ArcelorMittal South Africa : Reviewed condensed consolidated financial statements for the year ended 31 December 2022

ArcelorMittal South Africa Limited

Preliminary reviewed condensed consolidated financial statements for the year ended 31 December 2022

Salient features

• Considerable resources invested to improve safety and environmental performance
• International price corrections and soft local demand significantly impacted second half performance
• Business is more resilient than during other crisis or near-crisis environments of the past
• Value Plan delivered R1 561 million (2021: R2 085 million) and fixed costs were reduced by R784 million
• EBITDA down 50% at R4 274 million (2021: R8 569 million) as the negative price-cost effect affected margins
• Headline earnings down 62% at R2 607 million (2021: R6 860 million)
• Net borrowings position of R2 808 million (2021: R1 258 million) due to capital expenditure cash outflows of
  R1 912 million and R3 086 million increase (2021: R6 005 million) in working capital
• 13% decrease in sales volumes and 20% drop in crude steel production
• 6% increase in realised dollar steel prices
• Raw material basket (RMB) increased by 38% in rand terms (international RMB up 14% in rand terms)
• Decarbonisation roadmap announced targeting 25% reduction in carbon emissions by 2030 and 86% by 2050

The analysis below relates to the year ended 31 December 2022 (current period) compared to the 12-months ended 31 December 2021 (prior or comparable period), except where otherwise indicated. The immediately preceding six months refers to the first six months of 2022.

Overview

On 28 July 2022, at the announcement of the Company's interim financial results, it was indicated that the outlook for the second half of the year would be strongly influenced by intensified economic headwinds which threatened to significantly affect the trading environment for steel. As anticipated, the international price correction in a soft local demand environment did severely impact the financial results of the business. At that time, however, it was also indicated that the Company knows how to manage through a challenging cyclical business environment, and thus ArcelorMittal South Africa, with the support of its loyal staff, customers, and suppliers, has successfully delivered against its predicted outlook.

Globally, steel prices declined at a faster rate than raw materials as particularly evident in the second half of the year. This has led to negative price-cost effects with spreads (i.e., the difference between steel prices and raw material costs) under significant pressure. The Company could not escape the impact of the year's energy crunch, as seen in the extreme increase in the international price of coking coal (up 62% year-on-year in dollar terms). Domestically, market conditions proved to be especially challenging as customers destocked. This was particularly notable in the last quarter of the year, where market activity dissipated dramatically in certain sectors (being somewhat reminiscent of late-2008). The Value Plan and the associated improvements the business has made in recent years were firmly tested. The business is responding effectively, and thus despite the sharp weakness which characterised the second half of the year, the financial results are significantly stronger than during other crisis or near-crisis environments of the past.

Headline earnings of R2 607 million (2021: R6 860 million) were down 62% as EBITDA of R4 274 million fell by 50%

(2021: R8 569 million), with the depreciation and amortisation expense increasing by 28% to R771 million (2021: R601

million) and net finance charges having decreased by 18% to R952 million (2021: R1 163 million) mainly due to a net foreign exchange profit of R218 million (compared to a net foreign exchange loss of R109 million) partly offset by higher net interest charge on bank overdrafts and loans of R104 million.

An aspect of the business which unexpectedly came under significantly more pressure than initially anticipated, was the net borrowings position. Having successfully improved average asset capacity utilisation in the second half, to 54% from 42% in the first half of the year, the sudden slowdown in market activity in the latter part of the fourth quarter was greatly aggravated by a notable shortage of readily available road trucks for sales deliveries. The well-publicised rail logistic failures in the country's coal export rail corridors, and the very attractive prices offered for that product, resulted in a dramatic and unexpected shortage of road trucks for domestic and Africa overland deliveries.

Apart from a conscious decision to (i) restore steel inventory levels after the Newcastle blast furnace's mid-life campaign restoration, and (ii) hold additional raw material inventory to counter the impact of further rail disruptions (having proved the value of this during Transnet's labour disruptions in October), the impact of the fourth quarter's events saw lower sales levels and thus more finished steel on hand, all resulting in a considerably higher investment in working capital than forecasted.

ArcelorMittal South Africa Limited

Preliminary reviewed condensed consolidated financial statements for the year ended 31 December 2022

Overview cont.

Subject to market conditions, peak working capital investment is likely to begin to unwind towards the close of the first half of 2023 as the business adopts a highly flexible stance regarding its asset utilisation in response to uncertain market dynamics, all within technical limitations. Consequently, the net borrowings position was R1 550 million and R1 721 million higher at R2 808 million compared to December 2021 and June 2022 respectively.

Sales volumes were 13% down, with crude steel production 20% lower compared to the previous year. Against the immediately preceding six months, sales volumes were down 14% while crude steel production was up 29%.

ArcelorMittal South Africa's realised average steel prices increased by 17%. Its raw material basket increased by 38% with, in absolute terms, imported coking coal having increased by 117%, while iron ore decreased by 4% and scrap decreased by 2%. After accounting for conversion cost, the variable cash cost of steel increased by 36%1.

Fixed costs reduced by R784 million (11%) to R6 644 million in response to lower addressable demand and the winding down of restorative maintenance activity which started in 2021.

After the disruptive events reported in the first half of the year, the Company's Value Plan realised improvements of R1 561 million (2021: R2 085 million) consisting of commercial-related initiatives of R839 million and cost-based initiatives of R722 million. The performance was much improved against the R577 million realised in the first half of the year.

Free cash outflow of R1 600 million (2021: R1 961 million cash inflow) was after capital expenditure of R1 912 million, the final settlement of an overdue dollar-denominated payable of R628 million in the first half of the year, deferred related party fees of R618 million in the second half of the year, and payments to the Competition Commission of R100 million in the second half of the year.

The notable increase in capital expenditure of 115% to R2 073 million (2021: R965 million) consisted of R1 077 million

(2021: R658 million) sustaining (including safety and structures), R338 million environmental (2021: R64 million) and

R658 million (2021: R243 million) of strategic investments. The potential annual incremental EBITDA impacts of the

strategic investment is estimated at R270 million (2021: R370 million).

Sustainability

The business is responding effectively to the challenging market conditions while remaining focused on its long-term objectives.

Customers are destocking in response to lower market prices and adjusting inventory holding levels to the weaker trading conditions. Destocking is ultimately unsustainable and will end. Until then, the Company is adjusting its production to addressable demand, by idling plants, consolidating production at the most productive facilities, and reducing fixed costs. One blast furnace at Vanderbijlpark was idled in early November and only restarted in early February 2023 once commercially supported by the order book. In the Long Steel business, following the restart of the Newcastle blast furnace, the Vereeniging electric arc furnace was idled in October as the combined production of Newcastle and Vereeniging is way more than current demand. Further strategic asset footprint optimisation will take place in 2023 within the Long Steel business as certain operations in Pretoria and Vereeniging are idled con consolidated, with products from these mills moved to rolling operations in Newcastle to improve mill capacity utilisation and productivity.

The inexorable march of inflation in South Africa, which has been especially challenging for the last few quarters, progressively erodes international competitiveness. Good progress has been made in reducing and resetting fixed costs for the current year, however, more is needed. Included in the Value Plan for the next five years is an initiative to reach a more competitive fixed cost per tonne level. The own, hired and sub-contractor labour mix, pay rate levels, and productivity will be a key focus, along with ensuring maintenance effectiveness for every rand invested.

1 Based on crude steel production.

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ArcelorMittal South Africa Limited

Preliminary reviewed condensed consolidated financial statements for the year ended 31 December 2022

Sustainability cont.

A consequence of effective maintenance is equipment reliability, which has shown progress. Of the 22 priority plants, eight have exceeded the reliability baseline measure and eight have improved on the prior year's performance. The remaining plants, with higher priority given to coke-making and the sinter plants, will be subject to an initiative to add skills and leverage off plant twinning with ArcelorMittal group benchmark operations.

A reliable electricity supply is vital to the sustainability of the steel value chain. Increasingly, the unreliability of electricity supply necessitates more expensive stand-by alternatives to be developed. Four notable Eskom and four municipal equipment failure events were experienced in the second half of the year. While the business was fortunate to have avoided significant damage to its equipment, the risk associated with regular fluctuations in energy levels remains high.

Extremes in energy inflation necessitated actions to optimise energy consumption, which added some R126 million to 2022's Value Plan. More needs to be done, with a particular focus on combustion efficiency and improved utilisation of the Company's own electricity generation capacity. Loadshedding is felt in the form of load curtailment of the Company's operations. Progress has been made on operational planning and scheduling to better accommodate these unplanned disruptions. However, load curtailment may still interrupt production of rolling and finishing mills, which in turn may affect production and delivery to customers, especially of high-demand products. Through careful inventory management, the Company remains committed to minimising any impact of load curtailment on its customers.

The fully-funded feasibility study into a 200MW renewable energy solution is nearing completion. Early-construction work is scheduled to start in the fourth quarter of 2023, with the objective of yielding meaningful cost reduction benefits by 2024/5. Whereas it was previously reported that one 100MW plant would be constructed at Vanderbijlpark and one at Saldanha, a more attractive solution is to construct one large 200MW plant at Vanderbijlpark, as this will yield the greatest operational and commercial benefit. Work is progressing on commercially closing power purchase agreements with third party renewable energy providers.

The year started with plant closures due to the primary impact of rail disruptions, and the year ended with the secondary impact of such disruptions affecting sales deliveries. Daily briefings to the CEOs of ArcelorMittal South Africa and Transnet Freight Rail (TFR) have seen notable benefits, however, overall performance remains well below service design. While doing its best to support TFR and Transnet Port Terminals (TPT), the Company has completed a pre- feasibility study with its specialist rail operator advisor into the commercial viability of third-party rail access. It has been agreed to progress to the definitive feasibility study stage, which includes funding solutions. The announcement in June 2022 of the country's draft Rail Policy should remain the "north star" by which South Africa's rail infrastructure is managed. On an adjacent note, the market launch on 20 October 2022 of the rebranded ArcelorMittal Rail and Structures (AMRAS) business (previously the Highveld structural mill) with its 48kg and 57kg per metre mainline rail product, was well received and supported by partners and customers alike. It is believed that this asset can meaningfully contribute to the Rail Policy's localisation aspirations.

Unsurprisingly, a common theme on all global steel cost curve benchmarking, is the importance of backward integration into raw material supply, either through physical ownership or synthetically by contracting. Throughout the steel and commodity cycle, regionally sourced materials are always preferable to sea-borne imports, and cost-linked sources are always more preferable than international benchmarked prices, on condition that inflation-busting continuous improvement practices are applied.

Hard work is going into securing further raw material opportunities, including a supportive competitively priced logistics solution. As seen with the coking coal price, more work is needed in this area. Until the Decarbonisation Roadmap is fully implemented, the business will never be completely free of the need to import premium hard coking coal (which is not regionally available). By enabling Zimbabwe-based supplies of lower quality hard coking coal, some of the sharpness of the steep increase of the international coking coal price has been removed. More work remains to be done on sourcing, development, and logistics, however, following a meeting between ArcelorMittal South Africa and the leadership in the Republic of Zimbabwe in November, the willingness to seek out and execute these opportunities is mutually strong.

High import levels from China of anomalously low priced material and of European material at prices which are insufficient to cover fixed costs of marginal producers; the announcement in South Africa of new Flat Steel capacity; new Long Steel capacity attempting to leverage off the recent scrap export ban implementation; and new Long Steel capacity in the surrounding regions, are all ominous signs of the prevalence of unfair trade practices and less than completely rational investment decisions.

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ArcelorMittal South Africa Limited

Preliminary reviewed condensed consolidated financial statements for the year ended 31 December 2022

Sustainability cont.

Fair competition is good for business. Localisation of value-added steel production opportunities, collaborative value chains, and improved customer centricity are prospects which ArcelorMittal South Africa will leverage off to increase its assets utilisation, which is low in the present environment.

It is broadly accepted by the parties with which ArcelorMittal South Africa is collaborating, that the Company is best placed to advance these opportunities given its existing asset base. Improved building activity, higher demand for material for truck-trailers, and increased enquires for material stretching from pipelines to wind towers should add impetus to the rebound once the current destocking cycle ends. However, a Government growth agenda is now sorely needed to add the necessary momentum.

A strong balance sheet is needed for strategic continuity. Like all other businesses, the Company generally allocates capital expenditure over periods of several years. These very strategic and often weighty decisions are based, first and foremost, on whether it is believed the investment can be afforded. Over the past six months, significant effort has been invested in rescheduling to a later date some of the major rebuilds/relines timed for the next five years. This should also provide space to introduce a large electric arc furnace at Vanderbijlpark to replace one of the blast furnaces - fundamental in terms the Decarbonisation Roadmap.

More work is required to advance the localisation of value-added steel opportunities, reduce the capital expenditure envelope over the next five-to-seven years, all while putting in place responsible funding solutions. Although delayed for the reasons noted earlier, the Company remains committed to reaching a meaningful net cash position as soon as possible, and developing capital expenditure funding solutions, before contemplating a sustainable resumption of dividends.

Safety, Environmental, Social and Governance (ESG)

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

It is with deep regret that ArcelorMittal South Africa had two fatalities which occurred in the second half of 2022. The board and management express heartfelt condolences to the families, friends, and colleagues of Sabatha Petros Nkosi and Chris Swanepoel. Significant work is being put into understanding the root causes of the less than satisfying safety performance.

Stamping out fatalities and serious injuries starts with behavioural changes - starting at the top of the Company and cascading throughout the ranks to the shop floor. The Company spent considerable resources and time on accident- proofing its physical infrastructure - buildings and machinery - to improve safety. This is further evident in the additional capital expenditure made in 2022.

The business must assertively build on the overall improved safety performance in 2022 by focusing on thorough process risk management while continuing to cultivate a culture of care for its people. Some of the measures already implemented include engaging the services of world-renowned safety experts, weekly plant safety stops and a two-week safety visit by the Interim Chief Operating Officer to ArcelorMittal's standard-setting Brazil operation. Benchmarking and interactions with leading South African companies will start in 2023, as safety interdependency (between business, organised labour, civil society etc.) taps into the broader South African psyche.

The Company's lost-time injury frequency rate (LTIFR) improved from 0,98 to 0,87 and the total injury frequency rate (TIFR) improved from 7,80 to 5,74. Total number of injuries reduced from 215 to 171.

In January this year, ArcelorMittal South Africa released its first ever Decarbonisation Roadmap. The Company is serious about decarbonising despite the many major challenges currently faced. Around the world, the steel industry has signalled its determination to transition away from carbon-intensive production methods. That said, the Company recognises that it operates in a Sub-Saharan Africa context with its own challenges relating to poverty alleviation, economic development needs, constrained (electrical) infrastructure and others. In that regard, the opportunities offered by the deployment of carbon capture and use (CCU) technologies and the conversion of that captured carbon into sustainable synthetic fuels promise much greater opportunities in Africa. Flexibility in devising the final decarbonisation solution is an important foundational element underpinning the roadmap.

The Decarbonisation Roadmap stresses the point that the Company cannot decarbonise on its own - no steelmaker anywhere will ever be able to achieve net zero by itself. To achieve this the business will need collaborative partners.

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ArcelorMittal South Africa Limited

Preliminary reviewed condensed consolidated financial statements for the year ended 31 December 2022

Safety, Environmental, Social and Governance (ESG) cont.

It is pleasing that the Company is already able to point to solid progress on cementing partnerships with Government, development finance institutions and other corporates. This is very encouraging, but a great deal of work still needs to be done (and urgently) on securing the funding for the steel industry reinvention.

In many other jurisdictions, governments have already shown that they understand just how important it is for the state to support decarbonisation. In South Africa, the sentiments regarding support are very positive. However, coordinated meaningful traction (policy certainty, funding opportunities, commercialisation support etc.) to ensure that South Africa can benefit from the potential it has to be an "early mover", still needs to be demonstrated.

For example, industry requires clarity on how National Treasury plans to raise carbon taxes and at what pace. Or how, if at all, the authorities plan to incentivise lower-carbon behaviour. Clarity on incentives and taxes for good and bad carbon behaviour respectively, is very much needed as this is the reality faced by steelmakers in those countries with whom ArcelorMittal South Africa competes for steel sales.

Decarbonisation offers substantial opportunities to reindustrialise and create jobs - by producing and exporting green direct reduced iron, steel and manufactured goods, and by potentially re-employing hundreds in the areas which need it most, including the Vaal region, KwaZulu-Natal midlands, and the West Coast.

The Company's environmental commitments are by no means confined to decarbonising its operations. Very substantial strides have been made in recent years on curbing emissions like sulphur dioxide and dust, on recycling and, particularly, on rehabilitating hundreds of hectares of land. In 2022, R338 million was allocated to environmental capital expenditure - 428% more than the previous year and the highest allocation since 2013.

The Company continues to strive to build an environment in which ArcelorMittal South Africa is a place in which everyone is valued and rewarded appropriately for their contributions to the business's sustainability and success. The quarterly SpeakUp+ employee survey is a key barometer regarding progress in this effort.

The Company has recently concluded memoranda of understandings with the Emfuleni Local Municipality and Gauteng Department of Economic Development to make a pragmatic difference to the socio-economic realities in those regions. This adds to the collaboration which is already in place with the Department of Economic Development & Tourism of the Western Cape Government, and the Growth Coalition in KwaZulu-Natal.

Markets

After increasing by 4% in 2021, global crude steel production2 decreased by 4% or 82 million tonnes in 2022 to 1,9 billion tonnes. This reflects the slower global economic conditions prevailing in 2022 emanating from monetary tightening in response to aggressive inflation, weak demand in China and Asia due to Covid-19 outbreaks/restrictions, low consumer confidence, and the spill-over effects of the Russian invasion of Ukraine. Global crude steel production decreased by 8% in the second half of the year, compared to the immediately preceding six months.

China's crude steel production decreased by 2,0% to 1,0 billion tonnes, with its market share at 54% (2021: 53%). Europe's3 crude steel output decreased by 9% to 217 million tonnes. North America was down by 6% to 112 million tonnes. Both Russia and Turkey continued the downward trend as production fell by 7% and 13% respectively while India succeeded in increasing production by 6% to 125 million tonnes. Africa's output decreased by 5% to 16 million tonnes due to lower production in South Africa and Egypt. South Africa's crude steel production decreased by 12% to 4,4 million tonnes.

In November 2022 China's hot rolled coil (HRC) prices reached the lowest level since June 2020. (Subsequently, prices have recovered by USD150 per tonne). International HRC prices decreased by 21% in dollar terms year-on-year, while rebar prices decreased by 3%. These HRC prices decreased by 31% compared to the immediately preceding six months, with rebar prices decreasing by 20% for the same period. The international raw material basket (iron ore, coking coal, and scrap) was 3% higher in dollar terms. In absolute terms, coking coal increased by 62%, while iron ore and scrap decreased by 26% and 7% respectively.

1. Source: World Steel Association
2. Europe including Turkey
3. Year on year % sectoral growth forecast change.: Mining (-1,3%), Construction (-1,2%), Manufacturing (0%)

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