Exxaro is a diversified
black-owned
resources group

with interests in specific markets:

coal (controlled and non-controlled), titanium dioxide and alkali chemicals (noncontrolled), ferrous (non-controlled) and energy (non-controlled).

The group has business interests in South Africa, Europe, the United States of America and Australia. Our asset portfolio includes coal operations and investments in iron ore, pigment manufacturing, renewable energy (wind) and residual base metals.

Exxaro is listed on the JSE and was a long-standing constituent of the Socially Responsible Investment (SRI) index, reconstituted as the FTSE Russell ESG Index in 2015. Exxaro is now included in the FTSE/JSE Responsible Investment Index.

Performance

2016 PERFORMANCE AT A GLANCE

Sustainable operations

  • Lost-time injury frequency rate (LTIFR) improved 47% to 0,09
  • Over 2 consecutive calendar years without a fatality

Returning cash to shareholders

  • Final dividend of 410 cents per share at 2016 core attributable earnings cover of 3,2 times

Growth in coal

  • R5,2 billion coal net operating profit, up 101%
  • Operating profit margin of 25%
  • Export volumes — 7,9Mt up 27%

Strong profit margins and resilient balance sheet

  • Core net operating profit margin of 24%, up 6%
  • R2,4 billion income from equity-accounted investments, up 309%
  • Headline earnings at 1 302 cents per share
  • Net debt to equity at 3,8%
  • Cash generated from operations at R5,5 billion, up 23%

Strategic dashboard – selected key financial performance indicators (KPIs)

The tool we use to determine whether we are on track to achieve our objectives is the Exxaro strategic performance dashboard. As explained in the board review, this dashboard has built-in risk appetite thresholds to ensure the company’s decisions in pursuing its strategic objectives are in line with the risk threshold which, as a whole, makes up the risk appetite of the group.

  2016 2015
KPI Actual Indicator Actual Indicator
Core operating margin 24% 18%
Funds from operations to net debt 476% 2%
Return on capital employed (ROCE) 23% 6%
Return on equity based on core headline earnings 15% 4%
Core HEPS (short-term target) 1457c 425c
Net debt to equity* 12% 23%
Net debt to annualised EBITDA (times)* 0,6 1
EBITDA interest cover (times)* 11 12

*Calculated according to loan covenant agreements with loan providers

KPI threshold

Threshold
KPI Out of appetite Worst tolerable Best realistic Target Possible waste/
opportunity
Core operating margin Less than 15% 15% Between 15% and 20% 20% More than 20%
Legend        
 
Out of appetite
  
Worst tolerable
  
Best realistic
 
 Target
 
 Possible waste/ opportunity (exceeding target)

How to interpret the dashboard

  • The dashboard lists all key performance indicators (KPIs) linked to a strategic priority/sustainability capital/strategic objective and material issue. Current performance and the status of the indicator (shown as a bulb) reflects whether the KPI is within our risk appetite thresholds. We aim to be within the target threshold: anything outside worst tolerable and target means we act outside our defined risk appetite in pursuing our strategic objectives. This will require additional controls or improving existing controls.

Example of KPI measure

  • Exxaro has a strategic objective of improving our portfolio; one of many KPIs linked to this objective is core operating margin. Anything outside of worst tolerable and target will mean that we act outside our defined risk appetite in pursuing our strategic objectives and this will require additional controls or improving existing controls.

Group Profile

OVERVIEW

Exxaro ownership structure

*At 31 January 2017, post share buyback on 17 January 2017.



Investment proposition

Competitive advantages

  • Large multiproduct and long-life coal reserve base
  • Established domestic (short and long-term contracts) and international customer base
  • Adequate export and rail allocation to support export growth
  • Building a resilient ownership structure

Key financial strengths

  • Strong balance sheet – net debt:equity below 10%
  • Cash-generative operations
  • Returning cash to shareholders: dividend policy of 2,5 to 3,5 times core attributable earnings

Growth prospects

  • Organic coal production growth to supply Eskom and independent power producers
  • Domestic and offshore coal revenue growth (new projects and cost management)
  • New, stable revenue model from renewable energy

Leadership and governance

  • Experienced, growth-orientated leadership team
  • Established governance structures – proven economic, social and governance model
  • Stakeholder-orientated

Our coal asset base

  • Location

    South of Middelburg

    Market

    Domestic (Eskom)

    Product

    Thermal coal

    Resources (inclusive)

    139Mt measured;
    64,0Mt indicated

    Reserves

    -

    Mining method

    Open-cut and
    underground

    Run-of-mine

    Life-of-mine

    Coal-supply agreement with Eskom terminated on 31 December 2015

  • Location

    West of Kriel

    Market

    Export

    Product

    Thermal coal

    Resources (inclusive)

    85,7Mt measured;
    41,5Mt indicated

    Reserves

    34,5Mt proved;
    9Mt probable

    Mining method

    Open-cut and
    underground

    Run-of-mine

    3,3Mt

    Life-of-mine

    15 years

  • Location

    North of Bethal

    Market

    Export

    Product

    Thermal coal

    Resources (inclusive)

    75,7Mt measured;
    53,4Mt indicated

    Reserves

    11,4Mt proved;
    37,1Mt probable

    Mining method

    Underground

    Run-of-mine

    2,3Mt

    Life-of-mine

    12+ years*

  • Location

    West of Belfast

    Market

    Domestic

    Product

    Thermal coal

    Resources(inclusive)

    19,7Mt measured

    Reserves

    1,9Mt proved;
    1,9Mt probable

    Mining method

    Open-cut

    Run-of-mine

    4,4Mt

    Life-of-mine

    0,5 years

  • Location

    West of Lephalale

    Market

    Domestic and export

    Product

    Thermal,
    metallurgical and
    coking coal

    Resources (inclusive)

    3 025Mt measured;
    837Mt indicated

    Reserves

    2 534Mt proved;
    421Mt probable

    Mining method

    Open-cut

    Run-of-mine

    43,7Mt

    Life-of-mine

    24+ years*

  • Location

    South-east of Delmas

    Market

    Domestic and export

    Product

    Thermal and
    metallurgical coal

    Resources (inclusive)

    128Mt measured

    Reserves

    13,7Mt proved;
    52,9Mt probable

    Mining method

    Open-cut and
    underground

    Run-of-mine

    6,4Mt

    Life-of-mine

    13 years

  • Location

    West of Kriel

    Project stage

    Market

    Domestic (Eskom)

    Product

    Thermal coal

    Resources (inclusive)

    752Mt measured;
    211Mt indicated

    Reserves

    221Mt proved;
    34Mt probable

    Mining method

    Underground

    Run-of-mine

    7,9Mt

    Life-of-mine

    8+ years*

  • Location

    South of Belfast

    Project stage

    Feasibility concluded

    Market

    Product

    Thermal coal

    Resources (inclusive)

    81Mt measured;
    22,4Mt indicated

    Reserves

    45,7Mt proved

    Mining method

    Open-cut

    Run-of-mine

    Life-of-mine

    17 years

  • Location

    South-west of Delmas

    Project stage

    Concept phase

    Market

    Product

    Thermal coal

    Resources (inclusive)

    9Mt measured;
    213Mt indicated

    Reserves

    Not yet declared

    Mining method

    Open-cut and underground

    Run-of-mine

    Life-of-mine

  • Location

    West of Lephalale

    Project stage

    Feasibility concluded

    Market

    Product

    Thermal coal

    Resources (inclusive)

    270Mt measured;
    749Mt indicated

    Reserves

    109Mt proved;
    21Mt probable

    Mining method

    Open-cut

    Run-of-mine

    Life-of-mine

    29+ years*

  • Location

    West of Belfast

    Project stage

    Pre-feasibility phase

    Market

    Product

    Thermal coal

    Resources (inclusive)

    20Mt measured;
    47Mt indicated

    Reserves

    Not yet declared

    Mining method

    Open-cut

    Run-of-mine

    Life-of-mine

  • Location

    East of Musina

    Project stage

    Market

    AMSA (discontinued)

    Product

    Coking coal

    Resources (inclusive)

    3,7Mt measured;
    25,1Mt indicated

    Reserves

    In closure

    Mining method

    Open-cut and
    underground

    Run-of-mine

    Exhausted

    Life-of-mine

  • Location

    West of Lephalale

    Project stage

    Concept phase

    Market

    Product

    Thermal coal

    Resources (inclusive)

    22,7Mt indicated

    Reserves

    Not yet declared

    Mining method

    Underground

    Run-of-mine

    Life-of-mine

    Prospecting right lapses in 2017

  • Location

    East of Middelburg

    Project stage

    Market

    Domestic and export

    Product

    Thermal coal

    Resources (inclusive)

    133,6Mt measured;
    10,1Mt indicated

    Reserves

    4,8Mt proved;
    64Mt probable

    Mining method

    Open-cut

    Run-of-mine

    4,1Mt

    Life-of-mine

    12 years

  • Location

    North-west of Hendrina

    Project stage

    Market

    Export

    Product

    Thermal coal

    Resources (inclusive)

    6Mt measured

    Reserves

    Not yet declared

    Mining method

    Underground

    Run-of-mine

    Life-of-mine

    Under care and maintenance

* Adequate reserves exist well beyond expiry of mining right


group profile

BUSINESS MODEL

 
PURPOSE
STAKEHOLDER VALUE CREATION
STRATEGY
MAXIMISE OPERATIONAL OUTPUTS, OPTIMISE INVESTMENT PORTFOLIO, REDUCE COST
MINING VALUE CHAIN
INPUTS
OUTCOMES BY CAPITAL
Mineral resource
acquisition
  • Resource demands
  • Viable mineral deposits
  • Funding mine plan
  • Regulatory rights
MINING VALUE CHAIN
INPUTS
OUTCOMES BY CAPITAL
Mining and
Resource development
  • Mine plan
  • Production plan
  • Orebodies
  • Mobile and fixed infrastructure
MINING VALUE CHAIN
INPUTS
OUTCOMES BY CAPITAL
Metallurgical and
beneficiation
  • Run-of-mine
  • Plant and civil
  • Infrastructure
  • Equipment
MINING VALUE CHAIN
INPUTS
OUTCOMES BY CAPITAL
Market
supply
  • Transport and logistics
  • Public and mine infrastructure
  • Market demands
MINING VALUE CHAIN
INPUTS
OUTCOMES BY CAPITAL
Mine rehabilitation
and closure
  • Exhausted mineral reserves
  • Uneconomic life-of-mine
ENABLERS
Leadership Management Technology Innovation Project management Mineral resource management Sustainability Hire to retain Procure to pay Record to report
PHILOSOPHY AND FINANCIAL VEHICLES
INTERNAL: Organisational culture, ethics, governance, stakeholder engagement
FINANCIAL: Retained capital, investments, partnerships, ownership, market capitalisation

Exxaro Resources is a mining company. Each year, we extract over 40Mt of graded coal from eight mines in the Limpopo and Mpumalanga provinces of South Africa. Since the group’s formation and listing on the JSE in 2006, we have lived up to our promise of being a responsible corporate citizen through our commitment to good corporate governance, compliance, environmental stewardship and investing in our communities.

As shown above, we have a resource-to-market mining value chain that is supported by various inputs, enablers and fi nancial vehicles. By considering the impact of our activities on all stakeholders and all capitals in developing and implementing our strategy, we have proved that mining can have a net positive effect. We have considered the cumulative outcomes on the various capitals over the lifecycle of our mines and plotted these on a relative plus-minus scale.


board review

LEADERSHIP

Non-executive

  • Tenure: November 2006

    BCom, CA(SA), MAS, DCom, CRMA

    Expertise: After completing his articles at Ernst & Young, Len began a 15-year career as an academic at the University of Durban-Westville. He then spent six years with the Independent Development Trust as head of investments and internal audit, prior to becoming a professional director of companies and consultant. He chairs Exxaro, Steinhoff International, Guardrisk Insurance, Old Mutual Investment Group, Outsourced Risk and Compliance and Barringtons Corporate Advisors. He is a director of Lonmin plc, Sappi, Credit Suisse Securities and Alexander Forbes. He is a past member of the ad hoc ethics panel of the United Nations, safeguards panel of the International Monetary Fund (IMF) in Washington, co-chairman of the risk implementation oversight panel of the World Bank, and past chairman and member of the external audit committee of the IMF.

    Remuneration and nomination (chairs nomination matters)

  • Tenure: February 2012

    BA (economics and statistics), MA (development economics)

    Expertise: Salukazi is chairman of Nozala Investments, which she co-founded in 1996. Her career experience includes: five years as senior investment officer, Lesotho National Development Corporation; 12 years with African Development Bank (Abidjan/Côte d’Ivoire) as country programme officer and later principal corporation officer; senior manager, structured finance division of FirstCorp Merchant Bank and assistant general manager, BOE Specialised Finance. She is a non-executive director of Nozala’s investee companies including Basadi Ba Kopane, Woodlands Dairy, Tsebo Holdings Group, PPC, Lanseria International Airport and Constantia Afripack. She is also a non-executive director of MultiChoice South Africa Holdings, and a trustee of Nozala Trust, Chancellor House Trust and the National Movement of Rural Women.

    Social and ethics; sustainability, risk and compliance

  • Tenure: November 2013

    BSc (eng) (mining), BSc (hons) (eng), MSc (eng), DEng (Pretoria), MBA (Oregon), DSc (honoris causa) (Free State), strategic leadership programme (Oxford), senior executive finance programme (Oxford), registered international professional engineer

    Expertise: Between 1969 and 1974, Con worked for mining companies in the Anglo American group. For the next two years, he was a student and research assistant at the College of Business Administration, University of Oregon. From 1976 to 1995 he held senior positions in Gencor and JCI. In 1995, he joined Iscor and later became managing director of Iscor Mining. In 2001, he was appointed CEO of Kumba Resources and, in 2006, CEO of Exxaro Resources. He was an executive council member of the Chamber of Mines of South Africa and president from 2003 to 2005. He is a fellow of the South African Institute of Mining & Metallurgy, Institute of Directors of Southern Africa and South African Academy of Engineering. He has been an honorary professor in the department of mining engineering at the University of Pretoria and a fellow at the Gordon Institute of Business Science (GIBS) since 2007. He was an independent mining industry and management consultant from 2007 to 2010, and an independent non-executive director at Xstrata plc from 2010 until 2013.

    Remuneration and nomination (chair); social and ethics; sustainability, risk and compliance (chair); audit

  • Tenure: June 2015

    MA (urban planning) (UCLA School of Architecture and Planning), advanced management programme (Insead), certificate in accounting and finance (Wits Business School)

    Expertise: Monhla spent the larger part of her career in the infrastructure sector, starting in 1994 at the Development Bank of Southern Africa, which later seconded her to the municipal infrastructure investment unit. She was then appointed as non-executive chair of Johannesburg Water utility and later as managing director of Airports Company South Africa. In 2012, Monhla was appointed chair of the Industrial Development Corporation and, later that year, as chair of Royal Bafokeng Holdings and non-executive director of Liberty Holdings. She founded RutaThari Group, which invests in smart and innovative skills development and training solutions across Africa.

  • Tenure: August 2015

    BCom, BCompt (hons), CA(SA), advanced management programme (GIBS)

    Expertise: Saleh is a financial professional with over 30 years’ experience. After completing his articles in 1982, he joined the finance division of Anglo American South Africa (AASA), gaining experience in all aspects of financial reporting with ultimate responsibility for a number of listed and unlisted subsidiaries in that group. In 1993, he transferred to the international planning department which managed AASA’s offshore structures. After Anglo American plc’s London listing in 1999, he fulfilled various finance roles in Johannesburg and London and, in 2008, was promoted to his current position as head of finance for AASA. He has extensive experience on a wide range of corporate activities and currently serves on the boards of AASA and its strategic subsidiaries and trusts. He is also a member of senior management committees tasked with strategy, driving value initiatives and engaging with key stakeholders.

     

  • Tenure: November 2006

    BJuris, LLB (North West), LLM (Yale)

    Expertise: Zwelibanzi is executive chairman of Xalam Performance. He was formerly a senior lecturer at the University of Natal; executive director of IMSSA; director-general of Gauteng Province and chairman of the Commission for Conciliation, Mediation and Arbitration. He is a director of SA Tourism, and trustee of the Paleo-Anthropological Scientific Trust.

    Remuneration and nomination

  • Tenure: September 2016
    Election in 2017

    BSc (elec) (Pretoria), BSc (hons) (energy studies) (Johannesburg), MBL (Stellenbosch), executive programme (Virginia)

    Expertise: Between 1982 and 1996, Ras held operational and executive positions in operating, maintenance, engineering and power-station management at Eskom. In 1997, he joined Iscor Mining to lead its cost-improvement, business re-engineering, and transformation and empowerment projects. He was appointed managing director of Kumba Resources’ coal business in 2000 and, from 2003, headed the unit managing Kumba’s empowerment and mineral rights conversion, as well as project managing its empowerment transaction and unbundling into Exxaro and Kumba Iron Ore. He became the first CEO of Kumba Iron Ore in 2006. After the 2008 electricity crisis, he was seconded to Eskom to develop and implement a long-term coal supply strategy. In 2011, he co-founded Hindsight Financial and Commercial Solutions, a boutique corporate professional advisory firm providing investment banking, business development, specialist commercial solutions, and strategy and business improvement services to the resources, energy and industrial sectors. He is a member of the Institute of Directors of Southern Africa, an independent non-executive director of The Heartlines Centre NPC and serves on the international advisory board of Unashamedly Ethical NPO.

    Remuneration and nomination; social and ethics

  • Tenure: June 2014

    BSc (inf proc), BSc (hons), postgraduate diploma in accounting, CA(SA)

    Expertise: Vuyisa has over 20 years’ experience in investment banking and private equity. He completed his training as a chartered accountant with PricewaterhouseCoopers and then joined Deutsche Bank in 1997, where he gained experience in corporate and project finance advisory work over four years. He serves on the boards of Emira Property Fund and MMI Holdings Limited. He has served as financial director of Worldwide African Investment Holdings and director at Actis llp in its black economic empowerment funding unit. He was appointed CEO of Kagiso Tiso Holdings in 2012.

    Audit

  • Tenure: June 2013

    MRCS, LRCP, DRCOG

    Expertise: Globally, Fazel has served as board and council member of the World Medical Association (1997 to 2000), and chaired the global initiative on HIV/Aids reporting (2004). In South Africa, he sat on the Truth and Reconciliation Commission (1995 to 1998), founded the Ethics Institute and served as chairman (1997 to 2000), and served on the Human Rights Commission (1997 to 1999). Working in hospitals and facilities in the UK and South Africa, he specialised in a range of medical disciplines, including occupational health and HIV/Aids. He chaired the Private Healthcare Forum (2004 to 2007) and was health adviser at the Chamber of Mines.

    External directorships include chairman of Nehawu Investment Holdings and MediTech South Africa.

    Social and ethics (chair)

  • Tenure: July 2016

    BEng (mining), dip marketing management, MCom (bus management), mine manager’s certificate of competence, registered with ECSA

    Expertise: Peet has over 35 years’ experience in the mining industry, including Sasol Coal, Amcoal, Iscor Mining, Kumba Coal, Anglo Platinum, Riversdale Holdings, Continental Coal, Keaton Energy, Sable Mining Africa, Mmakau Mining and, most recently, Submex Investment. He also has over 10 years’ board experience in the industry.

    Sustainability, risk and compliance

  • Tenure: August 2008

    BCom, BCompt (hons), CA(SA)

    Expertise: Jeff is a director of companies in the Uranus Group, non-executive director of MTN Group and Pick n Pay Stores. He is a former chairman of the Financial Reporting Standards Council (FRSC), trustee of the International Accounting Standards Foundation and member of the University of Pretoria’s faculty of economic and management sciences’ oversight board. He was a partner at Deloitte, chairman of the Public Accountants and Auditors Board, CEO of the Financial Services Board and adviser to the Minister of Public Enterprises in the Mandela administration. Jeff is a founder member and former president of the Association for the Advancement of Black Accountants of South Africa.

    Audit (chair); remuneration and nomination

  • Tenure: November 2006

    BSc (eng)(mining) (Wits), MDP (SBL, Unisa), MBA (WBS, Wits)

    Expertise: Rain is CEO of Eyabantu Capital Consortium. Between 1989 and 1994, he was a stoper/developer and shift boss at Vaal Reefs Gold Mining Company. From 1995 to 2002 he was a shift boss, mine overseer, operations manager and mine manager at Impala Platinum, and CEO of Alexkor from 2002 until 2005. From 2006 to 2012, he was an independent non-executive director of the South African National Oil and Gas Company (PetroSA) and served on its business performance monitoring committee. He also serves on the board of Sentula Mining.

    Sustainability, risk and compliance

Executive directors

  • Tenure: April 2016

    BSc (hons) (energy studies), MBA, advanced management programme (Wharton)

    Expertise: Previously at Eyesizwe Coal, Mxolisi was responsible for marketing and logistics. After Exxaro’s formation, he managed the base metals and industrial minerals commodity business before being appointed to head our coal operations from 2008. He was appointed CEO from 1 April 2016.

    Mxolisi is a director of a number of Exxaro subsidiaries, Tronox Limited, Main Street 333, Talent 10 Holdings and Dynamo Investment Holdings.

  • Tenure: July 2016

    CA(SA), advanced and associate programmes in treasury management, advanced diploma in taxation, advanced management programme (Insead), certificate in theory of accounting. Member of the Association of Corporate Treasurers

    Expertise: Riaan started his career in 1993 at Coopers & Lybrand. After completing his articles, he branched into the fields of treasury, investment management and corporate finance. He has held senior managerial positions at Iscor, Kumba Resources and Exxaro Resources until his appointment as finance director of Exxaro Resources on 1 July 2016. He is a director of several Exxaro subsidiary companies, joint ventures and a trustee and investment committee member of the Exxaro Pension and Provident Funds.

MATERIAL ISSUES

Key board issues in 2016

In addition to developing Exxaro’s new strategy, the most material issues at board level in the review period were key customer dependency, our new black economic empowerment shareholding structure, ensuring sustainable returns to shareholders, portfolio optimisation and the safety of our employees.

EXECUTIVE REVIEW

Executing our strategy

As an executive committee, our mandate to execute Exxaro’s strategy is guided by priority areas that have been in place for the past four years.

  • Efficiency improvements through operational excellence
  • Cost saving from Exxaro improvement project
  • Drive innovation through digitised platform
  • Coal product placement through market excellence
  • BEE unwind and replacement in process
  • Disposed Mayoko iron ore project
  • Explore alternatives to dispose of Tronox shares and evaluate SIOC shareholding
  • Robust coal portfolio – evaluating possible non-core assets
  • Black Mountain, Moranbah and Chifeng – initiated disposal process
  • Internal rate of return and net present value differentiated
  • Prioritise capex for growth
    • Secure coal volume growth
    • Cleaner energy opportunities
  • Prudent debt management
  • Refinanced R8bn debt facilities
  • Maintained dividend distribution policy

Minimise costs, maximise operational output and optimise portfolio

Material issues

Material issues in this financial year (from an executive management perspective) are summarised below. Our strategic performance dashboard is explained here. Detailed commentary on our progress against KPIs for each material issue begins here.

Performance against material issues

Understanding the discussion

For each material issue, we include:

  • A consolidated table summarising performance
  • Performance and our response during the year

The board introduced our material issues in its review, while we detail our performance against significant KPIs for each material issue. We also expand on our stakeholder engagement during the year per issue as well as the main risks we encountered with associated controls in responding to these issues.

Although the discussion of each material issue refers to performance against KPIs, it is broader than that. Equally, drawing a direct correlation between a material issue and KPI may not be possible in all cases and some KPIs also refer to more than one material issue. The associated KPIs do, however, give our stakeholders a holistic view of the metrics that inform strategic performance management in each area.