Exxaro Resources Limited (EXX) Earnings Call Transcript & Summary

Good afternoon, and welcome to our first half 2024 FD Pre-Close. Let me start by welcoming our CEO, Dr. Nombasa Tsengwa, who will join us online from London Indaba together with our Chief Growth Officer; Mr. Richard Lilleike and his senior leadership team. Let me welcome in the room, our FD, Mr. Riaan Koppeschaar, and the leadership team; our Chief Cooperations Officer, Mr. Kgabi Masia, and his leadership team. The team from the Investor Relations Office. My name is Sonwabise Mzinyathi, and I'm the Acting Chief Investor Relations Officer, and I'll be facilitating the call for today. Let me start by reminding everyone to please stay muted. [Operator Instructions] So with that, let me hand over to our FD, Riaan Koppeschaar. Riaan, over to you.

Thanks. Good morning, ladies and gentlemen. It's a pleasure to engage with you again. So the purpose of our call this morning is to give you an update on the expected operational performance for the first 6 months of the year ending 30 June 2024 as well as update on certain of the strategic matters in the group. Firstly, I'm going to go through our safety [ performance ] that is very important to us. So you will see at the end of May, we have gone 21 months without a fatality in the group, but we have recorded 4 lost time injuries resulting in a lost time injury frequency rate of 0.06 against our target of 0.05. So an improvement compared to last year. Also last year, for the same period, we recorded 4 high potential incidents. And this year, we haven't reported any incidents. So although we've seen an improved in the safety performance. To sustain this further, various safety initiatives have been deployed across all our business units. Then if we look at the markets, the expected prices for the benchmark API4 price, It is expected that it will average about a $101 compared to a little $112 for the second half of last year. And on iron ore, the forecast is $117 compared to $121. So overall, definitely, weaker commodity prices during the 6 months period. If we then look our production and sales. Kgabi and the team will unpack that in more detail later on. But you can see, we forecast that the coal production will decrease by 14% and sales 12% as a result of lower offtake in demand, especially from Eskom at the Grootegeluk mine. The coal capital expenditure, you will see we're still very much in line with the ZAR 2.5 billion that we forecast on an annual basis in real terms. But for the 6 months period compared to the second half of last year, we forecast a reduction of 33%, and it's mainly due to timing of CapEx related to our equipment replacement strategies and also a certain of our license to operate projects. If we look at the wind generation from... All right. So if we turn to the energy operations, we forecast that the output for the 6-month period will be [ 325 ] gigawatt hour. That is in line with the guidance that we gave in March. And you will also recall that normally, if we compare it now to the second half of 2023, that the generation in the first half of the year is a bit lower, but we definitely expect it to pick up in the second half of the year. Then the construction of the Lephalale Solar project that is progressing well, and we still expect that the project will reach completion in the first half of 2024. If we look at the balance sheet, you can see there the balance sheet still remains very strong. It puts us in a good position to embark on our growth strategy. And as at the end of May, we were sitting off cash of ZAR 15.3 billion, excluding the synergy project financing. Concerning our portfolio optimization, as we communicated to the market, we've embarked on the sales process for the FerroAlloys business. That process is progressing very well, and we expect to conclude the sale and purchase agreement on that asset by the fourth quarter of this year. So I think that is in broad update on the operational performance in some of these key strategic matters. Kgabi, I'll hand over to you if you want to unpack the numbers in further detail.

Okay. Thank so much, Riaan. Maybe before I start with production, Sakkie to cover the markets.

Thank you, Kgabi. Yes. I think if we start off with the domestic markets, sales stable demand. We do see in the normal thermal coal domestic sized market, some pressure on customers due to huge input cost inflation and also interest rate saving a bearing. So we definitely see customers more under pressure in the domestic market, but our demand is still very stable. Pricing has become a bit more challenging than also international pricing that has come down. So definitely bit of pressure on pricing domestically, but otherwise good. Eskom demand, we will cover, I think, later when we come to that detail, but we're seeing a bit of an improvement from the first quarter. So we are hopeful that, that will improve things are looking a bit better for us, also a bit of a sluggish start to the year, but not looking -- we're quite hopeful towards the rest of the year. If I can then move over to the international side. I think from a supply side, supply that was a bit challenged in the 6 months, not hugely so, was Colombia and of course, South African with our problems. We also saw some impact from the Russian supply in the face of both logistics challenges to the East, but also the impact that Western sanctions on SUEK on the country supply. So definitely some impacts there and we are aware of more and more the Northeast Asian countries that is moving away from Russian coal who at least reduced the [ terms ] of Russian coal in the consumption. So having an impact there. From a demand perspective, internationally, Europe demand quite weak. We continue to see Europe back to the previous plan of reducing coal-fired generation, about 15 coal-fired power stations have been [indiscernible] in the 6 month period. So Europe is back to the strategic plan of reducing the dependency on coal, assisted by very low gas prices as well as very good renewables production to make that possible. And then on the -- in the East, Japan, Korea, both of them having fairly good high levels of inventory and reduced levels of burning coal. In South Korea, mostly because of the drive towards gas in Japan and mostly because of the drive towards higher levels of [ nuclear ] again on that side. I think the two positive points for us on the international side that the outward overall demand was India with very good growth rates, the highest coal-fired power generation ever in this past 6 months in India. So really good on electricity demand, good on coal-fired generation. In spite of they have very good local production of coal. They're inching they're on their way to come very close to [ 1 billion ] tonnes of local coal production, but still, the import increased. So a very good picture in India and then the same actually in China, where in March reported that in 2023, China had a very good year in terms of import for us as sellers. And we actually had doubts whether that will continue into '24. And the good news for the balance of market is that China continued with very good import also in spite of good local production, but the import actually then on the back of better economics from the import of coal and expensive domestic coal. So that also looked good for us. So largely a balanced market currently. We do not see huge imbalances. And we think huge price impacts will be either due to some supply side or the demand site shocks in the system, but currently a fairly well-balanced mark. Thanks Kgabi.

Thank you Sakkie, I'll then touch on the on the production and sales. Starting with production, our production is expected to decrease by 14% at Grootegeluk. This is mainly due to the latest plans [indiscernible]. What we've seen in Q1, it was very challenging. But Q2 is promising, and I can say that last month, it was the first time that we made a budget planning to Eskom. So that is how we're looking at the latest plan how they're going to pan out. If I move into the metallurgical coal production, the production is expected to remain within the 2% of what we previously guided. And this is in line with the modest demand, as Sakkie has explained and the logistics availability. And then coming to the Matla Mine [indiscenible] the production and sales, both of them are expected to decrease by 1% in line with the end of the Mine 2 short haul, which was a historic moment for us because it was the only remaining short haul in the country. We are now transitioning to establish Mine 1 project where we have received the capital to complete that project. If I then move to the sales front of things, the Eskom sales I expected decrease by 12% this is linked to what I've explained before, the internal complaints, there are maintenance and production trends. And one on the domestic and domestic coal sales, we expected to decrease by 54% based on the direction of the domestic sales into the export market, mainly at our Mpumalanga mines. And in that, you will see that we're now increasing -- or expecting to increase our export sales by [ 22% ], and this is enabled by moving sales through alternative export channels. And this channel, as we previously stated, we continue to optimize them and we're moving most of the coal from our operation. And our total exported sales remain within 1% of the guidance which we provided previously. If I move to CapEx, which Koppeschaar touched on, our capacity is expected to decrease by [ 23% ] and this is in line with our capital excellence program. This is mainly linked to the timing of the equipment of instrument strategy and the license to operating projects at Grootegeluk and Mpumalanga mine. Then if I move to logistics, I just touched high level that Transnet or you can talk about the National Logistics Crisis Committee, which has been put in place we can see that the results are already happening. Although yes, we'll talk about the numbers, what are we seeing. But what is important is that we have now started increase how we work with Transnet at the industry and what support and how the Board industry is already working and there's good collaboration. And also the appointment of Michelle and Russell, it has been quite good. I mean we're engaging them quite frequently. And we've also seen the availability [indiscernible]. I mean last week, they were also visiting for us. It is the first time that we've seen the leadership being available to us as an industry, and it's quite encouraging. However, we've experienced 3 arrangements this year that has resulted in an annualized rate of 46.75 million tonnes. But as Exxaro has performed better in that regard. So that the challenges of Transnet remains with us, but we know where the issues are. And what has been positive, which I'd like to state is that we've completed an adjustment of the lines to get Transnet. And this was the first time that this was allowed to happen where the industry is part of that network and the adjustment of the line. This can then tell us that what are the main issues to the line, which we can then set our focus on. So I'll then call that.

Probably we can hand over Q&A.

All right. Before we go into Q&A, I fail to recognize our MD, Energy Ling-Ling Mothapo welcome. [ Dane ] can you please just take us through whose hands are up and would they hand up to ask questions.

[Operator Instructions] The first question we have comes from Tim Clark of SBG Securities.

I've got a few questions. Coming to can you just talk about this line assessment in a little bit more detail? Have you -- can you give us anything on finding or the timing or just how the process is going to run. We heard from you that it was sort of towards the middle of the year that the line assessment would be complete. Can we just -- I'm just really interested in what the next stages? And then just two more questions on coal production. The first one Grootegeluk What happened there is it Medupi or Matimba that was really bad in the first quarter? Where did the sort of loss of offtake come from? And it looks like you're probably quite close to your minimum contractual relationships or offtake? Is that right, around about 12.3 million tonnes, if I've got the right number, and for the first half? And then my last question is just on alternative extraction of coal. Is the move out of domestic and into exports getting more stuff on the line near. Is that what are to translate that? Because it looks -- I mean, sometimes you call exports where you sell to a trader, you guys call it domestic. Is it sort of taking away from trucking? Or is it reallocation onto the rail line because the export number looks good, but your domestic number is obviously a bit lower. Thank you.

Thank you. I've noted the question. I thought with a line assessment question, so the line adjustment question. So the line adjustment we had what we call an whether industry participates in all the mining houses. Therefore, from that meeting, we had extra 2 weeks back, the line assessment results will be made available to us in July is what we have committed in that meeting. And from there and also the information coming from, they will build into the July slot. So far, that is the information we have for advertising is that at least that has happened because it took a while for Transnet to allow from the basin. So that information will be made available to us.

So just to understand that a little bit more, the line assessment. Is it going to be a sort of a mean long-term plan of what it takes to get the line back to operational kind of excellence? Or is it more short-term kind of signaling issues, et cetera, that can be sorted out in a shutdown?

Yes. So it is looking at actual medium to long term, as I look at the short-term issues. I mean the issues of signals, we know about it. But the lines for us is a quite important from the line from on the way into [indiscernible] base. I think, yes, it is both medium, but it is a majority is medium to long term, but the immediate issues that are being added, then we are sorting them out where we can in the...

We have to come in the team also just to support the question. Do we know what should be the what would look different after this assessment is done? I guess can somebody have summarized for us between you and Sakkie and Kgabi?

Yes.I'll take that. So depend that now. Now you know what are the issues because initially, you are more on short term, so the line assessment allows us to understand what are the main major focus areas. We should need to look at. So that will be different. So in terms of if one looks at next year's chart or if there might be some chart, there will be more informed from a planning and execution point of view.

Any other questions?

So there were a couple of questions, but do you want to add in something.

Okay. So the other question was around Eskom Matimba by Medupi. So what we've seen good performance coming from Matimba. The challenge remains at Medupi, but it's not on the unit themselves. The challenge is on the line feeding the station your conveyors. So as what the team is focusing on resolving. And always, to be also expecting a unit to come back. So that will also assist in terms of delivery of gold into the station. And then the other question on the alternative channels. Maybe if you can answer that one.

Yes. So Tim, you're on the domestic versus alternatives. So you may recall that previously reported that we are constrained as far as port capacity is concerned. And therefore, as much as we could track with outboard capacity, we could not export our product ourselves. So we were forced into a situation where we had to sell to other people that port capacity, and that is what we call our FCA sales. The plan was always for us to have more control over that. And we are now in a position where we do have access to for capacity. And that's why you will see that swing from domestic because that FCA sales that we did and still doing a bit of that reports as you sell it here to be domestically to someone, it reports as a domestic sell. And therefore, you will see a huge reduction in domestic sales because that was now swung to the export sales through alternative ports.

The next question we have comes from Brian Morgan of RMB Morgan Stanley.

Can we just ask on price realizations, how you saw them for the half were seen them for the half? And then also just on that last point around the FCA mix, how would we expect price realizations to evolve as you take more volume away from domestic and put it into the export line?

Yes, Brian, thank you for the question. I think in line with previous guidance at this stage, in the FD Pre-Close, we are not giving cost or price performance information through. They -- as I indicated previously, the more you shift the ratio from RBCT to the alternative port, you will come under pressure in your price realization because your opportunity for sales mix optimization is not there yet. We are working on that, optimizing that situation as well, but we definitely will see a little bit of an impact, which hopefully towards the end of the year, we also can come in a position where we have of that sales mix optimization opportunities in some alternative ports. So I do not, at this stage, see material impact. But as I've indicated before, there will be pressure on that number, the more you have to run to alternative ports to get the product out.

Okay. Can I then ask on the cash balance. You quoted a number of about ZAR 15 billion end of May. Is it fair to assume that provisional tax and royalties offset whatever cash flow you might generate in June. So that ZAR 15 billion should be sort of a good number for the end of June.

I suppose so.

And then on that, can we just chat in what you guys are thinking at this stage about dividends?

Look, we -- it's probably too early for us to talk about special dividends. We've got the normal dividend policy. And what we told the market is that cash balance, we earmarked to retain 12 million to 15 million. So then obviously, depending on where that actual balance is in August, the Board will then decide apart from the special dividend, is there a room for special distribution to shareholders. But if you -- at this stage, it's probably a bit too early to say.

[Operator Instructions] The next question that we have comes from Shashi Shekhar of Citi.

I have a couple of questions. First one is on the guidance, which you guys upgraded it today. I mean the new guidance now implies roughly 20% higher production and sales in the second half of this year compared to the first half. I just wanted to know how confident are you in achieving this target? And my second question is on your growth strategy. Could you please provide some update on the progress of your strategy? I mean, given the copper assets across the globe are currently pricing in over $11,000 per tonne of copper price? And are you also interested in buying assets which are up for sale by Anglo?

The first question on the confidence on our guidance. If I start with the production impact, which we have explained that on the Eskom front, we had a very challenging Q1 at applying to both Matimba and Medupi. But what we've seen in Q2, we've seen an improvement. So for us, then we're quite comfortable with that and also add main was that there's a unit coming in August, which is also supporting sales and many of the sales are improving in our production will also follow.

And on the growth side, it's Richard Lilleike Richard alike here. Thanks for the question. I think our investment criteria across all transition remains fundamentally unchanged. We take into a count where commodity prices are currently trading as well as analyst consensus of long-term pricing. And within that, we look at returns and return on equity on any investment. So copper remains fundamental to us as well as many other mining companies. that we'll certainly take into account pricing when we look at those opportunities. In terms of what we can do to mitigate it where we are exploring partnership opportunities as word looking at investments through the cycle of the commodity. And then what is the appropriate stage to end. So we are cognizant of your question looking at strategies in order to maximize returns on any investment. In terms of the Anglo question, right now, we are not evaluating any assets that Anglo may only not be selling that we're aware of. There's obviously the met coal business in Australia that they have announced publicly that they will be exiting. And we will review our options under the Moranbah South joint venture agreements as any offers are made.

[Operator Instructions] We have a follow-up question from Brian Morgan of RMB Morgan Stanley.

Can I just ask on -- you've spoken about the railway line between [indiscernible] North and Richards Bay. From North, how has the performance been on the line? It's been hit by a lot of cable set, how has that progressed? Just give us an update on operations there.

Brian, actually, I had one of the better 6 months period on the Waterberg line between [indiscernible] You will remember, historically, we've always complained that the Waterberg line is totally underperforming to that of what's happening in Mpumalanga. And in 6 months, we actually have quite a it's not where it should be, but quite an improvement on the previous half and quite encouraging. Also, the discussions we have with TFR on improving performance there. So we are glad to report that it's going a bit better differently affected by security-related matters, but also definitely seeing an improvement there.

Okay. That's great. And then last one, just relating to the previous question. Do you guys have any preemptives on this half? .

we'll -- we are currently looking at the agreements or our contractual, right? So it's probably premature for us to disclose whatever rights we have.

At this stage, there are no further questions, ma'am.

Okay. I think if there is no further questions, ladies and gentlemen, thanks for your interest in FD Close the Exxaro for the questions that were posed. And then we look forward to announce our results in the 15th of August. And we will see you on the 15th of August. All the best.

Thank you very much everyone. Thank you both and team bye.

Thank you. Bye-bye.

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