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WESCOAL HOLDINGS LIMITED - Production and sales report, strategic update and trading statement

08 November 2019 - 15:30 PM
WSL
Production and sales report, strategic update and trading statement

WESCOAL HOLDINGS LIMITED
Incorporated in the Republic of South Africa
(Registration number 2005/006913/06)
Share code: WSL
ISIN: ZAE000069639
(Wescoal or the Company or the Group)

Production and sales report, strategic update and Trading statement

1. Interim Period Production and Sales Report

                          September  September
 Interim period volumes   2019           2018          Variance
                                         
                          t'000        t'000          t'000      %

 Production               2,732        3,184           -452     -14%
 Elandspruit              1,287        1,419           -132     -9%
 Khanyisa                 695          77               618      803%
 Intibane                              133             -133     -100%
 Vanggatfontein           749          1,555           -806     -52%


 Sales                    3,107       3,047              59     -2%
   Elandspruit            871         1,055            -184     -17%
   Khanyisa               666         104               562     540%
   Intibane               -           166              -166     -100%
   Vanggatfontein         1,054       1,122             -68     -6%
 Mining                   2,591       2,446             145      6%
 Trading                  516         601               -85     -14%

Production:

Group mining production level for the six months to 30 September 2019 is in total 14% lower than the comparable
period of September 2018 (the Comparable Period). Production increase at Khanyisa Complex was offset by lower
production from the other operations.

Elandspruit production was negatively impacted by the ongoing suspension of underground mining operations since
October 2018 due to the contractor having terminated the agreement on the basis of it not being economically viable.

Vanggatfontein production is 806 000 tonnes (52%) lower than the Comparable Period, following onboarding of
Stefanutti Stocks Mining Services during March 2019, appointed to take over from the previous contractor (Liviero
Mining). Subsequent to the mining contractor changeover, Vanggatfontein was put on a production downtime
(associated with violent protest action at the mine) for a period of six weeks as reported during April 2019 and a
regulatory shutdown (section 54 directive) that was imposed following the fatal accident in June 2019. In addition to
these stoppages, production was also impacted by below target equipment availability, absenteeism and production
sequence inefficiencies.

Khanyisa Complexs production increased by 618 000 tonnes relative to the Comparable Period, mainly as a result of
the operation being 100% owned by Wescoal after the 65% interest acquisition announced during February 2019.

Sales:

Mining sales volumes relative to the Comparable Period are 6% higher, inclusive of 549 000 tonnes of coal bought
from third parties in order to meet contractual commitments (mainly Eskom coal supply agreements, 546 000 tonnes
for Vanggatfontein and 4 000 tonnes for Elandspruit) and 181 000 tonnes of intergroup sales from Khanyisa Complex
to Vanggatfontein.

Trading sales are 14% lower than the Comparable Period, reflecting the impact of increased market competition as
more coal producers continue to target domestic coal supply to offset lower priced export market business, together
with ongoing changes in the market place.

2. Quarterly Production and Sales Report

                           Quarter        QTR
 Quarterly Volumes         Sep19         Jun19               Variance
                           
                            t'000        t'000           t'000     %

 Production                 1,595        1,136             459   40%

 Elandspruit                  697          590             107   18%
 Khanyisa                     370          325              45   15%
 Intibane                       -           -
 Vanggatfontein               529          220             309  141%


 Sales                      1,765        1,338             436   33%

   Elandspruit                446          425              21    5%
   Khanyisa                   323          343             -20   -6%
   Intibane                     -           -                -   -
   Vanggatfontein             725          330             395   120%
 Mining                    11,494        1,098             396   36%
 Trading                      271          246              24   10%

Group mining production levels increased by 40% (459 000 tonnes) during the second quarter, compared to the
preceding quarter to June 2019, following various targeted interventions.

The Company activated various initiatives to address operational downturn at Vanggatfontein and to increase
productivity and, as a result of such initiatives, during Q2 FY2020 Vanggatfontein mines production increased by
309 000 tonnes (141%) compared to the preceding quarter. Key improvement initiatives implemented to deliver the
marked productivity improvement include:

    -       deploying senior Wescoal personnel directly at the operation;
    -       appointing an independent productivity consulting group, Renoir Consulting, to assist with the development
            and implementation of a back-to-basics turnaround strategy;
    -       fast tracking the voluntary separation process to exit employees in order to address absenteeism and lower
            employee productivity;
    -       acquiring new primary earth moving equipment fleet that has since been delivered to the operation during
            September 2019 to replace fully the old, unreliable kit;
    -       implementing improved operational management control processes, operating and supervisory structures;
            and
    -       appointing a mining sub-contractor (with full complement of own equipment and personnel) under Stefanutti
            Stocks Mining Services to rapidly accelerate waste removal and pit sequencing, a pre-requisite to delivering
            high volumes of coal consistently.

The process to evaluate the reopening Elandspruit underground operation is taking longer than anticipated and the
internal pre-feasibility report is expected to be finalised during this quarter. In order to mitigate against the loss of
underground tonnes, the Company reached an agreement with the opencast contract mining company to increase
capacity to 240 000 tonnes of coal production per month. This initiative has resulted in second quarter production
being 18% higher than the preceding quarter. The mine plan has also been optimised to allow for better sequencing
and a consistent high volume of opencast production.

3. Strategic update

Achieving Stability across operations is the top priority in the execution of the three-pillar strategy of Stability, Sustainability
and Scalability. Elandspruit and Khanyisa Complex are now demonstrating the ability to operate at the strategic sustainable
production capacity levels of 240 000 tonnes and 100 000 tonnes per of coal respectively. Vanggatfontein production has
been operating at above 200 000 tonnes per month over the last few months and focus now on steadily ramping up
production during the last quarter of the financial year to over 300 000 tonnes of coal production per month.

Wescoals strategic focus of progressing Stability and Sustainability in laying the foundation to grow sustainably is also
increasingly becoming important in light of operational challenges experienced during this reporting period. In this regard,
a number of capital expansion and extension growth projects are currently being executed.

Expansion and extension growth projects:

    -    Moabsvelden  an extensive process is being followed to appoint a contract miner for the development of the
         project. Negotiations are at an advanced stage with preferred contract miners and an appointment is expected
         to be made no later than 31 December 2019. As previously communicated, first coal and delivery to Eskom
         pursuant to the 10-year coal supply award will take place in H1 2020.

    -    Arnot Mine  Eskom consent remains the last outstanding condition precedent. Furthermore, Arnot Opco is
         awaiting Eskoms response on the coal supply tender for Arnot power station submitted in April 2019. Review
         of the current state of operations, as is status, has been completed and integration work will commence as
         soon as conditions precedent to the transaction are met, with start-up still expected during H1 2020.

    -    Khanyisa Complex
            o The operation continues to perform well and is maintaining consistent profitability and cash
              generation. The last instalment in terms of the 65% interest (Aztolinx) transaction is scheduled for
              December 2019, with the full purchase price having been self-funded by cash generated at Khanyisa
              Complex as previously announced.
            o Triangle 2 extension project, the opening of a new box-cut and coal face required for the remaining
              life of mine, is well advanced and first coal will be reached during November 2019.

    -    Vanggatfontein (VG5 pit)  This project, an extension project to replace VG3 pit during H2 2020, is already
         underway and well progressed to open a new box-cut for an additional mining pit and coal face. The project
         is being pursued as a joint development with a neighbouring mining right holder, which would further enable
         extraction of some 450 000 tonnes boundary pillar area coal that would otherwise have been sterilised.

Assets for sale:

The Leeuw Braakfontein Colliery (LBC) disposal transaction was cancelled. The conditions precedent in terms of regulatory
approvals were not closed and the potential acquirer opted not to further extend the timelines. The asset remains non-
core to Wescoal and a new asset disposal process may be considered in the near future.

4. Trading statement

Shareholders are advised that Wescoal is in the process of finalising its interim results for the period ended 30 September
2019.

Group profitability has been significantly impacted (negatively) by factors outlined in the above production and sales report.
Lower than breakeven production volume at Vanggatfontein resulted in significant losses being incurred over the entire
interim reporting period. However, various initiatives implemented during the second quarter (Q2 FY20) are showing
material productivity improvement. This improvement is expected to continue enabling achieving desired production levels
during the second half of FY20 and in turn return Vanggatfontein to profitability.

Group profitability was also impacted by increased mining costs at Elandspruit mine as a result of the mine entering the
phase of higher strip ratios, lower quality coal (lower yields) and increasing haul distances to established infrastructure. A
number of cost containment initiatives have been introduced, mainly through optimising the mine plan and coal blending
to improve product yields. In addition, increased opencast volumes are already contributing to the reduction of unit costs.

A number of corporate activities, including Universal Coal and South32s SAEC acquisition transactions which Wescoal
pursued and progressed to advanced stages, were closed off during H1 FY20. Residual once-off costs related to advisory,
structuring, legal and due diligence amounted to R18 million.

The Company expects, with reasonable certainty, that Headline Earnings Per Share ("HEPS") and Earnings Per Share ("EPS")
for the period ended 30 September 2019 are to vary by the amounts set out below:

-    HEPS will be a loss of between 10.5 and 12.5 cents (30 September 2018: 23.5 cents); and
-    EPS will be a loss of between 10.6 and 12.6 cents per share (30 September 2018: 25.2 cents).

Despite significant headwinds and the downturn in profitability, the Company was able to maintain positive cash generation
from operations with EBITDA expected to be between R140-150 million.

The above information has not been reviewed or reported on by Wescoals auditors.

The Company expects to release its interim results on or around Tuesday 26th November 2019.

8 November 2019

JSE Sponsor
Nedbank Corporate and Investment Banking

IR Advisor
Singular IR

Date: 08/11/2019 04:30:00
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