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Edited Transcript of SOL.J earnings conference call or presentation 24-Feb-20 1:00pm GMT

Q2 2020 Sasol Ltd Earnings Call

Johannesburg Feb 27, 2020 (Thomson StreetEvents) -- Edited Transcript of Sasol Ltd earnings conference call or presentation Monday, February 24, 2020 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brad Griffith

Sasol Limited - EVP of Chemicals

* Fleetwood Rawstorne Grobler

Sasol Limited - President, CEO & Executive Director

* Paul Victor

Sasol Limited - CFO & Executive Director

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Conference Call Participants

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* Adrian Spencer Hammond

SBG Securities (Proprietary) Limited, Research Division - Research Analyst

* Alex Robert John Comer

JP Morgan Chase & Co, Research Division - Research Analyst

* Christopher Nicholson

Morgan Stanley, Research Division - Research Analyst

* Gerhard Engelbrecht;Chronux Research;Analyst

* Henri Jerome Dieudonne Marie Patricot

UBS Investment Bank, Research Division - Associate Director and Equity Research Analyst

* Herbert Kharivhe

Investec Bank plc, Research Division - Research Analyst

* Sriharsha Pappu

HSBC, Research Division - Head of GEMs Petchems

* Thomas P Wrigglesworth

Citigroup Inc, Research Division - Director and Chemicals and Basic Materials Analyst

* Wade Napier

Avior Capital Markets (Pty) Ltd. - Research Analyst

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Presentation

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Operator [1]

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Good afternoon, ladies and gentlemen, and welcome to Sasol's Financial Year 2020 Interim Results Conference Call. Today's call will be hosted by Fleetwood Grobler, President and Chief Executive Officer; and Paul Victor, Chief Financial Officer. Following the presentation, an interactive Q&A session will take place.

I'd now like to hand the conference over to Mr. Fleetwood Grobler. Please go ahead, sir.

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Fleetwood Rawstorne Grobler, Sasol Limited - President, CEO & Executive Director [2]

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Thank you, operator. Good afternoon, everyone. This is Fleetwood Grobler speaking. Thank you for joining us -- this call during which Paul Victor and I will discuss Sasol's financial results for the 6 months ending December 2019. Other members of our management team will support us during the Q&A session.

We've published a slide presentation of our results, which you can download from the investor center on the Sasol website. In the interest of time, we will not focus and discuss all slides as we would like to make more time available for your questions.

Before we begin, I would like to refer you to the safe harbor note on the forward-looking statements contained on Slide 2 of the presentation. At the time of my appointment, I said we needed to prioritize some practical, short term objectives. In short, we need to be realistic around the challenges we face, focus on the issues within our control and start to deliver on the expectations of all our stakeholders. It has been almost 4 months since I took the reins, and so I want to share the work we have been doing.

As you know, the industry has faced intensifying macro headwinds over the last few months. Sasol has not escaped these and the challenges we have faced are reflected in the results we are announcing. But this macro volatility has served only to intensify our focus on improving the factors within our control, and there is much to deliver on.

So let me start with a recap of some of my key focus areas in these first few months. I was clear at the outset that we need to focus on delivery in order to rebuild confidence. We delivered a satisfactory operating performance and performed well on areas such as working capital, management as well as cost containment.

Admittedly, there are many areas in which we can do better. Frankly, a satisfactory performance is not good enough. We need to focus on areas such as delivering efficiencies through continuous improvement, making more changes to optimize the cost base and working capital. Thirdly, we need to focus on the transformation of Sasol's culture. I have introduced changes to deliver the key behavior shifts to progress our improved culture, and I personally commit to setting the right tone from the top.

Finally, sustainability remains a critical focus to position Sasol over the future. Our vision for sustainability also needs to consider the significant stakeholder ramifications, and our intention is to give a full update at our Capital Markets Day later this year.

With that context, let me move on to the business performance over the last 6 months. The safety of our people and contractors that service our business remains a key priority and the tragic loss of 2 of our Mining colleagues has been most difficult and efforts to erase safety risks are continuing.

Moving to our operations. A solid performance has been delivered across the business. Slide 7 highlights the regional performance of our operations across the globe. We have pockets that are challenging, such as Mining, and a productivity turnaround plan is underway to address this. In North America, our LCCP units in operations are ramping up and the cracker is performing well after the catalyst change in the acetylene reactivation.

Our Eurasian production has been lower in response to the lower market demand, set with volumes from the new oxidation unit in China. This unit's operation has been impacted following the coronavirus outbreak, and seriousness and duration of the impact is yet -- as yet unknown.

As a final point, let me stress that although we are in the peak gearing phase, we have taken care not to cut corners that could compromise asset integrity.

Now turning to the LCCP. There is no escaping that the past year has presented considerable challenges, including more recently with the incident at the LDPE unit. The delays in the LDPE unit start-up were a significant disappointment, but those issues are isolated. The root cause of the incident established better piping support structure within the LDPE emergency vent system failed during commissioning, causing a pipe to dislodge. The mediation work is underway. However, some of the high-pressure piping material component needing replacement have long lead times and beneficial operation for the LDPE unit is expected in the second half of this calendar year.

The cost of the restoration project will mostly be recovered under our insurance policy, and the overall project cost guidance of USD 12.6 billion to USD 12.9 billion remains intact. We are well on track for completion of the project and are rapidly nearing the end of our capital spend, and about 80% of the project's total installed output is already online.

It is noteworthy that in the second half, we expect to reach an all-important turning point as we see a positive EBITDA contribution from the LCCP. Management remains focused on near-term actions and controllable factors. Our financial performance have been impacted by the downturn in the macros which has resulted in soft pricing across the portfolio, and EBITDA has decreased by 27% to ZAR 19.6 billion. Our normalized cash fixed costs increased below our targeted 6% inflation level and our capital spend has declined as we near the end of the LCCP's construction. With our debt levels consistently within our guided range and decisive measures taken to protect and strengthen the balance sheet, we have made tough decisions to pass the interim dividend.

Regarding our balance sheet, we are working hard to protect our investment-grade rating, preserve asset integrity and restore dividends as soon as we can to allow shareholders to benefit from the anticipated positive earnings. Meanwhile, we are making changes to improve our culture. Culture change inevitably takes time and we have some way to go. As part of this journey, we are ensuring an advancing change readiness at leadership levels and across the organization.

While it is critical that we optimize the efficient running of the business in the short term, we have to position Sasol for a sustainable future. In parallel, work is underway to create the framework which will guide us in building a robust Sasol. Part of this framework entails improving our competitiveness, embedding our culture change and responding to our sustainability challenges. To this end, we are committed to delivering a sustainability roadmap and an update to our broader business strategy at our Capital Markets Day at the end of this year.

Let me hand over to Paul to report on our financial performance. We will then open up the session for questions. Thank you.

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Paul Victor, Sasol Limited - CFO & Executive Director [3]

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Thank you, Fleetwood...

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Operator [4]

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Hi, sir, I think your line might be muted.

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Paul Victor, Sasol Limited - CFO & Executive Director [5]

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Hello, is it clear?

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Operator [6]

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It's clear. Please go ahead, sir. Thank you.

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Paul Victor, Sasol Limited - CFO & Executive Director [7]

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Okay. Thank you, Fleetwood. Good afternoon, ladies and gentlemen. It's my pleasure to take you through our financial results for the interim reporting period. I think our results were negatively impacted by the difficult macroeconomic environment. In short, we faced a 9% decrease in the ramp of barrel crude oil price, softer global chemical prices and low refining margins. Against this backdrop, I'm pleased to report that our volumes, cost containment and working capital levels were mostly tracking our internal targets.

Our Mining business, on the other hand, experienced a very difficult second quarter, which negatively impacted our results. Mining is a key driver for the integrated coal-to-liquid chain -- value chain.

As through our guidance, we have managed our balance sheet debt levels to below our newly approved bank covenant levels with gearing at the upper limit of the guided range provided for in December 2019. We have been de-gearing and will now commence the transitory phase of deleveraging the balance sheet as the LCCP's construction is coming to an end. The commensurate cash flows from the LCCP will now start to positively impact EBITDA and flow through to the balance sheet. Very important to note that this will, however, be a very gradual process and it's particularly important that we continue to protect and strengthen the balance sheet by focusing on the controllable factors at our disposal. We have been able to effectively manage most of these levers in the past and are committed to do so in the future, especially in the current volatile macroeconomic environment.

We are also advancing our portfolio activities as we are progressing currently to achieve above 25% level of the $2 billion target previously communicated to the market. In this process, we will continue to safeguard the long-term shareholder value, while still aligning our portfolio to the company's long-term strategy.

On Slide 13, we see the group's profitability. Adjusted EBITDA decreased by 27% or ZAR 19.6 billion, largely due to the macroeconomic environment, the LCCP start-up losses incurred and the lower-than-expected performance from our Mining business. The decrease in cash generated by operating activities was limited to 21% or ZAR 19.6 billion as a result of the proactive cost and working capital management activities.

Earnings were also negatively impacted by the increase in the LCCP depreciation, and the interest charges now charged to the income statement as a result of almost 80% of the LCCP units being operational, which is very much in line with what we've messaged to the market before. Previously, we would have kept a lot of interest to the balance sheet, and because of these units achieving beneficial operation, those interest charges will now follow through to the income statement.

For these reasons, earnings per share decreased by 73% to ZAR 6.56 per share compared to the prior period. Core headline earnings per share was ZAR 9.20 per share, down 57% compared to the prior period. We expect the second half earnings to be much improved as we anticipate a much better revenue cost matching from the LCCP as it increases production and sales volumes and as capital spend comes to an end.

Macroeconomic factors reduced operating profit by 39%, as shown on Slide 13. Turning to the items within our control. Total costs reduced operating profit by 19%. However, as stated before, this is mainly as a result of the LCCP losses due to high depreciation and operating costs.

On a normalized basis, our cash fixed cost increased by 5.4%, which is below our 6% inflation target. The benefits of higher sales volumes, mainly from the LCCP, had a positive impact of 9% on operating profit. We do expect further contributions from the LCCP in the second half of financial year '20, with a significant uplift in earnings expected for financial year '21.

Our capital expenditure for the period amounted to ZAR 21.4 billion, of which ZAR 10 billion or $647 million relates to the LCCP as depicted on Slide 16. Our capital expenditure forecast of ZAR 38 billion for financial year '20 is sufficient to sustain the foundation business and to support the final execution of the LCCP.

I need to reiterate that we have stayed committed to our capital allocation framework and will ensure that the operations and asset health is not compromised. We have limited cash capital -- we have limited growth capital significantly to the LCCP's completion and the (inaudible) activities.

Going forward, we forecast ZAR 50 billion of capital expenditure for financial year '21.

Turning to Slide 17, it shows our gearing is at 65% and our net debt to EBITDA is at 2.9x, which was within the bank-agreed covenant level of 3.5x and the market guidance on gearing of between 55% and 65%. The increase in gearing from financial year '19 was impacted by the adoption of the new lease standard, IFRS 16, which added 4% to our ratio, coupled with the impact of the LCCP.

We have reached de-gearing and have started, as I said before, the transitory deleveraging phase of the balance sheet. Careful navigation of the balance sheet's deleveraging will be required during the volatile macroeconomic environment period, and we have limited [headroom.] Our objective remains to maintain our long-term gearing range to between 25% and 35% and the net debt to EBITDA ratio below 1.5x. Protecting our investment-grade rating remains quite essential. Over time, we remain committed to increase our dividend payout ratio to a targeted rate of 45% or 2x dividend cover, allowing shareholders full participation in our cash flows. Again, very important to note that as soon as the balance sheet starts to deleverage, the first part of capital allocation will be towards the increased dividend.

It's also quite important that we obtain and maintain an effective capital structure for the balance sheet. More specifically, over the course of the past couple of months, we have refinanced the asset-based LCCP loan with several other financing instruments in place. We have staggered the dematurity profile to very much the cash-generating ability of our assets. We currently have a liquidity buffer of around $3 billion, which allows us to complete the remainder small evolution on the LCCP in terms of capital spend, but with sufficient headroom to withstand further macroeconomic volatility.

We will continue with our fit-for-purpose hedging program to mitigate against any market exposures, which we may experience. We are all committed to take all prudent actions necessary to ensure that we manage our balance sheet to the targeted gearing levels over the short to medium term. Very important to note that also in line with our capital allocation and to protect the balance sheet, we did take the very hard and tough decision to also pass the interim dividend.

In terms of our outlook on Slide 18, financial year '20 and '21 are probably the most critical period for Sasol. Macroeconomic volatility is expected to continue. And within this context, we expect the following delivery from our assets: Mining to ramp up to targeted production levels as we focus on safety and efficiency; performance Chemicals sales volumes is expected to increase by between 7% and 9%; and average U.S. dollar margin was trending in line with the global macroeconomic outlook.

The increase in volumes on the Performance Chemicals is mostly as a result of the constitution of the LCCP units. And without that, the performance on sales volumes are flat on a year-by-year basis. Base Chemicals sales volumes are expected to increase by between 15% and 20%, and excluding the LCCP, we still expect a 1% to 2% increase in sales volumes. (inaudible) prices are also expected to remain soft given the ongoing trade wars and the potential impact of the coronavirus. .

South African liquid fuel sales volumes will range between 57 million and 58 million barrels, with Secunda Synfuels' operation forecast to increase production volumes of between 7.7 million and 7.8 million tonnes. An average utilization rate of between 55% and 60% is expected due to the extended planned shutdown during the second half of the year.

Our expectation for the chemicals and Energy business does come with a health warning and can be revised as the full impact of the coronavirus is fully understood. Our balance sheet leverage is expected to be in the range of between 2.6x to 3x net-debt-to-EBITDA as per the covenant definition agreement with the banks and the gearing to remain within our previous guidance of 55% to 65%.

In conclusion, we continue to face significant challenges as a business. And with our focus on the key actions required at this point in time, I am confident that we will be successful in managing this critical phase in the history of the company.

On that note, we can open the floor for questions and answers, which will be facilitated by Fleetwood Grobler. Thanks. Over to you.

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Fleetwood Rawstorne Grobler, Sasol Limited - President, CEO & Executive Director [8]

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Thank you, Paul. Operator, we now open the floor for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

The first question comes from Chris Nicholson of RMB Morgan Stanley.

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Christopher Nicholson, Morgan Stanley, Research Division - Research Analyst [2]

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My questions will really revolve around the balance sheet. So I've got 3 sub-questions here. So your guidance would indicate that where we are at the moment in terms of 2.9x net-debt-to-EBITDA and the gearing levels should be very close to the peak. We are already 2 months into this year. Could you give us a feel for how confident you are that we will actually start to see some of that deleveraging come through in this half? Or should we expect potentially this half to kind of take a long close to current levels? That's the first one.

Linked to that, clearly there's a lot of concern around the global demand environment at the moment. Maybe what would be help is maybe some sensitivities around rand, oil or whatever other metric you think is useful in terms of where we wouldn't stop -- where the balance sheet wouldn't deleverage and it could actually start trending in the wrong direction from here, if some of those demand concerns do play out in product pricing?

And then just finally, I know you have mentioned in your presentation that you would expect to explore further prudent measures to kind of protect the balance sheet. It looks like a lot of the obvious things in terms of passing the dividend, working capital measures have already been taken. Other than accelerating asset sales, is there other things available to you that you could do, maybe if you could just help us on that?

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Fleetwood Rawstorne Grobler, Sasol Limited - President, CEO & Executive Director [3]

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Okay. Good. Thank you, Chris. I'm going to ask Paul to deal with the first questions.

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Paul Victor, Sasol Limited - CFO & Executive Director [4]

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Good afternoon, Chris. Nice speaking to you. So yes, of course. I will basically be obliged to say that the gearing levels that we've seen at year-end of 2.9x and 65%, on the one side, what does work in our favor was effectively that the rand did end December at around about ZAR 14 to the dollar. So the conversion impact of the debt to rand, ultimately was more positive than if you do the same sum today with the rand. It's about ZAR 15. And I think for Sasol, it's all important to consider what that translation impact will be or may effect debt. But if one excludes that in this argument, and argue further to say, "what do we expect the underlying EBITDA performance of the business?" Because that really talks to the cash flow generating ability other than valuation impacts at period ends. And your question then to say, "can we see some positive greenshoots in terms of the first 2 months of the year?" Then we can argue, yes. The month of January was a very good month for Sasol and the EBITDA realized for January far exceeded any average performance that we've seen for the first 6 months of the year. We've got no reason to believe that there will be any different in the sense that we also expect a very robust performance on EBITDA in terms of that. The other thing that I did issue was that we are not inclined currently to give a firm view on coronavirus as it really needs to be fully understood. And based on what we know today and based on the factors today, we have seen an uplift in our EBITDA run rate using January and February as a proxy. I think the second thing is in terms of our EBITDA that will significantly shift, [is that] we have managed losses for the first 6 months on the LCCP -- EBITDA losses. January will be first month we'll be breakeven; and February is that the first month we will start to anticipate a significant uplift in the EBITDA of the LCCP. So to say that it will kind of push us on a run rate basis, to within that $50 million to $100 million range. And that in itself is a significant shift also to our EBITDA. So the long and short would be to say, I will not be able to answer you exactly where the balance sheet will end off at the end of the year. We are very comfortable with our EBITDA run rate. But let's watch the closing conversion rate in terms of the debt levels because they can have an influence. But what we see now is, we're still very comfortable in terms of today's rand per barrel rates where our EBITDA are planning out. In terms of your second question on sensitivities. And again, I think it's quite important that macroeconomics can, over the next 4 months, have an impact on our balance sheet gearing.

I will say that for the first 6 months, if we argue that we started the half year -- the second half at the 1st of January, then we can sustain oil prices on a rand per barrel basis of say above ZAR 800 per barrel, or thereabouts. So the leverage that we see so far is on average around about ZAR 850 to ZAR 860 per barrel, which is higher than kind of what we can sustain. So ultimately, very much comfortable with where things are at. Although, we're still being extremely tight. We will ultimately also consider from a hedging perspective, attacking potential protection out on oil. Although, our rand and ethane coverage ratios are quite high, which gives us still some protection, but we will consider, specifically in the first 6 months of the next financial year, some protection against oil below, let's say, $55 to $50, in that range.

In terms of prudent measures, you're 100% right. I mean, we are really kind of pulling all the management levers to our disposal. I think we've been quite successful in the sense that we have been able to manage costs with our inflation targets. The working capital is a very strong positive trend towards 14% to 15% working capital to turnover. Our capital allocation is really just to sustain our business. So we're quite frugal in that space. And obviously, we need to also push harder on our asset optimization, and we start to see some fruits beared on that perspective. We do believe if we push these levers quite consistently, they should get us over the line. And we've done that in the past, and we'll continue to do so forward.

There's actually other measures currently that we want to pursue, other than this, and obviously, managing the optimal debt maturity on the balance sheet is quite essential. So these sort of actions that I cannot talk about right now, but ultimately will also push that to ensure that it has sufficient flexibility. I think the last point is, Chris, is that we feel very comfortable is that our access to liquidity. So even in the event of a potential downgrade on South Africa that might impact us on Moody's, we do believe that our liquidity position through the cycle is actually quite strong. So there's many balls in the air that we need to manage, but hopefully it answers the questions that you've asked.

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Operator [5]

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The next question comes from Gerhard Engelbrecht of Chronux Research.

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Gerhard Engelbrecht;Chronux Research;Analyst, [6]

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A couple of questions. Fleetwood, you talk about the piping structure that failed at the LCCP leading on to the explosion. Have your investigations uncovered why this has happened? And maybe dig a little bit deeper into that. I'm quite curious as to the sales of the LCCP product, the polyethylene and the MEG that you're producing. Can you maybe give us an indication of where you're selling those products, local markets, domestic markets maybe, Gemini as well? And then I'll just see in your analyst book, it looks like you've downgraded your EBITDA guidance for the LCCP from about $1 billion to $700 million to $900 million. $100 million to $300 million down, was this -- is that downgrade just a move in recent prices? Or is there anything else in that downgrade?

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Fleetwood Rawstorne Grobler, Sasol Limited - President, CEO & Executive Director [7]

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Okay. Thank you, Gerhard. So I'll deal with the first question. So with respect to the root cause analysis that we have completed recently at the LCCP for the LDPE plant, we've gathered a lot of information. We've used all the experts and the licensors and older company that was involved with that action of the plant. And I think we summarized that we know exactly what is the cause of the failure. As you can imagine, at this point in time, we are busy with insurance dealings. We're busy with the commercial contracts that has got certain things we need to consider. So I would not like to give you a final exact answer today. But rest assured that we know what is the situation and that we will pursue all the necessary details through our commercial agreements as well as there is still the insurance investigation that is ongoing. But suffice to say is that, in a plant like the LDPE plant, it is ultra-high pressures and when a upset condition occur, the emergency wind system is put into operation. An incident occurred during the commissioning, which is quite new for these type of plants. You can expect a number of those incidents to happen throughout the lifetime of the plant and even every year of running.

So the response of how the systems reacted in terms of the incident that occurred, it worked exactly as intended. And the only thing that we are very disappointed about, is that a component then failed during such an incident of pressure relief. So that's as far as I would like to give context, in terms of that, rest assured, that we do know and that we would be able to remedy the situation in terms of that part of the plant. With respect to the sales distribution and where we sell it, I'll ask Brad to give you context there.

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Brad Griffith, Sasol Limited - EVP of Chemicals [8]

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This is Brad Griffith, thanks for the question. Can you hear me clearly?

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Fleetwood Rawstorne Grobler, Sasol Limited - President, CEO & Executive Director [9]

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Yes. Sure.

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Brad Griffith, Sasol Limited - EVP of Chemicals [10]

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Okay. Yes, you asked about -- let me speak with Gemini first. That's the plant that's been up the longest in this value chain. We continue to see a good placement of the high-density polyethylene in the domestic as well as the global markets, and we see good demand for the grades of those products that we're making. And I think as Paul mentioned earlier, we're very pleased with how that plant is operating, and it's been above our expectations for this year. As for linear low-density polyethylene, also very good placement of products globally. We've seen continued improvements in our production rates and quality which allows us to participate competitively with our cost base there in piping and film market. So again, really good customer base in excess of 800 customers for a near low density. The EO/EG plant is also running well. And we've been able to place all of our MEG.

I think we've disclosed previously that we have an exclusive distribution partner for MEG. It's not focused only on fiber resin grade. And so really no issues placing it. Of course, as Paul and -- has mentioned, we're also monitoring the coronavirus. We're not exposed to China with our sales. But obviously, any impact that we see there will -- can disrupt the global markets, and we continue to monitor that. We've recently started up the ethoxylates unit achieving beneficial operation in January and we're very happy with the way that unit's operating. And we're now integrating those ethoxylates into our global network.

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Gerhard Engelbrecht;Chronux Research;Analyst, [11]

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Thank you, Brad. And just a follow-up on that. And all the ethylene that you're producing in the absence of the LDPE plant working. Can you place that easily?

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Brad Griffith, Sasol Limited - EVP of Chemicals [12]

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Yes, thanks for the -- yes, for sure, we're well connected on the pipeline system. So in this period that we're waiting for the LDPE plant remediation to be completed and are able to place the ethylene and with the current state of the ethane pricing, we're still seeing good margins on the ethylene merchant sales.

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Fleetwood Rawstorne Grobler, Sasol Limited - President, CEO & Executive Director [13]

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Sorry. Okay. So Gerhard, with respect to your last question, in terms of the EBITDA guidance, so we can confirm that nothing changed in terms of our outlook in terms of ramp-up, et cetera. That's still, as we've indicated before, barring the LDPE that we see getting online later this year. However, the impact largely has been our revised price decks from the industry experts that we've been using in our forecast.

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Operator [14]

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The next question comes from Harsha Pappu of HSBC.

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Sriharsha Pappu, HSBC, Research Division - Head of GEMs Petchems [15]

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Could you give us a little bit more detail on the disposal program, please? You've had these targets in place for a while now. And progress today has been rather slow. So do you have any concrete targets or time lines in terms of what you're looking to sell? And what proceeds you can expect over that period?

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Fleetwood Rawstorne Grobler, Sasol Limited - President, CEO & Executive Director [16]

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Okay. Harsha, thank you for the question. So again, to just recap, we started our asset review process in 2017. We had a very thorough and robust assessment of all our global assets. We've come over 100 of those. We've determined that the various assets are categorized in the various classifications that we've assessed. And we are busy with that program. So at this point in time, we've indicated a number of assets that has been successfully divested and so we also indicated that we have -- we are tracking that this financial year, we still would see to realizing 25% of the so-called $2 billion we have announced last year. So whilst that program is ongoing, we would not comment on specific divestments that is under review at this point in time. When we're ready, we will communicate to the market with that on that. But rest assured that we believe we are still on track for the 18 to 24 months we've announced last year to reach this $2 billion target in terms of our divestment proceeds.

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Operator [17]

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The next question comes from Alex Comer of JP Morgan.

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Alex Robert John Comer, JP Morgan Chase & Co, Research Division - Research Analyst [18]

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First of all, you talked to a USD 3 billion liquidity buffer. I mean, there have been some rumors about potentially having to have an equity issue, but that looks unlikely to me. I wonder if you could kind of want to comment on where that would lie in terms of your priorities and how safe the dividend is for the year-end. Maybe also you could let me know how the 2.9x net-debt-to-EBITDA calculation is worked out. Because obviously, when you do it from the numbers we see, the ratio is much higher than that, sort of what the gaps were? And then also just regarding the LCCP. Can you help me with regard to run rate? You're talking about $50 million to $100 million this year and then $600 million to $750 million, I think, for next year. So where will you be, let's say, in June? What's your -- do you think your monthly run rate EBITDA would be at the end of this year? And does that then run smoothly through next year? Or do we see additional step-ups through the year? So maybe those questions, please.

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Fleetwood Rawstorne Grobler, Sasol Limited - President, CEO & Executive Director [19]

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Thank you, Alex. Paul is going to deal with those.

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Paul Victor, Sasol Limited - CFO & Executive Director [20]

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Thanks, Fleetwood. Alex, yes. So basically, Alex, before -- I've also heard about the comments being made in the market in terms of equity issuance, which I believe is a little bit premature, given the fact that I think we've been quite clear in terms of what levers we want to pull, what hedging activities we've got in place to protect ourselves. In the past, we did speak to the market quite extensively about what will trigger the extra [gains] and what assumptions flows into that. And none of that really has realized.

We've also started our guidance in terms of net-debt-to-EBITDA and as well as gearing. Although gearing sits at the upper end of the range, it was still within what we assumed would be a potential outcome. Now I don't want to underplay that. The world is very volatile. And any significant change in oil prices to [lead] on a consistent basis, below $50 to the barrel, can over time expose us definitely.

So I will be quite open to admit that macroeconomic volatility can have a significant impact, but it needs to be really steep step changes in macroeconomic volatility for an extended period of time. So let us keep moving to the specifics. So yes, we have a $3 billion liquidity buffer. And obviously, we want to extend that and even make it bigger, to ensure that we can sustain these shocks. Again, it comes back to the point that we need to capitalize on the run rate on EBITDA per month because that just kind of puts us so much further away from a potential kind of bridge of our current level. Now 2.9x as at the end of the year, it still leaves us with sufficient headroom. And I think what will be quite telling is to say we're in at the end of the year. And we've run various scenarios and the oil prices really need to be very subdued, well below $50 to the barrel for us to really [indiscernible] get to 3.5x covenant, given the fact that the rand closure rate and it doesn't kind of jump around very oddly as at 30th of June.

So we feel comfortable that we're doing all we can and drive the controllables to ensure that we stay clear on 3.5x covenant. I will say that what is important then is towards the end of December is where we have to step it down from 3.5x to 3x. And again, the macroeconomics needs to play along. We then believe that the LCCP will start to really kind of mitigate some of these risks that we are faced to step it down. But ultimately, as we get closer to December and we see in a scenario that it's maybe 3.1x, or not 3x, then surely we will engage with our bank consortium to see whether we can get a temporary relief or whether we actually can cure the situation because remember, if you're maybe in off at 3.1x at the end of December, you're still being granted time by the banks to cure the situation.

So I don't think one really needs to take a position of being super bullish. However, the question still remains is that in an unlikely event that the perfect storm does dawn on you, are you ready for equity issues? And any company in terms of our balance sheet, where we have limited headroom, needs to be ready. So ultimately, we consider all options. However, our plan is and also with the scenarios analysis that we do is to keep on managing the balance sheet, managing the controllables, and ultimately, if none of it works, we ultimately need to come to the market and update the market in terms of potential equity issues. We really see that kind of really with a low probability, although the markets are volatile,and hence the health warning that the issue is to always need to consider that. But that will be only in a case where oil prices on a prolonged based are quite negative.

The second part of your question is to say how we calculated 2.9x. I'm not going to do it over the phone or over the line. I think the banks are extremely sensitive for us to disclose this calculation methodology. But just very high level. On the balance sheet side, the operating leases is IFRS 16 is not being considered as debt or net debt, so we will usually exclude that impact, and that increased our gearing quite considerably by 4 percentage points. So that part, you will exclude.

On the income side in front, the normal stuff. Depreciation will be excluded and unrealized hedging gains and losses, translation, conversions. And I think the one that you may be missing, is also the evaluation or reevaluation of our employment contributions. Our employment exposure in terms of the post-retirement benefits. We as a team can sit with you and show you more in detail. But that broadly is kind of what the deltas between a perfect EBITDA to a negative EBITDA calculation is versus what we apply. I must say that the banks do issue us with a certificate, also they've audited our results. So it's very much in line with that.

The last question on LCCP run rate? So currently, you can do the math that we are around about targeting a run rate of $50 million from February onwards. By the end of June, given all things being equal in terms of the current spot macroeconomics playing out, we will probably step it up to around about $50 million and then further stepping it up as the LDPE and the [alcohol] units come to a level higher than that. We'll obviously update you as we're getting on. But by July, it will probably need to be at around about $50 million per month run rate.

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Fleetwood Rawstorne Grobler, Sasol Limited - President, CEO & Executive Director [21]

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Just to add to that as well, we are very encouraged with the current run rates of the LL unit, EO/EG unit as well as the cracker. So in terms of our plans, it's tracking well. And we believe that we would be in a full run rate on the last high commodity units in the next financial year. And then the other ramp-up of the latter units in terms of the ZAG, we'll continue to ramp up in FY '22.

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Alex Robert John Comer, JP Morgan Chase & Co, Research Division - Research Analyst [22]

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Could I just -- did you say your run rate at the moment is about $30 million?

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Fleetwood Rawstorne Grobler, Sasol Limited - President, CEO & Executive Director [23]

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Yes.

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Operator [24]

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The next question comes from Wade Napier of Avior Capital Markets.

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Wade Napier, Avior Capital Markets (Pty) Ltd. - Research Analyst [25]

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A couple of questions from me. How should we think about the trigger within the balance sheet for Sasol to recommence dividend payments? Then secondly, given cost inflation for labor and electricity, both running ahead of sort of 6%, what's your sort of line of sight for continuing to achieve fixed -- cash fixed cost inflation below your 6% per annum level. How sustainable is this for the next sort of 2, 3, 4, 5 years? And then finally, with sort of 80% of LCCP's production units now sort of operational, have the guys already begun to identify debottlenecking opportunities within the broader complex?

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Fleetwood Rawstorne Grobler, Sasol Limited - President, CEO & Executive Director [26]

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Okay, Wade, thanks for those questions. I'm going to start with your last question first. So with respect to the unit that's in operation. I think we all along said that we have seen the potential for higher than nameplate capacity options. We've seen that is realistic and feasible in our HDPE unit. We've seen that we could run higher than the nameplate capacity and I don't think we think differently on any of the LCCP units, namely the cracker we believe has got upside potential as well as the high-volume commodity units. So yes, that would be a focus. We want to get first stable operations in the most -- in the biggest portions of the plant, and then we will focus in our opportunities to run above that. And then as a last stage, we will also consider low-cost debottlenecking opportunities as and when that presents itself. But we're very sort of looking forward, and we believe that there is a good potential to see higher nameplate capacities realizing. Paul?

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Paul Victor, Sasol Limited - CFO & Executive Director [27]

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Wade, on your first question, on balance sheet triggers. So I think it's safe to say that the balance sheet needs to be well below 50%. It doesn't need to be below 40%, but it definitely needs to be below 50% to reintroduce the 36% payout ratio or the 2.8x covenant. And if you -- sorry, not covenant in terms of multiple in terms of core headline earnings per share. So ultimately, we will keep on monitoring it. Where our balance sheet currently sits at 65%, so it needs to grow 15%, so you can do the math. It will probably take us the best of 12 months at least to get to that level, maybe even longer. And the Board will want to understand that given the macroeconomic environment and the sustainability of dividend, that it can be sustained because we cannot chop around and pay out -- sorry, not to pay out going forward, that will not be good.

So anything below 50% on a sustainable basis will be the first trigger. And then to step it up to 2.2x, will probably not make so much cash. It's really kind of about the trajectory as well as sustainability of that. So I suspect that the timing between the 2.2x and 2.8x is not a long distance to cover, but that we ultimately need to make sure that below 50% is, at least, as the first port of call, where we want to kind of want to be at.

In terms of your second question on labor rights. You have seen, correct. It does put kind of the company under pressure as any other company in South Africa, where we have this inflation rate or labor escalation above that. But we have communicated in the past that we drive continuous improvement as a cultural focus through the organization, and we'll continue to do so. So as part of our digital initiatives, we anticipate that through efficiencies, getting more kind of robotics in our processes, use big data in terms of analyses, it does make our car go faster, and it does allow us to beat inflation on a continuous basis.

However, I think we can be more agile, more smarter at it going forward. And there is currently a lot of talk within Sasol to see how do you really kind of amount of step these efforts up going forward. Fleetwood, I don't know whether you want to add anything to this?

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Fleetwood Rawstorne Grobler, Sasol Limited - President, CEO & Executive Director [28]

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I think that covers it all.

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Operator [29]

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The next question comes from Tom Wrigglesworth of Citi.

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Thomas P Wrigglesworth, Citigroup Inc, Research Division - Director and Chemicals and Basic Materials Analyst [30]

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A couple of questions left, if I may. Secondly -- firstly, on refining margins. There you looked to have taken a quite a step down at the end of the year. Could you share your thoughts on how you see the white product margins evolving through the course of the second half and into 2021 that would be helpful. And just coming back on this dividend, it's -- sorry, it's not clear to me. Is the base case that you pay full -- the final dividend? Or is the base case that we have to wait for conditions to improve and then it can be -- and then a final dividend can be approved?

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Fleetwood Rawstorne Grobler, Sasol Limited - President, CEO & Executive Director [31]

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Thank you, Tom. Paul?

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Paul Victor, Sasol Limited - CFO & Executive Director [32]

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Yes. Tom, let me take your final question. Let me be quite clear. I think the probability of us paying a final dividend is extremely remote. Again, as I preached, our gearing range is between 55% and 65%. That implies that it's above 50% and means for us to reintroduce the dividend at those levels of gearing will not be kind of advisable. And hence, I think you can expect that the final dividend will also be passed, given the current prevailing market circumstances. The Board still needs to evaluate it at that point in time. But given where we are now with the facts at our disposal. I think there's a very, very high probability that the final dividend will also be passed. I cannot comment on the next year's interim dividend. That we will assess, based on these factors and triggers that Wade asked me about.

The second part of your question in terms of the margins -- in terms of refining margins. Yes, we did see a significant drop in refining margins. But we always cautioned the market in saying, we are not as bullish on IMO as the rest are. And in our planning, we did plan for a more -- very much of the same or even lower scenario on diesel. And then ultimately, on petro crack space, we were also kind of very bearish in terms of base rates. So petrol definitely well below $10 to the barrel for the next 6 to 12 months. And then on the diesel crack spreads, pretty much roundabout $10 to $12 over the next 12 months. That's really where we see it.

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Operator [33]

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The next question comes from Henri Patricot of UBS.

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Henri Jerome Dieudonne Marie Patricot, UBS Investment Bank, Research Division - Associate Director and Equity Research Analyst [34]

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A couple of follow-ups, please. The first one, I was wondering if you can give us just a bit of sense of where your chemical prices and the volumes were tracking in the first couple of months of the year, with regards to your guidance for the full year for volumes, in particular, before taking into account any an impact of the virus for the rest of this financial year? And then secondly, on the startup of LDPE unit? Is it fair to assume that it should be -- it will be a start-up towards the end of this calendar year? And if you can remind us of the just the ramp-up time for the unit?

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Fleetwood Rawstorne Grobler, Sasol Limited - President, CEO & Executive Director [35]

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Can you repeat the last question, please, Henri.

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Henri Jerome Dieudonne Marie Patricot, UBS Investment Bank, Research Division - Associate Director and Equity Research Analyst [36]

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Yes. The second question was around the LDPE unit and the precise timing for the start-up as it can be towards the end of the calendar year '20, and also just a ramp-up period for that you need to full capacity?

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Fleetwood Rawstorne Grobler, Sasol Limited - President, CEO & Executive Director [37]

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Okay. Thank you for those, Henri. So let me start with the LDPE first. And we've indicated that we have got long delivery time on some of the high-pressure piping components. And that is really driving our schedule at this point in time. So the start-up date has been indicated as the second half of this calendar year. So I think we will give the market an update as we get more clarity around how those deliveries are progressing, and we will then update the market if anything changed and give you a more focused time if we can improve. We've indicated that we are doing everything in our power to try and expedite that date because we want to believe that it is possible to improve over that period, and therefore, we'll give you a more specific timing once we really run on a date.

So with respect to the sale of chemical prices, we have seen further softness in the market. I mean, the coronavirus at the moment is bringing quite a lot of uncertainty how it will impact GDP. We've seen at various advisers and companies are indicating an impact on the Chinese GDP of up to 1%. That could, of course, have an impact on some of the demand advances. So that is still playing out. But suffice to say that, that's the case in most of our polyethylene type of products. But when we look at our more specialty-type of products, we see a much better outlook. One data point in that was that oil prices have firmed up earlier this year. Of course, that helps us in terms of our alcohol range products and also where that goes into effect and applications. And so therefore, our outlook on the Performance Chemicals side, barring the MEG which we know is not really going to go anywhere in the meantime, we believe that there's quite a bit of resilience in that product portfolio. So as far as the volumes go, I think in terms of our Base business, it's giving you an indication of what the sales volumes will look like in our outlook. So I think you can deduct from there, what we see is going to take place. And then with respect to the LCCP, I think we've also given a perspective on some of that, what is our outlook. So I hope that answers the questions.

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Operator [38]

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(Operator Instructions)

Next question comes from Herbert Kharivhe of Investec.

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Herbert Kharivhe, Investec Bank plc, Research Division - Research Analyst [39]

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Paul and Fleetwood. Can you give an update on the new Surfactant plant in China?

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Fleetwood Rawstorne Grobler, Sasol Limited - President, CEO & Executive Director [40]

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Okay. Thank you, Herbert. I'm going to start off, and I'm going to ask Brad also to come in, in terms of how the market and what it looks like there. So first of all, we have had a very successful start-up and commissioning of the plant last year, as we've indicated to the market when we achieve beneficial operation. Our ramp-up of the unit progressed really well through the best part of last year. And the impact started with the coronavirus when we returned from the -- or our people return from the Chinese New Year. And then there was a delay in the reassuming all the continuing operations.

I'm going to ask Brad to talk to what we see in the market currently.

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Brad Griffith, Sasol Limited - EVP of Chemicals [41]

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Yes. Thanks for the question. So as Fleetwood says, we ramped up the plant through the second half last year, really we had done quite a bit of work to prepare the market for the plant. So we saw ourselves ease into the market. So it's a very wide and diverse application base that we see. And so that was continuing to grow well. With the normal Chinese New Year time frame, we would normally expect to see a dip. And then, of course, as Fleetwood said and Paul indicated earlier, we're monitoring the situation around the coronavirus. So it's still a bit premature for us to comment on where we see that. We continue to run the plant. We continue to cover some customer requirements, but we're still having to monitor the situation.

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Herbert Kharivhe, Investec Bank plc, Research Division - Research Analyst [42]

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Are you able to offer some guidance in terms of the kind of run rates you are seeing that you are getting from the plant, pre-coronavirus?

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Brad Griffith, Sasol Limited - EVP of Chemicals [43]

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Yes. We've been able to achieve greater than 90%. So really full capacity has been available to us on that plant.

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Operator [44]

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The next question comes from Adrian Hammond of Standard Bank.

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Adrian Spencer Hammond, SBG Securities (Proprietary) Limited, Research Division - Research Analyst [45]

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Yes, a couple of questions from me. Firstly for you, Fleetwood. Could you give us some color on the rising Mining cash costs, which you're guiding up again? Is this something that's something you can recover from? And how does this impact the rest of the business? And then secondly, on Mozambique. It looks like you've delayed the replenishment of reserves there, that project towards another year or so, what is the potential impact on your business from that? And then for Paul, just your cash flow CapEx, trying to reconcile it with your Slide 16. You've got some $900 million of LCCP CapEx, but I work out about $1.5 billion. So could you just give us what the actual cash number is for CapEx rather than the accounting metric you've given us, please?

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Fleetwood Rawstorne Grobler, Sasol Limited - President, CEO & Executive Director [46]

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Okay. Thank you, Adrian. I will deal with the first question. Let me start off with respect to the Mining cost and outlook that we've seen so far. Yes, we had a productivity impact at the Mining. And as we've indicated, those were driven primarily by a couple of events. One was -- the one was in terms of our geological issues that we've encountered with one of the mines. Secondly, it was also impacted by heavy rains through the December period. And also the fatalities at the mines that we had also impacted the timing and the focus during that time at those months during that investigation. So where are we today? We have relooked -- the Mining team has really developed a business improvement plan. We call it so-called [SIENZA] program. The first portion of that program has been rolled out. We plan to implement the first major productivity improvement initiative at the mines during -- at the first mine during Q4 of this financial year. The team has really responded well over the last couple of months, so January, February so far. We could see things stabilizing. So the improvement is already tracking to the recovery of those productivity losses that we've announced in the half year results.

So I think with respect to the cost, yes, it has gone up much higher than we would have anticipated, primarily driven by the fact that we had to buy in some coal and it costed us more to mine yet. We have also indicated that we were buying some coal for the rest of the year, just to make sure that we've got a sufficient stockpile that our reserve is good as we go into labor negotiations and the rest of the activities that go along with that. So -- and that will impact, of course, in our mining costs. But as I said, we've got firm plan to remediate that productivity less, and that will then restore most of the costs that we've seen the increasing on the cost per tonne of coal mined back to the new levels that we would pursuing around the ZAR 320 to ZAR 340 per tonne.

So with respect to the Mozambique PSA gas project I think we -- suffice to say that we are progressing that further. We have approved, the Board has guided us to flow through the basic development phase now. We're on track. We delivered the field development plan in February to the Mozambican authorities. We are planning to go further and develop the project through to the latter part of this year. To get us to a point of a final investment decision.

So I think all of those plans, as far as the PSA are tracking. We're also continuing with the infill welling drilling campaign. And so the plateau and the decline of our existing reserves are being addressed now is it happening as quick as we wanted to be. Of course, the answer is no, we would like to have -- to make it happen earlier, but all efforts are focused on that, and we believe that we're well positioned to address those.

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Paul Victor, Sasol Limited - CFO & Executive Director [47]

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Adrian, then the last question was on the cash flows for the capital cash flow. And so ultimately, on page -- for the company, on Page 30 of the analyst book in terms of the statement of cash flows, you can see kind of the movement there for the half year, in total it's ZAR 25 billion, coming to the ZAR 21 billion. I'm just rounding the numbers off in terms of actual expenditure versus cash flow of ZAR 25 billion. And then for LCCP, we did quote that it's ZAR 10 billion or $647 million in terms of actual expenditure, and in terms of cash flow, it's roundabout $950 million in terms of cash flows on the LCCP. So what you will see is a kind of a significant unwind of accruals on LCCP as the project is coming to an end.

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Adrian Spencer Hammond, SBG Securities (Proprietary) Limited, Research Division - Research Analyst [48]

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So the CapEx of ZAR 38 billion for the full year, what's the cash element?

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Paul Victor, Sasol Limited - CFO & Executive Director [49]

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We will share that number with you during year-end.

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Operator [50]

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We have a follow-up question from Gerhard Engelbrecht of Chronux Research.

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Gerhard Engelbrecht;Chronux Research;Analyst, [51]

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I just see, Paul on Slide 14, you mentioned carbon tax as a cost increase. Did you pay carbon tax in the first half? When and how much, I'm just curious?

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Paul Victor, Sasol Limited - CFO & Executive Director [52]

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We have credited it and we have accrued for it, around about ZAR 500 million.

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Operator [53]

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As Gerhard has -- have you concluded your question?

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Gerhard Engelbrecht;Chronux Research;Analyst, [54]

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Yes.

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Fleetwood Rawstorne Grobler, Sasol Limited - President, CEO & Executive Director [55]

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Operator, we're going to take a final 2 questions.

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Operator [56]

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We have a follow-up question from Adrian Hammond of Standard Bank.

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Adrian Spencer Hammond, SBG Securities (Proprietary) Limited, Research Division - Research Analyst [57]

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Paul, just looking at the -- this may not be material, but I think to the bottom line it is. The external sales from the coal business fell quite materially year-on-year, although the sales volumes went down that much. Is there something in the pricing, perhaps that we didn't see?

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Paul Victor, Sasol Limited - CFO & Executive Director [58]

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So there's 2 things happening on the Sasol coal business. On the one side, the pricing as I -- well, the average pricing for the first half was down due to a more kind of subdued international coal prices. However, what we did need to do, as we saw some supply constraints of the running mines in Synfuels, a swap over more export coal volumes, the Synfuels of value chain. And hence, you will see the kind of the decrease in volumes to be sold externally and that more being consumed where you can, you have the flexibility to do so as part of this integrated Synfuels value chain. As soon as the stability on the mines return, we will ultimately then review a far larger export of export coal to the reaches petrol and ultimately to those destinations that we sell into. So it was really kind of a, I would say, a shorter blip in a way that we try to manage the supply between Synfuels and the Synfuels margins are still much higher than on an integrated basis than what you get for coal on the export market. So it makes sense to (inaudible) it over?

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Fleetwood Rawstorne Grobler, Sasol Limited - President, CEO & Executive Director [59]

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Thank you, operator.