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Edited Transcript of SOL.J earnings conference call or presentation 28-Oct-19 1:00pm GMT

Q4 2019 Sasol Ltd Earnings Call

Johannesburg Oct 31, 2019 (Thomson StreetEvents) -- Edited Transcript of Sasol Ltd earnings conference call or presentation Monday, October 28, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Bernard Ekhard Klingenberg

Sasol Limited - EVP of Global Operations

* Brad Griffith;Senior Vice President, Performance Chemicals

* Fleetwood Rawstorne Grobler

Sasol Limited - EVP of Chemicals Business

* Jon R. Harris

Sasol Limited - EVP of Upstream

* 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 G. Engelbrecht

Macquarie Research - Head of Resources

* Henri Jerome Dieudonne Marie Patricot

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

* Sean Ungerer

Arqaam Capital Research Offshore S.A.L. - 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 morning, and good afternoon, ladies and gentlemen, and welcome to the Sasol FY '19 Year-End Results Conference Call. Today's call will be hosted by Fleetwood Grobler, Chief Executive Officer; and Paul Victor, Chief Financial Officer. Following the presentation, an interactive Q&A session will take place.

I will now hand the call over to Fleetwood Grobler. Please go ahead, sir.

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Fleetwood Rawstorne Grobler, Sasol Limited - EVP of Chemicals Business [2]

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Thank you, operator. Good afternoon, everyone. This is Fleetwood Grobler speaking. Our sincere apologies for the delay in the start of this call.

Thank you for joining us on this call, during which Paul Victor and I will discuss Sasol's financial results for the period ending June 2019. Other members of our management, including the newly appointed EVP Brad Griffith, will be part of the team, who will support us during the Q&A session.

We have published a slide presentation of our results, which you can download from the Investor Centre on the Sasol website. In the interest of time, we will not discuss all the 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 forward-looking statements contained on Slide 2 of the presentation.

Before I provide you with an overview of the business and the FY '20 priorities, I would like to make a few comments by way of context. In order to move forward, I believe we need realism, focus and delivery.

Firstly, you need to be realistic that although today we address some key areas of uncertainty, we still have challenges ahead. Chief among these is the successful completion of the LCCP, protecting the balance sheet during the upcoming brief peak gearing phase and developing our carbon reduction roadmap. While we must not underestimate or understate our challenges, I do believe we have a clear pathway to address them.

To do so requires clear focus on the issues that we can control. Our stakeholders must be under no illusions that this is the first priority. More than focused though, the outcome must be delivering. Many of our stakeholders are not interested in promises, they want to see delivery, and I'm very much on that page.

In a nutshell, we need to make sure that we don't miss a beat. However, I'm also conscious of and embrace the key takeaways from the Board review. Here, in particular, I recognize that constructive dialogue and challenge across the organization is paramount and is well aligned with our aspirational culture.

With that context, let me move on to the key messages we have shared today, referring to Slide 4 of the presentation. As communicated, the Board review is complete. While it has been a difficult past 5 months for Sasol, this review was necessary for us to pause and self-reflect. This was to ensure that we clearly identified the recourses and embed the learnings as we strive to improve governance, culture and our controlled environment.

For the financial year, our foundation business has delivered resilient results despite challenging conditions. We are pleased by the performance, which continues to provide a stable base of earnings. Although certain products are experiencing margin pressure, we have steadily improved our operational performance, and we remain focused on our commitment to zero harm.

The softer chemical price outlook, combined with the increased capital cost on the LCCP, has placed additional pressure on our financial position. Our priority is to take decisive measures to protect and strengthen the balance sheet. This has resulted in a Board's decision to pass on the final dividend for FY '19. This was not a decision we took lightly, however; it is important that we make tough decisions right now to position us for the long term. Lastly, we must restore stability and confidence. In support of this, referring to Slide 11, we have identified FY '20 priorities, which we, as a management team, will be accountable for.

Looking at Slide 5, a key step in our journey to restoring credibility and trust in Sasol is acknowledging and learning from the recently concluded Board review. As you are aware, this review was initiated by the Board, following the revised cost guidance communicated to the market earlier this year. The Board sought to understand the circumstances that may have delayed the prompt identification and reporting of developments relating to the LCCP's cost and schedule.

That was followed and the outcomes of the review from the root cause perspective. With this said, I take comfort that while we have to refine and improve, the issues were limited to the LCCP. There were no restatements to earnings, our financial or cash flow position, which speaks well to the overall Sasol systems. As mentioned earlier, my focus is on ensuring that the remedial actions already implemented are addressing the controlled deficiencies identified, and more importantly, looking beyond that to the longer term as we developed a detail addressing the controlled efficiencies identified, and more importantly, looking beyond that to the longer term as we develop a detailed plan to embed these things.

Before I outline a few of the key learnings, it is important to reflect on the remedial actions that have already been implemented and are functioning as intended. Firstly, we implemented the new LCCP control structure, independent oversight in the LCCP on execution activities and redesign the controls regarding cost reporting with the LCCP to ensure segregation of duties, control effectiveness and appropriate oversight. We commissioned additional external assurance to validate aspects of the company's estimates regarding the LCCP's cost and schedule.

Secondly, LCCP oversight and accountability was reassigned to me as of 1 April 2019. Notwithstanding my new position, the Senior Vice President for the LCCP will still report directly to me to ensure continuity over the last month of project completion. In addition, the GEC will continue to provide support and oversight in Lake Charles on a regular basis.

Thirdly, we concluded the separation of the LCCP senior management and the remuneration at Sasol leadership levels was adjusted. We are promoting increased and robust challenge in our review of the Boards provided by the LCCP team.

So how do we learn and move forward? LCCP has highlighted the importance of creating the right culture and controlled environment, where open and transparent dialogue is encouraged. We as a management need to change our conduct and set the tone for the rest of the organization. This is completely in line with our ongoing culture-transformation program and a critical aspect of the new and enhanced controls being introduced throughout the group.

I will now focus on the LCCP, which is Slide 7 of the presentation. At 30 June 2019, the project was 98% complete. Construction stood at 94% and our capital expenditure was USD 11.8 billion. We have ensured strengthened controlled environment related to our capital forecasting process, a key learning from the Board's review and are confident in our range.

The ethane cracker, which is at the heart of the project, reached beneficial operation in August this year, a landmark milestone for us. With the cracker, LLDPE and EO/EG units operational, more than 60% of the LCCP's output is now online. The project's exceptional safety record continues with an RCR of 0.11, which is within base practice loans with a project of this health.

Our business readiness program has ensured that our marketing channels support the successful placement of the majority of the product in the market. We continue to work with our key customers on the specialty chemical side to develop niche applications by our Ziegler and Guerbet alcohols and high purity alumina products. We remain focused on maintaining the project schedule and in a softer chemical industry, we are also continuously balancing the trade-off between schedule and cost. Since we are already past the first quarter of FY '20, I will provide a further update as of in September 2019.

At this time, the project overall completion was 99%. Construction was at 96%. And the capital expenditure at USD 12.2 billion. The project is also tracking the revised capital cost estimate of USD 12.6 billion to USD 12.9 billion. By the end of this calendar year with the LDPE plant online, the LCCP will be around 90% operational, based on nameplate capacity for gross production or around 85% operational based on steady-state external sales.

The Ziegler unit, the largest of the remaining units, has now reached more than 80% construction completion. As mentioned earlier, we are focused on a balanced cost and schedule execution of these lost units. And hence, forecast being official operation of the ETO units in Q3 FY '20 and the Ziegler and Guerbet units in Q4 FY '20. Our updated EBITDA is expected to be in the range of USD 100 million to USD 200 million in FY '20 with a steady-state run rate EBITDA from FY '22 of approximately USD 1 billion.

The big capital spend on the LCCP is behind us and the finish line is in sight. Notwithstanding the significant and disappointing challenges related to the LCCP, we believe that this world-scale facility significantly strengthens our position in the global chemicals market.

I will now focus on Slide 9. Ensuring our business is economically, environmentally and socially sustainable, will be key to our success in a lower carbon future. This is why we support the Paris Agreement and remain committed to playing our part in contributing towards the global efforts to tackle climate change.

We understand the importance and urgency of transitioning to a lower-carbon economy and the need to further reduce our emissions. Nearly 85% of all our greenhouse gas emissions emanate from our South African operations, necessitating a particular focus here. On this accelerated part, our first goal is to reduce emissions for our South African operations by at least 10% by 2030 of our 2017 baseline. This target, over and above the 14% greenhouse gas improvement achieved since 2004, is challenging to a carbon-intensive petrochemicals complex. Based on our internal analysis, we believe that this is not only attainable but necessary.

Here, further improving our energy efficiency and the integration of renewable energy into our operations will be key focus areas. Equally important will be the securing lower carbon feedstocks. We are also working towards finding impactful economic and socially acceptable solutions to reducing our emissions, especially in South Africa, where our challenge is elevated given our coal-based operations.

Looking ahead, we are developing an emission reduction roadmap to support achievement of our energy efficiency and absolute carbon reduction targets and to ensure that we are transparent about our progress. We will continuously update stakeholders on our plans, and we'll share our roadmap at our next Capital Markets Day.

Now moving to Slide 9 -- Slide 10, beg your pardon, and the current status of our portfolio optimization program. At our Capital Markets Day, in 2017, we announced our asset review process. This review is now substantially complete with good progress made on optimizing our portfolio. The process -- this process is to ensure that Sasol has an asset portfolio that is aligned to our strategic objectives and which maximizes our return on invested capital in the long term. Our focus is on ensuring that we pursue divestments of assets that are not strategic and that disposals enhance our return on invested capital in accordance with our well-expected capital allocation framework. To be clear, we will dispose of assets only if we obtain value, and we'll not let assets go at suboptimal prices. Any proceeds realized will also support deleveraging the balance sheet.

Our total divestment target of USD 2 billion is on track, and we will shortly achieve approximately 20% of this amount. In addition, we have non-strategic assets undergoing a detailed asset sale readiness process.

To conclude on my part of the presentation, I will touch on the short-term priorities we will focus on to restore confidence. Firstly, regarding operational excellence, our drive towards zero harm and eliminating fatalities will be relentlessly pursued. We will maintain a rigorous focus on our key deliverables -- key controllable factors, namely safety, reliable and efficient operations, sustainable working capital management and cost discipline. Managing these factors will ensure we maintain robust operational performance.

With the LCCP tracking our latest guidance, our priority is full delivery of all the units of the LCCP.

We are also exploring gas sourcing options for our South African value chain. This will help us in reducing our carbon footprint, which is among our immediate and most urgent deliverables.

Secondly, let's look at our balance sheet, the peak capital spend on the LCCP is now behind us, and we will start to deleverage on the second half of FY '20 as we reach our free cash flow inflection point. We will look to protect and strengthen the balance sheet and we will take the necessary actions to achieve them.

Lastly, let's look more broadly at our stakeholders. Our promise to our stakeholders, including our people, is that we will deliver on our commitment and continue our journey to entrench our aspirational culture. Progressing a credible sustainability response and carbon reduction roadmap is among our immediate and most urgent deliverables.

To conclude, I would like to repeat what I stated at the beginning of my presentation. I believe what Sasol needs to move forward is realism, focus and delivery. And I'm committed to making these things happen and to make sure that this happens.

We will now take you through a summary of our financial and operational performance. We will then open up the position for questions. Thank you.

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

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Thank you, Fleetwood. Good morning, and afternoon, ladies and gentlemen, to make up some time, I will be brief.

I'm very pleased that we reached this milestone. If we grow through down the Board's LCCP review, we really have an opportunity now to look forward and learn from our past and really restate our focus in delivering value to our shareholders.

Our results published today are still very much within the earnings range, which was published as part of our trading statement update early in August. Our global assets footprint, better known as our foundation business, continues to perform well in a very challenging macroeconomic environment as evidenced by a year-on-year increase in core headline earnings per share. However, our balance sheet will be stretched as we reached the end of the LCCP construction sites, followed then by the EBITDA contributions as we start to ramp up the LCCP reduction in sales volumes over the next 12 months.

I do want to reiterate that the transitory phase of the balance sheet was always anticipated under the pre-pressure of pre-gearing the cost. The cash contribution of our foundation business and that of the LCCP at full run rate will assist us largely to progressively deleverage the balance sheet.

We are now also in clear sight of the projected cash flow inflection point, and we remain committed in delivering both this as well as giving shareholders an increased participation in the cash flows as they come online over the next few years.

So let's turn our attention to Slide 20 and then I'm going to briefly summarize the 2019 financial results. First, our foundation business delivered a strong operational production and sales volumes performance, enabling strong core earnings and delivered a 20% increase in the cash flow generated by operations. Unfortunately, our earnings per share was mostly negatively impacted by the $1 billion impairment, which we took on the LCCP. Despite the higher oil prices, much lower chemical prices and the fact that the LCCP only started with its ramp-up price had a significant negative impact on our results for financial year '19. We delivered a strong cost performance, resulting in us realizing a normalized cash fixed cost increase that was once again in our internal inflation target of 6%.

Our working capital levels are also managed to within our internal targets. During the following few months of the LCCP construction, we will manage the gearing. It is particularly important that now we protect and strengthen the balance sheet. For this reason, and in line with our capital allocation framework to protect our investment-grade status, it is difficult but very necessary decision to pass our final dividend for 2019. We still reached -- plan to reach our cash inflection point during the mid part of this year. And then from that point onwards, we'll start to delever the balance sheet.

Let me turn our attention to Page 22 -- Slide 22. Our year-end gearing of 56% was 7% higher than our internal target and mainly as a result of the high impairment, the increase in the capital expenditure for the LCCP, the lower chemicals, and very importantly the weaker rand-dollar closing rate, which impacted the translation of dollar-denominated data rate relative to equity. We also plan to prospectively adopt the new lease standard, IFRS 16 as from the 1st of July 2019, and -- which is very much aligned to our adoption rate of our peer group. We are over forecasting the impact of the new standards, where operating leases will now be capitalized to increase our gearing by 5% for financial year '20.

Our net-debt-to-EBITDA at 2.6x is actually lower than our bank covenant level of 3x, but we have a different calculation methodology, which we agreed to with our banks where our net-debt-to-EBITDA is in the range of between 2.2x to 2.4x based on the bank agreed calculation methodology, which leaves us with some more headroom as compared to the normal calculation method of 2.6x.

While gearing is elevated, we'll be quite proactive in creating additional balance sheet flexibility and ensuring an optimal capital structure. More specifically, this year, we removed the asset-based financing over the LCCP. We also have no major debt maturities until 2022. And we also left ourselves with a liquidity buffer of $1.5 billion, which allows us to complete the LCCP and ensure that cash flow is coming to the company.

By the end of the first half financial year '20, we plan to reach pre-gearing. And based on current planning assumptions, that's also when we plan for the cash inflection point to start. And from that point onward, we will start to delever the balance sheet.

So it's against this backdrop of Slide 23 that I believe it's necessary for us to reconfirm our commitment and actions towards the transition of the balance sheet. As a management team, we're all committed to increase the level of predictability of our short-term cash flow profile through the delivery of quality earnings and cash flows. It's quite essential that we deliver the effective ramp up of the LCCP as this will be paramount for us in turning the corner.

On capital costs, we need to stick to our guidance and preserve the integrity of the business. Our gearing program, we do believe, that it will make sure that we've got some protection, if macros deteriorate. And on the interim dividend payout, this will even be influenced by the health of the balance sheet at that point in time in February, and the Board will make its decision based on prevailing markets and circumstances as well as the status of the balance sheet.

There is really much going on in terms of improving the shortened cash flow dynamics, but I really want to make it quite clear to all of you that we are not willing to compromise the safety and operations sustainability of our business nor compromise the long-term value creation of the business by selling assets at below fair value as we continue to optimize the portfolio. We remain focused on maintaining a strong liquidity position, and that we do through the continuous engagement with our lending group on an ongoing basis.

As a company, we do remain committed to maintaining a long-term investment-grade rating. On that note, I'll hand back to Fleetwood, who'd open the floor for the questions-and-answer section.

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Fleetwood Rawstorne Grobler, Sasol Limited - EVP of Chemicals Business [4]

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Operator, you may proceed with questions.

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Questions and Answers

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Operator [1]

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[Operators Instructions) Our first question comes from Chris Nicholson with Morgan Stanley.

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

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I have 3 questions regarding the balance sheet. The first question is maybe could you give us a sense of how close or how much margin you have for error regarding the need on the balance sheet to that 3x covenant. So for example, maybe some scenarios around kind of what rand oil price we would have to look at before you start running that 3x covenant closed. That would be the first question. The second question is, I wonder if you could just -- I think you might have mentioned that but it didn't come through clearly. Your guidance for net debt-to-EBITDA between 2.6 to 3x. Is that including the IFRS 16 adjustment, or is that stripping that out? And then once again, how would the banks look at that? And then just the final question is, is I do understand on the Moody's review when they change the outlook to negative. They've specifically mentioned that they would need to see balance sheet gearing coming down over 12 months. The guidance you've given wouldn't indicate that, that's going to be a case this year. But potentially, could you give us a scenario, if you did lose that investment-grade rate what would the increase in finance costs? Or what would be additional cost be?

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Fleetwood Rawstorne Grobler, Sasol Limited - EVP of Chemicals Business [3]

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Right. Paul will answer that.

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

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Chris, thank you very much for your questions. So as I've mentioned that we are currently moving towards -- pre-gearing towards the middle part of the year. And implicit by our guidance that we did provide in terms of our net debt-to-EBITDA covenant level of between 2.6x to 2.9x. It does leave us with limited headroom in terms of our covenant. So ultimately, we need to manage things quite carefully in terms of the margin.

In terms of your question on scenarios, obviously, given the volatility in the market, one needs to consider several scenarios, different outcomes. But I will say that we are dependent on oil prices remaining above $55 to the barrel. The rand currently at its levels is probably better for us at ZAR 14.70 as opposed to ZAR 15.50, we were just trading some time back because that conversion ratio of debt-to-equity can be problematic as the weaker rand. So with the rand currency trades, it's quite good for us. As well as, I will say, the big game-changer for us is ultimately delivering the LCCP in terms of reaching beneficial operations. So that effectively, the bleeding of capital can stop, and we can start to move towards on getting the EBITDA online because in the ratio of net-debt-to-EBITDA, EBITDA is actually quite important for us to generate over the next couple of months.

So as we speak it, maybe tomorrow during our discussions, and also on the roadshow, we can see -- achieve more granularity in some of those scenarios. But for us, a scenario of oil price above $55 and rand kind of, I will say, between ZAR 14.50 and ZAR 15 will be a good level. And ultimately, our LCCP that kind of gets to within this range of $12.6 billion to $12.9 billion. But ultimately, if we did kind of nail those due date and we start to generate the EBITDA and delivering these $100 million, $300 million and it moving to $10 million EBITDA will be quite beneficial for us to actually manage and navigate this period.

In our strengths case, we did look at chemical margins, even further decreasing. We look at those scenarios as well potential further increases of costs we looked at, the shift it did, and we can maybe share some more details with you. So we are ready to deal with shocky days. I think that's the first point.

In terms of your second question, in terms of net debt-to-EBITDA range was the IFRS 16 was included? Yes, it was. So the range that we provided on net debt-to-EBITDA of 2.6x to 2.9x. That includes IFRS 16 impact on our debt.

Lastly, in terms of Moody's, I think it -- I will be -- not willing to speak on behalf of Moody's. Safe to say that we have had a civil engagement we engaged quite heavily with Moody's as well as S&P. And ultimately, might seem as it is although Moody's changed our outlook to negative they will probably still following our release of results still do it from the latest analysis and overall results and update the market accordingly. But in eventuality that it does go to sharp investment grade, to your question. So I'll just work on that scenario. I'm not saying that's going to be. But thanks, we believe we can still manage it within this investment grade. But let's say it does. And the sensitivity, if we do go to sub-investment is that our lenders will continue lending us money, we will continue to have access to the committed lending facilities that we could use with lenders. And the net impact on our interest on an annualized basis will be an increase of $14 million, 1-4, as a result of the knock-on impact if both rating agencies take us to sub-investment grade. So it's roundabout, I will say, ZAR 200 million or $14 million impact.

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Operator [5]

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Our next question comes from Gerhard Engelbrecht with Macquarie.

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Gerhard G. Engelbrecht, Macquarie Research - Head of Resources [6]

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I have a couple of questions as well. Can you give us an idea of where we stand with the cracker you talked in the slides about startup modifications that you intend to install at year-end? Is this related to the acetylene spec, are you achieving the acetylene spec? That's my first question.

And then secondly, you are now selling HDPE and LLDPE, in which destinations are these products landing? And what prices are you achieving? And what price benchmark do you suggest we use to model your revenues?

And then lastly, maybe a question for Paul. Can you confirm that all cash, short-term incentives for senior managers have been converted to shares rather than cash? Can you quantify the saving -- the cash saving? And also tell us what the strike price on the share incentive was? And what the expected dilution would be for ordinary shareholders as a result?

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Fleetwood Rawstorne Grobler, Sasol Limited - EVP of Chemicals Business [7]

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Thank you, Gerhard. So the first question with respect to the cracker, I'm going to ask Bernard to comment on that. And then we'll move on to the question on your HDPE and the benchmark pricing, which Brad will do it. And the last one, Paul would do that.

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Bernard Ekhard Klingenberg, Sasol Limited - EVP of Global Operations [8]

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Gerhard, it's Bernard Klingenberg. Thanks for the question. Towards the latter end of the year, late November, early December, we'll do a catalyst change on the asset lean reactors in the cracker. At the moment, we're able to achieve specs of between 7 and 9 parts per million, and we want to get that down to about 2 parts per million because it's limiting our throughput now to about 60% of capacity. And that's the modification or the changes that we'll be doing at the end of the year. It's going to take us about 18 days to do that. And we'll use the opportunity to make some small modifications that are required just to optimize on the plant.

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Fleetwood Rawstorne Grobler, Sasol Limited - EVP of Chemicals Business [9]

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Moving on to the second question, Brad?

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Brad Griffith;Senior Vice President, Performance Chemicals, [10]

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Okay. Gerhard, this is Brad Griffith. With the startup of Gemini last year, we've been well placed in the market for over a year on high-density polyethylene. And that's going to both the domestic and export markets. And we've really put in place a very strong network with market channel partners as well as direct marketing and sales globally. And what you'll see is that we're selling very close to the index pricing that you -- to measure. And we'd be happy to engage further on that during our meeting. For linear low density, also starting up earlier this year, also very strong uptake domestically for that linear load as well as for the export markets. Logistics have been working smooth with our packaging partners. And again, the same comment on pricing. We're seeing the same movements in pricing that you see on the indexes, and we're confident in being able to continue to achieve that.

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Paul Victor, Sasol Limited - CFO & Executive Director [11]

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Gerhard, Paul speaking. And so in terms of the HDI, maybe just to broadly explain how we did go about the HDI. So as part of the HDI at levels optimization and above, and I'll explain optimization just now. But the levels optimization and above, the equity issuance comes at play. And at levels below optimization in the organization, I think you will be familiar, the old Level 6 and below. Those employees receive still a cash payout in terms of the HDI. So ultimately, in terms of the total HDI, the value thereof is around about ZAR 1.2 billion. Just remember, this year, the number seems lower because the GEC as well as other employees, HDI is at 0 or lower levels. So ultimately, the number at the end is ZAR 1.2 billion. So through those levels, which are explained, ZAR 600 million was paid in cash and the other ZAR 600 million will then be ultimately converted to equity. So the equity share price that we will consider, obviously, it's the right price over a period of time. But let's just say, today's prevailing cost is ZAR 300 exchange if you then extrapolate that over the ZAR 600 million that's converted to equity, effectively, the dilution is 0.003%. So that's ultimately less than significant.

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Operator [12]

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Our next question comes from Henri Patricot with UBS.

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Henri Jerome Dieudonne Marie Patricot, UBS Investment Bank, Research Division - Associate Director and Equity Research Analyst [13]

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I have 3 questions, please. First one on the guidance update on the LCCP. Just to confirm for full year '20, the reason for the lower guidance compared to the previous one is mostly related to these repairs, I suppose? And on the longer-term guidance for full year '22, should we still expect to see slightly higher EBITDA after year '22 as you fully ramp up some of the needs? Or is the ZAR 1 billion guidance the new long-term guidance?

And secondly, still on the guidance, this time on CapEx. Could you expand on the drivers of the increase in the CapEx guidance for full year '20? I believe, you previously guided to ZAR 30 billion or ZAR 38 billion. So what are the moving parts there, and is there any flexibility around this figure?

And lastly, around the dividend. So you mentioned that you -- the possibility that you could pass on the interim dividend for full year '20. So I wanted to get some sense as to what metrics we should be looking at to assess whether that's likely to happen or not? What can -- perhaps the level of net debt to EBITDA that you have in mind?

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Fleetwood Rawstorne Grobler, Sasol Limited - EVP of Chemicals Business [14]

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Thank you, Henri. Paul will deal with these questions.

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Paul Victor, Sasol Limited - CFO & Executive Director [15]

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Henri, given the EBITDA is softening so ultimately, in terms of the first question, in terms of the LCCP guidance, what resulted in the kind of the decrease on the guidance, it was basically twofold. First and foremostly, it was the fact that ultimately we did delay some of the beneficial operations of some of the units, which we explained as well as the cracker that is running at 50% and ultimately, needs to be taken down for modifications. And we've taken all of those factors into account. And I would say the other half of it is really relating to the lower and softer margins, in terms of North America as well as what's playing out in terms of the trade wars, in terms of Street that we are currently seeing. Now again, it's a range. It's current providing spot prices play out in terms of the ethane price offset. It can potentially have a positive impact but on the flip side, if the chemical markets are kind of -- even more subdued, it can also go the other way. But we believe that the $100 million to $200 million that give us a sufficient range to take it through the bottom as well as the upside.

In terms of your second question. So the guidance that we did provide in full year 2, meaning the year financial '21, is [6 50] to [7 50]. And then ultimately, the run rate of $1 billion. And I will say that it is safe to say that markets are quite volatile, and they need to settle. In the eventuality, where the trade wars do settle make it a usable solution. Obviously, that will be the first signal towards better, hopefully, global growth. But it's a strong signal in terms of the profitability for -- kind of for the cracker. But on the flip side, if things continue and global economic growth is more sluggish and more negative, obviously, it may slow further waiting in terms of these numbers. And we have to closely monitor these assumptions going forward. I think we have to be quite in control of the controllables, which is reducing selling at the highest possible margins, at the base locations, at the lowest possible cost. That's really kind of where our focus is at this point in time.

The second question in terms of capital guidance. Yes. We did increase our guidance from ZAR 30 billion to ZAR 38 billion. And I won't say that it was a large component of our capital expenditure's dollar-denominated, the conversion from dollar to rand at a weaker exchange rate, which we confronted especially during the last period of time was a kind of much negative on this estimate. And we did experience a rollover of the LCCP expenditure from [9 2020]. Nothing untoward, it's just maybe [cutters]. We still plan to finish the project between [12 6] and [12 9]. And the rollover, it's really not going to give you more pressure, it just kind of in terms of where the work must be done, and where we be eventually accrue to all the expenditure.

In terms of your third question, in terms of interim dividend. I think the clear signal that we want to send in terms of our capital allocation framework, we need to consider the status of the balance sheet now as a priority. And hence, when we consider the interim dividend in our proposal to the Board in February, the status of the cash inflection point as well as the status of the completion of the LCCP and -- as well as where the markets are at that point in time will, obviously, be factors which we need to consider. At this point in time, what our current assumptions indicates is that we need to manage peak gearing over half year and then only from there on, it will start to reduce. Now we did give you guidance in terms of 2.6 to 2.9 on the net debt to EBITDA, which we consider being elevated. And what you will do is closely monitor that. If we need to pass it for either possess interim dividend to preserve and protect the balance sheet and to ensure our investment-grade status is unaffected, that's priority. And hence the interim dividend will be considered in terms of that scenario. In terms of scenarios, I think it's quite important at current run rate that we see in the market as -- interim dividend will be under pressure. It's -- unless we see a significant step-up in oil prices or -- (inaudible) market changes that would maybe argue differently. And so the pressure is definitely great to consider a potential cost on the interim dividend. But as I say, that's the Board's decision for review. I think we just want to make you realize that, that risk is currently there.

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Operator [16]

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Our next question comes from Alex Comer with JPMorgan.

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Alex Robert John Comer, JP Morgan Chase & Co, Research Division - Research Analyst [17]

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First of all, there's just one with regard to the cracker. Given where the balance sheet is -- I mean this catalyst change, sort of, Christmas seems to be quite important. So the first question is how confident are you that this is going to improve your performance of the plant? And maybe, if you can give us some background on that.

Secondly, just in terms of future targets. I see you still put this $6 a share of free cash flow in 2022 target out with rand-dollar 8.40. I just wonder how much conviction you still have in that being achievable. And then their equipment might -- the integrated resources plan talked about a 70% reduction, I think, in coal-fired electricity between 2030 and 2050. How do you square that with your asset life at Secunda out to 2050?

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Fleetwood Rawstorne Grobler, Sasol Limited - EVP of Chemicals Business [18]

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Thank you, Alex. I'll deal with the first question and Paul with the second one. So with respect to the cracker and the catalyst change, and the question relating to how confident are we that we'll address the issue. We have worked closely with our experts in the cracker technology space. We've also worked really closely with the licensor. And thirdly, very closely with the catalyst suppliers. And when we looked at the operating parameters, we are convinced that the catalyst is somehow damaged or contaminated. And we believe that the solution that we have now to replace the catalyst would be the remedy for the issue. And so we are rather confident that we would be able to remedy the situation and then ramp up from there.

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Paul Victor, Sasol Limited - CFO & Executive Director [19]

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Alex, in terms of your question on the cash flow per share. I will acknowledge the fact that debt ratio is currently under pressure, and it needs to be reviewed. And ultimately, we do plan, at some point in time, to announce at the Capital Markets Day in future. And as part of that process, ultimately, we need to consider the achievability of that number. But I think, all in all, the new effect that LCCP can achieve the $1 billion, which we still currently today believe it will. It's definitely itself, based on financial '19 numbers, can increase the EBITDA of the company by 30%. So there will be of some sorts expected increase in terms of the cash flow per share but given the change in market dynamics and the change in assumptions that you need to evaluate, we need to come back to you and say, okay, what is that updated range in terms of debt.

In terms of your second question, with regards to our sustainability journey in terms of 2050 and useful life. Let me just a bit clear about this objective of the sustainability. The objective of the sustainability doesn't mean no coal. It's, in fact, means still coal. And it also just means a broader or larger participation of renewables and potentially low carbon sources such as gas. So we have called feedstock in terms of 2050. And even if you reduce your coal usage, you still have feedstock available to feed you until 2050. The plan is still to operate until 2050, and given our current indication. And we see no reason to change your useful life in terms of the integrated complex for Secunda. So I do take your point that coal dependency may reduce but coal will still be a large part, probably the lion's share of our feedstock requirements for Secunda 2050. What happens after 2050, that there begs the question, how much you will be coal-dependent? But our useful life is only through 2050. So for now, we don't revisit any change to that.

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Operator [20]

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Our next question comes from Sean Ungerer with Arqaam Capital.

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Sean Ungerer, Arqaam Capital Research Offshore S.A.L. - Analyst [21]

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The line was a bit unclear. Yes. So excuse me for asking the question again. But just in terms of the potential H1 '20 dividend. So it sounds like it, if it goes -- if net debt to EBITDA goes below sort of 2.6x, then it sounds like it will be a possibility, otherwise not. And then just the comment around the FY '21 CapEx, I think the comment was a large part of it was related to sustenance. At ZAR 30 billion, it seems a bit heavy. Maybe if you could just expand on that. And then I know it's just really a bit too early, but I think, obviously, it's quite important to look at growth sort of post-LCCP, what sort of falls into the definition of affordable investment options? And maybe you could give a few examples.

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Fleetwood Rawstorne Grobler, Sasol Limited - EVP of Chemicals Business [22]

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Thank you, Sean. Paul will deal with the first 2 questions.

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Paul Victor, Sasol Limited - CFO & Executive Director [23]

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Sean, is the line clear to you now?

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Sean Ungerer, Arqaam Capital Research Offshore S.A.L. - Analyst [24]

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Yes. Yes. It is, Paul.

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Paul Victor, Sasol Limited - CFO & Executive Director [25]

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Good. All right. So Sean, I do take your question in terms of the first half dividend. I think what's quite important in terms for the interim dividend, and also dividend payout a day after, we did say that we pass this final dividend. But in future, I think what's quite important is that where we do currently see the leverage levels above 2.5x in terms of our covenant. Obviously, we do want to kind of get it more closer to between 2x and 2.5x, and we need to allow the balance sheet to get below that 2.5x at least for us to reconsider the continuation of the future dividend payout. How successful we are in terms of the ramp up with the LCCP as well as providing market circumstances will ultimately depict in terms of how quickly we get that. So ultimately, in terms of financial year '20, in terms of dividend payout, we will be stretched to get below 2.5x, I will say, and given our current assumptions. But the markets have surprised us on the ascension down over the past couple of months. So let us reassess in February. And in February, we will get a better sense of where we are. I just maybe pointing out that risks that we are facing today in current providing market circumstances today, the risk is elevated to potentially pass the interim dividend as well as our current assumptions don't indicate as the 2.5x or below at that 20 ton.

In terms of your second question, whether the kind of the capital estimate for financial '21 of ZAR 30 billion, mainly focusing on only sustenance and compliance, seems a bit rash. So ultimately, there is some growth capital that we have announced in the '21 estimates. We need to continue with our phase A objectives, for example. And there are some smaller committed capital cost as regards to growth that we have included to the order of between ZAR 3 billion and ZAR 5 billion in that ZAR 30 billion estimates. So when we really think about sustenance and compliance, that's around about ZAR 25 billion. I think what's quite important to entering the phase other than the normal sustenance basket of $1.5 billion is that you need to conform to keep to our SKUs, specifically with regards to the Secunda complex, which probably comes in addition. We are also busy with our compliance projects in terms of QA in Sasolburg and Secunda and as well as contributing a study as well as development costs with regards to our compliance, with regards to our CO2 footprint. So we've considered all -- the suite of that. And we think that gives us kind of a range of ZAR 25 billion. Ultimately, we won't update this number as we get better clarity. I think to at least comment of the room to squeeze more out, we have had a couple of rounds in terms of looking at this number. Now I'm not preaching that it will not change, however, I can give you the kind of assurance that we have scrutinized this number allocated to our activities, and we cannot sacrifice the integrity of our assets. It's not worthwhile. So we do believe that this level of spin is prudent for '21 but as I simply update it more closer to financial '21.

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Fleetwood Rawstorne Grobler, Sasol Limited - EVP of Chemicals Business [26]

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Sean, with respect to your question around growth post-LCCP. First of all, I think it's important that we acknowledge that LCCP in itself presents an opportunity with respect to debottlenecking. We've observed that similar plants and similar crackers has been rewrited in terms of increasing capacities, and we believe that there would also be some opportunity for us to focus on debottlenecking that might be very lucrative for us because of low capital spend for the rewards that we may see. So I think that's the first one, so we will look at that.

Secondly, consistent with what we've communicated to the market before was that we have growth options, both in our upstream and in our chemicals business, which comprise not only organic, smaller projects, but also we're getting ready for M&A activities. And so our programmatic M&A approach still remains intact, and we will consider that to be implemented once the balance sheet allows for that activity. And then last but not least, we still maintain our energy focus with respect to the retail side, high margining the volumes that we put through those channels to market. So I think that picture didn't change to what we articulated.

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Operator [27]

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Our next question comes from Wade Napier with Avior Capital Markets.

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Wade Napier, Avior Capital Markets (Pty) Ltd. - Research Analyst [28]

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Just a quick one, on clarity on the asset disposal program. I know you previously sort of spoke about a net book value target of $2 billion. Now that sort of changed to an asset sale target of $2 billion. Could you just help me reconcile the 2 figures? I mean are those different or they're still simply the same thing?

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Fleetwood Rawstorne Grobler, Sasol Limited - EVP of Chemicals Business [29]

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Paul will deal with that.

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Paul Victor, Sasol Limited - CFO & Executive Director [30]

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Yes. So Wade, the numbers still made asset value. I mean -- so ultimately, we haven't changed that target to kind of make it the sales value. So what's being referred to on Slide 10 and are on track to -- with the total divestment target of $2 billion. That's above -- that's the net asset value. Just to confirm that point.

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Wade Napier, Avior Capital Markets (Pty) Ltd. - Research Analyst [31]

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Okay. Then maybe just a follow up on the interim -- of the net debt-to-EBITDA guidance. The -- of 2.6 to 2.9x, is that per -- how you and I would calculate it? Or how the banks are calculating it?

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

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No, Wade. That's not the way you and I will calculate it. It's basically based on the way that we have agreed the methodology to calculate it with the banks. So it's based on the bank's definition, which looks at -- or that similar to that 2.2 to 2.4x ratio that I provided.

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Fleetwood Rawstorne Grobler, Sasol Limited - EVP of Chemicals Business [33]

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Operator, we will take one more question and then we will conclude the session. So Wade, any other questions?

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Wade Napier, Avior Capital Markets (Pty) Ltd. - Research Analyst [34]

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No. That's it for me for now.

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Operator [35]

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Our final question will be from Adrian Hammond with Standard Bank.

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Adrian Spencer Hammond, SBG Securities (Proprietary) Limited, Research Division - Research Analyst [36]

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Just firstly, looking at the balance sheet and available debt facilities, I see you've got about $380-odd million available fundings for the cracker, but you got $1.4 billion remaining. I just want to understand a bit how you utilize dollars for the remaining funding of the cracker?

And secondly, given the macro environment, if it weakens further passing -- and passing on the interim isn't sufficient, is there anything else you could do? And then thirdly, just on the asset sales, you've earmarked 20%. I assumed $400 million is what you could shore the balance sheet with. Does this include historical asset sales? And what is the idea around coal reserves, are you looking at specific coal mines? And how does this influence your ability as a low cost feedstock fuels business?

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Fleetwood Rawstorne Grobler, Sasol Limited - EVP of Chemicals Business [37]

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Thank you, Adrian. Paul will deal with the first two question.

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Paul Victor, Sasol Limited - CFO & Executive Director [38]

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Adrian, yes. So in terms of the liquidity, we do manage the liquidity on a global basis for the company. And yes, if you look at our analyst book analysis, we did provide a sense of how much access to liquidity that we have in terms of ZAR as well as dollars. The combined impact of -- is currently $1.5 billion of liquidity, which is more than sufficient to complete the LCCP. However, we are also busy with banks on a continuous basis to ensure that we have a better match between our dollar pools to ensure that we fund effectively our dollar expenditure. So if you just allow us a couple of weeks to complete that process, I think the fact that it's delaying our financial results, ultimately, held us back in terms of completing our liquidity negotiations with our banks. So hopefully, in a couple of weeks from now, we will provide you with an update in terms of our liquidity position. And I feel quite comfortable that we will achieve a much better match between dollar for dollar and rand for rand. In the eventuality that we are successful, we do believe that at that point in time, we still got sufficient liquidity that, that will then involve the conversion of rand to dollar, which is less ideal for us as a company that we believe for now going we're going to be the least likely to affect, if we can conclude the (inaudible). Just allow us some time to update that, and we believe that we'll have a quite effective dollar-for-dollar match to complete the LCCP.

In terms of the second question, in terms of macro deterioration, and both on the interim dividend, what else can we do? As far as our management actions in order to create flexibility on the balance sheet, we have identified a substantial amount of cash conservation actions that we all have agreed to the business, and we will be introducing and we have started to introduce, which we believe is sufficient for us to -- in addition to a potential interim dividend part, will assist us in managing the balance sheet. Obviously, we need to be quite effective and efficient in executing those. And we have a proven system of doing that in the past. So there's no reason to believe that we cannot do it going forward. However, I did point out earlier in the conversation that oil prices at below $55 or a much stronger rand or much weaker rand can influence us going forward. But we do believe that with our self-help measures and the way that current production performance of the business is going as well as the sales performance that we can steer the peak gearing phase, which will [refund our event]. I will let an update. Last question?

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Fleetwood Rawstorne Grobler, Sasol Limited - EVP of Chemicals Business [39]

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Yes. So Adrian, I'll deal with the last question and I'll ask Jon to assist me with respect to the coal reserves and how we monetize that. So Adrian, yes, the assets that we have so far divested from back-spend, back to the previous financial year during which time we did do the Malaysian Optimal and Petlin plants, and U.S. Lake De Smet land and coal reserves. But for the full list of the assets that is follow that, I'll refer you to Page 10 of the presentation. And that will also include the 2 transactions that Sean (inaudible) confusion, which is the (inaudible) in China with (inaudible) joint venturing (inaudible) Now if you add all of that up, that is (inaudible). Jon?

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Jon R. Harris, Sasol Limited - EVP of Upstream [40]

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Yes. Sorry, I didn't catch this question. Can you just repeat it?

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Paul Victor, Sasol Limited - CFO & Executive Director [41]

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Maybe I can comment, Jon. So ultimately, Adrian, I think the misconception here is that we will divest from our coal assets and ultimately sacrificing our competitive advantage. Now let me be clear about that. I mean ultimately, our feeds -- we have access to low-cost feedstocks in terms of our coal value chain in Secunda. And although there were a lot of media press with regards to our intention to divest from those assets. That's all hasn't gone on record stating that we will update soon, our coal assets. A lot of our strategic competitive advantage in Secunda is the fact that we've got access to low-cost feedstock. And that we have operatorship of that, and that's a key strength to our business. And we maintain to continue that. I guess the thing is, when we're looking in terms of your broader assets from a Sasol's perspective, [potential] assets are strategic to the company. And I think what you need to allow is to -- for this opportunity to evaluate and complete the final evaluation in terms of what parts of the assets we want to divest, at what value and then ultimately come back to the market once the Board has actually provided the mandate on such assets. So there's a lot of speculations. But giving up our competitive advantage in Secunda on the city our integrated value chain, it's really not something that currently we are thinking about.

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Fleetwood Rawstorne Grobler, Sasol Limited - EVP of Chemicals Business [42]

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Thank you, Paul. Operator, I think we will, at this stage, conclude the call. And I thank you for everyone that participated in this call this afternoon. Thank you for your interest in the company.

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Operator [43]

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The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.