FINANCE DIRECTOR S FYE 1 December 2016 Pre-close message This message covers the expected financial and operational performance of the Exxaro group for the FYE 1 December 2016. 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 financial and 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 p e r fo r m a n ce fo r t h e fi n a n c i a l yea r e n d i n g 1 December 2016 (FYE16). Unless otherwise indicated, all comparisons are against FY15. We achieved a significant milestone of 27 fatality free months during the year (as at 1 October 2016). We achieved a lost-time injury frequency rate (LTIFR) of 0.08 as at 1 October 2016, which is a 5% improvement on the LTIFR recorded for FY15 of 0.17. Following weakness in 1H16, commodity prices started to rebound in 2H16 due to production cuts, weather disruptions and supply reforms in various producer countries. For Exxaro s key commodities the API4 export price is expected to average US$75 per tonne for 2H16 (1H16: US$5) and iron ore fines US$57 per dry metric tonne, Cost and Freight (CFR) China (1H16: US$52). On the production front our coal business continued to be resilient with a slight increase in production forecast (excluding buy-ins) despite the closure of Arnot. We are continuing our cost-saving initiatives and capital optimisation with total coal capital expenditure (capex) for FYE16 forecast at R2 728 million compared to R2 1 million in FY15. We are also in the process of finalising our improvement project to ensure a fit for purpose operating model. Following the completion of the project we expect to be able to quantify the resulting cost savings in the 1Q17. Despite negative sentiment in the capital markets towards mining, we successfully refinanced our R8 billion loan facility at competitive rates and expect the balance sheet to remain robust in 2017. We are also pleased that we are now in a position to start implementing the unwinding of our existing Black Economic Empowerment (BEE) shareholding structure following the expiry of the lock-in period on 28 November 2016. The share repurchase from our controlling shareholder Main Street Proprietary Limited (Main Street ) and the replacement BEE transaction will ensure that the structure unwinds in a coordinated manner which should be supportive of our share price and ensure investor certainty. Interest received from Exxaro s BEE shareholder to reinvest in a replacement transaction is testimony of our BEE shareholders confidence in Exxaro s strategy and quality asset base. The disposal of our non-core assets is progressing well and we completed the disposal of Inyanda (mainly the mining right, plant, private rail siding and associated liabilities) and the Mayoko iron ore project in 2H16. We are continuing to review our portfolio to ensure we have a robust portfolio of assets that can withstand a low commodity price environment. We will provide a detailed account of FYE16 operational and financial performance when we announce our financial results on the 9th of March 2017. Yours sincerely Riaan Koppeschaar Finance director FYE 1 December 2016 PRE-CLOSE MESSAGE 1
TABLE 1: COAL PRODUCTION AND SALES VOLUMES ( 000 tonnes) Production (Re-presented) FY(E) 1 December Sales (Re-presented) FY(E) 1 December 2016 2015 % 2016 2015 % Actual Actual Thermal 42 08 41 100 2 4 02 42 146 Tied 2 8 215 9 260 (11) 8 199 9 270 (12) Commercial: domestic 868 1 840 6 27 024 26 694 1 Commercial: export 8 079 6 182 1 Metallurgical 2 016 1 856 9 1 299 1 41 () Commercial: domestic 2 016 1 856 9 1 299 1 41 () Total coal 44 099 42 956 44 601 4 487 Semi-coke 54 48 1 66 49 5 Total (excluding buy-ins) 44 15 4 004 44 667 4 56 Thermal buy-ins 585 1 222 (52) Total (including buy-ins) 44 78 44 226 1 44 667 4 56 1 Based on latest internal management forecast assumptions and estimates. 2 Mines managed on behalf of and supplying their entire production to Eskom. Mafube trading division buy ins of 1 818kt from Mafube JV are included under Thermal coal production and prior periods have also been recorded as Thermal coal production (FY15: 1 147kt). FYE 1 December 2016 PRE-CLOSE MESSAGE 2
GLOBAL ECONOMY AND COMMODITY PRICES Despite the fragile economic activity in 1H16 and the high levels of political and economic uncertainty, global economic fundamentals for 2H16 remained positive. Rising commodity prices were supportive to commodity producing economies such as Brazil, Russia and South Africa to return to positive Gross Domestic Product (GDP) growth territory. Following years of weakness, coal markets showed some improvement during 2H16. Globally, weather disruptions, production cuts, above-average seasonal demand and supply reforms, most notably the 276-operating days per annum policy implemented by the Chinese government, caused thermal and hard coking coal (HCC) prices to surge significantly. Iron ore fines prices also traded above US$55 per dry metric tonne, CFR China, for most of 2H16. For Exxaro s key commodities, the API4 coal export index price is expected to average US$75 per tonne for 2H16 (1H16: US$5) while 2H16 iron ore fines prices are expected to average US$57 per dry metric tonne, CFR China (1H16: US$52). The successful implementation of the 1H16 price increases for titanium dioxide (TiO2) pigment supported improvements in net operating profit margins for Tronox during 2H16. COAL COMMODITY UPDATE PRODUCTION AND SALES VOLUMES Commercial mines Thermal coal production from commercial mines is expected to increase by 6% mainly due to the inclusion of Exxaro Coal Central Proprietary Limited (ECC) for FYE16 compared to 4 months in FY15, partly offset by the sale of the Inyanda in 2H16. Metallurgical coal production volumes for FYE16 are expected to be 9% higher than FY15. Coal buy-ins are expected to decrease by 52% due to the availability of sufficient coal to fulfill contracts. Export sales volumes are expected to increase by 1% mainly due to the inclusion of ECC exports, and exports of Mafube power station coal, previously supplied to Eskom. Sales to Eskom are expected to decrease by 8% mainly due to lower offtake from Leeuwpan mine where the contract to supply Eskom was not extended at the end of 1Q16, coupled with lower offtake from Grootegeluk in line with Addendum 9 to the Medupi Coal Supply Agreement (CSA). Domestic thermal coal sales, other than sales to Eskom, are expected to increase by 7%, mainly due to higher demand in the domestic market. FYE 1 December 2016 PRE-CLOSE MESSAGE
Tied mines Thermal coal production and sales from tied mines are expected to decrease by 11% and 12% respectively due to the cessation of the mining activities at the Arnot operation. TABLE 2: GROUP CAPEX (R million) FYE16 FYE16 Current Previous FY15 Actual MAJOR CONTRACTS UPDATE: TIED MINES Since the last report on Arnot the following activities have taken place: All production has ceased and the mine equipment is being reclaimed from the underground sections; Consultation with employees, in terms of section 189 of the Sustaining Coal Waterberg Mpumalanga 2 275 2 22 1 78 494 2 201 2 144 1 492 652 1 66 1 597 1 62 25 July 2016; Continuing our discussions with Eskom to ensure full provision for the rehabilitation funds, mine closure costs and post mine closure costs in terms of the National Environmental Management Act (NEMA) regulations, as stipulated in the CSA. Other Expansion Coal Waterberg Mpumalanga 4 496 496 49 57 57 764 764 687 77 66 727 716 609 107 Large capital projects at Matla remain unfunded by Eskom, with mine 1 on care-and-maintenance. In the meantime, the remaining mine shafts (mine 2 and mine ) are expected to produce 8.2 million tonnes (Mt) for FYE16 against contractual volumes of 10,1Mt. We continue to engage Eskom to provide the required capital funding and are considering available recourse in terms of the CSA. Other Total 2 771 2 965 1 Based on internal management forecast assumptions and estimates, excluding tied operations. 11 2 90 MARKETS Demand for our coal remained stable in FYE16 amidst some uncertainty in commodity markets. There was an increase in semi-coke sales on the back of sustained marketing efforts which are expected to continue into FYE17. We continue to engage with Eskom on a possible Addendum 10 to the Medupi CSA. The discussions include consideration of the options to reduce future take-or-pay obligations through coal storage and/or possible movement of coal to the Mpumalanga region. Export markets are still dependent on India for the lower quality coal products. New markets are being explored in the Middle - East, largely for higher quality coal. Prices increased on the back of renewed buying interest out of China, and are expected to remain high into the 1Q17. Growth is expected to come from Africa and South East Asia. CAPEX AND PROJECTS We expect Coal capex to increase by 18% on FY15 due to higher sustaining capex resulting from a change in the timing of the planned capital spend. The expenditure for FYE16 is 4% lower than guided in August 2016, mainly as a result of timing. Grootegeluk Grootegeluk capex is expected to be 10% higher than that reported for 2015. No major changes are expected to the FYE16 Grootegeluk capex, as reported in August 2016. All Medupi coal deliveries are in line with Addendum 9 to the Medupi CSA. Thabametsi Mine The Thabametsi Mine has all the required licenses in place. However, the Environmental Authorisation has been appealed The rate of production ramp-up will ultimately depend on the developments with the coal baseload independent power producer procurement programme (CBIPPPP). The Thabametsi Mine Phase 1 will be developed at an approximate cost of R billion to supply approximately.9mt of coal per year at full in 2020, in line with the development ramp-up schedule of the Thabametsi IPP power station. Commercial operation of the Thabametsi Independent Power Producer (IPP) Power Station is anticipated to be in 2021. Exxaro will solely be responsible for the supply of coal for a contractual period of 0 years. On 10 October 2016 the Department of Energy (DoE) announced the Thabametsi IPP Power Station as a preferred bidder under Window 1 of its CBIPPPP. The circa 600MW Thabametsi IPP Power Station is being developed by Japan s Marubeni FYE 1 December 2016 PRE-CLOSE MESSAGE 4
Corporation and Korea Electric Power Corporation (KEPCO) together with a local consortium of Broad-Based Black Economic Empowerment (BBBEE) partners including Royal Bafokeng Holdings, KDI, Tirasano and the Public Investment Corporation (PIC). Financial Close on the Thabametsi IPP Power Station is anticipated to be in 2H17. Belfast Due to an appeal on our rezoning application, a further delay in the start of construction is expected. The construction is expected to start 2H17. This appeal will be dealt with in terms of the applicable legislations. The project team is continuing with actions to be ready for construction should the rezoning appeal matter be dealt with sooner. DISPOSALS The sale of Inyanda was completed to a consortium of Burgh Group Holdings Proprietary Limited and Lurco Group Proprietary Limited on October 2016. LOGISTICS AND INFRASTRUCTURE Transnet Freight Rail (TFR) railed 5,49Mt to Richards Bay Coal Terminal (RBCT) during the first half of its financial year ended 0 September 2016, equivalent to an annualised rail tempo of 72,5Mt. The coal line shut in July 2016 was completed successfully and performance has stabilised. As indicated by TFR, the performance on the North West Corridor has improved after the coal line shut, matching the best performance on record since March 2009 with four consecutive weeks of five trains per week during October 2016. FERROUS COMMODITY UPDATE MAYOKO IRON ORE PROJECT Exxaro is pleased to report that the sale of the Mayoko iron ore project (and related subsidiaries) to a Congolese Consortium has been completed for an amount of US$2 million. SISHEN IRON ORE COMPANY PROPRIETARY LIMITED (SIOC) Guidance on SIOC s equity-accounted contribution will be provided when we have reasonable certainty on its FYE16 financial results. TITANIUM DIOXIDE (TiO2) AND ALKALI CHEMICALS The TiO2 business is generating momentum on the back of higher pigment sales volumes and selling prices as well as improved operating cost performance. Ilmenite feedstock prices have also increased, driven by reduced supply by Chinese ilmenite producers. Alkali Chemicals are expected to deliver a stable performance, which will positively contribute to the Tronox results. We expect our equity-accounted results from Tronox for 2H16 to improve on those reported in 1H16. CENNERGI PROPRIETARY LIMITED (CENNERGI) The two wind-farm projects, Amakhala Emoyeni (AE) and Tsitsikamma Community Wind Farm (TCWF), have both achieved Commercial Operation Date during Q16 and within the project budget. FYE 1 December 2016 PRE-CLOSE MESSAGE 5
SALE OF NON-CORE ASSETS AND INVESTMENTS The group s interests in Black Mountain Mining Proprietary Limited and Chifeng Kumba Hongye Corporation Limited (Chifeng) remain non-core and we intend to divest from these investments through a disposal process once the lock-in periods expire in 4Q16. We are also reviewing our coal portfolio as part of our optimisation programme, with specific focus on closure and/or divesting from assets that do not meet our expectation of net present value, robustness of earnings and net operating profit margins that can withstand a low commodity price environment. Exxaro envisages to commence with this process early in FY17. PROGRESS ON UNWINDING MAIN STREET Refer to the detailed announcement published on the 22nd of November 2016. OTHER CONSIDERATIONS NATIONAL ENVIRONMENTAL MANAGEMENT ACT (NEMA) 107 OF 1998 The ministers of Environmental Affairs and Mineral Resources have determined that requirements for making financial provision to manage, rehabilitate and remediate environmental impacts from mining operations will be regulated under NEMA and no longer under the Mineral and Petroleum Resources Development Amendment Act, 2008 (MPRDA). This agreement has been formalised by amending the relevant environmental and mining legislation. The financial provisioning regulations will come into force in February 2019 for implementation and contain more onerous and detailed requirements than previously required by the MPRDA. The sum total of closure costs will be covered by actual contributions and guarantees. In terms of our corporate rehabilitation standards we are assessing the full impact of these developments on our rehabilitation and decommissioning financial provisions. PERFORMANCE AGAINST NEW BBBEE CODES AND MINING CHARTER Exxaro has achieved a commendable level 4 BBBEE recognition level. This performance positions Exxaro amongst the forerunners in BEE within the mining industry. Our analysis for 2016 and future performance indicate that enterprise and supplier development (ED) presents a new challenge given the considerable budgets that are required to achieve the targets. A total of % of net profit after tax (NPAT) must be spent to achieve full compliance. An ED policy and procedure is being put in place to govern and maximize the ED impact on social development and to ensure that Exxaro can improve its performance in future years. Exxaro, through the Chamber of Mines, has participated with the mining industry to provide inputs to the Department of Mineral Resources (DMR) to revise the Mining Charter elements and targets. Exxaro supports the strategic intention of transforming the mining industry. The Chamber of Mines and the regulator continue to engage to seek alignment in this regard. The revised Mining Charter is expected to come into force in January 2017. Clarity and certainty of the requirements of this legislation is critical to our imminent review of the black ownership status, our replacement BEE transaction and the ongoing investment and development of South Africa s mining industry. CARBON DISCLOSURE PROJECT (CDP) Exxaro has performed exceptionally well in the previous CDP submission for the 2015/2016 year, with a score exceeding the industry average. The challenge going forward is to reduce our Scope (Other indirect greenhouse gas) emissions, which are primarily contingent on the downstream use of our end products. EXXARO IMPROVEMENT INITIATIVE (EIP) Following the announcement of the section 189 (of the Labour Relations Act) relating to the EIP in April 2016, the consultation process was concluded at the end of August. It is anticipated that the staffing of the new structures will be completed at the end of November. The financial impact of the process is expected to be determined during 1Q17. OUTLOOK FOR 2017 We expect an improvement in the operational results of the coal business for 2017 mainly due to: Stable trading conditions in domestic markets; Higher international coal prices than 2016; Our operational excellence process delivering further results; and Technology and innovation improvements expected to contribute positively. The performance of the investment portfolio (SIOC and Tronox) will be positively influenced by a favourable price outlook for 2017. Rising commodity prices, receding deflationary pressures and the slight but continuing improvements in business sentiment will continue to support global economic activity during 1H17. 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. FYE 1 December 2016 PRE-CLOSE MESSAGE 6
TELECONFERENCE CALL DETAILS A dial-in teleconference call on the details of this announcement will be held on Wednesday, 2 November 2016 at 1h00 (GMT+2:00). Internet broadcast: www.exxaro.com DIAL-IN TELECONFERENCE NUMBERS: Republic of South Africa toll-free: 0800 200 648 Johannesburg: 011 55 600 / 010 201 6800 UK toll-free: 0808 162 4061 USA and Canada toll-free: 1 855 481 562 Conference ID: Exxaro FD s pre-close teleconference PLAYBACK A playback will be available until 0 November 2016. To access the playback, dial one of the following numbers using the playback code 54072#: South Africa: 011 05 200 UK (Toll-free): 0808 24 6771 USA & Canada: 1 855 481 56 Australia (Toll-free): 1 800 091 250 SPONSOR Absa Bank Limited (acting through its corporate and investment banking division). EDITOR S NOTE Exxaro is one of the largest South Africa-based in the coal, titanium dioxide, iron ore and energy commodities. www.exxaro.com ENQUIRIES Mzila Mthenjane, Executive Head: Strategy & Stakeholder Engagement Tel: + 27 12 07 79 Mobile: +27 8 417 675 Email: mzila.mthenjane@exxaro.com Pretoria 2 November 2016 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 1H16 Six-months period ended 0 June 2016 FY15 Financial year ended 1 December 2015 1H17 Six-months period ended 0 June 2017 FYE16 Financial year ending 1 December 2016 2H15 Six-months period ended 1 December 2015 FYE17 Financial year ending 1 December 2017 2H17 Six-months period ended 1 December 2017 2H16 Six-months period ended 1 December 2016 1Q17 First quarter of 2017 2Q16 Second quarter of 2016 1Q16 First quarter of 2016 Q16 Third quarter of 2016 1Q18 First quarter of 2018 4Q16 Fourth quarter of 2016 COMMODITY PRICE SOURCES 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. FYE 1 December 2016 PRE-CLOSE MESSAGE 7