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A ‘focus on what we can control’ helps Exxaro defy an unpredictable market

Miner reports 42% rise in headline profit.

DUDU RAMELA: Exxaro Resources has reported fair results for the six months to June 2019. A 42% rise in headline profits. The firm declared an interim cash dividend of 864 cents/share. For more on this, I’m joined by Exxaro executive head of stakeholder affairs, Mzila Mthenjane. A very good evening to you, Mr Mthenjane. Thank you so much for joining us.

MZILA MTHENJANE: Thank you very much for the opportunity to talk to you this evening.

DUDU RAMELA: You no doubt have happy shareholders. Given that coal and other commodity pricing declined during this period, would you say you are satisfied with the results?

MZILA MTHENJANE: We are quite pleased with the results, Dudu, if I can say so. I think there is really nothing we could do about the pricing. What is pleasing about the performance of the business is that operationally we remained sound, and we were able to respond through Sishen’s improvements in order to make sure that we continue to generate the volumes and deliver as much volume as we can in order to create value during this time of price depression.

DUDU RAMELA: And of course you are a world leader in environment, social and corporate governance performance. Your secret to success in this area?

MZILA MTHENJANE: It’s a legacy that Exxaro has built since its inception, and an area of focus. The ESG [environmental, social and governance] issues have increased in the tension across different stakeholders over the past 10 to 12 years. One of the most important aspects of that for a mining company like ours is safety, and I recall some of our historical charts where we had a lost-time injury frequency rate of above 0.2, which is quite high for a mining industry. We’ve reached a low of about 0.09, which is something we are quite proud about.

Secondly, we are very conscious of the fact that we do have an impact on the environment in which we operate, and the natural capital and we give a lot of attention to that. But I think, most importantly, the governance aspect of the environmental and social opportunities and challenges is an important one, because governance from the board, and leadership from the board, through to the executive and the senior management at the mine, [is important ] to make sure that we give the right attention to each of these areas.

DUDU RAMELA: Sure, you alluded to it earlier. You have achieved a few strategic and operational milestones, including zero fatalities in the 29 months to date. Let’s unpack some of these.

MZILA MTHENJANE: The fatality rate is an important one to us, and it accepts that context for the pursuit of zero harm, and one of the philosophies in the mining industry is that we would like for every employee to return home to his and her family unharmed. This is the reason we are concerned about our lost-time injury frequency rate, which in the recent two reporting periods has shown an increase. But we do have initiatives in place to arrest that and to make that we get back to the levels, firstly, below our target of 0.11, and continue to drive safety where we don’t cause any harm to people who work on our operation.

DUDU RAMELA: Are you able to share some of these interventions with us?

MZILA MTHENJANE: Some of these were shared briefly by our head of operations, which he presented this morning. One of the key things is leadership visibility, where you have mine leadership, but also executive leadership, where the opportunity provides doing a walkabout and engaging with employees at their place of work. This provides for a degree of objectivity, because it’s not a place where your senior management would ordinarily work, and so they’ll bring in different perspectives on the safety conditions which employees who are there quite often may not be aware of.

Secondly, there are campaigns that the operations are embanking on, and one which I can share with you is the Safety Always, All The Way campaign, which was launched. It’s a monthly initiative that we are planning on, for arresting the pathetic performance that we’ve seen recently.

DUDU RAMELA: Some analysts have been quite critical of the available cash the company is keeping on hand, citing specifically the payout ratio from Tronox. Do you perhaps have an opinion on this?

MZILA MTHENJANE: We’ve always said that the cash that we are receiving from selling our Tronox interest, the majority thereof would be given back to shareholders. That distribution back to shareholders is something that we would consider in the context of our tax allocation strategy. And that strategy consists, firstly, of making sure that the balance sheet is fine, that we take care of the debt; and then secondly that we take care of both our sustaining capital and growth or expansion capital. Thereafter we look at, in terms of ordinary dividend, what we can pay out to shareholders

And then, second to last, is the growth opportunities. Any extra cash is then going to be distributed to shareholders.

Now our coal operation has at the same time continued to be cash-generative. So I think it’s true. And the point was made that we have a lazy balance sheet, but the distribution from the Tronox disposal this time was about 65% of what we have, compared to the previous distribution last year, which was above 60%. So it is more than a simple majority that was distributed.

We have to consider possible scenarios in the future, because it is a cyclical industry. So, we would have to keep some cash in our back pocket in the event of an unforeseen incident in the market.

DUDU RAMELA: Healthy results, but I’m sure the year hasn’t gone without challenges. Perhaps you could speak through some of those, and the lessens learnt?

MZILA MTHENJANE: My industry is never without its challenges, really. I think the turnaround in the price is essentially one of those that we didn’t foresee, and that was as the result of occurrences in the Asian market in terms of, firstly, a key buyer of coal being China. That has been on a turnaround, in terms of reducing their coal purchases, and they’ve been restructuring the coal industry, and at some point they were not taking coal from Australia, and therefore Australia had to find alternative locations to deliver its coal. That resulted in an oversupply in the market, which has resulted in the coal price being reduced.

Other contributing factors include that gas, which is an alternative energy input, also experienced much lower prices, and we saw customers who would ordinarily use coal switching to gas, which further contributed to an excess of available coal.

That talks to the unpredictability of the market and the potential impact on price, and how the market shifts around for that.

The important lesson learnt from that is that we have to continue to focus on what we can control, and that has been key in this result. Two things that we can control are volume growth, in terms of how we exploit the resource and plan for an increase in production, and being able to respond to market demand.

A second aspect that we also have in our control is cost, and what we’ve always guided to the market is that cost would be within inflation. We can’t prevent inflationary costs, but, to the extent that we manage total costs and see an improvement in volumes on the unit cost basis, the operation will continue to perform sustainably.

DUDU RAMELA: Sure. Thanks very much for your time, Mzila Mthenjane.

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