ArcelorMittal South Africa : Reviewed condensed consolidated results for the six months ended 30 June 2022

ArcelorMittal South Africa Limited

Reviewed condensed consolidated financial statements for the six months ended 30 June 2022

Salient features

• Pleasing improvement in safety performance
• Headline earnings up 22% at R3 025 million (2021: R2 482 million) with net finance charges down 44% at
  R250 million (2021: R445 million)
• 61% lower net debt position of R1 087 million (2021: R2 782 million)
• EBITDA up 12% at R3 591 million (2021: R3 218 million)
• 23% increase in realised dollar steel prices
• Raw material basket (RMB) increased by 41% (rand terms) (international RMB up 39% in rand terms)
• Value Plan Programme realised improvements at R577 million
• Successful R464 million Newcastle blast furnace mid-life campaign restoration due to be completed in early August 2022
• Progressing the feasibility of the announced investment in two 100 MW renewable energy projects

The analysis below relates to the six months ended 30 June 2022 (current period) compared to the six months ended 30 June 2021 (prior or comparable period), except where otherwise indicated.

Overview and sustainability

On 10 February 2022, at the announcement of the Company's 2021 full-year financial results, the outlook for the coming six months was overall positive, though with demand returning to more normal levels and steel pricing generally being supported by raw material pricing trends. Central banks' responses to rising inflation was flagged as a risk.

Broadly assessed, the Company has successfully delivered against its predicted outlook and, in some instances, outperformed expectation. That said, the specifics of the delivery were far more complicated, and a particular word of thanks goes to ArcelorMittal South Africa's loyal staff, customers and suppliers who enabled the Company to manage through some tumultuous events.

Stronger headline earnings of R3 025 million (2021: R2 482 million) were supported by higher EBITDA of

R3 591 million (up 12%) and notably lower net finance charges of R250 million (2021: R445 million). The net debt

position was 61% lower at R1 087 million (2021: R2 782 million), as well as R171 million below 31 December 2021 levels (R1 258 million) due to cash generated from operations.

ArcelorMittal South Africa's realised average steel prices increased by 30% (rand terms). Its raw material basket increased by 41%. In absolute rand terms coking coal increased by 91%, scrap by 8% and iron ore by 4%.

As anticipated, with the higher maintenance activity undertaken in the second half of 2021 beginning to wind down into 2022, fixed costs of R3 448 million were lower by a significant R604 million (-15%) against the immediately preceding six months.

Free cash flow of R177 million (2021: R985 million) after capital expenditure of R693 million, the final settlement of a dollar-denominated trade payable with extended credit terms of R628 million, and other temporary investments in working capital of R1 951 million.

The Company's more growth-orientated Value Plan Programme, successor to the successful Business Transformation Programme, realised improvements of R577 million, being commercial-related initiatives of R343 million and cost- based initiatives of R234 million. This result was notable given the backdrop of disruptive events which lead to a 30% drop in crude steel production.

ArcelorMittal South Africa Limited

Reviewed condensed consolidated financial statements for the six months ended 30 June 2022

Overview and sustainability continued

The following events require highlighting to appreciate the complexity of the delivery of this financial performance:

• A month-long shutdown of one of Vanderbijlpark's blast furnaces and the intermittent stoppages of the remaining fleet to avoid the risk of an uncontrolled stop due to insufficient inventory (particularly of iron ore), resulting from the unavailability of the rail service
• Impact on customers of the damaging floods in KwaZulu-Natal
• An unnecessary two-week labour strike and associated violence, intimidation, criminality and misconduct
• Severe electricity load shedding which is proving to be particularly disruptive to suppliers and customers
• A softer local steel trading environment

The rail, labour and electricity events represent lost opportunities, which is lamentable for a country that so desperately needs to take advantage of every economic opportunity to rebuild after the destructive pandemic.

Having maximised road transport opportunities, the Company and Transnet Freight Rail (TFR) launched a CEO-led initiative to collaborate on aspects of security and technical assistance. ArcelorMittal South Africa is supporting tactical security initiatives to support TFR's own initiatives. Technical teams from both businesses are working on actions to improve locomotive spares' assessment and availability. Although locomotive availability has improved, it remains far below the contracted service levels and is still very volatile. As a result, in the third quarter of this year, the Company will deploy external consultants to assist the operational teams to improve their effectiveness. Should the Department of Transport's Rail Policy be successfully implemented, ArcelorMittal South Africa has appetite to progress a commercially sensible train investment programme to supplement volumes which TFR does not have capacity to move. The renewable energy sector is proof of what can be achieved when government policy is both certain and enabling.

It is a well-known industry fact that ArcelorMittal South Africa's bargaining category pay scales are the highest in the sector. Though satisfied with the outcome of the wage negotiation, which ended after an unnecessary and disruptive two-week strike, much work remains to reset the relationship with organised labour, while addressing the unsustainable increases in base pay that undermine the Company's competitiveness. The steel industry is highly cost sensitive, and all parties need to agree on ways to address this vulnerability, particularly given the more challenging economic landscape ahead. Further, the Company condemns in the strongest possible terms the violence, intimidation, criminality and misconduct displayed during the strike, which led to disciplinary action and criminal charges. Such behaviour has no place within ArcelorMittal South Africa's culture, which is being refreshed following the difficult but necessary restructuring initiatives. The culture refresh is supported by the rebuilding of the management system to ensure that responsibility, accountability, performance- and consequence management are engrained throughout all levels of the business.

South Africa experienced its worst bout of electricity loadshedding in June 2022, taking the year-to-date levels for 2022 to the full-year 2021 levels. The situation is aggravated by highly unreliable municipal infrastructure. Loadshedding is negatively impacting the economy and does not bode well for investor sentiment and job creation. As a sign of confidence in the country, ArcelorMittal South Africa, with the support of the ArcelorMittal Group, announced that it was embarking on a process to develop two 100MW renewable energy projects, planned for Gauteng and the Western Cape, subject to the outcome of a feasibility study, which should be finalised in 2023/2024.with the objective of yielding meaningful cost reduction benefit by 2024/25. These benefits will be increased and accelerated if regulations are relaxed.

Regarding energy diversity and supply, like many major manufacturers, ArcelorMittal South Africa is dependent on a ready supply of competitively priced natural gas. With dwindling supplies of natural gas from the current source in Mozambique, the Company is working closely with the Industrial Gas Users Association of Southern Africa (IGUA-SA) to find a solution to this challenge. Progressing South Africa's Gas Master Plan with key public and private sector participants will be vital to ensure that South Africa is not inappropriately exposed to the increasingly vital commodity.

In the first quarter of 2022, the global steel environment reflected the implications on supply from the Russia-Ukraine conflict, with stronger than anticipated steel prices because of tighter supply/demand dynamics. The second quarter saw an increase in uncertainties and risk, including the length of the Russia-Ukraine conflict; implications of higher energy prices and inflation on economic activity and consumer confidence; the slow-down in China; and the risk of recession in the US and EU due to tighter monetary policy.

Regarding fair trade protection, numerous import duty and safeguard investigations and reviews were initiated internationally with a specific focus on China, Russia, Turkey and India. South Africa is one of the least protected jurisdictions globally for steel trade, with rate structures notably lower than comparable countries.

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ArcelorMittal South Africa Limited

Reviewed condensed consolidated financial statements for the six months ended 30 June 2022

Overview and sustainability continued

In the wake of the global pandemic and reverberating effects of the Russia-Ukraine conflict, global economic activity is expected to slow to a GDP growth rate of 2,3% in 2022. After a substantial increase in international steel prices in May 2022, prices started correcting from June. In developing economies, the positivity in the near-term improvement in some commodity exports, more than offset headwinds of global inflation and tighter monetary policy. GDP growth in these regions has been reduced to 3%.

Understandably therefore, slowing economic growth and the heightened risk of a global recession present challenges for the outlook of commodities and steel demand in the next 12 to 18 months. In China, the world's largest steelmaker, plants are being idled to reduce high inventories and address weak orders. Inflation is at its highest levels in decades across many parts of the world. Inflationary pressures are expected to continue at least through 2022. It is against this backdrop, that the Company is intensifying its Value Plan Programme by prioritising key actions:

• Address specific immediate and short-term product pipeline opportunities arising from broader industry supply chain challenges
• Improve asset utilisation, production yields and overall reliability in, particularly, the coke making and long steel business, especially following the mid-life campaign restoration of the Newcastle blast furnace
• Realise the first volumes of the next phase of the Thabazimbi iron ore mine stockpile beneficiation project by the last quarter of 2022, while launching a definitive feasibility study into the banded iron mining opportunity
• Accelerate the regional sourcing of hard coking coal to reduce dependency on sea-borne imports
• Improve the effectiveness of logistics spend by implementing an integrated platform for efficient tactical planning of road logistics around rail availability and capacity. This process, which will start in the second half of the year, is a multi-year project
• Rebase and rescope the variable cost base with a focus on procurement effectiveness. This initiative will be implemented in the second half of 2022
• Accelerate energy efficiencies in the remainder of 2022, with a specific focus on reducing fuel and gas consumption rates. This initiative has multi-year targets
• Reduce fixed costs with a focus on discretionary spend, overtime, sub-contractors and vacancy management, with immediate, short and medium targets having been set.

Safety, Environmental, Social and Governance (ESG)

Safety is the Company's highest priority as it remains committed to Zero Harm.

Substantial time has been invested in:

• Behavioural interventions to change the safety culture, with a clear safety culture roadmap, firmly based on the recognition that staff, depend on one another for their collective safety
• Refreshed Seven Focus areas, being leadership visibility and audits, reporting of unsafe conditions, plant quarantines, environmental focus, leadership training, recognition and fatality prevention standards

Weekly safety stops have been implemented to reach each employee and contractor to emphasise the importance of safety. The objectives of the stops are to focus on the Life Saving Golden Rules, to unpack any safety incidents of the previous week to avoid a reoccurrence, and to explore a specific Topic of the Week.

The Company's lost-time injury frequency rate (LTIFR) improved from 1,13 to 0,71 and the total injury frequency rate (TIFR) improved from 8,86 to 5,78.

Later in the third quarter of this year, ArcelorMittal South Africa will present its Decarbonisation Roadmap. As alluded to in the most recent Integrated Report, the roadmap will describe how the Company plans to achieve its competitive carbon reduction targets for 2030 and 2050, through the application of energy efficiency initiatives, renewable energy sources, carbon capture and use, green hydrogen applications, and electric steelmaking. In addition to these initiatives, close collaboration with the ArcelorMittal Group and local and international first-mover public and private sector participants will be vital. Joint development agreements have been, or are in the process of being, concluded and span the range of advancing steel localisation, energy efficiency, carbon capture and use, green hydrogen and green iron and steel. With the appropriate support, the restart of Saldanha Works as an early supplier of green directly reduced iron to the international market is a very exciting prospect.

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ArcelorMittal South Africa Limited

Reviewed condensed consolidated financial statements for the six months ended 30 June 2022

Safety, Environmental, Social and Governance (ESG) continued

Specific joint collaboration programmes with the Gauteng Department of Economic Development, the KwaZulu-Natal Growth Coalition, and the Department of Economic Development and Tourism of the Western Cape Government have been established to pursue initiatives of common interest.

Markets

Global crude steel production1 decreased to 949 million tonnes due largely to plant idling because of pandemic-related lockdowns, high inventories and weak order levels in China. This performance is 54 million tonnes (or 5%) lower than the 2021 comparative period. Global crude steel production increased by 5% compared to the immediately preceding six months.

China's crude steel production decreased by 6% to 526 million tonnes, maintaining its market share of 55%. Europe's2 crude steel output decreased by 6% to 99 million tonnes. North America was down by 2% to 57 million tonnes. Both Russia and Turkey continued the downward trend as production fell by 7% and 4% respectively while India succeeded in increasing production by 8% to 63 million tonnes. Africa's output decreased by 9% to 7,0 million tonnes due to lower production in South Africa and Egypt. South Africa's crude steel production decreased by 16% to 2,1 million tonnes.

International hot rolled coil prices increased by 6% year-on-year, while rebar prices increased by 13% (dollar terms). These hot rolled coil prices decreased by 10% compared to the immediately preceding six months, with rebar prices increasing by 2% for the same period. The international raw material basket (iron ore, coking coal, and scrap) was 31% higher in dollar terms. In absolute terms, coking coal increasing by 250%, scrap increased by 17% with iron ore decreasing by 24%.

Turning to South Africa and the regional economy, the GDP growth forecast for South Africa is 2,3% for 2022, and those for near- and Sub-Saharan African markets between 3,4% and 3,7% but with significant risk and the potential for downward revision.

In South Africa, apparent steel consumption (ASC) for the first half of 2022 decreased by 14% to 2,0 million tonnes, reflecting high market inventory levels; slowing market activity in key steel-consuming sectors4; slow realisation of infrastructure projects; inflation and rising interest rates affecting disposable income in the retail sector. ASC decreased by 9% compared to 2,2 million in the immediately preceding six months.

Total steel imports of primarily hot rolled coil, galvanised sheet and plates decreased by 41% to 456 000 tonnes3 in response to slowing market conditions. This volume constituted some 23% of South Africa's ASC (2021: 33%). As predicted, imports decreased by 23% compared to 594 000 tonnes in the immediately preceding six months.

The Company's total sales volumes decreased by 8%, or 104 000 tonnes, to 1,2 million tonnes compared to the 2021 comparable period, due to a 10% fall in domestic sales to 1,0 million while exports increased by 12% to 137 000 tonnes. The regional mix of exports weakened as Africa Overland sales fell to 81 000 tonnes, being a decrease of 26%. Total sales volumes decrease by 4% compared to the immediately preceding six months.

The Company's overall realised steel price in dollars increased by 23%. In rand terms, this represented a 30% increase as the average dollar/rand exchange rates weakened by 6%. Realised dollar steel prices increased by 7% compared to the immediately preceding six months, with rand prices up by 10% for the same period. This trend reflects the lag- effect of steel price movements which characterise the Company's order intakes. The higher international steel prices early in the year contributed to this improvement. By the same measure, when steel prices drop, the impact thereof is delayed in reflecting in the realised prices.

The Company is the only primary producer in South Africa which supports the downstream industry through a formal support programme. This industry support saw a 19% increase to R126 million in value added export and strategic rebate assistance.

1. Source: Worldsteel Association and Statistics
2. Europe including Turkey
3. Source: Company projection based on import statistics from Customs
4. Year on year % sectoral growth forecast change: Manufacturing (-12%), Mining (-13%), Automotive (-30%), Construction (+1%)

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ArcelorMittal South Africa Limited

Reviewed condensed consolidated financial statements for the six months ended 30 June 2022

Operations

The Company's average capacity utilisation decreased from 59% in the 2021 comparable period to 42% in 2022 and should reach at 76% after the Newcastle blast furnace mid-life campaign restoration. The reduction in capacity utilisation reflects the impact of the delivery complexities associated with rail service unavailability, labour disruptions and electricity loadshedding as described earlier.

Crude steel production decreased by 30%, or 441 000 tonnes, from 1,5 million tonnes to 1,1 million tonnes in 2022. Crude steel production decreased by 31% to 1,1 million tonnes compared to 1,5 million tonnes in the immediately preceding six months.

The focus on maintenance and reliability restoration, which started in 2021, continued into the new year. Particular attention is being given to the coke battery restoration programme, lowering fuel rates in iron making, reducing energy consumption, improving yields in steelmaking and rolling, and increasing scrap melting. The latter is particularly relevant given the anticipated impact of a complete ban on the export of domestic steel scrap.

The R464 million, three-month Newcastle blast furnace mid-life campaign restoration is rapidly approaching completion with more than 40 000 hours worked without a single lost-time injury. The major benefits of the project include plant life extension, improved reliability and cost competitiveness, lower energy consumption and a reduced carbon footprint. Some 50 tonnes of steel, 5 382 carbon blocks and 14 047 refractory bricks have been consumed while 1 030 temporary job opportunities were created supported by 28 contractor companies.

For 2022, commercial coke production was 34% lower at 60 000 tonnes, with sales volumes down by 38% at 120 000 tonnes, reflecting intensive inventory balancing due to the continuing restoration of the coke batteries, and the use of more coke internally due to intermittent production interruptions arising out of the rail service unavailability and labour disruptions. Sales increased by 5% to 120 000 tonnes compared to 114 000 tonnes compared to the immediately preceding six months.

Financial results

ArcelorMittal South Africa reported an EBITDA of R3 591 million against R3 218 million in the comparative period, while its operating profit increased from R2 945 million to R3 235 million. The headline earnings of R3 025 million rose from R2 482 million, amounting to a 271 cents per share profit against 223 cents for the 2021 comparative period.

EBITDA decreased by 33% to R3 591 million compared to R5 351 million in the immediately preceding six months.

Revenue increased by 19% to R22 176 million due to a 30% rise in net realised steel sales prices, despite an 8% decrease in total steel sales volumes. Revenue increased by 5% to R22 176 million compared to R21 112 million in the immediately preceding six months.

The Company's raw material basket (iron ore, coking coal and scrap), representing 43% (2021: 43%) of cash cost per tonne, was 41% higher in rand terms, against a 39% increase in the international raw material basket in rand terms. This reflects a fly-up in imported coal prices along with lower, more stable local iron ore prices against higher but falling international prices.

Consumables and auxiliaries, representing approximately 31% of cash cost per tonne (2021: 31%), increased by 46%. Electricity tariffs increased by 12%. Dollar-denominatedcommodity-indexed consumables increased by 61%.

Fixed costs increased from R3 376 million in the 2021 comparative period to R3 448 million in 2022, an increase of 2%. Fixed costs decreased by R604 million (-15%) compared to R4 052 million in the immediately preceding six months in response to lower maintenance activity.

Net financing charges were substantially down at R250 million (2021: R445 million) mainly due to a higher foreign exchange profit of R140 million and a decrease in net interest charge on bank overdrafts and loans of R96 million.

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