South African Energy Landscape

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South African Energy Landscape

• Sipho Nkosi
• CEO Exxaro Resources Limited
• Merrill Lynch Global Metals Mining Conference
  May 2009

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Introduction to Exxaro
Our commodities
At a glance
COALthe fourth largest coal producer in South
Africa MINERAL SANDSone of the world's top
three producers of zircon and chlorinatable TiO2
slag BASE METALS AND INDUSTRIAL MINERALSthe
only zinc producer in South Africa IRON ORE 20
holding in Sishen Iron Ore Company

• South Africas largest diversified resources
  company
• One of the top 40 companies on the JSE
• 10 135 employees
• Head office in Pretoria, South Africa
• Revenue R13,8bn
• Net operating profit R2,5bn
• Annual results for 12 months ended
• 31 December 2008

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Opportunity in Africa

• 563bn required to meet Africas 20 year power
  needs
• Annual electricity demand growth of 4.4 over
  next 25 years
• 270GW expansion by 2030 (7xcurrent size of SAs
  utility - Eskom)
• Crucial need private sector investment which
  points to significant power sector reforms
• South Africa would have to deal with tariff
  structures that remain below the cost of
  production (set to grow further)
• Need to diversify energy mix and adoption of
  renewable technologies
• IPPs still achieve 20 returns in Africa versus
  15 in South America and 2.5 in Eastern Europe

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Cost of unserved electricity in RSA
Cost of unserved electricity in South Africa R18
000/MWhr
SA Megaflex tariff R270/MWhr
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Cost of load shedding during 2008 in RSA
Cost of Electricity in South Africa R7,500/MWhr
SA Megaflex Tariff R270/MWhr
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Cost of electricity in Nigeria and RSA
Nigeria 140 million people 3000MW grid
electricity Balance on own generation At a cost
of R4,500/MWhr
RSA 60 million people 36000MW grid
electricity Megaflex Tariff R270/MWhr
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Matching supply and moderate demand
Generation Capacity vs Electricity Demand
100,000
Short term IPP
Can we match moderate demand growth?
Opportunities
90,000
Yes..., in future..., but how?
80,000
Long term IPP
Opportunities
70,000
Available Capacity
Short term How? Peakers, EOS, Renewables?
60,000
Minus 19
Reserve Margin
50,000
MW
High Demand
40,000
Growth
30,000
Moderate Demand
20,000
Growth
10,000
Linear (Low
Demand Growth)
-
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
Year
Demand is already suppressed
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Market matching supply and moderate demand
Short Term IPP Opportunities
SA Generation Capacity
New Base Load (Eskom/IPP) to balance demand
90000
Eskom Base Load IPP Tender 2008
GAP New LT IPP opportunities gt 10,000-25,000MW
MTPPP's
Cahora Bassa (Extended contract in 2008)
80000
Cahora Bassa (Old contract)
New Renewable Energy Eskom as Single Buyer
70000
Base Load IPP tender
New Eskom Wind
Short term Peakers, EOS, Renewables?
New Eskom Nuclear PBMR
Medupi, Kusile - New Eskom Base Load
60000
IPP Co-gen
New IPP (Other) Eskom as Single Buyer
Medupi
50000
Kusile
IPP Wind
IPP Hydro
IPP Bagasse
MW
40000
IPP Coal fired
New Eskom pumped storage (2)
De-mothballing
30000
New "DME" IPP Peaking Stations (2)
New Nuclear
Co-gen
New Eskom Peaking (2)
Eskom Coal-fired "De-Mothballed (3)
20000
Eskom Nuclear (1)
Eskom pumped storage (2)
10000
Eskom hydroelectric (6)
Eskom gas turbines (2)
Existing Eskom coal-fired (10)
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Capacity Summary
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
Year
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_at_19 (154) Supply reserve margin
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Prognosis for the reserve margin
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Eskom Base case
10 demand savings
5 demand savings
2010 Soccer World Cup
net capacity reserve margin
Key assumptions

• Electricity Growth 4 p.a
• Supply side assumptions Eskom supply base case
  plans including some IPPs
• Excludes some renewable options, co-generation
  and possibly innovative options
• Demand savings calculation Annual energy is
  reduced by 5 or 10, and then the peak demand is
  calculated to derive the projected reserve margin

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05
07
09
11
13
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Source Eskom ECS Presentation October 2008
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A problem a decade in the making

• SA reserve margin in South Africa, has been
  steadily declining over the last ten years due to
  increasing demand and limited generation
  capacity.
• In 2006, there were incidents of regional load
  shedding due to network inadequacies and
  insufficient regional generation resources.
• In 2007, the first incident of national load
  shedding was experienced due to the inability to
  supply demand with the operational generation
  capacity.
• After successfully navigating the winter peak
  demand period (37 GW), during the generation
  maintenance season in October, November and
  December 2007 there were several more incidents
  of load shedding.
• In January 2008, there was almost daily load
  shedding for 2 weeks leading to a Government
  declaration of a national power emergency and a
  plan of action on the 25th of January 2008.
• This had a severe impact on production levels in
  all sectors of the economy and dented the image
  of Eskom and South Africa.

Solutions present us with opportunity to leverage
macro-economic benefits from the build programme
and creating a more energy productive economy -
the right thing from a climate change and global
competitiveness point of view
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Eskom generation resources and imports
28 000km of Transmission lines (over 132kV to
765 kV AC) covering an area similar to the part
of Western Europe from Berlin to Madrid.

• 25 Operational Power Stations.
• 38 979 MW of operational capacity.
• Just over 80 coal-fired. Mix of nuclear, open
  cycle gas turbines, hydro and pumped storage
  plant in remaining 20.
• Imports of about 1520MW.
• Returning 3 mothballed coal-fired stations,
  building 2 coal-fired and a pump storage station
  and expanding OCGT station.

• 29 of South Africas energy demand provided by
  electricity.
• Forecast of about 38GW peak demand in 2008 and
  over 250TWhrs of energy demand.
• Largest 138 customers consume nearly 40 of the
  energy.
• Largest 40 000 customers consume nearly 75 of
  the energy.
• Approximately 8 million customers consume about
  20 to 25 of the energy.

Consistent tight supply-demand balance with a
very extended electricity transport system
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SAs electricity supply industry historical
overview
White Paper on Energy policy drives country
electricity strategy
Eskom Govt engage on new plant
Decision on ES1 reversed. Medupi decision taken
Construction of Medupi begins
1999 2000 2001 2002 2003 2004 2005 2006 2007
Reserve Margin 27.1 24.6 23.2 19.2 15.9 8.2 10.8 6.4 5.1
Capacity added (MW) 900 300 300 0 0 0 195 377 1 684

Load Factor () 61 60.5 60 62.5 66.5 69.0 70.0 72.5 74.0
Direct correlation between the declining reserve
margin and the increase in load factor and plant
unavailability. This also put pressure on coal
stockpiles. At the same time there was
relatively small levels of new generation
capacity added to the system.
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Critical electricity situation since January 08
Notes

• Security of Supply Government launched a
  National Response Plan on the 25th of January
  2008

• The size of the deficit for the next few years
  was determined to be an average of 3000MW and
  26TWhrs and this is the amount that needs to be
  reduced in the power system demand to ensure
  balance
• To set an example, a focus was to drive down
  demand in the over 100,000 Government buildings
  throughout the country
• The supply side options required a co-ordination
  of Government efforts to support the traditional
  new-build programme
• An enabling framework for co-generation and other
  IPPs to be concluded

Cost of Supply A social dialogue between all
key players was convened in May 2008 using a
multi-stakeholder organisation (NEDLAC) to
facilitate the discussion around the cost of
supply. The regulator has publicly stated its
view on a 5 year price path and Government has
committed to financial support and possible
guarantees for Eskom debt.
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A three-phased roadmap to recovery
4000 MW
3000 MW
System Security Recovery
Transition
Power conservation Program and supply side options
Transition
Power Rationing
4 years
4 weeks
4 months
1 March
1 February
1 July
2012
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Conclusions

• Underlying savings or reduction to-date once
  weather is taken into account is about 2 to 3.
  If not sustained and increased vulnerability to
  single incidents is increased. We therefore need
  to focus on ways to achieve the required 10
  saving.
• Focus on energy efficiency while minimising
  economic impact which requires rapid resolution
  with all stakeholders.
• Medium term outlook requires an energy balance
  where efficiency improvements provides
  opportunity for economic growth while ensuring
  sustainable generation plant performance.
• 5 to 10 year prognosis is dependant on on-time
  commissioning of the build programme and other
  supply side initiatives.

With the increased infrastructure costs, the
current credit crisis and uncertainty on the
tariff price path, the prognosis could worsen.
However an opportunity also exists to leverage
benefits from the build programme and to create
an energy efficient/productive economy.
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Exxaros immediate approach
Medupi Grootegeluk Expansion Project
Medupi means The soft rain that brings
prosperity
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Exxaros current properties
Six farms from which both power stations will be
supplied from. New order mining rights have been
applied for.
Inferred
Daarby Fault
Current Pit
Measured
Inferred
Indicated
Five additional farms where we have exploration
rights
Eenzaamheid Fault
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Medupis production capacity to meet fuel demand
of Eskoms new power station
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• The feasibility study forms the basis for project
  execution.
• Eskom requires an additional dedicated source of
  coal from the Grootegeluk Mine for use by Eskom
  in the Medupi Power Station, or any other of
  Eskoms power stations.
• The objective of the Exxaro Medupi Project is to
  provide 14.6 million tons per annum of coal to
  Eskoms Medupi power station.
• This will be achieved through expansion of the
  current Grootegeluk open-cast mine and
  beneficiation of the resultant run-of-mine
  material through two new processing circuits,
  Grootegeluk 7 and 8. The Exxaro Medupi project
  will commence with coal delivery at the end 2011
  and full commissioning complete by the end of
  2013.
• A feasibility study was undertaken to define the
  most efficient solution and to investigate
  opportunities for enhancing Exxaros return on
  investment on this project.

The base case feasibility study has been
completed and a decision was required from the
board on the correct course of action to follow
to progress the project and to commit funds for
implementation.
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Medupi power station
Medupi Power Station 4800MW
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What is the impact on Grootegeluk and Lephalale

• The mine will grow from 58 Mtpa in total and 19
  Mtpa of product to about 110 Mtpa in total and
  35 Mtpa, which will significantly increase the
  operating income, cash flow and return of
  investment.
• During construction up to 7 000 jobs will be
  created on the construction site at the Medupi
  Power Station. Construction at the mine will
  create up to 2 000 jobs. The local community will
  benefit from these.
• At least 60 infrastructure growth is expected,
  which will have a positive impact.
• This project will set the scene for future growth
  from the Exxaro Coal project pipeline.

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THANK YOU
www.exxaro.com