievements:
• Record annual production and sale of power station coal to Eskom.
• Increased production of coal from Inyanda (above design capacity) and North Block Complex, combined with new reserves and capacity at the latter mine.
• Record synthetic rutile production at Australia Sands following the successful kiln shut in 2007.
• Annual records for zircon, titanium slag and pig iron production at the newly acquired Namakwa Sands.
• Efficiency improvements at Namakwa Sands translating into a record chlorinatable slag ratio of 84,5% and iron recovery rate of 91,3%.
• Zincor completed its roaster rebuild programme in the acid plant to position itself for improved efficiencies.

New operations

Commissioning and ramp-up to full capacity of the Mafube expansion project has been completed. The mine will produce 3Mtpa of export steam coal and 2Mtpa of power station coal. Exxaro’s 50% joint venture participation with Anglo Coal, although still awaiting fulfilment of all conditions precedent, added 733kt to overall export volumes allowing the group to benefit from higher average export prices during the year. The Inyanda mine was also successfully commissioned and ramped up to design capacity of 1,5Mpta.

Energy

In South Africa, coal has attracted much media attention during the year, with coal-fired power stations contributing some 92% of South Africa’s energy-generating capability. While energy is an immediate focus area for Exxaro, as detailed on page 87, several issues are worth noting here, given their importance to our long-term growth.

Although Eskom is planning to shift to a 30% nuclear mix within the next 15 years, coal will continue to play a
significant role in power generation. Given that South Africa needs to double its generating capacity by 2025 to support current growth rates while keeping costs down means a continued reliance on coal, which is still the cheapest source of power generation.

Currently the fourth-largest coal producer in the country, Exxaro is one of the largest suppliers to Eskom, accounting for more than 30% of total power station demand. With the Waterberg expansions, Exxaro could become one of the largest coal producers in South Africa.

The coal supply agreement for Eskom’s new base-load power station, Medupi, was signed in September 2008,
underscoring the valued and long-standing business relationship Exxaro has built with the power utility. In
terms of the agreement, Grootegeluk will supply an average of 14,6Mtpa of power station-grade coal for the
next 40 years through a R9-billion brownfields expansion of the mine. The mine will increase production through a seven-day continuous operations programme to supply additional coal to the adjacent Matimba power station. Two new beneficiation plants will be constructed at the mine to process new production for Medupi. Grootegeluk has the largest washing and beneficiation complex in the world. Production from the new section of Grootegeluk is planned for the end of 2011, with ramp-up to full production by 2014.

These investments by Exxaro and Eskom will have a significant benefit for the local, provincial and ultimately
national economy. Direct jobs created during construction will peak at about 9 500 (8 000 from Eskom’s investment, and 1 500 from Exxaro’s) and thousands of indirect jobs will be created. Some 550 permanent jobs will be created at Grootegeluk mine alone. As a key role player in the mining industry, it is our responsibility to become more energy efficient, to promote the use of clean technologies, and to fast-track coal mining
projects. In turn, it is government’s responsibility to ensure approval of mining rights and to provide a context in which private investors can – and are encouraged to – invest in independent power producers.

Mineral sands acquisition

Effective 1 October 2008, we began the formal process of integrating Namakwa Sands into Exxaro. Namakwa Sands’ products are sold mainly on international markets, and for an entity that operates in one of South
Africa’s most beautiful but challenging environments on South Africa’s west coast, it boasts significant market share. In 2007, Namakwa Sands produced 10% of the world’s zircon, 8% of its titanium dioxide slag, and 5% each of its rutile and high-purity pig iron. Namakwa Sands has a well-established customer base across the world, and its incorporation into Exxaro will more than double the group’s production of zircon, and effectively double its pig iron capacity.

Namakwa Sands’ products are sold mainly on international markets, and for an entity that operates in one of South Africa’s most beautiful but challenging environments on South Africa’s west coast, it boasts significant market share. In 2007, Namakwa Sands produced 10% of the world’s zircon, 8% of its titanium dioxide slag, and 5% each of its rutile and high-purity pig iron. Namakwa Sands has a well-established customer base across the world, and its incorporation into Exxaro will more than double the group’s production of zircon, and effectively double its pig iron capacity.

With Namakwa Sands in our stable, Exxaro is now the third largest integrated titanium dioxide feedstock group in the world. The benefits are considerable – ranging from a single marketing team for the mineral sands business, to shared infrastructure, furnace technology and mineral separation technology.

This makes Exxaro unique in that various mineral sands technologies representing the entire value chain, from mine to pigment, are housed in one group.

The strategy behind our continued presence in the mineral sands market is now unfolding. We have always believed we need to offer our stakeholders a balanced portfolio and, from the outset, we have chosen to protect the group’s interests by spreading the risk to deliver value to our stakeholders, including our employees, over the longer term. This underpins our strategy of a moderately diversified portfolio with the building blocks of our sands business remaining sound as it is a dollar-denominated market where prices are contracted annually and often for three- to five-year terms. Together with our leading position as a long-term power station coal supplier to Eskom, this should provide considerable protection against market fluctuations and
times of economic uncertainty. With demand for titanium dioxide feedstocks growing internationally, accompanied by supply constraints, we remain optimistic about this strategy.

Integration

In just two years, Exxaro has proved its ability to integrate acquisitions and mould these into a cohesive group. The process of integrating Namakwa Sands is currently well under way.

An integral element in creating value in the current economic environment has been to develop a focused group
by integrating our people, attitudes, processes and systems to function as a single entity. During the year, this meant consolidating the strategies and best practices of all the different teams in our group. With the integration of people under way early in the year, and succession planning bedded down, the focus shifted to processes and systems.

A project to optimise enterprise resource planning was initiated in the first quarter. This included migrating
various business units on to Exxaro’s enterprise-wide resource planning system. By mid-2009, this will ensure
more effective groupwide governance, decision-making, recording of business activities, risk management and
greater ability to identify opportunities for continuous improvement.

Strategy

Our strategy is to consolidate in the short term, optimise growth plans over the medium term and innovate in the longer term. In light of global challenges, I believe it is more pertinent to review our immediate strategy (the year ahead) in this report. In our current consolidation phase our short-term goals are to focus on operational excellence, to optimise cash flow and implement the new organisational structure. Given the credit crisis and worldwide economic meltdown in the second half of 2008, the group is reviewing its capital expenditure programmes, including sustaining capital, as well as the project pipeline. We will focus on successfully implementing committed expansions while reprioritising other identified growth opportunities. These projects are detailed on page 43.

A continuous business improvement programme is under way to preserve the group’s cash flow and ensure availability of sustaining capital. Exxaro is well positioned to weather this economic storm:
• We are a major (and proven) supplier to Eskom
• We have a growing role as a steam coal exporter
• Production has been sustainably increased in our mineral sands operations and the marketing strategy
consolidated
• An asset management and plant efficiency programme is under way in our zinc business. We are exploring
alternative markets and reviewing strategic options.

Legislation

In recent years, the legislative environment for South Africa’s mining industry has changed significantly. We welcome the deferment of the draft royalty bill – this is a valuable respite in the current economic climate.

Calendar 2009 also marks the end of the first cycle of the mining charter and its attendant scorecard. The process of reviewing the charter against progress and developments in the past five years begins in April and is expected to take some time to finalise. Exxaro has made good progress against scorecard targets (page 107), but our ultimate aim is closely aligned to the intention and spirit of the charter – equitable participation in the country’s natural resources, with fair and representative workplaces.

During the year, Exxaro’s applications to convert the mining rights associated with former Kumba Resources operations were granted. The process for executing these conversions should be completed in the current year. Applications to convert former Eyesizwe Coal mining rights were submitted in June 2008.

Sustainable development

This year, I have separated my review for the convenience of stakeholders. Our comprehensive sustainability report begins on page 74 with a message that outlines our strategy, progress and targets. This is supported by illustrative case studies available in a dedicated section in our electronic annual report, on www.exxaro.com/case_studies

Transformation

The genesis of today’s Exxaro Resources has been a case study in transformation. On unbundling from Iscor in 2001, the groundwork was done under the Kumba Resources banner to create a group that offered equal opportunity to all stakeholders. This ethos permeated the 2006 transactions to create Exxaro, South Africa’s flagship empowerment group in the mining industry. Among Exxaro’s shareholders are over 9 000 of our own employees and communities that enable us to trade.

At a time when many black economic empowerment groups are struggling with onerous debt burdens,
Exxaro’s black shareholders are seeing the fruits of their investment. To date, shareholders in BEE Holdco
(page 109), which owns some 53% of Exxaro, have received dividends totalling R994 million. Our own
people, through the MPOWER trust, have benefited from over R28 million in dividends.

We have achieved the targets set by the mining charter for transformation (page 96 and 107), but we will not be satisfied until transformation is truly widespread and our workforce a fully representative demographic slice of South Africa.

Directorate and governance

Best-practice governance remains the standard at Exxaro, facilitated by the skills and experience of a dedicated board of directors.

In August 2008, Mike Kilbride retired after more than 30 years in the mining industry, predominantly with our
group and most recently as chief operating officer. Mike played an invaluable role in shaping today’s Exxaro and we wish him well in this new phase of his life. There is now a direct reporting line between the heads of Exxaro’s commodity businesses and the chief executive officer. Subsequent to the year end, Dirk van Staden retired as financial director of Exxaro after 12 years with the group and its predecessors, during which he played an instrumental role in almost every corporate transaction. His career spanned 34 years in the corporate environment and we thank him for an exceptional contribution and extend our very best wishes for a healthy and rewarding retirement. Dirk is succeeded by Wim de Klerk, a chartered accountant by profession, miner by experience, and long part of the Exxaro team who will head the competent Exxaro finance team.

During the year, Ms Nonkululeko Nyembezi-Heita and Ms Pinkie Ncetezo resigned from the board. We thank these directors for their contributions while in office. Ms Simangele Mngomezulu and Mr Jeffrey van Rooyen were appointed as non-executive directors in August 2008. Both directors add to the expertise and diversity of the Exxaro board.

We thank Dr Len Konar for continuing to serve as Exxaro’s acting chairman during the period. While the process of appointing an independent chairman has been more protracted than we envisaged, progress is being made.

Appreciation

It has been a year of highlights and challenges, at times formidable challenges. The spirit and dedication our people brought to dealing with the challenges was inspiring, as was their delight in celebrating the milestones. Exxaro is fortunate to have exceptional people at every level and I thank each of you for the valuable role you play in our success.

We also continue to enjoy a mutually beneficial relationship with our empowerment partners and we will concentrate on entrenching this partnership as we grow.

Prospects

After two years, Exxaro is proving its mettle in the commodities market – having grown admirably through
good times and bad.

The group is expected to continue benefiting from strong demand for local power station coal. However, coking coal sales could be lower at reduced prices. Steam coal sales volumes should increase but at lower international prices. Increased production volumes at all mineral sands operations, a full 12 months’ contribution from Namakwa Sands together with the local and Australian currencies remaining at their present weaker levels, should improve prospects for this business in 2009 if market demand and prices remain at current stable levels.

The base metals business is expected to remain under pressure in 2009 as a result of continued depressed market conditions and zinc prices.

The equity accounted contribution from Sishen Iron Ore Company will be affected by market demand and the level of iron ore price adjustments effective from 1 April 2009. Accordingly, the group will concentrate on capital prioritisation and working capital management together with continuous business improvement initiatives and cost control to offset lower demand and price challenges. Consolidated results for 2009 will largely be driven by the extent to which global recessionary conditions impact on demand and prices for the group’s commodities as well as the trading levels of the local and Australian currencies. However, the uncertain market outlook remains a key factor to the group’s results for 2009.