Transcript Presentation

Rand Merchant Bank
Morgan Stanley: Big 5 Investor Conference
15-17 September 2010
Wim de Klerk
Finance Director
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
2
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 efficiency
South 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
3
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
4
Risk 2: Political stability
“Political risk can simply be defined
•
Government
– Positives
• Openness to foreign investment
• Macro-economic management
• Strong and independent Reserve Bank
as the risk of losing money due to
changes that occur in a country’s
government or regulatory
environment”. John Christie
– 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
5
Risk 3: Infrastructure
Fixed investment as % of GDP 2009
45
Constraints
•
Ageing road, water and electricity
infrastructure
Bottlenecks due to insufficient capital
spending
•
Lack of infrastructure in rural areas
•
Inefficient service delivery
•
•
Forecast
35
Wastage and unauthorised use
30
% of GDP
•
Actual
40
25
20
15
10
5
0
1970
1980
1990
China
Japan
Inadequate billing management
Opportunities
Proven success with mega projects
300
•
Government aggressively invests:
290
– Water: R30bn investment required
by 2025
– Power: R263bn by 2020
2009
South Africa
2015
2025
United States
Eskom electricity supply and demand (TWh)
•
– Railway: five year R93.4bn capital
investment plan
2000
280
280
Energy required
270
265
259
260
255
259
273
280
266
258
Supply available
250
250
2010
2011
2012
2013
2014
6
Risk 3: Infrastructure - electricity
Scenarios based on average NERSA projected tariffs*
• 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
Electricity sales by Eskom to SA industry 2008 #
# Source: Frost and Sullivan
* Sources: Energy Information Administration, NERSA, IHS, CIA Factbook, Exxaro Analyses
Scenarios compared to capacity*
7
Risk 4: Human capacity
•
Mathematics National Benchmark Test levels
SA February 2009
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
Proficient
7%
Intermediate
73%
Seifsa Chairman report 2008
•
Family structures: mothers at school
and child headed households
80
•
Fraud and corruption
60
•
Transformation and equality
•
Basic
20%
Unemployment rate per age group (%)
40
One out of 5 people will successfully
be absorbed into the formal sector Bruggemans
20
0
No education
Grade 1-8
Grade 9-11
18-24
Grade 12
25-34
Dipl/cert
Degree
Source: UCT 2009
Sustainable, balanced and labour absorbing economic growth is key to reducing unemployment and
poverty - creation of meaningful employment
8
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
Individual income taxpayers and social welfare
recipients
14
12
10
8
Child support grants went from zero in
1997 to 8,8million in 2009
6
5,2% of GDP currently goes towards
social grants
2
4
0
2004
2005
Taxpayers
2006
2007
Social grant recipients
Source:UCT 2009
Remuneration of labour is ultimately determined by skills which are in turn a function of education and
training
9
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
10
Mining in South Africa
South Africa, is not mature mining real estate! The country still has
significant geological potential
South African reserves for key minerals (% of global)
South African reserves for key minerals, 2008
Global rank
1
1
•
Creates 1 million jobs*
•
Accounts for ~ 18% of GDP* and
investment*
•
•
•
Critical foreign exchange earner - >50%
1
1
2
2
2
2
2
4
4
Attracts foreign investments >30% of
JSE value
5
5
6
8
8
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
•
1
Significant contributor to transformation
in the economy
* Direct and indirect
8
9
0
10
20
30
40
50
60
% of global
70
PGM's
Manganese
Chromium
Gold
Alumino-Silicates
Vermiculite
Vanadium
Zirconium Minerals
Titanium minerals
Fluorspar
Antimony
Phosphate rock
Nickel
Uranium
Lead
Coal
Zinc
Silicon
Iron ore top ten mining countries as measured by
The global
80
90
.
100
South Africa has the world’s fifth largest mining sector measured by
real GDP
Mining GDP
(2008, US$ billions)
Global top 100 mining
countries
GDP140(2008
200
180
160 US$bn)
120
100
80- mining
60
40
20
Rank
1
China
2
USA
3
Australia
4
Brazil
5
South Africa
21
6
Canada
21
7
Russia
20
8
India
19
9
Chile
18
10
Colombia
182
129
64
26
3
Source: Global Insight
SA dropped 12 places to 61st in the 2009/10 Fraser Institute of Mining Companies’ survey.
11
7
6
Colombia
7
7
Australia
7
8
Brazil
7
9
Peru
10
Venezuela
13
South Africa
Source: Global Insight
-1
SA mining & quarrying capital investment /
value added - real 2005 values
400 000
115 000
300 000
105 000
200 000
95 000
100 000
85 000
Gross fixed investment
2008
2006
2004
2002
2000
1998
Gross fixed investment
1996
SA capital investment expanded by a
factor of two from 2000 to 2009
compared to an Australian factor of
five
4
Source: Global insight
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
6
Gross value added (Rm)
•
India
8
1994
•
Indonesia
5
1992
•
4
10
1990
If SA mining had grown at 5% in this
period, direct value would increase by
$8billion, creating about 45 000
additional mining jobs
Russia
12
1988
•
3
19
1986
SA mining declined by 1%
Chile
1984
•
2
1982
From 2001 to 2008 global mining grew
by >5% per annum
China
Gross fixed capital formation (Rm)
•
1
1980
SA’s mining performance
The global top ten mining countries as measured by growth in
Global top 10 mining
countries
by growth
in mining
mining value
added (2001-2008
real US$
terms) value
added
(2001
2008
real
US$
terms)
Rank
-5
0
5
10
15
20
Gross value added
12
South African and Exxaro’s mining business risks
Financial
Compliance
Climate change
concerns
Price and
currency volatility
Access to capital
Capital allocation
Cost management
Resource
nationalism
Governance and
regulatory
efficiency
Skills
shortage
Infrastructure
access
Maintain social
license to operate
SA View
Exxaro view
Strategic
Access to secure
energy
Operational
Source: Adjusted from Ernest and Young
“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.
13
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
14
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
15
Exxaro Resources : history
16
2001
2006
2008
NAMAKWA
SANDS
Restructuring ensures compliance to South Africa’s mining charter
16
Exxaro Resources : Corporate structure
17
Anglo
American
BEE
HoldCo
Free float
9.9%
Employees’
Shareholding
trust
52.9%
34.2%
3%
Exxaro
Resources Ltd
100%
20%
Sishen Iron Ore
4th largest supplier
in international
seaborne trade
Exxaro Coal
4th largest SA coal
producer:
9 mines, 45Mtpa
Exxaro Base Metals
only zinc producer in
SA:
3 operations in
3 countries
Exxaro Sands
3rd largest mineral
sands producer:
3 operations in
2 countries
SA’s largest Black Economically Empowered resources company
17
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
18
COMMODITY RANKING - EXXARO
Exxaro
ranking
(Updatedcommodity
April 2008)
(Momentum updated November 2008)
(Momentum and markets updated February 2009)
(Updated November 2009)
(Updated August 2010)
Criteria
Fe
Ore
Pt
Market
Demand
Historical returns
Price
Barriers to entry
Industry structure
Momentum
Substitution
Cost Curve
Environmental
Total
Ranking
4
4
5
4
4
4
3
4
4
3
39
1
3
4
4
4
4
4
3
4
4
4
38
2
Cu
Metall.
Coal
4
5
3
4
4
3
4
3
4
3
37
3
4
4
4
4
4
4
3
3
4
3
37
3
Oil
Mn Titanium
Ore Pigment
4
4
4
4
4
4
3
3
4
2
36
5
3
4
4
4
4
4
3
3
4
3
36
5
3
4
3
3
5
4
3
4
3
3
35
7
Zr
Steam
Coal
Ni
3
4
3
4
3
4
3
4
3
3
34
8
4
4
3
4
3
3
3
3
4
2
33
9
3
4
3
3
3
4
3
3
3
3
32
10
Titanium
Feedstock U3O8
3
4
2
3
3
4
3
4
3
3
32
10
Notes:
Adapted from models by ABN Amro and Deutsche Bank
Higher numbers denote more favourable positions
2
4
2
3
3
3
3
4
4
3
31
12
Zn
3
4
2
3
3
2
4
3
3
3
30
13
4-5
3
1-2
Still a positive view on pigment & zircon over the long term
19
Exxaro’s mineral resource
SA diversified miners - LOM on the basis of resources,
reserves & UBS estimates (based on 2010 production rates)
Exxaro: LOM on the basis of resources,
reserves and UBS estimates
* Source: UBS investment research
20
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
21
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
22
Global steel production
Global steel production since 1920
1800
The golden era
1945 -1973 6.2% pa
Materials-intensive
gowth and
reconstruction in
Japan and Europe
1600
1400
1200
The efficiency era
1974 -1994 0.2% pa
Oil shocks
Fall of
communism
1000
800
600
The emerging era
Pre-1945 2.8% pa
400
200
2010
2005
2000
1995
1990
1985
1980
1975
1970
1965
1960
1955
1950
1945
1940
1935
1930
1925
0
1920
Production (Mt)
The China era
1995 - 2007 4.9% pa
The China era to be followed by the era of the “next two billion” – India, Brazil, Indonesia, Mexico,
Nigeria, etc.
23
Copper and iron ore long term view
Ultra long-term real 2009$ copper price
18000
16000
12000
10000
8000
6000
4000
2013
2008
2003
1998
1993
1988
1983
1978
1973
1968
1963
1958
1953
1948
1943
1938
1933
1928
1923
1918
1913
2000
1908
Ultra long-term real 2010$ fine iron ore prices
Materials intensive
infrastructure and
(re)construction
investment
160
140
Price (Real 2010 US$/t)
120
100
80
60
40
Source: Barclays Capital
US Price (cif)
Aus-Japan Price (fob)
2015
2010
2005
2000
1995
1990
1985
1980
1975
1970
1965
1960
1955
1950
1945
1940
1935
1930
1925
1920
1915
1910
1905
20
1900
Prce (US$/t)
14000
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
25
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
Doing business in South Africa
27
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
•
“The Waterberg
is the new
in South
Africa'sUSA
minerals
Sipho Nkosi
Geographically
well positioned
forjewel
export
to Europe,
andcrown”
Far East
28
Exxaro’s development plan for the Waterberg
Phase 1: Grootegeluk Mine
Phase 2: Thabametsi Mine
• Completed GG6 plant in 2006 -720ktpa to other
markets
• Greenfields development - new open pit coal
mine and beneficiation complex and a new
coal-fired (clean technology) power station
• Brownfields expansion of Grootegeluk coal
mine near Lephalale with Medupi power station
(4 800MW)
(5 000MW)
– 16Mtpa to power station (PF)
– 14,6Mtpa to Medupi power station
– 2,5Mtpa to other markets
– Time-frame: 2009 to 2015
– Time-frame: 2014 to 2017
Phase 3: Exports / Synfuels
Other downstream opportunities:
• Greenfields coal mine
• Char plant
– 10Mtpa for exports
– Phase 1 being commissioned
– Time-frame: 2015 to 2018
– Phase 2 in planning
• Mafutha JV with Sasol
– Time-frame: 2013 to 2018
• Market coke
–
Feasibility study in progress
• Electricity generation
– Including co-generation
29
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
• 200MW
concentrating solar
power plant at
Lephalale
• 15 MW Namakwa
Sands cogeneration
project in
• 50 MW coal bed
methane gas field and
power station in
Botswana
• 1800 MW Base Load
IPP coal fired power
station at Lephalale
• 40 MW Wind
Farm at
Tsitsikamma
• A number of other
projects, totaling
more than 300 MW
30
Why Mineral Sands?
Intensity of use plotted for 1980, 1990, 2000, 2007*, 2015 and 2025**
4.5
Pigment demand per capita - kg
4.0
3.5
3.0
2.5
USA
2.0
Rest of N America
1.5
Western Europe
1.0
Asia Pacific ex China
China
0.5
Rest of World
0.0
-
10,000
* 1980, 1990, 2999, 2007 - Solid line
** 2015 and 2025 - Dotted line
20,000
30,000
40,000
50,000
60,000
GDP per capita - real 2000 USD
Significant increase forecast - except in USA
31