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Rand Merchant Bank Morgan Stanley: Big 5 Investor Conference

Rand Merchant Bank Morgan Stanley: Big 5 Investor Conference. Wim de Klerk Finance Director. 15-17 September 2010. Contents. Our country Today Risks and challenges Our industry Today Risks and challenges Our business Today Risks and challenges Conclusion Addendum.

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Rand Merchant Bank Morgan Stanley: Big 5 Investor Conference

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

  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. 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 in the world 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. 45 Actual Forecast 40 35 30 25 % of GDP 20 15 10 5 0 1970 1980 1990 2000 2009 2015 2025 China South Africa United States Japan 300 290 280 280 Energy required 273 280 265 270 259 266 260 255 258 259 Supply available 250 250 2010 2011 2012 2013 2014 Risk 3: Infrastructure Fixed investment as % of GDP 2009 Constraints • Ageing road, water and electricity infrastructure • Bottlenecks due to insufficient capital spending • Lack of infrastructure in rural areas • Inefficient service delivery • Wastage and unauthoriseduse • 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) 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. 80 60 40 20 0 No education Grade 1-8 Grade 9-11 Grade 12 Dipl/cert Degree 18-24 25-34 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 (%) 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 0 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. 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. 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 Mining in South Africa South African reserves for key minerals (% of global) 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. 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 $8billion, creating about 45 000 additional mining jobs The gross value added by mining sector had shrunk from R103bn in 1993 to R92bn in 2009 The number of people employed fell from about 830k in 1987 to just below 500k because of the global recession and domestic issues like amongst others, electricity shortages SA capital investment expanded by a factor of two from 2000 to 2009 compared to an Australian factor of five SA’s mining performance Global top 10 mining countries by growth in mining value added (2001 - 2008 real US$ terms) SA mining & quarrying capital investment / value added - real 2005 values 115 000 400 000 300 000 105 000 Gross fixed capital formation (Rm) Gross value added (Rm) 200 000 95 000 100 000 85 000 Gross fixed investment 1994 2002 1992 2000 2004 1996 2008 1998 2006 1980 1982 1984 1990 1988 1986 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 Capital allocation Access to capital 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. 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

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

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

  18. 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

  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. 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. Global steel production Global steel production since 1920 1800 The China era 1995 - 2007 4.9% pa The golden era 1600 1945 -1973 6.2% pa The efficiency era Materials-intensive 1400 1974 -1994 0.2% pa gowth and reconstruction in Fall of Japan and Europe 1200 communism Oil shocks 1000 Production (Mt) 800 The emerging era 600 Pre-1945 2.8% pa 400 200 0 1950 1955 1960 1965 1970 1975 1980 1985 2000 2005 2010 1920 1925 1930 1935 1940 1945 1990 1995 The China era to be followed by the era of the “next two billion” – India, Brazil, Indonesia, Mexico, Nigeria, etc. 23

  24. Copper and iron ore long term view Ultra long-term real 2009$ copper price 18000 16000 14000 12000 10000 Prce (US$/t) 8000 6000 4000 2000 1973 1978 1983 1988 1993 1998 2003 2008 2013 1908 1913 1918 1923 1928 1933 1938 1943 1948 1953 1958 1963 1968 Ultra long-term real 2010$ fine iron ore prices Materials intensive 160 infrastructure and 140 (re)construction investment 120 100 Price (Real 2010 US$/t) 80 60 40 20 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 1900 1905 1910 1915 1920 1925 1930 1935 1940 1945 1950 1955 1960 1965 Source: Barclays Capital US Price (cif) Aus-Japan Price (fob)

  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

  26. www.exxaro.com THANK YOU

  27. Contents • Our country • Today • Risks and challenges • Our industry • Today • Risks and challenges • Our business • Today • Risks and challenges • 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

  29. Exxaro’s development plan for the Waterberg • Phase 1: Grootegeluk Mine • Completed GG6 plant in 2006 -720ktpa 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

  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 30

  31. 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 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 20,000 30,000 40,000 50,000 60,000 * 1980, 1990, 2999, 2007 - Solid line ** 2015 and 2025 - Dotted line GDP per capita - real 2000 USD 31 Significant increase forecast - except in USA

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