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Rand Merchant Bank Morgan Stanley: Big 5 Investor Conference Wim de Klerk Finance Director 15-17 September 2010.

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Presentation on theme: "Rand Merchant Bank Morgan Stanley: Big 5 Investor Conference Wim de Klerk Finance Director 15-17 September 2010."— Presentation transcript:

1 Rand Merchant Bank Morgan Stanley: Big 5 Investor Conference Wim de Klerk Finance Director September 2010

2 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 3 South Africa in the world 45th most competitive economy out of 133 countries Stable constitutional democracy 3,3% average growth p/a 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 Africas 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 4 Risk 1 : Double dip recession Euro zone fiscal solvency Global financial stability US and Chinas property bubble SA GDP and exports strongly dependent on world economy In 2009 exports were equivalent to 27,5% of SA GDP

5 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 countrys government or regulatory environment. John Christie

6 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 % of GDP China Japan South Africa United States ForecastActual Supply available Energy required Supply gap

7 7 Risk 3: Infrastructure - electricity Scenarios 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 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% Intermediate 73% Proficient 7% No educationGrade 1-8Grade 9-11Grade 12Dipl/certDegree

9 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 ,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 TaxpayersSocial grant recipients

10 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 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 Transnets 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 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.

12 12 SAs 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 $8billion, creating about additional mining jobs The gross value added by mining sector had shrunk from R103bn in 1993 to R92bn in 2009 The number of people employed fell from about 830k in 1987 to just below 500k because of the global recession and domestic issues like amongst others, electricity shortages SA capital investment expanded by a factor of two from 2000 to 2009 compared to an Australian factor of five Source: Global Insight Global top 10 mining countries by growth in mining value added ( real US$ terms) Gross value added (Rm) Gross fixed capital formation (Rm) SA mining & quarrying capital investment / value added - real 2005 values Gross fixed investment Gross value added

13 13 Access to capital South African and Exxaros 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 FinancialCompliance 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 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 industrys 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

15 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 16 Exxaro Resources : history Restructuring ensures compliance to South Africas mining charter 2008 NAMAKWA SANDS

17 17 Exxaro Resources : Corporate structure 17 Anglo American Exxaro Resources Ltd Sishen Iron Ore 4th largest supplier in international seaborne trade Exxaro Coal 4th largest SA coal producer: 9 mines, 45Mtpa Free float BEE HoldCo Employees Shareholding trust 9.9% 34.2% 52.9%3% 20% 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 100% SAs largest Black Economically Empowered resources company

18 18 Exxaro at a glance One of the largest South African diversified resource companies Top 40 companies on the JSE Employ about 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 19 Still a positive view on pigment & zircon over the long term Exxaro commodity ranking

20 Exxaro: LOM on the basis of resources, reserves and UBS estimates Exxaros 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 21 Exxaros 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 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 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

24 Copper and iron ore long term view Source: Barclays Capital Ultra long-term real 2009$ copper price Prce (US$/t) Ultra long-term real 2010$ fine iron ore prices Price (Real 2010 US$/t) US Price (cif)Aus-Japan Price (fob) Materials intensive infrastructure and (re)construction investment

25 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 Africas mining industry


27 Contents Our country –Today –Risks and challenges Our industry –Today –Risks and challenges Our business –Today –Risks and challenges Conclusion Addendum 27 Addendum Doing business in South Africa

28 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 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 ktpa 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 Exxaros development plan for the Waterberg

30 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 Exxaros strategy defines the intent also to get involved in renewable energy and reduce our carbon footprint WindSolarCo-generationGasBase 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 31 Why Mineral Sands? Significant increase forecast - except in USA ,00020,00030,00040,00050,00060,000 GDP per capita - real 2000 USD Pigment demand per capita - kg 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, Solid line ** 2015 and Dotted line

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