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Financial review

Calendar 2009 proved Exxaro’s resilience in difficult global economic conditions; solid results were reported despite lower demand and softer prices for number of our products amid a strengthening local currency. The group’s balance sheet remains healthy, interim and final dividends were declared and net debt levels remain relatively low as a foundation to secure funding for a significant part of the exciting growth pipeline, most notably in the coal business.

Introduction

The group’s audited financial results for the 12-month period ended 31 December 2009 include a proportionately consolidated 50% interest in Mafube Coal Mining (Pty) Limited (Mafube) from 1 June 2009 as well as a R1 435 million impairment (the impairment) of the carrying value of the assets of KZN Sands after the decision not to proceed with the development of Fairbreeze mine. The results are therefore not comparable with the corresponding period in 2008 which only includes the acquisition of Namakwa Sands and a 26% interest in Black Mountain Mining (Pty) Limited (Black Mountain) with effect from 1 October and 1 November 2008 respectively.

Fully comparable supplementary results have not been disclosed, however, analysis and comments in this report have been done by excluding the impairment due to the significant distortion it creates on inclusion.

Overview of group operating results

Table 1
	12 months ended 31 December

R million	2009	2008
Revenue	15 009	13 843
Operating expenses	13 270	11 376
Net operating profit before impairment	1 739	2 467
Net operating profit margin (%)	12	18

Group revenue increased by 8% to R15 billion, with net operating profit reducing by R728 million to R1 739 million before the impairment.

Export sales were recorded at weaker average exchange rates than in 2008. However, realised currency losses were incurred as foreign currency proceeds on export sales were repatriated at stronger exchange rate levels. Unrealised foreign currency losses were also incurred on revaluing monetary items in foreign currency at
31 December 2009.

The coal business reported lower net operating profit as an increase in revenue, mainly due to higher export and local power station sales volumes, was more than offset by lower international coal prices and above-inflation increases in the cost of electricity, rail tariffs and labour costs, as well as realised and unrealised foreign currency losses.

All three units in the mineral sands business reported operating losses on the back of lower demand for their products at generally softer prices. The two local operations, KZN Sands and Namakwa Sands, were also impacted by realised and unrealised foreign currency losses while the Australia Sands operation was affected by the Australian dollar (AUD) persisting at strong levels against the US dollar (USD).

Lower realised zinc prices and lower demand for products resulted in the base metals business recording a small net operating loss.

Segmental results

Segmental results are shown in tables 2 and 3

Table 2
	12 months ended 31 December

R million	2009	2008
Revenue
Coal	9 731	9 040
Tied operations1	2 681	2 492
Commercial operations	7 050	6 548
Mineral sands	3 508	2 776
KZN Sands	705	974
Namakwa Sands2	1 334	491
Australia Sands	1 469	1 311
Base metals	1 582	1 829
Rosh Pinah	566	436
Zincor	1 413	1 733
Inter-segmental	(397)	(340)
Other	188	198
Total	15 009	13 843


Table 3
	12 months ended 31 December

Net operating profit excluding the impairment (Rm)/margin (%)	2009	%	2008	%
Coal	1 905	20	2 654	29
Tied operations1	75	3	83	3
Commercial operations	1 830	26	2 571	39
Mineral sands	(124)		104	4
KZN Sands	(12)		31	3
Namakwa Sands2	(110)		155	32
Australia Sands	(2)		(82)
Base metals	(8)		(172)
Rosh Pinah	105	19	(14)
Zincor	(47)		(95)
Other	(66)		(63)
Other	(34)		(119)
Total net operating profit	1 739	12	2 467	18
Non-cash costs	1 224		976
Earnings before interest, tax, depreciation, amortisation and impairment (EBITDA)	2 963	20	3 443	25

1	Tied operations refer to mining operations that supply their entire production to either Eskom or ArcelorMittal SA Limited in terms of contractual arrangements
2	Revenue and net operating profit included from the effective date of acquisition of 1 October 2008.

Coal

Revenue increased by 8% to R9 731 million as higher export volumes, combined with increased domestic power station coal sales at higher prices, were partially offset by lower domestic metallurgical and steam coal sales and lower export prices realised.

Despite higher revenue, net operating profit decreased by 28% to R1 905 million, at an operating margin of 20%, as above-inflation increases in electricity, rail tariffs and labour increased the cost of sales. Costs were further impacted by realised and unrealised exchange rate losses and an increase in exploration expenditure for the Moranbah South project in Australia.

The net operating profit from the tied operations was slightly down year-on-year as the environmental rehabilitation provision was reduced after extending the life-of-mine at Matla mine.

Mineral sands

KZN Sands

Despite the increased production, revenue reduced by R269 million to R705 million as lower sales volumes of zircon, pig iron and chloride slag were recorded at softer prices.

The net operating loss of R12 million before the impairment was R43 million worse than the corresponding period as lower revenue combined with realised and unrealised foreign currency losses were only partially offset by improvements in production efficiencies and cost savings.

Namakwa Sands

Net operating profit for only three months in 2008 of R155 million was followed by a loss in the 2009 financial year of R110 million. Softer prices, albeit at a marginally weaker local currency, realised and unrealised exchange rate losses, and the R55 million derecognition of the preheaters due to their deteriorated condition, all added to the weaker financial results.

Australia Sands

Revenue increased 12% to R1 469 million while net operating results improved from a loss of R82 million in 2008 to a loss of R2 million in 2009. This was achieved on the back of a much stronger production performance, higher pigment sales and higher average prices for both mineral and pigment products at a realised rate of USD0,79 to the AUD compared with USD0,84 in 2008.

Base metals

Revenue for the 12 months to 31 December 2009 decreased by 14% mainly as a result of the lower average realised US dollar zinc price. The average zinc price for 2009 of USD1 658 is 12% lower than in 2008 and was only partially offset by the slightly weaker local currency.

A turnaround from a net operating loss in 2008 of R172 million to a loss of R8 million was reported due to cost-saving initiatives implemented as well as the upward revaluation of inventories at the Zincor refinery at year end. The impact of above-inflation increases in electricity and maintenance expenses is, however, still being felt.

Other

Production volumes at the FerroAlloys plant were slightly higher while Glen Douglas production volumes were lower due to unplanned plant stoppages. Sales volumes were lower at both Glen Douglas and FerroAlloys.

Revenue for 2009 decreased marginally compared to the previous year due to lower demand and selling prices.

Consolidated

The following graph reconciles net operating profit for 2008 to the R1 739 million reported for 2009:


Coal	2 654	(464)	369	(260)	(41)	(353)		1 905
Mineral Sands	104	61	(183)	(132)	(72)	362	(264)	(124)
Base Metals	(172)	36	46	(77)	(54)	213		(8)
Other	(119)		(4)	(29)	(15)	133		(34)
Total	2 467	(367)	228	(498)	(182)	355	(264)	1 739

Attributable earnings

Table 4
	12 months ended 31 December

R million	2009	2008
Net operating profit excluding the impairment	1 739	2 467
Income from investments	2	2
Net financing cost	(415)	(241)
Equity-accounted income – net of tax	1 898	1 663
Taxation	(766)	(510)
Minority interest		24
Attributable earnings excluding the impairment	2 458	3 405
Weighted average number of shares	345	343
Attributable earnings (cents per share)	712	993

Attributable earnings for the period, excluding the impairment, were R2 458 million (712 cents per share). This is significantly lower than the comparable 2008 attributable earnings of R3 405 million (993 cents per share) primarily due to lower operating results. Attributable earnings include Exxaro’s ts of Sishen Iron Ore Company (Pty) Limited (SIOC) amounting to20% share of the after-tax profiR1 762 million, a contribution of R13 million from the effective 22% interest in the Chifeng zinc refinery and an equity-accounted profit of R123 million from the 26% interest in Black Mountain.

The impairment of the carrying value of the assets at KZN Sands resulted in Exxaro recording a number of deferred tax asset write-downs to reflect the group’sssessment of the likelihood of having sufficient future taxable income. In order to eliminate the distortion caused by posting the required deferred tax write downs, attributable earnings should, for information purposes only, be determined using a normalised effective tax rate of 28% as shown below.

	12 months ended 31 December

R million	2009	2008
Net operating profit excluding the impairment	1 739	2 467
Income from investments	2	2
Net finance cost	(415)	(241)
Equity-accounted income – net of tax	1 898	1 663
Taxation	(371)	(510)
Minority interest		24
Attributable earnings for information purposes	2 853	3 405
Weighted average number of shares	345	343
Attributable earnings (cents per share) for information purposes	827	993

Net financing costs

An analysis of the composition of the net financing cost was:

	12 months ended 31 December

R million	2009	2008
Interest expense and loan costs	460	283
Finance lease	66	63
Interest income	(145)	(153)
	381	193
Interest adjustment on non-current provisions	34	48
Total	415	241

The higher interest expense is due to higher debt levels after the acquisition of Namakwa Sands and a 26% interest in Black Mountain in the last quarter of 2008 as well as payment for the 50% joint venture interest in Mafube in July 2009.

The interest adjustment on non-current provisions refers to unwinding of the discount rate for environmental rehabilitation provisions accounted for at net present value.

Income from equity-accounted investments — post tax

Table 5
	12 months ended 31 December

R million	2009	2008
SIOC	1 762	1 856
Chifeng	13	(4)
Black Mountain	123	(189)
Total	1 898	1 663

The results of SIOC are fully reported by Kumba Iron Ore Limited in its financial results to 31 December 2009.

Production at the Chifeng refinery was in line with 2008. Equity-accounted income from this operation improved by R17 million to R13 million mainly due to reduced production costs as well as lower rates of environmental duties paid.

Exxaro’s 26% share in Black Mountain, acquired in the last quarter of 2008, y to increased sales volumes.

Taxation

Due to the required deferred taxation asset write-downs subsequent to the impairment, the effective tax rate as disclosed is not meaningful.

A reconciliation of the tax rate reflects the following:

Percentage (%)

•	Effective tax rate including the impairment	42,8
•	Tax effect of:
	– Share of associates and joint ventures	29,6
	– Derecognition of deferred tax assets	(46,0)
	– Exempt income and special tax allowances	4,3
	– Assessed losses not provided for	(1,5)
	– Capital losses	(1,3)
	– Disallowable expenditure	(1,3)
	– Other	1,4
•	Corporate tax rate	28,0

Headline earnings

Headline earnings, which exclude the impact of the impairment of the carrying value of assets in KZN Sands, were R2 514 million (729 cents per share), which is 31% lower than the R3 630 million (1 058 cents per share) in 2008.

Headline earnings

Table 6
	12 months ended 31 December

R million	2009	2008
Attributable earnings excluding the impairment	2 458	3 405
Net impairment of property, plant and equipment (PPE)		20
Share of associates’ impairments and adjustments	(8)	167
Gains or losses on disposal of PPE and subsidiaries	88	59
Taxation effect of adjustments	(24)	(21)
Headline earnings	2 514	3 630
Headline earnings per share	729	1 058

Dividends

Exxaro’s intention remains to progress to distributing 50% of attributable nal dividend declarations. Dividend declarations in the medium term may, however, be lower to adequately provide for funding the current growth pipeline of projects, comply with contractually agreed loan covenants, and maintain healthy key financial metrics.

While Exxaro was affected by the global recession, the group continued with both its interim and final dividend declarations in 2009.

Due cognisance was however taken of the uncertainty of the global economic recovery, Exxaro’s capital risk profile as well as a prudent focus on cash flow preservation.

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


			R million
Period ended	Dividend (cps)	R million	Incl 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

1	No STC is payable due to the utilisation of STC credits arising from the dividend receipts from SIOC.

Total dividends declared for the 2009 financial year of R713 million equate to a dividend covered 3.5 times by attributable earnings and are paid or payable to the shareholders as follows:


	Total Rm	Final Rm	Interim Rm
Gross dividend declared	713	357	356
BEE Holdco	372	186	186
Public	249	125	124
Anglo American	70	35	35
Exxaro empowerment scheme (Mpower)	22	11	11

Cash flow

Table 7

	12 months ended 31 December

R million	2009	2008
Net cash retained from operations	2 117	3 574
Net financing cost, taxation and dividends	(2 323)	(1 664)
Cash used in investing activities
New capacity	(990)	(470)
Sustaining and environmental capital	(992)	(1 147)
Acquisition of investments and operations	(1 090)	(3 157)
Dividends received	1 754	1 044
Proceeds on sale of non-core assets and investments	11	29
Other	(107)	(55)
Cash (outflow)	(1 620)	(1 846)
Share issue	43	31
Other movements in net debt	227	(83)
(Increase) in net debt	(1 350)	(1 898)

Cash retained from operations was R2 117 million. This was primarily used to fund net financing charges of R381 million, taxation payments of R892 million, dividend payments of R1 050 million and capital expenditure of R1 982 million, of which R990 million was invested in new capacity and R992 million applied to sustaining and environmental capital. After the receipt of R1 754 million in dividends, primarily from SIOC, and the R1 082 million outflow to finalise the acquisition of the 50% interest in Mafube, the group had a net cash outflow of R1 620 million for the financial year.

Net debt of R2 381 million at 31 December 2008 accordingly increased to R3 731 million at a net debt to equity ratio of 29% at 31 December 2009.

Debt structure and financial covenants

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

Table 8

	Ratio	Covenants
Net debt to equity (%)	29	<125
EBITDA interest cover (times)	8	>4
HDSCR1	1,30	>1,3
CHDSCR2	2,06	>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 being less than 1,5.

Debt structure

The group’s debt structure at 31 December 2009 is:

Table 9

R million	Drawn	Available	Repayment profile
Long term	4 754	736	407	2010
Corporate	4 144	555	827	2011
Australia Sands	610	181	723	2012
			1 886	2013
			911	After 2013
Cash and cash equivalents	(1 023)
Net debt	3 731		4 754
Short-term standby facilities		1 300

The final dividend for payment in April 2010 will amount to a further cash outflow of R357 million offset by dividend inflow from SIOC of approximately R600 million.

Organisational structure

The acquisition of the 50% interest in the Mafube joint venture was completed with effect from 1 June 2009 followed by payment of R1 082 million being made in July 2009.

Following the commodity portfolio review detailed by the chief executive officer, Exxaro plans to reconfigure its zinc assets to ultimately divest from them in an optimal manner. The portfolio of zinc assets includes the Zincor refinery in Springs, Gauteng, a 50,04% interest in the Rosh Pinah zinc and lead mine in Namibia, a 26% interest in Black Mountain which owns the Black Mountain zinc and lead mine and the Gamsberg zinc project in the Northern Cape, and an effective 22% interest in the Chifeng zinc smelter in China.

The sale of Glen Douglas Dolomite (Pty) Limited remains imminent.

The final evaluation of the iron ore project in Turkey concluded that it did not meet the group’s was made to divest from the project.

A total of 60% of Rosh Pinah’s projected zinc and lead concentrate sales rangingare hedged from USD2 216 to USD2 061 for zinc and USD1 967 to USD1 713 for lead.

A detail of the hedging in place is as follows:

Table 10

		Tonnes	Average	Average
	Year	hedged	USD price	ZAR price
Zinc
	2010	26 400	2 216	19 944
	2011	26 700	2 061	19 976
		53 100	2 139	19 960
Lead
	2010	5 172	1 713	15 690
	2011	5 500	1 967	19 065
		10 672	1 840	17 378

Capital expenditure

As announced on 1 December 2009, Exxaro reviewed its commodity portfolio and growth pipeline against the background of the prevailing economic climate to align resources with a commodity strategy best positioned to release optimal value for all stakeholders.

Table 11 compares capital expenditure for the 12-month periods ended 31 December 2009 and 2008 together with an estimate for the 2010 financial year.

Investment on expansion of the Grootegeluk mine at a revised capital cost of R9,5 billion over the next few years to supply Eskom’s adjacent Medupi power station, and the AUD118 million Tiwest Kwinana pigment expansion project for an additional 40ktpa production, has to date, and will continue to dominate cash outﬂ ows on capital expenditure in 2010 and beyond. Sustaining and environmental capital in 2010 includes replacement of primary mining equipment at the coal operations.

Capital expenditure

Table 11

		12 months ended 31 December

R million	Financial year 2010 Estimate	2009	2008
Sustaining and environmental	1 445	992	1 147
Expansion
Coal1	1 513	492	337
Mineral sands	187	486	104
Base metals	8	12	26
Other			3
Total	3 153	1 982	1 617

1	Includes capital expenditure on the Grootegeluk mine for Eskom’s Medupi power station in FY10 of R1 314 million, excluding capitalised interest.

Acknowledgements

I express my sincere appreciation to the previous finance director, Dirk van Staden, for the solid platform from which I was able to operate and build, as well as to the very competent Exxaro finance teams for their continued commitment, dedication, and valuable contributions.