Exxaro Resources Limited (EXX) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to the Exxaro FD Pre-close First Half 2025. [Operator Instructions] Please note that this call is being recorded. I would now like to hand the conference over to Sonwabise Mzinyathi. Please go ahead.

Thank you, operator. A very good afternoon to you all. As the operator indicated, my name is Sonwabise Mzinyathi, and I'll be facilitating this call today. You are joining us for the FD pre-close for the first half of 2025. In the room here at Exxaro, I am joined by our CEO, Ben; and from his office, [indiscernible]. From the finance team, I'm joined by Riaan, who will be Chairing this meeting today. From finance, we also have Dashni, our Group Financial Manager; and [indiscernible], our Corporate Finance Manager. From Coal, we have Mervin, who looks after our Coal business. We have Sakkie, our General Manager for Marketing and Logistics. We have Mellis, our CFO for Coal; and we have [indiscernible], our Business Analyst in the Coal business. From Energy, we are joined by Leon, who's our MD for Energy. From Strategy and New business, we have Richard. And from the IR team, I am joined by [indiscernible]. I will now hand over to Riaan to give us his statement.

Good afternoon, ladies and gentlemen. It's good to engage with you again. As normal, we will start off with safety in the group. So as you know, safety remains our #1 priority in the group. And as at the end of May, we are proud to report that we're sitting on a lost time injury frequency rate of 0.06, which is in line with our performance last year, albeit that we have incurred 4 lost time injuries in the group during the first 3 months of the year. At our CEO Safety Summit in April this year, we also started to roll out our new refreshed safety strategy. It's called the One Voice strategy, and that strategy aims to make safety simpler, clearer and more consistent across the group. If we look at the prices, you would have seen that the realized API4 price or the benchmark price is forecast to average $91 per tonne compared to $110 per tonne FOB in 2024, the second half of the year. So you can see a substantial decline in that. And then on the iron ore prices, it's very much consistent. We're seeing $100 per dry metric ton compared to 101 tonne (sic) [ $101 per tonne ] in the last half of 2024, CFR China. The Coal team will later on unpack the production and sales figures in more detail. But you can see that the coal product, including buy-ins and the sales volumes are projected to decline by 6% and 7%, respectively and that is mainly due to reduced demand from Eskom. If you look at the coal capital expenditure, that is expected to decrease by 19% in line with lower sustaining capital at Grootegeluk and also at Belfast mine. On the synergy side, the generation for up to 30 June is forecast to be 335 gigawatts an hour. And as also pointed out previously, remember, normally, the generation in the first half of the year is lower than the second half of the year. Then also proud to report that we -- as of the end of May, the group had net cash of ZAR 19.5 billion in the group, that excludes the ZAR 5.8 billion debt in the energy business. Also, just on that front, we did pay interim tax at the end of June that amounted to about ZAR 1.6 billion. So with that, I'm going to hand over to the Coal team. Perhaps, Sakkie, you can give a brief overview of the markets, also TFR performance. And then Mellis and Mervin can give us some insight into production and sales.

Thank you, Koppes. Good afternoon, everyone. Thank you for joining us. Starting on the international market, I think a period with mixed situations, as we experienced it. There was a time that demand was actually quite good early on in the period, but supply just being better. And then we moved into -- in the latter half of the first year into a situation where demand generally weakened in the global markets with persistent high supply. So where we sit today is a bit of an oversupply situation with too much coal going around. We -- even with the prices that have come down both in Australia and in South Africa into the $90s in South Africa, even $80 space, we still have not seen substantial closure of production capacity which is what you will need for price to recover from these levels. We also, in this period, have not had any big supply side shocks as sometimes we get specifically on the Indonesian and Australian side. Within this, of course, the poor rail performance in South Africa is baked in. So it's not an unknown factor anymore, but there are just too much coal to go around. What's making the situation more difficult is that both in India and in China very good domestic production of coal that played also a role in this demand for seaborne imported coal, and therefore, both India and China being a bit lower on imports. If we look at the year, there is still a forecast that we may see again a 1 billion tonne seaborne coal market. Although the forecast currently is that it may be 30 million tonnes below that of last year, definitely above the 1 billion, the forecast is still there. And again, that also just illustrating the point that demand has not fallen away, there's just too much supply to service that demand. So internationally, I think price-wise, we've, of course, seen now the price have come down where even eventually in the Australian side with the API6 also coming down to as low as $96 per tonne in May. And that is forecasted for the rest of the year to go up a little bit. If you look today at the forward curves towards December, it shows $100 per tonne type pricing. So there's -- let's hope it's correct, and we see a little bit of an upside. But just structurally, we do not see anything that is going to change the oversupply of coal unless there is, in the Northern Hemisphere during the December period, really, again, a cold period that they need more energy. Also very dependent, of course, what's happening with gas and LNG pricing. We've seen in Europe that at one stage, coal price went up quite a bit with the LNG prices going up and the availability was not that good. Looking at the domestic market, our biggest volume, of course, going to Eskom. And there, we had a particularly poor period over the past 2, 3 years. Mellis will talk to these figures. But at Medupi, let's say, [indiscernible] the units except Unit 4 that is still not into -- back into production, but other units are doing fairly good. But of course, Unit 5 still needs -- Unit 4 is still out of production. We were hoping that it will have come back by end of June latest. Current indications are that it may potentially be third quarter; not sure when in the third quarter. Matimba is still struggling a bit. Matimba has a lot of maintenance going on, specifically also on the control and instrumentation side. But both power stations very full on coal stocks. And back to my international site that I covered earlier, this is actually a global [indiscernible] where from Europe into Japan, Southeast Asia, China, India, inventories across the globe is very high and therefore, you will need to see a drawdown of inventories before you will see substantive price action. Back to South Africa, ArcelorMittal, not taking all the coal we were hoping they will take. No final decision on Newcastle yet. But we try to help where we can with AcelorMittal because they really also battle with not getting trains to their plants to move the bulk materials. Rest of the domestic market still stagnant. A bit of an oversupply, I would say, with people not getting coal product out of the country. You do see a bit of price pressure in the domestic market. And then on the FCA market, which is very price dependent. If the coal price comes down to lower $90s and into the $80s, there's a lot of pressure on that market to realize economic prices. But where we currently are, we do see some interest in our coal in the FCA market. On Transnet, to close off with, 54.5 million tonnes equivalent rail performance up to end of May. As you may have heard, we've just had a second derailment after the big one we had earlier in the year. We're unsure still how long this is going to take. We think we may get one of the lines back within the next day or 2, and then the other line may take a bit longer. So yes, this will definitely hurt the performance of the first half of the year. And then, of course, we have the annual shut of the coal line that's coming up middle of July. And these two events will put a lot of pressure on exports running out of coal potentially in RBCT because clearly, a derailment was not planned. I think generally, it's going okay. We see very slow progress, but progress indeed. On the TFR side, we see still very good cooperation between industry and TFR and TRIM in investing money in the infrastructure to at least on the most critical elements have some restoration and that definitely is helping. And we are quite hopeful that for the second half of the year, we may start to see more sustained performance on a weekly basis by TFR of, let's say, 55 million tonnes to 60 million tonnes annualized equivalent. I think Koppes, I can stop there.

Thanks very much, Sakkie. Mellis...

Thanks, Sakkie. Thanks Riaan. Looking at the production and sales volumes and also I'll touch on capital as well. Overall, very small movements against the guidance that we gave in March. So we got 1% down on production guidance and we 2% down on sales guidance. Sakkie touched on the thermal impact that was largely felt in the GG space. So we're about 1 million tonnes down against the second half '24 in our first half '25 forecast, but only 1% down against what we guided previously. So no big movements on the production side. And at this rate, we're forecasting to be 3% up on our 2024 actual numbers, so still increasing that going into 2025. If we look at sales, you can see some quite big movements. The metallurgical side, it's been touched on in terms of the weather impacts early on in the year in GG, where we had a wash away. So that impacted our ability to evacuate coal, and that's where we've seen the biggest impact on the metallurgical side, where we're 22% down on the previous guidance that we gave at 517,000 tonnes versus the 661,000 tonnes. The other impact is on the Eskom line. So you've got the one line at the top, which is the GG offtake. And you can see there a 6% reduction in this what we've said previously and about 700,000 down on what we did for 2024. On the Matla side, you can see the improvement there with the Mine 1 ramp-up. And so we have about 500,000 up on the second half '24, and we're going to be about 500,000 up on the total for 2024 versus our forecast for 2025. And then on the exports, you can see a slight reduction there of 3% against the 7 million guided in March, but still overall looking at a 3% increase in sales as well between our 2024 number and what we're forecasting currently for 2025. If we go to capital, so 19% reduction, as you can see, against the 2024 second half number at both GG and the Mpumalanga side, which is mainly at Belfast. And then if you look at the reduction, we've got a slight reduction there, 4% against our previous guidance from ZAR 2.2 billion to ZAR 2.1 billion, that is ZAR 80 million increase against our 2024 number of ZAR 2.80 billion against the ZAR 2.1 billion that we're now forecasting. So you can see the reduction there at GG, but the numbers exaggerated on the Belfast side against a small base of 268. So there, we're showing an increase, and that's what we're going to be completing this year in terms of the capital. So no big changes, I think, on all 3 facets, well within our guidance and really the rhythm is there for the -- going into the second half.

Okay. Thanks, Mellis. I'll quickly ask Richard to give us an update on the Ntsimbintle transaction. As you know, we announced this transaction on the 13th of May, and the intention is still for the transaction to close the first quarter of next year. So Richard, just the progress on closing of the transaction.

Thank you, Riaan. We continue to make good progress on the key conditions precedent associated to the deal. The short-term CPs have been fulfilled. The more important ones that we're focusing on right now are the various preemptive and tag-along rights at the 2 joint ventures, both of which the process has recently started. And then the longer lead time items of Competition Commission and Section 11 approvals at the 2 mines are in progress as well with good engagements with the DMPR in the Northern Cape kicking off the Section 11 submissions. So good progress is being made.

Then just in terms of capital allocation, I think we did signal to the market previously that after this transaction, we don't intend to build up a war chest again. So that is still the intention. And then our share repurchase program is ongoing. You will see we do, on a monthly basis, cancel the shares as required by the JSE. So the next tranche of shares will be canceled at the end of today. And as we sit here, we're about probably 1/3 completed under the program, about ZAR 400 million of the ZAR 1.2 billion. Thanks. So Ben, I don't know whether you want to make any remarks?

Yes. Thank you very much, Riaan. Thank you so much. I think it's important that, yes, it is my first with Exxaro, and I look forward to it. I've had some very exciting 3 months visiting the mines and our operations, looking at the basic of the skills in the organization, and that excites me a lot. And just going through all the mines in the closed collieries, we also visited all the closed collieries, and I'm very pleased with the work that we're doing there in rehabilitation and other areas. But this morning, I possibly think I must just shed some more light on Leeuwpan. So I really want to direct your attention to Leeuwpan. Despite all the previous efforts, Leeuwpan continues to be loss-making. And we have to take some decisive action on it. So we took decisive action to review Leeuwpan. And this morning, we embarked on a formal consultation process at Leeuwpan under the Section 189 of the Labor Relations Act. This is a consultation process, which normally, if run appropriately, is a formal engagement process that normally takes 60 to 90 days. And in that process, we expect to get all the employees and their representatives to share with us their suggestions of the way forward because the nature of loss-making at Leeuwpan is not sustainable. So we've started this process this morning. And it's too early to say what will come out of it, but we will share details as they emerge. And I think it's important that everybody appreciates that. But the most important thing is our intention is to minimize any potential job losses while ensuring a viable business. So that's why we are here. Thank you.

Thanks. Sonwa, I think at this stage, we can pause there and then perhaps take questions.

Thank you, everybody. Operator, please assist us with questions online.

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

Just a couple of questions on my side. The first one is, can you give us a bit of an update on the time lines for the preemptive and the tag-alongs? When can we expect to hear whether -- what the counterparties have decided to do that? Will you be putting out on SENS when those are finalized? That's question number one. Question number two, can you give us an update on the [Technical Difficulty].

[Technical Difficulty] preemptive, we should know towards the end of July, early August is the time line for that one. So we're hoping by the end of August, we will have both responses.

Will you be putting out SENS announcements?

I don't think we have planned to, Brian, but I'll take that up with our Investor Day.

Yes, we'll update as we go along [indiscernible] the results announcement [indiscernible].

Just on the -- so the two questions on GG, one was around stocks and the other one was around the mine plan. So I mean we have the ability to do the 25 million tonnes, but we pace the mine plan according to the offtake. And over the last 2 years, we've seen it around 22 million tonnes. So I mean that's what we run the operation at in terms of mine planning. And then from a stocks point of view, I mean, the stocks are nicely balanced. I think we're getting to the upper end of the stocks on the power station side but we constantly engage, and we also -- I mean, Sakkie mentioned that Unit 4, so when that comes in, we can have a higher offtake, as you can see from our guidance as well in the second half. So we also want to make sure that we are -- as we get into the sort of wet period that we are nicely balanced and available from a stock offtake and supply point of view.

You can't give us an idea of how much stock sitting at the power station?

No, we don't normally give guidance or try and look across the fence and give guidance on behalf of Eskom.

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

I've got a couple of questions. My first question is with regards to the cash cost, we saw that it increased last year about 30%. Why -- can you give some color or guidance on that given the lower production volumes or sales volumes reported for this half? And then second question is on the domestic market. Seeing that you are redirecting export volumes to the local markets, what are your expectations in terms of pricing? And then thirdly, you did mention that there were challenges in the first quarter. What's your expectations going into the second quarter? Do you expect these derailments to carry on? And what mitigation actions have you guys have in baked should that happen?

Okay. So firstly, perhaps on the cost, I think we will give an update on the cost when we report in August. Remember, last time we indicated we are looking to implement cost-cutting initiatives across the group. That is ongoing. But obviously, also stuff like the unit cost is now dependent on your Eskom offtake. But we'll give more guidance on that for the full year when we report in August. Then the other one -- yes, so the coal that we -- thank you. The coal that we wish to export that we are now selling on an FCA basis to other people that's mostly exporting, the price there is higher than what you will get in the domestic market at that quality point, but it is definitely not the same price we get through RBCT due to the materially higher logistics cost, whether we take it to other ports or whether other people take it to other ports. So not nearly your RBCT export price.

Sorry, if I can just jump in there, what -- if you can give a number of those sales, if possible?

If I can give a number of?

Those sales that you redirected to the domestic markets or local markets.

For this year, it might be as high as 2 million tonnes.

Last question was around whether or not the challenges that we saw in Q1, do we think they're going to persist into Q2?

We obviously hope to get a lot of extra mileage and capacity from the shut that will happen on the infrastructure side. Of course, I think where we are today in South Africa, we are probably more constrained on the infrastructure side than actually on the rolling stock side with TMR. So we will need to see quite an improvement in the infrastructure side before we see any better performance. And workplace testament to that as well is these derailments that we experienced. So yes, we really hope that we can start to see the end of the derailments because it is very, very costly, both for the exporters and for Transnet. And that's the question is how long will that take? We are not sure of that. But we do hope we will see a better second half of the year in terms of TFR performance in the first half.

And what was the percentage of the 3.4 that was through alternative channels for the first half?

So on an annual basis, we still expect the guidance that we gave 800,000 so far. So about 800,000 to alternative ports. Thanks. Finance guys, I [indiscernible].

The next question we have is from Yaameen Gosain of Laurium Capital.

I just want to get an idea of what the cash burn is at Leeuwpan?

Yes. Look, I don't think we're going to go into the detail. I can just confirm, it is incurring losses at the moment.

The next question we have is from Thobela Bixa of Nedbank.

I've got a couple of questions. The first one is on your assumed run rate for the second half. That seem quite significant when I just look at what you're assuming by your full year guidance. So could you just give us some color as to why you see such a market improvement relative to the first half? That's the first question. And then just around the net cash position. I mean, you mentioned that it's about, what, ZAR 20 billion in the half to the 31st of May. What outflows are you expecting between then and the end of June? If you could just give us some color on that? And then on the marketing side, Sakkie, what do you think would drive supply cuts? That's the first question. And then the second one is we have seen some price movement on the upside, whilst prices moving higher in the month of June, what do you believe has driven that?

Okay. So perhaps, Sakkie, you can think about the increase in sales in the second half of the year and production. I think there's two parts to the question is Eskom and also the weather disruptions that we had in the first half of the year that we don't anticipate in the second half. And then just outflow between May and June, as I mentioned, there was a ZAR 1.6 billion provisional tax payment that we did to SARS, perhaps the production for the second half of the year.

So should I kick off, Sakkie, and then you can maybe add in. Yes, so I mean we've mentioned Unit 4. So I mean the big increases will be both at Matla and at GG, and it's both related to the Eskom offtake. I mean the ramp-up of Mine 1 is expected to deliver about 300,000 tonnes additional in the second half and then about 1.5 million on GG in the terms of the offtake. And Sakkie mentioned the timing of Unit 4 at Medupi. And then some of the Matimba issues and units are actually coming back on track as well. So the gap that we see in the first half, we don't see in the second half against the offtake expectation. So we see a much better offtake in the second half compared to the first half from an Eskom point of view. So that factors more positive in the second half. Anything else to add, Sakkie?

No, I think that's covered. Maybe if I then go to the question on what will drive supply cuts? Now there's the old energy in the coal market that the only cure for low prices are lower prices and the only cure for high prices are higher prices because what you need to do if prices go low due to an oversupply, you actually need to wash out some of the marginal suppliers to get the rid of that supply and so that you can restore the equilibrium. So yes, as much as we don't like the low prices, we're also aware that you need something in the industry globally for that oversupply to wash out. We're seeing about -- we're hearing about 30 million tonnes of Indonesian coal currently that's quite in trouble in terms of economics at the $90-type level. So maybe there something can happen. But we have not seen material cuts. I think people probably still hope it's going to go better. It may be that where we're going now into the summer of the Northern Hemisphere, if we don't see a pickup in demand, people may then actually take other decisions. And what is driving the price currently? Very difficult to say. I will -- even if I guess you're going to call me a liar. The only thing that has changed that we're aware of is the fact that Northern Hemisphere is moving into summer, and we hope there's a bit of demand coming from that. The oversupply is there, we're not aware of supply side shocks and demand out of India and China is still fairly pedestrian. So not something fundamental that we're aware of.

Okay. And maybe just a comment with regards to the production for the second half. It does seem as though quite a huge chunk of it is dependent on Eskom performing better in the second half, which does imply some risk. Yes, I will leave it at that.

Maybe it might be worth to mention though on that Eskom risk that the expectation was that Unit 4 of Medupi would have come online by now. So the numbers you see in the forecast do assume Unit 4 coming a bit later in the year, but still coming within this year. And that's why you'll see that number. So they are still dependent on the expectation of Unit 4 coming on board in time before the year -- the end of the year. Yes, so in our discussions with Eskom, there's no reason to not believe that they may just bring it before the end of the year. And that's why we see that number. It's really dependent on Eskom, you're right.

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

Leeuwpan, sorry, I missed the response. Could you please guide us on the operating cost and CapEx and cash burn at the Leeuwpan mine currently?

Yes, what we said is at this time, Leeuwpan is not taking -- we're not giving more information at this stage. And then on the cash cost, we will give more guidance when we announce the results in August. There are quite a number of initiatives going on in the group where we are looking at the cost base of the group, but more guidance in August when we announce the results. And then CapEx, I think we did indicate it.

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

Just last few questions for me. Just in terms of the CSA agreement, I know it expired in this year in March. That's for Matla. Can you provide any guidance on that? And also in terms of the mining rights that lapsed in March again this year? And then finally, on the solar projects, I did note in the pre-close that's published this morning that there were some delays. Can you give us some color on that? And then lastly, a clarification of what Ben said, you said there's a Section 189 at Leeuwpan, so I just want to make sure that I got that correctly.

Thank you for the question. We have an extension to the CSA running to later in this year to give the teams time to wrap up negotiations towards a new CSA, that process is still ongoing. And as we did in previous instances, if we do see the time is catching us, there may even be a further extension of the CSA. We're still hopeful that we can get within time, but there are quite a few big items still outstanding. But negotiations are particularly approached in good spirit, and we have every reason to believe that we will conclude that successfully.

And then on the mining rights, so the mining rights renewal application has been lodged within the time frame. So we're waiting for [indiscernible] to give us feedback on the mining right. We don't foresee any issues because it's not a new rights application, it's a renewal of an existing right.

Maybe to add that. However, the ZAR 5.6 billion capital being spent at Matla continues and we operate under this interim coal supply agreement and the mining right by default is granted if you apply for it before the expiry of your previous one, which we did.

Good afternoon from [indiscernible]. Yes, it is true that the LSP project is delayed. Construction is progressing, albeit not at the rate that we wanted in terms of the contract. We are doing a formal review of both the contractor performance and the reasons for that, which is the main reason for that delay. We have had some weather delays as well and some material delays where that material was defective, all of which has been remedied. We will announce the results of this investigation at the -- after the Board meeting in August, so in the results presentation and road shows in August then. Thank you.

You also wanted -- Mpumelelo, you also wanted something on Section 189 at Leeuwpan, right?

Leeuwpan clarity perhaps we issued the Section 189?

So we have issued the Section 189 this morning. It's a formal engagement process in line with the Labor Relations Act. Generally, people tend to worry that the dreaded 189 generally seems to mean retrenchments. In our case here, looking at all the expansion opportunities at Matla that we've already spoken about and at GG, we can see opportunities of redeployment of a lot of our employees. The majority of that mine is already run by contractors. So the mine's current life of mine, which is in excess of 7 years, we will continue. So this Section 189 is not meant to close the mine. It's meant to turn around the mine and all the efforts we need to do so. And that's what we have embarked on now. Critically, we want to minimize job losses by potential deployment. And we also want to make sure that the mine is viable because I think that's critical. In that redeployment, there may be some who choose not to go where they need to be going, where we think is appropriate for them. So the skills that we will have to reskill some of them. But all this is an engagement process that by law is required to be a consultative process. So we cannot conclude today what the outcome of that is going to be. Hopefully, we'll get to that conclusion within the 60 to 90 days that the Section 189 proposes in the Labor Relations Act of South Africa. Leeuwpan, as I said, continues to be a mine that's running. So all the social and labor plans, all the social impact projects, all the supplier and enterprise development initiatives around Leeuwpan and the Delmas operation, all those will continue because Leeuwpan still operates as a [indiscernible], but the effort we are putting in is to make sure we turn around Leeuwpan, and that's critical to make sure that it is a viable business. We still have fantastic infrastructure there. We've got some very good plants, processing plants in place. We also have a very sophisticated load-out system. And Leeuwpan is connected not only to the normal Richard Bay coal line, it's also connected to Majuba power station. It's also connected through the Johannesburg site to go to Devland for any dry terminals. So there's real opportunities as a pantry that setup that this business should come back. I think -- but the bottom line is we initiated the 189 process this morning, and it's a consultation to come up with answers to make Leeuwpan even more viable. Thank you.

We have no further questions online, either. And I would like to hand back over to management for any closing remarks.

Thanks very much. I think we can conclude the call at this stage. Thanks for the interest, and then we see you at the interim results announcement on the 21st of August. Thanks very much.

Thank you, everybody. Enjoy your day.

Thank you. Bye-bye.

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