Go to home page Search this Annual Report Print this page Email us
You are currently viewing : CHAIRMAN’S REVIEW

CHAIRMAN’S REVIEW

Desmond Sacco

Trading conditions improved during the second half of the financial year, and earnings recovered significantly…


As was the case in the previous year, this year was characterised by two very different sets of trading conditions. The extent of the world economic turmoil became more apparent, with the global economy being severely affected, in particular, the banking sector and capital projects. This resulted in the adverse trading conditions experienced in the latter part of 2008, continuing to impact the results for the year, especially in the first half.

THE YEAR UNDER REVIEW
Headline earnings for the group declined from R3,27 billion in the previous financial year by 54,3% to R1,49 billion in the current financial year. The conditions referred to above continued to negatively impact the markets in which we trade until the end of the 2009 calendar year. Conditions in our markets improved during the second half of the financial year, driven mostly by Chinese and Asian demand, and as a result, earnings recovered significantly. The extent of this recovery, however, was not sufficient to enable the group to generate earnings to the extent it did in the two previous financial years. The results for the past three financial years, on a six-monthly basis, are as follows:

 
Headline earnings (R’million)
 
The proportion of the year’s headline earnings recorded in the second half of the year amounted to 77,5%, where prices for all commodities recovered, most notably those for iron ore. The pricing convention in the iron ore market has changed in that these prices are now negotiated on a quarterly or spot basis. This replaces the annual price settlements that had operated in this market. Prices for our manganese and chrome commodities increased modestly, however, it is noteworthy that manganese ore appeared to be in an oversupplied position towards the end of the year, resulting in a slight softening of these prices. The other significant factor that determines the level of earnings for the group remains the level of the rand in relation to the US dollar. Due mainly to offshore demand for investments in emerging economies like South Africa, the average rate of the rand to the US dollar for the year strengthened to R7,60, which is nearly 14% stronger than the average level for the previous year of R8,80. Since most of the effects of the world economic turmoil have passed, it is apparent that, although the level of the rand remains strong, negatively impacting the group’s earnings ability, the degree of volatility in the rate of exchange experienced in the earlier part of 2008 has decreased markedly.

The group’s prime focus remains its 50% shareholding in Assmang and the commissions and other income derived from marketing the group’s products and providing technical and management services to group companies. The contribution from Assmang’s divisions to Assore’s headline earnings for the past three years on a percentage basis is as follows:
 
Percentage of headline earnings (%)
 
The relative impact of the contribution of the Iron Ore Division is notable, which is due to the increased volumes from the recently commissioned expansion at Khumani Iron Ore Mine (Khumani), which now has a capacity of 10 million sales tons per annum, as well as the recently increased iron ore prices.

The Department of Labour inquiry into the explosion that occurred at furnace 6 at Cato Ridge Works in February 2008 has not yet been concluded, and the details of the findings are awaited.

SALES VOLUMES

Assmang’s sales volumes for the year by commodity were as follows:      

2010  

2009

Metric  

Metric

tons  

tons
%  
 

’000  

’000
increase  
Iron ore

9 799  

7 409
32  
Manganese ore*

3 095  

2 152
44  
Manganese alloys*

238  

117
103  
Chrome ore*

272  

256
6  
Charge chrome

189  

144
31  
*Excludes intragroup sales

Continued strong demand for the group’s commodities from the East resulted in sales volumes being more consistent throughout the year in comparison to the previous year, where the second half in that year was severely impacted by the world economic turmoil.

CAPITAL EXPENDITURE
The bulk of the group’s capital expenditure occurs in Assmang, with R3,3 billion of capital being spent across its operations (2009: R2,8 billion), and R2,1 billion being spent on infrastructural items, aimed at increasing Khumani’s capacity to 16 million sales tons per annum. This expansion is progressing according to schedule, and the mine is expected to achieve this level of production as from 1 July 2012. As previously announced, Assmang converted a ferrochrome furnace at Machadodorp to a ferromanganese furnace, the cost of which amounted to R46 million. A further R258 million was spent on rebuilding several ferromanganese and ferrochrome furnaces at the Cato Ridge Works and at the Machadodorp Works respectively. Apart from the expenditure in Assmang, R42 million has been spent on further developing two underground shafts at the Rustenburg Chrome Ore Mine, which is 44% held by a black economic empowerment partner for the benefit of historically disadvantaged groups in the area surrounding the mining operations. One of these shafts has recently been commissioned, and full production is expected towards the end of the 2011 calendar year.

Assmang’s capital expenditure is summarised by division for the year as follows:
 
Assmang’s capital expenditure (R’million)
 
MINING RIGHT CONVERSIONS
New-order mining rights are in place for the Khumani Iron Ore Mine and the chrome mine at Rustenburg. Applications were submitted during 2008 for the conversion of the remainder of the group’s existing mining rights to new-order mining rights, as envisaged by the Minerals and Petroleum Resources Development Act. Assmang has since been notified that the new-order rights for Nchwaning and Gloria manganese mines have been approved.

Applications for the conversion of old-order rights for the Dwarsrivier chrome deposit and the Wonderstone pyrophyllite deposit were submitted timeously and are in the process of being approved.

DIVIDENDS
Due mainly to the trading conditions and uncertainties during the first half of the year, the board decreased the level of the interim dividend for the year to 500 cents (2009: 1 000 cents) per share.

In line with the improved trading conditions in the second half of the year, a final dividend of 1 200 cents (2009: 1 000 cents) per share was declared, resulting in the total dividend per share for the year amounting to 1 700 cents (2009: 2 000 cents), a decrease of 15%.

OUTLOOK
Assore’s results remain linked to conditions in the global economy, and specifically to those regions and countries where our products are beneficiated or processed into various grades of steel and stainless steel. As was noted in the results announcement in August, ore and alloy prices have recently come under pressure, however, in comparison to the previous year, there appears to be a greater degree of stability in these prices, and substantial fluctuations are not expected in the near future.

The current global economic climate makes it difficult to predict increases in demand for our products, and coupled with the current strong level of the rand, any recovery to the earnings levels of 2008 and 2009 will be dependent on favourable changes in these variables.

DIRECTORS
Subsequent to the year-end, Brian Hawksworth stood down as director on 27 August 2010, due to ill health. Brian has been associated with the group for over 40 years and served on the board as an independent non-executive director for 14 years, during which time he chaired the Audit and Risk, and Remuneration committees with consistent skill and professionalism. On behalf of the board, I would like to extend our thanks and appreciation for the valuable contribution he made during the term of his appointment.

We welcome Mr Bill Urmson who agreed to join the board with effect from 1 October 2010 as an independent non-executive director, and who will also serve on the group’s Audit and Risk, and Remuneration committees.

APPRECIATION
I am pleased to be able to end this report on a positive note, in that despite the significantly reduced level of earnings, the group did produce pleasing financial results in the second half of the year. I thank the management and staff for their ongoing support and commitment during the year. The roles played by our customers, agents, suppliers, shareholders and bankers have continued to contribute greatly to the group’s achievements and receive our appreciation.

Desmond Sacco
Desmond Sacco

Chairman
22 October 2010
Print this page mailto:info@assore.com