Exxaro Resources Limited (EXX) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to the Exxaro FD pre-close conference call. [Operator Instructions] Please note that this call is being recorded. I would now like to hand the conference over to Mzila Mthenjane. Please go ahead, sir.

Good afternoon, and thank you very much for handing over to me. My name is Mzila Mthenjane from Exxaro. Pleasure to welcome you all. I'm joined by our CEO, Mr. Mxolisi Mgojo; our Financial Director, Riaan Koppeschaar, who will be leading these discussions; as well as Dr. Nombasa Tsengwa. Nombasa, I don't know if the -- if Sakkie and Mellis are on the line as well.

Yes, they are.

Okay. Welcome to Sakkie Swanepoel, who is our General Manager for Marketing and Logistics, as well as Mellis Walker, who looks after the finances for the coal business. We have distributed the FD's pre-close note, and we appreciate the notes that have already come out, particularly from the sell-side. And I'd like now to hand over to Riaan, who will provide us with an overview, and then we'll allow for questions and answers. Riaan, over to you?

Thanks, Mzila. Good afternoon, ladies and gentlemen. It's good to speak to you again. So if we look at the FD close, we're firstly going to look at safety. So we're very proud about our safety record. So for the year-to-date, we recorded a lost-time injury frequency rate of 0.06, which is 45% better than our target of 0.11. And we've also now been operating for 45 consecutive months without a fatality. So very proud about our safety record. And obviously, we are going now through what we call the silly season in the company or the festive season. So a lot of focus and action is going into safety at this stage. Also on the COVID front, we all are aware of the devastating impact that COVID had on the economy, on livelihoods. But I'm also proud to report that our business are currently operating at 100% capacity, although we are still complying with many of the COVID protocols. If you look at the commodity markets that we play in, it's been a mixed bag. You would have seen the iron ore price will be higher compared to 2019. And what we forecast is that the average API for coal price will be lower. But we will leave that to Nombasa and her team later on to discuss in more detail. On a high level, if we look at production and sales, we expect both to increase by about 5%, mainly due to increased demand at the Medupi Power Station and also the ramping up of the Belfast mine. We're also very proud about our export performance, where we forecast a 27% increase in the volumes. On the capital front, we see that the coal CapEx will be about 47% lower due to certain project delays associated with COVID, mainly at our GG6 project as well as certain projects reaching their completion. If we look at the strength of the balance sheet and liquidity, so we were very cautious during the course of the year to ensure liquidity and to protect the balance sheet. But as you can see from the numbers, excluding Cennergi, our net debt the end of October for the rest of the Exxaro Group was ZAR 5.9 billion. If we look at our portfolio optimization on Black Mountain, I think earlier on, we were unfortunately encountered a few unexpected delays, but we are still very hopeful that we will be able to conclude the agreement for the sale of our interest in Black Mountain very soon. Concerning the sale of our interest in ECC and Leeuwpan current operations, there, we've made very good progress, and we also think that we should be in a position to announce the transaction for ECC very soon and with Leeuwpan thereafter. So with that, that is a bit of an overview. I'll hand over to Nombasa and her team to give you a bit more information on the coal markets in detail production and CapEx performance. Thanks very much.

Okay. Thank you very much, Koppes, and good afternoon to you all, ladies and gentlemen. I know that we've been getting a lot of questions around the market. We've been getting lately questions around what is happening and the implications of the standoff between the Australians and the Chinese. We're getting questions around why the prices we set. And you always -- we always say that we really don't have the crystal ball. However, I'm going to ask Sakkie just to start us off on the markets today. Perhaps he will be able to answer those difficult questions. Then I'll come back and give you highlights. I mean already Koppes has given you some numbers here on production and sales. And then Mellis will come back and just finish us off on CapEx. So Sakkie, can you start us off, please?

Well, thank you, Nombasa, and good afternoon, ladies and gentlemen. So I'm going to start off on the domestic side to give you a sense of where we are. I think, generally, with Eskom, in the Waterberg, our 2 big supply contracts, is going quite well. So we do not encounter any issues in terms of the offtake that was planned for the year, and we think is going -- is actually well on track to achieve that. So no major issues there. On the Leeuwpan and ECC side, as far as Eskom is concerned, still in the process of concluding agreements for supply from those 2 operations. And I really hope, before the end of this year we may have some, if not, really good news and very good process, but quite hopeful that we are heading also in a good direction there. So I think just Eskom market, in general, in South Africa is more than well supplied with coal, actually sit with a lot of coal at most of their power stations. And therefore, you also see a fairly subdued low-CV coal market in South Africa, because both Sasol and Eskom not currently big offtakers in the coal. As I said, Eskom is sitting with quite a bit of coal at present. Other key markets, of course, AMSA, that you guys know, is a big customer to us. AMSA has been in full lockdown, except for some of the [indiscernible] producing facilities during the lockdown period. But they've come out of that. You all have seen with the information AMSA has put in the market that they do see some demand on the steel side, most probably quite a bit of pent-up demand, but still some demand coming through, and they are in the process of starting up the third blast furnace in the group this year. So we are fairly positive on the AMSA market as well. Currently, not going badly. And in the next year, we also expect that very much on a normalized level where we've been, let's say, in 2019 before COVID, from offtake perspective. So not very big. On the domestic steel side, I think we all do appreciate the constraints that the construction companies, cement producers, et cetera, are under. So a lot of strain in those industries. We do see the required demand on our side in supplying coal to the cement industry, but definitely industry under severe distress. The rest of the domestic steel market going well, but fairly subdued. So nothing new happening, no new growth, no new demand. It is still a long and definitely a bit of pricing pressure there, but we really done quite well in terms of maintaining and sustaining prices but no growth in that market. And very much, of course, tied to the South African industrial production type index and has seen that we know that is very subdued. If I can then move over to international markets. A lot of international markets by any media, our view is that the international market throughout the year, even before lockdown, there was a bit of an oversupply. And definitely since lockdowns have started, has probably continuously been in about [ 30 million ] and at times even more million tonnes of oversupply in the general global thermal coal... [Technical Difficulty]

Is it me who's lost Sakkie?

I was just going to...

Sorry, is Sakkie still -- Sakkie is lost, right?

We lost the line for Sakkie. We will urge him to dial back.

Okay. No, let's allow Sakkie to come back in the meantime. But Sakkie was talking about the -- where did he leave it off? We're talking about the oversupply that was out there on the markets, and he was talking to the range of about 30 million tonnes to about 50 million tonnes oversupply, and we continue to see that there is still that sort of expectation of an oversupply. But I think what is very important really is the fact that the Indian market, as we were coming out of the lockdown level 3, we could start seeing the signs of recovery from the Indian side. And we continue to see strength in terms of the orders, especially for the last quarter, although we believe that the Indians may be destocking in terms of the high levels of coal that they have been keeping on their stockpile. And obviously, there are lots of challenges and pressures in that part of the world given the fact that we know that the Australian coal is no longer ending up in the Chinese market and is also playing and putting pressure in our doorstep in the Indian market. But we're still very strong in the Indian market as far as the sponge iron is concerned. And Australians quite strong in the cement industry. So with that division, I mean, we're still playing very well and still seeing a lot of good demand coming out of India. And we believe that the last quarter will probably be much stronger to where we are. But if you look at the third quarter, comparing the levels of demand in India, obviously, they are the highest than they have been since lockdown. So we do feel that there is that kind of recovery coming there. We have also seen, obviously, a lot of coal in the Pacific, with Australian also diverted away from the Chinese, which caused a lot of pressure in the market, such as the Japanese market, your Vietnam, your South Korea. We -- and the Australians are quite competitive. We're watching that very, very carefully. Yes, there has been interest. You may have picked up the interest of South African coal ending up. Also in China, we've seen that interest. And the questions that we've been asked is probably that's the only thing that we really see that could have probably prompt up the price to the $80 level that we're seeing it, which is really more rapidly, if you look at the last month where we may have started at about $70, now we're looking at about $80. And as I say, the only thing that we could really see as much as we don't want to over-underline what's happening in the market because the market is really turning very rapidly. Yes, we still see some supply cuts in steel. Sakkie, are you there?

Yes. I'm back.

Please go if you want to go...

I'm back. I'm not sure where I lost you guys.

We're talking now about the movement of coal into China, South African coal. Can you take us from there? The oversupply of steel in Pacific. So can you take us from there, Sakkie? You can start from where India demand is.

Okay. Thank you. So yes, I think in the Pacific, we've seen quite a few changes over the past few months. And of course, we are hopeful that China may open up the quotas to take about 20 million to 30 million tonnes for the rest of the year, which will release pressure. But what we have seen definitely with the Australian restrictions, that Australia is definitely running much more aggressively into our markets. So for South African exporters, I think the market has been generally quite prime to us from a demand perspective, with India coming back quite strongly after the lockdown. The Pakistani demand throughout has been very strong or very good. And then also the Vietnamese demand keep up. We have seen quite a bit of typing often at times a total fall away from Northeast Asia, Japan, Korea, Taiwan. And we've seen with South Korea specifically implementing more and more restrictions on coal and switching from coal to nuclear and then bringing in heavy carbon taxes. I think we probably will see more of this constrained market in that space going forward. But for South Africa, I think, in our markets, generally not having a problem in terms of demand. And on Exxaro side, specifically, we experienced fairly neutral to group markets. What we did experience in our markets, if you will, in our own turf market, Africa, Middle East, Indian subcontinent, is that we have definitely seen much more competition coming in from Colombia, from Russia, from Australia. So we definitely see competition there and pricing pressure from that side, but demand generally keeping up quite well. I think looking forward then into 2021, it's difficult to see that the China-Australia situation is going to be resolved very soon. So we expect that to carry over into at least the first quarter of next year. The Atlantic, as I said, we're a bit more relaxed about that from a severe overflow supply perspective, but there is the risk that as the winter eases, that demand might also fall a bit away. And with Colombia coming back into production via sell zone, I think we will not be short in the Atlantic. But I think that, in general, maybe to close off on this one, market itself, the India, the Australia and the -- the China, Australia and the China import levels for 2021 is probably going to determine quite a lot about market [indiscernible]. And then I think the other big thing probably will be the price of gas versus coal. And gas to coal switching is going to also impact demand-supply balance quite a lot and, therefore, pricing. Just closing off on pricing thing, you will have seen that the prices generally across the board of the major indices picking up quite a bit over the past 3 weeks. And to everyone's surprise, the South African API4 really running ahead of the rest of the show. Now that is good always in the short term, to an extent, because for your transactions that you have concluded, it is the price up and you get more for all your coal. But it does make the market very skittish, and the market is very unwilling to commit to new transactions when pricing becomes less volatile because we just don't know where it's going to be the next month. So we definitely see some of that in the market already, where it's becoming quite difficult for people to want to commit to new transactions. And the other reality of API4 is running so far ahead, specifically of API 6, the Australian index, is that it is very difficult for South African coal then to be in -- to be competitive in markets against your other origins. And therefore, what we expect to see over the next few weeks is some of the discounts on the subgrades to widen to again bring the South African coal competitive. But as I said, for us, luckily, Africa, Pakistan, Middle East and India is main coal market, and India at least the biggest market to South African coal the fact that we are close on the one hand and that our fixed carbon is quite attractive to that market remains very positive. Yes. I think I can stop here and bring later [indiscernible].

Sakkie, thank you very much. Can we just -- now the last thing I think we need to hear it from you would be your view on the cuts, which we've seen from the Australians. And obviously, Colombia also has seen some cuts. You did mention that some of this coming back on stream. Can you just fill us up on all of that picture there?

Yes. No problem, Nombasa. Yes, so on Colombia, I think that Prodeco, we're going to not see that return anytime soon but [indiscernible] is back in the market. So definitely better supply in the Atlantic. On Australia, we are currently a bit hampered by constraints on the vessel side. So we also don't see all the Australian coal in the market. I think for the whole industry, with the low prices, and if I mean low prices in the vicinity of $60 per tonne, there was a fair amount of the coal industry not in a cash positive position here. And therefore, we were kind of hoping that we will see some of the marginal supply falling out, which did happen. And we started to even see on the Australian side some of that happening. Now with China blocking some of the -- quite a bit of the RB3 from Australia mostly, we do see some of that running into other markets as we see. And that might keep the Australian supply under pressure because Australia is going to compete also in other destinations can take a big knock on price may render some of that supply not economical. I think the big change we've seen there is probably in Indonesia where specifically on some of the lower-quality grades, where we had the biggest impact from both the pricing and the Indian demand perspective. And with India pushing very strongly the domestic supply from coal with India, that is competing directly with the lower quality Indonesian supply, and there we've seen a big impact.

Okay. Thank you very much, Sakkie. And also to confirm that you've mentioned the issue around the fixed carbon and the fact that we're quite strong in the Indian market. And I think it's important for us to outline it in a specific market segment, which is sponge iron, and the Australians are still strong in the cement market.

Correct.

Thank you. All right. I think -- thank you, Sakkie. Let's continue. I think I really wanted the market to -- the people on the line to understand what is going on in-depth as far as the markets are concerned, to give context to the numbers that I will give you just now. But overall, I think it's obvious to say that we really expect to finish the year quite well and as far as production is concerned. He gave you some numbers comparing to the previous year. And I want to take you from where we last spoken to you, which was the previous guidance, and very much in line with what he said that we expect to be a bit higher than what we've mentioned to you in August because we have such good production both from the Waterberg, and Eskom has done quite well as far as the demand is concerned, and we had the coal. And most importantly and also mainly, due to the performance at ECC, we -- when we last talked, we didn't expect ECC to have an underground mine to come out so quickly and recover post-COVID, and they've done that quite well. And also the ramp-up of the 4 seam at DCM West which really gave us that availability from a production point of view. However, you will recall that we reported that Matla was still [indiscernible] thing, if you recall, coming out of lockdown level 3. So they have been slightly lower due to the fact that we delayed the return from the 2-shift system to the full 3-shift system where we're at to date. So that would be total thermal coal production. Then on sales, very much in line with our previous guidance. And Koppes mentioned the issue around exports from '19, but specifically from previous guidance, we are 5% more we expect by the end of the year, due to product availability, as I've already mentioned, partly offset by what Sakkie had mentioned earlier of delayed CF8 for ECC and Leeuwpan from Eskom. But that is very close to conclusion, we believe, given our latest conversations with Eskom, and being lower product availability from Matla due to the reasons I've already mentioned earlier. So really very pleased to say that our operations are quite stable despite the fact that we are practicing very stringent COVID-19 protocol, along with our safety programs. I'm very proud of our record, as Koppes has mentioned, which is our all-time high at Exxaro, especially this time of the year, and we hope that the silly season will not take us backwards. We really -- all of this good performance from our excellent people that really took the challenge at the beginning of COVID to get out of the blocks very quickly to make sure that we adopted those COVID protocols very quickly, and we were able to operate and apply for all the authorizations that we required. You often asked us about our cost. There's nothing out of the ordinary. Even though we were reporting full in March, nothing out of the ordinary that we see from a cost point of view. And if we look at our COVID-related costs, they are very much under control. And with all the price volatility that Sakkie has talked about, we are keeping an eye on costs to make sure that we protect the margins. As far as the biggest challenge we have, the biggest challenge we've had, and we are watching this and discussing it very closely, is the level of cable theft on the rail, which is really impacting us very, very badly. We're really trying to have these weekly meetings with TFR to make sure that we limit the impact because we do have the coal to go to Richards Bay. There has been quite a lot of community unrest in the Palala area. That also impacted us negatively, and some also of these committee issues on the rail as well. So it's not all that rosy. And I think on the Eskom side, we all ask questions, I think that we addressed all of those. There are no issues from Eskom at all worth reporting today. So we shall stop there and go to Mellis to finalize the CapEx story. Mellis?

Thanks, Nombasa. And good afternoon, everybody. On the capital side, so you can see that we're looking at ZAR 3.1 billion. That's our number for 2020. It's about ZAR 400 million down from what we talked about at the last guidance at about ZAR 3.5 billion. That was very much in line with what we talked about in the FD's pre-close in June. So nice savings. And we started the year with a ZAR 4 billion forecast for 2020. Obviously, COVID had an impact on our numbers, but we also are constantly optimizing and rationalizing and prioritizing our capital, especially on the same business side and the sustaining CapEx. We've got 2 big projects coming to an end in 2020. It's rapid load-out station, so very much in line with the numbers that we've talked about, and that will be closed out as we speak. And then Belfast is also being closed out. So both of those 2 big ones. GG6, there have been further delays, obviously, with the changes in the lockdown levels. As they've allowed more and more activity, the projects have got up and running again. So some of that money in that, ZAR 400 million, which is ZAR 100 million on sustaining, which is essentially optimizing Leeuwpan and ECC with the divestment coming up and some of that will rollover into 2021, but a lot of that is part of our optimization and cash preservation priorities and initiatives. And then on the expansion side, the amount of that ZAR 100 million of the ZAR 300 million will rollover into 2021. And on the Belfast side, we're also finalizing the numbers. And in March next year, we'll be able to report on what the final outcome was of any potential spillovers into 2021 and what is a permanent saving, and then we can further commit to savings in addition to the savings that we have committed to previously. Thanks, Nombasa. I think that's on the capital side.

Yes. Thank you, Mellis. Then we can open up with Mzila to any questions, please?

Thank you very much, Nombasa and Riaan for that. I don't know if there's any perspective you want to offer or you will leave that for maybe the closing?

No, there's nothing on my side, Mzila.

Okay. Thank you. So I think we can then allow for questions, if there are any questions from the audience.

[Operator Instructions] Our first question is from Shilan Modi of UBS.

A couple of questions from my side. Let's start with the noncore asset sales. Is the sale of ECC and Leeuwpan dependent on obtaining a contract from Eskom? And if so, like what sort of time lines are we looking at? I know you guided to ECC for this year. But yes, can we get a feel for what's going on with Eskom contract negotiations? And how long those generally take? In terms of the export coal markets, if Australian volumes are being displaced by China, which we have been seeing, does that create an opportunity for you to sell higher quality coal into China? And are your operations adequately geared to do that? I know Belfast is a high-grade colliery, but can we -- can you guys actually generate enough high-grade volumes to sell into that market? And then maybe just a question on migrant labors -- laborers. What percentage of your workforce is migratory? And the reason I ask is, if we go into this holiday season, if your workers are going home, especially, say, to the Eastern or Western Cape, there is a risk that they can fall ill given the spiking infections of COVID-19 in those regions. So maybe just talk around your strategy around that? And one more, if I may. The GG6 delay, can you kind of give us insight into that? I know it says in the disclosure that there's been a change to the contract plus the COVID-19 delay. But we can also see that there's -- I think it's a ZAR 500 million increase in the total CapEx for GG6. So maybe just give us some more color on that?

Okay. Thank you very much. Koppes, do you want to talk ECC and Leeuwpan? But we can talk to the second. Koppes, you want to go for it? Koppes, do you want to go for it first?

I don't know if he's still on the line. Hopefully, we haven't lost him. But maybe...

He's still connecting...

[indiscernible] questions. Look, on ECC, Leeuwpan sale, not necessarily dependent on the completion of the CSAs of -- Eskom CSAs, not dependent. However, those CSAs are at the tail end of completion. We were hoping that by the end of November, we will have those completed. Mxolisi, any addition from you?

No. Thank you very much, Nombasa. Yes, that's to emphasize the point that, yes, it's 2 different players are bidding for these assets. And there is -- part of the principal agreement with the individuals was that any form of sale should not be dependent on an Eskom contract. However, an Eskom contract that's confirmed during the process will be value-accretive to the overall transaction. Hence, why we are looking at making sure that by the time we conclude all of this, the Eskom contracts are there.

Yes. And as far as I know, I think we were really waiting for one more stage, Shilan, to conclude those contracts. So we should see that coming through quite soon. On migrant labors, maybe I can deal with that to say that, look, we do have quite a number, I think, from our employees, especially from our Matla mine, who are from the Eastern Cape, for instance. And as late as Monday, we were looking at all those strategies of how we will have to reintroduce our employees back into operations. And in fact, we don't want to take chances, even for people who are going to remain in housing, because what happens is that you get visitors from the Eastern Cape also going to housing. So what we've done there? We've got a very stringent protocol, which is going to be driven very aggressively, starting from people finding forms to tell us where their whereabouts. Even if they think they're not sure, they will be in the Eastern Cape, for instance, we ask people to give us that -- do give us that information, and our employees are very willing to give us that information. And the reason we're doing that is to make sure that on their return, we prioritize them in terms of cleaning and testing and focusing on those people who may have been into those areas. But we are going to rollout very massively a testing than a screening process, which we have planned up in, I think, we are ready to make sure that we manage. So no issues there. Then Mellis, do you want to pick up on GG6? And then I'll ask Sakkie just to talk to our strength in the Chinese market and the high grades.

Yes. Thanks, Nombasa. Shilan, so we've mentioned the ZAR 500 million before. It's not -- so we're still in line with our previous guidance. So that takes us from the ZAR 4.8 billion to the ZAR 5.2 billion. And number of the costs were related to extension of time, the COVID delays that took place, the changeover of the contractor, as mentioned, and the ramp-up of the new contractor. Current timing that we're looking at is in the first quarter 2022, when the project will be completed. So it will spill over into 2022. It's essentially a 12-month delay against the original time line that we've talked about.

And maybe before I go to Sakkie, something else, maybe I may have forgotten to mention, but we've mentioned before. Coming back to the issue around COVID-19, we do have test facilities at Exxaro. So we are not going to be waiting for labs that are far away from us. We're running the test ourselves, so that's why we are able to absorb a high number of tests at our operations: One that is sitting at Matla and then the one that is sitting in the Palala. And the Matla one is servicing our Mpumalanga operations as well. So we are quite busy in those 3 there. Sakkie?

Thanks, Nombasa. Yes, I think on the China situation, so the Australian coal that is currently blocked from China or by China is actually not high-value coal. It's traditionally not the RB1 or the 6,000 kilo cal type coal from Australia going into China but rather than 5,500 or RB3 material. That is where the major impact currently is. And therefore, the demand from South Africa from Chinese customers potentially will be for an RB3 or probably at best an RB2-type product. The dilemma that South African exporters sit with that market is that, one, Chinese have very stringent limits on price elements and specifically flooring. And traditionally, South African supply do not fall within those limitations that China have on 5 critical price elements. So apart from the economics, there is also a quality issue. Now most South African producers are currently going through a process where we have starters from different mines being analyzed to determine if it will be acceptable to the Chinese market. I'm only aware of 2 vessels from South Africa that have sold to China since they had break off this problem. So it is -- there's a lot of noise in the media and in the market, and there's a lot of talk, but not so much physical coal actually going there. I will also expect at the current pricing levels that South African coal may find it quite difficult to find competitively in China. And I would probably expect that both Colombia and Russian coal with the Indonesia might find it easier to get in there. But we do get quite a bit of requests from China to see what the availability of coal is. So we're looking into it. We're definitely investigating. We have -- our first outcome of samples analyzed, and we're still working with the labs to understand what that means. But I think North, South Africa [indiscernible] but we are definitely looking at the potential to supply it if it makes economic sense to us.

Thank you very much.

Any other questions?

Our next question is from Brian Morgan of RMB Morgan Stanley.

Just a few follow-up questions. You talk about export volumes from GG going just over 2 million tonnes for 2020, that's cool. What are we looking for, for 2021? And do we need GG6 ready to get those volumes up? Or do you have coal that you can send regardless of GG6?

Yes, we do have coal availability, Brian, because -- yes, sure.

So what volumes then would you be looking for, for 2021, sort of 4 million tonnes?

We have to -- we're going to have to bring those numbers back to you when we come in, in March, Brian, unless Sakkie has that number of the heart.

Numbers, yes -- so the rail agreement being signed, you want to say at a normal level of kind of 3 million tonnes per year, Brian. And I think our -- not our concern, but our reality for next year probably is, on the rail side, is to what extent can -- on the rail and product availability we get to that 3 million tonnes. But it's definitely not above 3 million tonnes. It's probably going to be a little bit below that, that we're looking at. But it's kind of a ballpark figure of 3 million tonnes that you can think about that export per our contract.

But there is no risk in terms of us getting to 3 million tonnes. I think that's important.

Okay. Cool. That's great. Then would you need to buy in coal to fill up your rail allocation?

Sakkie? We never really -- I don't think we're going to be buying coal unless there is unavailability -- unless you've got a real issue where you don't have coal at RBCT. But in terms of availability of coal, Brian, I'm not worried about 2021.

Okay. Cool. And then on the ECC disposal, when you guys bought it from Total, there was a requirement to do a BEE deal -- a second BEE deal in that thing. Does that transfer to the new owner? Or what happens to that whole story?

If I may just come in, in that. Well, there was not a requirement for us to do a new BEE deal. You remember, that was during that time when we said, it could be possible that we may need to, but those requirements are no longer there. So part of what we do in of our disposals is that we sell our assets to those companies which are BEE companies nonetheless. And remember -- already, if you remember, those mining rights are already part of the old order. So as part of the ruling -- the current ruling in terms of what is empowered, that instance, that will stand.

Yes, it was not legally binding, Brian.

No.

Our next question is from Thabang Thlaku of SBG Securities.

And again, well done guys. It doesn't seem like COVID has impacted you too much. I'm just -- I'm going to ask 2 questions. On TFR, the run rate is running at lower levels compared to history, but your guidance in exports, obviously, doing well with you guys potentially exporting just under 11.6 million tonnes. Does this mean that other exporters are struggling to fulfill their transmit take-or-pay requirements?

Sakkie, please?

Thabang, hello and thank you for the question. Yes, I think where we do particularly well is in the first half of the year where we have a deliberate strategy. To say the second half of the year, normally, we face issues like kind of [indiscernible] we faced Indian monsoon. We faced bad weather in Richards Bay. And we have the deliberate strategy, so we're going to push as hard as we can in the first part of the year to make use of every gram of additional capacity we can, and again to the credit of our leadership and the executive, Exxaro was very quick out of the blocks when the lockdowns took out. That fact gave us a lot of extra run in terms of rail capacity because when the rest of the industry could not and would not take train, Exxaro really made full use of any available rail capacity at that stage. Where we sit today, we're still doing very, very well in doing longer, and we are able to take up any excess capacity there is. And as you say, there are definitely players that are not able to take up the full capacity and we have the coal to operate into that. It's only on the Waterberg side where we do battle a bit with -- lot of impacts on cable theft as Nombasa has indicated.

Thank you very much for that, Sakkie. I do remember you guys this time last year saying that you know that the weather issues are annual. And so you need to start doing something different. And it seems like you guys have, so well done. And then guys, apart from the recent incident at Gamsberg, what has been the other delay at Black Mountain? I mean like in the June FD pre-close, we were talking weeks, but it's almost 6 months later. So what's happening there?

Yes. Go ahead, please?

Yes. Look, TT, unfortunately, things are not always in our control. In this instance, [Technical Difficulty] our agreement on that part, right? By and large, in terms of concluding the commercial part, that's all ready -- the sales and purchase, it's all ready. It's just that we just need to wait one other approval. So we are just waiting for that. And that's the best I can say at this point in time, we can't reveal much more.

Our next question is from Brendan Ryan of Miningmx.

Nombasa, could I give some more detail from you, please, on this cable theft issue. Is it only happening on your -- on the line from Lephalale to Ermelo and, therefore, only affecting you? Or is it widespread, right down to Richards Bay? And what should Transnet be doing about it to combat the theft? And then thirdly, do you have an estimate of how much in coal exports you've lost because of disruptions caused by cable theft from January to October this year?

Yes. Brendan, I'm going to ask Sakkie to talk to that. He's already talked to the fact that the impact is mostly from Lephalale. But Sakkie, please, maybe share some of the discussions that we had in detail, obviously, not necessarily details but some of the efforts that TFR is getting into in this regard?

Thanks, Nombasa. I think the cable theft itself is very widespread. I really want to say that anything towards North West from Ermelo back to Lephalale is impacted, Mpumalanga and the North West Corridor. What you generally do find in Mpumalanga is it is much easier to recover the things either through different avenues or just because there are a lot more early stops in circulation in [indiscernible] if you miss a slot, it's very easy to make -- much easier to make up the short spin. So it is not necessary that the cable theft is less -- has less -- the impact on us is much less in Mpumalanga. On the North West Corridor, we -- it's a very wide stretched out area and very difficult for Transnet to [indiscernible] of course. They are making ground -- good ground on -- and [indiscernible]. So it is -- obviously they cannot stay nothing to do and that we also do not want to talk in public about -- too much about the specific effect. But in terms of air surveillance, ground surveillance, having a lot more security on the ground, having a lot more intelligence in place or ongoing intelligence on what is going on [indiscernible] in terms of identifying the [indiscernible] and making progress in that -- on that front and having successes there. I think it's slow progress, but we do see progress to that because, let's say, for the past, I would say, 3 to 4 weeks, we have seen better performance on the North West Corridor. But I think it is -- it really is a widespread and very well-organized effort in terms of cable theft. And I think the 3 areas where we struggle with is: one is the cable theft; two is on locomotive reliability and also community impact that we do see. So it's not just cable theft, but cable theft is a major problem in the area. And I think they're definitely employing a lot of effort, but really not winning there the battle.

Okay. And do you have an estimate on how much you've lost in coal export volumes because of cable theft this year?

I don't think we've quantified that figure specifically and in the detail. We may discuss some of the details before answering, but it's not something we can discuss at this stage in public.

Okay. And then Nombasa, if I could just ask about Thabametsi, please. If Thabametsi doesn't go ahead, if that resource is not going to be utilized, can you talk about the impact on Exxaro and the impact on the Waterberg in general of that coal not being utilized? And what are your options as they stand now?

Look, remember, the need -- when we reported before to say that Thabametsi was at risk. And remember, we were being pressurized by the market to say, "Guys, what's your alternative?" And we always say that our alternatives had been to mine Thabametsi together with the GG reserve, which meant that you may want to mine some parts of Thabametsi to complement the sulfur, but not obviously to take 1 tonne out because you're going to need plant capacity. So you could still mine a tonne of coal -- about a tonne of coal from GG just to make up for sulfur, and we're even looking at about 1 million tonnes, which would have been a sort of a temporary interim period before Thabametsi would have realized. And in the long term, where we have thought that coal could go to would have been destined for Mpumalanga in the long term, whenever the shortage is in Mpumalanga, and maybe some of that coal would have been to the seaborne market. And you will recall, 2 years ago, when we revised our life-of-mine plans, we revised our life-of-mine plans in view of being left with stranded assets, and we applied our high-grading strategy, which we had to look at -- yet, we had to look at volumes. We also have to look at the quality of the reserve. We look at our Eskom market, and we realize that in terms of the contracts that we have at Grootegeluk, we have enough coal on the reserve for the Eskom market. And in terms of the reprioritization of high value -- from a high-value strategy point of view, again, we have prioritized the Grootegeluk reserves to the extent that Thabametsi is not as important as it was to us in the past. That is why that reserve was dedicated to an Eskom-type operations such as the power station. So if you ask us in terms of short -- I mean in the next 30, 40 years, we will really not be needing that coal in the context of what any value strategy, but we have the reserve [indiscernible] is part of our reserves.

So you're going to keep it. It's part of your reserves. You don't have to hand it back to the government. And you may or may not mine it in 30, 40 years' time. Is that what you're saying?

No. That is still up in the air, Brendan, and we continuously review our assets in terms of what is emerging. We don't know what will emerge. But if you look at what the plan of this government in the IRP, as it stand, a lot of power stations are going to be retired in Mpumalanga area. So that challenge that we used to see in the past, we are seeing a different view coming from Eskom to say that look guys, we will have to retire some of these power stations. Yes, our Lephalale and power stations will probably be the last ones standing. But that's really the future that we see. We may, we may not mine it. It's going to depend on what is emerging. We may decide to divest out of it. I mean there are a lot of options that we can look into. But at this stage, in our lives, our high-value strategy is prioritizing our facilities there.

Brendan, let me also add to that. You remember, we've come up also with a climate statement, hoping carbon neutral in terms of Scope 1 and Scope 2 by 2050. So that's also our commitment in terms of how we need to also decarbonize as we move forward. So we will also be guided by that commitment in terms of -- that it makes sense for us to actually increase our carbon footprint. If we are already committing that in the future, we want to actually decrease our carbon footprint. So that will -- that also comes into that phrase.

Thank you very much for those questions. Any other questions?

Our next question is from Tim Clark of SBG Securities.

Congrats on the results. Very nice set of results. Can I just talk to a couple of things, please. First of all, just on Mpumalanga. Nombasa, you sort of said the costs are running as expected. You've had a bumpy period in the first half on Mpumalanga, and you reported an operating loss, I think, of ZAR 409 million on your segment report, but you are up about some 600 -- sort of 600,000 tonnes. You've got a nice step-up in terms of production from Mpumalanga. Can you just talk to what we should think about in costs? Should we use the sort of 2019 base for the second half, perhaps, or how should we think about it because it has been a bit bumpy? That's the first question.

Okay. Mel, do you want to tackle this? I'll support.

Yes. Thanks, Nombasa. Thanks, Tim. I'd be disappointed if we didn't go through some discussion with you guys without Tim asking a question on the cost. So that's great. Obviously, the focus for this round is on volumes, sales and production and CapEx. But in terms of costs, I mean, obviously, it's been -- the first half, you had a quarter which we did really well and in a quarter, which we went into lockdown basically because of all the restrictions, volumes were impacted, et cetera, et cetera, that we ramped up. We took a 10-day shut at 3 of our operations just to balance stocks, et cetera. So I would think that the first half numbers that we discussed in the August guidance was -- is not representative. And I think, overall, we're still on track in terms of our guidance that we've given to you guys to look at mining inflation, which is kind of CPI plus 2%. And we are comfortable even with the additional cost and productivity challenges. Matla is one of them that Nombasa mentioned earlier, that was only back to 3 shifts from the 1st of October. So I think we're still in line with what we've talked about previously. So you have to look at an annualized number, I think, and then still pull that through in terms of that guidance on mining inflation. We feel comfortable that that's in line. Nombasa alluded to that earlier as well.

That's very helpful. Can I just ask then on -- you've ramped up your -- or you've handed over the load-out station, which presumably means you're sitting with quite a lot of excess load-out capacity at critical. Is there any progress on potentially leasing some of that capacity out to Eskom? You've mentioned that the line -- you've got a nameplate of -- or an allocation of 3 million tonnes. Can you share just what the current line capacity is because it was meant to have ramped up by now to quite considerably higher than that?

Sakkie, do you want to go first, please?

All right. Tim, so I think it's important to separate a few things from each other in the equation. The one is maybe your first question, how much line capacity is there? So if we talk line capacity, we talk infrastructure. And infrastructure-wise, there's probably quite a bit more infrastructure-wise than what we need. It has not concluded in the next phase of expansion, but there's definitely more than enough infrastructure for us and for Eskom to meet the economy should they want to do that. I think on the Grootegeluk load-out station, that's a bit of a different kettle of fish because the load-out station and the feed conveyors will not build in any way so that you can put Eskom coal onto the rail. At some stage during the development and the design, we did give those options to Eskom, and they were not taken up at the time. So what we sit with today is not a system where we can just -- as for our other export costs, just export of Eskom go onto the line from Grootegeluk and change it for the 2-way heads I want to. So it's not that -- again, we have made proposals to Eskom in August already to explain that we can be helping and how we can help them in the interim, other infrastructure is being built on the side, but we have not had positive response to that. But this is not just from an infrastructure perspective, there is not necessarily a constraint on that process.

That's useful. And sorry, then just my last question. I was quite disturbed by the community unrest reports that came off of Lephalale and Grootegeluk, and far -- and the fatality -- the issues that came up. And clearly from a company point of view, the ongoing reliable supply of production from Grootegeluk is a critical risk. And I just wonder if you could talk just briefly to some of the community concerns and how you can mitigate that risk of -- because losing Grootegeluk in terms of your coal business is critical, right?

Tim, I will respond to that quickly, it is my responsibility, and I thank you for touching a very important issue given the location of Exxaro's operations and the supply to this 2 critical power stations. And hence the response was quite encouraging for Exxaro that we received support from local government, district governments and province and national government in terms of ensuring future stability and safety in that area. And so we were able to have a session where we agreed on future engagement procedures and protocol and dispute resolution such that you don't end up with, firstly, incidents that lead to fatal accident which has happened, but also more importantly, disruption to operations given, I think, the criticality of the 2 operations. So where we are today is that we have agreed on how we will engage and how stakeholders will express their disapproval with any activity on behalf on the part of Exxaro. The key issue at the time was around, I think, as we've seen in a lot of other locations, access to opportunities for employment, enterprise development and procurement as well as skill development. While we have those programs in each of our mines, and particularly in an operation like GG, given the size of the social challenges, they're obviously not adequate. And for our projects, they particularly attract attention, given that it's a very visible economic activity. And those are areas where we're ensuring that we make sure we provide for those opportunities for communities. And so projects that -- such as GG6 that are still ongoing, we've ensured that those short-term contracts provide for employment and procurement opportunity. And so it's been stable since then. And we believe we've got a long-term solution rather than just an interim solution. Any other questions?

We do. We have a follow-up question from Shilan Modi of UBS.

Just a follow-up. It's more regarding your climate strategy. I know in the disclosure, you said you're going to release the climate report at the end of the year. But just my thinking around that is you've probably done quite a bit of work on it already. So maybe if you can give us some insight into the way you're leading in terms of how you'll deal with climate at your operations and how you'll skew your business going forward? Maybe also touch on, does this mean looking at expanding like -- businesses like synergy? And how does that tie into like your early value strategy where you're talking about, say, doubling the volume at Belfast? Maybe if you can just touch on those.

Okay. Maybe I'll touch on the -- we have indicated that we're going to be working on the [indiscernible] for climate financial disclosures. We are at the tail end of that work that has been ongoing. And we still need to go through the proper governance processes in terms of what will become the final report. So at this point in time, until we go through that, I'm not able to really share with you because it still has to go to the Board and get approval of the Board. But we will be able to have it published as of next year, that report, and also the report also looks at various initiatives that one will have to take in terms of what abatement -- carbon abatement throughout the period up to -- leading up to 2050. So if you can just bear with us, let us go through that formal process first, then once we have all of that, then we will release it to the public. So let's just bear with us on that.

Okay. So just to confirm, will it be published at the end of the calendar year or at the end of the financial year?

The end of the financial year. In other words, you will get -- we will get it included -- March around that time period with our integrated reports and all that. And of course, we can talk about your early value strategy.

Shilan, as we always say that given the fact that we are a dominant coal business and our belief that coal is still a very strong commodity. However, we do not know how long will the runway of coal last. The only thing that we know is that it's getting much more tougher out there in terms of market. There is all of this shift away from coal all over the world. We know that we've lost the European market already, and we are all playing where there's growth in Southeast Asian space. And therefore, we are compelled to make sure that we're playing with very robust assets in anticipation of all of those intense headwinds. And that's why you started seeing us now retaking our operations such that they are future-fit from a product point of view, from volumes point of view, so that at the end of the day, we are not left within this period that all of us don't know how long it is, we are not left with assets that are stranded with a lot of value on the ground. So whatever are the strategy alongside in terms of our ESG program, how we manage our operations, you may be aware of the fact that [indiscernible] we are trying to take all the -- we had a live discard dump that has been really contributing to fugitive emissions. We have since developed a very elegant and efficient discard or let me say rehabilitation system where we return the discard to the pits and not dump it and then we fill all of that to make sure that once we operate, we also are very environmentally responsible. We manage our carbon emissions to the extent that we have. So really, that is the strategy that we have to the extent that even, as you know, the Belfast operation has been looked at in that way. We are not going to keep operations for longer unnecessarily, but our idea is to take out the coal from the ground. But the fact that we have to look at our capabilities at miners to say then what? How do we sustain the business going forward given the fact that we are miners? The only challenge we have today is that we are mining coal. Therefore, what are the opportunities that these capabilities opening for us and we're looking at all of that alongside what Mxolisi is saying, that we will participate in the just transition. We will be part of cleaner energy solutions in the country, whilst we mine coal responsibly without a risk of having stranded assets when we don't know when that would be.

Thank you very much, Shilan, for your question. Any other questions from operator?

Our last question is from Johann Pretorius of Renaissance Capital.

Just back to the export coal market. As you pointed out, the $80 per tonne caught us all by surprise. What would you view as a sustainable export coal price for RB1 API4 coal price over the medium term, considering demand and supply? I think demand had surprised us perhaps a little bit on the upside, but clearly the deep capacity cuts that we've seen also played a role here. So if the capacity -- if the supply doesn't come back, can coal prices be sustained above $70 over the medium term? Or I would just like to hear your views about this?

Sakkie, you know that, your favorite question.

Good luck, Sakkie. I hope you've got a good crystal ball.

Yes. Johann, always a difficult one. I think firstly anything above $70 potentially is going to attract more supply to the market. Specifically on the Indonesian side and potentially even on the U.S. side, into the Atlantic, which may put further pressure. So it's quite difficult at this stage to see a sustainable price of more than $70 in the market. I would think somewhere between $60 and $70 is a more -- is a price where supply and demand can meet each other more sustainably, I would think.

And I think also the wildcard here as well is the Chinese. What the Chinese do? Are they going to take coal from unfamiliar players? Are they going to, in a long term, take from Colombia? What is going to happen to the Australian issues? So there's a lot of uncertainty there for me as well that you have.

I mean it's a good point that you're making there, Nombasa, because if you look at the coking coal market -- take talks about coking coal prices in China, which is around $160 per tonne, if my memory serves me right, and spot prices for coking coal for steelmaking coal is clearly a lot lower than that in the international market. So it's almost like a 2-street market at the moment. So I'm just thinking it seems that China is -- the Chinese market is tightening to some extent and China is looking elsewhere for coking coal, and possibly longer term for thermal coal as well. And that could be supportive, especially seeing that the Indonesian coal qualities could potentially be too low for China.

Absolutely. So that's an unknown, Johann. But you're right, yes. Very uncertain.

Any other questions? We've allowed for a bit of extra time.

[Operator Instructions]

I think if we don't have questions, we can bring the session to an end. And maybe also for the benefit of the sell-side analysts that we have on the call that we had arranged for a separate session, which it seems though needful, and so we have actually canceled that. If there are any other questions, open to receiving any e-mails for clarification or for the inquiries by e-mail. So with that, let me see if Mxolisi would like to close or say any closing words.

Thank you very much, Mzila and team, and to all the people that have dialed in. Yes, it has been a very challenging year for us all. And -- but I must say, I'm very proud of this team that despite all the challenges, we have been able to, by and large, meet all the key deliverables that we had envisaged since the beginning of the year. We do need to ensure that, as already highlighted, that we continue being vigilant, especially coming back into the New Year from that wave #2 in South Africa could become a reality, and therefore, we need to continue exercising that responsibility over the holiday period. We continue to look at how we optimize the business further and further. We continue challenging ourselves. We continue looking at how we can also create value in terms of how we return cash to shareholders. And so by and large, we are very cognizant of the various calls that we have been having, the various people talking to us, our shareholders. We are listening to them. We are taking very seriously their views. And therefore, going forward, we hopefully are going to be in a position where we hope that we can actually start ensuring that the very highly undervalued coal price of Exxaro that we do something about that. So I will leave it to that, but we are listening. We are paying attention to what you are saying. So with that, again, let me just say thank you for your continued support throughout this year. And we look forward to engaging with you all again when we -- at our next results presentation and the subsequent roadshows. And I wish you all and your families a very blessed, healthy and a safe festive season. And please, I know, it's time for family, it's time to want to relax after a very challenging year for all of us. But also do it in a very, very responsible way so that we can minimize any form of casualties going into the future. Thank you all. Have a safe and a blessed festive season.

Thank you very much, Mxolisi, for those wishes. And thank you, operator, and thank you very much for your help today. Thank you very much and goodbye to everyone.

Thank you. Ladies and gentlemen, that concludes this conference. Thank you for joining us. You may now disconnect your lines.