Full Year 2019 Exxaro Resources Ltd Earnings Call
Pretoria West Apr 10, 2020 (Thomson StreetEvents) — Edited Transcript of Exxaro Resources Ltd earnings conference call or presentation Thursday, March 12, 2020 at 9:00:00am GMT
TEXT version of Transcript
================================================================================
Corporate Participants
================================================================================
* Mxolisi Donald Mbuyisa Mgojo
Exxaro Resources Limited – CEO & Director
* Mzila I. Mthenjane
Exxaro Resources Limited – Executive Head of Stakeholder Affairs
* Nombasa Tsengwa
Exxaro Resources Limited – Executive Head of Coal Operations
* P. A. Koppeschaar
Exxaro Resources Limited – Finance Director & Director
* Sakkie Swanepoel
Exxaro Resources Limited – Group Manager of Marketing & Logistics
================================================================================
Conference Call Participants
================================================================================
* J. Timothy Clark
SBG Securities (Proprietary) Limited, Research Division – Head of Metals and Mining
* Thabang Thlaku
SBG Securities (Proprietary) Limited, Research Division – Research Analyst
* Martin Creamer;Creamer Media
================================================================================
Presentation
——————————————————————————–
Mzila I. Mthenjane, Exxaro Resources Limited – Executive Head of Stakeholder Affairs [1]
——————————————————————————–
Good morning, ladies and gentlemen, and welcome. It’s a pleasure to welcome you here to the connection. If buildings go by name, this is the name of our building. Quite a proud moment for us. And I think it seems like unknowingly, we thought it wasn’t a prediction. With the load shedding and the traffic grids in Sandton, we decided to host the event here, which also provides an opportunity for those who are coming to visit us for the first time to see our new location.
We gathered here today for our results presentation for the year ending 31st of December 2019. Some quick housekeeping rules before we carry on. Firstly, was of our ablution facilities. These are just behind this auditorium, through the passage to the right, both men separate from the women.
And then emergency response, we hadn’t planned for any emergency drills, so in the event of hearing a siren, it means that it is a real drill and there’s a problem. And in the event of that happening, you will proceed calmly through the doors at the back and then take the steps or the escalators down to the ground floor, exit through the doors behind the reception and meet at the assembly point.
I did mention that we are experiencing load shedding. In fact, as we sit here today, we are on backup. So in the event of any changes, there will be — there may be a slight delay and an interruption to our program today. So those on the webcast, I’d just like to say to you, please do redial or reboot in terms of your online access.
We’ll then take the next 5 to 7 minutes to watch a safety video. This was rather more convenient compared to the individual videos that you would have had to — which would have taken anywhere between 15 and 20 minutes. And at the end of the video, you will all be assumed to have passed and understood these safety procedures. So if we can play the video.
(presentation)
——————————————————————————–
Mzila I. Mthenjane, Exxaro Resources Limited – Executive Head of Stakeholder Affairs [2]
——————————————————————————–
Thank you very much. So now that we’ve been through all the housekeeping, let me say I think, as you all know, you’re all special guests. And always a pleasure to have amongst us our Board members. Welcome to Jeff and Geraldine as well as Ras. I think there are 3 that I’ve seen.
——————————————————————————–
Nombasa Tsengwa, Exxaro Resources Limited – Executive Head of Coal Operations [3]
——————————————————————————–
Likhapha.
——————————————————————————–
Mzila I. Mthenjane, Exxaro Resources Limited – Executive Head of Stakeholder Affairs [4]
——————————————————————————–
Likhapha. And I believe Mark and Isaac and Piet. Great. Well, we’ve got almost a full house. And Vuyisa. We really appreciate the support.
But amongst us, we have an even more special guest. I hope you don’t mind me saying so. It is an 11-year-old, grade 6 [Loyiso Chengo]. He wrote a letter to me through his godmother, my colleague, (inaudible). He has a special interest in financial services and would really like to experience Exxaro’s results presentation and to get a sense of what it’s all about. And [Loyiso] is sitting on the third row. He is from Centurion Christian School. And Loyiso , in his letter, he did a whole lot of analysis in terms of how Exxaro compares to local and offshore companies from a dividend yield perspective, high dividend yield stocks, monthly, and I think happy to say that we were rated amongst the highest. So we have a budding analyst amongst us and really proud to have you here and to — for you to have shown your interest in us. Thank you very much, and welcome, Loyiso .
The other thing I’d like to mention is that on your chairs, you’ll see that we have published our climate change strategy document or position statement. And it comes at a critical time, I think, not only in Exxaro’s life, but I think in all our lives. And I’m wearing here with me the SDG badge with 25 on it, and the 25 marks the 25th anniversary of the World Business Council on Sustainable Development (sic) [World Business Council for Sustainable Development]. And I was fortunate to have shared a meal last night with the Managing Director, where they’re on a global road show refreshing the 2050 emissions reduction pathways, which they had originally released in 2010.
Now at the beginning of a new decade, 2020, and looking forward to 2030, it marks the midpoint to 2050. And one of the key things that came out of the presentation that he presented yesterday was one of the things that we’re going to need going forward as business largely, but I think as society, is leadership and consider what the future of leadership is going to look like as we embark on this journey. Mindset, and this is a — was a very unusual attribute that was mentioned, but it is one which, within Exxaro, we also are taking on very seriously, that we cannot embark on a journey so long and so huge with the same mindset as what we’ve had in the past. And then accompanying that is real intent in that we’re not doing it because we’ve marked — we will have been able to tick a box or greenwashing or whatever the case may be, but it is with real intent and acknowledgment of the risks but also the opportunities of climate change. And that is something that we’re taking seriously.
And so with that, we’ve published it as a document that we use as an invitation letter for engaging and engagement with all stakeholders in terms of how we go about into the future to incur lower carbon. It’s not going to be an easy path. It is one which we’re under no illusion that we’ll be able to overcome by ourselves. It is an area of uncertainty but, we also believe, huge opportunity. We have a conviction and a belief in ourselves as Exxaro that we have the leadership, the mindset and we have the real intent to actually contribute to a lower carbon environment.
And so with those few words, it gives me great pleasure to then introduce Mxolisi, Riaan and Nombasa, who will come and deliver the results.
And we will kick off with Mxolisi giving his results overview. Mxolisi?
——————————————————————————–
Mxolisi Donald Mbuyisa Mgojo, Exxaro Resources Limited – CEO & Director [5]
——————————————————————————–
Thank you very much, Mzila. And again, welcome, everybody. It is a real honor and a pleasure to be standing here before you this morning. And again, welcome to our Board members. They came in numbers, in serious numbers. And that always gives one a lot of comfort that when it gets really tough up here, I can say, well, you can appreciate.
But I also want to acknowledge my previous boss. He seems to be hiding somewhere there at the back there, Nkosi. You started this whole thing. And so it is a real honor to also have you here. I know it’s hot where you have been. I guess coming from Sasol, it feels like you’re cooling off when you come here. So — but anyway, we hope that we can give you something to be joyful for in these very challenging times that you are facing.
As you will hear later from Nombasa, operational performance remains satisfactory for the previous year. However, our financial results have been largely dominated by the movements in our commodity price basket.
But starting with the economic context. Globally, throughout 2019, a slowdown in the economic growth was recorded. As the year progressed, the overhang from the U.S.-China trade tensions has impacted on international trade and investment flows. Global manufacturing activity also stagnated with several manufacturing indices contracting for extended periods during this year.
Our own country’s economic performance continues to disappoint and remain well below potential. Positive signs were evident in the implementation of some of the key economic reforms. However, the real big challenge is that tough decisions need to be taken and to be implemented. The economy slipped back into a technical recession in the fourth quarter of 2019, the second time in 2 years, illustrating once more the urgent need for structural economic reforms.
The critical importance of Eskom and the negative impact of load shedding on South Africa’s economic growth was again illustrated with the release of the official Q4 2019 GDP of minus 1.4%. As continuing load shedding is likely to plague South Africa until mid-2021, devastating consequences remain in store for the mining sector as the key investor in the economy, foreign exchange earner and direct and indirect employment provider.
As a direct result of the critical importance of Eskom to the economy as a whole, further financial support to the tune of about ZAR 100 billion is budgeted by government over the next 3 years for Eskom’s reform program. We remain optimistic, cautiously optimistic, as Eskom’s current management, together with the necessary political support, we’ll turn the power utility’s fortunes around.
In relation to commodity markets, thermal coal prices was under pressure with the API4 reducing by 27% year-on-year from continued lower gas prices. Significant oversupply of gas from the first quarter of 2019 and the LNG storage overhang added to coal destocking pressures in Europe and, in turn, the global seaborne market. The good news is that our SIOC investment positively contributed to our performance on the back of a favorable iron ore price during this period.
With this brief macro background, let me present to you the following highlights from our results. Nombasa and Koppes will provide more details in their respective sections.
It is pleasing to report that we have remained fatality free for the past 36 months to the 3rd of March 2020. The group recorded an LTIFR of 0.12, which is still higher than the set target of 0.11.
Despite the supply-demand market challenges in some of our key global markets and weather-related interruptions at RBCT, we achieved record coal export volumes of 9.1 million. However, our core EBITDA was down 20%, mainly attributable to the lower API4.
Cennergi achieved an all-time record energy output of 762 gigawatt-hours despite losing 2 turbines during the — due to fire incidences at Tsitsikamma for most of the year. The energy output amounts to an increase of 5% compared to 2018 of 721 gigawatt-hours. We are also pleased to announce that all CPs for the purchase of the remaining 50% of Cennergi have been met. However, the sale will be concluded at the end of March.
Our share of core equity-accounted income from associates and joint ventures increased to ZAR 4.7 billion compared to ZAR 3.3 billion the previous year mainly as a result of our SIOC contribution. Our HEPS increased by 9% to ZAR 23.54 per share. We’re also pleased to announce a final dividend of ZAR 5.66 per share.
We have improved our ESG performance rating from 3.7 in 2018 to 4, as measured in terms of the FTSE Russell ESG index. And this score is measured out of a maximum of 5. The overall ESG performance for Exxaro is a good reflection of managing 9 financial risks which cannot be modeled for valuation of a company, especially in times of heightened localized social conflict, depressed economic activity and increased corporate governance scandals. Relative to our peers, the level of the score reflects the best-in-class coal mining company. And with that, we are proud, especially given the pressures around ESG, as we are seeing our investors always asking us about what we are doing related to those issues.
And now, I will come back later on in terms of the outlook. I now invite Nombasa to come and present the core performance, of which I know she will do a good job, the lady dressed in red.
——————————————————————————–
Nombasa Tsengwa, Exxaro Resources Limited – Executive Head of Coal Operations [6]
——————————————————————————–
Okay. Thank you, Mxolisi. And good morning, ladies and gents. Once again, I am privileged to present to you our operational performance results for what we believe was a very tough 2019 compared to 2018 performance. And I will only emphasize from time to time without having to refer to the comparison.
If we look at our safety front, as Mxolisi has already mentioned when he was talking about group safety, our lost-time injury frequency rate remained at 0.12 despite the increase of 6,059 employees and contractors at our operations as a result of the work that we are doing on construction between 2016 and 2019. I am, however, pleased to report that we have not incurred a fatality for 36 months. And we continue to energize our employees to work safely all the time through our safety always, Khetha Ukuphepha, safety initiative.
On key environmental risks, I’m also happy to report that our total land disturbed and rehabilitated remained at 0.21% despite the fact that our mining activities have increased, as you’ve seen in the addition of our Belfast mine.
As far as water intensity, we were also below our 0.02 kiloliters per run tonne target. And this was the result of the reduction in intensity as a result of NBC sale.
And as far as our carbon intensity, also improved by 1.64% due to fuel efficiencies and again despite the fact that we’ve moved more tonnes this year in total than we have in the previous year.
As the previous guidance, you will recall that we reported that 3 of our residue facilities at ECC were going through an upgrade so that they can comply to the South African national standard of 10,286, and we continue to mitigate the risks all associated with the operation of these facilities in the interim.
Now moving on to the volumes. As you can see on the bar graphs, that both production and sales were lower by 5% and 2%, respectively. And you’ll see from the table a net decrease of 2.2 million tonnes in product, and I will tell you just now what the reason was.
Firstly, as we’ve reported half yearly, that Grootegeluk has been down by 1.9 million tonnes due to lower Medupi offtake as a result of all the challenges that Medupi had experienced in the first half of 2019 — the first quarter, sorry, of 2019. And some of these challenges continued into the second half, resulting in full stockpiles at Grootegeluk, which negatively impacted our production plan.
The next impact was the sale of NBC, and you can see from the table the impact on product and also on sales of 1.5 million tonnes.
And the third biggest driver has been at Matla, down 0.6 million tonnes. And as we have said before, that at Matla, we cannot replace tonnes, which result from any tempos that may be low on the walls or if we’ve got pit-room challenges for as long as Mine 1 is not recommissioned. And we know this is as a result of the delays in the capital from Eskom that we had to wait for. And all these movements, as you can see on the table, are offset by the tonnes from all our other Mpumalanga mines.
And now on sales specifically, you see a net decrease of 0.7 million tonnes, which is due to more or less the same trends that I’ve already mentioned. And these are partly offset by volumes from ECC and also from Leeuwpan, as you can see on the table, and the additional 1.1 million tonnes of export sales.
If we project into 2020, we expect our product to be up by 7% due to GG6 Mine 2 wall at Matla, Leeuwpan, Belfast, all of them ramping up. And on sales, we expect 11% increase due to Medupi offtake. And I can pleasantly tell you that Medupi has been taking according to plan, and this trend has started in the last quarter, specifically in December, and we believe that if they continue to take at the levels at which they do, they will be able to take all their tonnes. Obviously, in addition to this, as you know, that GG6 and Belfast will be ramping up as far as our export sales tonnes.
Moving on to exports and market performance. You can see sales were up 14%, which is an all-time of 9.1 million tonnes. Really, congratulations to our marketing team that really worked hard to make this happen. And this was really due to product and rail availability, supported by RBCT declared higher declaration. And this is despite monsoon rains in India in the third quarter and further weather disruptions that we experienced in Richards Bay in the fourth quarter.
Now just a little bit on insights on the global markets. In terms of what we’ve seen in Japan and Korea, we saw a decline in demand. And as far as gas prices in the Atlantic remained lower while India, China and Southeast Asia imported more thermal coal.
Then on price, and we provide you a price graph there, the top right, which showed much volatility. I’m talking more the API4 price as well as the discounts on the subgrades relative to the index. And this was a result — this resulted in noncommitted buyers that really caused a dampening effect on demand.
With the softening of RB markets, RB2 showed good demand, and we could compete quite favorably in that market. And whether these trends will continue into the future or not, this will pretty much depend on demand and the value opportunities in the market.
And as you can see on the lower-right graph, our product mix resulted in a slightly wider gap between average API4 and the average realized price than in the previous year, further exacerbated by a very wide discount experienced on RB3 and power station coal in the fourth quarter of last year. But we’re very proud of our balanced portfolio between Eskom, domestic and export sales, which really creates an effective market buffer, protecting our margins, especially at current prices. And our diverse product mix also allows us to respond quite competitively to ever-changing market conditions.
Now let’s deal with the costs. Looking at our cost per tonne. So increasing activity changes at our operations, where in 2019 alone we moved 14 million tonnes of overburden as well as the 1.1 million tonnes more of export sales. And you know that our product tonnes are already reported to you, which is our divisor to our rand per tonne. It’s sitting at a low of — or below by 2.2 million tonnes, which had a significant impact on our unit cost performance.
So this is a very important point to notice, ladies and gentlemen, that we’ve always said to you that our target is to be within inflation — mining inflation. And we’ve shown in the past, coming out of 2018, that we have been within mining inflation. And if you look at the impact of the 2.2 million tonnes and also the 1.1 million tonnes more that we’ve sold, then you’ll fully understand — obviously that and also the tonnes, which is 14 million tonnes more of total tonnes handled, you will then fully understand the challenges that we have. And we can talk a little bit more about what we’ve done in the past to make sure that we manage even that inflationary increase on top of our costs. So we can talk a little bit about that. So if you look at the normal inflation now in terms of the impact, it had an impact of 400 — ZAR 646 million at an average of about 5%.
So let me now unpack the activity changes that I talked to in terms of how that cost went. So if you look at our contractor cost of ZAR 419 million related to the higher overburden that we had to move, as you can see on the line graph, this was due to the stripping that we had to do at Leeuwpan and Belfast as well as at ECC related to more ROM that we had to move. And then I’ve mentioned already our additional selling and distribution costs of ZAR 369 million, which we incurred linked to the 1.1 million tonnes of higher export sales as well; and also early ROM from Belfast, including costs related to GGC’s [con ops], which is your 7-day work week, which is shown under Other on your graph, which were essentially offset by savings from the NBC sale.
Now looking at stripping ratios going forward. You will notice that Grootegeluk went up quite slightly in 2019 while stripping ratios peaked at ECC. And what we’ll see at ECC going forward is that the stripping ratios will decrease and stabilize at lower levels as we begin to mine pit 2 from underground.
At Leeuwpan, and you can see in Mafube, stripping ratios are expected to remain at the same levels for the next few years as we advance mining these new reserves. And even at Belfast, which has got stripping ratios which is quite high, comparatively speaking, of 10:1, you will see that it remains consistent over the life of mine. And what we do on an ongoing basis is to review our operating models regarding contract versus own mining in respect of operating cost and CapEx. This enables us to decide on what is an optimal operating model. And we’ve come to the stage where we can see a tipping point as far as now getting benefits from using contractors and considering a possible move now on to having our own mining in deployment.
Ladies and gentlemen, in my last slide, looking at our total capital spend for ’19 to ’23, that is the years, it’s expected to be lower by 1% compared to previous guidance. Now if we look at the expansion capital, it is expected to be 1% lower due mainly to Thabametsi’s IPP that has not yet achieved its financial close, and then the CapEx then moves into subsequent years.
You will also see on Belfast that CapEx was accelerated for early ROM in the first half of ’19. Therefore, you will probably notice an increase compared to previous guidance.
We also anticipate further impacts on CapEx and time lines due to GG6 delays, and we are in the process of quantifying what that impact is going to be. However, early indications show us that the increase in CapEx will probably be within approximately 10%, more than what was approved, together with a 6-month delay with commissioning in the second half of 2020. And we continue to work very hard and deriving plans to make sure that we don’t lose much value from the delays that are caused by the — these contractors associated with the construction.
As far as Matla Mine 1, we are going through the detailed design of the shaft. And the tender adjudication process has been kicked off, and we expect that work to start quite shortly.
All other large projects that we’ve been talking about over the last few years like the GG load out station, the Leeuwpan OI project, Belfast are all already contributing to the coal earnings, something that we’re very, very happy about.
On sustaining CapEx for ’19 to ’23, it is in line with previous guidance and includes the latest sustaining and replacement strategies. And that ZAR 1.3 billion that we’ve said we’ve saved is still intact. So we’re quite happy about that.
So ladies and gents, in closing, I really would like to give a special mention to the coal team and the support colleagues for their relentless drive to achieve results even in challenging times.
Now it’s over to you, Koppes.
——————————————————————————–
P. A. Koppeschaar, Exxaro Resources Limited – Finance Director & Director [7]
——————————————————————————–
Morning, ladies and gentlemen. It’s a pleasure to present the 2019 financial results. The results will be compared to the corresponding results for 2018.
So in the first slide, we look on a high level at the core results. And at the top, you can see there is the pit that — the own-managed operations, and at the bottom, our equity-accounted investments as well as our headline earnings per share. So you can see at our own-managed operations, although revenue was 1% higher at ZAR 26 billion, our EBITDA was 20% lower at ZAR 5.8 billion. The contribution from our non-managed operations showed a significant increase with the equity income increasing 45% to ZAR 4.7 billion mainly due to the performance of our investment in Sishen Iron Ore Company. This translated into a headline earnings per share of ZAR 23.54, an improvement of 9%.
On the following slide, you will see the noncore adjustments to earnings. Most of these adjustments are JSE headline earnings adjustments. I’m only going to look at 3 numbers.
So the one is the targeted voluntary packages. Exxaro is committed to complying with the mining charter and DTI codes, which includes adherence to employment equity targets by 2022. So one of the mechanisms that we’re looking to achieve this is through the targeted voluntary packages, which is an offering targeted specifically at non-designated employees in Exxaro. So we made a provision for this in total of ZAR 396 million, excluding the tied operations.
The other big number, the ZAR 2.4 billion, is on the TiO2 segment, where we excluded all the profits associated with our disposals of Tronox.
The last one that I want to highlight here is in the other segment, the ECC contingent consideration. 2019 will be the last year that we are liable for contingent consideration. From 2020, this will be out of the system.
So we will now focus on the core results. If we look at the revenue in the domestic market, the trend for the first half of the year continued, resulting in higher prices to be realized. However, as we already explained, the 27% decline in the benchmark API4 price resulted in a 30% decline in the realized export price. You can see there on the bar revenue. The impact of that is almost ZAR 3 billion.
If we then turn to volumes. So the domestic volumes decreased due to the reasons Nombasa already alluded to. But our exports were increased by 14% due to higher coal availability from our own operations as well as the first contribution from Belfast. The negative variance at Ferrous relates to FerroAlloys, where sales volumes were lower due to the termination of the contract to supply ferrosilicon to SIOC. The average rand-dollar spot rate that we realized was also 9% weaker, and we realized the rate of ZAR 14.73 compared to ZAR 13.24 last year.
The last bar there, where we strip out the captive mine, so revenue from Matla was ZAR 374 million year-on-year higher mainly due to the recovery of the cost and the CapEx from Eskom, which is accounted for as revenue.
If we then look at EBITDA. The revenue variance was already unpacked on the previous slide. Then if we look at inflation that Nombasa already alluded to, so on labor, the group’s specific increase in labor was 7.3% and electricity, at mine-specific rates, averaging 6.9%. And the rest of the inflation basket was at PPI of 4.5%. The positive variance on employee cost Is mainly due to the divestment of NBC that we spoke about earlier as well as lower bonus payments, in line with the lower profitability in 2019. This was, to some extent, offset by additional costs due to the implementation of the [fulcal] [shaft] roster at Grootegeluk.
The increase in rehabilitation cost is mainly driven by revised estimates from environmental specialist to bring our provisioning in line with the revised legislation that will come into effect in 2021. And this relates mainly to our closed operations being Hlobane and Durnacol. I also want to point out that these additional costs has not been included in the unit cost that Nombasa alluded to earlier.
The operational cost was higher due to the reasons that Nombasa already alluded to at ECC and Leeuwpan, also the early ROM at Belfast but offset by the divestment of NBC in 2018. The negative variance on distribution cost is in line with the higher exports as well as also the first tonnage that we received from Belfast. The positive variance on ForEx is a combination of realized and unrealized foreign exchange differences also on our working capital. Our royalties were lower due to a combination of factors, being the lower profitability, different rates in calculating the royalties and also the CapEx that qualify to be redeemed against revenue.
On the next slide, the split of revenue and EBITDA between Waterberg and Mpumalanga. We are very pleased by the increase in revenue and EBITDA at the Waterberg operations. The decrease in Mpumalanga is driven mainly by the impact of lower export prices that we already spoke about as well as the additional cost increases that we experienced there.
The last one, in the Other segment, the increase there relates mainly to the increase in rehabilitation costs that I alluded to earlier of about ZAR 300 million at Hlobane and Durnacol. Also important to highlight there included in the 2019 figure is an amount of ZAR 178 million relating to higher IM cost associated with our digitization and the associated support cost. Also, I want to point out that the Belfast project is still in a ramp-up phase. And for 2019, revenue and expenses amounting to a net loss of ZAR 324 million has been capitalized to the asset. But we foresee that the capitalization was — desist during the first half of 2020.
If we then look at the core attributable earnings. You can see that the financing cost is fairly low. That is due to higher capitalization at the GG6 and Belfast projects. In total for the year, we capitalized ZAR 448 million.
Looking at the equity income. The equity income from SIOC increased to ZAR 4.4 billion, and that was supported by the higher iron ore prices and the premia on their products. In Tronox in 2018 was still included the U.K. and the SA operations. But as you are aware, the U.K. operations were disposed of. So for 2019, it only includes the SA operations.
Mafube, our JV with Anglo, reported an equity profit of ZAR 127 million. Cennergi, the 50% joint venture with Tata, we recorded an equity-accounted profit of ZAR 45 million compared to ZAR 65 million last year. The results for 2019 were negatively impacted due to the ineffective portion on interest rate swaps. But to a large extent, it was offset by very good operational performance, especially at the Amakhala operation.
Included in Other is our investment in Black Mountain. So the equity income from Black Mountain, our 26% interest, was ZAR 51 million, and this was offset by a ZAR 103 million loss from Insect Technology Group, where start-up losses are still being incurred. Also, important to know that we are making good progress and are in the final stages in concluding the sale of our investment in Black Mountain.
So as can be seen from the above, the net decrease in operating income was more than offset by the increase in our equity-accounted income, resulting in core attributable earnings per share of ZAR 23.84 (sic) [ZAR 23.54], up 9%. Also, remember that the per-share calculation is based on an adjusted number of shares, and there is a backup slide, I think it’s on Slide 38, explaining that.
If we look at the capital allocation of the group. In total, we received ZAR 13,4 billion, comprising ZAR 4.1 billion from our own operations, proceeds of ZAR 5.1 billion from the disposal of our interest in Tronox as well as dividends of ZAR 4.2 billion mainly from sale. We then used that in terms of the capital allocation framework to pay financing costs of ZAR 232 million, CapEx to sustain the coal operations of ZAR 2.2 billion, CapEx to expand the operations of ZAR 3.6 billion. And during the year, we paid normal dividends of ZAR 5.1 billion and a special dividend of ZAR 3.2 billion.
Included in the ZAR 578 million under growth is our contractual further investment into Insect Technology Group, the amount there was ZAR 263 million, as well as about ZAR 250 million spent on non-coal-related CapEx. The dividends that we paid in enabled Eyesizwe RF to fully settle their share liability. And as a result of that, we are now also accounting for the structure as a noncontrolling interest. There is a slide at the back that explains that.
Included in the other bucket of ZAR 1.469 billion was ZAR 679 million for the acquisition of shares in terms of the vested share-based schemes, ZAR 519 million, due to the implementation of the new IFRS 16 standard on leases; and ZAR 344 million which we paid to Total as part of the deferred consideration that I alluded to earlier.
So this resulted in a final net debt position of ZAR 5.8 billion. We still have a very healthy balance sheet. The net debt-to-equity ratio, 13%; and the net debt-to-EBITDA cover ratio of 1, well below our target of 1.5.
On the next slide, we are pleased that we’re now in a position to implement our employee and community empowerment schemes via the Esop and community structures as — we undertook as part of the replacement BEE transaction. So a 5% shareholding in Eyesizwe RF will be transferred to each of the employee and community schemes through a combination of free and vendor-funded shares. So although the Esop scheme will initially have an upfront IFRS charge depending on the share price, it will now replace our existing Phantom scheme that we put in place as an interim measure. So for 2019, the payments under the Phantom scheme amounted to ZAR 80 million, which is then based on the dividends that Exxaro paid out.
The last slide, I’m pleased to announce that the Board to resolved to pay a dividend, a final dividend of ZAR 5,66. So in terms of our dividend policy, it’s a combination of the pass-through of the SIOC dividend of ZAR 3.93 per share as well as the dividend from the coal operations of ZAR 1.73, resulting in an overall cover ratio of just over 2x core attributable earnings for the group.
So with that, I also want to echo the sentiments of Exxaro. I think 2019 was a difficult year for everybody. I think the people at the operations did very well to get us to this stage. Also, a lot of hard work from the support functions. We even kept our Board very busy this year. And also for the finance team for putting in the long hours.
So back to Mxolisi.
——————————————————————————–
Mxolisi Donald Mbuyisa Mgojo, Exxaro Resources Limited – CEO & Director [8]
——————————————————————————–
Thank you very much, Koppes, for all the hard work that you also did with Nombasa. I know you guys always complain that I’m a slave master. But that’s okay. I take that compliment.
Now our overall outlook for this coming year. We do still remain very cautious. The global economic growth and the commodity market performance remain really uncertain. And by and large, more recently, the impact of the coronavirus is something that is making us all scratch our head as to which direction it’s going to take and what further impact it’s going to have on all of our businesses.
We expect domestic thermal coal demand and pricing to remain relatively stable during 2020. The API4 price is expected to remain under pressure from continuing low gas prices. However, depending again on the duration and the spread of the coronavirus in China, the recovery in thermal coal import demand in China might support the seaborne market somewhat. So corona, you are the future as to which way we’re going to go.
South Africa’s fiscal imbalance will remain a huge constraint in addressing the increasing socioeconomic challenges and the increasing risk of a sovereign rating downgrade. As a result, the rand-dollar exchange rate is expected to remain volatile for the remainder of this year.
Subsequent to the approval of our early value strategy, the Grootegeluk, Belfast and Mafube mine plans have been updated accordingly and incorporated into our business plans from 2021. So we are going to be executing our early value strategy.
Our early indications show that CapEx requirements will not increase, and we will be — and this will be confirmed and communicated after this work has been thoroughly analyzed, done and finalized. But it is encouraging that we could be able to get more value without much more capital expenditure going into the future.
In 2017, Exxaro adopted a strategy to explore new investment opportunities based on 3 pillars, namely water security, food security and energy security. Now based on our experience since then, we’ve had a rather robust engagement with the Board and ourselves in reflecting on that particular strategy. And we have undertaken that going forward, our strategy will focus solely on new opportunities in the energy security space. As we pursue these opportunities, our approach will continue to be measured with a view to mitigating potential risks and ensuring that the capital allocation decisions are in line with appropriate matrices.
Exxaro remains encouraged by the 2019 Integrated Resource Plan and efforts to secure Eskom’s financial viability as well as the pronounced self-generation opportunities, which could provide for improved carbon efficiency and broader energy security. In addition, these combined factors could provide opportunities — new opportunities for Cennergi and our aspirations in the energy space.
This backdrop provides for Exxaro’s own aspirations and climate response strategy. And in charting a just transition path towards a lower-carbon future, it is, however, important that we must consider firstly that South Africa will remain a largely coal-driven, energy-generating country for the foreseeable future in terms of the 2019 IRP. Exxaro is well positioned in this regard given the quality of its coal reserves and its operations.
Secondly, it’s the potential negative impact on the poorer and the vulnerable members of our society whom we must understand, consider and take along with us on this journey for a chance of a better life. That is part of our responsibility. Therefore, in response, we have aligned our climate change response strategy in line with the Paris Agreements.
Our 2050 carbon neutrality aspiration therefore is as follows: we aim to be carbon neutral by 2050 by reducing our Scope 1 and 2 emissions through investing in low-carbon fuel technology and self-electricity generation using renewables. We recognize the constraints in reducing our Scope 3 emissions from product use and employee travel. We aim to collaborate with our customers and others to find means to offset these emissions. That is the commitment we are making. And in a few years’ time, we will also review these commitments. As we continue building our renewable energy business, then we can become even more firmer around these commitments.
In addition, the Board has adopted the Financial Stability Board’s TCFDs as a framework for developing Exxaro’s response strategy and engaging shareholders and other stakeholders. The published climate change position statement is a first step in the engagement of stakeholders, and we invite you to further dialogue and action in this regard.
But I just want to close by just all of us understanding that the challenges that we all confront in this country are not challenges which can be solved by the government alone. These are challenges that we are confronted with day in and day out every day in our operations.
As Eskom is about to decommission a number of power stations over the next coming years, the pressure is not only there today but will continue to grow if we don’t see ourselves as being part of the solution to the problem by looking at new ways and innovative ways, creative ways of how we can collaborate with each other across business, across civil society, in every formation that we can in actually addressing these challenges. They are real. Let’s not make — be under any other illusion that they are not. And they are a big risk to our existing business. So by sitting on the sideline thinking that it’s somebody else’s problem, we’re going to be confronted by a challenge that once it actually boils over, our existing business is under threat. So let us embrace this challenge. Let us take action on this challenge.
That is why at the beginning of the year, under the banner of Busa, we took the liberty to actually make a commitment to the President and his cabinet that we as business are ready to roll up our sleeves and actually not sit on the fence but be part of the solution.
And so I urge you and some of you as my shareholders here that your own survival is based on ensuring that the challenges we have, the high levels of youth unemployment, the growing unemployment, the high disparities of equality, if these are not addressed, God help us all. Our children and our grandchildren are going to inherit a very, very bad outcome. And that also talks to climate change. If we don’t take climate change issues very, very seriously and see it as being part of our responsibility to respond to this in very effective, full and impactful ways, again, God help us because our children will inherit a very, very challenging future.
So let us embrace this. Let us be the patriots that are required. Let us do the right thing. It is the responsibility that we have for the next generations.
And with that, I just want to conclude by saying thank you very much, ladies and gentlemen. Thank you for taking the time to make it here today. And also, we are looking forward to all the questions, which I know — I can see Tim is already itching, but I just want to also thank the Board for the commitment they have given to us, working with us in shaping this future. And also to the management team, the people of Exxaro who work tirelessly to ensure that despite and in spite of the big challenges that we are continuously faced with, they come to the party. They come with the solutions. They help us to stand here every time to be able to tell a much better story every time. And so to you, all of you, I also say thank you.
And now, ladies and gentlemen, let me hand over to Mzila for the Q&A session. Thank you.
================================================================================
Questions and Answers
——————————————————————————–
Mzila I. Mthenjane, Exxaro Resources Limited – Executive Head of Stakeholder Affairs [1]
——————————————————————————–
Thank you very much, Mxolisi, for that conclusion. Now we come to the eagerly awaited Q&A session. And I do have already questions actually on the webcast, but I’ll take a few questions first from the room. And then I’ll give an opportunity to [James Connor] a bit later. So Tim?
——————————————————————————–
J. Timothy Clark, SBG Securities (Proprietary) Limited, Research Division – Head of Metals and Mining [2]
——————————————————————————–
This is Tim Clark from Standard — from SBG Securities. Congrats on the results.
A couple of questions from me. First of all, just the announced sale of ECC and Leeuwpan. You’ve been investing in the assets. You’ve spent a lot of time on the assets. And now the decision to exit them, I assume that, that goes with a rail allocation. So I would imagine it’s going to be quite a tough sale process because they’ve had quite bumpy profitability, and most of it’s built for export mines. So I think it will really help us if you could talk through just some of those assumptions. Are they — are you keeping the allocation? Are you not? And can you reorientate those mines very quickly and easily away from exports if they don’t have the allocation?
The second one is on Thabametsi, my favorite subject for you guys. It’s still in your CapEx numbers, and now it’s a very meaningful part of your growth CapEx going forward. Just when — what — is it going to happen? I mean I thought we would be on financial close now. So I thought we’ve gone beyond the drop-dead date. I was sort of expecting it to disappear or certainly be deferred or reshuffled.
And then my last one is just on Cennergi. It’s not profit — not very profitable at the bottom line at the moment. And presumably, from the 30th of March, which is sort of tomorrow, in meaningful terms, it’s around the corner, you’re going to have full revenue from that, you’re going to have full EBITDA from that. So I wondered if you could talk to the historic numbers from Cennergi from last year, what we should think of as revenue, EBITDA numbers. Because I imagine that you’re going to consolidate the debt and that we’ll need to bring in that ZAR 1.5 billion-odd of debt.
——————————————————————————–
Mzila I. Mthenjane, Exxaro Resources Limited – Executive Head of Stakeholder Affairs [3]
——————————————————————————–
Thanks. Obviously, you have 3 questions. The first one around, ECC and Leeuwpan investments. Given how we’ve spent in the past, whether, in terms of a sale, that those — that, that disposal goes with a rail allocation. It’s the first part of the question. And then the second part of the question, given that if the rail allocation is not going with that sale, can these operations be reorientated away from export?
——————————————————————————–
Nombasa Tsengwa, Exxaro Resources Limited – Executive Head of Coal Operations [4]
——————————————————————————–
Thank you very much. Thank you, Tim, for the question. Just a little bit of background before we get to talking specifically on entitlement.
You asked us a question, I think it could have been in August, about what are you going to do with the operations in Mpumalanga given the position that we’re in. And you talked to us in the middle of our early value strategy that we’re developing. And 3 big things we’re looking at in deciding on which priorities, from a value point of view, we’re looking at was the quality of the product, we also looked at the volumes and the length or the life of the mine. And what came out of that was that we would prefer to have the high-value products to go on rail and the fact that we had lots of capacity in our operations and the present reserves we have to get more of RB1 to the extent that in our mix, we could go up to about 80% of RB1, which in that process means that we will have to prioritize tonnes coming out of GG — GG6 in particular adding on top, and then Belfast tonnes, which we’re busy ramping up, and to the extent that we had to look at alternatives of the product, which landed us in a conversation with Eskom on 2 contracts for ECC and Leeuwpan, where we could easily swing those tonnes to the Eskom market for a 5-year contract at ECC and a 3-year contract for Leeuwpan. And those conversations are in advanced stages. So what — why am I telling you this is that whether those 2 operations are in our hands or not, they were destined to be in the Eskom market and even more profitable in that context.
Now let’s talk about your question on entitlement. It links to what I’ve just stated. If we were to sell it or those assets without entitlement, then I’ve already answered the question. But we do not know what will come out of the negotiations. So we are not necessarily saying 100% no, but we opened the process and we’ll engage. And we will have to determine what gives us more value in the process of sale. Are you happy? All right.
——————————————————————————–
Mzila I. Mthenjane, Exxaro Resources Limited – Executive Head of Stakeholder Affairs [5]
——————————————————————————–
And then around Thabametsi, are we still showing the CapEx for it? And an update on the process?
——————————————————————————–
Nombasa Tsengwa, Exxaro Resources Limited – Executive Head of Coal Operations [6]
——————————————————————————–
Well, Thabametsi is not closed yet, Tim. It’s the same story. As I’ve said, it has not reached financial closes yet. You know the challenges with Thabametsi in terms of the greenies and the push for cleaner technologies and that process, which is taking its own long process as well.
And then if you look at the IRP, the reason we’re hanging to this is the fact that the IRP is still talking to 1,500 megawatts of coal from IPPs, which then says that there is an intent in this government to continue to invest in these kinds of facilities. But we’ll have to watch this space, Tim, as much as you are.
——————————————————————————–
Mzila I. Mthenjane, Exxaro Resources Limited – Executive Head of Stakeholder Affairs [7]
——————————————————————————–
Okay. And then anything you want to add to that, Mxolisi?
——————————————————————————–
Mxolisi Donald Mbuyisa Mgojo, Exxaro Resources Limited – CEO & Director [8]
——————————————————————————–
Yes. So is it on?
——————————————————————————–
Mzila I. Mthenjane, Exxaro Resources Limited – Executive Head of Stakeholder Affairs [9]
——————————————————————————–
Yes.
——————————————————————————–
Mxolisi Donald Mbuyisa Mgojo, Exxaro Resources Limited – CEO & Director [10]
——————————————————————————–
I think just to add on to that, Tim. Remember, we have a contractual obligation with Marubeni, which is the developer of the IPP for the remaining of this year, in terms of being able to supply them with the coal, and we will make whatever decision we’ll have to make at a later date. But as Nombasa said, there is this 1,500 megawatts coal IPP. I think by and large, it has to be government’s decision as to whether they are looking at utilizing newer technologies, cleaner technologies for those coal IPPs for that allocated 1,500 because obviously, the country also has its own commitment in terms of carbon emissions. So by in hand — by and large, I think we are in abeyance just because of decisions that still have to be made by government as whether what technology they’re going to allow. And if they say that the older technologies are not going to be what they’re looking for, then it may be that the project may or may not go ahead. We don’t know.
——————————————————————————–
J. Timothy Clark, SBG Securities (Proprietary) Limited, Research Division – Head of Metals and Mining [11]
——————————————————————————–
Is there a drop-dead date in the contract or not?
——————————————————————————–
Mxolisi Donald Mbuyisa Mgojo, Exxaro Resources Limited – CEO & Director [12]
——————————————————————————–
Like I said, end of this year.
——————————————————————————–
J. Timothy Clark, SBG Securities (Proprietary) Limited, Research Division – Head of Metals and Mining [13]
——————————————————————————–
End of this year. Sorry, I thought it was last year. Okay.
——————————————————————————–
Mxolisi Donald Mbuyisa Mgojo, Exxaro Resources Limited – CEO & Director [14]
——————————————————————————–
Yes.
——————————————————————————–
Mzila I. Mthenjane, Exxaro Resources Limited – Executive Head of Stakeholder Affairs [15]
——————————————————————————–
Okay. And then around Cennergi, just perhaps context in terms of its historical performance on revenue and EBITDA?
——————————————————————————–
P. A. Koppeschaar, Exxaro Resources Limited – Finance Director & Director [16]
——————————————————————————–
Yes. So for 2019 — so Cennergi, the EBITDA and revenue is very close because the operating cost is not that big. So for 2019, what I can recall, the EBITDA is between ZAR 900 million and ZAR 1 billion. And how that contract works is every year, the price escalates by CPI. So for the term of the PPA, every year you will get the CPI adjustment on your price.
Then on the debt, so the current — when we constructed the project, 75% was project-financed and 25% was equity-financed. So the project finance that we will consolidate onto the balance sheet currently is about ZAR 4.7 billion. But remember, it’s ring-fenced, no recourse to the Exxaro balance sheet.
——————————————————————————–
Mzila I. Mthenjane, Exxaro Resources Limited – Executive Head of Stakeholder Affairs [17]
——————————————————————————–
Okay. I’ll take this question from[James Connor]. Three questions from him, one of which we’ve partly answered and which — maybe I’ll start with, and it relates to with — now the disposal of Leeuwpan and ECC, where is Exxaro’s strategy focused? And where do we see growth coming from?
——————————————————————————–
Mxolisi Donald Mbuyisa Mgojo, Exxaro Resources Limited – CEO & Director [18]
——————————————————————————–
Okay. Partly, I guess, Nombasa can talk about the early value strategy. But by and large, there is still a lot of value. And I just want to add on to — probably support Nombasa. There’s still a lot of value in the core business, of which, as we said, we want to extract that as early as possible so that we cannot end up with stranded assets.
One thing, I think, we’ve all learned is that as much as it is prudent to sometimes use a bit of debt to finance your growth, but we have seen what being highly geared can do to your businesses. So we want to make sure that we can generate as much cash we see now with the expense of our capital, of the ZAR 20 billion, coming through — in light where the business is going to be ramping up in terms of production, whether you’re talking Eskom, whether you are talking exports. And therefore, we want to generate as much cash out of that so that we always ensure that we have a healthy balance sheet. And that balance sheet, we will then that — I mean, that — those cash flows, we will then save. Some will come to the shareholders. And that will also support our growth around the energy side. So this is part of our whole capital allocation. So it is important that we maximize and sweat these assets for the whatever remaining period as — it is in terms of a coal future.
——————————————————————————–
Nombasa Tsengwa, Exxaro Resources Limited – Executive Head of Coal Operations [19]
——————————————————————————–
Got a lot?
——————————————————————————–
Mzila I. Mthenjane, Exxaro Resources Limited – Executive Head of Stakeholder Affairs [20]
——————————————————————————–
I’ll do it. Okay. And then [Piet], while we’re on the topic of strategy, from [James] again, on what we call the business of tomorrow, with the decision to refocus, what happened to the BoT investments and whether they’ve all been exited? And if not, what is the value of the remaining — of these remaining assets? Riaan?
——————————————————————————–
P. A. Koppeschaar, Exxaro Resources Limited – Finance Director & Director [21]
——————————————————————————–
So we are reviewing the portfolio. At this stage, we have not exited any of them. So the carrying values, I don’t have it now here with me, but it is — as per the original values when we originally acquired them, minus the — if they incurred equity losses, we would have written off the equity losses. So the only additional investment during the current year was a contractual commitment into Insect Technology Group, the ZAR 263 million that I alluded to. So if you look in total, then the value on the balance sheet should be in the region of below ZAR 1 billion.
——————————————————————————–
Mzila I. Mthenjane, Exxaro Resources Limited – Executive Head of Stakeholder Affairs [22]
——————————————————————————–
Below ZAR 1 billion, okay. And then the last question from [James] relates to the TVPs, just asking for that number again in terms of the embedded costs.
——————————————————————————–
P. A. Koppeschaar, Exxaro Resources Limited – Finance Director & Director [23]
——————————————————————————–
ZAR 363 million, excluding the captive mines, excluding Matla.
——————————————————————————–
Mzila I. Mthenjane, Exxaro Resources Limited – Executive Head of Stakeholder Affairs [24]
——————————————————————————–
Okay. Any questions from the room? Martin?
——————————————————————————–
Martin Creamer;Creamer Media, [25]
——————————————————————————–
Martin Creamer from Mining Weekly Online. Thanks very much for this climate change document and also for sounding such a good warning about climate change risk. My question is, from a regulatory point of view, is red tape rather than red carpet still being rolled out on this renewables issue? And what does South Africa need to do to speed up its response to climate change risk and decarbonization?
——————————————————————————–
Mxolisi Donald Mbuyisa Mgojo, Exxaro Resources Limited – CEO & Director [26]
——————————————————————————–
That’s a very loaded one, Martin. Yes. Look, I think, if you’ve just seen what has happened in the last 5 months in the energy space in South Africa, we have seen a drastic liberalization than what we expected, if you look at just what has — if you look at just the 2019 IRP. The load shedding Stage 6, we always said, sometimes, you need a crisis before action takes place. Stage 6 load shedding, the fact that — and the impact that it had on the mining sector specifically was as a big warning sign even for the other industries, whether you’re talking about banking or any other services industries that support mining, that they themselves came to the realization that unless we, as Busa, come together, we’re not going to make it. So that caused a call on the President through our requests around self-generation to happen. But in that, there was other — further the need to understand, how are we going to be able to enable that to happen? And with the Minister setting up a special task team made up of the DMRE, NERSA, the players in the mining industry to actually work out all the blockages to enable this as part of a task team is what is ongoing right now.
So yes, the Minister has even indicated that he’s already made his determination on the next round, and NERSA has also made the call that they are working on enabling that in the next coming 3 months. So there’s a lot of things that are going on behind the scenes. Sometimes, it seems as if there’s a lot of talk, but I think this time, the nature of the problem is so serious that Eskom with a 2, maybe even 3-year load shedding is not a solution for us to grow the economy. So I think in some of these instances, we are seeing a positive move.
Now you may believe it, but I think the Minister has been very consistent about it. But for some of us who are working behind the scene of this, we are seeing these things being done. Obviously, that doesn’t happen overnight, but we are going in the right direction with regard to that.
Now what was your second one? Because it was so long.
——————————————————————————–
Nombasa Tsengwa, Exxaro Resources Limited – Executive Head of Coal Operations [27]
——————————————————————————–
Is it a red tape or a red carpet?
——————————————————————————–
Martin Creamer;Creamer Media, [28]
——————————————————————————–
Or is there any list of what South Africa Incorporated needs to speed up its response to decarbonization and climate change? What steps are visible to be taken and should be taken? And are they allowed to be taken?
——————————————————————————–
Mxolisi Donald Mbuyisa Mgojo, Exxaro Resources Limited – CEO & Director [29]
——————————————————————————–
I think there is a genuine, I want to believe, at least we talk about it within the Minerals Council, around trying to commit around this 2 degree, less than 2 degree. Because when we do our own studies, our own analysis even in our own operations, anything that’s greater than 2 degrees in a pit like Grootegeluk becomes very, very challenging in terms of human safety. So that by itself is a risk that we don’t do something about committing in terms of what we are committing right now. It is said that for every 1 degree in another place in the world, in this part of the continent, it’s 3 degrees more. And so therefore, it is a commitment that we, especially Exxaro, take very seriously as a company, as a Board. That is the collective efforts of all of us making that commitment led by the country. So hence why we say we want to align ourselves with the Paris Agreement commitments
——————————————————————————–
Mzila I. Mthenjane, Exxaro Resources Limited – Executive Head of Stakeholder Affairs [30]
——————————————————————————–
Perhaps while we’re still on the topic of energy, a question from Johan Pretorius. Wanting to know, given the government’s activity in terms of opening up electricity generation, do we still see growth potential for Cennergi? I mean I’ll let you answer that because I think the next one, we’ll probably all need to put our seatbelts on for.
——————————————————————————–
Mxolisi Donald Mbuyisa Mgojo, Exxaro Resources Limited – CEO & Director [31]
——————————————————————————–
Of course, I mean, there is definitely an opportunity. I mean we have to be — we are going to be looking at our own self-generation. It is not only part of the stop measures in terms of ensuring that there’s energy security in the future, but in the way that it does happen is that it also helps us reduce some of our Scope 2 emissions. So it’s important that — Scope 1, Scope 2 emissions. So it’s important also that we look at that as part of an alternative way of how we’re going to be securing ourselves going into the future.
——————————————————————————–
Mzila I. Mthenjane, Exxaro Resources Limited – Executive Head of Stakeholder Affairs [32]
——————————————————————————–
And then to his next question is, would Exxaro consider buying Eskom power stations if government decides to sell them?
——————————————————————————–
Mxolisi Donald Mbuyisa Mgojo, Exxaro Resources Limited – CEO & Director [33]
——————————————————————————–
No.
——————————————————————————–
Mzila I. Mthenjane, Exxaro Resources Limited – Executive Head of Stakeholder Affairs [34]
——————————————————————————–
I think, Johan, that answer was precise and to the point.
——————————————————————————–
Mxolisi Donald Mbuyisa Mgojo, Exxaro Resources Limited – CEO & Director [35]
——————————————————————————–
At least not before my retirement.
——————————————————————————–
Mzila I. Mthenjane, Exxaro Resources Limited – Executive Head of Stakeholder Affairs [36]
——————————————————————————–
And then he takes us back to ECC in terms of the disposal strategy of why we’re selling the 2 assets together. Any comment on that?
——————————————————————————–
Nombasa Tsengwa, Exxaro Resources Limited – Executive Head of Coal Operations [37]
——————————————————————————–
Thank you so much, Johan. I think it’s very related to the answer I gave to Tim to say that if you find that your reserves can give you so much value and with the assets remaining giving you so much more in terms of what you can handle, surely our exposure to Eskom also must be considered because those 2 other assets, as good as they are, they’re very fitted into the Eskom stable, as I’ve said, and we’ll need to always measure our exposure at the same time. But very much the same what I’ve said earlier in terms of the priorities of the early value strategy, looking into the higher-quality assets from a product point of view.
——————————————————————————–
Mzila I. Mthenjane, Exxaro Resources Limited – Executive Head of Stakeholder Affairs [38]
——————————————————————————–
And maybe on that, you can comment around his next question around our view on the export allocation, whether it still has value given that, at least as he sees it, there’s a decline in coal production in South Africa, too.
——————————————————————————–
Nombasa Tsengwa, Exxaro Resources Limited – Executive Head of Coal Operations [39]
——————————————————————————–
Well, I think this is time now to talk to — let Sakkie must sing for his lunch. So he’s already forgotten, I mean…
——————————————————————————–
Mzila I. Mthenjane, Exxaro Resources Limited – Executive Head of Stakeholder Affairs [40]
——————————————————————————–
So — you must? I’ll come back to you, Thabang.
——————————————————————————–
Sakkie Swanepoel, Exxaro Resources Limited – Group Manager of Marketing & Logistics [41]
——————————————————————————–
Yes. Look, I think we can go, but our Board with the environmental stuff and actually forget that we are still exporting about 75 million tonnes of coal from South Africa. We shouldn’t lose track of the reality as well amidst all the pressure and the noises that we do here.
So I think there’s definitely a lot of value in export entitlement anymore. Logically, you will say that as we go forward, the price of that entitlement will be under pressure to the extent that exporters are able to fill that entitlement or not. So we believe there’s going to be pressure on that. But surely, there is still value in entitlement.
——————————————————————————–
Mzila I. Mthenjane, Exxaro Resources Limited – Executive Head of Stakeholder Affairs [42]
——————————————————————————–
Thank you very much. Thabang, we think you have the next question.
——————————————————————————–
Thabang Thlaku, SBG Securities (Proprietary) Limited, Research Division – Research Analyst [43]
——————————————————————————–
Just 3 questions from me as well, and it’s centered around the costs. So Nombasa, when I look at the contractor cost at — particularly at ECC and LP and I look at your sort of production guidance, it seems like you guys are planning for an eventuality where you aren’t able to sell those assets very quickly. How should we think about those contractor costs going forward in light of the fact that you said you guys might potentially use some of your own mining there?
And then in terms of like increased logistic costs because your export volumes went up, your guidance is saying exports should go up by another 2 million tonnes over the next 2 years. How should we think of those costs? Can we allocate them to the additional tonnes of exports? And should we expect that to go up further given that you’re increasing your exports? Or are they sort of once-off for fixed elements of that increase in costs?
And my last question is around GG. Well, we can appreciate that at Medupi, we have started taking the coal volumes from December. I would imagine that stockpiles is still quite high. And so can you sort of give us some guidelines in terms of when production will return back to normal completely?
——————————————————————————–
Mzila I. Mthenjane, Exxaro Resources Limited – Executive Head of Stakeholder Affairs [44]
——————————————————————————–
Okay.
——————————————————————————–
Nombasa Tsengwa, Exxaro Resources Limited – Executive Head of Coal Operations [45]
——————————————————————————–
Okay. So…
——————————————————————————–
Mzila I. Mthenjane, Exxaro Resources Limited – Executive Head of Stakeholder Affairs [46]
——————————————————————————–
Do you want to start with the last one maybe or…
——————————————————————————–
Nombasa Tsengwa, Exxaro Resources Limited – Executive Head of Coal Operations [47]
——————————————————————————–
Yes. Look, remember, what we said last year was that we never continued to produce coal when we saw that Eskom was not able to take. That’s why we say that when we hit the stock — the full stockpiles, obviously the production plan had to change. And that’s something that actually gave us flexibility in the GG complex as well to look into flexing on the high-value product as well at the same time. So in terms of when we — I would say that we’re more or less getting to that point now because we didn’t necessarily stockpile that much as a result of the impact of Medupi. Yes, we had built stock — a strategic stockpile when we were constructing GG6 as well as a buffer. So there is that part of the stockpile that still needs to be managed. I can’t give you the numbers now.
Are we at steady state as far as the stockpiles in terms of the current plan? We are at steady state. So we are not necessarily off-balanced because we did not stock way too much beyond what we could contain.
And then the other question was around…
——————————————————————————–
Mzila I. Mthenjane, Exxaro Resources Limited – Executive Head of Stakeholder Affairs [48]
——————————————————————————–
Costs. I think 2 parts. Firstly…
——————————————————————————–
Nombasa Tsengwa, Exxaro Resources Limited – Executive Head of Coal Operations [49]
——————————————————————————–
Stripping, right, was one, related to what we see in terms of stripping going forward and the fact that we still have Leeuwpan and ECC.
Look, we don’t know what the process and how long the process is going to take. So it’s always safer to keep those 2 in the stable as if they were part of the next whatever years.
——————————————————————————–
Mzila I. Mthenjane, Exxaro Resources Limited – Executive Head of Stakeholder Affairs [50]
——————————————————————————–
And then in terms of the export volumes, which came then with an increase in costs, and we are estimating an additional 1 million to 2 million tonnes next year. How should we treat the costs associated with that increase in volume?
——————————————————————————–
Nombasa Tsengwa, Exxaro Resources Limited – Executive Head of Coal Operations [51]
——————————————————————————–
So I think just go back also in terms of the contractor mining that you’ve asked us. We’re still doing that work, first. I know I didn’t answer that part. We’re still doing those analysis of contractor mining versus our own mining, and we will know in the next few months. In fact, the person who leads that work for us is [Lazarus] sitting in our audience who is from Belfast, and we will see what happens at the end of the year. So that one would be sorted.
As far as the cost of transport and the extra sale of those extra tonnes, surely there will be an increase in that regard. I don’t just quite have now the numbers, but there will definitely be — Sakkie, do you have an idea of what the impact would be on cost and look. But…
——————————————————————————–
Sakkie Swanepoel, Exxaro Resources Limited – Group Manager of Marketing & Logistics [52]
——————————————————————————–
Yes. I think we can obviously, you will understand, not talk about rail rates. But it’s a pure variable cost. So if you treat it as a pure variable cost with export volumes, it should be pretty close.
——————————————————————————–
Mzila I. Mthenjane, Exxaro Resources Limited – Executive Head of Stakeholder Affairs [53]
——————————————————————————–
Any other questions from the floor? Let me take another question from [James Connor] where — I’m not going to quote him verbatim here, but certainly understanding, given the transition that we’re in, we’re talking both coal and renewables and understanding the necessity for coal in South Africa, and it’s complementary, I guess, in terms of trying to play both sides and satisfying all parties. But he just wanted to know if there are any aspects of the energy strategy that we could share today with the market,
——————————————————————————–
Mxolisi Donald Mbuyisa Mgojo, Exxaro Resources Limited – CEO & Director [54]
——————————————————————————–
At this stage, we are still very early in those assessments. We are looking at various opportunities. There are various pathways of how to enter, looking at whom to partner with. So we — it’s a decision that has just been recently taken not too long ago by the Board. So there’s a lot of work and analysis being done with regard to that. As it becomes much more clearer, we will be able to share that information with you.
——————————————————————————–
Mzila I. Mthenjane, Exxaro Resources Limited – Executive Head of Stakeholder Affairs [55]
——————————————————————————–
Okay. Let me press refresh. It doesn’t look like there are any other questions here. Anything from the floor?
Okay. So that then brings us to the end of the session, which is right on time. Thank you very much for those who participated on the webcast and for everyone who is present here with us today and for your questions and continued interest in Exxaro.
I’d like to now invite you for a bite to eat and something to drink. And we will be having an analyst roundtable in [Room M100] in the next couple of minutes. Let me just check my schedule. So thank you very much to you all, and drive safely wherever you may go.