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Rand Merchant Bank Morgan Stanley: Big 5 Investor Conference

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Presentation on theme: "Rand Merchant Bank Morgan Stanley: Big 5 Investor Conference"— Presentation transcript:

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

2 Doing business in South Africa
Contents Our country Today Risks and challenges Our industry Our business 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 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

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
“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 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

6 Risk 3: Infrastructure Constraints
Fixed investment as % of GDP 2009 5 10 15 20 25 30 35 40 45 1970 1980 1990 2000 2009 2015 2025 % of GDP China Japan South Africa United States Forecast Actual 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) 255 259 258 266 250 265 273 280 260 270 290 300 2010 2011 2012 2013 2014 Supply available Energy required Supply gap

7 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 # Scenarios compared to capacity* # Source: Frost and Sullivan * Sources: Energy Information Administration, NERSA, IHS, CIA Factbook, Exxaro Analyses

8 Mathematics National Benchmark Test levels
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 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 Proficient Basic 7% 20% Intermediate 73% Seifsa Chairman report 2008 Unemployment rate per age group (%) 20 40 60 80 No education Grade 1-8 Grade 9-11 Grade 12 Dipl/cert Degree 18-24 25-34 Source: UCT 2009 Sustainable, balanced and labour absorbing economic growth is key to reducing unemployment and poverty - creation of meaningful employment

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 Individual income taxpayers and social welfare recipients 14 12 10 8 6 4 2 2004 2005 2006 2007 Taxpayers Social grant recipients Source:UCT 2009 Remuneration of labour is ultimately determined by skills which are in turn a function of education and training

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

11 Global top 10 mining countries - mining GDP (2008 US$bn)
Mining in South Africa South African reserves for key minerals (% of global) Creates 1 million jobs* Accounts for ~ 18% of GDP* and investment* Critical foreign exchange earner - >50% Attracts foreign investments >30% of JSE value Represents 18,5% of corporate tax receipts 50% volume of Transnet’s rail and ports Generates 93% of electricity via coal power plants Constitutes15% of electricity demand Key foundation industry - enabled South Africa to become the most industrialised country in Africa Significant contributor to transformation in the economy Global top 10 mining countries - mining GDP (2008 US$bn) * Direct and indirect Source: Global Insight SA dropped 12 places to 61st in the 2009/10 Fraser Institute of Mining Companies’ survey.

12 SA’s mining performance
Global top 10 mining countries by growth in mining value added ( real US$ terms) 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 SA mining & quarrying capital investment / value added - real 2005 values Gross fixed capital formation (Rm) Gross value added (Rm) 95 000 Gross fixed investment 85 000 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 Source: Global Insight Gross fixed investment Gross value added

13 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 Skills shortage Maintain social license to operate Governance and regulatory efficiency Infrastructure access SA View Exxaro view Access to secure energy Strategic 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.

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

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

16 Exxaro Resources : history
16 2001 2006 2008 NAMAKWA SANDS Restructuring ensures compliance to South Africa’s mining charter

17 Exxaro Resources : Corporate structure
17 Anglo American Free float BEE HoldCo Employees’ Shareholding trust 9.9% 34.2% 52.9% 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

18 * Interim results for 6 months ended 30 June 2010
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 Exxaro commodity ranking
Still a positive view on pigment & zircon over the long term

20 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

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

23 Global steel production
200 400 600 800 1000 1200 1400 1600 1800 1920 1925 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 Production (Mt) The emerging era Pre % pa The golden era % pa Materials-intensive gowth and reconstruction in Japan and Europe The efficiency era % pa The China era % pa Oil shocks Fall of communism Global steel production since 1920 The China era to be followed by the era of the “next two billion” – India, Brazil, Indonesia, Mexico, Nigeria, etc. 23 23

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

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


27 Doing business in South Africa
Contents Our country Today Risks and challenges Our industry Our business Conclusion Addendum Addendum 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 28 “The Waterberg is the new jewel in South Africa's minerals crown” Sipho Nkosi 28

29 Exxaro’s development plan for the Waterberg
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 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 29 29

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 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 30 30

31 Significant increase forecast - except in USA
Why Mineral Sands? Intensity of use plotted for 1980, 1990, 2000, 2007*, 2015 and 2025** 4.5 4.0 3.5 3.0 2.5 Pigment demand per capita - kg 2.0 USA Rest of N America 1.5 Western Europe 1.0 Asia Pacific ex China China 0.5 Rest of World 0.0 - 10,000 20,000 30,000 40,000 50,000 60,000 * 1980, 1990, 2999, Solid line ** 2015 and Dotted line GDP per capita - real 2000 USD 31 Significant increase forecast - except in USA 31

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