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Rand Merchant Bank Morgan Stanley: Big 5 Investor Conference. Wim de Klerk Finance Director. 15-17 September 2010. Contents. Our country Today Risks and challenges Our industry Today Risks and challenges Our business Today Risks and challenges Conclusion Addendum. - PowerPoint PPT Presentation
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Rand Merchant BankMorgan Stanley: Big 5 Investor Conference
Wim de KlerkFinance Director
15-17 September 2010
2
Contents
• Our country– Today– Risks and challenges
• Our industry– Today– Risks and challenges
• Our business– Today– Risks and challenges
• Conclusion
• Addendum
Doing business in South Africa
3
South Africa in the world
• 45th most competitive economy out of 133 countries
• Stable constitutional democracy
• 3,3% average growth p/a 1994 -2009
• CPI inflation under control and mostly within target range
• South Africa economy: 3,2% real GDP growth in 4Q09 Labour participation rate of 42%
• Financial markets ranked SA highly for sophistication and protection of investors
• Strong currency - low interest rates
• 2010 Soccer World Cup (9 out of 10)
• The country is ranked 90 out of 133 for labour market efficiencySouth Africa’s key figures
Population : 49 million
GDP : $287 billion
GDP per capita : $5,600
Unemployment : 25,2% (conservative)
State grants : More than 12 million
No of taxpayers : ± 7,5 million
(5.4 individual)
Education budget : 20% of revenue
4
Risk 1 : Double dip recession
• Euro zone fiscal solvency• Global financial stability• US and China’s property bubble• SA GDP and exports strongly dependent on world economy• In 2009 exports were equivalent to 27,5% of SA GDP
5
Risk 2: Political stability
• Government– Positives
• Openness to foreign investment• Macro-economic management• Strong and independent Reserve Bank
– Negatives
• Influence on policy by the “left”• Pressure toward developmental state• Threat to press freedom• Industrial action
• Regulatory environment• Increased bureaucracy• Allocation of property rights and farm land• Continuing debate on nationalisation of mines• Unresolved matters - mineral rights application, permits and licences
"We reiterate that nationalisation is not government policy" President Zuma in parliament in a reply to debate on his state-of-the-nation address February 2010
“Political risk can simply be defined
as the risk of losing money due to
changes that occur in a country’s
government or regulatory
environment”. John Christie
6
Risk 3: Infrastructure
Constraints• Ageing road, water and electricity
infrastructure• Bottlenecks due to insufficient capital
spending• Lack of infrastructure in rural areas• Inefficient service delivery • Wastage and unauthorised use • Inadequate billing management
Opportunities• Proven success with mega projects• Government aggressively invests:
– Railway: five year R93.4bn capital investment plan
– Water: R30bn investment required by 2025
– Power: R263bn by 2020
Eskom electricity supply and demand (TWh)
Fixed investment as % of GDP 2009
0
5
10
15
20
25
30
35
40
45
1970 1980 1990 2000 2009 2015 2025
% o
f G
DP
China Japan South Africa United States
ForecastActual
255259 258
266
250
259
265
273
280
250
260
270
280
290
300
2010 2011 2012 2013 2014
280
Supply available
Energy required
Supply gap
7
Risk 3: Infrastructure - electricityScenarios based on average NERSA projected tariffs*
Scenarios compared to capacity*Electricity sales by Eskom to SA industry 2008 #
# Source: Frost and Sullivan
• Electricity prices in SA will increase
significantly• The degree to which industry in SA adapts
to higher prices will determine new
generation capacity• Greater energy efficiency is inevitable and
will contribute to the continued
competitiveness of industry
* Sources: Energy Information Administration, NERSA, IHS, CIA Factbook, Exxaro Analyses
8
Risk 4: Human capacity
• Growth too slow to tackle >20% unemployment
• Income inequality (Gini-coefficient 0,59)
• >27% South Africans live < $1,25 per day
• Unskilled and unemployed youth• Mathematics and science proficiency• Xenophobia: estimated at 4 million
illegal immigrants • Family structures: mothers at school
and child headed households• Fraud and corruption• Transformation and equality• One out of 5 people will successfully
be absorbed into the formal sector - Bruggemans
Sustainable, balanced and labour absorbing economic growth is key to reducing unemployment and poverty - creation of meaningful employment
Unemployment rate per age group (%)
Source: UCT 2009
Mathematics National Benchmark Test levels SA February 2009
Seifsa Chairman report 2008
Basic 20%
Intermediate73%
Proficient7%
0
20
40
60
80
No education Grade 1-8 Grade 9-11 Grade 12 Dipl/cert Degree
18-24 25-34
9
Risk 5: Reliance on the state
• Legacy of inadequate black education• Low participation in the labour force
contributes to low productivity and sustained high poverty levels
• People receiving social support grants increased from 2,4million to 13million since 1997
• Child support grants went from zero in 1997 to 8,8million in 2009
• 5,2% of GDP currently goes towards social grants
Remuneration of labour is ultimately determined by skills which are in turn a function of education and training
Individual income taxpayers and social welfare recipients
Source:UCT 2009
0
2
4
6
8
10
12
14
2004 2005 2006 2007Taxpayers Social grant recipients
10
Contents
• Our country– Today– Risks and challenges
• Our industry– Today– Risks and challenges
• Our business– Today– Risks and challenges
• Conclusion
• Addendum
Doing business in South Africa
11
Mining in South Africa
• Creates 1 million jobs*• Accounts for ~ 18% of GDP* and investment*• Critical foreign exchange earner - >50%• Attracts foreign investments >30% of JSE value• Represents 18,5% of corporate tax receipts• 50% volume of Transnet’s rail and ports • Generates 93% of electricity via coal power plants• Constitutes15% of electricity demand• Key foundation industry - enabled South Africa to become the most industrialised
country in Africa• Significant contributor to transformation in the economy
182
129
64
26
21
21
20
19
18
3
0 20 40 60 80 100 120 140 160 180 200
China
USA
Australia
Brazil
South Africa
Canada
Russia
India
Chile
Colombia
The global top ten mining countries as measured by Mining GDP (2008, US$ billions)
Rank1
2
3
4
5
6
7
8
9
10
South Africa has the world’s fifth largest mining sector measured by real GDP
Source: Global Insight
South African reserves for key minerals (% of global)
Global top 10 mining countries - mining GDP (2008 US$bn)
* Direct and indirect
SA dropped 12 places to 61st in the 2009/10 Fraser Institute of Mining Companies’ survey.
0 10 20 30 40 50 60 70 80 90 100
PGM'sManganese
ChromiumGold
Alumino-SilicatesVermiculiteVanadium
Zirconium MineralsTitanium minerals
FluorsparAntimony
Phosphate rockNickel
UraniumLeadCoalZinc
SiliconIron ore
% of global .South African reserves for key minerals, 2008
1
1
1
1
1
2
2
2
2
2
4
4
5
5
6
8
8
8
9
South Africa, is not mature mining real estate! The country still has significant geological potential
Global rank
12
SA’s mining performance
• From 2001 to 2008 global mining grew by >5% per annum
• SA mining declined by 1%
• If SA mining had grown at 5% in this period, direct value would increase by $8billion, creating about 45 000 additional mining jobs
• The gross value added by mining sector had shrunk from R103bn in 1993 to R92bn in 2009
• The number of people employed fell from about 830k in 1987 to just below 500k because of the global recession and domestic issues like amongst others, electricity shortages
• SA capital investment expanded by a factor of two from 2000 to 2009 compared to an Australian factor of five
South Africa’s mining sector has underperformed in terms of economic growth relative to peers
19
12
10
8
7
7
7
7
6
4
-1
-5 0 5 10 15 20
China
Chile
Russia
Indonesia
India
Colombia
Australia
Brazil
Peru
Venezuela
South Africa
The global top ten mining countries as measured by growth in mining value added (2001-2008 real US$ terms)
Source: Global insight
1
2
3
4
5
6
7
8
9
10
13
Rank
Source: Global Insight
Global top 10 mining countries by growth in mining value added (2001 - 2008 real US$ terms)
19
80
19
82
19
94
19
96
19
98
20
00
20
02
20
04
20
06
20
08
19
84
19
92
19
90
19
88
19
86
400 000
300 000
200 000
100 000
115 000
105 000
95 000
85 000
Gro
ss value ad
ded
(Rm
)
Gro
ss f
ixed
cap
ital
fo
rmat
ion
(R
m)
SA mining & quarrying capital investment / value added - real 2005 values
Gross fixed investment
Gross fixed investment Gross value added
13
Access to capital
South African and Exxaro’s mining business risks
“Developments in South Africa's mining sector will not lead to changes to the country's sovereign rating and outlook, international ratings agencies Moody's and Standard & Poor's.”INet Bridge17 August 2010.
Financial Compliance
OperationalStrategic
Climate change concerns
Cost management
Access to secure energy
Capital allocation
Resource nationalism Skills
shortage
Price and currency volatility
Infrastructure access
Maintain social license to operate
Source: Adjusted from Ernest and Young
SA View
Exxaro view
Governance and regulatory efficiency
14
Mining stakeholders’ response to these risks
• Agreement by tripartite leadership to develop “Strategy For Sustainable Growth And Meaningful Transformation Of The South African Mining Sector” to be developed by tripartite under auspices of The Mining Industry Growth, Development and Employment Task-team (MIGDETT) (including other key government departments) will:– Address macro-economic issues that could impact the industry’s competitiveness – Limit retrenchments– Develop human capital– Develop infrastructure in time for the next up-cycle
• Substantive tripartite declaration on 13 topics signed on 30 June 2010, e.g.– Promoting growth and transformation– Innovation, productivity and cost competitiveness– Sustainable development in mining
• The Chamber of Mines has the role to ensure addressing of:– Lack of clarity in laws (review of Mineral and Petroleum Resources Development Act)– Time periods for processing and granting rights raised– Understanding the refusals and rejections
"We are definitely not going to nationalise mines" Susan Shabangu 8 July 2010
• Our country– Today– Risks and challenges
• Our industry– Today– Risks and challenges
• Our business– Today– Risks and challenges
• Conclusion
• Addendum
15
Contents
Doing business in South Africa
16
Exxaro Resources : history
16
2001 2006
Restructuring ensures compliance to South Africa’s mining charter
2008
NAMAKWASANDS
17
Exxaro Resources : Corporate structure17
Anglo American
ExxaroResources Ltd
Sishen Iron Ore 4th largest supplier
in international seaborne trade
Exxaro Coal4th largest SA coal
producer:9 mines, 45Mtpa
Free floatBEE
HoldCo
Employees’ Shareholding
trust
9.9% 34.2% 52.9% 3%
20%
Exxaro Base Metalsonly zinc producer in
SA: 3 operations in
3 countries
Exxaro Sands3rd largest mineral
sands producer:3 operations in
2 countries
100%
SA’s largest Black Economically Empowered resources company
18
Exxaro at a glance
• One of the largest South African diversified resource companies
• Top 40 companies on the JSE
• Employ about 10 000 people
• Access to significant strategic assets and quality resources
• 50%+ BEE owned business
• Healthy financial metrics
– 10% increase in revenue
– 43% increase in net operating profit
– 73% increase in attributable earnings
– Decrease in cost in real terms
– Strong cash flow and balance sheet
– Decrease net debt by R857m
– Net debt/equity 19%
– R4,5bn undrawn Medupi facility
• Extensive growth pipeline and stable platform for growth opportunities
* Interim results for 6 months ended 30 June 2010
19
Still a positive view on pigment & zircon over the long term
Exxaro commodity ranking
CriteriaFe
Ore Pt CuMetall. Coal Oil
Mn Ore
Titanium Pigment Zr
Steam Coal Ni
Titanium Feedstock U3O8 Zn
Market 4 3 4 4 4 3 3 3 4 3 3 2 3Demand 4 4 5 4 4 4 4 4 4 4 4 4 4Historical returns 5 4 3 4 4 4 3 3 3 3 2 2 2Price 4 4 4 4 4 4 3 4 4 3 3 3 3Barriers to entry 4 4 4 4 4 4 5 3 3 3 3 3 3Industry structure 4 4 3 4 4 4 4 4 3 4 4 3 2Momentum 3 3 4 3 3 3 3 3 3 3 3 3 4Substitution 4 4 3 3 3 3 4 4 3 3 4 4 3Cost Curve 4 4 4 4 4 4 3 3 4 3 3 4 3Environmental 3 4 3 3 2 3 3 3 2 3 3 3 3Total 39 38 37 37 36 36 35 34 33 32 32 31 30Ranking 1 2 3 3 5 5 7 8 9 10 10 12 13
Notes: 4-5Adapted from models by ABN Amro and Deutsche Bank 3Higher numbers denote more favourable positions 1-2
Exxaro: LOM on the basis of resources, reserves and UBS estimates
Exxaro’s mineral resource
20* Source: UBS investment research
SA diversified miners - LOM on the basis of resources, reserves & UBS estimates (based on 2010 production
rates)
21
Exxaro’s strategy
• Safety first, always
• Exxaro will remain a diversified resources group
• Coal
– Remain a major reliable supplier to Eskom
– Consider mega-mine opportunities to grow the coal business
– Increase export allocation and de-bottleneck logistical chain
– Develop downstream value-adding products such as char and market coke
– Increase volumes to metals markets
• Mineral Sands
– Complete detailed studies on strategic fit
– Advance bankable feasibility study on Fairbreeze
– Ramp-up of pigment expansion
• Base Metals
– Progress divestment initiatives
• Iron ore
• Energy
– Energy security
– Clean and renewable alternatives
22
Contents
• Our country– Today– Risks and challenges
• Our industry– Today– Risks and challenges
• Our business– Today– Risks and challenges
• Conclusion
• Addendum
Doing business in South Africa
23
Global steel production
The China era to be followed by the era of the “next two billion” – India, Brazil, Indonesia, Mexico, Nigeria, etc.
Global steel production since 1920
0
200
400
600
800
1000
1200
1400
1600
180019
20
1925
1930
1935
1940
1945
1950
1955
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
Pro
du
ctio
n (
Mt)
The emerging eraPre-1945 2.8% pa
The golden era1945 -1973 6.2% paMaterials-intensive
gowth and reconstruction in Japan and Europe
The efficiency era1974 -1994 0.2% pa
The China era1995 - 2007 4.9% pa
Oil shocks
Fall of communism
Copper and iron ore long term view
Source: Barclays Capital
Ultra long-term real 2009$ copper price
2000
4000
6000
8000
10000
12000
14000
16000
18000
1908
1913
1918
1923
1928
1933
1938
1943
1948
1953
1958
1963
1968
1973
1978
1983
1988
1993
1998
2003
2008
2013
Prc
e (U
S$/
t)
Ultra long-term real 2010$ fine iron ore prices
20
40
60
80
100
120
140
160
1900
1905
1910
1915
1920
1925
1930
1935
1940
1945
1950
1955
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
2015
Pri
ce (
Rea
l 20
10 U
S$/
t)
US Price (cif) Aus-Japan Price (fob)
Materials intensive infrastructure and (re)construction
investment
25
Conclusion
• Debate on political issues should not be confused with government policy
• Risks around the mining industry have increased
• Super tax policies the norm of the future?
• Environmental pressures around mining industry will increase further
• Long term growth driven by China and still very healthy
• India to play an important future role
• China is becoming a major investor in Africa including South Africa, securing access to
future minerals
• Good quality resources and assets the key for companies to survive these realities
• Great investment opportunities available in South Africa
Very strong long term growth opportunities still available in South Africa’s mining industry
THANK YOU
www.exxaro.com
Contents
• Our country– Today– Risks and challenges
• Our industry– Today– Risks and challenges
• Our business– Today– Risks and challenges
• Conclusion
• Addendum
27
Addend
um
Doing business in South Africa
28
Why coal?
• Healthy fundamentals of coal industry
• Good position in industry with quality assets
• Diversifying and balancing the Exxaro portfolio and mitigates exposure to R/$ exchange
rate
• High quality growth project pipeline
• Access to the Waterberg reserve:
– Volume: 75,7 billion tonnes in-situ inferred resources
– > 50% of remaining SA coal reserves
– Stratigraphic thickness: 115m consisting of 11 coal bearing zones
– Mineable coal seams much thicker than Witbank Mpumalanga coalfields
• Develop opportunities:
– Grootegeluk (including reductants and market coke)
– Medupi
– Thabametsi
– Mafutha
• Geographically well positioned for export to Europe, USA and Far East “The Waterberg is the new jewel in South Africa's minerals crown” Sipho Nkosi
29
Phase 2: Thabametsi Mine
• Greenfields development - new open pit coal
mine and beneficiation complex and a new
coal-fired (clean technology) power station
(5 000MW)
– 16Mtpa to power station (PF)
– 2,5Mtpa to other markets
– Time-frame: 2014 to 2017
Phase 3: Exports / Synfuels
• Greenfields coal mine
– 10Mtpa for exports
– Time-frame: 2015 to 2018
• Mafutha JV with Sasol
– Time-frame: 2013 to 2018
Other downstream opportunities:
• Char plant
– Phase 1 being commissioned
– Phase 2 in planning
• Market coke
– Feasibility study in progress
• Electricity generation
– Including co-generation
Phase 1: Grootegeluk Mine
• Completed GG6 plant in 2006 -720ktpa to other
markets
• Brownfields expansion of Grootegeluk coal
mine near Lephalale with Medupi power station
(4 800MW)
– 14,6Mtpa to Medupi power station
– Time-frame: 2009 to 2015
Exxaro’s development plan for the Waterberg
30
Why energy?
• Kusile expected to be the last coal fuelled power station built by Eskom in South Africa
• Waterberg replacing Mpumalanga coalfields as primary source of new coal supply
• Integrated Resource Plan for electricity due later in the year is expected to include renewable energy and participation of independent power producers in the energy mix
• Renewable Energy Feed-In Tariff guidelines was approved by NERSA in 2009
• Business collaborates with Eskom to ensure electricity supply/demand balance
• Exxaro’s strategy defines the intent also to get involved in renewable energy and reduce our carbon footprint
Wind Solar Co-generation Gas Base Load
Why? • Lower carbon footprint
• Sufficient resources
• Refit R1,25/kWh
• Lower carbon footprint
• Readily available resource in parts of SA
• Refit R2,10/kWh
• Use of readily available waste gas/heat
• Can utilise over the fence distribution option
• Lower carbon footprint than coal
• Utilises non-mineable coal beds
• Contributes to satisfy demand
• Advanced technology• Economically attractive• Exxaro owns significant
coal reserves
What? • 50 MW Wind farm at Brand-se-Baai
• 40 MW Wind Farm at Tsitsikamma
• 200MW concentrating solar power plant at Lephalale
• 15 MW Namakwa Sands cogeneration project in
• A number of other projects, totaling more than 300 MW
• 50 MW coal bed methane gas field and power station in Botswana
• 1800 MW Base Load IPP coal fired power station at Lephalale
31
Why Mineral Sands?
Significant increase forecast - except in USA
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
- 10,000 20,000 30,000 40,000 50,000 60,000
GDP per capita - real 2000 USD
Pig
me
nt
de
ma
nd
pe
r c
ap
ita
- k
g
USA
Rest of N America
Western Europe
Asia Pacific ex China
China
Rest of World
Intensity of use plotted for 1980, 1990, 2000, 2007*, 2015 and 2025**
* 1980, 1990, 2999, 2007 - Solid line** 2015 and 2025 - Dotted line