ArcelorMittal South Africa : Reviewed condensed consilidated financial statements for the year ended 31 December 2021

ArcelorMittal South Africa Limited

Preliminary reviewed condensed consolidated financial statements for the year ended 31 December 2021

Salient features

• Strongest annual EBITDA since 2008 of R8 569 million
• 13% increase in sales volumes and 34% increase in crude steel production
• Raw material basket (RMB) increase limited to 10% against a 42% increase in the international RMB (rand terms)
• Business Transformation Programme savings of R2 085 million
• 91% increase in average international dollar steel prices, with a 47% increase in realised rand prices
• Unreliable rail and electricity supply limit volume growth
• Free cash flow of R1 961 million results in R2 366 reduction in net borrowings to R1 258 million, after a R2 724 million reduction in a payable with extended credit terms
• Headline earnings of R6 860 million (2020: R2 033 million loss)
• Increased capital allocated to improve reliability and quality, enhance environmental compliance and target growth opportunities
• Significant progress on decarbonisation roadmap development

The analysis below relates to year ended 31 December 2021 (current period) compared to the 12-months ended 31 December 2020 (prior or comparable period), except where otherwise indicated.

Overview and sustainability

Despite the volatility from the ongoing presence and repercussions of Covid-19 and its various variants, 2021 was an exceptionally strong year for ArcelorMittal South Africa.

The Company's annual results were supported by a continuing strong price environment, higher sales volumes, and the benefit of robust price-cost effects, all resulting in the highest yearly EBITDA (R8 569 million) and headline earnings (R6 860 million) since 2008.

An acceleration of free cash flow generation, from the first half of the financial year's R985 million to the full year's R1 961 million, resulted in a reduction of net borrowings by R2 366 million to R1 258 million, against R3 624 million at 31 December 2020. The free cash flow performance was after the R2 724 million reduction in a significant payable with extended credit terms. This represents meaningful progress against one of the key strategic pillars of the business, namely, to improve financial resilience by operating on a net cash funding basis.

The Business Transformation Programme (BTP) contributed a further R2 085 million (2020: R1 543 million) in improvements, bringing the cumulative benefit achieved since the programme started in the second half of 2018 to R5,6 billion.

These results were far from effortless, and were achieved through the significant commitment and efforts of the Company's employees and service providers as several difficulties were traversed and responded to though the year, most notably:

• a painful, disappointing and unacceptable safety performance
• ramping-upof production and restoring stability after the o restart of operations in late 2020 and early 2021; and o interruptions due to the safety incidents
• adverse impact of the civil unrest in July 2021
• spill-overeffects of last October's paralysing labour strike in the downstream industry, which necessitated the rebalancing of dispatches to export markets
• unreliable electricity supply at both the generator and, particularly, at local municipal distribution levels
• an ever-worsening rail logistics service aggravated by significant fire damage at Transnet's Richard Bay's facility
• managing through the extreme volatility in international coking coal prices in the second half of 2021.

The global steel environment for 2021 was characterised by overall positive yet differing dynamics when comparing the two halves of the year. The first half of the year saw strong demand recovery due to low supply chain inventories and a strong recovery in steel spreads (i.e., the difference between steel prices and raw material costs). It was during the first half of the year that China reduced the incentive to export steel by cancelling the export rebates on VAT. Given the scale of the China steel industry and the size of its exports, this represented a material change to the medium‐term prospects of the global ex‐China steel industry. The second half of the year saw still-positive demand, though with steel prices off record highs. Falling iron ore and volatile coking coal prices were also experienced in response to easing supply constraints among exporters, and notable economic interventions evident in China.

ArcelorMittal South Africa Limited

Preliminary reviewed condensed consolidated financial statements for the year ended 31 December 2021

Overview and sustainability continued

Regarding fair trade policy, ArcelorMittal South Africa continues to support actions which target unfair trade practices in the jurisdictions in which it operates and trades. 2021 proved to be a particularly active year as globally the unfair practices, which initially provided protection, remained prevalent. A very real risk exists of those unfair practices intensifying as supply constraints ease and markets normalise in time.

Within Europe, at least seven new or review investigations were launched, and new or extended protection measures implemented, targeting mainly hot rolled coil, galvanised sheet and wire rod from China, Russia and Turkey. In the US, Section 232 continues to apply a 25% tariff on all steel product categories from most countries, though, from 1 January 2022, it will replace the existing tariffs on EU steel with a tariff-rate quota on a product category and EU member state basis. Imports above the permitted volumes will continue to be subjected to the 25% tariff.

The average international dollar steel prices increased by 91%, with iron ore by 48%, coking coal by 82%, and scrap by 68%.

Turning to South Africa and the regional economy, consensus GDP growth forecasts for South Africa are around 4,6% for 2021, and those for near- and Sub-Saharan Africa markets between 3.0% and 3.3%.

Steel inventory levels have largely returned to normal, while business conditions in South Africa, particularly in the second half of 2021, proved to be more challenging than initially anticipated. This was due to the negative impact on sentiment of events such as the civil unrest in July, labour disputes in the downstream sector, continuing electricity load-shedding, municipal distribution network failures, and lockdown uncertainty. In contrast, the anticipation of impactful progress on the renewable electricity build programme, private sector's potential involvement in rail and port logistics, the advancing of the next tranche of "shovel ready" projects within the Infrastructure Investment Programme, and positive spin-offs for growth from the upcoming band spectrum auction, serve as a basis for some optimism.

Diversifying the sourcing of strategic raw materials continued to yield significant though hard-won benefits, as best illustrated during times of extreme price volatility. Disposal of Coza Mining and the consequential offtake agreement reached financial closure during the last quarter of 2021. The second phase of the Thabazimbi iron ore beneficiation project is scheduled to begin in the first half of 2022.

As reported in July, the Company took a very conscious though responsible and well-considered decision to invest in certain key fixed cost areas. This was extended to also encompass targeted capital investment, both incurred in 2021 and allocated for 2022. This additional fixed cost and capital investment is directed at improving reliability and quality, further enhancing environmental compliance, and targeting growth opportunities. A return to stable, reliable production is key to the Company's commitment to improving its customer service experience after a difficult 2020 and early- 2021. Additional fixed cost, amounting to R2 362 million, was largely attributed to higher activity levels, additional investment in maintenance to improve reliability and quality, and supplementary temporary staff for pandemic risk mitigation purposes.

With varying degrees of global supply chain seizures, and the impact of government stimulus packages being progressively felt in the real economy, expectedly, inflation has made an unwelcome return, with the prospect of a tighter fiscal and monetary environment into 2022. Aggravated by the high electricity and logistics cost in South Africa, improving ArcelorMittal South Africa's position on the global cost curve while bettering its product offering to customers, will be critical to the next phase of its Transforming for Sustainable Growth strategy, as best expressed through the strategic pillars: reposition, restructure and resilience.

For 2022, the BTP will advance to the more ambitious and more encompassing multi-year Value Plan Programme (VPP), targeting:

• greater integration between suppliers and customers to improve the overall efficiency of the supply and value chains, including integration and consolidation opportunities
• improving the product and value offering to customers
• adopting a more agile and variabilised fixed cost structure
• pursuing alternatives to counter unsustainable cost inflation of both rail and electricity, which is limiting volume recovery and risking growth aspirations
• implementing the decarbonisation roadmap which is being finalised for formal announcement later in 2022.

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ArcelorMittal South Africa Limited

Preliminary reviewed condensed consolidated financial statements for the year ended 31 December 2021

Safety, Environmental, Social and Governance (ESG)

The Company's financial performance was overshadowed by its safety results.

ArcelorMittal South Africa's board, management and employees were saddened by the six fatalities in 2021 and commiserate with the families and friends of these colleagues. Unfortunately, the Company's lost-time injury frequency rate (LTIFR) increased from 0,58 to 0,98 and the total injury frequency rate (TIFR) increased from 7,21 to 7,80.

Improving the business's safety performance is the highest priority. With the assistance of its parent company, ArcelorMittal, and external advisors, the Company has intensified its efforts by rigorously applying the necessary safety tools and accelerating in‐person training. The Company is also analysing further interventions that can be introduced to ensure fatalities are eliminated.

A step-change in safety performance with greater visible and tangible care for the Company's employees and service providers has started and will be significantly intensified in the coming year. This will be supported by greater people engagement initiatives, with a particular focus on addressing skills gaps, training and development, and diversity.

With the assistance of external specialists, front-line managers and supervisors are being upskilled in areas such as safety engagements, observation and interactions, and risk awareness and analysis.

Beyond ongoing vigilance against Covid-19 (that is, strictly implementing the latest guidelines and ensuring the workforce is enabled to follow strict prevention protocols at work, supported by continuous health monitoring), early in the second half of 2021, the Company launched its own Covid-19 vaccination programme. By early February 2022, more than 2 500 doses had been administered on-site.

The ArcelorMittal Group's stated aim is to lead the steel industry's important role in ensuring the global economy achieves net zero emissions. It has made a series of well-published and sizable decarbonisation commitments as the necessary government and funding support is secured. Positively, ArcelorMittal South Africa has made significant progress from the second half of 2021 to develop various roadmap options to achieve a material reduction in carbon intensity by 2030 and net zero by 2050. Numerous bankable "no-regret" opportunities have been identified, central of which is energy efficiency improvement, both of a non-capital and capital-intensive nature. Of critical importance is the establishment and adoption of an international carbon price, supportive policies and enabling funding solutions. Securing the benefits of early-mover advantages are being explored with various private and public sector entities. This represents an unprecedented opportunity to redefine South Africa's industrial footprint.

Other important ESG initiatives include greater engagement with the Company's environmental stakeholders (also incorporating details on its progress on the decarbonisation journey), improving ArcelorMittal South Africa's B-BBEE standing as a proudly South African corporate citizen, and opportunities to further leverage off an already significant learner training programme, by exploring upscaling opportunities with government.

Markets

Global crude steel production1 increased to 1 910 million tonnes for 2021 off a vigorous recovery in demand, returning to pre-pandemic levels (other than for China) earlier than anticipated. This performance is 68 million tonnes (or 4%) higher than 2020, and reflects pent-up demand by mining, construction and manufacturing, as well as the notable recovery within the automotive industry and increased fixed capital formation levels. Global crude steel production decreased by 9% to 909 million tonnes in the second half, compared to 1 001 million in the first half of 2021.

Early in the second half of 2021, China aggressively reduced steel production to limited output to 2020 levels to address energy constraints and limit emission volumes.

Generally, developed countries' demand has recovered more strongly than that of developing countries due to higher vaccination rates and greater government stimulus, against intermittent stop-starts due to infection resurgency.

1 Source: Worldsteel Association and Statistics

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ArcelorMittal South Africa Limited

Preliminary reviewed condensed consolidated financial statements for the year ended 31 December 2021

Markets continued

China's crude steel production decreased by 3% to 1 031 million tonnes, its market share dropping to 53% from 58% a year earlier. Europe's2 crude steel output increased by 14% to 206 million tonnes. North America was up by 17% to 118 million tonnes. Turkey and Russia managed to increase production by approximately 13% and 6% respectively while India rose by 18% to 118 million tonnes. Africa's output increased by 27% to 16 million tonnes due to higher production in South Africa and Egypt. South Africa's crude steel production increased by 28% to 5 million tonnes.

In South Africa, apparent steel consumption (ASC) for 2021 increased by 25% to 4,5 million tonnes, driven by the recovery of construction, mining and manufacturing. ASC decreased by 5% to 2,2 million tonnes in the second half compared to 2,3 million in the first half of 2021.

Total steel imports of primarily hot rolled coil, galvanised sheet and tinplate increased by 47% to 1,4 million tonnes3 in response to inventory rebuilding in the local market. This volume constituted some 30% of South Africa's ASC (2020: 25%). Imports decreased by 23% to 594 000 tonnes in the second half compared to 770 000 tonnes in the first half of 2021.

The Company's total sales volumes increase by 13%, or 284 000 tonnes, to 2,5 million tonnes compared to 2020, due to a 16% rise in domestic sales to 2,2 million while exports decreased by 5% to 302 000 tonnes. The regional mix of exports improved significantly with Africa Overland customers at 218 000 tonnes, representing an increase of 47%. Total sales volumes decreased by 4% between the first and the second halves of 2021.

Average benchmark China export hot rolled coil prices increased by 70% year-on-year, while rebar prices increased by 60%. Benchmark hot rolled coil prices increased by 9% between the first and second halves of 2021, with rebar prices up by 6% for the same period.

The Company's overall realised steel price in dollars increased by 62%. In rand terms, this represented a 47% increase as the average dollar/rand exchange rates strengthened by 10%. Realised dollar steel prices increased by 15% between the first and second halves of 2021, with rand prices up by 19% for the same period. The improvement reflects the lagged benefits of the higher steel prices which characterise the Company's order intakes.

The Company is the only primary producer in South Africa which supports the downstream industry though a formal support programme. Our industry support saw a 67% increase to R308 million in value added export assistance and rebates.

2Europe including Turkey

3Source: Company projection based on import statistics from Customs

Operations

Excluding Saldanha Works, which through an orderly and commercial wind-down was placed under care and maintenance early in the second quarter of 2020, the Company's average capacity utilisation increased from 42% in 2020 to 60% in 2021 and is currently at 79%.

Crude steel production (including that from Saldanha Works) increased by 34%, or 769 000 tonnes, from 2,2 million tonnes to 3,0 million tonnes in 2021. Crude steel production marginally increased by 3% to 1,53 million tonnes in the second half, compared to 1,49 million tonnes in the first half of 2021.

In addition to the significant maintenance programme undertaken in 2021:

• in November and December, Vanderbijlpark Works' second blast furnace underwent a successful scheduled maintenance programme targeting refractory shotcreting, and certain electrical components, conveyors and structures; and

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ArcelorMittal South Africa Limited

Preliminary reviewed condensed consolidated financial statements for the year ended 31 December 2021

Operations continued

• in December, Newcastle Works' blast furnace similarly underwent a refractory shotcreting following the postponement of its mini-reline to the second quarter of 2022 due to a combination of market dynamics and to ensure the availability and preparedness of appropriate skills (amid pandemic-related availability factors).

After safety, production reliability and stability to enable improved delivery to the Company's customer base, are key focus areas. To deliver against these objectives, efforts continue to attract new process- and maintenance-related skills and to develop existing skills though specialised training programmes, all supported by a refreshed and more structured management system.

As reported in July 2021, the safety incident at Vanderbijlpark Works' coke-making unit was the primary contributor to the lower commercial coke production. For 2021, although commercial coke production was 43% lower at 160 000 tonnes, supplemented with available inventory, sales volumes remained flat at 308 000 tonnes. Sales fell by 40% to 115 000 tonnes in the second half compared to 193 000 tonnes in the first half of 2021 due to lower inventories and a slower post-incident production recovery.

Financial results

ArcelorMittal South Africa reported an EBITDA of R8 569 million against R37 million in the previous period, while its operating profit increased substantially from a loss of R963 million in 2020 to a profit of R7 976 million. The headline earnings of R6 860 million recovered strongly from a loss of R2 033 million, amounting to a 615 cents per share profit against a 185 cents loss for 2020.

EBITDA increased by 66% to R5 351 million in the second half, compared to R3 218 million in the first half of 2021.

Revenue increased by 61% to 39 708 million due to a 13% rise in total steel sales volumes and a 47% rise in net realised steel sales prices. Revenue increased by 14% to R21 112 million in the second half compared to R18 596 million in the first half of 2021.

The Company's raw material basket (iron ore, coking coal, and scrap), representing 43% (2020: 41%) of cash cost per tonne, was 10% higher in rand terms, which is satisfying given the 42% increase in the international raw material basket in rand terms. This reflects the work done in diversifying the sources of raw materials. Consumables and auxiliaries represented approximately 30% of cash cost per tonne (2020: 32%), increased by 5%. Electricity tariffs increased by 14%.

Fixed costs increased from R5 066 million in 2020 to R7 428 million in 2021, an increase of 47% reflecting higher activity levels as well as efforts to improve reliability and quality. Fixed costs increased by 20% to R4 052 million in the second half compared to R3 376 million in the first half of 2021 in response to the higher maintenance activity.

Net financing charges were marginally up at R1 163 million (2020: R1 123 million) due to a higher interest expense and the unwinding of the discounting effect on provisions.

The debit fair value adjustment on investment properties of R228 million (2020: R118 million) is based on the latest fair value of these properties obtained from independent valuators.

Cash flow and borrowing position

Cash generated from operations of R3 024 million improved by R2 157 million in 2021, despite a significant investment of R6 120 million (2020: R1 896 million release) in working capital, reflecting higher prices and improved activity levels.

Net finance cost outflow decreased by 3% or R7 million to R261 million. A net foreign exchange profit of R60 million was realised compared to a loss of R289m in 2020.

The net capital expenditure cash outflow was R860 million against R509 million in 2020, reflecting higher activity levels and the postponement into 2022 of the mini blast furnace reline at Newcastle Works.

The net borrowing position of R3 624 million at 31 December 2020, improved by R2 366 million to R1 258 million at 31 December 2021. At 30 June 2021, the net borrowing position was R2 782 million.

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