Good morning, ladies and gentlemen. My name is Mzila Mthenjane, and I'm Executive Head for Stakeholder Affairs at Exxaro. Welcome to our Financial Year 2021 Results. It's great to be here and pleased to see quite a great turnout of our colleagues from Exxaro in the auditorium, where we're also in the presence of our Chairman, Mr. Geoff Qhena . Welcome. I think this is your first results, as well as the executive management team and other members of our employees. We also have guests on the webcast as well as Chorus Call, so welcome to all of you. We're quite excited to be here today to present what is certainly a sterling set of results under very trying circumstances.
Our schedule today is slightly longer, so I won't be spending too much time on introductions. Suffice it for me perhaps to just mention for those present here, in the event of an emergency, we are not expecting any drills, so if you do hear an alarm, please do respond. It's not a joke. You will be directed to a waiting place outside the building. I think as employees of, I'm presuming you all know where the ablution facilities are, just outside the door to the right. Without further ado, I will ask Mxolisi to kick us off, and he will present the overview and outlook. In between as per normal, Dr. Nombasa Tsengwa, CEO. As at the first of March, she dropped the MD for minerals title.
She will then present the operating performance followed by Riaan on the financial results. We will have an item at the end with our Chairman giving a commemoration. You will have seen the trading statement where we make mention of the early retirement of the CEO and the Chairman would like to have a few words on behalf of the board and the company. With that Mxolisi, if I can hand over to you. Thank you.
Thank you very much, Mzila. A very good morning, ladies and gentlemen, and also a special welcome to all the members who are in attendance, both here and virtually. It is really a pleasure for me to be here this morning presenting Exxaro's 2021 financial results for the year end 31 December 2021. As you can see on this slide, this really contextualizes the type of operating environment that we were under for the financial year 2021. It has indeed been a very dynamic environment and continues to be so as we are seeing the events that are developing in Europe. Against this backdrop of this dynamic operating environment, the global economy made a transition from recession in 2020 to recovery and expansion in 2021. This amid ongoing turbulence from the COVID-19 pandemic, supply challenges, supply chain challenges, and inflationary pressures.
After a 3.4% contraction in 2020, global real GDP increased by 5.6% in 2021, its strongest advance since 1973. As a result, global energy demand increased significantly and contributed to the global energy crunch. Exxaro's specific commodity markets recorded strong performance in 2021 as market fundamentals remained tight before softening towards the end of the year. The Chinese import restrictions on Australian coals, China's domestic thermal coal shortfall, European gas, carbon, and coal price shocks disrupted the thermal market and resulted in record moves. Iron ore prices also traded at record levels on the back of strong Chinese steel production, supported by the rest of the world's robust demand conditions. However, concerns around China's economy slowing, pollution-related steel output cuts, and reduced steel mill profitability triggered a change in sentiment that led to significant price declines towards the end of 2021.
The pandemic has strained South Africa's fiscal position, and together with rotational power cuts, will continue to weigh on our economic activity. During 2021, the shift in energy transition policy intensified, especially in the run-up to COP26. Given this macro context, we remain focused on delivering on our strategic priorities and positioning the business to continue creating value for all stakeholders. I am pleased with the steady progress so far. With regards to optimizing our coal portfolio, we have completed the sale of ECC and are making good progress with the Leeuwpan disposal. We remain committed to responsibly maximizing the value of our coal assets while we rebalance the business portfolio for the long term. The cost competitiveness of our operations is a consistent and primary focus and not driven by movements in market prices.
Our capital allocation framework remains disciplined and relevant for today's market conditions and prudent for future investments. In addition to the maximization of value for the coal business, as a reminder, the strategy to transition Exxaro to a low carbon future and decarbonization business portfolio includes using our mining capabilities to move beyond coal into a low carbon minerals. We are also building a new renewable energy business that will protect the value of the coal business through energy self-generation, while building market position in emerging opportunities for distributed energy. Developments for our 70 MW solar project for Grootegeluk are progressing, and we expect to start construction early next year. In addition, we have commenced development of the second phase studies for Grootegeluk that will include wind and storage, which will reduce costs and emissions further.
In total, we are looking at renewable solutions for the decarbonization of all our mines that will require approximately 200 MW of developments. Since establishing the Decarbonization Project Office in June 2021, we have finalized our detailed greenhouse gas emission baselines. We have concluded an opportunity scoping exercise to reduce our scope 1 and 2 greenhouse gas emissions, and engaged our top 10 upstream and downstream suppliers and customers to collaborate in reducing our scope 3 emissions. With identified opportunities, we are confident that we'll meet our target of becoming carbon neutral by 2050. Critical for a positive socioeconomic impact on communities where we operate, we are developing a comprehensive land use development approach for the resilience of our host communities during this transition.
The highlights of our performance results for the full year with the backdrop of this dynamic macro environment and our strategic priorities are maintaining our leading ESG rating in the FTSE Russell ESG Index, and becoming among the top 100 emerging market performers according to the ranking by both Moody's ESG Solutions and Vigeo Eiris. Safety and zero harm remains critical performance indicators for our business, and are among key social performance indicators in these index ratings. We are very pleased with the record safety performance of five years fatality free. Our lost time injury frequency rate of 0.08 is in line with our target. Given this performance, our future LTFR target for 2022- 2025 is 0.06. Our coal volume was overshadowed by a particularly poor logistics performance, resulting in a year-on-year decline of 37% in our export volumes.
The industry, through the Minerals Council South Africa, continues to engage with government and Transnet at the highest levels to try and resolve these challenges. Our operational excellence efforts have delivered in terms of cost containment, maintaining our cost increases below mining inflation. Nombasa will discuss the impact of TFR when she presents the operational results. Cennergi's wind energy generation showed a steady performance, remaining within its performance range during the year. Kopis will elaborate more later, and Rowland can provide more insights during the Q&A session if required. The strong commodity price performance has contributed handsomely to our financial performance. The increase in Core EBITDA by 46% and HEPS by 58% is attributable to the level of performance of both coal and iron ore prices, and most importantly, the cost containment during the year.
Given this financial performance, the board has declared a final ordinary dividend of ZAR 11.75 per share, down 5% from the final dividend declared in 2020, bringing the total dividend for the year to a record ZAR 13.52 per share.
Mm.
I will now hand over to Nombasa to present the coal operational results. Over to you, madam.
Thank you, MX. Good morning, ladies and gentlemen. I'm happy to present my last, but not least, of our operational performance for the financial year 2021, which coincidentally was the most challenging year I have experienced. Over the years, as miners, we have demonstrated our ability to resolve our own operational challenges, and you'll agree that we have successfully contained the impact of COVID-19. However, the rail constraints we face today will take more than just a miner to solve. If we go to the next slide, you will see on the safety, as Mxolisi had mentioned, I'm really proud to report an outstanding performance from our operations if we compare ourselves to the industry performance. A record five years without a fatality as of yesterday, which was the 2 March. A special mention goes to our new Belfast mine that has not had an LTI since its construction.
Remarkably, our Leeuwpan mine, that has had no fatalities for the last 31 years, that is since its inception. We're really proud. We congratulate all our teams for continuing to drive zero harm and demonstrating that Khetha Ukuphepha is indeed the best choice. Over the last four years, we have seen a 56% improvement in our occupational health incident frequency rate, driven by elimination of silicosis in the group and a constant reduction of TB cases. On COVID-19, as at the 28th of February of this year, a total of 7,303 confirmed cases were recorded with a recovery rate of 99%, with 42 active cases. Regrettably, we've lost 37 lives, including four at Mafube. 81% of employees and our contractors were vaccinated, exceeding the mining industry target. We were also quite fortunate during this period to remain fully operational.
Now moving over to the volumes. As you can see from the bar graphs, production and sales were lower by 10% and 9%, respectively, for 2021. On product, you can see a net decrease of 4.9 million tons and movements and reasons thereof are clearly indicated on the table. Also, a net decrease of 4 million tons on sales can be seen due to very much the same drivers as you can see on the table. Specifically, on Leeuwpan, you will note the impact of the market constraints associated with the low product, or grade product, and also a decreased ECC volumes due to its divestment early in September. In this year, we forecast production and sales to increase by 4% and 3% respectively, mainly at Grootegeluk, the ramp-up of GG6, and Eskom sales in line with contractual offtake.
The decreased production at Matla due to limited pit room we've been talking about and poor mining conditions resulting from the delays of mine one shaft. Increased domestic sales at Leeuwpan based on the assumption that Eskom supply contract will realize this year. Exports remain flat, where ECC's volumes are replaced with increased sales from Grootegeluk, Belfast, and Mafube. As you can clearly see that our volumes were severely impacted by the logistics constraints, and we expect this to continue in this year as we have already seen at the current performance. We do, however, continue engagements with TFR, both as Exxaro and as the industry. Now to the exports. You know, we are very happy to report the fact that our demand for our good suite of product was quite healthy. These markets were generally very tight amidst disrupted global supply.
Steep increases in the oil and gas prices, as well as shortages in gas in Europe, specifically, leading to high coal prices last seen nearly a decade ago. Unfortunately, as Exxaro, we could not fully benefit from this robust pricing due to the logistics challenges I've already mentioned. Although we could not close the export gap, Exxaro has made quite good progress on sales to other export channels. Really congratulations to the work that Sakkie's team has done in this regard. Our market diversification strategy has also rendered good results with a more balanced position in India, driven by a few factors, also impacted by increased competition from Australian coal. Pakistan and Africa remain key markets in our diversification strategy and have shown a healthy demand.
The Chinese market remained opportunistic for our South African coal, as can be seen obviously with the pie charts in the other Asia, which is in line with the strategy and enabled by our product portfolio. An optimized product quality as well as optimized price initiatives resulted in an average increased price of 77% to the index. During these challenging times, once again, our marketing and logistics team explored every opportunity to find solutions. Our operations have done a sterling job showing resilience and adapting their cost base and production plan to the scenario at hand.
Now, looking at operational excellence and the way we've managed the costs, we managed to keep our costs on a rand per tonne basis increase steady below the mining inflation of 6.5%, and this is what we've been promising all these years, despite the 4.9 million tons reduction in production tons on the back of increasing inflation and ongoing COVID-19 unplanned impacts. Overall, we were able to avoid an impact of ZAR 237 million, which is that 1.2%, and equivalent to ZAR 7.50 per ton, achieved through good cost initiatives, efficiencies and savings. We had good success in containing our operational costs with the major contributors as follows, decreasing contractor costs by 13%, that is saving ZAR 9.24 per ton.
Managing the effects of lower volumes in response to market demand. This was offset by an increase of ZAR 11.89 per ton on maintaining our mining equipment and plant in line with our normal maintenance plans. As well as an increase in electricity of about ZAR 3 per ton due to the inflation of 14% and fixed charges not related to the lower volumes. Koppes will further unpack the other cost movements when he presents his EBITDA slide. Now, going on to my last slide. You will see that our total capital spend in 2021 was 1% higher than our previous guidance provided in December last year. Made out of a 2% savings on expansion capital and 3% increase on sustaining capital. Expansion capital was 2% below previous guidance, mainly due to the rollover of the GG6 project in 2022.
Our project still remains within the original guidance of ZAR 5.3 billion. We are coming to an end of our Expansion CapEx in this year, and we will henceforth focus on sustaining our business. On Sustaining CapEx, our 2021 spend was 3% higher than the previous guidance, mainly due to timing of our discard and backfill project. We will still sustain our business at an average of ZAR 2 billion per year in real terms. As previously advised, servicing our markets and executing our value strategy, we are continuously reviewing our capital requirements over the short to medium term as we promised, as we optimize our business, and our sustainable savings remain at ZAR 1.3 billion.
In closing, ladies and gentlemen, during all my years as the head of this coal business, this coal team never failed to astound me at the speed and level of determination they have displayed in resolving any, if not all, of our operational challenges. I believe this is a skill I will always be proud of. Really thanks to my colleagues and my core team for always making me look so good. Before I hand over to Koppes, I just want to welcome Kgabi Masia, who is also joining the team, taking over from me. With the wealth of experience that Kgabi is bringing in, I have no doubt that Kgabi will add enormous value to this business. Thank you, ladies and gentlemen. Now I hand over to Koppes.
Thanks, Nombasa. Good morning, ladies and gentlemen. It's a pleasure presenting our financial results for the year ending 31 December 2021. The IFRS results are adjusted with non-core items consisting of headline earnings adjustments and other items deemed to be non-core. There were no additional non-core adjustments in the current period, and the main items included in the headline earnings adjustments are a ZAR 1.3 billion gain on disposal of our shareholding in Tronox and a related gain on translation difference of ZAR 876 million recycled to profit and loss, as well as a loss on the sale of ECC of ZAR 946 million. Further details are included in the backup slide. On this slide, the high-level overview of core results highlights the difference between our own managed operations depicted at the top and income from our equity accounted investments at the bottom.
Revenue and EBITDA will be unpacked in the next two slides. The contribution from our non-managed operations showed a significant increase, with equity income from SIOC increasing to ZAR 9 billion and in total 52%. This translated into Core Headline Earnings Per Share of ZAR 46.83, an improvement of 58%. If we look at revenue, domestic prices realized on our Eskom sales as contractually agreed, and we also received higher prices on AMSA in line with international price indices. On exports, the benchmark API 4 price resulted in an average price per ton achieved of $96, 100% higher than in 2020. If we look at volumes, our domestic offtake increased as our clients ramped up to normal capacity following the COVID restrictions. Higher coal volumes were also sold in the domestic market to curb the impact of the lower exports.
The decrease in export volumes as a result of the logistical challenges has already been addressed by Nombasa. It should be noted that if we were able to export an additional 4 million tons, additional revenue of more than ZAR 5 billion could have realized, assuming the average price we realized in 2021. The rand dollar spot rate was 10% stronger, and we achieved a realized rate of ZAR 14.88. Revenue from our Matla operation increased ZAR 734 million due to the higher recovery of CapEx from Eskom. The ECC and energy bars are explained in the footnote to ensure comparability. If we look at EBITDA, the revenue variance was unpacked on the previous slide.
As explained, we are experiencing inflationary pressure from the COVID-19 disruptions, with our labor cost increasing 5.6%, diesel 21.5%, electricity 14.1%, and the rest of our cost at PPI of 7%. Employee cost increased mainly as a result of bonus payments to employees in line with performance targets and the ESOP distribution, which included the proceeds from the Tronox special dividend. The operational cost decreased in line with the lower production volumes, resulting in a positive variance of ZAR 567 million. This was offset by lower buy-ins from Mafube, but at higher prices amounting to ZAR 500 million. The positive variance on selling and distribution cost is in line with the lower export volumes.
Stock movement, third-party buy-ins were lower but at higher prices, and the effect of the lower production volumes resulted in higher drawdowns from our stockpiles to meet our contractual volumes. The net Forex variance is a combination of realized and unrealized differences on foreign debtors and cash balances. The royalties expense increased in line with the higher revenue, as well as lower CapEx to offset against the revenue. Included under general for coal are savings due to lower exploration costs and professional fees relating to our Moranbah JV and also lower consulting fees at Belfast and Grootegeluk, offset by an increase in expected credit losses for the non-payment of debtors, mainly by government departments and municipalities.
The variance in the other segment consists of lower consulting fees in line with our drive for cost savings, as well as a fair value gain on the repatriation of U.S dollar proceeds from the sale of Tronox, and also a fair value gain on the derecognition of the Chifeng financial asset of ZAR 175 million. On this slide, we split the revenue and EBITDA for our coal operations between Waterberg and Mpumalanga. We are pleased to report an increase in EBITDA at both. If we look at the Waterberg, the increase of ZAR 434 million is mainly due to higher revenue of ZAR 1.4 billion and lower distribution cost of ZAR 105 million.
This was offset by inflation of ZAR 578 million, higher bonus payments of ZAR 280 million, and the negative impact of rehabilitation provision adjustments of ZAR 191 million. The Mpumalanga increase in EBITDA of ZAR 2.5 billion is attributed to higher contribution from ECC due to the higher pricing, lower contract mining and selling and distribution costs, and an increase in stock. Note that ECC was divested from in September and is only included for eight months. At our other Mpumalanga mines, we received higher revenue and incurred lower distribution costs in line with the lower exports. This was offset by inflation and the negative impact relating to stock movement. The increase in the other segment in coal relates mainly to the ring-fencing of royalties accounted for in the corporate office and higher bonus payments.
This was offset by the positive impact of rehabilitation provision and fair value adjustments on the rehabilitation trust fund for our mine closure. All of this translated into a very healthy 34% EBITDA margin for the coal operations. For Cennergi, it generated 724 GWh of electricity during the year in line with our expectation. Overall performance is, however, below our guidance due to lower wind conditions and lower plant availabilities as a result of performing the required end of five year warranty inspections and plant maintenance in the low wind seasons. Our plant availability increased to normalized levels in the second quarter of this year. Our normalized EBITDA margins exceed 80%, showing the consistency of earnings and cash flow underpinned through long-term offtake agreements. The project finance debt of ZAR 4.8 billion will mature over time and be fully settled in 2031.
It has no recourse to the Exxaro balance sheet and hedged through interest rate swaps at an effective rate of 11.9%. Hedge accounting is applied and therefore has limited volatility on the income statement. Since the start of the operations, both facilities have maintained a availability of 98% and we achieved capacity factors of 37% at Amakhala and 40% at Tsitsikamma. If we look at the group core earnings, net financing cost for Exxaro was ZAR 129 million as we capitalized interest of ZAR 307 million at our GG6 project. Net interest costs associated with Cennergi was ZAR 492 million.
Looking at equity income, Mafube, our 50% JV with Thungela, recorded an equity profit of ZAR 375 million as a result of higher coal prices, offset by the stronger exchange rate and lower export sales volumes. The increase in equity income from SIOC to ZAR 9 billion was mainly driven by higher iron ore prices and price premia. Tronox consists of our 26% interest in the South African operations for only two months before the disposal of our shares. At Black Mountain, the equity income increased mainly due to higher zinc, lead, and copper prices, as well as lower financing costs.
At the end of 2020, our issued number of shares was 358.7 million, and with a share buyback of 9.4 million shares, the number used in calculating attributable earnings reduced from 251 million to 247 million shares. This resulted into core attributable earnings per share of ZAR 46.83, up 58%. When we look at cash generation and capital allocation, in applying our framework, we aim for a net debt-EBITDA ratio of below 1.5x . Cash inflows for the year totaled ZAR 19 billion, comprising of ZAR 9 billion from our own operations and dividends of ZAR 10 billion, mainly from SIOC. Following the disposal of our shareholding in Tronox, we received proceeds of ZAR 5.8 billion.
In terms of our capital allocation framework, we used this to pay financing costs of ZAR 800 million, sustaining our operations and support functions with ZAR 1.6 billion, and expanding our coal operations with CapEx of ZAR 836 million. Dividends paid totaled ZAR 13.7 billion, which included a special dividend of ZAR 1.9 billion from the proceeds of trust, a pass-through of the SIOC dividend of ZAR 10 billion, and ZAR 1.8 billion from our own managed operations. As part of the share repurchase program, we allocated ZAR 1.5 billion for share repurchases. Included in the other bucket of ZAR 339 million is the acquisition of shares to settle vested share-based payments.
Excluding the synergy net debt of ZAR 4.5 billion, this resulted in a closing net debt position at the end of December of ZAR 764 million, cash position. If we then look at the dividend, as Mxolisi already mentioned, we are pleased to announce that the board has resolved to pay a final dividend of ZAR 11.75 at a group cover ratio of 1.4 for the full financial year. This is again a pass-through of the SIOC dividend and a cover of 2.5x on Exxaro adjusted group earnings. With that also, I'd like to thank everybody at the operations for their contribution to these results, also our support functions, and especially the finance team for all the effort. Thanks, Mxolisi, and back to you.
Thank you very much, Koppes, for presenting such sterling results. Now turning to our business outlook for the first half of this year.
As we are all aware, the Russian invasion of Ukraine is one that we still yet to understand the net impact of this is going to have, not only on the global economy, but also South African economy and also to Exxaro. However, we believe that it will trigger a renewed European energy crisis with significant downside risk to global economic activity. Long-lasting implications for different commodity markets, energy policy, and energy transition are also envisaged. The debate in the European Union about diversifying gas supply away from Russia will only intensify. Russia may inadvertently activated a faster energy transition. Threats to supplies and high price resulting from the invasion could harden policy and action underway in the EU, U.K., and elsewhere to move away from fossil fuels.
South Africa's economic growth outlook for 2022 declines to 1.7% from an estimated 4.7% in 2021. The future geopolitical dynamics within the BRICS mechanism will also be impacted. However, although the significant government revenue windfall will again be realized, as was in the case in 2021, with the mining sector a key contributor, overall, pressure on the fiscus is anticipated to continue. The U.S. dollar-rand exchange rate is also expected to remain volatile as higher for longer inflationary pressures are now anticipated. In turn, the key impact on Exxaro for first half of this year are as follows: If Europe needs to replace Russian coal volumes, it would result in a price shock to global coal markets and a coal shortage in Europe. Russia accounts for over 60% of European thermal coal imports.
The primary issue with replacing Russian coal exports in Europe is its reliance on Russia's particularly high-quality coal. For thermal coal markets, European coal-fired plants that import Russian coal are designed to burn higher quality coal. We've got the products. We just need to get it there. Fuel cost inflationary pressures, such as diesel prices, will be significant as a result of the higher Brent crude U.S dollar prices and weaker U.S dollar-ZAR exchange rate. We are indeed in for a rollercoaster ride.
Mm.
Our results underpin the proposition of our early value coal strategy, which is to responsibly maximize the value of our coal assets and to minimize the sterilization of our resource base. However, addressing the logistics challenges is the key to the success. We will focus on executing our growth and impact strategy in a manner that serves the needs of our communities and society in general, through applying our capabilities to develop efficient mining operations by implementing renewable energy solutions to enable Exxaro's and the industry's decarbonization journey. We will prioritize acceptable value distribution with long-term investments towards our just transition. We are committed to rewarding shareholders and creating sustainable value over the long term for all our stakeholders. ESG is embedded in our strategy in order to deliver stakeholder value. Responsible and equitable value creation is an imperative for our sustainable success.
Now, after almost six years as CEO of Exxaro Resources, as already communicated, I will retire at the end of July 2022. This is my last financial results delivery. Let me begin by saying how privileged, blessed, and humbled I am to have had the opportunity to serve this incredible organization. Anchored on sound business principles, ethics, values, and ethos, we have created an organization that we believe best serves the interests of our employees, shareholders, and the people we serve in our communities and society. Most significantly, I have greatly appreciated working with capable teams of professionals who are dedicated to serving Exxaro's purpose of powering better lives in Africa and beyond. I am proud to say that we have remained and continue to be resilient in attaining business success and excellence regardless of the dynamic operating environment.
The success of this company has been achieved through the support and encouragement and cooperation from the board of directors, the executive team, and the full Exxaro family right up to the coalface who have given us, also our communities, the social license to operate. To them, we also say thank you, because we do see from time to time a lot of activism that takes place in our communities, but it seems like there's something right we seem to be doing because we have minimal of that, and it's due to our people. The role that the DMRE has played is also noted, and I thank you all. At this special moment, I express my honest gratitude to Dr. Nombasa. Madam, your commitment towards ensuring that the company grows beyond the set prospects is commendable.
This would not have been possible without the support, hard work, and the dedication you have provided me personally as a leader and to the broader business. Your drive and passion for this company is evidenced by the phenomenal growth trajectory of our coal business, which you have been spearheading over the last seven years. I have full confidence and faith that this great company will continue to grow and prosper as you steer this ship into a new, prosperous future. Nombasa, you are truly deserving of being the next CEO of Exxaro. In closing, I want to express my deepest gratitude to the board, my colleagues, as I indicated, the broader Exxaro community, family. She has been a family to me for all these years. Our shareholders, communities, customers, unions, government partners, for giving me the opportunity to be CEO of this remarkable organization.
It has been a long journey for me, which started in 1998 when Sipho Nkosi led the Eyesizwe Mining bidding consortium to acquire coal assets from Anglo Coal and Ingwe Coal that were ring-fenced in an SPV. This was the birth of Eyesizwe Coal in 2001. In 2006, this subsequently led to the creation of Exxaro with the merging of Eyesizwe Coal and Kumba's non-iron ore assets. I leave Exxaro with fond memories of the last 24 years, relationships with colleagues and coworkers that have been of great impact and significance and will have lasting impact on my life. I also believe I leave an Exxaro that is well-positioned to meet the opportunities and challenges of being an industry leader that drives true transformation, a champion for socioeconomic development, and one that will deliver good stakeholder returns now into the future. Ladies and gentlemen, it has been a privilege.
It has been a blessing. It has been an honor. I am humbled to have served you. Thank you. Now over to Mzila for the Q&A session.
Thank you very much, Mxolisi. Thank you very much for that, I don't know, it wasn't quite your farewell speech, but certainly, for sharing with your thoughts of your experiences with Exxaro. Before we move to Q&A, we'd like to invite our chairman, Mr. Geoffrey Qhena , to come.
Yeah. Sheryl Sandberg said, "Leadership is about making others better as a result of your presence and making sure the impact lasts long in your absence." Thank you, Mzila, for allowing me to say a few words. As you heard, the CEO is eager to take questions. It's this day when a number of people are a bit anxious about these great results, especially since they have been achieved under these challenging times. Let me quickly remind you that on the eighteenth of March last year, we issued a SENS in regards to the change in the leadership. Where we said, Exxaro aims to ensure that there is a clear balance of power and authority at board level, and to ensure that there is adequate succession planning to maintain ongoing knowledge and experience at the board level.
We said MX, as he's fondly known, will retire on the 31st of May 2023, and Dr. Nombasa Tsengwa was appointed CEO-designate. I would like to believe when we issued a SENS on the 1st of March where we announced that we have approved an early exit of MX, there must have been questions to say, "But why now? Doesn't he go through to the end of May, as we said, 2023?" To us, this is, firstly, he requested that. I think let's just put it on the table. He wasn't pushed. I think what is important, it was evidence that this project of ensuring that there's a proper succession has worked.
Mm-hmm.
Because in this period, almost a year, he felt comfortable, not only because of the noise of the grandchildren, but he became comfortable that, now Dr. Nombasa can indeed take over. When you go through MX's, what he has achieved for the company and the industry during his time with Exxaro, not only as a CEO, but also as head of mining at some point, it is clear that what you see, especially in terms of these results, it's not an accident.
Mm-hmm.
There was a lot of planning, a lot of hard work. Of course, there were moments where there were disappointments. However, he did not stop there. In fact, if anything, he continued to provide leadership and learn from those instances. He has already mentioned some of the things he's achieved, but let me go through a couple. He took over as the CEO from Sipho Nkosi in 2016. Most importantly, he was part of the team that started Eyesizwe Coal. I know some of us would forget that, but that was really the basis of where we are now. When some people started empowerment companies, we can't even refer to them now. The hard work and the planning that this team went into has resulted in us having this giant called Exxaro.
His contribution and passion was not only to Exxaro itself, but to the industry as well, having served for four years as the president of the Minerals Council South Africa. Some of the commendable accolades during his career, which he did not mention, it shows you how modest a person he is. He was awarded the Paul Harris Fellow Award from the Rotary Club of Hatfield in 2017. He was also named a finalist of the Masters category of the 2019 Ernst & Young World Entrepreneur of the Year Award for South Africa. Nkosi has worked tirelessly in ensuring that TFR increases its real capacity. Something leaders forget is to put the needs of their followers ahead of theirs. However, in MX's case, I'd like to believe that he did not.
Cause when we look at what drove him, he states that his philosophy of life, which, I think you would have picked up also when you were speaking, is to give, to share, to love, and to make the world a better place. Therefore, his dedication to reach the company's goals in achieving the vision that is so closely aligned to his personal philosophy is indeed commendable. Having observed during my eight months with Nkosi, when I interacted with him, I would like to believe that he also took a leaf from a process which I think contributes in making leaders succeed, which is a process summarized by the word Respect. Where R is Respecting yourself and those with whom you work, because respecting others first is indeed a key in earning respect from others. Where E is Exceeding the expectations of others.
Leaders earn respect when they go an extra mile. Where S is Standing firm on your convictions. Leaders are resolute by their nature, though not blind on what they believe, even when others are doubtful. Where P is Possessing uncommon security and maturity. Mature leaders do not grab credit for themselves. They give as much credit as they can. Where E is Experience personal success. Leaders cannot help others enjoy success unless they've succeeded themselves. However, they are not blinded by that. They are mature in it. Where C is Contribute to the success of others. The leader will do everything in their power to ensure that others succeed, giving them all that they need within their ability.
Where T is Thinking ahead of others. Leaders do not just give instructions, they spend time in the development of implementable plans and strategies while incorporating different views in assisting others to succeed. MX, the board thanks you for your contribution to this organization. I would like also to thank all the stakeholders that have supported. If you did mention them, I know some of them did exercise tough love, MX. If they didn't, I don't think you would have succeeded to the extent that you have. Exxaro has indeed improved under your watch, and you leave Exxaro at the end of July, a better organization on a strong footing for Dr. Nombasa. Now, in relation to the decision to appoint Dr. Nombasa, this action, at least to me, demonstrated how hard the board took the issue and seriously took the issue of succession very seriously.
They planned it and executed it well, which is why we are here and we announce that even before the end of May 2023, MX is comfortable and can give over the reins to Dr. Nombasa. This process did not only start now. Even when Sipho was the CEO and the handover was also properly planned and hence it was a seamless process as we see it now. We know when companies do not, or at least boards do not take the process of succession very well, we know what happens. There's lots of stories, and the company really takes time to recover from that.
I'd like to say congratulations to the board for having had the foresight in ensuring that this succession does indeed happen. With the appointment of Dr. Nombasa, history being created here in many fronts. I'd like to believe that she was not chosen to make history, but was chosen because an opportunity was given to the most deserving leader in the organization. She's a very capable person. Even MX did refer to that. She has 18 years of executive management and board experience and is one of the hardest working leaders. I've experienced that in my 18 months that I've been here, and we've seen how the performance of the coal mines, which she was responsible for, has indeed performed. I'm sure lots of shareholders, as far as the contribution to the bottom line, are indeed pleased.
She's the winner of 2017 Standard Bank Business Woman of the Year and also the Africa's Most Influential Women in Business and Government Mining Industry category. For those who are into road running, they would know that if you attempt Comrades Marathon, you must be a very resilient person. She's completed nine of those. That tells you how resilient she is. Under her leadership, Exxaro has expanded in as far as geographic diversification, while nourishing project costs and capital management skills. I will not repeat some of the achievements which Mxolisi has referred to, but as the board, we are indeed comfortable that a right decision was made in affording her the opportunity to lead this organization.
We are indeed, as a board, going to play our role in ensuring that we give you that conducive environment, Nombasa, with your team to succeed. To you, Mxolisi, we say thank you also for having really contributed to ensuring that Exxaro it is where it is now, but also the contribution you've made into the company. With those few words, thank you very much.
Thank you very much, Chair, for those few words. We'll now then move to the Q&A. As I mentioned earlier, we have an audience on the webcast and chorus call. From the webcast, I don't know whether it's due to your expert delivery of the results or that maybe the device is not working. There's only one question. I think I'm not gonna leave much to the imagination in terms of what the question is about. But it certainly shows the extent to which I think the country is really concerned about the TFR issue. The question from Jacques Conradie from Peregrine Capital, really an emotional question that says, "Is there anything more you can do to assist Transnet to improve volumes on the coal line?
At current prices, it would be such an immense boost to the South African economy to get higher volumes on this line right now. Are there any short-term actions they can take? Maybe I added a little bit of my own emotion there, but I think the point is carried across. That's the only question we have so far.
No, thank you very much for that question, and very relevant, you know, where we are with the challenges we've been facing with Transnet. Really, of course, we had numerous high-level engagements, technical engagements, and there is no lack of understanding of what the challenges are. The sad part is that the challenge is more systemic and much bigger than TFR and just the industry, which then requires, you know, a concerted effort which will take time, but also includes our government. There is that recognition, but maybe what we can talk to at this stage are those short-term successes we've seen. Sakkie will stand up and talk to those successes in the short term and whether you believe that there's something we can do to assist.
Just to say there is commitment from the Minerals Council, all players involved that we've interacted with, to even, you know, invest their own resources in solving this problem. Maybe, Sakkie, you can talk to the stuff that we've done in Mpumalanga from a security point of view.
Thank you, Nombasa, and Jacques, good morning. Thank you for the question. I think if we can start off on the successes that we've seen to date. Firstly, I think the situation with regards to derailments has definitely improved. TFR on the safety front has improved quite a bit, some of these issues that crept up, so we're very positive on that. I think the industry collaboration with TFR on the rail side, specifically on the Mpumalanga area, has definitely yielded good results, where we see the weekly incidents, security incidents, reducing from where it was at a very high peak. Who knows how high it may have gone if we did not step in with support on that front.
We are in process liaising with all stakeholders, inclusive of TFR, to increase that on the northwest corridor towards our Grootegeluk operation as well. We are very hopeful that somewhere during March, we will see that being implemented, and we will see further increases or improvements on the safety on the security front. What will help us this year as well, of course, is that we only have one shut and not two shuts as we had in the prior year due to the impact of COVID in 2020. That will provide a bit of upside. I think the comment that Nombasa made on the systemic issue, specifically regarding the issues of security, sabotage, cable theft, vandalism, those things we will need a lot of time.
Yes, the industry is supporting, but we need a lot more effort and support at governmental level as well. Those discussions are underway. The big one that Transnet really is battling with still, and to an extent in the short term is out of their hands, is the availability of locomotives, and that talks directly to spares for the locomotives. The situation they're facing there is not being able to procure the spares that they need due to legacy issues in our country that we're all aware of. Transnet is currently making a lot of effort to try and retrofit spares from other locomotives on those ones that need the spares, and there has been successes in that regard. They are also embarking on a program to source local suppliers for some of these spares.
Now, that takes time to firstly source the local producers or manufacturers and then to get them to be able to produce those spares. That will take time, but we're hopeful that towards the end of 2022, we should see good progress on that front. Are we hopeful? Definitely, we have not lost hope. We're also measured in our expectations. I think you can see in our forecast for 7.6 million tons of export this year, that we do expect that it will be challenging, that it will take time. Yeah, we definitely have not lost hope, and we do whatever we can. We, as an industry, have also expressed that we are willing to go a long way to help TFR through this exercise. Thank you.
Thank you very much, Sakkie. I don't know if there are any questions from Chorus Call.
Yes, sir. There are questions on the telephone line. The first question comes from Brian Morgan from RMB Morgan Stanley. Please go ahead, Brian.
Hi, guys. Thanks very much for the time. If I could just ask three quick questions. Is that me or somebody else?
Go ahead, Brian.
If I could just ask three quick questions on first of all, with this Transnet thing, at current prices, presumably you'd be incentivized to use road transport to move materials down to the port. Is that an option? Is that something you're doing? Is it something you're exploring? Second one is, forward curve is pretty elevated, basically throughout the curve. Are you looking at hedging? Is it something that you see as an opportunity right now. If you could hedge out at, say, anything about 200 a ton, you know, surely that would be attractive to you. Is there liquidity in the curve? Would you be able to do it?
On the third question on Eskom, to what extent do you think these spot coal prices is going to put pressure on them to increase or to contract short-term contracts at elevated coal prices? Or is it just a function of the producers have no option but to sell to Eskom and they're pretty much price takers. If you could just weigh in on those three ones, I'd appreciate that.
Brian, morning, and thanks for the question. Yeah, road transport is really favored to an extent currently to try and augment the rail transport. We are doing a lot of that. I believe everyone in the coal industry is doing a lot of that. Your ultimate constraint then becomes not actually the road transport but also how much of that can you get out via other ports. Yeah, I think that is an area we're pushing very hard and we have had some good successes and definitely plan to even double our efforts in that regard. On the hedging, I have no mandate from my board to say to you we will do it or not.
Just from my perspective, I definitely if it was from a liquidity perspective possible, I will have been at the board yesterday already to ask for that mandate to hedge. Yeah, that always is the trouble, specifically when price volatility is high. The liquidity in the forward curve and in the paper market disappears because the risk is just too big.
Mm-hmm.
We will keep on evaluating those options. Don't think it's something that's really available to us currently. Then on Eskom, I think Eskom's pricing and Eskom is very well covered with contractual relationships currently. I do not think it's gonna have an immediate impact on Eskom. Specifically for as long as the supply chain or the logistics constraint in South Africa remains a reality. Coal exporters will actually find it difficult to export everything they want to. I think there will still be a very good availability of coal for Eskom. Then the export price is not always that relevant.
Mm-hmm.
Thank you.
Very good. Thank you.
Thank you very much. Any other questions from Chorus Call?
Yes. The next question comes from Shilan Modi from HSBC. Please go ahead, Shilan.
Morning, guys. Thanks for taking my questions. Congrats on the good set of numbers. You know, inflation's picked up across the sector and it's been affecting, you know, the miners locally and offshore quite substantially. You seem to have a much more moderate inflation coming through into the base. Maybe can you talk to us about the inflation pressures you're facing and not facing? The other question related to that would be, is the lack of train availability also contributing to a lower cost on your side and therefore driving lower inflation versus your peers? Just lastly, are you able to optimize your exports on the rail when you do have rail availability, i.e., are you able to maximize the quality of the coal that you export? Thanks.
Inflation.
Got inflation.
On the inflation side, we're definitely experiencing pressure. As I pointed out, the labor inflation, I think is still within control, 5.6%, but electricity is 14% for the past year. Now again, with the 10% or 9% increase, it's going to play a major role. If you look at our numbers, I think the electricity bill is close to ZAR 500-ZAR 600 million per annum. Then, also a big one is diesel. Diesel year-on-year is 24%. I think there was a big concerted effort at all our mines to reduce costs to try to absorb the impact. Of course, if you do the calculations with the less production on a unit cost basis, our costs should have gone up substantially.
We were able to do that below inflation. There were quite a lot of optimization on specifically our mining contractors, also, reducing consultant spend, wherever at the mines at the head office. I think it is going to be still a big pressure for us this coming year, and we will have to put in a big effort to make sure that we stay below the mining inflation. Even mining inflation, the numbers that we quoted there, I think for this year is going to be higher. You would have seen some of the other companies are quoting figures 9%-10%. It is going to be a focus area for us.
Thanks.
Okay.
The other question was related to ability to maximize our exports in terms of putting the highest quality coal on the rail.
Low cost.
Yeah. Thanks, Shilan. Yeah, I think the question of are we putting the highest quality of coal on rail, we have changed that question a bit around over the past few years in the context of our market to resource optimization strategy, to not say, "Do I put the highest quality of coal on rail?" But to ask, "What is the right quality of coal to put on rail? And what is the right quality of coal to sell through other avenues?" So the question we're trying is, what is the highest quality of sales I can get and value I can get for my business? And the rest is the derivative.
Maybe just to give the assurance, we are definitely looking at every product, every ton, every avenue, which is the right decision to make to get the highest value.
Thanks, Sakkie.
So-
Sorry, wanna follow up on that, Shilan?
Where I was going with that is, you know, with the situation in Europe at the moment, there is a potential that Europe starts buying more coal, especially given that they've effectively banned Russian coal. As I understand it, Europe generally buys higher quality coals and, you know, they pay a premium for that. So it's more about operational flexibility. Are you able to maximize the amount of high quality coal that you can sell to Europe, and then effectively maximize on your revenue generation? That's kinda where the question was going. Mzila, if I can follow up with a separate question about the appointment of Mr. Masia joining shortly. I mean, his experience is in manganese, coal, and aluminum.
Does this indicate that he's gonna be accelerating the strategy you guys highlighted at the Capital Markets Day last year? Thanks.
Are you accelerating?
Accelerate the strategy.
Oh.
Okay. Perhaps we can deal with.
Maybe. No, I-I-
Do you wanna answer that and then Sakkie will follow up?
Well, I think the quick one, that one, Shilan, is to say that we are on the same track as we announced at the CMD. That we were waiting for our board to approve the strategy, which they did in March, and we just needed to go back to the board to share what we believe are going to be our criteria to go to market with, which they actually approved as well in June. Thereafter, we have been in on the implementation phase of that strategy. The reason Mr. Masia is being appointed is because, yes, he's got the experience, and in fact, we're very lucky that he covers most of the commodities that we have put on the table. Also the fact that I'm moving over to the COO office.
Not really related to speeding up the strategy per se, but we will actually put pressure on him to deliver on the strategy.
Thanks. Maybe, Sakkie, if you can follow up on the question around quality of coal, Europe, and in fact, it relates to a question that Lawrence Sithole had asked from AccessPeak Investments, if we have any substantive plans to expand exports to Europe given this energy crunch.
Yeah. Thanks for that clarification, Shilan. Yeah, so if you look at Exxaro's product portfolio on that export slide that Nombasa presented, bottom left graph. You will see that our export product mix has the potential to move even higher in terms of the quality. I think that is exactly where Exxaro is quite unique in the coal exporting business, is this very strong flexibility we have in our product portfolio. We can flex that portfolio between a four to eight and a high CVRB1 very easily. We can really play to the strength of where we find value in the market and adapt our product portfolio to that. Just to answer directly on the European one.
Europe, as Mxolisi said earlier in his presentation, 60% of European coal imports come from Russia. In the context of geopolitics, as we have come to witness it in the past two weeks, one can just imagine that Europe is quite anxious and may see the logic of strategically diversifying their supply base again. That can only be good for South Africa, and it can even be better for Exxaro with our high quality coal portfolio. Definitely we see it as a huge opportunity in which we can play in future.
Thank you.
Thanks.
Thank you. The next question in the queue comes from Thabang Thlaku from SBG Securities. Please go ahead, Thabang.
Thank you very much, and good afternoon, everyone. Also just a few questions from my side. Nombasa, during your presentation, you mentioned that you guys are possibly finalizing the offtake from Eskom from your Mpumalanga mine . I don't know if I heard that correctly, but if that's the case, what's the timing on that? Will it be this half or next half? Just as a follow-up question from Shilan, you know, Kgabi has been appointed as the head of minerals. Does that mean, Nombasa, you will continue to head up the coal portfolio even as you take over from Nkuli as COO, or is the appointment of a head of coal in the pipeline? My last question is on costs.
There seems to have been a significant reduction in your central costs from what I can see in your statement report. You know, could you give us some color on that? Can you let us know if that is sustainable? That's it from my side.
Okay, thank you very much. The first question we struggled to hear.
Sorry about that.
It sounded as if we are talking Eskom offtake that we expect for our Mpumalanga mines.
Yes.
Was that the question?
Yes.
Good.
Yes.
That is for Lephalale. You'll recall that Lephalale has been waiting for a finalization of a contract which we'd been advancing in negotiating with Eskom. Obviously, Eskom has been going through a lot of internal challenges, and we have been informed that this year we should get a break, at least in terms of that contract being approved. That's why for the sales at Lephalale, you'll probably notice that we've increased that number in anticipation of this approval. Whether it's gonna be in the first quarter or I mean, sorry, the first quarter is almost finished. Whether it's gonna be in the next quarter or the third, we're really not sure. I don't know, Sakkie, if you've got anything latest on this.
Insofar as the minerals portfolio, it does include the coal business, Thabang, in it.
The last question she asked was just comments on the cost performance and whether-
At head office, yeah.
It will be sustainable.
The cost savings that you indicated, we had a project at the corporate level to look at non-labor costs. The reduction is about in the region of ZAR 100 million, and we think that should be sustainable in future.
Okay, thank you. Any other questions from Chorus Call before I go back to the webcast?
At this time, we have no further questions on the phone line, sir.
All right. Thank you very much. From the webcast from Merit from African Business, I think it's a journalist. We did mention diversification into manganese, copper and bauxite. She wants to know, or he wants to know, if there are any projects or prospects in the pipeline, targets in terms of share in our portfolio, and what the resulting coal share will be in the portfolio with that diversification.
Well, thank you so much. The targets for coal in 2030, if we can use that, we're looking at 45% share EBITDA, 30% renewable energy, and then the balance from the minerals business. Those are the targets we have. We are indeed looking at different opportunities on the market around each one of the different minerals. Obviously we will announce if we find anything that is value accretive, as we have promised at the market scale.
Thank you.
Is it gonna be coal only?
We've already announced. We have.
Okay. The last question I have here is from Gavin Robolini from PS Management. He asked how he should be thinking about the translation of spot API 4 prices into realized volume weighted prices, being mindful of the quality discount.
Say that again.
It's a comparison of the spot API 4 prices and how they compare to the volume weighted prices. I think the volume weighted would be what we receive, I assume. Yeah. Bearing in mind the quality discounts.
Thanks, Mzila. Yeah. I think two mechanisms to keep in mind there is. Yes, I would have loved to bank the $422 spot that we see today for the whole month or the whole year. That would have been really great. Normally your exports work on a monthly average, a determination by Argus. The vessel that you sell in a given month is, for that specific quality, sold at the average daily determination by Argus of the price whatever the quality. I think that's first, the averaging for the month.
If you talk to the weighted average quality and volume effect on our realized price, I will refer you to our export slide, bottom right-hand graph, which then talk to the price that we actually realized in the portfolio across all products and volumes in our export portfolio vis-à-vis the API 4 index. You will see, I think we're probably sitting there 77% or something like that of the index. That's actually our target going forward, is to increase that percentage. Firstly because the quality of the export mix will increase or improve going forward, but also due to our market to resource optimization efforts to continuously improve on that price realization. We hope to improve that. I think those are the two key elements to that one.
Thank you very much, Sakkie. We have exhausted all the questions. Okay, here's one that's just popped in.
10 minutes.
From Nnamdi Duma, from Allan Gray. My understanding is that Eskom, which I presume is Eskom, is in the process of recapitalizing Matla Mine. I thought this would be good for production outlook. Can you give me a sense of what's driving the lower production in the coming years?
Yeah. It's very much the challenges obviously that we experienced with Eskom as they hit their cash flow challenges a few years ago, where Eskom had already committed, you know, an amount of capital that they were to spend, which included very key life of mine projects that would have taken us beyond mining of the long walls or short walls underground at particularly mine 2 and also the wall at mine 3. That capital needed to be in line with the phasing out of the mining of those walls, which unfortunately, the phasing of the walls, you know, sort of surpassed the allocation of the capital from Eskom. That's really the key challenge we have. I think they've released an amount for one of the project, which is the Northwest Access, which was only last week.
An amount of about ZAR 922 million. That's a substantive amount. We are expecting Eskom to still release about ZAR 1.8 billion. Is it the next one? Over a billion, right? Just over ZAR 1 billion for the Mine 1 shaft for us to really complete that work. Unfortunately, we will have all of the installation from a sections point of view, which are supposed to replace the volumes that we're extracting from the walls and also the shafts to be sunk in Mine 1 by 2025. That is when we will see a turnaround going back to 10 million tons at Matla. Is that correct, guys?
Yes.
Thank you.
Great. Thank you very much for that, detailed response. We've exhausted all the questions on the webcast. If we don't have any other questions on the Chorus Call. Do we?
There are no further questions, sir.
Okay. I think that brings us to a timely end of our session. We had budgeted just an hour and a half. What remains for me is to say thank you very much for joining us today. Also let me join the team as well in thanking those who have assisted me in making today a very successful day. Leading up to today, the CEO was also pleased to say this has been the most stress-free results preparation session that he's had. Certainly I can echo that. It has been teamwork throughout. I can't thank all the people who've been involved, but they know who they are. We really appreciate that.
also to express my thanks, Mxolisi, for your leadership and to have known you for my past nine years at Exxaro, and it's been a pleasure working with you and wishing you all the best. With that, thank you very much, ladies and gentlemen. We will be having at 12:30 P.M a sell-side round table discussion.
12:30 P.M ?
Yeah, at 12:30 P.M. We shifted it from 12:00 to 12:30. My understanding is that just to avoid any clash with some of the other mining companies that are reporting today. Looking forward to that discussion, and wishing you all the best and be safe. Thank you.
Thank you.