FINANCE DIRECTOR’S FYE 31 DECEMBER 2015 PRE-CLOSE MESSAGE

Abstract
This message covers the expected financial and operational performance of the Exxaro group for the FYE 31 December 2015. Whilst there are several key stakeholders for the group, the message is targeting primarily the investor community and has a distinct focus on financial and operational matters, without undermining the importance of other sustainability matters.

Dear stakeholders

Further to the group’s 1H15 financial and operational performance, this is an update for the year to date as we approach the full-year financial results for the reporting period ending
31 December 2015. The update focuses on the group’s operational performance, as well as some of our strategic initiatives.

A significant achievement in the company’s history is the lowest lost-time injury frequency rate (LTIFR) of 0,15 year to date, which is a 21% improvement compared to the LTIFR reported for the prior full year in 2014. While we are proud of this milestone, our efforts to achieve zero harm shall not stop.

We continue to operate in a challenging environment, characterised by low commodity prices and higher input costs. However, our operational excellence programme is delivering efficiency improvements and sustainable cost reduction at our operations. We expect to reap the full benefits of this over the next 12-18 months. In addition, we are reducing overhead costs through a group-wide voluntary separation package offer.

The continuing global oversupply of commodities is reflected in a reduction of the average US$ coal, iron ore and titanium dioxide prices by 20%, 32% and 14% respectively, since the beginning of January 2015. In order to weather these difficult times, our short to medium-term focus remains on track, with specific attention on:

  • Productivity improvement – we have improved production tonnes per full time employee by 18% to maximise profitability
  • cash conservation – we are preserving the group’s free cash flow by reducing capital expenditure (capex) and focusing on cost savings.

We are pleased that our coal business’ wage negotiations were settled without unrest.

We remain prudent with our capital management by striking a balance between returning cash to shareholders, debt management, and selectively re-investing into the business for growth. We have reduced (through cutbacks and deferrals) our expansion capex by 13% over the next five years while critically evaluating sustaining capex to preserve cash flow in this period. These cuts have yielded a further R744 million reduction for FY15, against our guidance in August 2015 for FY15 total capex of R2 950 million for the coal business, without compromising business sustainability and safety. This translates into a total FY15 cut of around 50% of our estimated capex as guided at the beginning of this year. The Waterberg capex programme to FY20 has also been revised to R15 billion (sustaining and expansion). With every growth and sustaining project considered, we have a disciplined decision-making approach to allocate capital and we take into account the expected investment rate of return; net present value; cost curve position; payback period; risk and mitigation balance; as well as overall impact on shareholder returns.

We expect to maintain our dividend policy between 2,5 to 3,5 times core attributable earnings cover in FY15.

Our international credit rating was placed on a negative watch in 2015 and our SA credit rating was downgraded in 1H15 by Standard & Poor’s Ratings Services from A- to BBB+, mainly due to lower global commodity prices (particularly in relation to our exposure to iron ore). The impact of the downgrade is that our cost of borrowings may increase. Ensuring that Exxaro is able to raise financing at competitive rates remains critical as we move closer to refinancing our existing R8 billion facility in 2Q16.

There has recently been much activism against coal as a source of energy due to the environmental impact from carbon dioxide (CO2) emissions. Exxaro’s efforts at reducing its emissions are well regarded by the CDP (“formerly “Carbon Disclosure Project”). Given the current and expected outlook for South Africa’s electricity requirements, Exxaro believes coal remains a relevant source of affordable electricity generation for the economy and thus Exxaro remains well positioned to supply this energy source to Eskom. Therefore, the coal business is to a great extent hedged against falling US$ denominated coal export prices through the exchange rate as well as domestic Eskom prices remaining stable.

Strategic priorities for the Exxaro group during the next financial year include:

  • integrating and optimising Exxaro Coal Central Proprietary Limited (ECC) (previously Total Coal South Africa Proprietary Limited) assets
  • developing Exxaro’s future black economic empowerment (BEE) shareholding strategy amid regulatory uncertainty and ensuring the current BEE structure unwinds efficiently with minimal impact on stakeholders
  • evaluating our current shareholding in key investments: mainly Sishen Iron Ore Company Proprietary Limited (Sishen) and Tronox Limited (Tronox)
  • growing investor confidence in Exxaro’s prospects for the coal business through increased communication of the coal strategy.

We expect the global economy to remain subdued as emerging markets continue to battle with low economic growth rates and commodity markets face oversupply, particularly in iron ore and coal. Markets could also be impacted by the expected interest rate hikes in the United States, as well as other global geo-political events.

We will provide a detailed account of the FY15 performance when we announce our annual financial results on 3 March 2016.

Yours sincerely

Wim de Klerk
Finance director

1. Global economy and commodity prices
FY15 started with some positive sentiment towards the global economy. However, global economic growth divergence has become even more pronounced in 2H15 as uncertainty in global financial and commodity markets continues. As a result, the emerging markets are negatively affected, whilst growth in developed economies continues to show some signs of strength, albeit still modest.

In addition, in 2H15, downgrades were confirmed for the FY15/16 global economic growth outlook, including that of South Africa.

API#4 RB1 coal export US$ prices for 1H15 averaged US$61 per tonne, with the consensus forecast average for 2H15 at US$53 per tonne.

2. Coal commodity update
As the average API#4 coal US$ price remains low, the coal business is accelerating its focus on reducing costs, improving operating efficiencies and implementing relevant initiatives under a fit-for-purpose model.

2.1. Production and sales volumes
FY15 production and sales volumes are expected to be higher than FY14 mainly due to the scheduled ramp-up of Medupi power station and inclusion of ECC production from 1 September 2015, partially offset by lower production at our tied operations.

Domestic sales are expected to be 6% (2,3Mt) higher while export sales are expected to be up 11% (0,6Mt). We expect our export sales volumes for FY15 to be around 5,5Mtpa, including ECC.

2.2. ECC
Progress in implementing Department of Mineral Resources (DMR) approval conditions
As part of the DMR’s conditions for approving the transfer of ECC’s mineral rights to Exxaro (and granting a section 11 transfer of the mining rights in terms of the Mineral and Petroleum Resources Development Act 28 2002 (MPRDA)), Exxaro was required to include additional broad-based black economic empowerment (BBBEE) participation in the shareholding of ECC assets.

Exxaro is committed to create a structure that meets these requirements at arm’s-length and on commercial terms, and is considering various options. The outcome will be communicated once finalised. This does not impact the inclusion of ECC production volumes from 1 September 2015.

Strategic intent and outlook
Our rationale for the acquisition was to gain access to long-term primary export entitlement.

In reaction to lower US$ export prices, various optimisation opportunities are being pursued to improve profitability and cash flow on the ECC assets, which are currently mainly focused on the lower-quality grade export markets. Interventions include optimising sales based on grades, supplying the domestic market instead of the export market as well as reducing overhead costs.

Capex at ECC operations is expected to be limited to essential sustaining capital.

2.3. Major contracts
Eskom and Exxaro have initiated discussions on Eskom’s proposed intention to convert the captive mines’ coal-supply agreements to commercial arrangements. Operations likely to be affected are Matla and Arnot. The two parties are also in discussions regarding the financial viability of future supply of coal from Arnot mine.

2.4. Markets
Domestic coal demand remains stagnant, but stable, in the power-generation and steam coal markets. As the US$ price of coal in international market continues to test new lows, supply to the domestic steam coal market has increased markedly, resulting in downward pressure on prices. International prices have dropped below US$50 per tonne free-on-board (FOB) for Richards Bay RB1 coal (basis 6 000kcal/kg net). International thermal coal prices are expected to remain at these levels for the short to medium term.

There is however still good demand for Exxaro’s higher-quality RB1 as well as its lower-quality coal.

The local metals market is struggling to compete with cheap Chinese imports, very weak demand and low international metals prices. We expect demand for coal from the local metals market to remain subdued in the short to medium term.

In the reductants markets, various companies in the ferroalloy industry face financial difficulty as they struggle to compete globally due to low ferroalloy prices and high local electricity prices. Poor demand has affected the offtake of semi-coke from our reductants business unit.

2.5. Capex and projects
Given the current unfavourable economic climate and subdued price outlook, we have delayed the execution of certain of our coal projects, notably:

  • Semi-coke retort (phase 5 and 6)
  • Moranbah South
  • Mafube Nooitgedacht
  • Belfast
  • Grootegeluk 6
  • Grootegeluk load-out station.

The impact of the delays on production growth and the resulting operating profit is expected to be mainly on projects that have been already approved for implementation (i.e. mainly Belfast).

We continue to forecast significant sustaining and expansion capex in the Waterberg, with some R15 billion (previous guidance (August 2015): R16,9 billion to FY17) planned over the next five years to FY20.

Grootegeluk
To date, the ramp-up of coal supply to Medupi power station has progressed as scheduled, with unit 6 commissioned and coal stockpiles being built.

We continue to engage with Eskom on its announcement of commissioning dates for the remaining units to understand and reach agreement on the potential impact on coal supply and our offtake agreement.

Thabametsi
The timing of certain future phases of this project depends largely on progress with infrastructure (rail, water and roads) developments in the Waterberg. The bankable feasibility study (BFS) of phase 1 was completed in 4Q15 to supply 3,9 million tonnes per annum (Mtpa) of coal to the Thabametsi independent power producer (IPP).

The Thabametsi mining right approval is imminent and first run-of-mine coal production to the Grootegeluk beneficiation complex could therefore be achieved by FY18. The rate of production ramp-up thereafter will depend on the coal baseload IPP procurement programme and the Waterberg infrastructure development schedules.

Thabametsi IPP project
A bid was submitted by the Thabametsi IPP in the first bid window under the Department of Energy’s coal baseload IPP procurement programme on
2 November 2015 for a 630 megawatt fluidised bed combustion coal-fired power station. Marubeni Corporation is the lead developer and Korea Electric Power Corporation (KEPCO) the co-developer on this project. Preferred bidders are expected to be announced in 1Q16.

Belfast
The project’s construction start date has been delayed by up to 12 months from 3Q15 to 3Q16, mainly due to environmental appeals, with first coal now expected in 3Q18. The appeals are being dealt with in terms of applicable environmental legislation.

Mafube Nooitgedacht
This project has been delayed by 12 months from the originally announced 1Q17 date with first coal now forecast in 1Q18, mainly due to environmental permits required to mine the Springboklaagte pans.

2.6. Disposals and mines in closure
Arnot South
Exxaro entered into a binding sales agreement with Universal Coal plc (Universal Coal) in FY12, in terms of which Exxaro would sell the associated prospecting right over Arnot South to Universal Coal, pending the conclusion of certain conditions precedent.

The last condition precedent to the sales agreement, in respect of the section 11 transfer of mining rights, remains outstanding.

Inyanda mine
The coal reserves of Inyanda mine will be depleted by the end of November 2015. A sales process for the mine’s assets (including the Blackhill private siding) and liabilities was initiated in 1Q15. We expect this sales transaction to be concluded before the end of FY15, subject to conditions precedent which include a section 11 transfer.

2.7. Logistics and infrastructure
Exxaro was forced to cancel trains in 3Q15, due to full stockpiles at Richards Bay Coal Terminal (RBCT) as a result of low coal demand from the markets.

We are beginning to see some improvement in the Leeuwpan supply to Eskom as we continue with the rail-to-road migration for the Eskom Majuba plant. Eskom’s rail offtake has not been consistent due to commercial and operational issues, forcing Leeuwpan to institute road dispatches to Eskom from June 2015.

Engagement with Transnet Freight Rail (TFR) has confirmed their commitment to ensuring that adequate rail performance levels are reached and maintained. Exxaro will align its Waterberg production with TFR’s rail ramp-up schedule.

3. Ferrous commodity update
3.1. Mayoko project

The group’s focus in 2H15 has been to secure a ratified mining convention and the associated agreements from the government of the Republic of the Congo. Exxaro has submitted all documentation for the mining convention. The process of ratification includes approval by the Supreme Court, the Council of Ministers and then Parliament for final ratification. As previously communicated, we expect this process to be finalised before the end of FY15.

We remain committed to our strategy of reducing operating costs including reducing labour cost and remaining cash neutral, while protecting the mining rights.

3.2. Sishen
The continued decline in the iron ore US$ price in 2H15 is expected to result in lower equity income and dividends from Sishen, which in turn has a direct impact on Exxaro’s cash resources.

4. Titanium dioxide (TiO2)
TiO2 US$ prices have declined by around 14% since January 2015. We expect this will have a negative contribution to our share of Tronox’s financial results for FY15.

Guidance on Tronox’s equity-accounted contribution will be provided when we have reasonable certainty on its FY15 financial results.

5. Cennergi
We expect financial performance from this investment to remain in line with the FY14 results.

6. Sale of non-core assets and investments
The group’s interest in Black Mountain and Chifeng remains non-core and the group will consider divestment when market conditions improve.

7. BEE shareholder
7.1. Financial assistance

As published on the Stock Exchange News Services (SENS) on 24 July 2015 and 23 October 2015, additional funding to support Exxaro’s controlling BEE shareholder, Main Street 333 Proprietary Limited (Main Street 333), has been secured and provides a longer-term solution to Exxaro’s BEE status until the structure unwinds in FY16.

7.2. Progress on unwinding Main Street 333
Exxaro, in conjunction with its advisors, continue to review options to unwind the current BEE structure and to possibly implement a replacement BEE structure. The outcome will be communicated once finalised.

8. Outlook
We expect the current commodity (coal, iron ore, mineral sands and pigment) market oversupply, coupled with low demand, to persist in the short- to medium term. The impact of low coal prices is expected to be partially offset by a weaker rand in 2H15. Due to this challenging environment, Exxaro’s focus in the short- to medium term will be to:

  • continue to concentrate financial and people resources to the coal business
  • Integrate and optimise ECC assets
  • prioritise and stagger projects (mainly expansion capex) to preserve cash to ensure that our debt levels remain within acceptable levels
  • continue the drive to reduce input and overhead costs
  • develop Exxaro’s future BEE shareholding strategy amid regulatory uncertainty and ensure the current BEE structure unwinds efficiently
  • evaluate our current shareholding in key investments (mainly Sishen Iron Ore Company Proprietary Limited (Sishen) and Tronox Limited (Tronox)) and assess the ability of these investments to contribute to the group’s future earnings and cash flow
  • grow investor confidence in Exxaro’s prospects for the coal business through increased communication of the coal business strategy.

9. Group financial update
Consolidated earnings guidance will be provided when we have reasonable certainty on financial and operational performance results for the year ending 31 December 2015, taking into account:

  • outstanding November and December 2015 results
  • performance of equity-accounted investments
  • any adjustments required from the financial closure process.

10. Review of the update
The information in this message is the responsibility of the directors of Exxaro and has not been reviewed nor reported on by Exxaro’s external auditors.

Teleconference call details:
A dial-in teleconference call on the details of this announcement will be held on Friday, 20 November 2015, at 09h30 (GMT+2:00)

Internet broadcast: http://www.exxaro.com/
Dial-in teleconference numbers:

  • Republic of South Africa toll-free: 0800 200 648
  • Johannesburg: 011 535 3600 or 010 201 6800
  • Cape Town: 021 819 0900
  • UK toll-free: 0808 162 4061
  • USA and Canada toll-free: 1 855 481 5362
  • Conference ID: Exxaro FD’s pre-close teleconference

A playback will be available until 27 November 2015. To access the playback, dial one of the following numbers using the playback code 41186#:

  • South Africa: 011 305 2030
  • UK (Toll-free): 0 808 234 6771
  • USA & Canada: 1 855 481 5363
  • Australia (Toll-free): 1 800 091 250

Editor’s note:
Exxaro is one of the largest South Africa-based diversified resources companies, with interests in the coal, titanium dioxide, iron ore and energy commodities. www.exxaro.com

Enquiries:
Wim de Klerk
Finance director
Tel: + 27 12 307 4848
Mobile: +27 82 652 5145
Email: wim.deklerk@exxaro.com

Pretoria
19 November 2015

Sponsor:
Absa Bank Limited (acting through its corporate and investment banking division)

Disclaimer:
The financial information on which any outlook statements are based have not been reviewed nor reported on by Exxaro’s external auditors. These forward-looking statements are based on management’s current beliefs and expectations and are subject to uncertainty and changes in circumstances. The forward-looking statements involve risks that may affect the group’s operations, markets, products, services and prices. Exxaro undertakes no obligation to update or reverse the forward-looking statements, whether as a result of new information or future developments.

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