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Financial and operational review

‘Calendar 2010 saw Exxaro benefit from a faster-than-expected recovery from the global recession as gains from generally greater demand at higher selling prices for Exxaro’s commodities, coupled with disciplined cost management, more than offset the negative impact of a stronger local and Australian currency to the US dollar.’

The group’s balance sheet and key financial metrics remain healthy and provide a solid platform to support its growth aspirations. Exxaro reported record earnings since its creation in November 2006, in turn resulting in a record dividend declaration to shareholders.

Overview

Revenue increased 14% to R17,2 billion
Comparable net operating profit up 52% to R2,6 billion
Headline earnings per share up 105% to 1 495 cents per share
Net cash inflow of R1,4 billion
Net debt to equity of 13%
Healthy financial metrics
Total dividend of 500 cents per share covered three times by attributable earnings

Introduction

The group’s audited financial results and actual physical information for the 12-month periods ended 31 December 2010 and 2009 are not comparable due to the R1 435 million impairment of the carrying value of the assets of KZN Sands, accounted for on 31 December 2009, and the inclusion of the 50% proportionally consolidated interest in Mafube Coal Mining (Pty) Limited (Mafube) for 12 months compared to seven months in 2009. To be meaningful, comparable supplementary financial results are disclosed in this review by excluding the 2009 impairment of the carrying value of the assets of KZN Sands.

After fulfilling all suspensive conditions, Glen Douglas dolomite mine was sold to Afrimat Limited effective 1 January 2011. The operating results of Glen Douglas are therefore still included for 12 months in 2010.

An average exchange rate of R7,72 (spot average R7,30) to the US dollar (USD) was realised compared to R8,39 for the corresponding period. In addition, unrealised foreign currency losses on the revaluation of monetary items denominated in foreign currency were recorded based on the relative strength of the local currency to the USD at 31 December 2010. The relative strength of the Australian dollar (AUD), most notably in the second half of 2010 when it traded around parity against the USD, continued to impact negatively on the financial results of the mineral sands operations in Australia. An average rate of USD0,87 cents (spot average of USD0,92 cents) to the AUD was realised compared with USD0,76 cents in 2009.

COMPARABLE SEGMENTAL RESULTS

	12 months ended 31 December
R million	2010	2009¹
REVENUE
Coal	10 515	9 731
Tied operations	2 952	2 681
Commercial operations	7 563	7 050
Mineral sands	4 640	3 508
KZN Sands	1 288	705
Australia Sands	1 551	1 469
Namakwa Sands	1 801	1 334
Base metals	1 787	1 582
Rosh Pinah	674	566
Zincor	1 598	1 413
Inter-segmental	(485)	(397)
Other	213	188
Total external revenue	17 155	15 009
NET OPERATING PROFIT
Coal	2 690	1 905
Tied operations	186	75
Commercial operations	2 504	1 830
Mineral sands	179	(124)
KZN Sands	(66)	(12)
Australia Sands	138	(2)
Namakwa Sands	107	(110)
Base metals	(113)	(8)
Rosh Pinah	143	105
Zincor	(171)	(47)
Other	(85)	(66)
Other	(120)	(34)
Total	2 636	1 739
¹Unaudited due to restatement of net operating profit of KZN Sands in 2009.

Revenue

Group consolidated revenue increased by 14% to R17,2 billion due to generally higher sales volumes and commodity prices despite the impact of a stronger local and Australian currency.

Coal
Revenue was up 8% due to higher domestic sales volumes at lower realised prices being only partially offset by lower export sales volumes at higher export prices.

Mineral sands
Revenue increased by 32% to over R4,6 billion with increased sales volumes realising at higher prices.

Base metals
Revenue increased by 13% mainly as a result of the higher zinc price at an average zinc price for 2010 of USD2 161 per tonne; 30% higher than in 2009 when an average price of USD1 665 per tonne was realised.

Net operating profit

Group consolidated comparable net operating profit was R897 million or 52% higher at R2,6 billion at an operating margin of 15% compared with 12% in 2009.

Coal
The coal business reported a 41% increase in net operating profit to R2 690 million at an operating margin of 26% with higher export selling prices, higher sales volumes to ArcelorMittal South Africa Limited (AMSA) and Eskom, offset by lower sales prices domestically, lower export volumes and a stronger average realised local currency.

Net operating income for the year for the tied mines increased 148% mainly due to the non-recurring impact of Matla’s scope change in life of mine in the previous year together with the inflation-related increase in 2010 in terms of supply agreements with Eskom and AMSA.

Mineral sands
The mineral sands business reported a consolidated net operating profit as higher sales volumes at higher prices, supported by disciplined cost management, were instrumental in offsetting the significant impact of the relative strength of both the local currency and AUD to the USD.

Higher revenue assisted in achieving a consolidated net operating profit, increasing from a comparable loss in 2009 of R124 million to a profit of R179 million. Unlike 2009, where all three businesses reported net operating losses, only KZN Sands reported a loss in 2010.

Base metals
Despite higher revenue, a net operating loss of R113 million was reported due to production challenges at Zincor refinery. This was exacerbated by the higher cost associated with external zinc concentrate purchased, higher selling and distribution, electricity, labour, rehabilitation as well as maintenance expenses.

The following graph reconciles comparable net operating profit for 2009 to that reported for 2010:

Comparable net operating profit: FY09* vs FY10

	FY09	Price	Volume	Exchange	Inflation	Cost	FY10
Coal	1 905	564	764	(178)	(329)	(36)	2 690
Mineral Sands	(124)	504	674	(486)	(198)	(191)	179
Base Metals	(8)	141	7	102	(108)	(247)	(113)
Other	(34)	12	8	18	(27)	(97)	(120)
Total	1 739	1 221	1 453	(544)	(662)	(571)	2 636
*Excludes impairment of R1 435 million at KZN Sands in FY09

Operations

	12 months ended 31 December		6 months ended 30 June
	2010	2009	2010	2009
UNAUDITED PHYSICAL INFORMATION (000 TONNES)
Coal
Production
– Power station coal	36 767	36 562	18 269	18 583
Tied operations¹	16 461	16 486	8 365	8 704
Commercial operations	20 306	20 076	9 904	9 879
– Coking coal	2 419	2 020	1 187	922
Tied operations¹	285	268	124	129
Commercial operations	2 134	1 752	1 063	793
– Other coal	7 502	6 638	3 518	3 061
– Char	114	38	49
Coal buy-ins		759		430
Total	46 802	46 017	23 023	22 996
Sales
– Eskom coal	36 428	36 299	18 379	18 494
Tied operations¹	16 438	16 473	8 356	8 700
Commercial operations	19 990	19 826	10 023	9 794
– Other domestic coal	5 044	4 587	2 447	1 920
Tied operations¹	260	259	117	130
Commercial operations	4 784	4 328	2 330	1 790
– Coal export	4 106	4 715	1 842	2 389
– Char	122	31	52
Total	45 700	45 632	22 720	22 803
Mineral sands²
Production
– Ilmenite	718	819	367	424
– Zircon	196	185	94	97
– Rutile	63	62	28	33
– Synthetic rutile	90	109	51	54
– Pig iron (LMPI)	153	181	81	95
– Scrap iron	12	15	8	7
– Slag tapped	262	331	141	171
– Chloride slag	232	201	84	104
– Sulphate slag	52	44	16	19
– Leucoxene	13	14	7	7
– Pigment	57	53	25	25
Total	1 848	2 014	902	1 036
Sales
– Zircon	243	146	124	47
– Rutile	79	51	35	19
– Synthetic rutile	30	50	23	24
– Pig iron (LMPI)	194	138	107	64
– Scrap iron	3	6	1	4
– Chloride slag	264	144	98	67
– Sulphate slag	39	44	7	14
– Leucoxene	16	15	7	1
– Pigment	55	54	24	23
Total	923	648	426	263
Base metals
Production
– Zinc concentrate	120	108	60	53
Rosh Pinah	101	94	52	47
Black Mountain	19	14	8	6
– Zinc metal	120	116	54	54
Zincor	90	87	43	44
Chifeng³	30	29	11	10
– Lead concentrate	37	38	17	20
Rosh Pinah	19	20	9	12
Black Mountain	18	18	8	8
Sales
– Zinc metal sales	119	122	59	58
– Domestic	90	93	46	44
– Export	29	29	13	14
Lead concentrate sales
– Export	20	19	7	6

¹ Tied operations refer to mines that supply their entire production to either Eskom or ArcelorMittal SA Limited in terms of contractual agreements.
² Includes Exxaro Sands Australia’s interest in the Tiwest joint venture.
³ Exxaro’s effective interest in the Chifeng refinery is disclosed.

Coal

Production
Volumes were marginally higher than the previous year. Power station coal production at the Eskom tied mines was 25kt lower due to adverse geological and technical issues at Arnot mine which were only partially offset by higher production at Matla mine. Production in 2009 at Matla mine was affected by a water ingress incident for which successful mitigation was implemented in 2010.

Production at the commercial operations was marginally higher than in 2009 as higher production at Leeuwpan mine after commissioning the crushing and screening plant in 2010, coupled with the inclusion of production from Mafube for 12 months as opposed to seven months in 2009, offset lower production at Grootegeluk mine and North Block Complex due to full stockpiles at Eskom.

Coking coal production increased at Grootegeluk and Tshikondeni mines as a result of increased demand mainly from ArcelorMittal SA Limited (AMSA).

The inclusion of production from the Mafube joint venture for the full year in 2010 compared to seven months in 2009 as well as higher production at Grootegeluk, Leeuwpan, North Block Complex and New Clydesdale operations due to higher demand and improved dispatches, offset by marginally lower production at Inyanda, led to a 13% increase in steam coal production.

The char plant production was 200% higher than the previous year as the plant only started production in the middle of 2009.

Sales
Power station and coking coal sales to Eskom and AMSA respectively were marginally higher than the previous year. Other domestic sales were however 10% higher than in 2009 based on higher demand from AMSA which was met by redirecting sales destined for the export market from Grootegeluk; this in turn was only possible because of lower availability of trains and leased-in export entitlement.

Exxaro Coal’s strategy to increase export volumes was hampered by lower availability of trains, the Transnet Freight Rail strike as well as less export entitlement available for leasing. Exxaro’s Richards Bay Coal Terminal (RBCT) export entitlement increased from 1,8Mt to 6,3Mt per annum with the commissioning of the Phase V expansion but Transnet Freight Rail’s constraints limited Exxaro’s export capacity for 2010 at 3Mt per annum. The remainder of exports were either sold on a free-on-rail basis or though the lease of export entitlement.

Sales of reductants from the char plant improved threefold as 2010 was the first full production and sales year. Quality and demand for the product has exceeded our expectations.

Mineral sands

Production
At KZN Sands, there was a burn-through at Furnace 2 on 26 October 2010. Fortunately there were no injuries but the incident resulted in both furnaces being out of commission simultaneously for two months in the last quarter of 2010. Furnace 1 was shut on 1 July 2010 for a planned reline and pre-heating has now been completed, with first production at the end of January 2011.

Total run-of-mine tonnage was more than a million tonnes lower in 2010 as the Hillendale mine in KwaZulu-Natal nears the end of its life of mine. As a consequence of this and lower grades, heavy mineral concentrate was 73kt lower in 2010 at 414kt.

Zircon and rutile production was 11kt and 1kt higher than the prior year respectively as higher zircon production at Australia Sands due to improved overall utilisation of the dredge mine, coupled with improved recoveries at Namakwa Sands despite lower zircon head grades, more than offset lower production at KZN Sands resulting from the lower concentrate grade.

Higher slag and pig iron production at Namakwa Sands resulting from the benefits of increasing side feed into the furnaces was not sufficient to offset lower furnace production at KZN Sands caused by extended furnace downtime. Total slag tapped was 69kt lower at 262kt while low manganese pig iron (LMPI) was 28kt lower at 153kt. Ilmenite production was lower in line with the decrease in smelter slag output.

Furnace 2 at Namakwa Sands will be down for 103 days for a planned reline starting in February 2011.

At Australia Sands, synthetic rutile production was lower due to the planned 38-day shut late in the year and maintenance-related challenges in the first quarter of 2010. The synthetic rutile plant has a major shut every three years; the previous shut was in 2007.

The Kwinana pigment plant expansion in Australia was successfully commissioned in late June 2010 and achieved nameplate production capacity of 40ktpa in October. Significant supply interruptions from a key raw material supplier and an 11-day shut in May to complete all the tie-ins for the expansion led to lower pigment production.

Sales
Volumes at all three businesses generally increased on the back of stronger markets, further supported by higher selling prices. High stockpiles at the end of 2009 were reduced significantly, improving cash flow.

Base metals

Production
Zinc concentrate production at a higher grade at Rosh Pinah mine was 7kt higher than in 2009 with lead concentrate production 1kt lower.

Production of zinc metal at the Zincor refinery of 90kt was more than 3kt higher than in 2009 and can be attributed to less downtime on the acid plant. The 2009 production was also adversely affected by the accident in September 2009.

Sales
Zinc metal sales were 2% lower due to lower local demand.

Comparable earnings

	12 months ended 31 December
R million	2010	2009¹
Net operating profit excluding 2009 impairment	2 636	1 739
Income from investments	2	2
Net financing cost	(455)	(415)
Equity-accounted income – net of tax	3 717	1 898
Taxation²	(665)	(371)
Minority interest	(27)
Attributable earnings excluding impairment	5 208	2 853
Adjustments net of taxation impact	(22)	56
Headline earnings	5 186	2 909
Weighted average number of shares (millions)	347	345
Attributable earnings (cents per share)	1 501	827
Headline earnings per share (cents per share)	1 495	843
¹ Not audited due to the comparability adjustment of 2009 figures. ² A normalised rate of 28% was used in 2009 for comparative purposes.

Comparable attributable earnings, including Exxaro’s equity-accounted investment in associates, were
R5 208 million or 1 501 cents per share, up 81% from 2009.

Headline earnings were R5 186 million or 1 495 cents per share. This is a 105% increase on the disclosed 2009 earnings of R2 514 million at 729 cents per share, but 77% higher on comparable 2009 HEPS of 843 cents.

Net financing costs

An analysis of the composition of the disclosed comparable net financing cost is shown below:

	12 months ended 31 December
R million	2010	2009
Interest expense and loan cost	321	460
Finance lease	70	66
Interest income	(135)	(145)
	256	381
Interest adjustment on non-current provisions	199	34
Total	455	415

The higher interest expense is due to the higher interest adjustment on non-current provisions, namely the unwinding of the discount rate in respect of Exxaro’s environmental rehabilitation provisions accounted for at net present value, offset somewhat by a lower net interest expense due to lower net debt levels.

Income from equity accounted investments - net of tax

	12 months ended 31 December
	2010	2009
Sishen iron ore company (Pty) Limited (SIOC) - 20%	3 623	1 762
Chifeng - 22% effective interest	8	13
Black Mountain - 26%	86	123
Total	3 717	1 898

The results of SIOC are fully reported by Kumba Iron Ore Limited in its financial results to 31 December 2010.

Production at the Chifeng zinc refinery was marginally higher than in 2009.

Exxaro’s 26% share in Black Mountain, acquired in the last quarter of 2008, contributed R86 million to equity income; lower than the 2009 contribution of R123 million.

Taxation

Excluding post-tax equity accounted income, the effective tax rate was 30%, marginally higher than the statutory rate of 28% due to the net effect of non-permanent differences.

A reconciliation of the tax rate reflects the following:


	Percentage (%)
Effective tax rate as a percentage of profit before tax	11,3
Tax effect of:
– Share of associates and joint ventures	17,6
– Prior-year tax	(1,9)
– Special tax allowances	1,3
– Exempt income	0,7
– Other	(1,0)
Corporate tax rate	28,0

Dividends

Exxaro intends to progress to distributing 50% of attributable earnings to shareholders by means of interim and final dividend declarations. Dividend declarations in the medium term may, however, be lower to adequately provide for funding of the current growth pipeline of projects, comply with contractually agreed loan covenants, and maintain healthy key financial metrics.

Based on the record earnings and healthy cash flow position, the Exxaro board declared a total dividend of 500 cents per share for the 2010 financial year; a dividend covered three times by attributable earnings. The dividend declarations took cognisance of Exxaro’s significant short- to medium-term capital expenditure requirements.

Since the creation of Exxaro in November 2006, the following dividends have been declared:


Period ended	Dividend (cps)	R million	R million including STC¹	Date declared	Date paid/ payable
30 June 2007	60	211	211	15 August 2007	10 September 2007
31 December 2007	100	353	353	20 February 2008	17 March 2008
30 June 2008	175	620	620	13 August 2008	22 September 2008
31 December 2008	200	710	710	23 February 2009	30 March 2009
30 June 2009	100	356	356	19 August 2009	28 September 2009
31 December 2009	100	357	357	24 February 2010	19 April 2010
30 June 2010	200	715	715	11 August 2010	4 October 2010
31 December 2010	300	1 074	1 074	23 February 2011	11 April 2011
¹ No STC is payable due to the utilisation of STC credits arising from the dividend receipts from SIOC.

Total dividends declared for the 2010 financial year of R1 789 million are paid or payable to shareholders as follows:


R million	Total	Final	Final interim
Gross dividend declared	1 789	1 074	715
BEE Holdco	933	560	373
Public	629	378	251
Anglo American	174	104	70
Exxaro employee empowerment scheme (Mpower)¹	53	32	21

¹ 50% of this dividend accrues to employee beneficiaries in the non-management category.

Cash flow

	12 months ended 31 December
R million	2010	2009
Net cash retained from operations	4 106	2 117
Net financing cost, taxation and dividends	(1 742)	(2 323)
Cash used in investing activities
– New capacity	(1 522)	(990)
– Sustaining and environmental capital	(1 155)	(992)
Acquisition of investments and operations	(149)	(1 090)
Dividends received	1 817	1 754
Proceeds on sale of non-core assets and investments	60	11
Other	(29)	(107)
Cash inflow/(outflow)	1 386	(1 620)
Share issue	29	43
Other movements in net debt	96	227
Decrease/(increase) in net debt	1 511	(1 350)

Debt structure and financial covenants The group’s debt structure at 31 December 2010 is:

R million	Drawn	Available	Repayment profile
Long term	4 360	4 930	716	2011
– Corporate	3 576	355	856	2012
– GMEP		4 500	1 865	2013
– Australia Sands	784	75	296	2014
			627	After 2014
Cash and cash equivalents	(2 140)
Net debt	2 220		4 360
Short-term facilities		1 300

Cash retained from operations was R4 106 million for the group. This was primarily used to fund net financing charges of R256 million, taxation payments of R430 million, dividend payments of R1 056 million and capital expenditure of R2 677 million of which R1 522 million was invested in new capacity and R1 155 million applied to sustaining and environmental capital. R918 million of expansion capacity expenditure was for the Grootegeluk mine expansion for Medupi (GMEP). After the receipt of R1 817 million in dividends, primarily from SIOC, the group had net cash inflow of R1 386 million for the financial year. The final dividend for payment in April 2011 will amount to a further cash outflow of R1 074 million offset by the dividend inflow from SIOC of R1 623 million.

Net debt of R3 731 million at 31 December 2009 accordingly decreased to R2 220 million at a net debt to equity ratio of 13% at 31 December 2010.

Compliance with the group’s financial loan covenants with external financiers is shown below:


	Ratio	Covenants
Net debt to equity (%)	13	<80
EBITDA interest cover (times)	9	>4
HDSCR¹	3,75	>1,3
CHDSCR²	3,71	>1,5

¹ Historical debt service cover ratio (HDSCR) being cash earnings, less unfunded capital expenditure and taxation, plus dividends received (collectively referred to as free cash flow), divided by mandatory capital and interest payments on financing facilities.

² Cumulative HDSCR being cash and cash equivalents at the beginning of the period, plus free cash flow, less dividends paid, divided by mandatory capital and interest payments on financing facilities. Dividend payments may not result in this calculation being less than 1,5.

Organisational structure

Activities to optimise Exxaro’s zinc asset portfolio continue to ultimately extract the most value in the divestment process, which is expected to start in 2011.

Commodity price and currency hedging

A total of 60% of Rosh Pinah’s projected zinc and lead concentrate sales was hedged in 2008 for the period July 2008 to December 2011 at forward prices ranging from USD2 215 to USD1 887 per tonne for zinc and USD2 385 to USD1 771 per tonne for lead. Taking the favourable currency hedging in place on these hedged prices, the average ZAR price equates to R19 976 per tonne. These hedges will mature in 2011.

On 31 December 2010 Exxaro had USD106 million of hedging in place at an average exchange rate of R7,19 for local operations as well as USD52 million at an average rate of USD0,87c to the AUD for the Australian operation.

Capital expenditure

More detail is provided in the growth section.


R million	Financial year 2012 Estimate	Financial year 2011 Estimate	12 months ended 31 December 2010	12 months ended 31 December 2009
Sustaining and environmental	3 956	2 244	1 155	992
– Coal	2 204	1 014	516	432
– Mineral sands	1 610	676	398	340
– Base metals		150	169	127
– Other	142	404	72	93
Expansion	3 717	5 957	1 522	990
– Coal	3 655	5 872	1 225	492
– Mineral sands	62	41	294	486
– Base metals		10	3	12
– Other		34

Total	7 673	8 201	2 677	1 9827
GMEP (incl capitalised interest)	3 190	5 231	918

Capital expenditure for 2010 and the medium term is dominated by Grootegeluk’s Medupi expansion project, known as GMEP. The GMEP capital disclosed includes capitalised interest.

Further capital expenditure warranting mention is:

Primary equipment replacement:
- 2011 R263 million
- 2012 R635 million
- 2013 R608 million
Grootegeluk backfill project:
- 2011 R243 million
- 2012 R700 million
- 2013 R368 million
Investment in developing Fairbreeze of R2,4 billion over the next two years (included in sustaining capital)
Co-generation at Namakwa Sands of R175 million
SAP upgrade of R214 million.

Post 2012, sustaining capital expenditure is expected to revert to a normalised R1,3 billion per annum.

Acknowledgements

I express my sincere appreciation to the very competent Exxaro finance teams throughout the group for their continued commitment, dedication and valuable contributions.