Presentation at the South African Academy of Engineering Annual Induction Dinner

The contribution of the minerals industry to the future of South Africa Presentation by Exxaro’s Chief Executive Officer, Dr Con Fauconnier, at the South African Academy of Engineering Annual Induction Dinner held in Johannesburg on 28 June 2007.

28 June 2007

Contents

• The international context

• Current state of commodity markets

• The role of China with regard to mineral demand

• Underinvestment in global mining capacity

• Mineral industry outlook

• Exploitation of minerals in South Africa

• Contribution of the mineral industry to South Africa’s economy

• Role of the mineral industry in the future

• Key challenges

• Sustainability

• Conclusions

The current state of commodity markets

INDEX OF COMMODITY PRICES 1985 - 2007

0

50

100

150

200

250

300

350

400

450

19

85

19

86

19

87

19

88

19

89

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

Ind

ex (

1985

= 1

00)

Base Metals

Iron Ore

Steel

Steam Coal

Strong demand and market deficits illustrated by the significant increase in prices

Sources: I-Net, AME

The role of China

• China has gone from 5-8% of world demand for metals in 1990 to 25-30% in 2005/06

• Even allowing for a slowdown from current growth rates, China is likely to account for 30%+ of world demand by 2010 and 40%+ by 2020

Strong consumption growth in China had a major impact on overall mineral demand

Source: Macquarie

Relative underinvestment in new mining capacity

METAL PRICES AND EXPLORATION EXPENDITURE

50

70

90

110

130

150

170

190

210

230

250

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Eco

no

mis

t M

etal

Pri

ce I

nd

ex

1

2

3

4

5

6

7

8

Exp

lora

tio

n E

xpen

dit

ure

(U

S$

bil

lio

n)

Exploration Expenditure

Metals Price Index

• Low commodity prices of the 1990s and early 2000s resulted in low investment in new mining production capacity

• Increased investment from 2004 onwards will only result in significant new productive capacity with a lag of 5 to 7 years, due to the long lead times required to bring new mines to production

Source: MEG, I-Net

The lag in supply response will see market balances restored only in 2008/09

Mineral industry outlook

Industrial Revolution

- UK, Europe

USA, Japan, Europe

BRICMI+ ?

A strong possibility that industrialisation, urbanisation and infrastructure development in China and other emerging economies result in a new “super cycle”

Note: BRICMI refers to Brazil, Russia, India, China, Mexico and Indonesia

Source: BHP Billiton

Mineral exploitation in South Africa

• Started with copper mining in Namaqualand in the mid-1800s, followed by the exploitation of diamonds, gold, coal, iron and manganese ore and the minerals associated with the geological treasure chest of the Bushveld Complex

• Played a major role in the development of South Africa’s infrastructure

• Important factor in the development of the country’s secondary industries and financial infrastructure

• Instrumental in the establishment of world-class academic and research institutions

• In 2005, some 55 different minerals were produced from 1113 mines and quarries and mineral exports were made to 101 countries

• In 2006 some 72% of South Africa’s primary mineral sales were destined for the export market

Has been a cornerstone of the country’s economy for more than a century

Contribution of the mineral industry to South Africa’s economyRemains a key industry

Sources: SARB, StatsSA, COM

In addition, accounts for:

• 30% of market value of the JSE

• 50% of volume of Transnet’s rail and ports

• 93% of electricity generation via coal power plants

•16% of electricity demand

• About 39% of liquid fuels via Sasol’s use of coal

MINING'S CONTRIBUTION TO THE SOUTH AFRICAN ECONOMY 2006

0

10

20

30

40

50

60

GDP Fixed Investment Formal Employment Merchandise Exports

Co

ntr

ibu

tio

n (

%)

Direct

Direct plus Indirect

Role of the mineral industry in the future

The potential role of the mineral industry in future is illustrated by South Africa’s resource base

• In view of South Africa’s mineral resource base and expected demand growth from, especially, the highly populated emerging economies of the world, South Africa’s mineral industry will continue to have a decisive impact on the country’s economic future, if the constraints facing the industry are overcome

SOUTH AFRICA'S ROLE IN WORLD MINERAL SUPPLY 2005

0

10

20

30

40

50

60

70

80

90

100

PGMs

Man

ganes

e Ore

Chrom

e Ore

Gold

Verm

iculit

e

Alum

ino-s

ilica

tes

Vanad

ium

Zirconiu

m

Titaniu

m M

iner

als

Fluors

par

Nicke

l

Uraniu

m

Antimony

Phosphat

e Rock

Coal

Iron O

re

Co

ntr

ibu

tio

n (

%)

Reseves %

Production %

Domestic economic growth will also bolster mineral demand

SOUTH AFRICA'S HISTORICAL AND FORECAST REAL GDP GROWTH

-3

-2

-1

0

1

2

3

4

5

6

7

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

GD

P G

row

th (

% C

ha

ng

e)

Forecast

Especially in view of Government and other infrastructure development

Source: Global Insight

Key Challenges facing the mining sector

• Rising cost pressures eroding benefits of higher prices

– Fuel, spares, labour, cement, steel, timber, etc.

• Meeting health and safety milestones

• Infrastructure constraints

– Electricity- impact on operations and safety

– Liquid fuels

– Transport (rail, ports, roads)

– Water services

• Availability of machinery, equipment, fuels and tyres

• Regulatory uncertainty

– Beneficiation legislation

– Finalising the royalty bill

– Continued red tape on mining and environmental licensing

• The availability of skills, especially project management, engineering skills• Strong rand exchange rate

An example – the skills shortage

Engineers Artisans

Source: JIPSA

South African mining real gross fixed capital formation, 1994 to 2006

0

5000

10000

15000

20000

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

R'b

illio

ns

in 2

000

mo

ney

ter

ms

.

Growth 7.8% pa.

16% decline pa.

7.2%

New capital expenditure in Australia

Impact of the challenges on mining investment in SA

Sources: SARB, ABARE

Resulted in a deterioration in fixed investment during times that an investment boom was experienced in other commodity economies

World per capita carbon dioxide emissions

• South Africa is one of the most carbon emissions-intensive countries in the

world

• It is responsible 43% of total African emissions, three times more than

second largest emitter (Egypt)

SustainabilityThe challenges of sustainable development - illustrated by the issue of carbon dioxide emissions

SustainabilityWill require innovative solutions from our scientists and engineers with regard to our soil, air, water, human population and biological diversity

Conclusions

• It is expected that the international and local markets for South Africa’s mineral products will remain positive for some time to come

• South Africa’s minerals and mining sector is a mature industry that has demonstrated over a long period that it can consistently and competitively deliver products of high quality

• The country has a world-class resource base

• The mineral industry has proven in the past that it can tackle challenges successfully and will need to, in partnership with with Government, approach the current constraints in the same manner and spirit

• The challenges of sustainability will tax the capacity of the industry, domestically and internationally, to come up with creative long-term solutions

• The mineral industry will, undoubtedly, continue to play a key role in the growth and development of South Africa’s economy and society

THANK YOU