SNAPSHOT

*	Net operating profit before interest, tax, depreciation, amortisation, impairment charges or impairment reversals and net loss or gain on disposal of assets and investments (including translation differences recycled to profit or loss).
^	Sishen Iron Ore Company Proprietary Limited.

GLOBAL ECONOMY AND COMMODITY PRICES

Notwithstanding the COVID-19 lockdown restrictions imposed in 2020, steam coal demand remained fairly steady in the domestic market. There was good offtake from Eskom at the Matimba Power Station, with the Medupi Power Station falling slightly short for the year. Eskom did not take coal from Leeuwpan and ECC as the parties are still in the process of concluding new CSAs.

Demand from AMSA was impacted due to the initial lockdown restrictions and lower steel demand. AMSA's offtake recovered somewhat with the easing of the lockdown restrictions.

Internationally, the onset of the COVID-19 pandemic impacted global demand as industries ceased production under lockdown conditions. This was evident in the sponge iron markets on the East Coast of India. As restrictions eased, demand in India returned to pre-pandemic levels in the last quarter of 2020. The import ban on Australian thermal coal in China resulted in China importing coal from South Africa. In turn, Australian coal found its way into the Indian and Pakistani power generation and cement markets.

The average benchmark API4 RBCT export price of US$65 per tonne was 10% lower (2019: US$72 per tonne) resulting in an 11% lower average price per tonne achieved of US$48 (2019: US$54 per tonne). The average spot exchange rate was weaker at R16.45 to the US dollar (2019: R14.44).

CAPITAL MANAGEMENT AND SHAREHOLDER RETURNS

In terms of our capital allocation framework, free cash flow generated will be prioritised per the diagram below:

During 2020, we received cash of R10.1 billion, comprising R6.8 billion from our operations (net of tax paid) and dividend income received from our equity-accounted investments of R3.3 billion.

We then utilised this cash in terms of our capital allocation framework, to mainly:

• Service our debt (R1.1 billion)
• Sustain our coal operations with capital expenditure (R2.1 billion)
• Expand our coal operations with further capital expenditure (R1 billion)
• Pay ordinary dividends of R4 billion
• Acquire Exxaro shares in the market to the value of R270 million to settle vested share-based payment schemes
• Pay the final payment for the ECC contingent consideration of R195 million

Our net debt increased to R11 billion at 31 December 2020 with the consolidation of the Cennergi project financing of R4.7 billion.

The closing net debt position at 31 December 2020 therefore culminated in a:

• Net debt: equity ratio of 28%
• Net debt: core EBITDA cover ratio of 0.96 times, excluding the Cennergi project financing, which was well below our target of 1.5 times

Given our strong balance sheet, underpinned by strong cash flow generation, the board of directors approved a final dividend of 1 243 cents per share in March 2021, in line with our revised dividend policy, comprising:

• A pass through of the SIOC dividend receivable
• 2.5 times adjusted group earnings

Exxaro paid the following dividends during 2020:

• A final dividend relating to the 2019 financial year of 566 cents per share (R1 420 million to external shareholders) paid in April 2020
• An interim dividend of 643 cents per share (R1 614 million to external shareholders) paid in September 2020

VALUE DISTRIBUTION

The value generated by Exxaro is distributed to its various stakeholders as follows:

• Employees receive salaries or wages, share-based payments as well as bonuses (where certain performance conditions are met)
• The governments of the countries where Exxaro has operations and investments receive various taxes and royalty payments
• Suppliers and contractors are supported through the procurement of consumables, services and capital goods
• Shareholders receive a return on their investment through dividends and capital growth in the share price
• Providers of finance receive a return through interest and other loan costs
• Communities surrounding the operations of Exxaro benefit through CSI
• All stakeholders benefit from continuous reinvestment into the group to ensure sustainability and expansion

CORE PERFORMANCE HIGHLIGHTS

For a better understanding of the comparability of results between the two reporting periods, we have adjusted the financial results with non-core items to derive our core financial results. Further details on non-core items are shown under the respective financial performance measures.

Group core performance — diverse portfolio delivers higher earnings

Group revenue

Consolidated group revenue increased 12% to R28 924 million (2019: R25 726 million), mainly due to higher commercial coal revenue driven by higher domestic prices on Eskom sales, slightly offset by lower metallurgical and market coke prices in line with international prices, as well as record coal export volumes. Despite the impact of the COVID-19 pandemic, we managed to increase export volumes by 34%, mainly due to higher coal availability, with Belfast ramping up to full production, albeit at lower export prices realised in line with the lower benchmark API4 price. The 14% weaker average rand/US dollar spot rate realised also contributed to an overall increase in export revenue. With the acquisition of the remaining 50% interest in Cennergi, renewable energy revenue was included in our consolidated financial results from 1 April 2020.

Group EBITDA and core EBITDA

The higher revenue was the main driver of the 22% increase in consolidated group EBITDA of R7 246 million (2019: R5 953 million).

For a better understanding of the comparability of results between the two reporting periods, the table below sets out the non-core adjustments to derive our core EBITDA.

Key items impacting on comparability (non-core items)

	2020  Rm		2019  Rm
EBITDA	7 246		5 953
Insurance claim recovery from external parties	(14)		(99)
Losses on share of cash flow hedge reserve recycled on deemed disposal of Cennergi JV	59
Indemnification asset relating to the tax implications of the partial disposal of Tronox Holdings plc			(65)
Targeted voluntary packages			396
Loss on financial instruments revaluation recycled to profit or loss			1
Fair value adjustment on debt			(58)
Fair value adjustment on the ECC contingent consideration			(296)
Core EBITDA	7 291		5 832

Group core EBITDA increased 25% to R7 291 million (2019: R5 832 million) for reasons shown in the graph below.

The positive revenue impact has already been discussed under group revenue. In respect of inflationary increases, labour inflation was 4.2%, electricity at mine specific rates averaging 10.1% and inflation on the rest of the costs at producer price index (PPI) of 2.5%.

Employee cost was higher with the capitalisation of costs at Belfast ceasing in February 2020. COVID-19 allowances were also paid to employees at the mines during the hard lockdown period coupled with additional costs incurred to comply with sanitisation protocols.

Adjustments to the environmental rehabilitation liability resulted in a positive variance due to the increase in the closure cost estimate at Durnacol and Hlobane in 2019 (not recurring in 2020), an increase in the LoM of Dorstfontein East as well as higher discount rates used in the calculation of the liability for the group. This was partially offset by the liability adjustment of Belfast, which was previously capitalised.

Operational cost was higher mainly due to the ceasing of capitalisation of costs at the Belfast mine, partially offset by lower production volumes and associated production costs at our ECC operations as well as lower contractor costs at Grootegeluk.

The negative variance in selling and distribution costs is in line with higher export sales volumes.

Higher volumes of third-party buy-ins were incurred in the first quarter of 2020 to fulfil contracts, due to some production challenges.

The net negative forex variance is a combination of realised and unrealised forex differences on export sales as a result of the fluctuation of the rand/US dollar exchange rate.

Higher royalties expense was in line with the higher revenue.

Cennergi costs represent operational costs for the two windfarms for the nine-month period from 1 April 2020 to 31 December 2020.

The positive variance under general expenses can be ascribed mainly to lower costs incurred on various projects during the lockdown period as well as a favourable adjustment to our expected credit losses due to outstanding payments received from debtors.

Group core equity-accounted income

Core equity-accounted income from associates and joint ventures (after adjusting for non-core items1) increased 36% to R6 455 million (2019: R4 750 million), mainly as a result of SIOC.

Refer to the table below for a full breakdown of core equity-accounted income.

Core equity-accounted income

	Core equity-accounted income/(loss)				Dividend income
	2020  Rm		2019  Rm		2020  Rm		2019  Rm
Coal: Mafube	67		127
Coal: RBCT	8		3
Ferrous: SIOC	6 123		4 423		3 119		4 051
TiO2: Tronox SA	226		236
Energy: Cennergi2	13		45		144		95
Energy: LightApp	(18)		(28)
Other: Black Mountain	122		51
Other: Insect Technology	(85)		(103)
Other: Curapipe	(1)		(4)
Total	6 455		4 750		3 263		4 146

1	Non-core items relate to headline earnings adjustments.
2	Application of the equity method ceased on 31 March 2020 after which Cennergi was consolidated.

Group earnings and core earnings

Headline earnings were 2% lower at R7 417 million (2019: R7 599 million). The decrease in the headline earnings is mainly due to the BEE Parties sharing in the consolidated Eyesizwe results for 12 months in 2020 compared to the two months in 2019, partially offset by better profitability from controlled operations and higher equity-accounted income from non-controlled operations. This equates to basic headline earnings per share (HEPS) of 2 955 cents per share (2019: 3 027 cents per share). The weighted average number of shares (WANOS) for both financial years was 251 million.

Key items impacting on comparability (non-core items)

Description	2020   Rm		2019   Rm
Headline earnings	7 417		7 599
– EBITDA adjustments	45		(121)
– Eyesizwe preference dividend accrued (consolidated impact)			25
– Additional tax on non-core adjustments			(101)
Core headline earnings	7 462		7 402

After adjusting for non-core items, core headline earnings increased by 1% to R7 462 million (2019: R7 402 million). To ensure a consistent comparison on core headline earnings per share (core HEPS), the core WANOS before 1 November 2019 was 332 million, reducing to 251 million from 1 November 2019 due to the recognition of non-controlling interests. Core HEPS increased 26% to 2 973 cents per share (2019: 2 354 cents per share), mainly driven by a 36% increase in core equity-accounted income, of which SIOC is the main contributor, as well as better performance from our own managed operations.

SUMMARISED STATEMENT OF FINANCIAL POSITION

	2020 R		2019 Rm
ASSETS
Non-current assets	65 824		57 978
Property, plant and equipment	38 395		33 562
Intangible assets	3 095		16
Right-of-use assets	453		462
Inventories	128		101
Equity-accounted investments	20 006		17 502
Financial assets	2 141		2 674
Deferred tax	1 076		467
Other assets	530		3 194
Current assets	9 033		9 121
Inventories	1 821		1 809
Financial assets	169		272
Trade and other receivables	2 827		3 241
Cash and cash equivalents	3 196		2 695
Other assets	1 020		1 104
Non-current assets held-for-sale	3 749		1 741
Total assets	78 606		68 840
EQUITY AND LIABILITIES
Capital and other components of equity
Share capital	1 021		1 021
Other components of equity	2 495		2 723
Retained earnings	35 265		31 032
Equity attributable to owners of the parent	38 781		34 776
Non-controlling interests	9 340		8 111
Total equity	48 121		42 887
Non-current liabilities	19 103		19 364
Interest-bearing borrowings	7 448		6 991
Lease liabilities	493		461
Other payables	24		121
Provisions	1 946		4 305
Retirement employee obligations	147		181
Financial liabilities	782
Deferred tax	8 236		7 138
Other liabilities	27		167
Current liabilities	10 244		5 179
Interest-bearing borrowings	6 163		50
Lease liabilities	29		27
Trade and other payables	2 940		2 603
Provisions	185		99
Financial liabilities	49		498
Overdraft	17		976
Other liabilities	861		926
Non-current liabilities held-for-sale	1 138		1 410
Total liabilities	30 485		25 953
Total equity and liabilities	78 606		68 840

Property, plant and equipment increased by R4 833 million when compared to the previous year, which includes R2 225 million spent on sustaining and environmental capital (stay-in-business capital) and R950 million on new capacity (expansion capital) as well as the consolidation of Cennergi from 1 April 2020.

As part of the accounting for the acquisition of Cennergi on 1 April 2020, intangible assets in respect of key customer contracts of R2 685 million and goodwill of R521 million were recognised.

Cash and cash equivalents increased 19% to R3 196 million when compared to the previous year. Cash flow generated by operations of R7 770 million (2019: R5 273 million) and dividends received from investments of R3 336 million (2019: R4 653 million) were sufficient to cover our capital expenditure and ordinary dividends paid. Total dividends received from our investment in SIOC was R3 119 million (2019: R4 051 million). SIOC declared a final dividend to its shareholders in February 2021, amounting to R3 663 million for Exxaro's 20.62% shareholding. The dividend will be accounted for in 2021.

Net debt for the year ended 31 December 2020 increased by R5 157 million to R10 967 million (2019: R5 810 million), mainly driven by the inclusion of the Cennergi project financing of R4 632 million.

The graph below summarises key movements in the net debt balance for the year ended 31 December 2020.

SALE OF NON-CORE ASSETS AND INVESTMENTS

Exxaro continues to evaluate its options to dispose of its 26% shareholding in Black Mountain following the suspension of the sale process in December 2020. At 31 December 2020, the investment no longer met the criteria to be classified as a non-current asset held-for-sale with the retrospective reinstatement of the equity method from 1 November 2019.

As mentioned previously, we undertook a strategic decision to dispose of our total equity interest in ECC and Leeuwpan, having identified these assets as non-core to the future objectives of Exxaro. The resultant sales process is well underway and good progress has been made notwithstanding the COVID-19 environment. Subsequent to 31 December 2020, Exxaro signed a sale and purchase agreement with Overlooked Colliery Proprietary Limited, who will acquire ECC. The sale will only be effective once all conditions precedent have been met. The disposal process for Leeuwpan continues.

Subsequent to 31 December 2020, Exxaro concluded its stated strategy to monetise its stake in Tronox over time in the best possible manner taking into account prevailing market conditions.

KEY FINANCIAL PERFORMANCE INDICATORS

The achievement of our key financial performance indicators is presented in the table below.

All internal KPIs are well within target, indicating a healthy balance sheet and strong cashflow generation. The impact of various coal sensitivity measures as well as the key financial risk factors can be further used to stress test our current headroom.

We have also comfortably met all our bank covenants for the year ended 31 December 2020 as well as the previous financial year.

Performance — key indicators	Target		2019		2020
Internal KPIs
EBITDA interest cover* (times)	>4		160		15
Net debt: equity* (%)	<40		17		17
Net debt: EBITDA* (times)	<1.5		1.0		1.0
Return on capital employed (%)	>20		28		25
Bank covenants**
Net debt: equity (%)	<80		17		14
EBITDA interest cover (times)	>4		19		11
Net debt: EBITDA (times)	<3		0.7		0.7

*	Excluding Cennergi since consolidation of 100% of results since the step-up acquisition from 1 April 2020.
**	Including dividends received from associates and contingent liabilities, except DMRE guarantees and excluding Cennergi consolidated results.

COAL SENSITIVITY ANALYSIS

KEY FINANCIAL RISK FACTORS AFFECTING OUR PERFORMANCE

The group's corporate treasury function predominantly provides financial risk management services to the business, coordinates access to domestic and international financial markets, and monitors and manages the financial risks relating to the operations of the group through internal risk reports which analyses exposure by degree and magnitude of risks. These risks include market risk (including foreign currency risk, commodity price risk, interest rate risk and price risk), credit risk and liquidity.

In managing its capital, the group focuses on a sound net debt position, return on shareholders' equity (or return on capital employed) and the level of dividends to shareholders. The group's policy covers its annual net funding requirements through long-term loan facilities with maturities spread over time. Neither the company nor any of its subsidiaries are subject to externally imposed capital requirements.

Market risk management

Market risk is the risk that changes in market prices, such as foreign exchange rates, interest rates, commodity prices and equity prices, will affect the group's income or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposure within acceptable parameters, while optimising the return on risk. The group's activities expose it primarily to the financial risks of foreign currency exchange rates, commodity prices, interest rates and changes in the environmental rehabilitation funds' portfolio of assets' quoted prices.

Price risk management

The group's exposure to price risk in relation to quoted prices of the environmental rehabilitation funds is not considered a significant risk as the funds are invested with reputable financial institutions in accordance with a strict mandate to ensure capital preservation and growth. The funds are held for strategic purposes rather than trading purposes.

Foreign currency risk

Certain transactions are denominated in foreign currencies, hence exposures to exchange rate fluctuations arise. The currency in which transactions are entered into is mainly denominated in US dollar, euro and Australian dollar. Exchange rate exposures are managed within approved policy parameters utilising forward exchange contracts (FECs), currency options and currency swap agreements.

The group maintains a fully covered exchange rate position in respect of foreign loans (if any) and imported capital equipment resulting in these exposures being fully converted to rand. Trade-related import exposures are managed through the use of economic hedges arising from export revenue as well as through FECs. Trade-related export exposures are hedged using FECs and currency options with specific focus on short-term receivables.

Uncovered cash and cash equivalents amount to US$116.35 million (2019: US$89.81 million).

Monetary items have been translated at the closing rate on the last day of the reporting period.

The FECs which are used to hedge foreign currency exposure mostly have a maturity of less than one year from the reporting date. When necessary, FECs are rolled over at maturity.

The following significant exchange rates applied during the year:

	2020						2019
	Average spot rate		Average achieved rate		Closing spot rate		Average spot rate		Average achieved rate		Closing spot rate
US$	16.45		16.43		14.62		14.44		14.73		14.13
Euro (€)	18.76				17.97		16.16				15.83
AU$	11.35				11.27		10.05				9.90

Commodity price risk management

The group entered into commodity FECs to hedge certain of its export product exposure, in terms of coal prices for the period ended 31 December 2020. The current commodity FECs on coal will mature within the next four months.

Details of the contracts at 31 December 2020 are as follows:

	Group
2020	Tonnes		Market related value Rm		Contract value Rm		Recognised  fair value  losses  Rm
Coal	450 000		577		528		(49)

Commodity price sensitivity

An adverse change in the commodity price of 10% is demonstrated below. This analysis assumes that all other variables remains constant.

2020	Impact on  profit/(loss) Rm
Coal	(53)

A 10% positive move against the above commodity prices at 31 December 2020 would have had the equal but opposite effect on the amount shown above, on the basis that all other variables remain constant.

Interest rate risk

The group is exposed to interest rate risk as it borrows and deposits funds at floating interest rates on the money market and extended bank borrowings. The group's main interest rate risk arises from long-term borrowings with floating rates, which expose the group to cash flow interest rate risk. The risk is managed by undertaking controlled management of the interest structures of the investments and borrowings, maintaining an appropriate mix between fixed and floating interest rate facilities in line with the interest rate expectations. The group also uses interest rate swaps and interest rate forwards to manage the interest rate risk exposure.

As part of the Cennergi business combination the group assumed Cennergi's borrowings and interest rate swaps as financial liabilities. The contractual terms of these borrowings required interest rate swaps (hedging instruments) to be entered into to swap out the floating interest rate of the underlying project financing for a fixed interest rate. This was required to fix the future expected returns given the long-term nature of the project financing. The group amended its interest rate risk management strategy as follows:

• When the contractual terms of the borrowings and covenants thereof require the use of hedging instruments to mitigate the risk of fluctuations of the underlying interest rate risk cash flow exposure and the impact on profit or loss of specific projects being financed, the group looks to apply hedge accounting where an effective hedge relationship is expected and to the extent that such exposure poses a real risk to the achievement of the loan covenants.

The financial institutions chosen are subject to compliance with the relevant regulatory bodies.

Liquidity risk management

Liquidity risk is the risk that the group will not be able to meet its financial obligations as they fall due. The group's approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under normal and stressed conditions, without incurring unacceptable losses or risking damage to the group's reputation.

The ultimate responsibility for liquidity risk management rests with the board of directors, which has built an appropriate liquidity risk management framework for the management of the group's short, medium and long-term funding and liquidity management requirements.

The group manages liquidity risk by monitoring forecast cash flow in compliance with loan covenants and ensuring that adequate unutilised borrowing facilities are maintained.

Borrowing capacity is determined by the board of directors, from time to time.

	Group
At 31 December	2020 Rm		2019 Rm
Amount approved	48 476		43 470
Total borrowings	(13 611)		(7 041)
Unutilised borrowing capacity	34 865		36 429

The group's capital base, the borrowing powers of the company and the group were set at 125% of shareholders' funds for both the 2020 and 2019 financial years.

To avoid incurring interest on late payments, financial risk management policies and procedures are entrenched to ensure the timeous matching of orders placed with goods received notes or services acceptances and invoices.

Credit risk management

Credit risk relates to potential default by counterparties on cash and cash equivalents, loans, investments, trade receivables and other receivables.

The group limits its counterparty exposure arising from money market and derivative instruments by only dealing with well-established financial institutions of high credit standing. The group exposure and the credit ratings of its counterparties are continuously monitored and the aggregate value of transactions concluded is spread among approved counterparties. Credit exposure is controlled by counterparty limits that are reviewed and approved by the board of directors annually.

Exxaro has concentration risk as a result of its exposure to one major customer, being Eskom. To date the customer adheres to the stipulated payment terms.

Exxaro establishes an allowance for non-recoverability or impairment that represent its estimate of expected credit losses in respect of trade receivables, other receivables, loans, cash and cash equivalents and investments. The main components of these allowances are a 12-month expected credit loss component that results from possible default events within the 12 months after the reporting date and a lifetime expected credit loss component that results from all possible default events over the expected life of a financial instrument.

The carrying amount of financial assets represents the maximum credit exposure. None of the financial assets were held as collateral for any security provided.

Detail of the trade receivables credit risk exposure:

	Group
At 31 December	2020 %		2019 %
By geographical area
RSA	72		65
Europe	16		17
Asia	12		16
USA			2
Total	100		100
By industry
Public utilities	57		53
Mining	6		38
Manufacturing	1		1
Merchants	30		1
Food and beverage	1		1
Steel	4		3
Structural metal			2
Cement			1
Other	1
Total	100		100

OUTLOOK

Economic context  

World real GDP growth in 2020 contracted by 3.9% compared to an expansion of 2.6% in 2019. In 2021, global economic growth recovery is anticipated to continue, however, the worldwide resurgence of COVID-19 infections together with associated restrictions and the availability and timeous roll out of vaccines will weigh on the extent of such economic recovery.

The impact of COVID-19 on South Africa's fragile public finances has been devastating. As a result, the much-anticipated Economic Reconstruction and Recovery Plan was released by the President of South Africa on 15 October 2020. If fully implemented, the plan is expected to lay a solid foundation for a higher economic growth path for the longer term.

In South Africa, the rand depreciated to an all-time low (first half of 2020), before it significantly retracted (second half of 2020). The reversion to a riskier financial market environment during the second half of 2020 due to easing of global COVID-19 lockdown restrictions, vaccine development, approval and roll-out strategies, together with the uncertainty of the US elections, supported the rand. However, rand volatility is expected to continue into 2021.

Commodity markets and price

The API4 price remained stable during the third quarter of 2020 before gaining momentum during the fourth quarter of 2020 on the back of demand recovery from India, Japan and South Korea, a tightening in the LNG market with increased global LNG prices, and Chinese buying activity from South Africa. Further to the impact of COVID-19, China's renewed ban on Australian coal imports in September 2020 disrupted the thermal coal market. However, going into 2021, risks to the anticipated coal demand remain as well as the reintroduction of second and further rounds of COVID-19 restrictions.

As a direct result of disappointing iron ore global supply during 2020, inventory levels at both ports and mills did not adequately increase. Increasing concerns in China about iron ore availability, especially considering the high steel production levels recorded, supported the robust iron ore prices into 2021.

Operational performance

South African domestic coal stock levels are fairly high and Eskom stock levels are above average. It is however expected that the demand for thermal coal in the domestic market will remain fairly stable in 2021.

We do not currently foresee a major impact of the second wave of COVID-19 in our international markets. We expect global economic growth to stabilise during 1H21, and thermal coal demand in our markets to remain strong.

The political dynamics between Australia and China are expected to impact South Africa exports as Australian producers encroach on South Africa's natural markets to evacuate coal.

South African free on board export coal prices are expected to remain fairly strong in the first quarter of 2021, but to soften in the second quarter of 2021 as the northern hemisphere moves out of winter.

We continue to drive productivity improvements through our operational excellence and digitalisation processes across the full value chain. This is all in relation to our drive to remain low on the cost curve.

The pre-feasibility study on determining the way forward for the Moranbah South hard coking coal project is expected to commence by the end of the first half of 2021.

Riaan Koppeschaar
Finance director

19 April 2021