Exxaro Resources Limited (EXX) Earnings Call Transcript & Summary

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

Thank you, operator. Good afternoon, everyone on the line. My name is Sonwabise Mzinyathi, as operator has said, I'm the Acting Chief Investor Relations and Liaison Officer. Welcome to our FD pre-close for the financial year-end 2024. In the room with me, I have the CEO, Dr. Nombasa Tsengwa; as well as a technical assistant [ Rufilo Mabappa ] I also have our FD, Mr. Riaan Koppeschaar, who is joined by Deshnee, our Group Finance Manager; I also have Mervin Govender, who is our Acting Chief Coal Operations Officer, and he's joined from his team by [ Sean Mueller, ] who's our business analyst. We also have Richard. From Coal, we also have Sakkie, Sakkie Swanepoel, who is our GM for Logistics and Marketing. And we have Richard, and Richard is our Chief Growth Operations -- Chief Growth Officer. And then, we have Leon, Leon Groenewald, who is our MD for Energy -- for the Energy business. I will now hand over to our FD to just give us a statement.

Good afternoon, ladies and gentlemen. It's good to engage with you again. As usual, I'll start off with safety. So safety is very important normally for us at Exxaro, and we're pleased to report that we've gone now 26 months without work-related fatality in the group. And currently, as of the end of October, we're standing on 9 lost time injuries, resulting in an injury frequency rate of 0.06 against our target of 0.05. Also, this period of the year, we call it the critical period. So there's also a special attention given in the group on safety matters, and various actions are [ good ] at our business units to enforce and strengthen our safety actions in the group. If we look at commodity prices for the year on the coal side, the API4 price we forecast to average about $105 a tonne on board for the year. And on the iron ore side, the 62 iron ore, Fe $107 a tonne CFR. If we look at our numbers for the 12-month period, we forecast that the coal production or product is expected to decrease by about 6% and coal sales volumes expected to decrease by 2%. On the CapEx front, we expect the stay in business capital to be about 11% lower, mainly due to lower spend at Grootegeluk mine. As of the end of October, our net cash balance was about ZAR 16 billion, excluding our energy net debt. And remember, we earmarking to retain ZAR 12 billion to ZAR 15 billion for our acquisition strategy. Also just a note that we still need to pay tax as of the end of December. So we forecast that the total tax and royalties will amount to about ZAR 1.6 billion. When we look at the energy business, our forecast when we last spoke to you in August was 727 gigawatt of energy. So our latest forecast is pretty much in line with that at 729 gigawatt of hour of electricity for the year that we will generate. And then also just to update, it's going well on the construction of our 68-megawatt Lephalale Solar Project, and it still anticipated that we will reach commercial operation of that facility during the first half of 2025. Also on the disposal side, the ferroalloys, that process is continuing well, and we expect to reach financial close on a transaction or sign sale and purchase agreement during the first quarter of 2025. So with that, I'll hand over to the Coal team, if you want to give any guidance on the markets or perhaps something you can start off on the markets.

Thank you, Riaan. Good afternoon, everybody. If I start off on the domestic market, market quite stagnant, quite a bit of the few of the customers under a lot of pressure with inflation pushing up their costs very high, and they are not able to pass on increases to the market. So we see in our domestic market quite a bit of pressure, experienced by our customers. Then internationally, I'm not going to spend too much time on what happened in the past period. That, I think, is adequately articulated in the sense that has gone out. But if we take a look at where we currently are, I think quite a bit of better demand we're seeing from India currently. We had a really poor 3 months from India up to about October, largely due to very low steel prices, making the sponge iron industry quite unprofitable and also very high stock levels, combined with the effect of the normal monsoon period. But a bit better in India, generally, overall, the Indian demand in the seaborne market is quite good this year, and we're quite encouraged by that, fueled by very high energy demand in India. The energy demand is expected to grow 6% to 8% over the next 3 to 4 years. So there is a good pull in terms of the energy market. Also, the Chinese imports were very high this year as the second year to 2023, which I don't think we were expecting. And so despite quite a high production by both Australia and Indonesia, we were quite fortunate that both Indian and Chinese demand was quite strong in this year and has helped us on the pricing side. Europe has showed a bit of a strange behavior with the gas prices that went quite high there amidst gas concerns, availability of gas being a concern again there. And we've seen actually that the European Amsterdam, Rotterdam, [indiscernible] CFR price went quite a bit higher than expected to $122 per tonne in this period. We do think that prices will come down there, because we think that the shortage -- potential shortage of gas is already reflected in the price sentiment of the market. South African market was very strangely priced in this period where we found that the API4 index to which we price was very unattractive for our, let's say, Eastern customers. Middle East, India, Southeast Asia, because one of the issue that I said that was in India with affordability due to the unprofitability of the sponge iron industry, but also what we saw is the South African index kept up to an extent by what was happening in Europe with gas. And we found ourselves for quite a while that our index was just not pricing into any Eastern market. So we had a bit of a challenge there. I think overall, we're quite still positive on the global seaborne thermal market where previous times, we reported that by this time, we would have expected to reach peak coal in terms of seaborne thermal coal of 1 billion tonnes. It is now by even the most conservative analyst forecast that up to 2026, we will see 1 billion tonnes, and confidence in India about 10 days ago, there were actually quite a few papers that forecasted that we might see seaborne thermal coal at a 1 billion mark up to even 2030. So it seems that the demand remains stronger than what is expected by analysts generally. So as Exxaro, we have not a bad time in the markets. We are a fairly small player in the market, and we, I think, could push quite a bit on pricing in spite of the challenges that was in the market. Maybe I can stop there.

All right. So maybe I should take over from this. Just on the production of coal, we've seen in our previous forecast, the one we said last time, we're 1% within that guidance. And I think from 2023, we're still about 6% down on thermal coal. Just on the metallurgical coal, we down about 3% on that one, and that's purely because of running into full stockpiles, because of the rail rates out of critical [indiscernible] I just think on the production side, those were the comments we had and then -- we also had the issues of Leeuwpan, where we couldn't supply that coal to Matla due to quality issues on that one. Then on the sales product, we saw the thermal coal that's the same thing. The struggle of taking coal from Grootegeluk [indiscernible] and that's pushing back that full stockpiles for us. And then obviously, on -- you'll see between the domestics and the exports, we obviously cut back on the domestics and push more to exports, and that's purely on the way we balance our railing of coal. Just on the Logistics, we saw in -- in the first 9 months of the year, we were railing at 42.1 million tonnes to RBCT. And obviously, in the last quarter, we're seeing a good annualized uptake slightly of 50.5 million tonnes per rail rate that we got. Yes, that's all we're going to comment, the rest is in the pack. Thank you.

Thank you, Riaan, Sakkie and Mervin. We will now get into the Q&A session. But before we do so, I just want to emphasize that any questions that are related to the Sunday Times article should -- they should please be channeled to our Chairman. This call is really focused on our FD pre-close statements. Any other questions should please be directed to the Chairman. Thank you. Operator, please can you assist us and just remind us on the process of asking questions.

[Operator Instructions] The first question we have is from Brian Morgan of RMB Morgan Stanley.

Two questions from my side. This reduction in CapEx to ZAR 2.2 billion, is that -- how much of that is sort of structural and how much of it is timing, if some of the CapEx shifting out into 2025, maybe from 2024? And then the second question is cash balance at the end of May was [ ZAR 15.3 billion ] and now [ ZAR 15 billion. ] So net cash generation of ZAR 700 million. And it looks a little underwhelming. Could you maybe just give us an idea of what the moving parts were in there?

Yes. So Brian, I think on the CapEx, it's mainly timing. It's specifically related to our truck and shovel program at Grootegeluk. So we are still within that ZAR 2.5 billion to ZAR 3 billion guidance that we gave previously. Then on the -- the end of May figure that we quoted previously was also before tax. So we also had to pay tax the end of June. So that is the -- that why that number was lower. And dividends. Remember, the other big one is dividends. You also paid out your dividend.

The next question we have is from Shashi Shekhar of Citi.

I have two questions. The first one is on export. Could you provide the split between railing and trucking? And my second question is on TFR. Just could you provide some brief comment on TFR performance in the second half of this year?

Yes. Shashi, thank you for the question. So it's becoming quite difficult to distinguish our export volumes, what's being tracked and what has been railed. Also, a lot of that is actually multimodal Logistics operations currently. So the RBCT tonnes for this year will probably be in the order of 5 million tonnes, of which all is railed into RBCT, but some of the coal is even being trucked to sidings to be put on trains. So even there, you have multimodal. And then, our export channels through the alternative ports are some trucked and some are multimodal. But obviously, the bulk of the alternative ports, which then is about 1.8 million tonnes being forecasted is to a large extent being trucked. But as I said, it is not trucked only. If I then can go to the rail performance of TFR, after quite a poor first half, we've actually seen from the shut that we had in July, that there is definitely an improvement. I think also, since the publishing of the infrastructure assessment report, there was quite a nice focus on what should be tackled first which really assisted in the process from a infrastructure maintenance perspective. And we've seen that till end of October, we were about 50.5 million tonnes on an annualized basis. And if things continue like it is now, we do expect that number to go up towards the end of the calendar year. TFR still aiming for 60 million tonnes annualized in their financial year, which ends in March of next year, which we think is highly unlike, but definitely a nice improvement for the past 4 to 6 weeks, probably, we've seen a consistent performance between, let's say, 52 million tonnes and 57 million tonnes was probably an average for the past 4, 5 weeks of close to 54 million tonnes. I've not calculated the number, so please don't quote me, but definitely an improvement on that front.

The next question we have is from Mpumelelo Mthembu of Absa Capital.

Okay. My first question is with regards to Maputo. Have you guys seen, faced any challenges with that alternative channel? And then, my second question, in terms of your cash cost, do you expect it to be lower than the first half? And as distribution costs still a key factor in that? And then, in terms of your thermal prices, what's the outlook you guys are seeing, noting that you said you're expecting $105 to average this year. So what's the expectation for 2025? And maybe the last one, in terms of Black Mountain, is it still a key part of your asset portfolio, noting that selling the ferroalloys?

Okay. Mpumelelo, thank you for the questions. So if I can start, I don't necessarily, I think, in order that you mentioned. Thermal coal prices, we hope it's going to stay around $110 per tonne. I see the latest analysis by Wood Mackenzie says, there are not many factors that we should expect to push it higher. There are, however, two upside risk to the pricing view. The one is as much as La Nina was downgraded recently, if we do see that, that comes through stronger, then we might see supply side disruptions in Australia and Indonesia, which normally gives a quite a price spike in this period of the year. And then also, I think, currently in price forecast, it's quite a bit discounted that the Northern Hemisphere will not experience cold winter. So of course, if that change, then it may impact pricing. On Maputo, I think, we've done quite well. We have not lost a single vessel out of Maputo due to all the disruptions. We had quite a few business continuity actions that we've put in place to ensure trucking continues from our mines to intermodal stockpiles and from there then with the various modes of Logistics to the port. But we currently are not forecasting any vessel to be lost due to that. I must say we are really very, very good service and cooperation with the operator on that side being ring road, in the port to really go out of their way to assist us to work around the challenges. Logistics costs definitely in terms of the alternative ports remain a challenge. So we are working very hard towards a more optimal Logistics mode there to eventually get most of the coal on to the rail. But towards in that journey, we definitely still experience very high Logistics costs. Even -- although saying that, we're at ease that the goal that we are exporting is definitely value accretive to our business. So yes, despite of high Logistics costs, we are still happy to move the export tonnes.

Just coming back to the unit cost things, so that will be largely dependent on as we said last time, the Eskom offtake. So at this point in time, I don't think we're going to venture into a number on what the unit cost for the second half will be. Black Mountain, you'll recall that we did say it is a non-core asset. So I think, it remains a non-core asset. But at this point in time, we're not running any sales process on the assets.

The next question we have is from Lisa Steyn of News24.

I would like to find out expectations around Eskom offtake. I mean, we've seen a huge improvement in plant performance. Is there a limited upside that Exxaro can experience from improved plant performance at Eskom even if it were to improve into next year?

I think, Lisa, you must understand that the problem we're having is down at Grootegeluk and Lephalale, and it's based purely on the units that they're operating at Eskom. And I think one of the units is obviously still our maintenance and extended maintenance that's causing the problem with the offtake. Once that unit comes in, we should be able to see that coal go over the belt later on.

The next question we have is from Nkateko Mathonsi of Investec. It seems there is no response from that line. We have a follow-up question from Brian Morgan of RMB Morgan Stanley.

Just a question on the railway line in the Waterberg. It doesn't sound like it's going very well. We're not seeing the same sort of improvements as we are in Mpumalanga down to RBCT. Could you just give us a bit of color on that?

Brian, we've actually seen quite an improved performance directly to Grootegeluk in this period. We do have a bit of disappointing past 2 weeks. But apart from that, we've actually seen quite a nice improvement in performance directly to Grootegeluk, not where we want it to be, of course, but definitely an improvement from the previous year.

What's driving the improvement?

I think, the fact that we have dedicated locomotives on that corridor that is really working on that, what we call the smalls, the trains that have not your big jumbo trains. That is helping. We definitely also see an improvement in security towards that line. And personally, I think TFR is just realizing that actually the future of coal industry is moving in that direction, and it is quite important for them to start to improve on performance towards the Waterberg.

That's cool. Can I ask on Leeuwpan? You guys said at the half year that you're going to look to get an Eskom contract for that mine? How did that go?

Yes. No, Brian, the problem we had with Eskom, the one at Matla Power Station taking that coal out of Leeuwpan, it was purely a quality issue, were Eskom was starting to reject that coal because of the soft contact, and that's why we couldn't supply them.

Okay. Cool. So what's the way forward on Leeuwpan now then?

So I think, Brian, thank you very much, Nombasa speaking. I mean, we've always said that we want to land every tonne of coal from any of our mines where we can derive value. So with the delays that we've received from Leeuwpan, is very indicative for us that, that process may take even longer, and we may not be able to meet the numbers that we wanted to meet. And therefore, we look for alternative markets. One thing that we have not picked up and I guess, early in the year, we would be able to give an indication of what Sakkie and the team are finding from the likely markets of Leeuwpan without anything specific, which inclusive of the domestic market. What has been quite pleasantly surprising in this last few months, is to see consistent, even though low number of trains that are picking up the 5 3 material from Leeuwpan. And that part of material would have been the one that would have been dedicated to Eskom. So it's not all the gloom -- doom and gloom in as far as supply from that mine.

The next question we have is from Nkateko Mathonsi of Investec.

I am sorry, if I'm repeating some of the questions. I got disconnected halfway through. The first question on the trucking. I just want to get an idea of what is the proportion of trucking from the potential 6.6 export volume that you're forecasting for this year, which looks very good, but how much of that was actually trucking? And then the lower CapEx at [ EG, ] if you can give us a little bit more color and whether we should think about that being rolled forward into the new year? And then, also in terms of your net cash position of ZAR 16 billion. I just want to verify this. Should I see it as -- when I'm thinking about the potential special dividend, should we see that ZAR 16 billion less ZAR 1.6 billion of that tax and royalties that was mentioned?

Yes. Okay. Nkateko, thank you for the questions. You may have missed the question and answer from earlier. So what I explained, it's becoming quite difficult to put a number to how much of our export coal is being railed and how much being trucked. Because part of the coal even going to RBCT, some of that coal, at least, for a distance is being trucked. But in the mine, I would think what you can use as a thumbs up is that the coal through alternative ports are definitely multimodal. So partly truck, partly rail, and most of your coal going to RBCT, which of the guided number is more or less 5 million tonnes, most of that coal will be railed. Then just on...

On the cash balance, so -- so there will be cash generation the next month or two. But what I just pointed out is remember, we still need to fight tax the end of December, and that is going to influence the number that informs our ZAR 12 billion to ZAR 15 billion range. So that will be one of the things that the Board will consider when we declare our dividend at year-end, just to not forget about tax. And then, I think the other question was on -- CapEx is more -- it's timing. It's timing. It's not permanent, most of it.

I think we have lost her again. So over to you, operator, any other questions?

We have a follow-up question from Mpumelelo Mthembu of Absa Capital.

Just I guess two questions follow-up. It's just an update on the growth strategy. And then the second question is with regards to Matla. Do we see improvements from offtake there, if there could be any color on that?

Yes, I'll take the Matla one. We're seeing very good performance of starting up Mine 1. So we should see an improvement on the tonnes going forward. That's all on the Matla side, yes.

And I think, Matla has almost done very well this year and servicing its own then rates that we've given to them. So they're really on the green as we speak. And I think what is important to notice here is the fact that Eskom has invested a lot of billions into that Mine 1 shaft, and they're really pestering us to start seeing their first coal. And that's what the team is really focusing on. And hopefully, we will see the flow of first coal coming out of that mine before the end of the year, maybe little bit, but surely the second half.

It's Richard here on the growth side. So we continue to have active engagements on a number of well-advanced projects supporting the strategy. However, we were not always in control of the timelines. Suffice to say, we've been making good progress and then remain optimistic on the growth strategy, specifically in the commodities mentioned by the CEO recently. Thank you.

Any other questions, operator?

At this time, we have no other questions on the line.

Thank you. CEO, any closing remarks?

No, thank you very much for attending today's FD pre-close. And as you have heard, obviously, we have a few challenges. And the one that stick out is around Leeuwpan. We know Leeuwpan has really been struggling from a cost perspective, and we've migrated to a single pit, and we hope that we can see stability coming out of that pit. And as I said earlier, I am quite encouraged by what I see in terms of the trains. Even though there's a dribble, it's not what we needed. It actually helps us to deal with the markets and divestive markets for Leeuwpan. We -- and I've engaged at my level with Eskom on this offtake at Matimba, and secondly, Medupi, to understand when do we see the full complement of those units starting to burn that coal, because of our own plans are not always as accurate as we'd like them to be. And if your players are not accurate, they do impact the operations in terms of having full stockpiles, because of an expectation of an Eskom taking the coal. I've been promised by Dan himself in our interaction we had recently that at least by June next year, we need to see stability. And I don't want to burst their bubble in terms of what they see that happen, but we've really been urging them to take us to the minimum levels of our contract, which is 25 million tonnes. And we're hoping that we're getting there. In terms of the Logistics Solution, we want to reiterate what we've been saying that, what we see is not optimal, especially with the railing, not necessarily just railing, the trucking of coal that takes us to Maputo. And I know the team is working quite hard at optimizing this route without losing sight of the advantages and the little green shoots we see coming out on the RBCT line. When I talk about green shoots, I'm talking about what was promised within the lower levels of declaration, which is 60 million tonnes. But we are seeing 50 million tonnes, I think, Sakkie mentioned that, but I think that there is a little bit of consistency in some aspects of surprises in terms of seeing some of those trains coming through. And we will continue to optimize Maputo rails. It's not Maputo at all cost, and we'll make sure that this works for us. In terms of what we're looking at during this critical season, we are very focused on safety, really urging all leaders to be visible, demonstrating the standards that we want to see from our people in managing these operations at this time of the year, focusing on the right things, making sure that they observe people in the way they work and assist people to identify the risk. We're also obsessing right now over the cost containment across all the parts of the organization, including this building, which is our head office, to make sure that we meet the margins halfway, because we continuously see the squeeze that is coming with the Logistics, and the kind of bank on the price, because we don't have any control over. And lastly, from my side to say that, look, it's been a tough year, and I think, the teams have really worked quite hard, including research team, very exciting times to see what they're working with and we wish them well as well in the team, because we know that they're working in Ernest. And once again, thank you so much for all of you for keeping us safe, for always asking the tough questions and Merry Christmas and have a wonderful festive season to you all. Thank you.

And with that, thank you so much for joining us. Goodbye.

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