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Exxaro Resources Limited (Exxaro) – the black empowered diversified resources group – has reported healthy results for the six months to June 2019, a notable achievement given that coal and other commodity pricing declined sharply in the period.  The robust performance of the group’s investments boosted results, which translated into an interim cash dividend for shareholders of [864] cents per share [1H18: 530cps].  Exxaro has further returned to shareholders the proceeds of the Tronox disposals to date as promised, in the form of a special dividend of [897] cents a share.  The period has seen the group attain several key strategic and operational milestones, with a profitable coal business, zero fatalities, B-BBEE recognition improved to Level 2, 178 new permanent jobs created through our social investments, rehabilitated land mass increasing and first coal at Belfast realising ‘early value’ and ahead of schedule.

Despite a 10% decrease in revenue to R12 billion and EBITDA 15% lower at R2.8 billion due to a sharp decline in export coal prices and challenging domestic and international trading conditions, the group reported Core HEPS* of R12.01, up 4% on the previous period (2H18).  All coal operations but one in Mpumalanga reported profitability.  The macro-impacted top line results were effectively offset by the 31% increase in income from investee operations, with SIOC the main contributor.

Exxaro’s fatality-free safety record continued into the period.  “The Exxaro group has experienced no fatalities in 29 months to date, while individual operations such as Matla Central Engineering and Plant and Leeuwpan have enjoyed 21- and 29- fatality-free years, respectively,’ says Mgojo.  The group’s positive LTIFR trend has continued since 2015, declining 24% over the four-year period, and Mgojo explains that the slightly worse LTIFR of 0.13 in the period coincided with the ongoing major capex development activity and a further increase in the number of contractors onsite.  He adds: “Any potential decline in the group’s LTIFR trend will effectively be arrested by intensified safety initiatives at all operations to ensure that Exxaro’s commendable safety record continues as we strive for Zero Harm.”

Recognising the group’s broader ESG efforts, the JSE’s FTSE Russell ESG Index has entrenched Exxaro as the world leader in ESG performance in mining.  Mgojo points out that in the period, Exxaro increased its already-leading average score of 3.7 out of 5, to 4.1, compared to 2.1 for global coal peers.  The company reported improved electricity and water consumption metrics during the period.

Optimisation of the portfolio progressed well in the period.  The transfer of Arnot Mine and Exxaro’s stake in US-listed Tronox advanced, with the Arnot transaction now pending one last remaining condition. The sale of the Tronox interest has progressed well, grossing a total of R5 billion cash received so far in 2019.  We remain with an interest of about 10% in the US-listed entity and 26% in the South African operations. The group continues returning excess cash to shareholders as promised, whether generated by its non-managed investments or by its own cash-generative coal operations.  Exxaro is also exploring options for the disposal of its interest in Black Mountain Mining.

“For the remaining coal business, portfolio optimization will involve maximizing the value of our coal resource through an ‘early value’ strategy, and we are evaluating options in this regard,” says Mgojo.

The group’s coal business managed to remain resilient in the face of inflationary cost pressures and falling coal prices, according to Mgojo “due in large part to the team’s proactive management, innovation and productivity initiatives which all helped to contain cost increases below-inflation and to drive efficiencies”.  Domestic volumes dropped by 6% to 22Mt compared with previous period while exports increased by 5% to 4.3Mt.

Challenging factors impacting production were mainly the Medupi offtake rate achieved, Matla’s shortwall challenges and the divestment of NBC. Additional impacts were felt by the contractor changeover required after Group 5 experienced business difficulties. Management acted swiftly, including terminating, appointing and onboarding the new contractor within three months. Mgojo says a focus on contractor risk management across all operations has intensified and should mitigate any further impact on production or sales performances.

Mgojo also attributes Exxaro’s resilience to the group’s ability in responding to dynamic market conditions through flexibility in its product mix and astute proactive management by the Coal Team.  “Exxaro responded to softer demand for RB1 during the first quarter of 2019 by effectively competing in the RB2 market, where there was good demand and where value could be maximised.”

We have maintained the integrity of the balance sheet through prudent debt levels in terms of our debt covenants and improved our liquidity with the bond issue,” says Mgojo.  He adds that the integrity of the balance sheet is also testament to the group’s ongoing disciplined capital allocation practices which effectively delivered returns for the group and for its stakeholders.  “Not only have we successfully realised brownfields projects at Mafube and Leeuwpan, but the greenfields Belfast project successfully delivered first coal six months ahead of schedule which has spurred the acceleration of the entire project.

Looking ahead Mgojo is not optimistic that macro conditions might improve this year and expectations are that the global oversupply of thermal coal to continue depressing coal markets.   He says that domestically, the priority is for government to introduce policy reforms to stimulate investment and economic development, which will in turn create skills development and employment opportunities and potentially stave off a sovereign credit rating downgrade. “Business is ready to partner with government in this regard,” he adds.

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