Exxaro Resources has reported a R235 million top-line increase for the financial year ended 31 December 2019, a notable achievement in the face of escalating global trade tensions, a deteriorating local economy and a decline in thermal coal pricing.
Core EBITDA declined by 20%, mostly due to the impact of the 27% drop in the export API4 coal price, local inflationary cost pressures and higher rehabilitation costs at our closed operations.
The strong performance of iron-ore in our commodities basket saw a 70% increase in core equity income from Exxaro’s investment in Sishen Iron Ore Company (SIOC) which led to a 7% increase in our core HEPS.
Exxaro will return to shareholders a final dividend of 566 cents per share [FY18: 555 cps].
The group, in addition, paid to shareholders an interim dividend of 864 cents (FY18: 530 cents) and a special dividend of 897 cents in October 2019 from the ongoing disposal of its interests in Tronox.
CEO Mxolisi Mgojo says that Exxaro continued to successfully advance its key objectives of safety, portfolio optimisation, operational excellence and capital allocation in the year.
“We achieved three-years of zero fatalities, grew our coal export volumes by 14%, delivered first coal at Belfast early, progressed divestments and earmarked assets for future disposal, all while creating around 746 new jobs through our Enterprise and Supplier Development programme, in an environment of chronic unemployment.”
“Revenue grew 1% year-on-year, while EBITDA reduced by 20% to R5.8 billion (FY18: R7.3 billion).
Exxaro nonetheless reported Core HEPS of R23.54, up 9% on the prior year, with the increase in equity income from investments, mainly SIOC, more than offsetting the drop in coal earnings.
Mgojo explains that to arrest the declining trend in safety performance during the year, the company launched a safety campaign Khetha uKuphepha (Choose Safety).
“Workers onsite at our mines have increased by over 6 000 in the last three years and we remain well-ahead of the global industry curve according to leading safety surveys.
“However, our internal benchmark of zero harm dictates our ambitious group safety targets,” he says.
“We maintained best-in-class performance in terms of our ESG ratings. This is positive and objective recognition and momentum upon which we are building our climate-response strategy.
“The opportunity for self-generation is being evaluated, which will present additional opportunities for improvement in our emission-reduction efforts.
“Exxaro acquired the remaining 50% ownership of our renewable energy investment in Cennergi with the last condition precedent being met in March 2020; although it delivered a reduced profit, it showed an improvement in its operating performance in terms of energy generated.
“The consolidation of this renewable energy asset comes at a crucial time in South Africa when energy security is needed, and it aligns to the company’s response to increasing negative sentiment towards coal-based electricity generation.
It further underscores Exxaro’s intention to power better lives in Africa.”
Mgojo says that full control of the investment gives the group time and opportunity to fully consider its options, including the potential for Cennergi to form the bedrock of a renewable energy business within Exxaro.
Exxaro’s ESG achievements in the year extended beyond safety, with ongoing improvement in water conservation and carbon footprint. The group also supported real economic transformation locally with 746 new jobs and over R170 million invested in 30 black-owned small businesses.
Portfolio optimisation progressed during the year with the ongoing disposal of Exxaro’s interest in US-listed Tronox, grossing R5.1 billion cash for the group, of which Exxaro returned 65%, or R3.2 billion to shareholders via a special dividend.
The disposal of the group’s interest in Black Mountain Mining is in progress. Exxaro further identified ECC and Leeuwpan as disposal targets from the coal portfolio.
“This forms part of our response to Climate Change,” says Mgojo “in terms of which we aim to reduce our coal resources by 22% over time, as well as commit to achieving carbon neutral footprint by 2050.”
The performance of the coal business remained resilient with some strong operational wins despite the tough economic and market landscape. The starting point was an assessment of coal quality and yield to determine sustainable production volumes and life of mine under different climate scenarios – this was the basis of the early value strategy we shared with our stakeholders in 2019, which aims to maximise the value of our coal reserves by reducing the potential for stranded high-quality coal reserves.
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Mgojo attributes this to the group’s agility as a result of the flexible and diverse product mix, and balanced exposure to domestic and international customers and Eskom.
Exports increased by 14% to 9.1Mt, albeit subject to falling pricing. Total product and sales tonnes dipped slightly by 5% and 2%, respectively, due to challenges including lower Medupi offtake resulting in full stockpiles at Grootegeluk.
“For the year ahead, we are forecasting an uptick in domestic product and sales tonnes of 7% and 11%, respectively, with the Medupi offtake now firmly back on track, a ramp-up expected at Matla, and a focus on growing export levels at Belfast and GG6.”
The group’s expansion capex for the five years FY19-FY23 is expected to fall 1% below guidance previously given, which Mgojo says is due to sustained focus on fiscal discipline within the company’s capital allocation strategy.
He points out that the new projects flowing from expansion capex investment are expected to deliver an additional 7.2 Mt coal per annum by FY21, and were completed ahead of schedule and under budget.
He is cautiously optimistic of some stabilization ahead in global economic conditions, subject to “unknowns” such as the impact of the Covid-19.
However, depending on the duration and spread of the corona virus in China, the recovery in thermal coal import demand in China might support the seaborne market somewhat.
Domestically, he is less positive given increasing socio-economic hurdles and the looming possibility of a sovereign downgrade, with a resulting volatile Rand/Dollar exchange rate.
“According to the 2019 Integrated Resource Plan, South Africa will remain a primarily coal-fueled energy region for at least the next decade. We intend to continue focusing on optimizing our coal business accordingly.”
In this regard, he says Exxaro is further encouraged by the efforts to secure Eskom’s financial viability and is fully supportive of the utility’s restructuring plans.
“We will also ensure our response strategy to Climate Change develops and progresses alongside our stakeholders, within a Just Transition framework ensuring that we do not compound the prevailing negative living conditions of vulnerable South Africans.
In 2017 Exxaro adopted a strategy to explore new investment opportunities based on three pillars, namely, water security, food security and energy security.
“Based on our experience since then, we have now changed that strategy to 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 metrics.”