Operational review and commentary

The financial results of the Assore group are largely dependent on the level of global economic growth, as almost all its commodities are used in the production of crude and stainless steel, the consumption of which is intimately related to the incidence of global capital spend. Group results are significantly affected by US dollar commodity prices, exchange rates and world economic growth, all of which are risks that cannot be directly controlled. Refer “Risks and opportunities”.

The group

The group’s markets are located predominantly in the Far East, India, Europe, North America and South Africa. In protecting the interests of all the group’s stakeholders, management strives to ensure that the customer base is developed and monitored in a manner that does not expose it to levels of unacceptable risk, principally by monitoring the economic sustainability of its customers and the countries in which they operate.

For the first year since 2009, global steel production is expected to reduce and production of crude steel is expected to be less than 1 640 million tonnes for the 2015 calendar year, compared to the 1 665 million tonnes for 2014. Consumption of steel in China is expected to reduce by up to 4% for the year, which has resulted in surplus steel stock being exported, changing the dynamics of the world steel market significantly, particularly in Asia. Modest growth in the major developed economies of Europe, North America and Japan has not been sufficient to absorb this increased supply of steel. India has been one exception, where stronger growth was recorded and antidumping duties against steel imports were rapidly imposed. The resultant low prices for steel are expected to cause industry consolidation and the closure of high cost steel mills.

The performance of the group remains significantly dependent on Chinese demand, which in turn is affected by the level of global economic activity. The results of the group on a per-commodity basis, are more fully set out below. Contributions to the group’s headline earnings by commodity are as follows:

2015 2014
R million R million
Iron ore 1 248 3 179
Manganese 289 529
Chrome 81 45
Other group transactions 358 477
Total headline earnings 1 976 4 230

The group, through its wholly owned subsidiary Ore & Metal is the sole marketing and distribution agent for all the group’s products, including those of Assmang.

The sales volumes for Assmang for the current and previous year are as follows:

2015 2014 Increase/
metric tons metric tons (decrease)
’000 ’000 %
Iron ore 16 185 15 640 3
Manganese ore* 2 736 2 708 1
Manganese alloys 223 279 (20)
Chrome ore 1 068 988 8
* Excludes intra-group sales to alloy plants.

Iron ore

Iron ore is mined in the Northern Cape in open-cast operations at the Khumani Iron Ore Mine which is located near Kathu and at the Beeshoek Iron Ore Mine which is located outside Postmasburg. Export sales volumes for the year were consistent with the previous year, while local sales volumes increased by nearly 28% over the previous year. The Iron Ore division achieved record sales of 16,2 million tonnes for the year (2014: 15,6 million tonnes).

The group’s marketing strategy for iron ore is to sell to those customers who are able to make use of its specific characteristics, while simultaneously reducing dependence on sales to China. Some success has been achieved in this regard, with 11% (2014: 0%) of export sales being made into India, while the Chinese share of export sales declined from 66% to 62%. Export sales to the European market also declined from 16% to 14% as a result of the slower pace of growth in its steel-making industry.

In addition to the reduced production of steel, supply of iron ore has increased substantially during the year, with an estimated 70 million tonnes entering the seaborne market, mostly from low cost producers in Australia and Brazil. Prices for 62% content fines grade, delivered into China were 42% lower for the current financial year, at US$72 per tonne (2014: US$123 per tonne), with average prices declining over each successive quarter. The recent price range has been between US$45 and US$60 per tonne. However, the premium for lumpy grade ores has, on average, been only marginally lower across the year at approximately US$12 per tonne (2014: US$13 per tonne). This premium has remained relatively stable due to the increased cost of production of the alternative of sinter material, brought about by the enforcement of environmental controls in China.

Some relief from the lower selling prices was received from lower freight rates from South Africa to China. In the first half of the financial year, rates were volatile, between US$12 and US$23 per tonne, but in the second half, rates were much lower, between US$7 and US$8 per tonne, due to excess shipping capacity and lower oil prices.

The contribution to Assore’s headline earnings by Assmang’s Iron Ore division decreased by 60,7% to R1 248 million (2014: R3 179 million). The distribution of iron ore sales on a per-region basis for the current and previous financial year is illustrated as follows:


Capital expenditure during the year in Assmang’s Iron Ore division amounted to R1,6 billion (2014: R2,1 billion) of which R730 million was spent on waste-stripping at both mines. The Village Pit at Beeshoek Iron Ore Mine is expected to produce saleable ore during the first half of the 2016 financial year. With Khumani Iron Ore Mine having reached a steady production state, the bulk of the remainder of capital expenditure was incurred on replacement items.

Manganese ore and alloys

Manganese ore is mined by Assmang in the Black Rock area of the Northern Cape province, while manganese alloys are produced at the Cato Ridge Works. Cato Ridge Alloys Proprietary Limited, a joint venture between Assmang, Mizushima Ferroalloys Company and Sumitomo Corporation (both of Japan), produces refined ferromanganese by “blowing” oxygen through a lance into a converter which contains molten metal supplied by Cato Ridge Works, producing a product with a reduced carbon content. Ore-feed for the works is sourced mainly from Assmang’s manganese mines and the bulk of both ore and alloy production is exported. Manganese alloys are used in varying quantities in the production of steel, providing it with strength and a degree of malleability. During the year, high-carbon ferromanganese was produced from one furnace at Machadodorp Works and two furnaces at Cato Ridge Works, while medium carbon ferromanganese was produced from hot metal sourced from furnaces No 5 and No 6 at Cato Ridge Works.

Manganese ore prices also fell markedly in the middle of the year due to oversupply, but were reasonably stable by year-end. As was the case in the previous year, much of the oversupply was due to additional production by South African semi-carbonate medium grade ore producers, and by year-end prices had fallen to the extent that it was only profitable to transport it from the mine to the port via rail, prior to export. The average high grade (44% manganese) lumpy ore price index for the year was 22% lower than in the previous year, at US$3,88.

Sales volumes of manganese ore for the year were in line with those of the previous year. On a per-region basis, the percentage of sales for the year and the previous financial year are illustrated as follows:


Market conditions for manganese alloys have remained similar to those for 2014, with prices remaining depressed despite the closure of furnaces by Assmang and the suspension of production by the other South African producer. The supply-demand balance has not been reached for high carbon ferromanganese. However, the market for medium carbon ferromanganese was relatively balanced. For most of the year there was a large difference between prices in North America and Europe, being the main seaborne markets for manganese alloys, which eroded to some extent towards the year-end. The margin between prices for medium and high carbon ferromanganese remained very high and was attracting additional production by year-end.

The increased cost of electricity and labour were the main considerations in Assmang’s mothballing of the last operating furnace at Machadodorp Works and a further furnace (furnace No 1) at Cato Ridge Works towards the end of the year.

Sales volumes of manganese alloys for the year were similar to the previous year and remain in line with the production from the group’s ferromanganese facilities.

The distribution of ferromanganese sales on a per-region basis for the current and previous financial year are illustrated as follows:


The contribution to Assore’s headline earnings from Assmang’s Manganese division decreased by 45,4% to R289 million for the current year (2014: R529 million). Capital expenditure during the year in Assmang’s Manganese division amounted to R2,0 billion (2014: R1,3 billion), the bulk of which (R1,3 billion) was spent in almost equal proportions on the expansion and continued sustainability of the Black Rock mines to reach a sustainable output capacity of at least four million tonnes per annum by 2020.

Construction work at Assmang’s joint venture ferromanganese smelting project in Malaysia (Sakura), in which it has a 54,36% stake, continues, with commissioning expected in January 2016, while commercial production is expected to commence within schedule, by July 2016. The project is still expected to be completed within budget (US$328 million), with a further US$53 million remaining to be spent. Once fully commissioned, the plant will be able to produce 110 000 tonnes of high-carbon ferromanganese and 70 000 tonnes of silico manganese annually.

Chrome ore

Chrome ore is mined at Assmang’s Dwarsrivier Mine in the Limpopo province, located near Steelpoort and Lydenburg. The group also mines chrome ore near Rustenburg (Rustenburg Minerals Development Company Proprietary Limited (Rustenburg Minerals)) from established open-cast pits. Rustenburg Minerals is 44% held by a black economic empowerment (BEE) partner, Mampa Investment Holdings (refer “Black economic empowerment status report”).

The bulk of chrome ore mined worldwide is converted to ferrochrome and utilised in the production of stainless steel. Consistent with recent years, markets for ferrochrome and chrome ore continue to be driven by the level of Chinese stainless steel production, which is now more than 21 million tonnes per annum and represents 51% of global production.

The increased production of ferrochrome in China has had a positive effect on the demand for chrome ore, and low inventories together with reduced global availability of chrome ore and substitute materials have resulted in prices remaining relatively strong compared to other commodities. Indications are that as the Chinese economy moves towards an increasing consumer-based economy, its requirements for stainless steel will increase further. Prices for chrome ore (LG6 concentrate grade) declined by approximately 12% over the year, to levels of US$180 per tonne.

Exports of chrome ore from South Africa have recovered to the high levels seen in 2013 as UG2-grade material, produced as a by-product by platinum producers, has recovered, following the strike in that sector in 2014. These export volumes were supplemented towards the end of the year due to the closure of ferrochrome furnaces in South Africa, caused by the higher cost of electricity. Assmang’s Chrome Ore division achieved record sales volumes for the year; ore sales on a per-region basis for the current and previous financial years are illustrated as follows:


The contribution to Assore’s headline earnings by Assmang’s Chrome Ore division increased by 43,8% to R92 million (2014: R64 million). R180 million (2014: R241 million) of capital was spent at Dwarsrivier Chrome Mine (Dwarsrivier), mostly on the replacement of mining equipment (R98 million) and shaft development (R40 million). Assore announced the acquisition from ARM of its 50% indirect share of Dwarsrivier (held in Assmang) for a consideration of R450 million on 24 June 2015. The completion of the transaction is subject to certain conditions precedent, the most significant of which is the consent, in terms of the Mineral Resources and Petroleum Development Act, of the Department of Mineral Resources (DMR) for the transfer of the mining right from Assmang to a new entity that will operate Dwarsrivier (the Section 11 transfer) (refer notes 8 and 32 to the consolidated financial statements).

During the year, Rustenburg Minerals sold approximately 137 000 tonnes (2014: 182 000 tonnes) of lumpy and concentrate grades and Zeerust sold approximately 56 000 tonnes (2014: 20 000 tonnes). Development of the two underground shafts at Rustenburg Minerals has been suspended indefinitely, due to assessments indicating their unsustainability in current and expected market conditions (refer note 2 of the financial statements). Subsequent to the end of the financial year, Zeerust has been placed on care and maintenance.


Since 1937, the group has mined a type of pyrophyllite which, for trade purposes, is referred to as Wonderstone. The deposit, which is located outside Ottosdal approximately 300 kilometres west of Johannesburg, is volcanic in origin and displays unique heat and pressure-resistant properties, as well as exhibiting properties useful in filtration applications. The bulk of the material mined is beneficiated and reworked into components for export to the USA, the United Kingdom and the Far East. These components are utilised in various high-tech industrial applications, including the manufacture of synthetic diamonds and consumable products for the welding and electronics industries, and are sold as specialist ceramic products. The most significant market for Wonderstone products is its use in the manufacture of polycrystalline diamond (PCD) cutters for the oil well drilling industry. Over the past year the significant reduction in the oil price has negatively impacted investment in oil/gas exploration projects. Coupled with an oversupply of PCD and diamonds (especially in China) this reduced short-term demand and therefore revenue from traditional Wonderstone customers based abroad. However, there has been growth in demand from local customers for spray dried powders and a shipment of Wonderstone run-of-mine (ROM) material has been sold to PCD manufacturers in China to gain access into this potential market. The sale of manufactured Wonderstone material and ROM material resulted in a modest profit for the year.

Alumina wear-resistant tiles are produced by the Ceramox division of Wonderstone (Ceramox), most of which are supplied to local installers of wear-resistant linings, which have shown significant sales growth over the recent past. Wonderstone, through its division Group Line Projects (Groupline) specifies, selects and installs a range of lining products, including Ceramox alumina tiles, to assist in solving a wide range of industrial wear and flow problems associated with mined commodities. Local market conditions in the past year were difficult and although Ceramox and Groupline achieved budgeted revenue targets, both these divisions recorded losses for the year. The Ceramox division secured increased prices on its specialised manufactured products, which has improved its prospects into 2016. Due to a shortage of its traditional project work, Groupline adopted a turnaround strategy, which includes expanding its footprint in South Africa, with branches established in Rustenburg, the Northern Cape and Richards Bay, which provide more complete maintenance services.

In conjunction with a minority shareholder, Wonderstone has established a company, iCerMax Proprietary Limited (iCerMax), to exploit the properties of Wonderstone’s pyrophyllite to manufacture consistently performing ceramic filters. These can be tailor-made to service a wide range of applications, especially in the harsh African conditions. While these applications can be multi-functional for a variety of mediums (air, gas, liquids or acids), the initial focus is on fuels, oils and hydrocarbons. This business remains in an embryonic phase, which has extended beyond the initial projections, due mostly to subdued local economic growth.

The proportion of sales of Wonderstone’s divisions for the current and previous financial years are illustrated as follows:


Capital expenditure by Wonderstone for the year amounted to R4,6 million (2014: R2,3 million), most of which was spent on mining and machining equipment.

Marketing and shipping

Wholly owned subsidiary Ore & Metal Company Limited is responsible for the marketing and shipping of all the group’s products, including those produced by the three divisions of Assmang. Strong relationships have been established with customers in Europe, North America, South America, Africa, India and the Far East, and products with a market value of approximately R21,1 billion (2014: R27,6 billion) were marketed and distributed in these regions during the year. The company is an established supplier to steel and allied industries worldwide and has operated effectively in these markets for almost 80 years. Commission income is based on the value of sales negotiated during the year, and attributable profit after taxation for the year decreased to R222,9 million (2014: R320,9 million) for the year under review, due mainly to lower selling prices for iron and manganese ores.

Minerais U.S. LLC

The group holds a 51% share in Minerais U.S. LLC (Minerais) which is a limited liability company registered in the state of New Jersey in the United States of America (USA). Minerais is responsible for marketing and sales administration of the group’s products in the USA, in particular manganese alloys, and trades in other commodities related to the steelmaking industry. The continued gradual recovery of the US economy, particularly in the first half of the financial year, has in conjunction with increased rand-translated US dollar profits, resulted in Minerais’ contribution to the group’s attributable profit for the year increasing to R31,2 million (2014: R20,9 million).

Technical and operational management

As technical adviser to Assmang and other group companies, African Mining and Trust Company Limited provides operational management services to the group’s mines and plants. For these services it receives fee income, which is related to turnover in Assmang and the Assore group. Due to the lower selling prices for iron and manganese ore, its attributable net profit after taxation for the year decreased to R109,8 million (2014: R193,7 million).


The group maintains a limited portfolio of listed shares which are selected and held in accordance with long-term investment criteria. In accordance with IFRS, the portfolio is valued in the financial statements at market value. During the year, the market value of this portfolio declined and the group recorded a loss of R93,0 million (2014: R22,2 million loss) on its revaluation (after allowing for capital gains taxation relief). At 30 June 2015, the market value of the portfolio was R233,9 million (2014: R378,0 million), based on a cost of R293,4 million (2014: R293,4 million). Other income includes interest received of R155,3 million (2014: R112,9 million) generated on cash in excess of current requirements which was invested on a short-term basis in the money market. The higher amount of interest received is due to higher average available cash balances and slightly higher rates of interest.