Commentary for the year ended 31 December
Comparability of results
Comments are based on a comparison of the reviewed condensed group financial results and unreviewed production and sales volumes information for the years ended 31 December 2014 and 2013 (referred to as 2014 and 2013 respectively), unless otherwise indicated. The financial results for 2014 and 2013 are not comparable mainly due to key events and transactions listed in Table 1.
Table 1: Key events and transactions during the reporting periods which make financial and operational results not comparable
|Coal||Loss on sale of non-core assets and voluntary severance package expenses||(22)||Net impairment of carrying value of property, plant and equipment at NCC and loss on sale of property, plant and equipment||(152)|
|Ferrous||Impairment of the original investment including goodwill, carrying value of the property, plant and equipment and qualifying project costs capitalised for the Mayoko iron ore project as well as write-off of financial assets||(5 817)|
|Other||Loss on dilution of shareholding in Tronox Limited||(58)||Loss on dilution of shareholding in Tronox Limited||(12)|
|Intellectual property assets impairment||(202)||Zincor partial impairment reversal||98|
|Profit on sale of other non-core assets and voluntary severance packages||(67)||Profit on sale of Zincor refinery||964|
|Loss on write-off of intangible asset||(2)|
|Total net operating (loss)/profit impact||(6 166)||Total net operating profit/(loss) impact||896|
Safety, health, environment and community
On 5 July 2014, the group recorded an unfortunate and regrettable fatality at Arnot mine in Mpumalanga when an employee, Mr Solomon Latebotse Mashigo, was fatally injured by a rock that had dislodged from the tunnel roof and slid from a continuous miner. The investigation of this incident by the Mpumalanga Department of Mineral Resources (DMR) was finalised on 29 August 2014 and concluded that poor employee judgement and a culture of focus on “short-term incentive scheme achievement” were the major causes. Corrective measures have been implemented as recommended by the investigation report. This fatality followed Exxaro’s 2013 achievement of a full year without a fatality. We remain committed to our goal of zero harm.
On 25 November 2014, Mr Christopher Schroeder, a mechanical foreman employed at the Mayoko iron ore project in the Republic of the Congo (RoC), was regrettably fatally injured after being bitten by a snake. The investigation into this fatality has revealed that the incident happened outside of working hours, not at his place of work, and was not related to any of his official duties. As such, it is not classified as a reportable fatality.
The LTIFR remained constant at 0,19 for 2014 and 2013, well below the 0,32 coal industry and 2,55 mining industry averages as published by the Chamber of Mines for 2013. Thirty-six lost-time injuries (LTIs) were recorded in 2014, a 10% improvement on the 40 incidents recorded in 2013. Exxaro will continue with its commitment to further raise awareness of safety risks.
Table 2: Reported occupational disease incidents
|Noise-induced hearing loss||12||8|
A 46% reduction in reportable occupational disease incidents was recorded in 2014 compared with 2013. This reflects the group’s concerted efforts in implementing occupational risk exposure profiles since 2013 to further reduce the incidents of occupational diseases. The number of employees enrolled on the HIV/Aids programme continued to increase, from 545 in 2013 to 667 in 2014.
Exxaro continues to develop technologies aimed at maximising water use efficiency. The research and development department developed and piloted a passive water-treatment plant at the North Block Complex (NBC) mine in the fourth quarter of 2014. Results from this pilot were encouraging. Construction of a scaled-up water treatment plant is scheduled to start in the second quarter of 2015. The water treatment plant at Matla mine has been commissioned and performance tests are under way. These two water-treatment plants are expected to return approximately 10 mega litres of potable water for public use per day.
Obtaining environmental authorisations for expansion activities and projects is a strategic priority for the group. Exxaro has ensured that all critical environmental authorisations are obtained.
The group spent R88 million (2013: R57 million) on social and labour plans (SLPs) and other community related projects, mainly on education (R39 million on teacher and learner development) and infrastructure (R15 million on building roads and houses).
Financial and operational excellence
Group consolidated revenue increased by 21% to R16 401 million for the year ended 31 December 2014 compared with R13 568 million in 2013, mainly due to higher revenue from the coal business.
Table 3: Reviewed group segment results1 (Rm)
|Revenue||Net operating profit|
|for the year ended 31 December||2014||2013||2014||2013|
|Coal||16 176||13 362||3 297||2 769|
|– Tied2||4 577||3 917||319||215|
|– Commercial3||11 599||9 445||2 978||2 554|
|– Iron ore4||(6 100)||(27)|
|– Base metals5||(1)||145|
|Total||16 401||13 568||(3 292)||3 566|
|1||An average exchange rate of R10,86 to the US dollar (US$) was realised for 2014 (2013: R9,48).|
|2||Mines that are managed on behalf of and supply their entire production to either Eskom or ArcelorMittal South Africa Limited (AMSA) in terms of contractual agreements.|
|3||Net operating profit includes the NCC net pre-tax impairment of R143 million in 2013.|
|4||Net operating loss includes the pre-tax impairment of the original investment including goodwill, carrying value of property, plant and equipment and qualifying project costs capitalised to the Mayoko iron ore project of R5 760 million as well as the impairment and write-off of financial assets totalling R43 million recorded in 2014.|
|5||Net operating profit includes a Zincor refinery partial impairment reversal of R98 million recorded in 2013.|
|6||Net operating (loss)/profit includes a pre-tax impairment loss of other non-core assets of R202 million in 2014 as well as profit on the sale of subsidiaries of R964 million on the sale of Exxaro Base Metals Proprietary Limited (which held the Zincor refinery) recorded in 2013.|
Net operating profit
The group’s net operating profit decreased by 192% to a loss of R3 292 million (2013: net operating profit of R3 566 million) mainly as a result of the pre-tax impairment of the Mayoko iron ore project which included the original investment including goodwill, carrying value of property, plant and equipment and qualifying project costs capitalised to the Mayoko iron ore project of R5 760 million, as well as the write-off and impairment of financial assets totalling R43 million recorded in 2014, a pre-tax impairment loss of other non-core assets of R202 million in 2014, a partial impairment reversal of the carrying value of property, plant and equipment of the Zincor refinery of R98 million recorded in 2013, the NCC net pre-tax impairment of R143 million in 2013, as well as profit on the sale of subsidiaries of R964 million on the sale of Exxaro Base Metals Proprietary Limited (which held the Zincor refinery) recorded in 2013.
Support functions (functions other than those directly linked to mining activities) costs reduced by R124 million compared with 2013, mainly due to continuous cost-saving initiatives being implemented across the group. This reduction resulted in a net lower recovery from the coal and ferrous businesses of R116 million.
Losses attributable to owners of the parent, which include Exxaro’s equity-accounted investments in associates and joint ventures, were R883 million (2013: attributable earnings of R6 217 million) or 249 cents loss per share (2013: 1 751 cents earnings per share), down 114% from 2013 mainly due to the non-recurring post-tax impairment losses recorded in 2014 as well as profits realised on the sale of subsidiaries of R964 million in 2013.
Headline earnings, which exclude, inter alia, the impact of any impairment and partial impairment reversals as well as profits realised on the sale of subsidiaries and other non-core assets, were 6% lower at R4 869 million (2013: R5 194 million) or 1 372 cents per share (2013: 1 463 cents per share), mainly due to a R1 116 (31%) reduction in the post-tax income from the equity-accounted investments.
Cash flow and funding
Cash flow generated from operations was 88% higher than in 2013 at R4 083 million (2013: R2 173 million). This cash was used to fund dividends paid of R2 055 million, net financing charges of R248 million and taxation payments of R120 million. R3 197 million was spent on acquiring property, plant and equipment, of which R1 737 million was invested in new capacity (expansion capital), with the remaining R1 460 million applied to sustaining and environmental capital (stay-in-business capital). Of the funds spent on new capacity, R277 million was for the Grootegeluk Medupi expansion project (GMEP) (2013: R1 633 million), and R759 million for the Mayoko iron ore project (until impairment in June 2014) (2013: R1 613 million).
After the receipt of dividends of R3 719 million (2013: R3 229 million), primarily from Sishen Iron Ore Company Proprietary Limited (SIOC) and Tronox Limited (Tronox), as well as the outflow associated with capital expenditure, the group had net cash inflow before financing activities of R2 280 million (2013: R1 044 million outflow). Net debt decreased 68% to R1 071 million at 31 December 2014 (2013: R3 377 million), reflecting a net debt to equity ratio of 3% (2013: 9%).
Exxaro successfully raised R1 billion in its debut bonds issuance in the first half of 2014, under Exxaro’s R5 billion Domestic Medium-Term Note Programme listed on the interest rate market of the JSE Limited (JSE).
Coal commodity business
General trading conditions in the coal commodity remained challenging in 2014 with average API4 export US$ prices dropping from US$83 per tonne at the beginning of January to a low of US$63 per tonne in November, closing the year at US$66 per tonne (20% lower). Export volumes, however, increased from 4,5 million tonnes (Mt) to 5,3Mt. The group realised an average export price of US$65 per tonne in 2014 compared to US$80 per tonne in 2013, mainly on higher sales of lower-value product. An average of 67% of export product sales was on the RB1 product, compared with 92% in 2014.
Production and sales volumes
Overall coal production volumes (excluding buy-ins and semi-coke) were 0,34Mt higher (1%) than in 2013 and sales volumes were 1,47Mt higher (4%).Metallurgical coal
Grootegeluk’s production was 212kt (11%) higher and sales were 357kt (19%) higher than 2013, mainly reflecting increased Transnet Freight Rail (TFR) train allocations to Richards Bay Coal Terminal (RBCT) as well as higher AMSA demand. Tshikondeni production was 189kt (55%) lower than 2013 while sales were 102kt (30%) lower than 2013 due to the mine stopping production in September 2014 as it reached the end of its life.Thermal coal
Power station coal production from the tied mines was marginally higher (48kt) than 2013, mainly due to production at Matla which was 241kt (2%) higher as a result of improved cutting rates at the short walls, offset by 193kt (12%) lower production at Arnot due to the fatality in July and difficult geological conditions.
The commercial mines’ power station coal production was 933kt (5%) higher than 2013, mainly reflecting the 869kt increase at Grootegeluk due to the Medupi power station supply which started in the second half of the year. Higher throughput at Leeuwpan resulted in a 130kt (5%) increase in production while NBC production was 66kt lower due to the limitation on Eskom contractual volumes. Eskom demand from Leeuwpan was impacted by the Majuba silo collapse in the fourth quarter of 2014, with Leeuwpan production negatively affected by approximately 200kt.
Domestic power station coal sales from the commercial mines were 658kt higher than 2013, primarily due to higher demand with Medupi off-take commencing, while export sales increased by 515kt due to the ongoing review and balancing of export volumes, export logistics capacity as well as market commitments and opportunities.
Table 4: Unreviewed coal production and sales volumes (‘000 tonnes)
|for the year ended 31 December||2014||2013||2014||2013|
|Thermal (Power station and steam coal)||36 875||36 553||39 071||37 859|
|– Tied1||11 814||11 766||11 808||11 768|
|– Commercial: domestic||25 061||24 787||22 753||22 204|
|– Commercial: export||4 510||3 887|
|Metallurgical||2 274||2 251||2 470||2 215|
|– Commercial: domestic||2 120||1 908||1 456||1 308|
|– Commercial: export2||781||572|
|Coal||39 149||38 804||41 541||40 074|
|Total (excluding buy-ins)||39 276||38 895||41 656||40 171|
|Thermal buy-ins||2 202||1 470|
|Total (including buy-ins)||41 478||40 365||41 656||40 171|
|1||Mines that are managed on behalf of and supply their entire production to either Eskom or AMSA in terms of contractual agreements.|
|2||Exported as a steam coal product, blended at RBCT.|
Steam coal production was 659kt (12%) lower, mainly due to NCC which remains under care-and-maintenance (419kt) and lower stock levels at Inyanda (359kt) as the mine nears the end of its life. Leeuwpan production rose by 173kt on the improved performance of the dense medium separation (DMS) plant.
Domestic steam coal sales decreased by 109kt (3%) mainly due to lower sales from Grootegeluk of 91kt (6%), affected by industrial action in the Rustenburg area in the first half of 2014, 36kt (100%) lower sales at NCC (under care-and-maintenance) as well as at Inyanda 11kt (4%) due to stock being redirected to the export market. These were partly offset by 29kt (2%) higher sales at Leeuwpan due to higher demand.
Export steam coal sales were 108kt (3%) higher, mainly due to increased train allocations and buy-ins. This was partially offset by 507kt lower export sales at NCC (care-and-maintenance) and at Inyanda 324kt (20%) as the mine nears the end of life.
Buy-ins were 732kt (50%) higher than 2013, which contributed to overall higher export sales, albeit at lower margins.Semi-coke
The ferroalloys market demand for reductants improved from the previously depressed levels, allowing Exxaro to operate at full capacity. As such, the semi-coke plant production was 36kt (40%) higher as new markets were identified, coupled with repositioning the reductants product as semi-coke.
The TFR performance rate was at 72Mt for 2014 (2013: 71Mt), despite the force majeure event in February 2014 and annual shut in May 2014.
Exxaro used 100% of its available RBCT entitlement for 2014 and 2013 and leased additional entitlement requirements to meet demand.
Coal revenue was R2 814 million (21%) higher than 2013, reflecting a combination of higher coal export sales volumes at weaker Rand prices, higher power station coal sales at higher prices, lower domestic steam coal volumes at higher prices as well as the take-or-pay income generated from Eskom.
Net operating profit
Coal achieved net operating profit of R3 297million at an operating margin of 20% in 2014 compared to R2 769 million at 21% operating margin for 2013. This 19% increase was mainly on the back of higher volumes (R632 million); favourable exchange rate due to the weakening of the local currency against the US$ (R561 million); lower allocated corporate costs (R91 million); the saving against previous losses realised at NCC after it was placed under care-and-maintenance (R243 million), offset by higher royalty tax provision (R86 million); higher distribution costs (R137 million); higher depreciation costs (R141 million); higher buy-ins from Mafube joint venture (JV) (R181 million), weaker prices (R54 million); inflationary pressures recorded at a general inflation rate of 7,5% (R400 million); as well as the impact of changes in environmental rehabilitation provision other than the unwinding of the discount rate (R768 million, which includes a second half adjustment of the provision for possible future affected water treatment liabilities of R370 million).
The group has initiated a proactive implementation of the DMR’s affected water treatment requirements by compiling a model that seeks to calculate an estimate of current provisions that should be raised for any possible future affected water treatment. The financial provisioning for environmental liabilities is governed by Regulation 53 and Section 41 of the Mineral and Petroleum Resources Development Act 28 of 2002 (MRPDA), as well as Section 30 of the National Water Act which require the financial provisioning on protection of water resources. However, in both sets of legislation, there is limited guidance provided on the manner of determining the liabilities associated with the treatment of any affected water. Exxaro has taken a stance in calculating the possible future liabilities’ net present values.
Income received from the Mafube JV with Anglo South Africa Capital Proprietary Limited increased by 104% to R267 million from 2013 as a result of higher volumes and due to the cost-plus mechanism in place. Overall cost increases due to the maintenance of plant and equipment, higher petroleum use and increased labour costs as a result of higher production bonuses contributed to the higher equity-accounted income from this investment through the cost-plus recovery mechanism.
Construction on GMEP to supply Eskom’s Medupi power station with 14,6 million tonnes per annum (Mtpa) of coal progressed well and Exxaro met its contractual commitments on time and within budget. Total capital expenditure for the project remains within the forecast R10,2 billion. The project has achieved 34,6 million hours without a fatality, and the project LTIFR remained at 0,17. All commissioning was completed in December 2014, with all plant modules individually tested. The operational team will follow a steady ramp-up curve based on the revised Eskom demand schedule until nameplate capacity is achieved. The construction of in-pit crusher 3 is progressing to plan and commissioning is still expected in the second quarter of 2015.
In January 2014, Eskom formally notified Exxaro that it would not be able to begin off-take from 1 February 2014. An agreement was reached and approved by both parties’ respective boards in the third quarter of 2014, resulting in the ninth addendum to the original coal supply and off-take agreement. First coal was delivered to Medupi power station in July 2014. GMEP delivered 3,1Mt of coal to Eskom in 2014 as per the coal supply and off-take agreement.Total Coal South Africa Proprietary Limited (TCSA)
Exxaro entered into a binding sale and purchase agreement on 25 July 2014 with Total S.A. (Total), subject to certain conditions precedent, whereby Exxaro will acquire 100% of the issued share capital of TCSA and its related export marketing rights under primary RBCT allocation. Exxaro will pay a total purchase consideration of US$472 million (US$386,5 million to acquire 100% of the issued share capital of TCSA and US$85,5 million to settle outstanding loan claims of Total Finance against TCSA). Three of the conditions precedent have been fulfilled. The condition precedent regarding the consent by the DMR of South Africa for the acquisition being granted in terms of Section 11 of the MPRDA, is still outstanding.Thabametsi
Thabametsi is a prospective greenfields opencast coal mine adjacent to Grootegeluk mine in the Waterberg, Limpopo province. Development will be phased over a 10 to 15 year implementation period ramping up to a 20Mtpa mining complex. The mine will supply some 3,8Mtpa run-of-mine (ROM) coal to the 600MW Waterberg independent power producer (IPP) post ramp-up. The pre-feasibility study (PFS) for the development of Thabametsi North phase 1 was completed in the second quarter of 2014. The bankable feasibility study (BFS) began in the fourth quarter of 2014 and is expected to be completed in the second half of 2015. The environmental authorisation for Thabametsi mine was granted in December 2014 and the mining right application process is progressing. The first coal ROM production to Grootegeluk mine is expected to be achieved by 2016/17 (phase 1A), after which the production ramp-up rate will depend on the 600MW Waterberg IPP (phase 1B). For phase 1B, Exxaro and the GDF SUEZ consortium continue to engage to finalise the coal supply and off-take agreement, as well as water supply development schedules. Exxaro is also engaging with the relevant stakeholders to conclude implementation plans on integrated infrastructure for the Waterberg coalfields, which is deemed crucial for the development of all projects in the Waterberg region.NCC
The fulfilment of most of the outstanding conditions precedent to the NCC sale transaction has been achieved. Section 11 from the DMR remains outstanding. Competition Commission approval has been obtained and Universal Coal has secured funding guarantees for the transaction.Belfast
The Belfast project is a greenfields opencast mine development expected to produce an average of 2,2Mpta of A-grade export coal and 0,5Mtpa of Eskom coal over a 16-year period post commissioning, after which a phase 2 ten-year life-extension will be considered. The BFS was completed in the first half of 2014. In June 2014, the Exxaro board approved R3,8 billion for development of the project, subject to required licences and regulatory approvals being obtained. The integrated water use licence (IWUL) was granted in October 2014. Rezoning appeals are expected to be finalised by mid-2015. Detailed engineering will be conducted in 2015, after which it is expected that construction will begin, with commissioning scheduled for the second half of 2017.Moranbah South project
The environmental impact study (EIS) authorisation to develop an underground dual long wall mine on the Moranbah South project (50% joint arrangement with Anglo American plc), in the Bowen Basin of Queensland, Australia, was obtained. However, the development schedule of the project was intentionally reprioritised due to current adverse market conditions. This position will be reviewed in the second half of 2015. The mine is anticipated to eventually reach 18Mtpa ROM production of high-quality hard coking coal.Reductants
Semi-coke capacity expansion is determined by the availability of suitable feedstock and is being executed in a phased approach. The BFS for Retorts 5 and 6 is on schedule for completion during the first half of 2015. The concept study for the addition of Retorts 7 and 8, which had been rescheduled for completion in the first quarter of 2015 to allow incorporation of the scope change work done on Retorts 5 and 6, will no longer be performed in 2015 due to project reprioritisation across the group.Mines in closure
September 2014 marked the last production at Tshikondeni. Inyanda’s life of mine will end in the third quarter of 2015, which will result in lower export sales in 2015.
Exxaro will be executing approved community projects in line with the committed social and labour plans.
Ferrous commodity business
Production and sales volumes
Changes in the product mix at FerroAlloys in 2014 resulted in an overall production increase of 1 637 tonnes (30%) from 2013. This was mainly due to the addition of a blend product made from a combination of buy-ins and own product.
Sales volumes increased by 1 361 tonnes (19%) from 2013 mainly due to higher production and the commissioning of the new ferrosilicon plant in November 2014.
Net operating loss
The overall ferrous net operating loss, excluding the pre-tax impairment of non-current assets relating to the Mayoko iron ore project in 2014 of R5 760 million, increased by 239% to R478 million. The increase in losses reflects costs incurred on the Mayoko iron ore project which are no longer eligible for capitalisation following the impairment, higher costs at FerroAlloys mainly due to the Letaba project which has been terminated, as well as an overall increase in group corporate costs and ferrous head-office costs allocated. This has been partly offset by an increase of R61 million in income earned from the Ultra-High Dense Medium Separation (UHDMS) plant.
Equity-accounted income from Exxaro’s 19,98% interest in SIOC in 2014 decreased by 32% to R2 830 million, mainly due to a 47% decrease in iron ore prices in 2014 compared to 2013’s closing price.
Portfolio improvementMayoko iron ore project
In January 2014, the mining convention was signed by the government of the RoC, along with rail and port framework agreements for the development of a 12Mtpa Mayoko mine. A concept study on a revised 12Mtpa project was concluded in June 2014. The outcome of this study and delays in concluding further definitive agreements for rail and port resulted in Exxaro impairing the investment in the project. Subsequently, the RoC government indicated that it would take responsibility for the required upgrades to public rail and port infrastructure to enable Exxaro to transport and export up to 12Mtpa of iron ore from the Mayoko mine. In July 2014, the RoC government signed the first amendment to the mining convention extending the mining exploitation convention and the exploitation permit by 24 months. In September 2014, the content of definitive agreements (comprising both rail and port related agreements) were agreed with relevant technical teams from the RoC government. Exxaro continues to actively liaise with the RoC government to finalise port and rail agreements before a final decision can be made on any future pre-feasibility studies.
As communicated in the Securities Exchange News Service (SENS) announcement in June 2014, any further development expenditure on this project will be determined through a staged approach after considering the outcome of a PFS, BFS as well as commodity market conditions. Project expenditure for 2015 is expected to be limited to the cost of maintaining the minimal remaining footprint in the RoC, as well as costs relating to the project team’s interaction with the RoC government until a final decision is made.
The independent review of the Mayoko iron ore project investment process by KPMG Inc was completed in the second half of 2014 and findings are being implemented. The review covered the period from identifying African Iron Limited as a possible acquisition up to June 2014, when the impairment was announced. The key findings of the review are that deviation from standard internal project development governance processes, in pursuit of first-mover advantages, resulted in inadequate identification of project specifications. An aggressive ramp-up schedule was assumed at acquisition of the project, which was continually moved out largely as a result of the delay in concluding the mining convention and rail and port access agreements, resulting in the gradual erosion of projected returns. An independent technical review of the project has been completed in the first quarter of 2015, and the results are being analysed. The purpose of this review is to verify the project assumptions for the project at concept study level.Alloys
In 2014, Exxaro ceased its AlloyStreamTM Letaba operation in Pretoria West. Assmang relinquished all rights and obligations to AlloyStream technology and waived the pre-2016 intellectual property lock-in period, thereby exiting the JV arrangement.
Exxaro’s FerroAlloys business embarked on an expansion of its operation in 2014 in reply to increased demand for its product. Significant improvements were introduced into the design of the new plant optimising throughput and utilisation. The expansion project was successfully commissioned with the operation now able to almost double its existing capacity. The new facility will be ramped up in the first quarter of 2015.
The UHDMS processing technology is a breakthrough beneficiation process developed internally that uses a high-quality gas atomised ferrosilicon powder only manufactured by Exxaro. Exxaro has developed unique ore characterisation equipment, methodologies and a mobile pilot plant to support this technology. In conjunction with Kumba Iron Ore Limited, this technology has been proven to outperform existing beneficiation technologies relevant to low-grade, near-density ores. Exxaro is evaluating business opportunities for this technology on a large commercial scale with various partners.
TiO2 commodity business
Equity-accounted losses from Exxaro’s 43,98% effective interest in Tronox, together with the 26% equity interest in Tronox SA and Tronox UK for the year ended 31 December 2014 were R568 million, mainly due to lower sales prices across most products.
Subsequent to 31 December 2014, Tronox has made an announcement to acquire Alkali Chemicals, a division of FMC Corporation and the largest global producer of natural soda ash serving blue-chip customers in the glass, detergent and chemical manufacturing industries for US$1,64 billion in an all-cash transaction to create a leading inorganic chemicals company with enhanced scale, stability and financial strength well-positioned to pursue strategic growth initiatives. The transaction will be funded through existing cash and $600 million debt. It is expected that the transaction will be accretive to Tronox EBITDA, free cash flow and earnings upon closing. It is expected that the transaction will close in the first quarter of 2015 and subject to customary closing conditions. Alkali Chemicals is expected to add stability and has a history of consistently delivering strong operational and financial performance. Exxaro will continue to equity-account the Tronox investment, including the contribution made by the Alkali Chemicals business.
The equity-accounted investment in Cennergi has contributed R92 million in losses, which represented an 11% decrease on losses recorded in 2013 mainly due to lower operating, business development and project costs.
In 2013, the Botswana government embarked on a prequalification process for units 5 and 6 on an Independent Power Producer (IPP) basis. Cennergi was selected as one of seven prequalified bidders for the Morupule B Phase 2 process. Final bid documents were received from the Botswana government in December 2014 and bid submission is expected to be in May 2015. Cennergi is preparing a bid for the Morupule B phase 2 units 5 and 6 coal-fired base load IPP (2x150MW).
Cennergi continues the project execution phase of both its Amakhala Emoyeni Wind Farm (AEWF) project and Tsitsikamma Community Development Wind Farm (TCWF) project for which financial close has been achieved. Construction on the 134MW AEWF project began in June 2014 and is expected to be completed in the second quarter of 2016. The commercial operation date is planned for the third quarter of 2016. The Cookhouse and Bedford Community trusts together own 5% of the equity of the project.
Construction on the 95MW TCWF project began in the third quarter of 2014 and is expected to be complete in the fourth quarter of 2015. The commercial operation date is planned for the first quarter of 2016. Cennergi owns 75% of the project, while Watt Energy and the community trust own 25%.
Both projects are progressing within contractual commitments, on time and within budget.
Other non-core businesses
Exxaro will review the Black Mountain Mining Proprietary Limited (Black Mountain) Swartberg and Gamsberg projects to determine optimal timing for the sale of its equity interest in Black Mountain. Based on Exxaro’s strategic decision to divest from zinc and its minority shareholding in Black Mountain, Exxaro has indicated to Vedanta Resources plc (majority shareholder of Black Mountain) that it is unlikely to contribute additional shareholder funding to develop the Gamsberg project. Should Exxaro not meet future funding calls, Vedanta can elect to disproportionately contribute Exxaro’s portion of shareholder funding by advancing an additional shareholder loan to Black Mountain or by diluting Exxaro’s shareholding in Black Mountain.
In the third quarter of 2014, Black Mountain completed the definitive feasibility study on the Gamsberg project. The project was approved in November 2014 and construction is planned to start in the first half of 2015.
Table 5: Reviewed equity-accounted investments (Rm)
|Exxaro’s share of
|for the year ended 31 December||2014||2013||2014||2013|
|SIOC||2 830||4 166||3 095||2 664|
|South Dunes Coal Terminal (SDCT)||1||(2)|
|Total||2 515||3 631||3 719||3 229|
We expect that the challenging conditions facing most commodity markets in 2014 will continue into 2015. However, significantly lower oil prices and more supportive initiatives from key central banks are expected to boost global real GDP growth to the 3% level in 2015, last achieved in 2009. The average API4 price expected is around US$62 FOB RBCT per tonne. The Rand exchange rate against the US$ is expected to remain weak for most of 2015, mainly due to the combination of lower commodity prices and the overall strength of the US$.
Most of Exxaro’s capital expenditure in coal over the past five years has been directed at GMEP. While the benefits of this expenditure are expected to realise in 2015, the delays recently announced by Eskom on the synchronisation of unit 6 at Medupi power station present challenges in configuring the Grootegeluk mining plan. This will, in turn, require a revised focus on the operational productivity and configuration of the entire operation to maximise efficiencies and profitability. To protect margins, there is a renewed focus on managing controllable costs across the business.
The group will continue to exercise caution and discipline in allocating capital to projects in 2015. Like many others in the industry, Exxaro is expected to reduce its expansion capital expenditure in the short to medium term.
We expect 2015 financial performance to be impacted by lower coal prices, continued Rand/US$ exchange rate volatility and the availability of coal for the export market. With Inyanda nearing its end of life, Grootegeluk will become the major supplier of coal to the export market. As such, export performance in 2015 will hinge largely on TFR rail performance between the Waterberg and RBCT. In 2015, Transnet is expected to maintain its 2014 record performance levels. Although RBCT reached record-setting levels in 2014 of 70,2Mtpa, lower export coal US$ prices are expected to affect export volumes.
Both thermal and coking coal seaborne markets are expected to remain weak given the general oversupply of coal and subdued economic growth outlook globally.
In the domestic market, demand for steam coal is expected to be stable. However, declining commodity prices in the international market have a direct impact on sales of metallurgical coal. Strong resistance from metallurgical customers is expected as they struggle to reduce their own costs. Strong resistance from Eskom on commercial sales terms is also expected as the state-owned company continues to experience operational and financial challenges.
Coal will remain a significant part of South Africa’s energy mix even though the government’s integrated resource plan 2010 – 2030 sees renewable energy making up over 40% of all new electricity generated in South Africa over the next 20 years.
The finalisation of the phase 1 close-out and metallurgical test work on the remaining drill samples on the impaired Mayoko iron ore project will continue in the first half of 2015. In the meantime, the second amendment to the Mayoko mining exploitation convention is under way and will be submitted to the RoC government in the second quarter of 2015, after which it is expected to be submitted to the RoC parliament for ratification. This should occur in the second quarter of 2015, subject to scheduled parliamentary sessions in the RoC.
TiO2 pigment producers reduced inventories in 2014 as demand did not improve to sustainable levels and favourable market conditions for feedstock producers. In 2015, market conditions are expected to remain challenging for TiO2 pigment and feedstocks.
The electricity shortfall crisis at national level creates a renewed and accelerated need to invest in renewable energy programmes in 2015. Following delays in the government’s third window of renewable energy procurement process, 2015 is expected to bring a revived sense of urgency from government to commit to initiatives that can deliver sustainable solutions to the challenges of the shortfall in the supply of electricity. Exxaro remains committed to participating in any procurement opportunities that present themselves in 2015.
Exxaro has won the 2015 Ethical Boardroom magazine’s Best Corporate Governance Award in the mining category in the Africa region. The global publication delivers in-depth coverage and analysis of governance issues such as leadership, committees and quorum, ethics and compliance, shareholder engagement, activism and risk management strategies. Each year, a panel of four adjudicators scores entrants under four pillars (Board Composition, Board Committees, Shareholder Rights and Transparency) and 120 governance factors. The awards recognise companies that have shown exceptional leadership in governance and highlight the important role that corporate governance plays in dictating a company’s success and a board’s contribution in creating long-term value.
Exxaro was named the overall winner in the Nkonki Inc. Top 100 Integrated Reporting Awards 2014. The awards recognise South African companies excelling in the integrated reporting sphere. Exxaro also received an Excellence award for being judged as one of the top 22 of the top 100 reports received and was awarded the number one spot in the Basic Metals Industry category.
The group also achieved a top 10 placing in the third annual EY Excellence in Integrated Reporting Awards. The awards recognise companies that are emerging as leaders in integrated reporting, as well as trends and best practice with regard to integrated reporting.
Exxaro remains committed to returning regular income through dividends to its shareholders, as well as ensuring long-term capital growth on shares held.
Notice is given that a gross final cash dividend, number 24 of 210 cents (2013: 315 cents) per share, for the year ended 31 December 2014 has been declared, payable to shareholders of ordinary shares. No secondary tax on companies (STC) credits are available for offsetting against the dividend withholding tax, while total STC credits available for final dividend number 22 amounted to R195 million, representing 54,51893 cents per share. The gross local dividend is 210 cents per share for shareholders exempt from dividend withholding tax. The dividend declared will be subject to a dividend withholding tax of 15% for all shareholders who are not exempt from or do not qualify for a reduced rate of dividend withholding tax. The net local dividend payable to shareholders who are subject to dividend withholding tax at a rate of 15% is 178,50000 cents per share. The dividend withholding tax amounts to 31,50000 cents per share (2013: zero cents per share). The number of ordinary shares in issue at the date of this declaration is 358 115 505 (2013: 358 115 505). Exxaro’s tax reference number is 9218/098/14/4.
|The salient dates on payment of the annual dividend are:|
|Last day to trade cum dividend on the JSE||Friday, 10 April 2015|
|First trading day ex dividend on the JSE||Monday, 13 April 2015|
|Record date||Friday, 17 April 2015|
|Payment date||Monday, 20 April 2015|
No share certificates may be dematerialised or rematerialised between Monday, 13 April 2015 and Friday, 17 April 2015, both days inclusive. Dividends for certificated shareholders will be transferred electronically to their bank accounts on payment date. Shareholders who hold dematerialised shares will have their accounts at their central securities depository participant (CSDP) or broker credited on Monday, 20 April 2015.
Additional information on the financial and operational results for the year ended 31 December 2014, as well as the presentation thereof can be accessed from the company’s website on www.exxaro.com.
On behalf of the board
Wim de Klerk
4 March 2015
Exxaro Resources Limited
This report is available at:
Dr D Konar*** (Chairman), SA Nkosi* (Chief Executive Officer), WA de Klerk* (Finance Director), S Dakile-Hlongwane***, Dr CJ Fauconnier***, NB Mbazima**^, VZ Mntambo**, RP Mohring***, V Nkonyeni***, Dr MF Randera**, J van Rooyen***, D Zihlangu***
* Executive ** Non-executive *** Independent non-executive ^ Zambian
Prepared under supervision of:
WA de Klerk, CA(SA)
Group company secretary:
M Mthenjane (+27 12 307 7393)Sponsor
Deutsche Securities (SA) Proprietary Limited (+27 11 775 7000)
Registration number: 2000/011076/06
JSE share code: EXX
ADR code: EXXAY
(“Exxaro” or “the company” or “the group”)
If you have any queries regarding your shareholding in Exxaro Resources Limited, please contact the transfer secretaries at +27 11 370 5000.