Commentary – Final Results for the year ended 30 June 2016

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Commentary

Results  |  Impairment charges  |  Sales volumes  |  Expansion projects  |  Capital expenditure  |  Event after the reporting period  |  Outlook  |  Dividends  |  Accounting policies, basis of preparation and review by auditors  |  Directors  |  Declaration of final dividend


Results
Headline earnings for the financial year to 30 June 2016 (“2016”or “the reporting period”) declined by 11,7% to R1,7 billion, compared to R2,0 billion in the previous financial year (2015). After taking into account impairment charges of R299 million (2015: R886 million), attributable earnings for 2016 were similar to those recorded in 2015, at R1,5 billion, with attributableearnings for Assmang Proprietary Limited (Assmang) marginally lower by 2,7% at R2,6 billion in 2016. The group’s principal investment is a 50% interest in Assmang, which it controls jointly with African Rainbow Minerals Limited (ARM), and in accordance with International Financial Reporting Standards (IFRS), is accounted for using the equity method.

During the second half of 2016, prices for the group’s products recovered, due mostly to the application of economic stimulus and increased environmental restrictions in China, which favour the group’s products, combined with improved steel prices and increased productivity. The index price for iron ore (62% iron content, “fines” grade, delivered in China) reached levels of below US dollars 40 per tonne in the first half of 2015, but recovered to an average price of US dollars 52 per tonne for the second half. Prices for manganese ores also recovered over the second half of 2016, during which the average price was US dollars 3.13 per manganese unit (44% manganese content, “lumpy” grade, delivered in China), 18% higher than during the first half of the year.

After declining significantly towards the end of the first half of 2016, and into the second half, prices for chrome ore recovered and increased sharply during the middle of the second half, with average prices for the year at approximately US dollars 150 per tonne (44% grade concentrate, delivered in China). These recent increases in selling prices were brought about mainly by global inventory shortages.

The average rand/US dollar exchange rate across the second half of 2016 was R15,38, which was 12,2% weaker than the first half. This also lifted the profitability of the group over the second half. The resultant turnover for Assmang for 2016 was 2,2% lower than 2015, with commissions earned for 2016 by the group at similar levels to 2015.


Impairment charges
During the year, a review of the continued commercial viability of Furnace 6 at Assmang’s Cato Ridge Works was undertaken and it was decided to cease production of high-carbon ferromanganese from this furnace, resulting in an impairment charge of R333 million. Assets at Machadodorp Works, with a net book value of R72 million were also written down, in the form of an impairment charge. In accordance with IFRS, the group recognised 50% of Assmang’s results in determining its profit and therefore the group’s share of the impairment arising from Assmang is R203 million. In addition, the group has assumed impairment charges amounting to R96 million, most of which arose from the assessment of the recoverability of the remaining assets at Rustenburg Minerals (R41 million) and the reduction in the value of the group’s share portfolio (R30 million). The total impairment charge recognised therefore amounts to R299 million, before deferred taxation relief and obligations of non-controlling shareholders.


Sales volumes
For the second consecutive financial year, Assmang achieved record sales volumes of iron and chrome ores due to increased production at Khumani Iron Ore Mine and at Dwarsrivier Chrome Mine, combined with the utilisation of additional port and rail capacities. The initial impact of the expansion project at Assmang’s Black Rock mines, combined with increased rail capacity, realised additional sales tonnages of manganese ore. Sales volumes of ferromanganese were depressed due to lower levels of global crude steel production.

The table below sets out Assmang’s sales volumes for the year:

    Year ended 30 June   Increase/(decrease)
Metric tons ‘000   2016 2015   %
Iron ore   17 008 16 185  
Manganese ore*   3 030 2 736   11 
Manganese alloys   175 223   (22)
Chrome ore   1 147 1 068  
*Excluding sales to intra-group and associated alloy plants.


Expansion projects
On 24 June 2015, Assore announced the acquisition from ARM of its 50% indirect share of Assmang’s Dwarsrivier Chrome Mine (Dwarsrivier) for a consideration of R450 million. The final necessary regulatory approval was granted on 30 June 2016 and payment for Dwarsrivier was completed on 29 July 2016. The acquisition will improve the balance of the group’s product risk as well as generate production and marketing efficiencies. In terms of the transaction, Assore also refunded Assmang an amount of R55 million for funding advanced from the effective date of the transaction, being 1 July 2014. Refer “Event after the reporting period” below for more detail of the transaction.

Construction of the Sakura Ferroalloys smelting plant in Malaysia, in which Assmang holds a 54,36% interest, is nearing completion, with the first ferromanganese being produced (tapped) from Furnace 1 in May 2016, and the first shipment exported in June 2016. Furnace 1 has a design production capacity of 110 000 tonnes of ferromanganese per annum. The second furnace, which will produce 70 000 tonnes of silico manganese annually, is scheduled to be commissioned in September 2016 and is expected to reach full production capacity in early 2017. The anticipated cost to completion of the project remains within its original budget of US dollars 328 million.

The expansion and sustainability project at Assmang’s Black Rock Mines continues, with most aspects of the project remaining on schedule. Once completed, this will enable Assmang’s Manganese Division to produce in excess of 4 million tons of manganese products annually, from the end of 2017. Assmang spent R1,7 billion (2015: R1,3 billion) during 2016 on the project, with R2,1 billion remaining to be spent.


Capital expenditure
Capital expenditure for the year in Assmang amounted to R3,0 billion (2015: R3,8 billion). In addition to the expenditure on expansion projects referred to above, approximately one third of the remainder was spent on waste-stripping in its Iron Ore Division, with replacement capital making up the balance.


Event after the reporting period
On 29 July 2016, Assore acquired the entire issued share capital of Dwarsrivier Chrome Mine Proprietary Limited (DCM) from Assmang. This acquisition has resulted in a better commercial balance in the base minerals to which the group is exposed.

The final accounting for the business combination has not yet been completed as the group is in the process of determining the acquisition date fair values of the identifiable assets and liabilities of DCM. Furthermore, the group is still in the process of determining the fair value of the total purchase consideration, which excluding the equity interest in DCM, the value of which is still being determined, is comprised as follows:

    R’000
Purchase price, agreed as at 1 July 2014   450 000
Amount refunded to Assmang for operating funds advanced between 1 July 2014 (effective date of the transaction) and 30 June 2016 (closure date of the transaction)   55 313
Interest foregone on purchase consideration placed in escrow and paid to seller in terms of acquisition agreement   34 894
    540 207

Had control been obtained from 1 July 2015, the following disclosures for 2016 would have been adjusted as follows:

R’000 Reviewed Adjustment Adjusted
Profit for the year attributable to shareholders of the holding company 1 539 363 17 934 1 557 297
Revenue 2 941 047 1 667 301 4 608 348


Outlook
The economic environment facing the steel industry continues to be challenging with China’s economic slowdown impacting globally across a range of indicators, contributing to increased volatility in financial markets, sluggish growth in global trade and lower commodity prices in the last two years. The global steel market continues to suffer from insufficient investment expenditure and weakness in the manufacturing sector. Within the European Union (EU), the predicted mild recovery in steel demand has not taken place, with lower than expected demand set to continue into 2017.

The recent increases in iron ore prices have attracted additional supply from higher cost producers and will add to the already-existing oversupplied iron ore market. Prices are therefore expected to remain under pressure and it is unlikely that the current price levels will be maintained. Pressure from the Chinese authorities on steel mills and pelletising operations continues to increase demand for “lumpy” grade products, which carry a premium over the “fines” grade material. This is expected to continue into the near to medium term.

The markets for manganese are driven by similar dynamics, where oversupply of mostly medium-grade ores continues to cause volatility in prices for manganese ores. Current prices for manganese alloys are weak, however, these are expected to recover slightly off their low base.

Stainless steel production in China continues to be driven by increased demand and other seasonal factors that are expected to continue for the medium term. Consolidation in the South African ferrochrome industry, as well as stable levels of supply from chrome ore miners, have resulted in a notable recovery in chrome ore prices. Inventories of chrome ore in Chinese ports recently reached a ten-year low and based on the current fundamentals, the chrome ore market should remain strong in the near future.

Mining and alloy production in South Africa is becoming increasingly expensive, due largely to price increases in electricity and labour that continue to exceed inflation. Therefore, the group has embarked on further right-sizing and restructuring projects in an attempt to improve and maintain the competitiveness of its operations.

In addition to the impact of the above economic conditions and market dynamics, the results of the group continue to be significantly exposed to fluctuations in exchange rates.


Dividends
The results in this announcement include the interim dividend of 200 cents (2015: 300 cents) per share which was declared on 18 February 2016 and paid to shareholders on 14 March 2016. Based on the increased level of earnings achieved in the second half of the year, a final dividend of 500 cents (2015: 300 cents) per share has been declared, making a total dividend in respect of results for the year of 700 cents (2015: 600 cents) per share. The final dividend will be paid to shareholders on or about 3 October 2016 and, in accordance with IFRS, is not included in the results contained in this announcement as it was declared after year-end.


Accounting policies, basis of preparation and review by auditors
The financial results for the year under review have been prepared under the supervision of Mr CJ Cory, CA(SA), and in accordance with IAS 34 Interim Financial Reporting and comply with International Financial Reporting Standards (IFRS), the SAICA Financial Reporting Guides as issued by the Accounting Practices Committee, the Listings Requirements of the JSE Limited (JSE) and the Companies Act, No 71 of 2008, as amended. The accounting policies applied are consistent with those adopted in the financial year ended 30 June 2015, and amendments and improvements to IFRS effective in the year have not had any significant impact on the results or disclosures of the group for the year under review. Ernst & Young Inc, the group’s auditors, have reviewed and issued an unmodified report on the condensed financial results included in this announcement in accordance with ISRE 2410 – Review of Interim Financial Information Performed by the Independent Auditor of the Entity. A copy of their report is available for inspection at the registered office of the company.


Directors
On 26 May 2016, Ms IN Mkhari resigned from the board as an independent non-executive director and the board wishes to thank her for her contribution during the period of her appointment.


Declaration of final dividend
Shareholders are advised that on 6 September, the board declared final gross dividend number 119 (the dividend), of 500 (2015: 300) cents per share (gross) for the year ended 30 June 2016.

In terms of paragraph 11.17 of the Listings Requirements of JSE Limited, shareholders are advised of the following with regard to the declaration:

  1. the dividend has been declared from retained earnings;
  2. the local dividend tax (dividend tax) rate of 15% will apply;
  3. the net local dividend amount is 425,0 cents per share for shareholders liable to pay dividends tax;
  4. the issued ordinary share capital of Assore is 139 607 000 shares, of which 36 400 000 shares are accounted for as treasury shares in terms of IFRS and are therefore excluded from earnings per share calculations; and
  5. Assore’s income tax reference number is 9045/018/84/4.

The salient dates are as follows:

Last day for trading to qualify for and participate in the final dividend   Tuesday, 27 September 2016
Trading “ex dividend” commences   Wednesday, 28 September 2016
Record date   Friday, 30 September 2016
Dividend payment date   Monday, 3 October 2016
Dates (inclusive) between which share certificates may not be dematerialised
or rematerialised
  Wednesday, 28 September 2016 to
Friday, 30 September 2016

On behalf of the board

Desmond Sacco CJ Cory Johannesburg
Chairman Chief Executive Officer 7 September 2016