Despite interim results which reflected headline earnings of only R1,1 billion, headline earnings for the year amounted to R3,5 billion and were only marginally lower than the previous year of R3,7 billion, a decrease of 4,7%. The results for the second half, which accounted for about two thirds of headline earnings, were significantly improved due to higher prices and sales volumes for iron ore as well as a weaker rand/US dollar exchange rate, resulting in a better-than-expected performance of the group for the year.
Uncertainty in world markets remains, largely due to poor economic growth rates in Europe and to a lesser extent in the United States. With the exception of iron ore, this has resulted in continued downward pressure on the markets for the group’s products. Increased demand for iron ore was mainly out of China where economic growth rates remain at significantly high levels although they too are starting to slow. China continues to produce more than half the world’s crude steel and production in the year ended 30 June increased by 7,5% from 690 million tons in the previous year to 742 million tons. By succeeding in railing record levels of iron ore during the year, the group was well placed to take advantage of this increased demand.
The year under review
The highlights for the group this year include the sales of record volumes for iron and chrome ores. Sales of iron ore amounted to over 16 million tons (2012: 14,8 million tons), which included sales in excess of 2 million tons in the local market. Sales prices fell below US$90 per ton, in the first quarter of the year and increased to US$160 per ton, before declining to about US$120 per ton by the end of the year. The group also achieved record sales volumes of chrome ore, due mostly to higher availability of ore from the Dwarsrivier Chrome Mine, following the suspension of ferrochrome production at Machadodorp Works. The continued increases in the cost of electricity led to the group reviewing the viability of all of its smelting operations. This resulted in the closure of the remaining ferrochrome furnace at Machadodorp, with five ferromanganese furnaces remaining operational, four of which are at Cato Ridge Works and the fifth one at Machadodorp Works.
As has been the case in the past two years, iron ore remains the biggest contributor to group earnings, which is a significant shift from the historic position where the bulk of earnings was generated from the sale of manganese ores and alloys. The relative contribution to earnings by each of the divisions is set out in the table below:
While the Manganese division is now the second-largest contributor to profits, the manganese business remains profitable and capital projects are under way to expand production capacity of both manganese ore and alloy which are set out in more detail under “Capital expenditure” below.
Capital expenditure
The bulk of the capital expenditure occurs in Assmang and amounted to R4,1 billion (2012: R4,5 billion) for the year under review and is detailed on a per-division basis as follows:
R2,7 billion (2012: R3,3 billion) was spent in the Iron Ore division, with R2,2 billion (2012: R2,5 billion) being spent at Khumani Iron Ore Mine and R362 million on waste-stripping at Beeshoek Iron Ore Mine. Expenditure at Khumani included R553 million being spent on the Wet High Intensity Magnetic Separation (WHIMS) plant, which is designed to increase yields on iron ore production and R223 million on production efficiencies. The group continues to review the capacity of its manganese operations and spent R339 million on feasibility studies involving various expansion scenarios for its operations in the Northern Cape and on projects to maintain existing production levels.
The cost of alloy production in South Africa has become relatively expensive compared to that of its global competitors, mostly due to recent substantial increases in the cost of electricity. As part of the group’s strategy to remain competitive in the production of ferromanganese, Assmang has, subject to certain regulatory approvals, entered into a joint venture, to be known as “Sakura Ferroalloys”, in terms of which it has the majority shareholding (54,36%), with Sumitomo Corporation (Japan) (26,64%) and China Steel Corporation (Taiwan) (19,00%), to produce ferromanganese in the Sarawak State in Malaysia. This greenfields project is expected to cost approximately US$328 million and construction is scheduled to commence in February 2014.
Dividends
Based on the current strong cash-generating ability of the group and its current net cash position, the board declared an increased final dividend of R3,50 (2012: R3,00) per share, bringing the total dividend for the year to R6,00 (2012: R5,50) per share.
Outlook
The group’s products are used in the production of crude and stainless steels and it is expected that these markets will grow by approximately 2,5% from 2013 into 2014. Over the medium term the group remains confident that the demand for commodities will continue to strengthen, but for most commodities, supply has caught up with demand, putting pressure on prices. Iron ore prices are expected to decline, with additional capacity from Brazil and Australia coming into production over the next two years. Prices for manganese ore are also expected to remain under pressure, with increased quantities of ores of various grades being exported from Australia and Gabon and with the production of additional volumes by new mines in South Africa. Both ferromanganese and chrome ore are likely to remain in oversupply, the former due to the weak steel production in Europe and North America and the latter due to increased quantities of lower grades of material becoming available as platinum production recovers. It is unlikely that the prices of either of these commodities will increase in the short term. Cost management is the largest single challenge facing the group and the resources industry in South Africa, particularly in the face of above-inflation increases in costs of electricity and logistics as well as the current unpredictable labour market. As more than 80% of the group’s sales are for export, and the commodities concerned are priced predominantly in US dollars, the group remains significantly exposed to exchange rate fluctuations. With the slow economic recovery in the USA and Europe and the current economic uncertainty in South Africa, exchange rates are expected to remain relatively volatile.
Appreciation
Considering the economic and labour market conditions in which the group has had to operate, this year has proved to be a very successful year and I thank my fellow directors, the management and staff for their ongoing support and commitment during the year. Additionally, I am very appreciative of the roles played by our customers, agents, suppliers and bankers who continue to contribute greatly to the group’s achievements.
Desmond Sacco
Chairman
15 October 2013