EXXARO RESOURCES LIMITED Incorporated in the Republic of South Africa (Registration Number: 2000/011076/06) JSE share code: EXX ISIN: ZAE000084992 ADR code: EXXAY ( Exxaro or the Company ) FINANCE DIRECTOR S Financial year ending 31 December 2017 (FYE17) Pre-close message This message covers the expected operational performance of the Exxaro group for FYE17. While we acknowledge and recognise the diverse stakeholders for our group, this message is targeted primarily at the financial and investor community with a distinct focus on operational matters, as well as progress on some of our strategic initiatives, without undermining the importance of other sustainability matters. Dear stakeholder, Below is an update on the group s operational performance for FYE17. Unless otherwise indicated, all comparisons are against the financial year ended 31 December 2016 (FY16). We recorded a year-to-date lost-time injury frequency rate (LTIFR) of 0,13 compared to 0,09 reported in FY16. No high potential incidents and fatalities were reported during 2H17. Exxaro remains committed to the Zero Harm Vision and efforts to reduce incidents through the Safety Improvement Plans are under way. A significant uptick in commodity prices was recorded during the third quarter of 2017, supported by favourable economic data from China and fears of supply disruptions, amongst others. However, the momentum was not sustained through to the last quarter. For Exxaro s key commodities, the API4 coal export price index is expected to average US$88 per tonne and iron ore fines US$67 per dry metric tonne, Cost and Freight (CFR) China, for 2H17. On the production front our coal business continued to be resilient with an increase of 8% in production volumes forecast (excluding buy-ins). We expect Coal capex to increase by 50% compared to FY16, mainly due to the timing of sustaining and expansion capex at Grootegeluk. The expenditure for FYE17 is expected to be 4% lower than that guided in August 2017, primarily as a result of the timing in capex spending. We sold 22,425 million shares in Tronox Limited (Tronox) in October 2017, realising net proceeds of $474m (R6,5bn). The disposal reduces Exxaro's ownership of Tronox's total outstanding voting shares from approximately 51,2 million to approximately 28,8 million, representing 24% of Tronox's total outstanding voting shares. On 20 November shareholders approved the terms of the Replacement BEE transaction. Implementation is expected before 31 December 2017. We will provide a detailed account of FYE17 operational and financial performances when we announce our financial results on the 8 th March 2018. Yours sincerely Riaan Koppeschaar Finance Director
TABLE 1: COAL PRODUCTION AND SALES VOLUMES ( 000 tonnes) Production Sales FY(E) 31 December FY(E) 31 December 2017 Forecast 1 2016 Actual % Change 2017 Forecast 1 2016 Actual % Change Thermal 44 083 40 811 8 43 554 42 489 3 Tied 2 7 376 7 900 (7) 7 374 7 893 (7) Commercial: domestic 36 707 32 911 12 28 530 26 738 7 Commercial: export 7 650 7 858 (3) Metallurgical 2 174 1 985 10 1 177 1 298 (9) Commercial: domestic 2 174 1 985 10 1 177 1 298 (9) Total Coal 46 257 42 796 8 44 731 43 787 2 Semi-coke 94 54 74 93 65 43 Total (excluding buy-ins) 46 351 42 850 8 44 824 43 852 2 Thermal coal buy-ins 218 606 (64) Total (including buy-ins) 46 569 43 456 7 44 824 43 852 2 1 Based on latest internal management forecast assumptions and estimates. 2 Mines managed on behalf of and supplying their entire production to Eskom. GLOBAL ECONOMY AND COMMODITY PRICES During 2H17, global economic activity remains on track to record the strongest annual growth rate since 2011. Accelerations in global industrial production as well as trade and fixed investment underpin levels of real Gross Domestic Product (GDP) growth of around 3,1% for 2017, compared to 2,5% in 2016. The strong economic activity and the return of cost inflation in key commodity producing countries remain supportive to commodity markets, however, political and policy uncertainty have the potential to limit and/or delay further investment in the sector. China s supply-side reform initiatives and slow domestic output response, mainly due to stricter safety and environmental inspections, global supply pressures together with strong demand, contributed to thermal coal prices holding up during 2H17. Although Chinese steel production remains strong, softer economic data with relatively solid supply growth from the majors started to weigh negatively on iron ore fines seaborne prices towards the end of 2H17. The iron ore lump premium reached record levels during the latter half of 2H17. The improving and strong titanium dioxide (TiO2) pigment market fundamentals continued during 2H17. The return of geopolitical risks in the Middle East was reflected in the higher brent crude oil price during 2H17. COAL COMMODITY UPDATE PRODUCTION AND SALES VOLUMES Commercial mines Despite a strike in September, thermal coal production from commercial mines is expected to increase by 12%, primarily due to the power station coal ramp-up at the Medupi power station, in line with Addendum 9 to the coal supply agreement (CSA) and strategic stockpiling at Grootegeluk. Coal buy-ins are expected to decrease by 64% due to the availability of sufficient own coal to fulfill contracts. Export sales volumes are expected to decrease by 3% mainly as a result of the congestion at Richards Bay Coal Terminal (RBCT) in 1H17, driven by adverse weather conditions. Total local sales tons are expected to increase by 6%, mainly due to Eskom sales being 8% higher, mostly from Grootegeluk, as well as increased demand in the domestic market.
Tied mines Thermal coal production and sales from tied mines are expected to decrease by 7%, resulting from a five month stoppage of Mine 3 short wall, requested by Eskom, to manage qualities at Matla. MAJOR CONTRACTS UPDATE: TIED MINES Exxaro and Eskom are engaging, through the arbitration process, to resolve contractual arrangements at Arnot and this will be continuing into 2018. Large capital projects at Matla remain unfunded by Eskom, with Mine 1 on care-and-maintenance. The remaining mine shafts (Mine 2 and Mine 3) are forecasted to produce 7,4 million tonnes (Mt) for FYE17 against contractual volumes of 10,1Mt. Exxaro continues to engage with Eskom to provide the required capital funding, through an arbitration process, as per the tied mine Coal supply agreement (CSA), which will enable the achievement of contractual production and sales volumes. COAL MARKETS International thermal coal prices remained favourable in 2H17 as we saw good demand from Asian markets, including India. However, there is some sentiment that prices are expected to soften a bit during 2018. Domestic coal markets remained strong in 2H17 amidst higher demand for product as exporters attempted to maximize returns. The strong demand in all the domestic sectors is expected to continue into 1H18. CAPEX AND PROJECTS Exxaro expects Coal capex to increase by 50% compared to FY16 mainly due to timing of sustaining and expansion capex at Grootegeluk. The expenditure for FYE17 is expected to be 4% lower than guided in August 2017, primarily as a result of the timing in capex spending. Grootegeluk Grootegeluk capex is expected to be 48% higher than that reported for FY16. FY17 Grootegeluk capex is expected to be 5% lower than that reported in August 2017 largely due to the timing on GG6 expansion, Load Out Station, Trucks & Shovels and Backfill capex. TABLE 2: COAL CAPEX (R million) FYE17 Current Forecast 1 FYE17 Previous Forecast 2 FY16 Actual Sustaining 3 345 3 717 2 380 Waterberg 2 657 3 017 1 940 Mpumalanga 688 700 440 Expansion 762 578 367 Waterberg 677 494 312 Mpumalanga 85 84 55 Total 4 107 4 295 2 747 1 Based on latest internal management forecast assumptions and estimates, excluding tied operations. 2 Provided in 30 June 2017 results presentation during August 2017. Thabametsi Exxaro and Marubeni / Kepco (the lead developers of the Thabametsi Independent Power Producer (IPP)) are engaging on the definitive CSA and associated infrastructure agreements. Financial close is expected during 1H18 due to the IPP awaiting environmental authorization (EA). Marubeni has submitted its integrated water use license application (IWULA). Exxaro has requested the Department of Water and Sanitation (DWS) to consent to Exxaro ceding 720 000 m 3 of its water allocation.
Eskom has indicated that the temporary supply of electricity of 3 mega-volt ampere (MVA) to the IPP requires Exxaro Coal (Pty) Ltd to sign a new electricity supply agreement (ESA) to be in line with current electricity demand. Construction of the bulk water pipeline and powerline is in process, with the handover expected in December 2017. The project is proceeding on schedule and on budget. Belfast All licenses for the mining and plant areas construction were authorised at the beginning of September 2017. Construction activities commenced during October 2017. The project is proceeding on schedule and on budget with first production expected 1H20. Leeuwpan The Leeuwpan expansion environmental licenses and the wayleave permit were also granted, and during this period, similarly, construction has commenced. LOGISTICS AND INFRASTRUCTURE TFR railed 56,03Mt to RBCT from January to September 2017, equivalent to an annualised rail tempo of 73,21Mt. The annual coal line shutdown took place in July for 7 days, with rail services restored successfully afterwards. The Waterberg LTA was approved and signed by Exxaro and Transnet. This LTA guarantees rail capacity at affordable tariffs to enable Grootegeluk Complex s export growth projects. TFR s performance on the North West Corridor has remained at satisfactory levels with a year-to-date (Jan Oct 2017) total strike rate of 93% being achieved (96% strike rate for export). FERROUS COMMODITY UPDATE SISHEN IRON ORE COMPANY PROPRIETARY LIMITED (SIOC) Guidance on SIOC s equity-accounted contribution will be provided when we have reasonable certainty on its FYE17 financial results. TITANIUM DIOXIDE (TiO 2) AND ALKALI CHEMICALS TRONOX Exxaro sold 22,425 million shares in Tronox in October, realising net proceeds of $474m (R6,5bn). The disposal reduces Exxaro's ownership of Tronox's total outstanding voting shares from approximately 51,2 million to approximately 28,8 million, representing 24% of Tronox's total outstanding voting shares. Exxaro intends to use the proceeds to fund operations, repay debt and distributions to shareholders. As previously communicated, it is the intention that the majority of the proceeds received from the disposal of the first tranche will be returned to shareholders. The method, the amount and the timing of any distribution will be announced with our FYE17 results, at the latest. Exxaro will continue to assess market conditions going forward for further possible sell downs of its remaining Tronox investment. The remaining investment was classified as a non-current asset held-forsale on 30 September 2017, and equity accounting ceased from the date of classification. ENERGY CENNERGI PROPRIETARY LIMITED (CENNERGI) The two wind-farm projects, Amakhala Emoyeni (AE) and Tsitsikamma Community Wind Farm (TCWF), are running at planned capacity.
REPLACEMENT BEE TRANSACTION On 20 November shareholders approved the terms of the Replacement BEE transaction. Implementation is expected before 31 December 2017. SALE OF NON-CORE ASSETS AND INVESTMENTS The group s interests in Black Mountain Mining Proprietary Limited and the Chifeng Kumba Hongye Corporation Limited s refinery remain non-core and Exxaro intends to divest from these investments. As previously communicated, Exxaro intends to dispose of its interests in Arnot and North Block Complex (NBC). The divestment process for NBC is well advanced and it is anticipated that a transaction agreement will be concluded by the end of the financial year. In respect of the divestment process for Moranbah South coking coal project in Australia, Exxaro did not receive viable offers for its 50% shareholding and will reassess its position in due course. OTHER CONSIDERATIONS MINING AND PROSPECTING RIGHTS Much of the progress obtained in 2H17 revolves around the successful submissions or amendments to existing rights, with the intent to either protect, or ensuring greater Life of Mine potential to operations. These include 1) the addition of associated minerals to the Thabametsi Mining right; 2) additional mining methods at Matla for greater extraction; and 3) the inclusion of environmental and infrastructure liabilities in the Grootegeluk mining right area. The Arnot South Prospecting right renewal was successfully concluded during the period. OUTLOOK FOR 1H18 We expect an improvement in the operational results of the coal business for 1H18 driven primarily by: Ongoing good demand in the domestic market underpinning prices; Stable seaborne demand internationally; Our operational excellence process delivering sustainable improved results; and Technology and innovation improvements starting to contribute positively with the establishment of the innovation project office. During 1H18, the performance of our SIOC investment will be influenced by an anticipated softer iron ore market. The iron ore lump premium is expected to revert to its long term historic average after the winter heating season in China. Relative stable commodity prices with global industrial production, trade and real fixed investment momentum, together with successful international mediation efforts in Middle East, will continue to support world economic activity over the next six months. The Rand Dollar exchange rate remains extremely volatile, and subject to ongoing event risk as the economic and political environment in South Africa remains a challenge. REVIEW OF THE UPDATE The information in this update is the responsibility of the directors of Exxaro and has not been reviewed or 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, 24 November 2017 at 12h00 (GMT+2:00). PARTICIPANT TELEPHONE NUMBERS (Assisted): Johannesburg (Telkom): 010 201 6800 South Africa (Toll Free): 0 800 200 648 Johannesburg (Neotel): 011 535 3600 USA and Canada (Toll Free): 1 855 481 5362 UK (Toll Free): 0 808 162 4061 Please instruct Participants to ask to be joined into the Exxaro Resources call. PARTICIPANT TELEPHONE NUMBERS (Press *0 for operator assistance): Hong Kong (Toll Free): 800 966 117 Australia (Toll Free): 1 800 350 102 France (Toll Free): 0 800 902 688 Please instruct Participants to ask to be joined into the Exxaro Resources call. PLAYBACK A playback will be available until Wednesday, 6 December 2017. To access the playback, dial one of the following numbers using the playback code 19127#: South Africa: 011 305 2030 UK toll-free: 0808 234 6771 USA and Canada: 1 855 481 5363 International Toll: +27 11 305 2030 SPONSOR Absa Bank Limited (acting through its corporate and Investment banking division). 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 Mzila Mthenjane, Executive Head: Strategy & Stakeholder Affairs Tel: + 27 12 307 7393 Mobile: +27 83 417 6375 Email: Mzila.mthenjane@exxaro.com Pretoria 24 November 2017 EXXARO RESOURCES LIMITED (Incorporated in the Republic of South Africa) Registration number: 2000/011076/06 JSE Share code: EXX ISIN: ZAE000084992 ADR code: EXXAY ( Exxaro or the company or the group )
LEGEND 1H18 Six-months period ending 30 June 2018 FY16 Financial year ended 31 December 2016 FYE17 Financial year ending 31 December 2017 2H17 Six-months period ending 31 December 2017 1H20 Six-months period ending 30 June 2020 COMMODITY PRICES SOURCE Coal IHS Energy Iron ore MB Online Mineral sands and pigments TZMI 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. 24 November 2017