BUSINESS SUSTAINABILITY

Business sustainability in times of constant change

Comp_-_Truck_and_shovel_at_Exxaro’s_Grootegeluk_mine_near_Lephalale,_Limpopo1.jpg

Exxaro Resources was established in 2006 from the unbundling of non-iron ore assets out of Kumba, leaving the company with a strong mining, beneficiation and value-in-use competency

 

Exxaro’s key competitive advantage, today, rests on the calibre and technical ability of its people, long-term thinking and quality of operational assets. The company has a distinguishing asset and investment portfolio, which will enable them to continue growing and exploring new opportunities.

“Our advantage lies in extracting maximum value for both the company as well as the customer in the way we mine, beneficiate and find the correct blend of product for the customer,” says Mxolisi Mgojo, CEO.

 

Trends and industry challenges

Mgojo explains that, within the broader mining industry, declining profitability, post-commodity boom, and the increasing adoption of new technologies and innovation to improve performance and protect profit margins are commonplace.

Within the coal industry, the trend of a reduced use of coal for energy generation is gaining momentum.

In addition, he adds that the mining industry is improving its ability to respond to socio-economic and development challenges and opportunities.

“Business sustainability is under persistent threat in these times of constant change, hence, our emphasis on the need to innovate and think differently about ourselves and our future, as well as how we respond to societal demands and expectations. Staying relevant will be the key challenge,” he says.

Mgojo believes the next few years will be characterised by change and uncertainty in many spheres, but there will be an offering of many opportunities as well—the resilience of the organisation to fast-paced change will be tested.

“The first challenge for us is maintaining our momentum of growth in the coal business to supply Eskom and coal IPPs for electricity generation.

“We are a coal supplier for roughly a third of the megawatts of electricity generated by Eskom, and with the prospect of supplying to the Thabametsi Coal IPP, we anticipate respectable growth in volumes.

“However, we are also seeing opportunities for growing beyond coal, given the headwinds against coal in relation to climate risk. We have, thus, invested in renewal energy (wind) projects, which were commissioned in the second half of 2016.

“Both the coal business and renewables are establishing a firm foundation for Exxaro to seek additional opportunities on the energy landscape. The challenge will be how we take our people along during this transition, not just our employees, but all of our stakeholders,” he says.The way Exxaro traditionally does business and how business interacts with key stakeholders, such as the government, competitors and the community, to name but a few, is changing. Traditional business models are being tested with competition and innovation coming from unexpected locations and industries.

 

The opportunity for growth

In the coming years, Exxaro will leverage their existing strengths to maximise value from current assets and expand into new areas.

“We see opportunities for further growth in energy, given the emerging and established innovations in this sector such as energy storage, which will lead to distributed electricity generation systems.

“We are excited about playing a better developmental role in the country, leveraging from our surface land assets. With both water and food security identified by the World Economic Forum amongst the highest ranking global risks for humanity, we aim to champion the wellbeing of our communities by exploring commercial activities in these sectors,” Mgojo says.

With man’s primary sustaining resources coming from mining and agriculture, their intention of powering a better life for all will be achieved through mining and strategically considered activities in these two respective areas.

In terms of future product offerings, Mgojo explains that technology adoption and adaptation have become a norm, given the need to continue to flourish as a business—the company has looked at scenarios for mining fifteen to twenty years from now and what it could possibly involve: “It is a much more modern sector with the latest technologies for extracting minerals, it is much safer to work in, as people are removed from unsafe working conditions and it is cleaner and much friendlier to the environment. These are the possibilities for our future and they are achievable.”

Exxaro has seen numerous successes in recent years and Mgojo proudly points several out. He considers the successful commissioning and operation of two wind farms in the Eastern Cape with a combined generation capacity of 229MW and the expansion of the Grootegeluk (“GG”) mine, at a cost of R10.2-billion, to commercially supply Eskom’s Medupi power station in Lephalale, Limpopo amongst them.

In addition, during 2016, there was the selection of the Thabametsi coal independent power producing (IPP) project as a preferred bidder for the Coal-Based Independent Power Purchase Programme (CBIPPP), which has provided Exxaro with an opportunity for a coal supply agreement from the development and construction of Thabametsi coal mine at an estimated cost of R2.8-billion, also located in Lephalale.

“This project will play an important contributing role in unlocking the Waterberg coal reserves and the broader Waterberg mineral belt in terms of the SIP I and SIP 10 projects of the Presidential Infrastructure Coordinating Committee (PICC),” he says.

Of working with Eskom, Mgojo says there have been both successes and challenges. A notable success, especially in the Waterberg, was the conclusion of the Coal Supply Agreement (CSA), with Eskom supplying the coal to the Medupi Power Station, which is currently under construction.

“Upon completion, Exxaro will be supplying 29.2 million tonnes per annum (Mtpa) to both the Matimba and Medupi Power Stations from its Grootegeluk Coal Complex (“GCC”)—equalling about 25% of South Africa’s generating capacity.

“Additional successes were the establishment of the Lephalale Development Forum as Medupi was commencing construction and Exxaro was planning for the expansion of the GCC, the co-investment in local infrastructure alongside the local municipality for road construction and, more recently, investing in a local health centre,” he says.

A key challenge for both Exxaro and Eskom is the delay in the completion of the Medupi power station. However, Mgojo says they continue to work together to find mutually-agreeable solutions.

 

A question of sustainability

Safety health

Notwithstanding the excellent safety record over the last 12 months, Exxaro’s top two sustainability concerns remain potential risks to their employees and contractors in relation to health and safety.

Through the Exxaro Safety Improvement Programme (SIP), they have been steadily improving their safety record year-on-year. In 2016, they managed to achieve an all-time low Lost-time Injury Frequency Rate (LTIFR) of 0,09, which is 40% better than their target. In fact, over the past two years, 2015 and 2016, the company is proud that all Exxaro employees returned home to their families—their operations did not record a fatality towards an employee as a result of work conducted on site.

In a similar vein, Exxaro has also become aware of the importance of health and wellness amongst its employees. Over the next three years, they will be dedicating their efforts to reducing occupational health and non-occupational health risks and lifestyle diseases such as diabetes and hypertension.

 

Environment

Exxaro’s license to operate remains critical. Environmental compliance in South Africa is becoming more complex, with increasing legislative requirements and societal expectations of stewardship. As such, enormous effort is being placed on improving the environmental compliance process.

This has yielded positive results in that Exxaro has obtained authorisation and approval for the bulk of its license applications.

“We are also focussing more on continuous rehabilitation so that the environment can be restored as soon as possible after mining has completed in a specific area,” explains Mgojo.

 

BEE codes

The amended DTI BEE codes have added another layer of compliance. However, Exxaro is a black-owned company, which strives to remain a flagship BEE company in South Africa.

Mgojo says they maintain an active involvement in the Chamber of Mines, where they contribute their resources to shape and mould the future of the mining industry.

In summary, he says, “at Exxaro, the sustainability of our business rests on our people, their health and safety, as well as fulfilling all aspects of our social licence to operate. We remain conscientious to the environmental impact of our mining activities and, where we can, we pursue a zero-harm approach, or rehabilitation and restoration”.

The Thabametsi Power Project

The Thabametsi Power Project was selected as a preferred bidder in terms of the first bid window of South Africa’s Coal-Baseload Independent Power Producer Procurement Programme (“CBIPPPP”).

Mgojo describes this as an exciting milestone for Exxaro in terms of realising the vision of unlocking the Northern mineral belt, creating employment opportunities and powering economic development in South Africa by enhancing the generation of electricity. From the estimated R17 billion planned over the next five years in the group, about half of that will be spent in the Waterberg alone, with the balance in Mpumalanga.

“As the largest supplier of coal to Eskom, we are already integrated in South Africa’s energy value chain and are aiming to take advantage of the opportunities provided by current regulatory developments in the mineral and energy sectors to develop a coal mine that can supply new power-generating capacity.

“We have played to our strength of coal production and partnered with competent entities such as Marubeni and KEPCO for the development of the power plant. We anticipate working closely with all the relevant authorities to make this project a success for the benefit of all in South Africa,” he says.

 

Labour force challenges

Maintaining labour stability and managing the negative impact of labour unrest and its associated costs will always remain an area of continuing improvement in the mining industry for the foreseeable future.

Key contributing factors remain high unemployment rates, union rivalry, communities’ expectations of insufficient government infrastructure and support.

“We have seen a growing trend of community-based protests impacting our employees directly through their physical ability to get to work but it also manifests through interactions with labour in that, often, there is an expectation that mining companies need to fill the void of a lack of service delivery.

“Therefore, within the balance of achieving increased employee productivity as a strategic imperative for mining companies, the increasing demands from unions together with communities for fair wages and benefits, does place a strain on labour stability,” explains Mgojo.

As a company, Exxaro has successfully adopted a pluralist approach to union recognition and through appropriate governance, they have enjoyed labour stability in this regard.

In an effort to initiate modernisation to improve the working environment, the focus for Exxaro is on labour upskilling, training and other employment opportunities to sustain the mining communities in which they operate. We have also identified opportunities for further enterprise and supplier development initiatives.

Despite having gone through S189 processes across their business in 2016, Exxaro’s positive track record in redeploying as many impacted employees as possible by upskilling and other training interventions has minimised the potential negative impact of these processes on labour stability.

Mgojo expresses Exxaro’s continued focus on the communities in which they operate, providing skills development as well as the uplifting of schools to ensure better education opportunities. Going into the future, Exxaro will ensure the fostering of effective government and community relations by creating ecosystems to extract the greatest impact and value and being a key contributor to the economy.

Through these combined efforts and in partnership with their organised labour stakeholders and employees, they seek to ensure continued employment for people in the communities close to their operations.

 

Sustaining BEE structures

According to Mgojo, the sustainability of BEE structures is always very challenging. In the mining industry, they have seen that structures, which are predominantly debt-funded, are prone to financial difficulties due to the volatile nature of commodity prices and the cyclical nature of the mining sector.

Any empowerment transaction, therefore, needs to strike a careful balance between the equity contributed by the BEE shareholders, facilitation provided by the company in the form of financial assistance to the BEE partners as well as a prudent amount of debt funding.

“Structures, which are debt-funded should also have sufficient flexibility to allow for BEE shareholders to monetise a portion of their shareholding at an opportune time to redeem debt and capture value. As more empowerment ownership investments become successful, so the pool of equity owned by black investors increases, which can then be reinvested or invested in new mining opportunities,” he explains.

In November 2016 Exxaro, Main Street 333 (“MS333”) and the Industrial Development Corporation (“IDC”) entered into the Implementation Agreement. This agreement set out the key terms of a proposed replacement BEE transaction for Exxaro, as well as steps for the structured unwind of the MS333 shareholding structure.

“MS333 is a broad-based BEE company that was formed in 2006 upon the formation of Exxaro, when it acquired a 52% shareholding in Exxaro and agreed to a 10-year lock-in period—this lock-in expired in November 2016,” says Mgojo

One of the mechanisms set out in the Implementation Agreement was a specific share buy-back of R3.5-billion from MS333. The share buy-back enabled MS333 to fully settle all of its debt obligations.

Exxaro shareholders approved the transaction on 30 December 2016 and the buy-back was implemented in January 2017. The buyback was priced at a level which was attractive to the MS333 shareholders as well as accretive to minority shareholders.

As Exxaro is desirous of maintaining a substantial BEE shareholding, which they view as a critical component to implementing the strategic objectives of the company, they are working on a replacement BEE transaction.

The BEE shareholders in MS333 will participate in a 30% replacement transaction. They will be investing a substantial portion of the value obtained from the unwinding structure, about R2 billion, as equity.

“We hope that we can be in a position to take the replacement transaction to our shareholders in Q2 2017 for consideration. Exxaro views BEE as an important transformation imperative and competitive advantage in the current landscape as well as a mechanism to ensure regulatory compliance,” Mgojo says.

 

The current state of the nation’s energy and power

For the short- to medium-term, Mgojo says they do not foresee any shortage in energy supplies, mainly due to depressed market and industry conditions impacting on the demand from high energy users.

“We are aware that Eskom is currently using this period of low demand to do extensive maintenance and repairs on some of their power stations, which will help the situation over the longer term.

“Once the new build programme of Medupi and Khusile are completed, we do not foresee the potential of rolling blackouts or load shedding to the degree that we have experienced in the past,” he explains.

Mgojo believes that, given the low growth rates in South Africa, the move towards a services-based industry, the decline of energy intensive businesses through closures, the connection of new coal-fired power stations and IPPs to the national electricity grid, the integrated management of the national electricity grid and the population’s increased socialisation with renewable energy and energy conservation, future load shedding will be eliminated.

He adds that electricity supply seems to be adequate, due to electricity-intensive businesses going out of business and additional generation capacity coming through.

Mgojo, however, implores the business and residential community to appreciate the fact that electricity is available at the click of a switch.

“Think about what it takes to have the privilege to have electricity: the source, the generation, the electricity networks, the job creation, the joy it brings, the lifesaving abilities.

“Contribute towards the continued availability of having electricity by paying your bills, reporting illegal connections, reporting the theft of infrastructure, being thankful and appreciative for having a job and looking after it,” he says.

We are living in a resource-constrained world, and he warns that it is incumbent upon us to optimise our total use of input resources, whether that is electricity, water or raw materials.

“Higher energy costs have taught us to optimise and not be wasteful, let’s learn the lesson and keep it in mind in respect of water usage as well. Energy efficiency is not optional, we all do need to do our part,” Mgojo says.

 

Water conservation in light of the drought

Given the fact that water is a scarce commodity in the country and climate change is exacerbating the situation, Mgojo says all stakeholders have the responsibility to conserve water usage.

“Our water management strategy is in line with the Sustainable Development Goal 6.4 wherein we are striving towards increasing water-use efficiency and ensuring that our operation is self-sufficient in the long term,” Mgojo says.

Exxaro has invested in water treatment technology and infrastructure that are targeted at reducing their consumption and increasing the recycling of water at their operations. Some of these projects include:

The implementation of water treatment plants

10 megalitres a day (MLD) at Matla mine,
In a process of commissioning a 1.5MLD plant at NBC Glisa mine, and
the NBC Belfast mine will be constructed with Water Treatment plan from the onset
The cyclic ponds at Grootegeluk mine will recover water for reuse, and
Installation of dewatering process equipment (filter presses) at all their beneficiation plants to ensure water is recovered and reused, while ensuring tailing’s safety.
In terms of partnership with the government, Exxaro actively participates in the national water conservation and water demand management project of the Department of Water and Sanitation (DWS), which aims to set the national water-saving targets for the mining industry.

“We also participate in other public-private partnerships for water stewardship such as the Strategic Water Partnerships Network (SWPN). We have long recognised that mining (in fact humanity) cannot be sustainable without efficient management of water resources in the country.

“Thus, our involvement in strategic partnerships with the government, academia and business is critical to ensure we attain positive outcomes on efficient water management,” Mgojo explains.

 

Recent sales and acquisitions

Disposals and acquisitions are an essential part of any business strategy to optimise the performance of operations and acquire news skills, technology and access to new opportunities. Recently we embarked on the following corporate activity:

The Inyanda colliery disposal: Inyanda was reaching the end of its reserves for Exxaro, however, combined with adjacent reserves, it could extend the life of mines and, thus, create value for neighbouring reserve owners.

The Mayoko disposal: The global iron ore price has reduced dramatically since its highs of about $160/ton and the commodity currently remains in oversupply, resulting in a long-term depressed market. In light of this, Exxaro chose to rather dispose of the asset before additional project capital was spent.

The ECC acquisition (end 2015): The acquisition of Total Coal brought resources with export allocation, enabling growth opportunities for the rest of Exxaro’s operations in terms of additional volumes, coal product diversification and logistics.

 

CSI and community building initiatives

Exxaro’s CSI initiatives are driven through their social and labour plans. Mgojo says their primary areas of focus are education and skills training, local infrastructure and health, to name a few.

“We are planning for our next five-year SLP programme, which we plan to better in terms of impact, particularly where we can collaborate with other companies to spend sums of money typically spent on these programme. We spent about R300m in past SLP programmes” he says.

In terms of building the community, Mgojo says their standout success is the development of an initiative that will empower a local community, post-mine closure.

In Limpopo, they have closed and rehabilitated an underground coal mine. However, the remaining mine infrastructure (employee housing and mine offices) will be donated for use by the local game reserve staff (SANPARKS) for a local training centre in conservation activities.

Furthermore, an area has been selected for commercial game farming where the local community will earn revenue and training for employment opportunities.

Exxaro has challenged itself to look for opportunities beyond the coal business, which will provide solutions to the challenging livelihood in Africa. Mgojo believes the energy space provides one such growth opportunity in Africa.

“We have taken the time to understand the trends and emerging innovations in the energy sector. It’s an exciting space where we plan to build a future Exxaro business. Developing relevant partnerships with suitable knowledge and capability will be our operating model in pursuing these opportunities,” he says.

Mxolisi Mgojo has over 20 years’ experience in the investment banking and resources sectors including coal and zinc operational, logistics and marketing arenas. He obtained a BSc in Computer Science in the United States, an honours degree in Energy Studies and an MBA. Additionally, he completed the Advanced Management Programme (Wharton).

He started working as a Software Programmer for an American company, Sperry Univac (which later became Unisys).

He later moved to the United Kingdom where he worked at the Unisys office in London for roughly two years. When the first global dot-com bubble hit, as a foreigner, he was one of the first people to be retrenched.

“I faced another hardship after an entrepreneurial stint in a family business left my wife and I almost without any livelihood. Fortunately, I received two job offers and returned to a career in banking.

“Losing a business made me humble. You can never believe that everything you achieve is because of your own doing. One moment you have it and the next you don’t. For me, there is a strong spiritual element in terms of how I view my life. I understand it’s not only about my own capabilities. There is also a lot of divine intervention at play. The experience taught me that one needs to pray for wisdom, guidance and humility,” says Mgojo.

Mgojo believes that, in order to be a great leader, you have to surround yourself with great people. “All I have to do is define the score of the orchestra (strategy). Get the best musicians, certainly, but what makes them produce beautiful music is the combined effort of their individual capabilities under the direction of a great conductor. The smarter the people who surround you, the more you can learn from them. All you have to do is to help them have a vision of where they should go in the future. If you excite and empower them, they will drive you to the destination,” he says.

It’s his view that leaders should help people believe in themselves and understand their own potential.

“I like talking to people and I like to hear their view. I can also be very demanding because of the nature of the job but at the end of the day, people should still have their dignity intact and feel they are valued,” he concludes. 

 

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