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Exxaro reports 12% jump in revenue, declares record dividend

‘We’re looking at how we can install our own renewable self-generation, which will bring down the overall total cost of operating…[as well as] our emissions’ – Mzila Mthenjane, executive head of stakeholder affairs.

NOMPU SIZIBA: JSE-listed miner Exxaro released annual financials today (March 18, 2021). For the 12 months ended December, 2020, the company reported that revenue came in at R28.9 billion; that’s up 12% on the year prior. Adjusted headline earnings per share came in at 2902 cents; that was down 26%. Shareholders are getting a final dividend of 1243 cents or R12.43/share, which is up 677 cents on the year prior. And, on top of that, they’re also getting a special dividend of 543 cents or R5.43/share. Very happy shareholders, I’m sure.

Well, to take us through their results I’m joined on the line by Mzila Mthenjane, executive head of stakeholder affairs at Exxaro. Thanks very much for joining us, Mzila. It’s been a great run for many resources that are produced here in South Africa. To what do you attribute the increase in your revenue line, and did you experience favourable coal prices during the reported period?

MZILA MTHENJANE: Unlike what you’ve seen with platinum and iron-ore, price was not the contributor, except towards the latter end of the year. What we attribute our performance to has really been the resilience of employees, firstly, given the difficult times that we faced in terms of Covid and the restrictions.

Certainly in terms of volumes, though, the investments that we have made in the past are  certainly beginning to bear fruit. We saw that with our Belfast operation, which was built and designed as an export mine. We indicated that it is ramped up and will be reaching full production in this year. That’s where we saw the record 34% increase in exports, which contributed to a 5% increase in sales.

NOMPU SIZIBA: And just as a matter of interest, what capacity does that mine have?

MZILA MTHENJANE: It was about 2 to 2.2 million tonnes.

NOMPU SIZIBA: And then to what extent did a relatively weaker rand aid in your numbers for the period?

MZILA MTHENJANE: The exchange rate certainly did have a contribution, given that the actual dollar price was lower. In our results we do indicate the specific proportion of contribution. The rand weakness is always a great help when it comes to the results. But we don’t depend on prices and rand exchange. It’s really a function of the operational performance and volumes.

NOMPU SIZIBA: Your adjusted headline earnings per share number was down 26%. Just explain that one for us, and the reason why.

MZILA MTHENJANE: One of the reasons the accountants explained today was that with the BEE transaction we had to make certain adjustments. And the other factor was that we had to write down our ECC (Exxaro Coal Central) investment. And thirdly we in the past made an investment in what is now ITG, the Insect Technology Group, which was previously called AgriProtein. This was a business of tomorrow investments in the past. It experienced difficulties in 2020 to raise capital to be able to grow further. And so that investment also had to be written down. That contributed to that impact on earnings.

NOMPU SIZIBA: Just remind us about ECC – just remind us about that.

MZILA MTHENJANE: ECC is an Exxaro [Coal Central] and this is the asset that we purchased in about 2015 from Total [Coal South Africa.]

NOMPU SIZIBA: What were your production levels? We know that it was a tough time, it was Coronavirus time and all of that. What were your production levels, and were you able to keep up with demand internationally?

MZILA MTHENJANE: Certainly internationally we were able to enhance the record export, but I think given that our Belfast [?] mine had been ramping up after we finished building it, it meant that we had the volumes to meet the demands. The other operation, where we were able to increase production and sales was with what we call our Grootegeluk Mine in the Waterberg, which supplies Medupi and Matimba. And there we experienced an increase in sales as per the contract in terms of annual terms of supply.

NOMPU SIZIBA: You’ve told us about what’s happening with your supply to Eskom and all of that. That’s very positive, but is that partnership ticking along nicely in terms of the contracts that you have? Is that fairly long term?

MZILA MTHENJANE: Absolutely. We are strategically positioned in the Waterberg because we are the only producer in that area, supplying the Matimba power station, which has been operating for the past 20 to 25 years, and then Medupi, which is still in a ramp-up phase – and it sounds like, from what our GM is reporting, that even Unit 6 is beginning to operate. So it’s reaching full production.

Our supply is what we call mine-to-mouth. So out of the pit and on to a conveyor belt, on to the power station. So that provides very affordable coal to Eskom.

NOMPU SIZIBA: Very efficient.

MZILA MTHENJANE: And the long-term contracts are in relation to the life of the power station, and we have a minimum supply of coal to to Eskom. And for both those power stations it will be somewhere between 25 and 28 to 29 million tonnes, where there’s a variable portion which Eskom can decide to keep with us or, if a new producer comes along in that area, that can certainly be allocated to that new producer –  just so that they’re able to diversify their supply risk.

NOMPU SIZIBA: How did you handle the disruption of the pandemic? Presumably keeping your miners safe at work was a top priority.

MZILA MTHENJANE: Yes. We were very proactive. Early in January we could see what was happening around the world in terms of the impact of Covid. And perhaps, as with many South Africans, we kind of thought this is not going to hit our borders because that was the experience with previous epidemics. But as soon as we could see that this was really coming close to us, we were proactive in restructuring the business operations.

We had to look at shift patterns, working in terms of three shifts where each shift has a total number of people. We had to make sure that each shift had a minimum required number of people to maintain the same level of production.

Secondly, all employees that were based on surface at the operations and those who were working at head office then had to work from home. I think in addition to that we were declared an essential service, so we were able to continue to operate. That provided us some scope to be able to produce at the levels that we have, despite our having to restructure the shift pattern.

NOMPU SIZIBA: Despite the fall in your earnings, you’ve given shareholders a nice treat with a final and a special dividend. Just tell us about the rationale there, and what the special dividend was all about.

MZILA MTHENJANE: Let me start with the ordinary dividend, because I think that in itself was a record, more than an 80% increase in the final dividend. And when you look at the total dividend year on year, that also recorded an increase of more than 30%. The rationale there is that, firstly, it has been a good performance for the business, and especially the iron-ore business, because part of that ordinary dividend includes what we call a pass-through of what we get from our Sioc investment, Sioc being the Sishen Iron Ore Company that is operated by Kumba Iron Ore. So it was really giving shareholders the benefit of that iron-ore price and the performance of the coal business.

And then in terms of the special dividend, one of our key strategic pillars has been the portfolio optimisation. What that means is that we’ve been looking at our portfolio, at which assets are robust, which assets are non-core. And Tronox, which is a pigment manufacturing company based in the US, is one of those we had declared non-core a while back. We were able to execute our remaining interest in Tronox, which got us about R5 billion, and we apportioned R5.43 to a special dividend, and another portion for a share-buyback programme. And we’ve kept a little bit back just to be able to take advantage of future opportunities and tame our current operations as well.

NOMPU SIZIBA: We know that you’ve invested in alternative energy projects, realising that appetite for coal will at some stage wither. But from where you sit right now, what do you see as the timeline for coal here in South Africa – and even in terms of external demand?

MZILA MTHENJANE: Eskom has indicated that I think even in this year but in the next year to two years it’s going to be decommissioning two to three of its power stations in Mpumalanga. And if you look at the decade to 2030, it’s going to decommission probably up to a third of its total installed capacity – and that’s a lot of power.

So if I can then come back to how we see Exxaro or being affected with that, we are operating two of Eskom’s most modern power stations, being Majuba and Medupi. And with the IRP (Integrated Resource Plan) foreseeing that coal will remain part of the energy mix, those are the two power stations, I guess together with Kusile in Mpumalanga, that will be the remaining coal-fired power stations in the Eskom portfolio.

So I guess coal will be will be part of the portfolio for another 20 to 30 years, perhaps even longer – I’m being conservative – and we are going to be supplying into that, certainly from the Waterberg. And then we have Matla mine, which contract at the moment is up to 2023, but I think that power station has a little bit of a longer life beyond that.

NOMPU SIZIBA: Super. And then lastly, in the short to medium term, what’s the outlook?

MZILA MTHENJANE: In the short to medium term, picking up from what we were just talking about now, it’s really to make sure that we have a coal business that continues to perform well. And by “well” I mean, firstly, from a cost performance that we’re going to continue to look at how we manage our costs and how we do that. We’re really looking at reducing redundancies, being efficient in terms of energy, being efficient in terms of electricity. And there we’re looking at how we can install our own renewable self-generation, which will bring down the overall total cost of operating. And at the same time it will bring down our emissions. So a carbon- and cost-efficient coal business is really the business that will be sustainable for the next 10 to 20 years.

That will also form the base of energy strategy going forward. With the successes that we are certainly planning for, how do we take that to other potential mining companies which who can be our customers? On the back of that we’ll be growing our energy business and we’ll then also be exploring how we take our mining capabilities – we’ve been mining in South Africa for a long time – and how we look at other commodities that are going to be important for a low-carbon future.

NOMPU SIZIBA: That was Mzila Mthenjane. He’s the executive head of stakeholder affairs at Exxaro.

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I’m pleased for the shareholders… But given the comments I hope staff got a bit of a bonus too?

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