Exxaro Resources Limited (EXX) Earnings Call Transcript & Summary

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

Thank you very much, Claudia, for the introduction, and good afternoon at the hour and good morning to some of you. It's great to have you on our FD's pre-close in anticipation of our financial year ending on the 31st of December 2021. I am joined as per normal by the management team. Perhaps let me start by introducing myself. I'm Mzila Mthenjane, the Executive Head for Stakeholder Affairs and responsible for Investor Relations. I'm joined by our CEO, Mr. Mxolisi Mgojo; our CEO Designate, Dr. Nombasa Tsengwa; our FD, Riaan Koppeschaar, who will be leading us in the discussions; as well as Roland Tatnall, MD for Energy. And each one is joined by their respective teams, and they will introduce them as they invite them to contribute to the discussion. We did publish the FD's pre-close earlier today, and hopefully you've had a chance to go through it. And so I will hand over to Riaan, who will provide us with a brief overview. And we'll then allow for questions and answers once we've also given a chance to the minerals team and the energy team to also give their perspective of the year. Riaan, with that, can I hand over to you?

Thanks, Mzila. Good afternoon, ladies and gentlemen. It's good to engage with you again. As normal, I will give you a brief overview of the expected performance where often Nombasa on the coal team will give you some insight into the forecast reduction volumes, the CapEx guidance as well as what they're currently seeing in the coal markets. We also have Dr. Joseph Matjila on the line. So if there's any safety- or health-related questions, he will also be able to field the questions. So firstly, on health and safety. So the health and safety of our employees and communities remain a priority for us, and our focus has shifted to avoiding, reducing and managing COVID infections. Also, vaccinating employees is very important to us. We've got a target that we want to vaccinate 80% of contractors and employees. And currently, we're sitting at about 69%. Then on the safety front, we continue to have a very good safety performance, and our lost-time injury frequency rate is at 0.08, in line with the target. We're also proud that it's now been 4 years and 8 months without a work-related fatality in the organization. On the production and sales front, you will see throughout the discussion that we were severely impacted by logistical challenges, and we expect that our production and sales volumes to be about 8% lower compared to 2020. Roland and the team can also talk about the energy generation if required later on, but the synergy guidance that we're giving is still to be in line with what we've previously given to the market at 719 gigawatt hours. Also, we're pleased to announce that we've now completed our share repurchase program. And you will see from the presentation we bought back the shares at just below ZAR 160, representing a 6.4% discount to the volume weighted average price during that period. When we look at the strategic initiatives, as you will be aware, the ECC transaction was completed in September, so that is now not part of Exxaro's table anymore. And we continue to make good progress with the Leeuwpan disposal, and we continue and hope to sign agreements during the first quarter of this year. So with that background, I will then hand over to Nombasa on the coal team to take you through the production and CapEx guidance.

Thank you very much, Koppes, and good afternoon, ladies and gentlemen, and thank you for joining us. If you're looking at the numbers on the table, which is Table 1, and that's what I'll be talking to, you will agree with me that our operations have really experienced tough times over this last year with our Mpumalanga operations really hit very hard on both production and sales that you would see in the Waterberg at Grootegeluk. And really this is because of Mpumalanga exposure to the export markets than a Grootegeluk ease. So if you look at the detail of the Table 1 on production, you can see that we expect the total thermal coal to be 2% lower than previous guidance. So we'll be talking more previous guidance, not 2020. And as I said, you will see Mpumalanga operations expected to be 18% down, mainly driven by rail constraints, which we had shared with the market quite extensively in the past, coupled with the exit of ECC, which was in September. And we had anticipated ECC exit to be in December, so there will be that differential in terms of volumes. Leeuwpan. We've seen Mpumalanga was most vulnerable. In addition to the rail constraints, we have mentioned that we are expecting Eskom CSA to Majuba, and that CSA still has not materialized. And then we had to really look for alternative domestic markets for that coal. And as you can imagine -- Sakkie will tell you that the domestic market also had its own challenges in terms of some of the coal that some of the producers could not export. So it's really been tough in the domestic market as well. However, if you look at Grootegeluk, as I said, we do expect a 6% uplift in production, specifically of power station coal, due to Eskom demand in the second half, which then reduced semi-soft coking coal production because we obviously had to prioritize power station coal. And we were able to do this, especially with our poor rail performance. We also experienced full stockpile in metallurgical coal Grootegeluk due to the fact that logistics to ArcelorMittal and also to RBCT were negatively impacted, thereby expecting a 16% decline in production. And lastly, on Matla, we expect good geological conditions at Matla, especially around Mine 2. And we've seen some good development in the sections resulting in an expected 6% increase in volumes. So if we look at sales, very much the same themes that we've experienced, expected to dip 2% as well compared to previous guidance with the same impact in Mpumalanga as well in -- and in Grootegeluk. At Grootegeluk, as I mentioned earlier, sales to Eskom are expected to lift slightly, while other domestic sales, which exclude met coal, are also in line with the previous guidance. In Mpumalanga, expected to be 13% lower than previous guidance due to reasons already mentioned. Specifically on exports, we want to highlight our revised forecast, [ settled ] down by 1 million tonnes from 8.6 million tonnes we reported previously now to 7.5 million tonnes, which then give us a net decrease of 13% to our exports expected by the end of this year. Met coal also taking a 12% dip due to earlier reasons I've mentioned in terms of domestic rail and also RBCT rail capacity impact. So I won't really dwell much on these numbers. They are what they are on the basis of -- driven by rail issues and also the biggest impact coming from the ECC coming out earlier and some challenges at Leeuwpan as well. So Mellis will now take us through CapEx, which is demonstrated in Table 2. He will be followed by Sakkie on the market. And lastly but not least, we'll will have Dr. Joseph Matjila, who will then close us out on COVID-19 update. So Mellis, Can you take us away?

Thank you, Nombasa, and good afternoon to everybody. On CapEx, against previous guidance, we were about ZAR 400 million down, ZAR 450 million. And Nombasa has mentioned the exit of ECC. So ECC left us on the 3rd of September. In our previous guidance, we would have had ECC in for the full period. So there are 4 months of ECC that's not in there. So the same theme related to capital, as Nombasa has mentioned, on both sales and production. And that was about that -- of the ZAR 450 million, about ZAR 30 million is related to ECC. That will obviously be a permanent saving. And then on Leeuwpan, there are some optimization on the last part of the OI project, which is related to the relocation action plan on the community that was moved, and that's about ZAR 20 million. And some of that will be a saving and we'll reflect that in our total numbers for '22, and we will show that. The bulk of the amount is related to GG. Stay-in-business capital is about ZAR 300 million down. Some of it is related to timing and some of it will just be a bottom line saving because there's optimization that's taking place all the time. And then ZAR 80 million is related to GG6, the timing of that project coming to fruition, and that has rolled over into 2022. All the construction work will be completed by end of this year, but the commissioning and the ramp-up happens during the course of 2022, going from a [ C4 ] sign-off right up to a [ C6 ]. And that will take -- that'll be completed, the full ramp-up, by the end of 2022. So ZAR 450 million down, which is 16% against the previous guidance. Thank you. Nombasa?

Okay. Sakkie?

Nombasa, thank you. And good morning to everyone, good afternoon, where we are. Maybe let's start with the overall view on the international side. I think broadly to say, we sit in certain markets globally where demand is much stronger than what we've seen in 2020. And in certain areas of the world, we still sit with major supply constraints. So I think these -- the price action that we've seen over the past few months driven by a lot of factors currently in the seaborne thermal coal world. If I can start off maybe on the China side. China has taken 2 big steps in this period to influence the coal market. The first was to put an absolute cap on domestic coal pricing in China, where the price at one stage in China was, I think, RMB 2,500 per tonne. And you will know that the upper limit is actually RMB 750. And the cap that they've placed on -- the absolute cap of RMB 1,200 per tonne has forced the price down. We think price will approach about [ $8 ]at some stage. I think what it has done to the market is to hurt some sentiment, and we definitely see hesitancy markets currently, specifically from the Chinese market, to replacing transactions into the future, not knowing what it's going to do. On the back of that, we also saw quite a few vessels being turned away in China and defaults on trades that were done previously. So it remains a risk to the coal supply industry. The other thing that China has done that really impacted the situation in China is to approve a lot more mines to expand and to grow production. So an aggressive ramp-up of domestic coal production in China. And then what they've also done is to put a cap on the power that is allowed to be sent to general industry and for that power to be prioritized for general power for the country. So China took an active decision to say we are willing to give away something on our economic growth by curbing our industries. But we want to make sure that for primary energy use, we do have enough energy and, in that way, restricted the demand for coal as well. So China, once again, as in the past, a massive impact on markets. And it is really broad that spike that we saw in pricing down quite a bit. Keeping to the Eastern side, Japan, very strong demand. Same from Korea. Japan driven very much by nuclear outages that were in previous months and very, very cold weather, ending up in a very strong demand, but we think that will subside a little bit with some new players coming back online. And in South Korea, the gas shortage and gas prices remaining a big problem, and therefore, they've actually allowed more of the coal-fired power stations to run. In India also, we saw an active process by the government to deal to redirect domestic coal away from industry to power generation. And we could definitely see a new demand from imports into India even though the domestic coal production was improving a lot. So I think a huge focus from both China and India to expand domestic coal supply into those areas. We still expect India for the year to be about 20 million tonnes down on imports compared to a 2020 figure, which was lower than 2019. Moving over to Europe. I think the big story in Europe is poor performance generally on the renewables and specifically on wind. And then also, where Europe, as you will remember, in 2020 had the big impact on coal because the price and availability of gas was so -- well, the price was so low and the availability so big that the gas -- coal-to-gas switching was massive. And this situation has turned around very much this year where gas is not very expensive at up to 6x more expensive than it was last year. But there's also a huge shortage of gas, and that is causing both economically a gas-to-coal switching but also purely from availability of fuel causing more coal-fired power stations to run. And we saw huge jumps in the -- our price for -- so 6,000 kilocal coal at one stage was up at $300 per tonne in October but then falling back to about $199 towards the end of October. So I think that on the demand side, very much driven at this stage in the market by very, very cold Northern Hemisphere winter. And we will talk about the La Niña factor, having that kicked in, that is really causing much colder weather in the Northern Hemisphere. But then also, the effect of our energy complex, being it coal, being it gas, being it oil, is very expensive. So in that, coal actually faring better from an economics perspective. But then also, the serious gas shortage globally, that is helping coal very much. If we'll move to supply side. I think in all regions, still huge impacts on supply disruptions and constraints in supply. In Australia, I think we currently sit at about 57 vessels at Newcastle in the queue that's trying to [indiscernible] and very much a factor of -- at Newcastle and other ports. And at the mines, impact of rainfall and flooding, of maintenance at other ports, of rail systems that are out and Australia being impacted still in that regard. Indonesia, experiencing a lot of wet weather and expected to, both Australia and Indonesia, to see a lot more weather-induced supply disruptions in the coming months because of the La Niña that's in place. Russia, we had 2 major incidents. First, a mine explosion that took about 5 million tonnes out of supply to the East, into the Pacific. And then also, we sit still with massive constraints on the Eastern-bound rail supply to the Pacific. In South Africa, I think we're all aware of the situation of the exporters not able to move their coal to ports due to the rail unavailability and poor performance on rail. And just the week -- last week actually, we dropped our stocks in RBCT by about 0.5 million tonnes to end the week just above 2 million tonnes, which is a low in many years for Richards Bay. So very, very tight from our Richards Bay, and no coal available for the following months, which is really -- with all of the good demand and the supply constraints that we see, we expect good support for coal prices at least over the next 2 months. I think if we then stand back and just look a bit at what are the factors we expect to -- on the outlook to play the whole year. Potential downside impacts to the coal price is China, India and Vietnam can be more successful than estimated on the domestic production ramp-up. That can put a damper on pricing. The COVID impacts that we -- that the world is a bit nervous about currently if that goes wider than currently discounted in prices, we might see downside to pricing. And then always the risk of further price interventions by China. But I think on the upside, there's actually quite a few factors that we feel quite positive about, la Niña being one of the strongest that has, in general, the effect of much colder winter for the Northern Hemisphere than normal and much more weather-induced supply disruptions on the supply side. So we're really impacting on supply and demand in that way. We also think that the LNG tightness is going to continue. We do not think that's going to dissipate anytime soon. So we think that coal will be very good contender against gas in most places not just because of price but because also of availability. And then the bulk freight market, the dry bulk freight market has come down a bit or has come down quite a lot from the absolute peak, but we witnessed that it's on its way up. So I think that's going to give more support. So in general, I think 2021, I see Wood Mac is forecasting an average price for the year of 1 -- for the average for the year of $125 and looking forward to 2022 $129, with an expectation of very strong fundamentals still over the next 2 or 3 months and from there onwards potentially a mild softening of international pricing. If we go to the domestic pricing. Generally, our offtake at Grootegeluk, as Nombasa indicated, quite good from Eskom. Not too much trouble there. In the general steam market, demand quite good, but we -- as Nombasa indicated, we see a lot of growth in the domestic market as people are not able to get their coal out of the country. Everyone is trying to find a gap for it in the domestic market. And with Eskom not building -- or burning enough coal, sitting with very high stockpiles, the demand for this -- for lower-quality coals domestically is just not there. So domestic market, not a lot of opportunities, and the market there is really very, very full of coal. AMSA demand, quite good, but AMSA offtake impacted also negatively by rail performance. But generally, demand we experienced from AMSA, quite good. So for Exxaro in the domestic -- in a normal domestic market, quite stable, if I can call it that, but the challenges that we experienced, of course, are because we can't get our product to the export markets. We also try to sell more of our product in the domestic market, to other players and to domestic consumers, which remains a challenge. We were successful to an extent, but it really remains a challenge with the availability of coal in this market. Thank you, Nombasa. I will return then to you.

Well done, Sakkie. Let's move over to Dr. Matjila.

Yes. Good day, everyone. Thank you, Dr. Tsengwa. I will give an overview of our journey in response to COVID. I'll touch on 3 aspects on our COVID response strategy. The first one is an update on how we've been doing on the vaccine trial, which is an important step in dealing with the COVID pandemic. The second one is an update on the fourth wave that is upon us. The third part is to give an indication on how we are planning on managing this pandemic now and into the new year as we reengage the colleagues post the holiday season. The first one is to just remind everyone that the South African target of vaccination of other populations is 70%. We are happy to confirm that we are smack-bang on that mark. As Riaan had said, we are -- yesterday, we're on 69%, and today it was at 70%, which is in line with the target that the state has given for the vaccination of the adult population. It's an important milestone. What is also comforting is that our performance is also in line with the average vaccination rate that we're seeing in the broader mining industry in spite of the challenges that we are experiencing of misinformation and vaccine hesitancy. So we are comfortable with our journey towards ensuring resilience of the workforce. We are also committed to the Minerals Council's target of vaccination of 80% of the workforce, and some of our big operations are already close to the target. For example, for the Grootegeluk Mine now is already at 77% vaccination of the workforce. Matla Mine, which carries a substantial amount of our employees as well, is already at 75% of vaccination of the workforce. So we are gradually moving towards that 80% target, which is important for us to ensure that we manage this pandemic. This, in a way, has been a big benefit for us when we observe the changes that we are seeing in terms of the fourth wave. You'll recall we had a good recovery in the last wave of the pandemic, about 99%, and we're at a low of 0 infections in October. But we have been observing a steady increase of infections, particularly in Limpopo, at our Grootegeluk Mine as well as our operations here in Gauteng, which is the epicenter of this new wave of the COVID pandemic and the new strain that has been announced. What is comforting is that notwithstanding the steady increase of the infections, we are seeing a 0 hospitalization of employees. None of the infected employees that we are managing through our occupational health center is showing any severe symptoms. Like I said, [indiscernible]. It's minor symptoms. And as per our protocols, when such employees present with COVID, they are managed by our health center, given supplements and an opportunity of being isolated in our facilities, provided with oximeters. And we continue with our 24-hour call center where we monitor all our employees who are infected across the operations. So yes, we are observing an increase in infections, but the high vaccination rate that we have is an indication that having a person vaccinated stands in good stead should they be infected, that they don't suffer severe symptoms of COVID. So we are seeing 0 hospitalization of our cases today. So the third part of the conversation on our response on COVID is some proactive measures that we have taken even when the state moved us to alert level 1, where the engagement of employees has been very robust. If you are at our mines for 5 days, you're required to subject yourself to our screening test, antigen testing. And if there is indication that you could have been at risk, we subject you to a full COVID PCR lab which we are doing at our facilities, which has been a big benefit that we are able to have turnaround times of such screening and interventions, and we are able to arrest any risk before it even enters our operations. So these measures, we've continued with our preventative protocols, social distancing, wearing of mask, segregating the workforce. And this has helped us to be a little bit ahead of the game even before this fourth wave started. We continue with these protocols. Whether this peak happens now before December or after December, we are confident that we will firstly be able to pick it up fairly early and be able to respond to it. Number two, that we have a workforce that's substantially vaccinated. So should there be such a risk over the December holidays, we believe the impact will not be the same as what we have in the third wave. And we prepare ourselves to manage the -- really the pandemic in that. Thank you, Doc Tsengwa.

Thank you, Dr. Matjila. Over -- back to you, Koppes. I think you were probably going to the energy side, I don't know. Thank you. Koppes, are you there?

Riaan, check that you're not on mute.

Yes. Okay, I'm here. Perhaps, Roland, you can give a bit of detail on the energy generation at the wind farms and what you've seen in the past month or so.

Thanks, Riaan. So we're forecasting slightly lower generation this year to last year. The wind conditions haven't been as good as we've seen in the past. So this year, we're looking at around 720 gigawatt hours forecasted to the end of the year, whereas last year it was 727. Following the end of this year, we're expecting the wind farms to produce a similar amount that we're targeting, around 730 gigawatt hours per annum. On the availability side, we're on target at about 98% for both wind farms, which is above the contracted level of 97%.

Okay. Thanks, Roland. So Mzila, if -- we can probably then start taking questions and answers.

Great. Thank you very much to the team for that detail. And so if there are any questions, I think the -- if I can ask the Chorus Call to just remind us of the guidance in terms of how the audience can pose their questions.

[Operator Instructions] The first question comes from Brian Morgan from RMB Morgan Stanley.

Just if I can ask, you mentioned about Eskom's inventory levels being somewhat higher than normal, and I found that interesting. And just if you could just give us a bit more color. In the past, it's always been an issue where distribution of inventories at different power stations has been quite different. So you always had a lot of inventory at Medupi and Matimba and much less elsewhere. Do you think that the inventory situation at Eskom is better balanced now?

I think in general, if you look at an average number for Eskom on the stock days number, then it is way higher than where they would like it to be. And it is a factor of, as I said, they're not burning enough coal with all the load-shedding we've also seen and supply agreements that continue to supply coal to them. We know they were in discussion with certain suppliers to hold back on coal supply in some of those agreements. But yes, the stock at Medupi, of course, still sits there. But also in Mpumalanga, stock levels are generally very high at power stations. And no urgency at all from Eskom to procure additional coal at the moment to what they already have on their books.

Okay. And then on that, I saw in the write-up that you were able to divert some of the Belfast products into the domestic market. I assume that's not to Eskom. That must be to somebody else then, if I...

Great. So yes, from all our mines where it's possible, we try to sell coal that was planned to go to the export market. We sold that, frankly, to whoever was willing to buy it, whether that is a local consumer of coal, whether that's local traders or whether that is other export traders that may have an opportunity to put more coal through their logistics. So from all our mines, we try to sell as much as we can to domestic offtake for -- either for domestic industry or for export purposes.

And just as a matter of interest, that would be lower quality than you would ordinarily sell in the export market, right?

No, it is a mixture of all qualities. So as we simply didn't have enough rail capacity, as Nombasa indicated, where we are 4 million tonnes down, we were willing to talk to anybody about every product that we -- even whether it's export or domestic, to sell that to players for them to decide where they take it. And so a mixture of all qualities.

And if I could more loop on one in, Sakkie, it would be quite a big amount of the lower grade, right, because that's the one that was destined for Eskom.

Yes. So at a place like Leeuwpan and ECC going mostly on your [ 4A ] and RB3, but then your sales from other mines will be a mixture of [indiscernible] and Middle East that was supposed to go to each market or RB2 coal.

Okay. Then RBCT has taken over control of security on the railway line as far as copper theft goes, and that was pretty recent. Have you seen an improvement yet in the situation? Or is copper theft still ongoing?

Yes. So just to clarify that, RBCT has not taken over security on the coal line. I think they just made sure we use the right size. Security on the coal line is firmly under the control of Transnet and TFR. The coal industry, through RBCT, has contracted with service providers to render and augment their current security resources on the coal line. But TFR is running the security effort there. To your question of success, we've seen huge success in the areas where we have deployed those additional ground teams and tactical reaction teams on the ground. Unfortunately, as we know it, even in our private insurance business, if you put up the -- make up the fences on your own neighborhood higher, the thieves go to the neighborhoods without fences. So it's very much the same with the coal line. So there where we have increased -- and the focus of the coal industry specifically was on the night shift, to assist on the night shift of the different areas to reduce cargo theft. And we've seen huge success in that, as I indicated. But yes, as expected, the thieves moved to other areas where the presence is not so big. So the new effort that we've agreed to in the coal industry now...

Sakkie, I don't know if you've muted yourself by mistake. Can you go back?

I see. Sorry. sorry, I went on mute. Yes. So the coal industry, what they've done now is on the back of that success and the criminals moving to other areas, we have now even augmented the first agreement on support of TFR in this regard and agreed to even a higher resource load to put on the coal line for that purpose. The efforts are still very much focused, let me say, between, let's call it, Pretoria and Richards Bay because that's the easy area to do it because the coal industry is the big player on that space and it's very easy for the coal export industry to find agreement on what to do and how to do it through RBCT. Our biggest challenge is -- and there are still a lot of challenges, but I think we're on our way to eventually have better control and not just get -- end up in a situation where cable is being stolen and then we react to apprehend the thieves. And we've seen, with more than 1,000 people being arrested and end up over to the police by TFR, very, very few prosecutions following from that. So the focus here really is to be proactive, to actually stop the incident before it happens. And that is the focus currently of the security effort. And then the next leg where we are seriously working with different stakeholders to try and bring the same effort into being is then, let's say, north of Pretoria towards Lephalale, where we are to work with the steel industry, cement industry, chrome industry and the coal industry to try and find common understanding between all these role players in different industries to go to the same solution. Making progress but a lot slower than what we've been able to do on the, let's say, the historic portion of the coal line.

The next question comes from Patrick Mann from Bank of America.

I just wanted to ask, maybe looking further out and in your own sort of demand modeling, what are you expecting for offtake from Eskom going forward? I mean I suppose what I'm trying to figure out is whether this, let's say, oversupplied domestic market is the new normal.

Patrick, thank you for the question. The -- if you think about Exxaro's positioning in the Eskom market, then of course our big positioning is at Grootegeluk with the Medupi and Matimba power stations and in Mpumalanga with the Matla power station. We do not have any other contracts currently with Eskom even though we're in negotiation to try and get a contract still for our coal mine. But from where we are sitting, we do not see that impact going forward on our Grootegeluk Mine. They are offtaking at the minimum of the allowed offtake for those 2 coal supply agreements. And we have -- actually, as previously indicated, over the 5-year period, that is the planning that we continue to do, is that Eskom, until the coal burn has increased dramatically from Medupi and until the stockpile level has normalized at that power station, we expect Eskom to continue at the minimum offtake levels. And that's part of our planning. At our Matla Mine, they are in the area of about 6 million tonnes per year. And as those capital projects kick in that we are busy implementing, I think it's about 2, 3 years on that under-correction. We hope to see us going back way there to 10 million tonnes. And we know that it's coal that the Matla power station definitely need. It is -- it will replace what we call imported coal. So very expensive coal that they bring in from other sources, and not just the cost of coal but the cost of transport as well. So in terms of our positioning with Eskom, we feel confident that we will not see that impact on us. Where the potential impact may be in the short term is whether we are able to secure a contract for our Leeuwpan mine or with Eskom or not.

And I suppose I was also trying to get an idea of more broadly, if Eskom's coal burn rate is low and if exports remain constrained, then it still has a knock-on impact on what you are able to sell in the domestic market, right? So even if it's not directly, it's an indirect impact domestically.

Yes.

So maybe a more direct way to ask this is, I mean, do you see Eskom, the amount of coal burn, increasing significantly sort of next year? Is it going to rebound? Or is this kind of a structural decline problem in terms of the power stations in general?

Yes. I think not an easy one to answer because it very much depend on 2 things. Firstly, I think the demand for electricity in South Africa is there. We all know that. So from a demand perspective for Eskom, I don't think they will have a challenge. The question will be -- from an infrastructure and a power station availability perspective is whether the maintenance will have caught up enough to enable them to run more of the units. As we know, a huge amount of gigawatts are out on maintenance and out on shutdowns that is not available to the country. So I think that is where the big question comes in for South Africa, is to what extent and how quick can Eskom recover and return to full operational installed capacity on their side. And once you see that, then you will see coal burn picking up, you should start to see stocks going down and a more amenable market to the lower-quality demand side for those coals. But yes, in short, you're very right, as long as Eskom is -- maintenance is not back up, as Eskom's coal burning is not back to full strength and they continue to sit with high stocks -- there are not many other avenues in South Africa. The domestic industry is using what they're using, right? They're not expanding. So you're right, as long as Eskom is not taking coal and export rail is not recovering, we will sit with a very full domestic market in terms of coal.

The next question comes from Thabang Thlaku from SBG Securities.

As you know, we saw a stall on offtake on stuff. So is it correct to assume that your CSA at Matla contract is actually still at 10 million? It's just you're supplying 6 million because Eskom hasn't given you the funding? And a follow-up question to that is, I know you guys have given us guidance of ZAR 2.4 billion CapEx for the sort of accessing Matla Mine reserves. Is that the total CapEx? And has Eskom given you all of that money?

Okay, Thabang, thank you for the question. I'm going to talk the CSA and then I will hand over the capital side to Mellis. On the CSA, yes, we sit within the same CSA, so no change to that. So you're right, the CSA still calls for 10 million tonnes per annum and then 2 million for the capital one, I assume.

Yes. Thanks, Sakkie. Thanks, Thabang. So the ZAR 2.4 million that you talk about, so the project...

Billion, not million.

Sorry?

What? What, -- billion, yes.

Oh, what did I say? Million?

Oh, yes.

Yes, no, I think it's million. So it's ZAR 2.4 billion. And the -- there's a life-of-mine program, which is a combination of 4 different programs in the mine. One is by far the biggest portion of it. The capital -- we've got some of the capital from Eskom, not all of the capital. They have committed on the mine one side to provide the balance of that capital. The current number is about ZAR 1.6 billion that we've received approval from them. The balance, they still need to receive. And then the total program is closer to ZAR 4 billion if you look at all 4 parts of that program. But yes, that's the -- that will build us up to the 10.1 million tonnes per year by 2026 with ramp-up happening in 2025. So we'll go through the 6 million for the next couple of years and will drop to 5 million as we go through the ramp-up and the decommissioning and the reestablishment of those sections, and then going up to the 10.1 million tonnes by 2026.

Okay. So to clarify, Mellis, ZAR 2.4 billion is for the mine line aspect, and they've only given you ZAR 1.6 billion? And then the balance of another ZAR 1.6 billion is for the other 3 programs?

Yes, that's correct. And they have given us money on the others as well but not the full amount. So there is still a differential there that we're in discussions with Eskom to fully fund the full program.

And is -- there's many -- and the one -- yes, [indiscernible].

Sorry, just say that again? You just broke up there to, Thabang. Sorry.

Sorry, Mellis. I was asking if like for the other programs, if that money is included in that ZAR 1.6 billion that they've already given you.

Yes. Yes. S it's -- that would be the full picture. The ZAR 2.4 billion is the one on Mine 1, and then the 3 -- let's call it, ZAR 3.5 billion is the total amount that we will be finalizing the total -- program in total.

Okay. And then I've got another question on GG, right? So I saw [indiscernible] that said Transnet has sort of put off the expansion. I think [indiscernible] north corridor line. I might be wrong. Please correct me. Could you please remind me of where the sort of capacity for that rail line was supposed to be and where it is now and how that impacts your sort of expansion towards 4.8 million tonnes of exports from GG?

Sakkie, are you on mute?

Thank you, Thabang. Yes, I must just actually check those detailed numbers because I don't have those details in my head of the different phases. But to answer you in short, Thabang, the expansion profile on the northwest corridor was developed by Transnet through the different phases to accommodate all the, and I didn't want to say this, aspiring new coal mining companies in the Waterberg. So that was the whole idea with that. And what we've seen over the past few months and during -- even during the course of this year was that a lot of that then start to fall by the wayside. So I think in short, I can come back on those exact numbers of what the different phases mean but -- and where we are. But in short, to where we sit as Exxaro currently, in the current scenario where we do not see a new player coming on stream in the Waterberg in the medium term, if I can call it that, we actually have enough infrastructure as Exxaro for our own business plans. So we do not foresee that infrastructure will be a limiting factor to us. And the pronouncement by Transnet was not an operational capacity, it was an infrastructure capacity. So just to also bring clarity there. But yes, the short answer is we do not see that, that will impact us. And then there is also a door open to say if we get to a space where we have utilized the full infrastructure and we can demonstrate that we are willing to expand for further expansions in infrastructure, then we can talk about it. But I think Transnet just came to a point where they say, we have invested this much now in infrastructure on the back of a lot of prospective new players in the Waterberg, and it's clear that, that is not going to happen. And therefore, probably a prudent thing from them to say, let's just hold here for a moment and see where this is going before we just pump more capital into that space. So as Exxaro, we do not see that as a threat to our plans in future.

Okay. And...

Can I just add something, Thabang? I think I've just picked up like recently that if they were to fix the 2 loops, which I think they still left to it, we will probably have about 6 million tonnes capacity in -- on that line.

Oh, okay. Yes, because that's the number I had in my head numbers, about...

Yes. Yes.

6 million to 10 million, which would be more than enough for your sort of4.8 million out of GG.

Yes, I think just to complement what Nombasa says, for future rail capacity on the Waterberg from Grootegeluk, the risk for us is not infrastructure. The risk is operational capacity, which means rolling stock, operational efficiency and effectiveness, the ability to move the coal with the kit that is there. And that is where we're currently backfill as well. So that remains the key risk for us.

That's quite insightful. Well, I do have this email with me now for the sort of like different phases just to remind myself, and then I'll get the email across to you.

The next question comes from Tim Clark from SBG Securities.

I've got a couple of questions. The first one, just on the Leeuwpan coal supply agreement. Is that a necessity for the sale? Or is that -- will that just be a sort of an uncertainty on the sale price, whether that's -- that contract is awarded or not? And then second question just on the Grootegeluk and Belfast renewables programs. My understanding was that there were some regulatory hurdles that needed to be overcome. I just wonder if you could speak to the progress there and when we're going to start seeing the revenue coming into renewables from those farms and just what we should expect there.

So Tim, firstly, the Eskom CSA at Leeuwpan is not a condition to the sale currently. So we are ironing that out. And then Roland, perhaps you can give an update on those projects.

Thanks, Riaan. Yes. So two questions, I suppose. So the regulatory -- not hurdles, just the processes we need to go through, same for any renewable projects of a certain size in South Africa. We need -- principally, the 2 main items are the EIA, which is the long lead item, and we don't have any control over that. That's typically up to an 18-month process, but that's underway. And the licensing. And as you know, the licensing thresholds changed earlier in the year, which will help perhaps get that through quicker. But it's the EIA that's the long lead item, and that's not entirely in our control. In terms of revenue from inception, these projects typically take about 3 years to develop, get through those regulatory processes I talked about and reach financial close, construct and start generating revenue. So we're looking at 2024 before those projects start generating revenue, unless we can compress that EIA time line. We do know that both the ministry and NERSA are looking to try and compress the time lines for the regulatory approvals and that NERSA have to give and the EIA process. So there's a chance that, that whole process may compress slightly, but we're not banking on it yet.

Well, it's quite a long time table. I'm sorry, can I ask just one follow-up just on -- I'm not sure if you answered it earlier. I just might have missed it. But just on the progress on getting locomotives t Transnet and whether it's locomotive availability or cable theft. There seems to be a lot of action on the cable theft side, as Sakkie you described. But what about locos and availability of spares? When will that constraint ease?

[indiscernible] I must actually [indiscernible] , because the previous time we spoke to you guys in August, I was brave enough to profess that I think we will sort out the locomotive issue operationally within a few months but that the security issue that is linked to socioeconomic issue is the bigger issue that we're facing. And actually, I think we are making bigger progress currently on the security side even though the massive amount of electric cable is still in it. So as -- it's done. And easily, 100 kilometers per week is at times stolen. So it is a massive impact really, the cable and the vandalism of substations and stocks theft. But I think we are seeing progress there. Back to your locomotive question, I think important to understand there's one -- different locomotives, if I can call it that. So you have what we call the 19E locomotive on the coal line. These have been used extensively, and those our Japanese-manufactured locomotive. So there, the industry has collaborated with TFR to get -- actually get third-party procurement involved to see how we can obtain spares for these 19E locomotives, the Japanese locomotives for TFR. And a lot of building blocks are in -- are put in place to get that done. A lot of information has already -- have been exchanged between TFR rail engineering and, again, RBC (sic) [ RBCT ] to facilitating this process with the third-party procurement people. Well, basically, that implies and we think it's probably going to take a few months, but we have a solution in place that hopefully can land us with -- up with spare for those locomotives. The bigger issue that we do sit with is 2021 and 22E in locomotive, which all are Chinese locomotives. And the problem we sit with is Transnet is embroiled in legal proceedings with some -- with a Chinese rail on the 22Es as part of the state capture legacy. And because of that, we see the impact on spares availability of 20, 21 and 22E locomotives, where, on the one hand, we end or the China rail is not willing to supply because of the legal proceedings going. And when TFR tried to go to OEMs in China to get some of that spares, it was clear to us that there was some leaning onto them to not go [ buy it ]. So that's where our biggest problem currently actually is, to get spares for some of those locomotives. But there are also plans, and it's obviously plans that we would not like to broadcast because it can only harm the industry in South Africa. So there are a lot of work going on behind the scenes to try and use Transnet from many sources -- to try and get spares for these locomotives. But I think this one is going to be with us for much longer than the 19E problem. So yes, I -- unfortunately, I do not have good news for us getting out of this in just a month or 3.

The next question comes from David Fraser from Peregrine Capital?

Okay. Have you got me now?

Yes, sir. Thank you.

Sakkie, sorry, it's a follow-on question from Tim's, unfortunately, and specifically around these sort of locomotives. I mean it does seem like a place where perhaps some high-level diplomacy could really help you. Perhaps our President should get onto that red telephone and speak to the potentially President in China, who is desperately looking for a bit of coal as well. So it does look like surely some common sense will prevail here. But just aside from that, over the medium term, I mean, how long do you think this Transnet constraint is going to stay with us? If you look at what's happened between half 1 and half 2, I mean, the half 2 run rate is absolutely dismal. I mean do we see this situation persisting for at least another 12 to 18 months? Or would you expect some resolution? I mean I have had some personal interaction with Transnet. There was some talk about them running, I guess, deeper into December and perhaps the transit holidays being shortened somewhat. Perhaps you could just give me your comments on that.

Thank you, David. Look, it is so difficult to try and venture an answer to this as to how long this may take us. I personally think if we could get the 19Es sorted out, let's say, during quarter 1 of next year and then on the 22Es where there's a -- I think the big concern there is what they call the ECP braking systems that are -- that those locomotives are not fitted out. TFR is look -- has already, I think, found a workaround to make the ECP braking systems from a hardware perspective to work on those locomotives, and they're busy testing software to try and get a workaround. If we could get the 22E to be able to run with ECP braking systems, which means they can run them with your jumbo-type wagons, your [indiscernible], that will give some relief. But the concern -- I think the big concern remains on the 20E and the 21Es. And yes, I would like to believe that during the first half of next year, we should see a bit of an uptick in performance. I'm not very hopeful that we're going to see a jump in performance, but a bit of an uptick in performance. But hopefully, from the second half of next year, that we, operationally and from a local availability perspective, may see a bit of a better situation. But yes, I think as an export industry, we're going to be very, very tight probably for the whole of 2022.

The next question in the queue is a follow-up question from Thabang Thlaku from SBG Securities.

Yes, I do have a follow-up question. How -- I mean, Eskom is saying that Unit 4 probably will be up and running by the end of next year. How is that impacting the offtake from you guys from GG? And with stockpiles obviously being quite high, I'd just like to understand how that is working out at the moment.

Do you want me to take that one, Nombasa?

Yes, continue, Sakkie.

Yes. On that one, continue.

Thabang, so as we communicated previously to you that we were running on 5 units and then went on to 6 units for -- I think it was about a month or so, end then with this explosion back to 5 units again, so what we have witnessed is not an impact on us thus far on coal offtake, and we're quite hopeful that we are not going to see an impact on us going forward. We are definitely still seeing that Eskom transfer -- offtake on the to be coal supply agreement, transferring back to the thermal power station and also taking minimum offtake at Matimba. So we still see that, and we will probably going to see that continue for a while longer. But at this stage, we are not seeing under or definitely not a red flag in terms of that offtake from our liaison with Eskom at this stage.

And in the past, you've discussed potentially Transnet allowing you guys to sort of operate at the 91 million-tonne capacity simply because there isn't a lot of other guys fighting for rail capacity. Are you guys there yet? And if not, what sort of capacity are you guys operating at, at the moment?

Yes. So just a correction there. It is Transnet allowing us to operate, it's not RBCT, from a port entitlement perspective. So Transnet, as you will recall, for the past few years, railed coal to Richards Bay somewhere between, let's say, 70 million tonnes and a maximum of, I think, over 76 million tonnes. So within that context, all of us as producers and exporters have what we call the long-term rail agreement with Transnet, which is kept at 81 million tonnes. And then what happened, for example, if I can go back to 2020, was that because both Koornfontein and Optimum, which was close to 7 million tonnes, was not in production and Transnet was, from an operational perspective, still able to give a fairly good performance, then we sold spare capacity -- rail capacity in the industry. And to that extent then, RBCT said, well, in that event, we will then declare available port entitlement not at the 81 million-tonne level, which is then in comparison with TFR, I think, but we will declare at our nameplate capacity, which is 91 million, which then enable the Phase 5 players like Exxaro to be able to utilize more of the entitlement in Richards Bay if they could conclude additional capacity agreements with Transnet to utilize their port capacity. And in fact, in 2020, that is exactly what we did. We had our 8 million tonnes of own contracted TFR capacity. We contracted an additional 2 million tonnes with TFR because there was spare capacity in the industry, bringing up to 10 million. And then on a weekly basis, we sweep the industry for any spare trains available, which gave us another 2 million tonnes. And that's how we got to our 12 million. And that is why this year we really end up short, because of the fact that Exxaro only has 8 million tonnes of capacity by budget or forecast and indicated to the market as such a view of 11.6 million tonnes initially that we thought for this year but only contracted for 8 million of that, not able to contract for anything more and no spare capacity in the industry because everybody is now constrained. Therefore, we cut back to our contracted capacity and therefore Exxaro impacted so heavily. So until -- I really want to say until TFR is able to perform at much higher levels and we all know that Optimum and Koornfontein are looking at plans to come back into production, so if they come on stream or -- and TFR is not upping their performance, we will enrich it by the constraint to the 81 million entitlement level, which then effectively allow Exxaro about 8 million tonnes of export going forward.

We have a follow-up question -- 2 follow-up questions that have come in the queue. The first one is from Brian Morgan from RMB Morgan Stanley.

Can I just quickly go back to the spares issue and, it looks like, the key constraints at the moment, as you say? We're obviously looking at ways that things could improve in 2022 and trying to work out how long this is going to last. But is there any possibility that things could actually get worse, that throughput rates from the line get worse over the next 12 months or so?

I wish I could say no, Brian. But never say never. So let me rather talk about our expectations. Our expectation is not for things to get worse. We were really hoping -- and on all previous indications from TFR, we were hoping that quarter 4 at least will have been a much bigger quarter. Unfortunately, about 2 or 3 weeks ago, we had the worst railing week of the year. And I'm not talking during the shut period where we've railed just over 900,000 tonnes for the whole industry for the week where we're supposed to rail close to 1.7 million tonnes per week. So even last week, we railed only 1.2 million tonnes where we're supposed to rail not far from 1.7 million. So we're losing still 0.5 million tonnes compared to the 81 million-tonne level on a weekly basis in the industry. TFR has come out, I think, a week ago and indicated to the industry that they declared a capacity that they declare on -- from April '22 to March '23 will be at 70 million tonnes. Now that is then the levels at which we will start to plan as an industry as well to say we probably will not see over the next year anything close to a -- to anything above 70 million tonnes, because from that 70 million, you must still subtract the operational inefficiencies and the normal causes of not reaching it from an operational perspective. But yes, hopefully, next year, we can see something better than probably the 60 million tonnes we're going to see this year. So at least if next year, we can move that closer to 70 million, it will already give some relief.

Are you able to claim any performance penalties from Transnet? Or is that not on the contract?

So the long-term rail agreements do include a take-or-pay clause for both the suppliers and to the service provider. There are the normal commercial processes underway to see where we will end up with that in terms of the contract mechanisms and the normal recons that needs to be done. Those things are done on an annual level after the closure of the TFR contract year, which is end of March. So we still have not seen the outcome of the previous year and even await the outcome of the year before that. So it's not a quick process, but it is a process I'm pretty sure that both Transnet and every exporter is looking at anxiously to see where it's going to end up at. But yes, there is a clause like that in the long-term rail agreements.

The next question is another follow-up from Patrick Mann from Bank of America.

I apologize if this is a very basic question. But why are we seeing such a different impact on the coal export line versus iron ore? I mean is it -- and again, it might just be because I'm not familiar with the differences. But, I mean, is this just because different locos and different maintenance issues? Or is it -- yes, I mean, let me just leave it at that.

Yes. I think the short answer is, to be honest, Patrick, I don't -- I honestly don't know the actual reason. I am aware that we have much, much more, let me say, sabotage, vandalism, cable theft incidents on the coal line than down in the iron ore. So that -- there is a big difference in those 2 -- on the security side between the 2 lines. But to be honest with you, I actually do not have information on the locomotive side, what the difference is and if and how that is different. And I'm definitely making a note to go and look into that because I think it's a very good question, and I will definitely go into that. Thank you.

Okay. Yes, I mean, I've always understood that you obviously have a lot more communities and a lot more densely populated areas you're going through, right? So that security element makes sense. But in terms of the -- it seems like now the critical constraint is really maintenance and parts. So it does seem strange to me that it's only on one -- I mean, again, unless there's something to do with different logos. But -- okay.

We have no further questions in the queue. Mzila, can I hand back to you before we conclude, sir?

Thank you very much, Claudia. And thanks to the audience for their questions. And well done to the team for those detailed responses. To the extent that there may still be questions, I think you're more than welcome to direct those to myself through email. And so without any other questions then, it brings us to the end of this FD's pre-close. I can announce that our results will be presented. It will be the first week in March of -- a Thursday, next year. And details will be provided. And I don't know if, Mxolisi, you have any closing words or Riaan?

Nothing from my side except to say that yes, the teams have been really pulling all stops to make sure that we -- even under the most difficult circumstances that we really try and make sure that we find all avenues to keep our business sustainable and also really respond quite in a very agile way to overcome any issues. And yes, the issues are bigger than Exxaro in most instances as the industry is trying to also land into addressing these issues, and quite rightfully so. I think somebody even mentioned this. I've got maybe a telephone call between the President because this really has a huge impact on the economy overall not just in terms of just Exxaro just the mining industry, but it's the mining industry's contribution to the overall South African economy that has heavily been impacted. So yes, I think it really does require all stakeholders to be involved in addressing this situation. Thank you.

Thank you very much, Mxolisi. Riaan, on your side?

No, thanks, Mzila. Nothing from my side. So just again, thanks for everybody showing interest in our call.

Okay. Great, thank you very much all, and we wish you a safe and blessed festive season and look forward to engaging with you early in the next year. Bye-bye. Thanks, Claudia.

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

Thank you. Bye-bye.

Cheers. Bye-bye