Chief executive officers's review

‘Exxaro’s fourth year as a listed empowered group was characterised by several excellent operational performances, notable progress in the safety field, technological breakthroughs, and pleasing progress in realising our growth opportunities, particularly the Grootegeluk mine expansion for Eskom’s Medupi power station (known as GMEP).’

The group’s solid performance for 2010 is reflected in consolidated revenue rising 14% to R17,2 billion and net operating profit by 52% to R2,6 billion on generally higher sales volumes and commodity prices, and despite the impact of a stronger rand and Australian dollar to the US dollar.

Strategic intent
Exxaro’s strategic intent is to be a diversified mining company with the following commodity-specific aspirations:

• Coal
  • Develop mega mines such as GMEP
  • Increase export volumes as well as volumes to the metals market
  • Develop downstream value-adding products such as char and market coke
  • Pursue viable hard coking coal projects
• Mineral sands
  • Maintain position among leading global suppliers of titanium dioxide and zircon, and increase share of global chlorine pigment market
• Iron ore
  • Increase Exxaro’s footprint by adding a direct, managed operational asset
• Energy
  
  • Pursue viable clean-energy alternatives as part of a drive to achieve energy security.

Progress against strategic intent

• Excellent progress has been made on our R9,5 billion GMEP to supply Eskom’s Medupi power station with 14,6Mtpa of coal for 40 years. First coal is due to be supplied in early 2012. The project was at 41% overall completion by 31 January 2011, and remains on schedule and within budget.
• On 23 February 2011, the Exxaro board approved the development of Fairbreeze subject to normal regulatory and environmental approvals. Fairbreeze will replace Hillendale mine which is nearing the end of its life of mine.
• The four retorts at the char plant reached nameplate capacity in the last quarter of 2010.

In October our Western Australia-based joint venture, Tiwest, commissioned a major expansion project at its Kwinana pigment plant, increasing production capacity by 40 000tpa to around 150 000tpa. This will meet growing global demand for its core product, titanium dioxide pigment.

Further growth initiatives aligned with Exxaro’s strategic intent appear in the growth report from here.

Compliance
At the time of writing, mining rights conversions had been granted for all but two of Exxaro’s operations. All Exxaro’s new operations (or extensions to existing operations) have mining rights and approved environmental management and social and labour plans, except Belfast. Final revisions for this operation were submitted to the department for consideration.

The compliance status of Exxaro’s operations is disclosed in the governance section found here.

Optimising our business
To realise our strategy, we initiated an intense business-improvement process in 2009. Known as Siyaya, two specialised teams were mandated to explore how best to help the group become operationally excellent - a high-performing, low-cost and sustainable business.

In October 2010, a proposed solution for the way forward was approved in principle, subject to the consultation process, by the Exxaro board.

• The services element of Siyaya was tasked with redesigning Exxaro’s services environment to better support the group’s operations, growth aspirations and to achieve operational excellence.
• The Siyaya core project focused on key challenges in Exxaro’s operational environment: how to improve the return on capital employed to support the group’s growth plans; how to align and optimise operational structures and processes in business units; and how to entrench a culture of continuous improvement in the group.

The key elements of the proposed services approach are largely internal and have been well communicated to employees. These include a clearer distinction between the role of the corporate office (managing the group from a strategy, risk and governance perspective by setting direction, implementing policies and safeguarding the group) and the services unit (providing efficient services to internal clients, with no corporate control functions). The services function will measure performance, set continuous improvement targets, define clear service catalogues and manage Exxaro’s services offering.

Most importantly for external stakeholders, the proposals address the relatively high cost of Exxaro’s services, which are at the upper end of industry benchmarks. The proposed solution will move Exxaro to the lower end of that scale by 2015 by entrenching a culture of continuous and disciplined improvement to enhance the group’s long-term competitive advantage and optimise productivity.

The Siyaya services and core teams have identified ways to potentially save over R700 million in costs, while releasing around R900 million in untapped revenue potential.

These proposals, if implemented, could result in a significant restructure of the group. About 1 300 employees could be affected, either through minor or substantial changes to their jobs, a reduction in the number of positions or location changes. Exxaro has already announced that a maximum of 300 employees might be retrenched. However, the group will do everything possible to limit the impact on employees and all options will be investigated, including.

• Offering voluntary severance packages at Exxaro’s discretion
• Limiting external and temporary staff appointments
• Strictly managing filling of vacancies
• Critically considering the use of external contractors
• Offering early retirement at Exxaro’s discretion
• Limiting excessive overtime
• Redeploying or reskilling employees.

Exxaro has started a formal consultation process with trade unions, in accordance with the Labour Relations Act. The process applies only to the following employers: Exxaro Resources, Exxaro Coal, Exxaro Coal Mpumalanga, Exxaro Reductants, Exxaro TSA Sands, Exxaro Sands and Ferroalloys. Therefore Zincor, Rosh Pinah Zinc Corporation, Glen Douglas and Ferroland are excluded from the process.

Group safety performance for the year showed excellent progress at several operations, with fatalities decreasing from four to two and a record 24% improvement in the lost-time injury frequency rate to 0,25.

Safety
While the lost-time injury frequency rate was weaker than our internal target of 0,21, the steady improvement is encouraging given that it reflects the all-important behavioural change.

As an industry, we improved our safety record by 24% in 2010, making it the best safety year in South Africa’s mining history. In no small measure, this reflects the cooperation of the Department of Mineral Resources, the leadership of organised labour and fellow mineworkers. It is also testimony to the myriad initiatives under way at each of the Chamber of Mines’ member companies.

Among proposed changes to the Mine Health and Safety Act is a clause that stipulates prison sentences for chief executives found guilty of contravening safety regulations. We welcome this enforcement in the interests of a safer, growing industry. The established mining industry has already demonstrated its deep commitment to safety, recording a 24% decrease in mining fatalities in 2010. In addition, 40 000 safety representatives will be trained across the industry in the next four years as part of several initiatives to curb fatalities and reach international performance standards by 2013.

Energy
The broader energy issues - securing supply, reducing cost, reducing the impact of climate change and limiting environmental impact - continue to be elevated as a strategic priority for many businesses, including Exxaro. The chairman has commented on water, energy and climate change in more detail. In the foreword to the 2010 Carbon Disclosure Project, CEO Paul Dickinson made an interesting observation:

These are exciting times for business, with significant changes coming to the way we produce and consume energy. New power from low- or zero-emission sources is an urgent priority for climate change policy that simultaneously helps deliver energy security. New technologies such as smart grids, electric vehicles, alternative fuel sources, advanced telepresence videoconferencing, are showing a clear case for business growth with reduced emissions. The opportunities for business are enormous - it is through the intelligent investment of capital into the right solutions, identified by the business community, that we will achieve the low-carbon future we need.

The CDP report also presented some thought-provoking context for climate change:

August 2010 (the month in which this CDP analysis was undertaken) was an interesting month in the global greenhouse: it saw fire, drought and record-breaking temperatures in Russia, floods in Pakistan, a “once-in-a-1 000-year storm” in Tennessee, mudslides in China, and a 260km2 ice-sheet break off a Greenland glacier. Not only was there an obvious and profound human cost to these events, there were also visible impacts on the global market: wheat prices hit a 22-month high; stock and bond trading was at one stage curbed in Russia by as much as 60% after wildfires east of Moscow; and unseasonal wet weather delayed the offloading of sugar from a record 122 ships at Brazil’s ports, causing one market analyst to suggest that weather-related issues will result in “this year’s worst-performing commodity to rise more than gold.

Exxaro aims to be a carbon-neutral group - offsetting its carbon emissions in a number of ways from planting trees to cleaner production and energy efficiency. At the same time, we believe the active participation of business across all sectors is essential in developing national policy that finds the appropriate balance between environmental effectiveness, economic efficiency and social equity. To meet the government’s commitment to a +30% reduction in emissions by 2020 will require accelerated focus on energy efficiency across all sectors, a significantly expanded low-carbon electricity supply programme, introducing carbon-capture and storage technologies, achieving ambitious targets for vehicle efficiency, electric vehicles and passenger modal shifts, and promoting enhanced agricultural practices.

Appreciation
History has proven that challenging times bring out the best and the worst in people. Throughout the review period, I have been inspired and humbled by the dedication and passion evident at every level of our group. Exxaro is indeed fortunate to have people of this calibre.

Chaired by Dr Len Konar, our board of directors plays an invaluable and constructive role in our development and governance, for which we are most grateful.

The loyal support of our customers and suppliers around the world remains a mainstay of our group while we value the co-operation from regulatory authorities which is playing an integral and important role in our aspirations.

Prospects
Given the prevailing uncertainty of the strength and pace of an economic recovery in 2011, Exxaro will continue with prudent capital prioritisation and working capital management while pursuing business improvement initiatives.

Coal export volumes, at higher international prices, are expected to remain in line with the tonnage achieved in 2010 despite the build up by Transnet Freight Rail to increase its total export rail rate to Richards Bay Coal Terminal to 70Mtpa. Prices to the domestic market for similar volumes should reflect normal inflation increases, however supply agreements with pricing mechanisms linked to hard coking coal prices should reflect a considerable increase.

The positive price trends for mineral sands products recorded in the second half of 2010 are expected to continue while demand should remain strong in the medium to long term until supply and demand imbalances are corrected.

Base metal prices are widely expected to be lower in the first half of 2011. Production and sales volumes should be in line with those achieved in 2010 with the logistical chain to Zincor remaining a challenge.

The group’s consolidated results for 2011 will continue to be affected by the trading levels of the local currency and Australian dollar against the US dollar.

Sipho Nkosi
Chief executive officer

15 March 2011