Sasol Ltd (SSL) 2016 Q2 法說會逐字稿

Good morning and good afternoon, ladies and gentlemen, and welcome to the Sasol interim financial results conference call. Today's conference call will be hosted by David Constable, President and Chief Executive Officer, and Bongani Nqwababa, Chief Financial Officer. Following the formal presentation by Sasol management, an interactive Q&A session will take place. A copy of today's live presentation is available on www.sasol.com. I would now like to hand the call over to David Constable. Please go ahead, sir.

Thank you, operator. Good day, everyone, and thank you for joining us for our interim results conference call. Joining me on the call from Sasol, our Chief Financial Officer, Bongani Nqwababa. Also on the call are other members of our Group executive committee who will support us [if we flag] any questions you may have.

As you can see, today we announced an encouraging Group-wide performance, notwithstanding an extremely tough and uncertain macroeconomic environment. The first half of the 2016 financial year was characterized by a further steep decline in global oil and commodity chemical prices, with the average Brent crude price sitting at $47 per barrel versus $89 for the first six months of FY 2015. It's clear that current crude oil price has placed a great strain on the global energy landscape and the financial performance of the entire industry. Despite ongoing economic uncertainty though, our [colleagues] throughout the world maintained a focus on safety and volume growth and advancing our key strategic projects.

Turning to slide 4 in the pack and the key messages you'll hear today, we'll begin with a high-level overview of our management interventions are ensuring that Sasol remains resilient, even during these unforgettable times. I will then talk you through the latest developments on our business performance enhancement program, where we're expecting higher sustainable cost savings than expected.

Undoubtedly, and instrumental to our ability to ride out this storm, is our response to the low oil price environment. Here I'll update you on progress made on our response plan and the cash conservation benefits we're already realizing. In addition, we'll provide you with details on the extended scope and duration of our response plan target in anticipation of a lower-for-much-longer oil price.

I'll then talk you through the advancements we've been making on our dual regional strategy and highlight how we continue to stimulate Southern African regional growth through our domestic efforts, and second, update you on our Lake Charles chemicals project in the US.

And next we'll review our key performance achievements for the half year. Bongani will then go into more detail on our financial and operational performance. And before wrapping up, we'll conclude today's call by recapping how Sasol is prioritizing our business activities to remain resilient. We'll then open it up to any questions you may have.

Moving on to slide 5, as you can see from the graph, up through 2014 the Brent oil price was stable between $90 and $125 a barrel and the share price, Sasol share price gained significant traction, reaching the ZAR500 to ZAR600 range. However, notwithstanding the comfortable position we found ourselves in and looking at the white color boxes on the slide there, we formally launched the business performance enhancement program in early 2013, as you remember, focusing on simplicity, efficiency and cost optimization across the Group.

By removing red tape, organizational red tape and by introducing a simplified value-chain-based operating model, not only were we able to significantly reduce Company-wide complexity and streamline utility lines and processes, we also successfully stripped out unnecessary cost. Here and over time we've increased our stated targets from the initial ZAR3b to now an exit run rate of ZAR5b by the end of FY 2017.

Of course, with the change in market forces in May 2014, the steep decline in international oil price has resulted in the Sasol management team moving quickly to formulate a comprehensive plan to conserve cash. And here I draw your attention to the two gray-colored boxes. As you may recall, our Response Plan catered to a cash conservation target range of ZAR30b to ZAR50b over a 30-month period, from January 2015 to end of June 2017.

Although the execution of our Performance Enhancement Program and Response Plan has been going extremely well, with even greater market volatility and uncertainty, the management team reevaluated our cash conservation target. We've extended both the target range and the duration of our Response Plan now to ZAR65b to ZAR75b through FY18.

What's important to note from the slide in the various colored boxes is that our interventions relating to cost and cash flow put us consistently ahead of the curve.

Now looking at the specific details of our Business Performance Enhancement Program on slide 6, this large-scale change initiative which we started formulating back in 2012 is nearing completion. Restructuring charges for the program to date are ZAR3.4b. If you look at sustainable cost savings, we delivered ZAR3.1b for the first half of FY16 alone. Importantly we remain on track to meet if not beat our savings target forecast of ZAR4b, with an annualized exit run rate of ZAR4.3b by the end of this financial year. And as highlighted earlier, we increased our cost savings target to an exit run rate of ZAR5b by the end of the 2017 financial year.

Turning to slide 7 and our low-oil-price Response Plan. This program, as you may recall, was launched to favorably position Sasol within the context of a $45- to $50-per-barrel oil price environment. For the half year our Response Plan realized cash conservation benefits of ZAR10.8b and we are on target to achieve the upper end of our FY16 range, which is between ZAR10b and ZAR16b.

Given the $30-per-barrel oil price reality and as previously mentioned, we have increased our cash conservation target range to between ZAR65b and ZAR75b through FY18. And while our Response Plan protects cash over a relatively short period, several initiatives we are actioning will also result in longer-term cost savings. Coupled with the ZAR5b from the Business Performance Enhancement Program, we expect our sustainable cash cost saving from our response plan to increase to ZAR1.5b by the end of the 2018 financial year, up ZAR0.5b from the previous guidance.

Having concluded our organizational restructuring processes and as part of our business performance enhancement program, our full-time-equivalent sustainable headcount reduction is approximately 9.2% or 3,100 employees through voluntary separation, voluntary early retirement and natural attrition at the top, senior and middle management layers of the Company.

In addition, excluding project work, we've reduced the number of service provider personnel by 13,000. That's a 23% reduction over the same period.

The introduction of our Response Plan measures has also resulted in organizational optimization to include the structural refinement and the freezing of non-critical vacancies. These optimizations approximate an additional 5.3% or 1,800 positions.

Moving on to slide 8, despite a lower-for-much-longer oil price reality, we have maintained our focus on executing our dual regional strategy here in Southern Africa and in North America. Now this approach augments our other important business activities in Eurasia, the Middle East and the rest of Africa.

Looking first at our Southern Africa regional strategy, we are expanding our interest in Mozambique. From January 2016, we attained approval from the Mozambique Council of Ministers for our field development plan, where we'll see further hydrocarbon resources monetized to support Southern Africa's growth objectives. With an initial investment estimated at $1.4b, the first phase of the production-sharing agreement proposes an integrated oil, LPG and gas project adjacent to Sasol's existing petroleum production agreement area.

The Mozambican gas industry is playing an increasingly important role in the regional energy landscape, and this project represents a major milestone in further developing natural resources, which will significantly benefit Southern Africa.

In addition, during half year we took a final investment decision on a ZAR2.7b Loop Line 2 natural gas pipeline project. This project will increase gas capacity on the Mozambique-to-Secunda pipeline to [191m] cubic feet per year. Benefits of operation is expected during the second half in the 2016 calendar year.

Turning to our ongoing South African investments, the establishment of our Impumelelo and Shondoni collieries, which form part of our ZAR14b mine replacement program, will ensure uninterrupted coal supply to our Secunda center of operations. The Impumelelo colliery achieved beneficial operation during October 2015 within budget. Similarly, the development of the Shondoni colliery continues to progress steadily and we expect to see beneficial operation during this financial year.

In our chemicals business, the expansion of our Wax facility in Sasolburg is progressing well. As you may recall, Phase 1 achieved beneficial operation in May 2015 and the progress is on track to achieve beneficial operation for Phase 2 during the first half of the 2017 calendar year. Total project cost of both phases remained unchanged at ZAR13.6b.

Turning now to slide 9 and to the second leg of our regional strategy. In United States, significant progress continues to be made on our methane cracker and downstream derivatives complex, with $3.7b expended to date. Detailed engineering for all process units and supporting facilities is at an advanced stage. Site construction has commenced, with major underground and civil work nearing completion.

To support our Response Plan and lower cash flow requirements, we have taken a decision to [pace] the execution of the project. Importantly, the proposed shift in schedule will further optimize field efficiency and limit the spend rate. The project team is focused on minimizing any potential cost increases as they work through a detailed review of the revised execution plan.

Our view is that a phased commissioning of the cracker and early derivative units will still occur in 2018, with full beneficial operation of the remaining derivative units moving into calendar year 2019. By optimizing the project's cash flows, we are managing the Company's gearing and credit rating, ensuring [completed] balance sheet strength, protecting our dividend policy and driving resilient earnings.

Now to slide 10. Looking at our operational performance through the half year, our Group safety recordable case rate excluding illnesses remains encouraging at 0.32. And we are sustaining our zero-harm drive, with not a single fatality since September 2014. In addition, with [still] contributing across the value chain, with Secunda Synfuels operations production volumes up 3% and liquid fuels production volumes up 4%.

Through determined management action, our normalized cash fixed cost in real terms was down 8.4% across the entire value chain. Over the period, headline earnings per share was down by 24% to ZAR24.28 per share, this despite a 47% decline in international oil price. Subsequently, as a result, we declared an interim dividend of ZAR5.70 per share for the first half of FY16.

I'll now hand it over to Bongani, who will unpack our results in a little more detail for you. Bongani?

Thank you, David, and good day, ladies and gentlemen. It is my pleasure to present our 2015 interim results to you today. Our results are will within the earnings range provided in our SENS trading statement. We continued to deliver another strong operational performance, supported by effective cost management. This is despite a highly volatile and unsettled macroeconomic environment, with a 30% decrease in our prices for the period under review.

Through ongoing management interventions and operational delivery, we are focused to mitigate the challenges of the current environment. We are well positioned to continue to deliver sustainable shareholder value by focusing on the volume and margin expansion, cost -- reflexive cost management and strategy-driven capital allocation.

Now on slide 12. The first half of the 2016 financial year was characterized by a further steep decline in the oil and commodity chemical prices on the back of global economic uncertainty and softer demand. Oil prices further decreased by 47% when compared with global oil supply, as well as a lack of clear signal from OPEC in rebalancing the global oil market.

Our commodity chemicals market price declined by 23% relative to the drop of oil -- in the price of oil. The average margin of our specialty chemicals remained resilient as previously messaged to the market. The rand versus dollar exchange rate weakened by 24% due to the negative market sentiment of the South African economy, coupled with continued dollar strength. The weaker rand provided a partial buffer against lower oil and commodity chemical prices.

The Sasol business remains highly sensitive to significant movement in the rand/US dollar exchange rate and oil prices. We estimate that a $0.10 change in the annual average rand/US dollar exchange rate will affect our profits from operations by approximately ZAR532m, while a $1 change in the crude oil price will have an impact of approximately ZAR769m.

Now going on to slide 13. Overall we delivered a strong operational performance through work on the value chain. We achieved increased production volumes, as well as significant cost and cash value. Profit from operations of ZAR14.9b was down 50%, driven largely by the lower average Brent crude oil price and the negative impact of the one-off item of ZAR5.3b. This was partially offset by the weaker rand.

Profitability of the Group functions increased by 46% due to the increased translation gains resulting from the weaker currency. I will unpick the performance of our individual businesses a bit later.

Headline earnings per share decreased by 24% to ZAR24.28. An interim dividend of ZAR5.70 has been declared, in line with our current dividend cover of 2.3 to 2.8 on an annualized basis.

Capital expenditure increased to ZAR33.6b, which (inaudible) on the LCCP.

Now going on to slide 14. I'll take you through the items impacting the change in profit. The weaker rand/US dollar exchange rate increased profitability by 46%. This benefit was overshadowed by the lower crude oil price and product prices, which adversely affected profit by 62%.

Profit from operations were further adversely impacted by 31%, mainly as a result of the following one-off items and period-end adjustments: the partial impairment of our Canadian shale gas asset a ZAR400m cash-settled share-based payment charge in the current period compared to a credit of ZAR3.9b; and lastly, an increase in the rehabilitation provision following a credit adjustment as a result of the implementation of the 2015 strategy. These one-off items were partially negated by the [ZAR3.3b] reserve balance of the Nigerian cash provision.

Contribution from our costs and cash flow initiatives positively impacted profit. This increase was partly negated by higher depreciation charges (inaudible) movement at [work] expansion projects. Unfortunately, sales volumes were down 5% due to the safety demands and logistical constraints in moving production. These issues are currently receiving focused attention and are expected to be resolved by the end of the financial year.

Now going on to slide 15. We are extremely pleased with our continued [inflections] between cost performance. Normalized cash costs were down 8.4% again for the first half of the 2016 financial year. Contribution from our Business Performance Enhancement Program and Response Plan resulted in this reduction in our cash costs. We continued to report record performance despite a very challenging operating cost environment.

The restructuring costs and the cost of the Mozambique growth and development fund incurred in the prior period, decreased fixed cost by 5.7%. These savings was partly negated by a 2% increase in gross costs.

On the macro level, while (inaudible) has [reflection] increased costs by 3.9%. Overall we benefited from a weaker exchange rate; however, we think that the weaker rand, added 3.7% to the total cash fixed cost.

Slide 16. Now focusing on our operating business units. Profit from operations in mining increased by 5% to ZAR2.4b mainly as a result of a continued strong and sustainable cost performance, coupled with stable mining operations. Meaningful contributions were made from our Business Performance Enhancement Program and Response Plan. This resulted in normalized unit cost of our operation being contained at 4% below inflation.

Exploration and production international recorded a loss from operations of ZAR8.3b. Excluding the Canadian impairment, this business generated a loss of ZAR853m, which was a 51% improvement on the previous period.

Our Mozambican operations recorded a profit of ZAR437m compared to ZAR1b in the prior period. This increase was mainly a result of translation losses. We were successful in ensuring that debottlenecking the production facility resulted in an 8% increase in volume.

The lower oil price continues to have a significant impact on our partners in Gabon. It is encouraging to note that production was 26% higher and averaged 19,100 barrels of oil per day.

Our Canadian upstream output continued to be adversely affected by the deterioration of the conditions in the North American gas market. The 16% decline in forecasted natural gas prices has resulted in a further ZAR7.4b partial impairment in the period. Our forecast remains only [regenerative] activity until we see a sustainable increase in gas prices.

Slide 17. Underpinned by record production and a solid cost performance, our energy business delivered a [sharp set] of results relative to the current macroeconomic environment. Secunda Synfuels increased liquid fuels production by 6%, with Natref delivering a 1% increase despite an Africa energy portfolio was positively impacted by weaker rand/US dollar exchange rate and higher refining margin. However, the impact of the 47% lower oil price negated these gains.

Overall, liquid fuel sales were 1% lower than the previous year. Higher-margin direct sales increased by 1.3% over the previous year as a result of increased retail and commercial fuel sold. These volumes were offset by 6.9% lower sales to the (inaudible) wholesalers.

Gas sales were 3% higher, mainly due to higher [net enriched] sales to commercial customers. Our ORYX GTL venture contributed ZAR573m to the energy business. The plant achieved an average utilization rate of 90%. This volume decrease, coupled with the significant drop in oil prices, resulted in our share of profit from the joint venture decreasing by 50% compared to the prior period.

In Nigeria, our EGTL plant continued to steadily ramp up towards [develop] capacity and is currently standing at 75% utilization.

Slide 18. The chemical business contributed [56%] to Group profitability and continues to grow. This provides the resilience to the overall Group earnings in a low oil price environment. The average basket price of commodity chemicals decreased by only 23% despite the 47% drop in oil prices. Average margin for specialty chemicals remained resilient despite the market volatility.

Profit from the operations in base chemicals decreased by 45% to ZAR3.2b due to softer demand for some commodity chemical products and margin pressure. Sales volumes were 13% down as a result of an extended plant shutdown to allow the commissioning activity related to the [P3] expansion project. Volumes were also lower due to the softer demand for some commodity products, particularly our fertilizers and (inaudible) business. (Inaudible) were 11% down from [nominal 10], mainly due to the benefit of our cash savings and cost reduction initiative.

Performance chemicals continued to deliver and improve their resilient average gross margin. On a normalized basis, profit from operations decreased by 15%. Our (inaudible) value chain was negatively impacted by lower ethylene prices and lower production volume as the result of a planned shutdown. Our margin in surfactant and alcohol businesses remained extremely resilient to the crude oil price drop. Our Eurasian operations reported a 5% improvement in production volumes.

Slide number 19. I'd like to expand on what David touched on earlier in respect of our Business Performance Enhancement Program. We have increased our savings target to generate sustainable annual savings of ZAR5b by the end of the 2017 financial year. We have achieved actual year-to-date savings of ZAR3.1b, so we are on track to meet our 2016 financial year savings target of ZAR4b. This represents an annualized average run rate of ZAR4.3b by the end of the 2016 financial year.

While we expect our cost trends to follow inflation for financial year 2017, further optimizing cost savings from our Response Plan will enable us to check and potentially drive costs below inflation over the coming financial year.

Now on slide 20. Our comprehensive Response Plan has yielded cash savings of ZAR19.7b since its inception. The updated and extended scope of the Response Plan will ensure a balance sheet and earnings resilience at lower-for-much-longer oil prices. The additional savings will be delivered from the existing (inaudible).

Out of our Response Plan, we will deliver further sustainable cash savings of ZAR1.5b annually by the end of financial year 2018. This is ZAR500m higher than we previous guided. These savings are in addition to the ZAR5b cot savings we delivered from our Business Performance Enhancement Program and brings the total sustainable savings to a significant [ZAR6.5b] by end of financial year 2018.

Now on slide 21. It is paramount that despite our capital -- it is paramount that, despite our capital portfolio prioritization, the safety, reliability and sustainability of our operations are not compromised. Our 2016 CapEx forecast is increased by ZAR4b to ZAR74b. And our 2017 CapEx forecast has increased to ZAR73b, mainly as a result of the impact of the weakening rand. I'd like to emphasize that this increase is only as a result of the translation effect of our US [credit], with no impact on our cash flow.

We have managed the strategic response plan to further optimize our capital portfolio of projects. Any further exchange rate volatility or average to our LCCP forecast cash flow following the detailed project review will affect the forecast. Our strategic projects in North America and Southern Africa remain our critical focus areas.

Slide 22. In recent years, as a result of the sustained higher oil prices and limited growth in capital expenditure, Sasol generated significant positive cash flow resulting in an ungeared balance sheet. Even though international oil and commodity chemical prices have declined sharply, proactive management interventions, such as the previous performance enhancement program and response plan, have enabled us to weather the adverse changes in the macroeconomic environment.

Despite reduced cash flows, our balance sheet shows the capacity to lever up if we continue to execute our growth plan and return value to shareholders through our flexible dividend policy based on [set] cover range. Our Board (inaudible) has lifted our internal gearing ceiling to 44% for financial years 2017 and 2018 as a short-term measure to manage the impact of the market volatility and the lower-for-much-longer external environment.

As a result of our cash saving initiative, we don't expect our peak net debt to EBITDA to increase beyond our ceiling of 1.7 times over the coming years, as detailed earlier in previous years.

Our cash reserves and unutilized facilities provide significant headroom and our liquidity remains strong. This give us flexibility to allow -- and allows us to protect the balance sheet. And we continue to execute our strategy by implementing our growth plan and continue to maintain our cover-based dividend policy in determining value to shareholders.

Our credit ratings remain unchanged at investment grade. And we'll do whatever is necessary to protect our investment-grade status.

Slide 23. Even though anticipated lower-for-much-longer oil prices and exchange rate volatility, we expect an overall strong operational performance to continue for the 2016 financial year. We project South African liquid fuel sales to remain around 60m barrels.

We expect ORYX GTL average utilization rate to be approximately 80% due to an extended statutory shutdown and plant maintenance in the first half of the year. This is lower than the previous guidance provided of about 87%.

Base chemical sales volumes are likely to be lower than the prior year, with margins remaining under pressure.

Our chemicals -- our performance chemical sales volumes are likely to be slightly lower than the prior year, with average margins for the business remaining resilient.

We expect cost and cash savings contribution from the Response Plan to deliver the upper end of the ZAR10b to ZAR16b range. Sustainable cost savings of ZAR4b for the financial year 2016 will continue to drive normalized cash fixed cost to remain below inflation. We expect our balance sheet to reach gearing level of between 20% and 30% by close of this financial year, which is FY16.

In closing, we are well positioned to continue to deliver strong operational performance. This is despite the volatile macroeconomic environment that (inaudible) the balance sheet and execute our geo-regional in North America and Southern Africa.

On that note, I will hand it back to David.

Thanks, Bongani. We'll now turn to the final slide, that's slide 25. As many of you know -- as all of you know, I would think, from December last year Dr. Mandla Gantsho, Chairman of Sasol Ltd announced a joint CEO leadership structure for the Company which will commence July 1, 2016, led by Bongani Nqwababa, current CFO, and Steve Cornell, our Executive Vice President, International Operations.

Bongani and Steve have complementary skills and backgrounds that will make a truly formidable team. As joint CEOs, they are jointly and severally liable, which means that both of them are fully responsible for the Company and to the Board equally, thus reinforcing a One Sasol mindset.

Now, our near- to medium-term strategy through the end of the decade in conjunction with our new operating model will allow us to deliver growth in the longer term. Our consistent operational performance, coupled with a strong safety focus, will ensure the Company's sustainability. To build on our successes, the actions taken to reposition Sasol through our cost savings and cash conservation programs place the organization in a strong position going forward. Given the lower-for-much-longer oil price scenario, we have intensified our Response Plan efforts while prioritizing capital for the advancement of our growth projects in Southern Africa and the United States.

Over the next few months, Steve, Bongani and I will continue to work through a detailed handover plan to ensure a seamless leadership transition. And I am confident that Bongani and Steve will hit the ground running when they assume their new responsibilities on July 1.

With that, let me now open it up for any questions you have for us. And I'll turn it over to the Operator.

(Operator Instructions). Jarrett Geldenhuys, Investec.

Hello, everyone. Thanks very much for the opportunity for the questions. I just have three questions. I suppose they're fairly detailed, around the US delays, potentially. I wonder if you could just give us a bit of color around how the delays are scheduled, and when we can expect some cash flow from the projects? And I suppose how some of the IRRs that you're seeing of these projects are going to be impacted by some of these delays?

And I suppose the second question also is on CapEx, and relates to Mozambique. And I just wonder, that $1.4b which you're mentioning, it doesn't seem to be in your FY17 CapEx numbers or your changes. I wonder if you can just give us some guidance as to when those CapEx numbers start coming through? And actually, I think I'll leave those questions there. Thanks very much.

Okay, I'm going to -- Jarrett, it was breaking up on us a little. Let me try to -- I got the second one on Mozambique and the $1.4b CapEx in FY -- [maturing] in FY17. Let me go to the first question, though. And I think it was a question generally on LCCP and optimizing the cash flows and therefore pacing the project and how that's coming along and what that means to returns. Is that what you asked?

Yes, that's perfect, David. And also, I'm just trying to try and assess your thought process about I suppose costs escalating on delays relative to getting cash flow on pushing the project ahead?

Okay, thanks. Well, as I said in the presentation, the Response Plan efforts quite a few being extended and increased requires us to look across the Company and where are we going to get those additional savings. It's primarily in cash cost savings which includes supply chain, external spend, and so on. And then capital portfolio, which means we'll be in three areas primarily. We're not going to look at [substinence] that much. There is some optimization [cuts]. Primarily we are looking at reduced spend in Canada, derisking and saving the program in Mozambique.

And as you point out, the LCCP, where we're again optimizing cash flows, we've given the project team a target to support the Response Plan so that we can keep the gearing in check which obviously drives credit ratings and supports our dividend policy continuing successfully and keeping the balance sheet strong. So those are the objectives, and obviously the background in taking the decision to pay for the project.

Now, there's certainly some upside here. We believe that this will allow us to get engineering even further along. We are about 70% completed engineering. We are 80% complete on the cracker -- 82% complete on the cracker's engineering, and 90% complete on the first big derivative unit there, LLDPE. So the engineering is growing extremely well. Procurement also is over 50%, I think it's at 51% or 52% of the (inaudible) today as recent as January, it's probably a little higher than that now.

This optimizing of the cash flow, storing the [stand-down], getting all the drawings AFC approved for construction to the field, all of the equipment and bulk, piping and vessels, equipment purchasing in the [way-down yard, the way-down being where the GTL is going to go. So we've got great space on the project to lay down our equipment and ramp up the later field accounts later. And that [wibbly] will feel more like a shutdown, and you'll have everything you require on-site to align with -- get world-class productivity out of the trade arm on site.

So that's what we're looking at. Again, cracker and LLDPE still in 2018, with some smaller, derivative units pushing in into the 2019 calendar year. So because there is a cap on the cash flows, you're seeing a slight extension to the schedule.

Now, we've just told the project team, that's what their marching orders were. So obviously they're looking at the revised execution plans. Fortunately, we've not ramped up. I think we could probably accept 6,000 people on site as we speak, but we're only at or about 2,000. And we'll continue at that level or after we ramp up, probably we'll ramp it down a bit before picking back up, like I say, a little later in time. By mid-year the project team will have that execution approach finalized, costs schedule for us. And we'll take a look at how that all works out for the return sampling.

We're still comfortable -- you remember that at the current CapEx and lower pricing we still make WACC at $70 real oil to the life of the project. We've talked about that in the past. And so that's where we stand right now, and we'll update you when we get further along here in the year. But that is definitely a good reason to make the decision and there's also some upside on field productivity and still getting cash coming on online -- getting the project online in 2018, the main -- the big, main units.

I'll turn it to -- on the Mozambique, Bongani, you'll handle the $1.4m -- that's $1.4b in Mozambique for the [PSA] stage one that we're looking at right now. Bongani?

Yes, thank you, David. Currently on the (inaudible) it's important to realize that the $1.4b is the total cost of the project. And when issue [when we] have the ramp-up that starts next year. On the PSA [if I can take] the rand I'll give you the exchange rate shortly. We are looking at the PSA ZAR1.3b, and (inaudible) ZAR1.7b on an exchange rate of between 15 and 16.50. So if we [ended] parts of the ramp-up, the obviously there's more spent in years to come and we mentioned earlier, we gave (inaudible) and rebasing project. So that has to be taken into consideration.

Thanks, Bongani. Next question? Thanks, Jarrett.

Gerhard Engelbrecht, Macquarie.

Good afternoon and thank you. Can you maybe -- I've got -- I'm also talking about the project and the Mozambique in PSA. If you compare the returns and the NPVs of these projects, won't it make more sense to delay the Mozambique PSA rather than the downstream units at the cracker?

And maybe with that, do you have contractual obligations to proceed with a PSA soon?

And then just maybe around the balance sheet. You say that gearing is going to be 20% to 30%. We've got two, three quarters of the year are now virtually behind us. Under what scenarios do you actually see gearing increase to 30%? And how do you service the US debt? Can you do that with South African rand from here? And maybe how much are your cash balances in rands? Thank you.

So let me start on the first one. Gerhard, it was very difficult to hear the questions. It's quite muffled. Let me try. I think there were three questions. I think the second one has to do with balance sheet and whether the gearing -- how we can even get close to 30% gearing by the end of the year, given where we at half-year. I'll give that to Bongani.

The first one, (inaudible) can help me with the third question, but the first question I think was Mozambique PSA and why don't you delay it completely or further versus touching the cracker project. Is that what I heard?

Exactly.

Okay. And then the third question, who got the third question. Servicing US debt in -- okay. So let me give -- I'll start with Bongani on the balance sheet, number two, and US debt in rand number two -- three. Thank you.

Hi, Gerhard. Your question was [gearing] -- it's based on the cost of the cracker in the second half of the year and obviously the translations effect thereof. That's why we are giving a guidance of 20% to 30% for NDA. Remember, it was the guidance that we expect for that (inaudible) in our base chemicals business portfolio.

So last part in terms of the funding, the funding is primarily from the US sources. But I think your question also is [said] on the repayments. We see the repayment primarily coming from the USA although you've got approval from the South African Central Bank to fund 30% from rand, for now we are holding out on that. So it's primarily --

Perhaps --

[Is this correct?]

No, no, I'd just like the current interest charges, can you service that from the US cash flow?

We can service it not only from our US cash flow but we can service it conservatively from our offshore cash flow.

Okay, thanks.

Okay.

Thanks, Bongani. Let me just catch you on the first question there and we can get into it more during the road shows that I --. On the PSA, in the field development program there's obviously commitments with the government and with our partner, these two oil reservoirs and two gas reservoirs there, and there is a time, a schedule that's been proposed and expected, at least certainly best efforts to get close to that schedule that we've submitted in the field development plans in the approval.

And right we're in process with our Response Plan we are de-risking and focusing more on the gas side of our program, derisking the gas fields, understanding the reserves better so that we can start ramping up and looking at (inaudible) gas train and the gas to power project.

And then we're scheduling behind that, obviously due to macroeconomics, scheduling behind that the oil program and get going on oil and the LPG plant 20,000 tonnes per year, which will be able to service the entire country. So there's definitely commitments made as part of the approval process but we are certainly optimizing the schedule as much as possible. But there's certainly -- it's not something we can just shelve and just put all that money onto the cracker.

And as I said earlier, I think the cracker, this is more than silver lining, I would think. It's going to give us even a better chance of success with this decoupling of engineering and construction, giving us some breathing room. Whereas if you remember on FT (inaudible), a market-driven project where we didn't (inaudible), we ended -- certainly we had engineering on top of construction and it turned into a bit of a train wreck until we got out of the ditch.

We've looked at this here from many different angles and that's what we're comfortable with. Again, we can talk more on the road show, but back for the questions.

Operator?

Thank you.

Alex Comer, JPMorgan.

Hello, a couple of questions, one relating to the cracker again, and then one on the cost savings. Just if I look at the slide that shows the cost savings 18 -- from the response plan, it seems to me that the -- hello? Sorry, the cash cost saving, sorry, slide 20, the cash cost savings have jumped quite a lot, to ZAR13b or so from what we saw in the summer, when I think it was something like ZAR6 million. And that seems to imply a big impact in 2018 from the Response Plan. So I just wondered what else you've got planned in there?

And then just on the cracker, I mean, one of the big issues here is the ethane window, the reason for building this project is to try and capture low cost ethane. Could you just explain to me with the delay what that does to the economics? And just remind me, what window, in terms of number of years, have you got in your model for ultra-cheap ethane?

Okay, thanks, Alex. We continue to have challenges with the sound, but I think we've got the questions. And trust me, we did not (inaudible) the teleconference service provider, given the sound here. We did test the system before the call.

We'll start with the Response Plan additional cash cost savings. And I'm going to turn it over to Bongani and he can help us with where does the additional cash cost savings that come [into it]. Yes, please.

(inaudible) it comes from (inaudible), about [ZAR4b] for the -- from the [vacancies]. And then another ZAR6b to ZAR8b is from the labor. And (inaudible) is in for another ZAR3b and then professional fees is another ZAR1b, and then we've got the partnership agreement which is - with (inaudible) that increasing at 9.4%. I'll update you it was lower than what we internally factored at about 13% so we see a benefit there. Then (inaudible) the cash net up as well.

Thank you, Bongani. And obviously (inaudible) contributing to that, being longer extended.

On the cracker and ethane window and what that looks like for us, certainly the optimized schedule starting a little later is, I think, going to benefit from the higher oil price and going to bring up the units. Steve Cornell is with us and can comment on the ethane window and what that looks like right -- currently.

Sure. I think your question was around the ethane fighting and ability to be able to capture the low ethane pricing. I think we said before we've got supply contracts from various companies set up over a three to five-year term. And our view is that the ethane is going to stay below the fuel through most of next decade. It's certainly right now down near energy parity and we see it staying down near energy parity for some time.

And as we said, in terms of looking at the schedule, how to optimize the field construction, what we're doing is pushing the smaller consumers out. We're still moving ahead on the cracker at pace on the big LLDPE unit at pace. So we're going to be able to bring those up and get the polyethylene out to the market. So I really think it's going to have a pretty minimal effect in terms of the overall IRR, given the guidance we're talking about clinging on in 2018.

Thanks. Thanks, Steve.

Thanks, Alex. Operator, we've got time for it looks like one more question.

Adrian Hammond, Standard Bank.

Hi, David. Yes, I've got a couple of questions from my side, please. Just firstly, as an observation, I'm struggling to understand how your Response Plan addresses your capital expenditure, which remains steady for FY17 and post this revised plan. That's the first -- that's just a statement, really.

But could you perhaps just give us some understanding of how you manage your balance sheet? What your thinking is? Because I've got a feeling maybe being a bit too conservative in terms of delaying projects for the sake of retaining the dividend, perhaps. Could you just run this through your thinking on that? Thanks.

Thanks, Adrian. Yes, your comment on the Response Plan and the CapEx obviously staying fairly flat. The majority of that spend is going to the cracker is both of those obviously this year it was about 59% -- it will be about 59% of the capital expenditure. And then that'll ramp up to 66% in FY17.

So as other CapEx is coming down, the cracker, even though we are containing it, it still makes up certainly a good portion of the FY17 capital expenditures. So like I said earlier, we have contained that spending. And that just happens to be the profile that you get considering that you see the sustenance spend there of ZAR19b staying pretty steady. ZAR19b is the number for FY16, and then it doesn't drop much. It goes to ZAR17b in FY17. So it's just -- it's some puts and take and pluses and minuses just happens to be a fairly similar profile.

Our balance sheet, and being too conservative, I think we've taken the prudent view. We've obviously looked at assumptions and oil prices which we've plugged in a $40 oil price through this year, remaining this year and FY17 $40, and that has driven a lot of our thinking around what we're seeing in the gearing. And obviously you do want to protect the dividend, we want to continue to pay a reasonable dividend, but at the same time, protect the balance sheet.

And we believe that it's prudent to do that with a bit of haircut on the cracker and obviously Mozambique and Canada -- Canada obviously it makes sense to keep gas in the ground. The $1.70 ended up is not something you want to have coming out of the ground right now. So that makes sense. And Mozambique I've already talked about and the cracker, we think it's actually from an execution standpoint, it's going to pay dividends to us in final execution and world-class productivity. Our [F1] guidance is to comment further on our conservatism and how we look at it.

I won't add much more to it what David has said. The key issue (inaudible) we aim to maintain our investment grade rating, because if it gets much, much worse than that, not only do we have an issue about corporate funding, but more importantly, an issue with access to funding so I'm not going to even consider taking the (inaudible) which you might think we are being conservative but we are looking at the overall sustainability of the Group, what we need to deliver the project when it's good, but also at some time, not before to do any rash decision which would impact the sustainability of our foundation business (inaudible).

Thanks, guys. Thanks, Bongani, and thanks to everyone for calling in. Thank you, Operator.

As this is my last results call, I'd like to close by thanking all of you for your ongoing interest and support of Sasol, and I look forward to visiting with many of you on the upcoming road shows to say my goodbyes in person. Thanks very much, and see you soon.

And once again, ladies and gentlemen, that does conclude today's conference. We appreciate your participation today.