Exxaro Resources Limited (EXX) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to the Exxaro Resources FD Pre-close conference. [Operator Instructions]. Please also note that this event is being recorded. I will now hand over to the Chief Investor Relations and Liaison Officer, Ling-Ling Mothapo. Please go ahead.

Thank you very much, Chris. Good morning, everyone, and a very warm welcome to you. Good afternoon, everyone. A very warm welcome to our FD Pre-close today, where we look forward to sharing with you just a brief overview on how our operations -- our core operations have performed and also catching based on a few other items as well, where you have an opportunity to engage with our management team. On the line, I am joined by our CEO, Dr. Nombasa Tsengwa; our FD, Riaan Koppeschaar; the Chief Coal Operations Officer, Kgabi Masia ; Richard Lalicker, who is the Chief Growth Officer; Refilwe Mabapa, the technical assistant to the CEO. In the room, I'm also joined by Leon Groenewald, who is the MD Minerals; Sakkie Swanepoel on the logistics side, supporting the coal business; Mellis Walker, who is the CFO of the coal business; Mohloana Magwai , the Group Manager on the growth side; [indiscernible] also support team, finance. I will now hand over to our FD to do the introduction and welcome.

Thanks, Ling-Ling. Good afternoon, ladies and gentlemen. It's a pleasure to engage with you again. So the purpose of the call is to give you a brief overview of the expected reduction sales and CapEx forecast for the coal business for financial year 2023. Also, just to give you a brief update on markets, if there are questions, and also the performance of the energy business. So as we normally do, first on the agenda is safety. Safety is obviously very important to us. And I also want to start off by expressing our heartfelt condolences to the families, the employees and colleagues impacted by the tragic loss of life and injuries occurring at the Impala operations earlier this week. You are definitely in our thoughts. If we then come back to the Exxaro operations. So up until the end of October, we've recorded 8 lost time injuries. Our lost time injury frequency rate is sitting at 0.06 against our target of 0.05. So this is a bit of a regression on performance, but various site initiatives are afoot at all our operations to improve our safety performance. If we then briefly look at coal production compared to 2022, you will see that the coal production, excluding third-party buy, is flat. And on sales volumes, we expect a decrease of about 2%. In terms of the capital allocation program, the CapEx on the coal business, you will see the increase of about 57%, mainly driven by higher spend at Grootegeluk and Belfast, which the coal team will elaborate later on. Also on the energy side, I think there's a bit of good news there. You would have recalled that 2022, we experienced very low wind conditions. The wind conditions improved in 2023. And as you can see, we expect higher generation from the 2 Cennergi wind farms during 2023. Also, the Lephalale solar project has reached financial close, 2 weeks ago, we had the sod-turning ceremony. So that construction is taking place, and we expect by the first quarter of 2025 for that operation to come on stream. If we then also look at our cash balance, the cash balance at the end of October was sitting at about ZAR 13.5 billion, excluding the Cennergi project financing debt. And as mentioned in August, we are year-marking to retain about ZAR 12 billion to ZAR 15 billion of cash for our acquisition strategy. So I think that is just a brief overview of where we stand. We can now hand over to the coal team to look in more detail at the detailed numbers.

Thanks, Riaan. I'll ask Sakkie to start with the market, and I'll then take it over from there to go to production. Sakkie?

Thank you, [ Savi ]. I think from an international side, we have seen a period of fairly strong demand of both China and India. China continued to surprise on the upside. We thought for the second half of the year that the Chinese demand will go down. But China is still applying production restrictions within the country on the account of safety, and we see that, that is supporting the import side in the Chinese economy, which definitely helps with the additional supply that we've seen from both Australia and Indonesia in the Pacific. So those factors balanced out each other. In Europe, we continue to see very soft demand. We've also seen that API2 at times going below API4. So the European landed index currently low, the South African FOB index also demonstrating very poor demand in the Atlantic. On the Russian side, as far as supply is concerned, we continue to see constraints going up to the Eastern ports and the Russian exports not as much as previously thought to be and that with Korea and South Korean limitations on the Russian imports also having impact has helped us as far as Africa, from a market perspective, as I said, is that Pacific was fairly balanced. And in the Middle East, African markets, and Indian market, fairly strong demand. So we could not complain about market pricing. You've seen it have gone to very low levels earlier in the year, it has picked up to about $150 and it has come down to current levels. And if I look at the latest with McKinsey report that I have read this morning, just to see what they are saying now, I actually think that coal prices maybe in the order of $110, $120 up to 2025, the latest deal, which is quite a surprise and a bit of upside on what we previously thought. In the domestic market, things are going well. We have stable uptake from all domestic customers. We see a lot of pressure on what we call FCA sales of coal. So that's coal that we sell to other exporters that have capacity to export at some port or through some logistics. And due to the lower price of coal, as we previously indicated, most of that exports to other ports have turned unprofitable, and therefore, a lot of pressure in the domestic market with available coal not going out to the export market as we will have out. But generally, the domestic market, fairly stable. And in our markets, we see stable offtake, so not a concern. I think I can stop here [ Savi ].

Okay. Thanks, Sakkie. I'll then move into production. If I look at our business, I would say that we -- our business is resilient. If one listens to what is happening out in the markets, the talk of curtailing production, that is not what we're seeing. And for us, we are seeing a very steady production performance by the team. The overall production is expected to increase by 2%, and thermal coal production from Waterberg is expected to remain in line with the previous guidance. What is encouraging is that we're expecting a 14% increase against the previous guidance in our Mpumalanga commercial mines. Last year, we're coming from a disappointing incident with fatality at Belfast, but the team at Belfast has done very well. Majority of that contribution of 14% comes from Belfast. And also Leeuwpan and Mafube. And also what also assisted in terms of production is the -- how the team has looked at, how do we optimize logistics. And we need to give credit. I mean I know there's a bigger conversation in our Transnet which we will touch later. But if I look at what -- how Mpumalanga has performed, it has performed better in terms of optimizing and allowing us to schedule and hence that production impact will be seen from both Leeuwpan and Mafube. And also, as Sakkie had alluded to we place some of the product into the domestic markets. If I move to the metallurgical coal production, that was our major challenge. The biggest contributor remains poor rail performance. And from a coal buying point, we expect that to be in line with the previous guidance. On the sales side, the domestic thermal sales are expected to remain in line with the previous market guidance in our CapEx region. The Mpumalanga domestic thermal coal also has done well where we are expecting an increase of 19%. And that is also attributed to what the team has done in terms of placing material into the domestic market. The export product is also expected to increase by 6%. I mean the sales of exports with the wet weather, which the team is doing in terms of optimizing logistics. And the increased export sales are planned at Mafube and Leeuwpan is offset by decreased export sales at Belfast. The product -- the sales at Belfast are being placed into the domestic market. Overall, our export sales are expected to decrease by 2% in financial year 2023 compared to financial year 2022, the biggest contributor is the rail performance, which has been challenging at Grootegeluk. And the metallurgical coal sales are expected to be in line with the previous guidance. With regards to Matla, the coal production and sales are both expected to be in line with the previous guidance. And later on, I'll ask Nombasa to touch on Transnet. However, I'll say with Transnet that the performance has improved. If we look at the year-to-date ending October, Transnet is just shy of 40 million tonnes. And if we annualize the current performance, we'll just move to just above 47 million tonnes. And the biggest impact for us is Grootegeluk where we are only averaging three trains per week, and the challenges there is issues of security, vandalizing and locomotive shortages. The Mpumalanga rail performance has been better. We've seen 8 trains per week for the same period. Even though the coal export industry has supported Transnet, probably Nombasa, I don't know if you -- maybe later on you want to touch it later. When we finish maybe I'll ask Nombasa to maybe we talk about Transnet and what is happening in that regard. I think for me, I've covered everything.

And Ling-Ling can you [indiscernible].

Yes, we can. CEO?

Good afternoon, everybody. And let me join Koppes for welcoming you earlier. Really thanks for you taking your time, as always, to listen to us. Indeed, challenging times. And the biggest challenge, as you know, that is really keeping us busy is Transnet. And we have tried as a team to really dedicate time myself. We've seen the Minerals Council as the office bearer. And obviously, as a CEO of this company, to get closer to this conversation, especially with the newly formed Board. We've picked up interest from this Board, which was appointed on the 11th of July. Interest to engage us as a market and key stakeholders, and they've also prioritized engaging the National Crisis Committee on logistics and rail, which is led by Mxolisi Mgojo, our former CEO. And their task, as you know, has been to put together a national turnaround strategy for rail, especially on Transnet matters as it pertains to the challenges that we're talking about. This recovery plan has been based on a few challenges, which I will mention to you, but they have to deliver this plan and had it approved by the 14th of October. I give you this date because I am noticing the sense of urgency that is creeping in. So when they spoke to us the first time we engaged them, it was still early days. And I also said in one meeting this morning where we engage the team. This morning's meeting comes on the back of several meetings we've had as the leads of the MCFA, with Minister of Finance, where we were pushing clarity on issues or scenarios they foresee on this concessioning, which was very welcomed by Minister of Finance to say they do not have any other plan, but to accept that the industry needs to have a much more structured investments into Transnet because it has already been discussed, cannot clear the set minimum. So the leads of the different areas. We've got a leader in the coal line, we have leads in chrome, manganese and also iron ore. [indiscernible] is leading us on the coal side, and he's really been engaging quite honestly on these scenarios and what we believe will work for the coal line. Suffice to say that the Chairman today brought in the acting CEO of TFR, Mr. Russel Baatjies. He also brought in the CEO of TPP, which is Mr. Jabu Mdaki. So they would give us clear vision on this turnaround. But for me, what was quite interesting on everything I mentioned is just the fact that for the first time, I hear that there is acceptance that Transnet has operated without a high performance culture, which then says that they need to focus on people and how to engage people to deliver. They have said this before, but they are agreeing today that they've got outdated technology. And they've also acknowledged that they've got inherent inefficiencies that they could leverage and go back to basics to improve. And all of these have really impacted their income statement. They also shared a lot of issues on the balance sheet side and we all know that they don't have a [indiscernible] asset base or asset base that can actually deliver on a revenue basis. The board told this morning that they take full ownership and they seek our support and also that these challenges have been coming a long way, and there's no way that they are going to solve these issues offline. In any case, what also came up today for me that was quite surprising, which we're hearing for the first time that they acknowledge that this backlog -- significant backlog on maintenance. And the fact that they need to make sure that this maintenance is taken care of, they had some agreements on the diesels, which they've just concluded, but these are diesels. It's not the Chinese leg of the challenges. These guys have heard that procurement issues and ultimately, it seems that the National Crisis Committee has actually taken responsibilities to deal with procurement issues with them. The infrastructure on the coal side, it seems that if they've got new assessments, which are technical assessments to talk to the state of these different corridors, and they've already finished the Northwest Corridor assessment, which is being looked at to see what must be done. They are looking at security issues at that level as well. But as I said, really going back to basics on operations, like across is what they're looking at. They're also looking at a digital planning system. Apparently, they have been using this manual planning system that also is causing inefficiencies and they found a similar technology that we use in our mines, which is the ops center, which are digitalized, and that's what they are looking at. And as I said, they are also investing time on people. I won't get too much into detail except to say that on the policy side, the report we're given was that, yes, we've just appointed infrastructure manager from the government side, but this one is mainly to access or sorry, to enable government to access third-party players. That is investors would like to come now and put in the locos or any kind of capital to make sure that we are able to move from a concessioning point of view. So they are putting that in place. There is also one thing to look at the charges. What would be the charges for access to rail. This is what the infrastructure manager is going to be doing at this point in time. And that will also be done by regularly engaging us as the industry. So I'm going to leave it at this for now, but to say that it looks as if there is some responsibility being taken with some clarity and transparency on reporting on what has been achieved. Thank you, [indiscernible].

Thank you. I think Leon then can come in. We have to cover the energy corporations.

Good afternoon, all. So like Riaan said, certainly, from an energy generation perspective, we're much better off than last year. We're seeing that although that there's still some volatility from a month-to-month perspective, the generation levels are up to normalized levels. That is including an Eskom [indiscernible], which occurred earlier in the year, which is being resolved that is, of course, majeure event. And we're taking that into account, we would have exceeded normalized levels of production. We're happy with the equipment. They're performing as contracted liability or availability levels. And then on the growth side, as Riaan said, we're full steam ahead with the constitution of the Lephalale solar project. It's still early days in the construction with site clearing. We'll start construction early next year and to be in operation early in '25. All indications are that we are still on track in terms of time and in terms of cost. I'll stop there, thank you.

Thank you. On the capital allocation, maybe probably before you get into the numbers, I mean, last year, we did talk about the capital excellence and what we do in that regard. Probably maybe you start from them, maybe then we can get into the [indiscernible] conversation.

Okay. Thanks, Koppes, and good afternoon, everybody. So we're now transitioning into our staying business and sustaining capital program and strategy, as Koppes has mentioned. So we gave the guidance around the ZAR 2.5 billion per year in real terms is what we're going to be spending. So we're well within those numbers at ZAR 2.5 billion projected for 2023. And the increase that we're talking about from the August guidance to the guidance we're giving now is ZAR 100 million, and it's a very deliberate addition and timing around our trucks and the placement thereof. So that's essentially the difference why there is an increase of just over ZAR 100 million between the August guidance and this guidance that we're giving now. So well within our -- we're well within our program, well within the equipment replacement strategy that we're driving and we're really comfortable with the numbers that we're putting forward and the rhythm that the capital excellence program is actually bringing to the business, the discipline around the different themes that we drive and the progress that we're making. We'll essentially get into the end of the program this year. And next year, we'll be spending time in bidding it, then after that will be part of our normal way of doing business. So thanks very much. Thanks, Koppes.

And Ling-Ling, I think we can probably then take questions.

Thank you very much, Riaan. Thank you for that overview on the business. And Chris, I'd like to invite you to assist us with any questions we may have on the line.

[Operator Instructions] Our first question is from Nkateko Mathonsi of Investec.

Good afternoon. My question is actually more for Nombasa around Transnet. What is your sense on how long we could see and how long would it take before we see some difference on Transnet? I mean, people issues and equipment that has been stopped of CapEx can often take a bit longer to resolve. So I just want get a feel from you in terms of how long that could take? Is it 1 year, is it 2 years or 3 years? And thank you very much for the feedback in terms of there's a bit of some agency as far as the new Board is concerned. And then I also have a question on the cash retention. The guidance that you will retain between ZAR 12 billion and ZAR 15 billion. How should we think where you land? Is it the lower end or higher end of guidance? So those are my 2 questions.

So should I come in, Ling-Ling?

Yes, please, CEO.

Thank you very much, Nkateko, for that question. Very important question, which actually we've been engaging them with. So let's prioritize first them putting together a credible executive, as they communicated today, was they assessed the parity one in terms of target was end of this month -- sorry, end of December. But the latest they foresee for the last executive to join would be end of February. So that's what they gave us this morning, which says to me that the acting individuals will continue to execute this plan. And when the new CEO comes I doubt that CEO will really have much room to create new things, that CEO would have to really go into execution mode because this is obviously vetted from a government level that is. The -- in terms of the diesels, which were required, those -- it seems they should be within the next 6 months because they had a diesel agreement, which has been concluded. I am not quite sure from a specific point of view in terms of which line these business are going to impact, but it seems if there would be realistic results. The engagement they have with the Chinese they did mention today that they're happy with the coal support on enabling the Chinese impact, which they said that within the next 6 months, they would be able to announce something around that impact with the Chinese. Yes, we have helped them, but I'm not at liberty to share how that helps you because I am not mandated to do so. This is led by the Minerals Council. But we have committed to help them specifically and they claim that, that would then come into play in the next 6 months from concluding. Well, in terms of when we start seeing improvement in low cost, if the June date materializes it should start flowing as they said, we should see that in the third quarter of 2024. Other issues of maintenance and efficiencies the deadline they gave us was that we should be able to start seeing some improvements. They started mentioning improvements on the iron ore line and also on the coal line. And on the coal line, also they've given us 3 months to start feeling the impact. But on big things in terms of buying locos in terms of engaging the industry, I thought what was the date, 2023, so September, I think that's what they said when they would have some solid proposals on the start of those concessions. And then the next one?

Yes. So just on the cash retention, the ZAR 12 billion to ZAR 15 billion, I think at this stage, we can't now already comment on whether we will be at the lower or higher end of the range. So that is obviously the Board's prerogative when we take our results in March to the Board. And that will then be informed by the operating environment at that point in time and as pointed out, possible growth opportunities that we could pursue.

The next question is from Sven Forssman of Kela Security.

Is there's more demand for rail maintenance from agreement? At their pre-close presentation, just recently, they were telling us that. And I know that at one stage, I think it was probably about 6 months ago when I attended one of your presentations, you guys were expecting quite big tonnage from Transnet coming through. And now that your target is almost being postponed a little bit until the end of next year. So 47 million tonnes this year, would you expect around about 60 million tonnes by the end of next year?

Sure. Yes. Look, this is why we always at pains really to represent Transnet on the basis of what they tell us. But suffice to say that if this deadline of next year of concluding with the Chinese by June, I do not think that they would get everything sorted out in that last 6 months of the year. So we probably will see some of those tonnes coming back. But in terms of how much, I really won't like to. It's very difficult to say. But we are only hoping that if they do within the next 3 months or so resolve the issues even earlier by the end of June, we should be able to see more coming in because really, the rolling stock has been one of the key problems in as far as improving the task. Maintenance is an issue of availability of cash to do this. As far as I have heard, I did not pick up that they're going to need any help necessarily directly on this one, they're engaging government in this regard.

Thank you very much, CEO. Chris?

The next question is from Tim Clark of SBG.

Just a couple of questions from me. The first one just is rail kind of performance has been disappointing for quite some time. You've set up for quite high volumes. I just wondered if you could comment on the margin as to what you're doing with costs that is controlling costs and sort of aligning your costs to a sort of certain level of value. Things are taking longer. And then the second one is we've had some recent deal on [indiscernible] and others. And I wonder if you could comment on your experience of looking for these future materials and how your experience is evolving and what you're thinking about at the moment?

Maybe start with the cost one.

Thanks, Tim. You always have pertinent question, especially when the volumes are constrained. We did give the indication at half year that from -- we are structured to reduce a certain number of tonnes. And if you constrain around the volume opportunities that you have, the costs will be impacted. We still have diligent programs within our businesses to manage the cost, and we do always take account of what the market forces are and what does it mean from a volume and a rhythm point of view in our businesses. Clearly, when you're not moving some of the tonnes like we've seen with Eskom around the second half volumes, you are going to have cost pressures we have seen that inflation has dropped off a little bit in the second half compared to what we saw in the first half, but still working at making sure that the businesses are positioned to produce at the tonnages that they are currently kind of allowed to produce from a market demand point of view.

Thank you very much. Harvey?

Richard is going to answer the question of what we see on the market.

Yes. Yes, we note the same announcements on [indiscernible] . Strategically, did fit a lot of what we were looking for. I understand a very competitive process. But with all the assets and opportunities that we review, we will do so responsibly and ensure that any evaluation must add -- must be value accretive to our business as well as shareholders. And therefore, we won't win every process that we participate in, but we'll put our best foot forward as and when we find assets that meet our criteria. I think in the wake of [indiscernible] and you're talking about other announcements, we certainly are seeing a lot of investment opportunities, mostly on the earlier stage capital raising, I think markets are quite tough right now. And then, therefore, our balance sheet stands out as a partner to new assets or assets under development. So right now, very busy. A lot of opportunities that we are looking at, and we'll continue to do so into the future.

So is it fair to say then that where you initially said that you wanted to be in a producing asset you're moving a little bit more down the development curve given the balance sheet is that the change? Because obviously, it's very difficult to get these assets and effectively good assets in geographies is really hard, right, without paying it a fortune.

Yes, that's not wrong. I don't think the strategy has changed fundamentally. We are looking for producing assets. We are looking for assets that can add to our EBITDA line. But that doesn't mean we're exclusive on producing assets. We do have a 2030 target as well. And as part of that target, maybe earlier stage assets that can feed into that in due course. So we'll be looking at a broad range of opportunities that make sense.

Thank you, Richard. Chris?

We have no further questions in the queue. And now I would like to hand back to Ling-Ling for some -- to close out the call.

Okay. No. Thank you very much. Perhaps I can give over to our FD, Riaan, for final comments before we end the call.

Thanks very much, Ling-Ling. Also, thanks for attending the call. It's always appreciated to give you a bit of insight into our business. So as pointed out, the results will come out on the March 14, 2024. And then we will be able to give you more color on the full year performance. So thanks very much for everybody attending.

Thank you very much. That brings us to the conclusion of our FD Pre-close. We look forward to seeing you next year when we announce our year-end results. Please feel free to send me through any questions if you may need further clarification. And with that, a good afternoon to you all.

Thank you.

Thank you.

Thank you. Bye-bye.

Ladies and gentlemen, that concludes today's event, and you may now disconnect your lines.