Exxaro annual results for the six months ending 30 June 2022

Exxaro Resources Limited, the black empowered diversified resources group, reported a 67% increase in EBITDA to R10 603 million (2H21: R6 340 million), and a 75% increase in HEPS at R34.26 (2H21: R19.61) for the six months ended 30 June 2022, mainly due to the exceptional performance of our coal business driven by higher sales prices with slightly lower sales volumes, due to logistical challenges which substantially impacted export sales volumes.

We however mitigated this through our logistics focus by utilising alternative channels to sell our product in the export and local market and achieving our cost performance guidance of an increase below mining inflation based on our continuous improvement initiatives and operational efficiency drives. Our Early Value Strategy continues to make us more competitive due to optimised high value product mix and good pricing against the AP14 Index.

Exxaro welcomed Dr Nombasa Tsengwa as the CEO effective 1 August 2022.

Presenting her first set of results as CEO, Dr Nombasa Tsengwa said, “It has been a challenging period for our industry this past six months, and I am very pleased to present these results, which not only underscores the resilience of our business through continued delivery against our strategic priorities, but also the excellence of our people and management’s ability to respond by achieving excellent safety performance and increased production volumes despite the logistics challenges, whilst absorbing increasing inflationary pressures through ongoing disciplined cost management throughout our business.

Our commitment to continue to create long-term value for all stakeholders through focusing on our early value strategy and capital excellence journey has placed us in a stable financial position, allowing us to announce an interim cash dividend distribution for the period of 1 593 cps.

The divestment of ECC in September 2021, together with the poor logistical performance, resulted in a period-on-period decline of 28% in our export volumes, which was partially mitigated through our logistics focus by utilising alternative channels to sell our product in the export and local market. Our strong operational performance was also underpinned by an increase in our production volumes with the ramp up of GG6 at Grootegeluk. We are continuing to engage with government and TFR to resolve some of these challenges and take advantage of prevailing high commodity prices.

The cost competitiveness of Exxaro’s operations remains a primary focus and our continuous improvement initiatives and operational efficiency drives continue to deliver in terms of cost containment – ensuring cost increases remain well below mining inflation, at 4.7% compound to mining inflation of 11.6%.”

The shift in energy transition policy has intensified, and ahead of COP26 Exxaro announced its Sustainable Growth & Impact Strategy, outlining its commitment to supporting a just transition towards a low carbon economy through diversification into manganese, copper and bauxite, and expanding its energy solutions business, Cennergi, which will enable the protection of the value of the coal business through self-generation, and build a market position in emerging opportunities for distributed energy. The strategy includes responsibly maximising the value of its coal assets and decarbonizing its operations, whilst rebalancing the business portfolio for the long term. In this regard, we are aiming for a 43% reduction in our Scope 1 and 2 emissions by 2026 applying current technologies. A further critical element of the strategy is establishing sustainable communities through a comprehensive land use approach.

Exxaro has maintained its industry leading position of 3.8 on the FTSE Russell ESG Index.

Tsengwa added, “Safety and health of our employees remain our main priority and are critical performance indicators for our business sustainability as well as being key social performance indicators in the ESG index ratings. Whilst we are proud to have achieved a record safety performance of sixty-five months without a work-related fatality as at 2 August 2022, it is with regret that we inform you of the unfortunate passing of one of our contractor employees, Mr. Mathews Moanalo, at our Belfast Mine on 15 August 2022. We wish to extend our sincerest condolences to his family, colleagues, and friends. Safety remains a top priority for Exxaro, and we will continue to strive to achieve zero harm at all our operations. Our LTIFR for the past six months was 0.04 against our set target of 0.06.”

Financial results: For 1H22 Group revenue increased 27% to R 22 330 million (2H21: R17 627 million) mainly due to the exceptional performance of our coal business driven by higher sales prices despite slightly lower sales volumes. The 67% increase in consolidated group EBITDA to R10 603 million (2H22: R6 340 million) was mainly driven by a 67% increase in Coal EBITDA.

Revenue growth of 27% to R22 330 million (2H21: 17 627 million) was attributed to the following business segments: coal: R21 692 million (2H21: R16 870 million), energy: R523 million (2H21:R654 million), ferrous: R108 million (2H21:R94 million), and other; R7 million (2H21: R9 million) includes some non-core operations.

Headline earnings increased 74% to R8 290 million (2H21: R4 764 million) mainly due to a 67% increase in group EBITDA and a 173% increase in equity-accounted income from our Mafube JV as a result of the higher coal prices, which was partially offset by a 15% decrease in equity-accounted income from SIOC as a result of lower iron ore prices and higher operating expenses, partially offset by a weaker currency. The weighted average number of shares (WANOS) decreased slightly to 242 million (2H21: 243 million) because of shares repurchased in 2021 and cancelled in terms of the R1.5 billion share repurchase programme. The increase in earnings together with the lower WANOS equates to basic headline earnings per share (HEPS) of 3 426 cents per share (2H21: 1 961 cents per share).

EBITDA of R10 603 million was attributed to the following business segments: coal:
R10 525 million (2H21: R6 316 million), energy: R362million (2H21: R404 million), ferrous:
R26 million (2H21: R13 million), and other reflected a loss of R310 million (2H21: loss of R483 million).

Exxaro remains prudent in its capital allocation framework, in terms of returning cash to shareholders, managing debt, and selectively reinvesting for the growth of the business in a low carbon future.

In line with the dividend policy based on a targeted cover ratio of 2.5 times to 3.5 times adjusted group earnings and a pass-through of the SIOC dividend, the board declared a gross interim cash dividend, number 39 of 1 593 cents per share, for the six months ended 30 June 2022, comprising: 2.5 times adjusted group earnings and a pass through of SIOC dividend receivable of R2 498 million.

Cash generated by operations was up 43% to R9 433 million (2H21: R6 579 million) and, together with the dividends received from our equity-accounted investments of R3 030 million (2H21: R6 328 million), were sufficient to fund capital expenditure and ordinary dividends paid. Capital expenditure decreased to R744 million (2H21: R1 297 million), comprising R710 million sustaining capex and R34 million expansion capex. Positive operational results and strong cash generation resulted in a net cash position of R5 679 million (excluding Cennergi’s net debt of R4 547 million) at 30 June 2022, compared to a net cash position of R764 million (excluding Cennergi’s net debt of R4 482 million) at 31 December 2021.

Coal business performance: Coal production volumes across all Exxaro’s mines (excluding buy-ins) increased by 292kt (1%) to 21.7 Mt, despite the divestment of ECC on 3 September 2021, while sales volumes decreased by 769 kt (-3%) to 21.1 Mt.

Coal revenue increased 29%, largely driven by higher revenue from our commercial mines as we realised higher sales prices in all markets. Higher domestic sales volumes were offset by lower export volumes. Coal EBITDA of R10 525 million (2H21: R6 316 million) increased 67%, at an operating margin of 44% driven mainly by: higher commercial revenue (+R5 414 million), driven mainly by higher sales prices; positive inventory movements and lower external buy-ins (+R474 million); realised and unrealised foreign exchange rate gains (+R145 million); and lower employee costs (+R115 million) as a result of higher bonus payments to employees in 2H21

The increase in coal EBITDA was partially offset by higher operational costs (-R1 019 million), mainly attributable to the higher buy-in cost of R834 million from the Mafube JV linked to the API 4 benchmark price; higher inflation (-R456 million), driven by diesel and electricity tariff increases significantly above the PPI inflation rate;; higher selling and distribution costs (-R187 million) driven by additional road transport costs to mitigate the impact of logistical challenges as well as higher transport costs incurred in line with higher domestic coal volumes sold; higher environmental rehabilitation costs (-R171 million) due to inflationary pressures on rehabilitation costs; and ECC divestment (-R147 million)

Energy business performance: Cennergi EBITDA was R421 million (2H21: 543 million).

In South Africa and other regions such as Europe, wind farms have experienced their worst wind conditions for a six-month period. The two Cennergi windfarms were operating at the lower end of the historical range compared to planned capacity due to these lower-than-expected windspeeds, impacting energy generation negatively. Combined electricity generation was 307GWh (2H21: 393GWh).

Cennergi’s average equipment plant availability has been marginally better than contracted levels and in line with normalised levels.

Cennergi’s EBITDA margin was 80%, which shows the consistency of earnings and margins underpinned by long-term offtake agreements.

The Cennergi project financing debt of R4 692 million (2H21: R4 755 million) will mature over time and be fully settled in 2031. It has no recourse to the Exxaro balance sheet and is hedged through interest rate swaps at an effective rate of 12.0%.

Tsengwa concluded, “Exxaro continues to be well positioned to play a meaningful role in the South African energy transition. We are supportive of the Paris Agreement and have committed to carbon neutrality by 2050. We acknowledge that we must transition to a much better place than where we are today, our commitment to our Sustainable Growth and Impact Strategy which remains intact – comprising of both Energy and Minerals Business strategies. However, we must accept that the transition will not be achieved quickly – we need to be responsible in how we will embark on this, ensuring that we take all of our stakeholders with on this journey.

As we transition from today’s business to a future that benefits a cleaner world, how we get there cannot be ignored – coal, together with our renewable business are key to the success of the just energy transition. Whilst we are compelled to return value to our shareholders from our early value strategy execution, we are committed beyond compliance to remove scope 1 and 2 carbon emissions from our current and future operations, by 43% by 2026. With our Renewable Energy business, we can do this through self-generation at our Grootegeluk and Mpumalanga operations, and with accelerated capacity and extra electrons, we will be able to assist in decarbonising other interested parties in our industry and beyond, including Eskom, taking advantage of the energy liberalization recently announced by the President of South Africa, Mr Cyril Ramaphosa.

We still believe in the fundamentals of the 3 commodities we chose, as critical to the energy transition, whereby copper, bauxite – the primary source of aluminium and steel from manganese, will be key to renewable energy distribution networks.

A new and robust capital allocation model will enable our ambition – focusing on risk to benefit ratios, key factors of importance linked to finance and environmental issues, stay in business capital excellence, acquisition of skills and cost management. Our competitive advantage is our mining and project development capabilities and the strength of our balance sheet to fund acquisitive growth in the development of our energy business and minerals strategy.”

Exxaro CEO, Dr Nombasa Tsengwa will be hosting a webcast and call today, 18 August 2022, at 10h00 CAT to discuss the results.

The webcast can be accessed via the following link: www.corpcam.com/Exxaro18082022

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