In an interim pre-close update by FD Riaan Koppeschaar on 25 June, the group noted that, to date, eight positive Covid-19 cases had been recorded among employees, one of which had been fully recovered.
The other seven cases remained active.
However, Exxaro experienced the impact of disruptions to supply chains, demand, international trade flows and travel, as well as lockdowns, currency collapses and stock prices resulting from measures related to Covid-19, which had a “heavy blow” to the global economy.
While a deeper recession is expected in 2020 compared to 2008/9 when the global financial crisis hits, commodity markets have recorded mixed results over the six months to 30 June.
With respect to Exxaro ‘s key commodities for the first half of its 2020 financial year, the AP14 coal export price index is expected to average $66 / t, free-on-board and iron-or fine prices at an average price of $90 per dry metric tonne, cost and freight of China.
Total coal production, excluding buy-ins, and sales volumes are expected to decrease by 1 % and 2% respectively, mainly due to the impact of the pandemic on market demand and the lock-down measures affecting Exxaro’s Mpumalanga operations.
While Exxaro expects to achieve higher export volumes, this is offset by lower commercial domestic sales volumes, and the company expects a lower dollar sales price per ton to be achieved, in line with the weaker AP14 export price index of coal, which is somewhat cushioned by a weaker rand: dollar exchange rate.
In terms of the capital allocation program of the company, Exxaro expects the capital expenditure of its coal business to decline by 61% in the first half of the year compared to the second half of 2019, mainly due to project delays linked to the pandemic and the timing of the replacement of equipment.
As at May 31, the net debt of the group was R5.3 billion.
In addition to the operational measures implemented by Exxaro to combat the spread of the virus, additional downside scenarios have been used to stress the solvency and liquidity position of the company.
As a result, the management and the board of directors believe that the group has sufficient liquidity to withstand the interruption of its operations and will remain a concern in the foreseeable future.
A detailed account of Exxaro’s business performance and the outlook for the next six months to the end of the year will be provided when the company announces its financial results on 13 August.
COAL
With regard to coal, which South Africa has defined as an essential service for the state-owned power producer Eskom, as well as being an exporter, Exxaro ‘s coal operations have continued to operate at various capacities, while complying with the Covid-19 lock-down restrictions imposed by the national government.
However, as a result of the impact of Covid-19 and the subsequent lockdown, many industrial customers on the domestic market either reduced demand or stopped coal mining in April and May.
In addition, the coal exporters produced a large coal product for local markets due to very low export prices, which Koppeschaar said resulted in oversupply, negatively affecting domestic prices.
The seaborne market is estimated to be over-supplied by at least 40 million tonnes.
“We have seen the worst of the lockdowns, with negative impacts on the energy complex. The prices of both oil and gas have dropped to record levels and the API4 index price dropped to historically low levels of $40/t. Markets like Vietnam and Pakistan took advantage during this period of low prices to buy more South African coal while the Indian demand fell below the normal offtake,” Koppeschaar pointed out.
As governments around the world are trying to revive their economies, Exxaro expects to see a gradual increase in demand in some markets.
Waterberg Thermal Coal Product is expected to increase by 4 per cent in line with improved production and Eskom offtake, while production at Mpumalanga Commercial Mines is expected to be 11 per cent lower, mainly at Exxaro Coal Central (ECC) and Leeuwpan due to the impact of the pandemic on market demand and the lock-down impacting operations, as well as a 10-day shutdown in Leeuwpan, B.
This was partially offset by Belfast having increased to full production in the first half of the year.
Metallurgical coal production is expected to increase by 34% as a result of Exxaro’s high-value strategy and improved value chain visualization. Coal buy-ins are expected to be 173 000 t higher, mainly due to the fulfillment of supply obligations in the first quarter of 2020.
The expected 16 per cent increase in export sales volumes is driven by the availability of export products from Exxaro’s own operations, as markets return to normal, as well as good demand in alternative markets.
Total sales to Eskom are expected to decline by 8 per cent, as supply agreements at ECC and Leeuwpan are still being negotiated, partly offset by higher sales from Grootegeluk.
Domestic thermal coal sales are also expected to be 8 percent lower, mainly due to the impact of the pandemic on key customers resulting in lower offtake, which is offset by slightly higher offtake by other local Leeuwpan customers.
Both thermal coal production and sales are expected to decrease by 9% in bound mines (Matla), mainly due to the impact of the pandemic on operating protocols and difficult geological conditions in Mine 3.
In addition, Eskom was presented with a revised capital estimate to fulfill the full scope of the project, with construction scheduled to begin in the second half of this year.
Although the arbitration proceedings on contractual matters have been finalized in favor of Exxaro at the Arnot mine, action continues to be taken to resolve outstanding payments from Eskom pursuant to the order of the court.
Exxaro has previously notified Eskom of the call for force majeure in the Matimba and Medupi coal supply agreements.
“We have also communicated that the company is of the view that this event does not constitute a force majeure as stipulated in the coal supply agreements and that the company will vigorously defend its position in this matter and take the necessary action. Eskom and Exxaro are still engaging on this matter, with offtake currently in line with contractual volumes,” Koppeschaar explained.
In addition, the conclusion of the Thabametsi power plant has been affected by the delay in finalizing all regulatory approvals and by lenders withdrawing their support for the financing of greenfield coal-fired power stations.
Exxaro has completed all of its Thabametsi mining studies and has obtained all the necessary licenses and permits to operate the mine, but will not continue until the independent power producer is able to achieve financial closeness.
Exxaro reported in Belfast, Mpumalanga, that the plant acceptance test had been completed on 24 February, and that the project is now in the final phase and will be completed within the budget and timeframe.
With regard to ferrous metals, Exxaro said that it would provide guidance on Sishen Iron Ore Companies (SIOC’s) equity-accounted contribution when it has reasonable certainty on its first half financial results.
ENERGY
The effective date for the consolidation of the results of Cennergi into the Exxaro Group is 1 April.
Total generation output for the year to date is marginally below (-1.5 per cent) the planned figures.
Eskom issued a force majeure notice to Cennergi in March 2020 indicating that it could reduce generation from all wind farms. That notice was lifted by Eskom at the end of May.
Cennergi does, however, engage with Eskom on this notice, as they do not agree on the contractual interpretation.
Curtailment, although not material, occurred in both wind farms during the force majeure period, Koppeschaar said.
