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Exxaro has released its reviewed condensed Group interim financial results and looks to preserve cash in the face of commodity price volatility and labour unrest.

Revenue and net operating profit

Group consolidated revenue decreased by 36% to R6 245 million for the six-month period ended 30 June 2013, mainly as a result of the disposal of the mineral sands and Rosh Pinah businesses in 2012.

Group consolidated net operating profit was R1 795 million lower at R1 222 million after the exclusion of the items listed in the ‘comparability of results’ section above. This was mainly due to the coal operations being the main contributors to the group’s performance in the first half of 2013 compared to 2012 where the mineral sands and Rosh Pinah operations contributed to operating profits for five and a half and five months, respectively. Corporate further saved costs (R231 million) mainly from reduced consulting fees (R180 million).

Earnings

Attributable earnings, inclusive of Exxaro’s equity-accounted investment in associates, amounted to R2 244 million (2012: R8 809 million) or 632 cents per share (R2012: 2 488 cents) for the six-month period, representing an 75% decrease from the 2012 comparative period, mainly as a result of the non-recurring profits on the sale of subsidiaries and other non-core assets recorded in 2012.

Headline earnings

Headline earnings achieved, which exclude, inter alia, the impact of the impairment and partial impairment reversal as well as profits realised on the sale of subsidiaries in 2012, were R2 529m (2012: R4 115m) or 712 cents per share (2012: 1 162 cents) for the six-month period ended 30 June 2013, representing a 39% decrease in headline earnings per share from the corresponding period in 2012.

Cash flow

Cash generated from operations was R602m (2012: R2 485m) for the group, which was primarily used to fund net financing charges of R128m, taxation payments of R117m and a portion of the dividends paid of R546m. A total of R1 826m of capital was invested in new capacity, with R57m applied towards sustaining capital.

After the receipt of R1 216m (2012: R1 958m) in dividends, primarily from Sishen Iron Ore Company Proprietary Limited (SIOC) and Tronox, as well as the outflow associated with sustaining and expansion capital, the group had a net cash outflow before financing activities of R1 429m (2012: R1 275m) for the period under review. A total of R1 087m of the capital investment in new capacity was for GMEP (R850m) as well as the backfill project (R237m).

Net debt at 30 June 2013 was R3 677m, reflecting a net debt to equity ratio of 12%.

Interim dividend

The dividend declaration was carefully considered to take into account the group’s capital allocation strategy, with an effort to balance distribution between shareholders and long term growth.

Notice is hereby given that a gross interim cash dividend Number 21 of 235 cents per share for the six-month period ended 30 June 2013 has been declared payable to shareholders of ordinary shares.

Salient features

  • Core net operating profit of R1 187m (2012: R2 609m)
  • Headline earnings per share (HEPS) of 712 cents (2012: 1 162 cents)
  • Interim dividend of 235 cents per share (2012: 350 cents)
 Challenges

  • Lost time injury frequency rate (LTIFR) at 0,21 against target of 0,15
  • Three-week strike in first quarter of 2013, causing coal production losses of 2,2Mt
  • New Clydesdale Colliery (NCCpre-tax  impairment  of R292m
Comparability of results

The following comments are based on a comparison of the group’s condensed reviewed interim financial results and unreviewed production and sales volumes information for the six-month periods ended 30 June 2013 and 2012 respectively. These results are not comparable due to (amongst others):

  • the pre-tax impairment charges on the NCC carrying value of property, plant and equipment of R292m recorded in the six-month period ended
    30 June 2013;
  • the partial impairment reversal of the carrying value of property, plant and equipment at KZN Sands of R103m in 2012;
  • profits realised on the sale of the mineral sands operations amounting to R3 537m and Rosh Pinah operations amounting to R544m as well as other assets amounting to R40m during 2012;  and
  • the loss recognised on the dilution of the investment in the Tronox Limited (Tronox) associate, amounting to R13 as a result of a decrease in the effective shareholding to 44,42% (2012: 44,65%).
Outlook

General economic conditions and internal cost pressures require Exxaro to preserve cash for purposes of future growth and dividend payment. Corporate costs continue to be overweight following the divestments in 2012; as such sustainable cost savings initiatives and the need to remove the inefficiencies across the group will be top priority over the next six to 12 months. The long lead times of Exxaro’s Grootegeluk Medupi Expansion and Mayoko projects result in Exxaro’s earnings being sensitive in the short- to medium-term period up to 2016.

The financial and operational results for the remainder of 2013 are expected to be impacted by continued low coal prices, the ZAR/USD exchange rate volatility as well as the availability of trains for coal exports.

To broaden coal marketing options, Exxaro is active in developing new markets in China, India and Pakistan. A proposed ban on low-grade imports to China may benefit higher-grade South African coal. However, developments in the financial markets may impact on the availability of trade finance and impact coal trading.

Whilst expected to remain stable, domestic market demand is expected to be sensitive to international market pricing influences. Supply to Eskom from Exxaro will remain on schedule at agreed supply levels.

Capital investment management as well as project execution and delivery are critical factors in Exxaro’s short- to medium-term outlook.

Key challenges that are expected to have significant influence over the group’s strategy include:

  • Commodity price volatility;
  • the potential  for labour unrest in the mining industry;
  • the impact of carbon tax on the Exxaro group;
  • uncertainty in future government policy on South Africa’s future energy requirements mix; and
  • the proposed changes to the Mineral and Petroleum Resources Development Act and introduction of beneficiation legislation.

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