Chairman's statement

‘The Chilean mine rescue in October 2010 was an unmitigated triumph but an equally stark reminder of how much more needs to be done to improve mine safety all over the world. In South Africa, we exceeded the 20% annual milestone agreed by the mine health and safety tripartite alliance stakeholders, reducing the number of fatalities in the industry by 24%.’

More importantly, there has been a 59% improvement since 2003. Recording this progress at increasing operational depths, combined with a national skills shortage and slow industry advances in fostering a general culture of safety, is an exceptional achievement.

Equally exceptional was the June 2010 launch of a strategy for sustainable growth and meaningful transformation of the South African mining industry. This was an important milestone in collaboration between government, the mining industry and organised labour. Critically, it is also a fundamental acknowledgement by all stakeholders that the prosperity of South Africa is inseparably linked to the successful operational imperatives of its world-class and dynamic mining sector.

The mining industry is vital to South Africa’s economy, accounting for around 9% of GDP, and 1 million direct and indirect jobs of the 9 million people formally employed. It accounts for more than 50% of the country’s merchandise exports and is, by far, South Africa’s biggest earner of foreign exchange. The mining industry accounts for about 35% of the value of the JSE and maintains its profile as a significant contributor to the development of infrastructure, quite frequently in deep rural areas of South and southern Africa where very little other economic activity takes place. In the areas of secondary beneficiation and final fabrication, about R200 billion in value is added to South Africa’s minerals with the country being self-sufficient in steel and cement, and a major producer of ferroalloys, chemicals, plastics and synthetic fuels. These initiatives save the country some R20 billion in imports and about 90% of South Africa’s total electricity generation is derived from power stations fuelled by locally mined coal.

As chairman of one of South Africa’s major coal producers, it gives me great pleasure to disclose that by sales value, coal has become the largest component of our country’s mining industry. According to the Chamber of Mines, in 2009 total coal sales revenue exceeded R65 billion, followed by platinum group metals or PGMs at R58 billion and then gold at R49 billion - together accounting for over 70% of South Africa’s mineral sales in that year.

But South Africa’s mining sector has shrunk over the 16 years to 2009, compared to a global average growth rate of 5%. The reasons for this are manifold, including those beyond the industry’s control, such as a volatile rand/dollar exchange rate and the global economic recession. However other constraining factors are now being addressed, to a greater or lesser extent. These include infrastructural challenges, bureaucratic delays, regulatory uncertainty, the balance between productivity and cost, and the pool of available skills.

We remain concerned at the high levels of unemployment in South Africa compared to major emerging economies, as well as the continued challenges of poverty and inequality. We must be vigilant in ensuring that ongoing above-inflation wage increases are matched by productivity gains.

In the past year, we succeeded in being the best World Cup hosts. We need to build on that momentum and spirit and - in line with President Jacob Zuma’s recent state of the nation address - meet the challenges of job creation and functioning schools to produce new generations of citizens ready to play their rightful role in a new and improved South Africa, as well as beyond our borders.

South Africa has been rated as the richest mineral resource holder in the world, well ahead of resource-rich countries such as Russia and Australia. The mining industry has a pivotal role to play in developing people and communities, and investing in the necessary research and development to beneficiate our minerals in support of sustainable economic growth. The commitment of the major mining companies to this path is evident in a range of collaborative initiatives: the mining industry growth and development task team, the revised mining charter, and the tripartite action plan on health and safety. With ongoing cooperation between government, labour and the mining industry, we can ensure mining remains a force in the South African economy.

Focus on water, energy and climate change
Nine of the world’s 10 warmest years have occurred since 2000, and 2010 was one of the hottest globally since records began. According to the UN World Meteorological Association, over the past century the global average has climbed from 13,6°C to 14,4°C. Rising temperatures have obvious implications, particularly in water-scarce regions such as southern Africa.

Last year, I noted that energy in its broadest context must be dealt with as a strategic imperative - we need to take a multi-faceted approach to this issue. As part of this process, Exxaro recommitted to saving 10% on energy efficiency and carbon emissions by 2012 - a savings target that would be included in the annual business planning process. We are now in the second year of the three-year pledge, and we will strive even harder in 2011 to achieve these targets.

Equally, we acknowledge the view that human activity, especially in burning fossil fuels, contributes to increasing the concentration of greenhouse gas emissions in the atmosphere; this in turn contributes to global warming and ultimately climate change that affects social and economic wellbeing and the ecological balance in different ways across the world. As a responsible mining group, Exxaro continues to participate in the Carbon Disclosure Project (CDP) and has again improved its performance significantly. In 2010, Exxaro was ranked fourth out of 74 of the top 100 JSE-listed companies.

Acknowledging the potential severity of water issues - supply, quality and access - in South Africa, Exxaro launched an integrated water and waste management programme during the year.

It is now widely accepted that the first effects of climate change will be experienced in the areas of water and water management.

The overriding objectives of the programme are to:

• Ensure a cost-effective integrated approach to water management
• Be environmentally responsible
• Be ecologically sustainable.

Accordingly, we commissioned an expert analysis on water reclamation and re-use across our group. This formed the basis of developing a detailed action plan to address water and waste management for Exxaro. The plan addresses all key components - from risk management to stakeholder engagement - against measurable progress markers.

Exxaro also voluntarily participated in the first CDP water disclosure initiative and will continue to do so.

Regulatory environment
Several key developments were finalised during the review period. These included agreements by the industry’s tripartite stakeholders (government, the mining sector and organised labour) on strategic imperatives, particularly transformation and growth, that will guide and direct mining sector decision-makers well into the future. The aim is to elevate the industry to higher levels of effective performance so that it is able to maintain and increase its contribution to national socio-economic development and prosperity.

Intrinsically linked to realising this aim is the revised mining charter which was published in September 2010. Following extensive consultation, we believe the Department of Mineral Resources has succeeded in producing a reasonably balanced charter. In the new charter, some targets are specified in more detail which adds the important element of certainty, always a top-end consideration in investment decisions. New targets relating to the sustainability of the industry have been added and the scorecard has been improved. We welcome the elevation of health and safety performance to charter level.

While the charter has achieved the difficult balance needed between the imperatives of transformation and encouraging investment in the South African mining industry, the interpretation of some provisions will be important. These include the need for clarity on the continued recognition of empowerment transactions that have established independent and viable historically disadvantaged South African (HDSA) mining companies. The requirements and possible offsets relating to beneficiation also remain unclear, especially when the restrictive impact of potential electricity supply constraints on possible beneficiation activities is taken into account. The procurement requirements in the charter will remain challenging but we acknowledge the importance of developing HDSA enterprises; our commitment is reflected in the solid progress made in this field here.

The mining industry’s regulatory framework has been critically examined and work has begun on a review of the Mineral and Petroleum Resources Development Act, the MPRDA. Proposed amendments are expected to be finalised in 2011.

Given that infrastructural inefficiency is another area of concern affecting industry growth and competitiveness, the tripartite stakeholders decided to establish a long-term infrastructure planning mechanism for the sector. The primary purpose of this initiative is to thoroughly research the infrastructural needs of the industry and provide inputs to all other national infrastructural processes. The ultimate intention is to fast-track specific infrastructural interventions so that mining commodities can more effectively and in greater quantities be conveyed to global demand destinations.

Sustainable development
Embedding sustainable practices as part of corporate strategy offers valuable environmental and social benefits, as well as greater business and shareholder value in the long term. Exxaro has joined leading companies around the world in entrenching this approach.

While the business imperative to remain profitable must be central to all Exxaro’s actions, we recognise that sustainability and social responsibility issues have a direct influence on our ability to perform in future.

Sustainable development, or its end goal of sustainability, is a cornerstone of Exxaro’s business, strategy and culture. We aim to make Exxaro an undisputed leader in sustainability. Equally, reporting on and providing assurance to stakeholders each year on financial and non-financial performance is becoming a standard against which responsible companies are measured. We support the transition to integrated reporting espoused by King III and the Global Reporting Initiative (GRI), believing this approach will clearly communicate how Exxaro aligns sustainable development considerations with core enterprise-wide strategy.

As part of our reporting process this year, we used a multi-disciplinary approach to identifying the group’s material issues. These impacts were tested with a corporate stakeholder forum comprising interested and affected parties. Feedback from the forum was incorporated into divisional plans to manage these issues and approved by Exxaro’s executive committee. Functional heads have committed to managing these issues by either setting specific performance targets or committing to do so in 2011.

We were pleased to again be ranked among the 15 reports regarded as excellent in the 2010 Ernst & Young Excellence in Sustainability Reporting survey. We understand that reporting to stakeholders and providing assurance in a balanced way on financial and non-financial performance is an evolving discipline. At Exxaro, much effort goes into distilling this information each year to present an honest picture of the group to all stakeholders. We therefore welcome local and global initiatives under way to develop standards for integrated reporting. This will make stakeholder reporting more meaningful by entrenching a culture of sustainability and engaging board members to ensure that this permeates throughout each company. Exxaro is making good progress on both aspects.

Transformation and skills development
South Africa is currently producing around 5 600 qualified artisans each year, well below the annual target of 12 500 set by the Department of Higher Education and Training. Exxaro has, similar to previous years, contributed more than its proportionate share to skills development in the wider industry in an attempt to address the ongoing shortage of skills in the country. Through our talent pipeline programme for graduates, we are addressing future shortages of critical skills as part of our commitment to skills development within a broader socio-economic development framework.

Corporate governance
Exxaro and its directors are fully committed to sound corporate governance and to the principles of fairness, transparency, accountability, responsibility and integrity in dealing with shareholders and all other stakeholders. We endorse the King III report on corporate governance released on 1 September 2009, and have begun to implement these recommendations.

Good governance is the foundation of our ongoing ethical approach to business. The board continued to focus on promoting the high standards of conduct we expect of our employees, customers and suppliers around the world, recognising that our leadership and actions speak louder than words.

A comprehensive governance report is published here. The tone at the top and on the board has fostered an environment that reinforces the commitment to high ethical standards, compliance with legal requirements and resistance to market pressures for short-term results.

Our vision, our values and our commitment to accountability will keep us focused on our pursuit of excellence, regardless of how challenging the road ahead is.

We believe in the importance of our culture and ethics in business. Exxaro’s long-standing traditions of financial strength, long-term customer relationships and entrepreneurial, yet responsible, management are as important as ever.

Directorate
The following changes took place in our directorate during the year. Ms Simangele Mngomezulu resigned, effective 21 December 2009, and Ms N Langeni was welcomed as her successor with effect from 23 February 2010.

Remuneration
At Exxaro, we are committed to the principle of sensible market-related remuneration, structured to align our business objectives with long-term shareholder interests. Exxaro’s strategic objectives focus on delivering sustainable value over time.

The board of directors and executive management measure Exxaro’s progress against these strategic objectives. Progress is then benchmarked using both financial and non-financial measures and performance is appropriately rewarded.

A detailed remuneration report appears here.

Integrated risk management
Over the years, we have embedded robust risk, capital management and internal controls group-wide.

Events during the year have powerfully reinforced the need for boards to have a clear understanding of the risks their businesses face. We believe the Exxaro board and its committees have set a high standard and we continue to improve the manner in which we evaluate, formulate, communicate and manage the broad spectrum of risks to which our businesses are exposed.

Our existing risk practices, frameworks and procedures proved relatively robust during the review period and no major changes to the risk management process were necessary.

Safety, health and environment
Health and safety remain top priorities for the board and group as a whole.

We are committed to enforcing compliance with the requirements of the South African Occupational Health and Safety Act 1993 (Act 85 of 1993). Management remains dedicated to identifying potential hazards and reducing risks at all our operations.

Our efforts in addressing environmental issues are constantly developing and we are committed to protecting the environment.

Dividend
While acknowledging the need for prudent cash flow management in an uncertain global economic environment, Exxaro’s solid operational and financial results, and extensive growth aspiration, supported the board’s declaration of a final dividend for the 2010 financial year of 300 cents per share (2009: 100 cents). This brings the total dividend for the year to 500 cents per share (2009: 200 cents), covered three times by attributable income. Particularly pleasing, some R27 million accrues to Exxaro’s non-management category employees in terms of an employee share ownership plan implemented subsequent to the creation of the group in 2006. Since inception of the share ownership plan, these employees have benefited from dividend declarations worth R66 million.

Appreciation
The past two years have been among the most challenging in mining history. The young Exxaro group has weathered this with commitment and passion, underscoring its depth of mining and management talent. Sipho Nkosi, who also completed his third consecutive term as president of the Chamber of Mines in the review period, and his executive team have led by example in spearheading Exxaro’s continued growth and development. Behind them is a formidable team of almost 11 000 dedicated professionals - we thank every one of you.

Thanks too to my fellow board members for their input and counsel, and ongoing contribution to the highest standards of corporate governance.

Exxaro continues to make sterling progress since its formation four years ago and we are confident that the groundwork has been laid for continued success, operationally and in creating value for all stakeholders.

Prospects
Prospects for the mining industry in South Africa are arguably more robust at present than any time since 2007, qualified by the need for cost containment across the sector and fears of a protracted recovery from the recession.

However, and to follow on from my opening remarks, to avoid missing out on the next commodities boom, South Africa needs to prioritise infrastructural investment, particularly rail, ports and electricity supply. In tandem, as an industry, we also need to concentrate on innovation and beneficiation in a supportive regulatory environment.

These challenges will not be addressed by government alone. Electricity supply is probably the single-biggest constraint to growth in the local mining sector. But meeting this need will take time. Recent developments spearheaded by the Chamber of Mines illustrate an unprecedented level of cooperation between mining companies, labour and government to put the industry on a sustainable growth path - one that incorporates transformation and addresses the salient issues to make the industry more competitive. Mining is one of the government’s top five priority growth areas and our industry is expected to be a major contributor to the government’s new growth path target of creating five million jobs by 2020.

Exxaro is ready to play its role in achieving this vision, firstly because we are a South African company and, secondly, because in a world with a growing population and limited resources, there will always be demand for minerals and commodities.

Through the resources, expertise and experience base of the wider group, our goal is to unlock value for shareholders associated with our portfolio of investments.

Dr Len Konar
Chairman

15 March 2011