Chairman's review

Manganese and iron ore continue to be big profit generators but to attempt any specific predictions regarding the world economy or the outlook for our business at this stage would be foolhardy.

If it does nothing else, a chairman’s annual review is expected to address at least two key issues: a review of the past year and an informed preview of the year ahead. While I eagerly look forward to doing the first, to attempt any specific predictions regarding the world economy or the outlook for our business at this stage would be foolhardy.

The need for caution in this respect is emphasised by the fact that many of the world’s financial experts, who were predicting ‘soft landings’ and ‘a possible minor recession’ a few months ago, are increasingly relating the current state of the world’s economy to conditions in the Great Depression of the 1930s.

Possibly the turmoil currently being experienced is different, but one thing seems prudent and that is to assume that the spin-off of what has already happened, will reverberate around the world for many months to come.

THE YEAR UNDER REVIEW

The past financial year ended 30 June 2008, saw the group achieve exceptional results, exceeding even the high expectations, which I anticipated in my review last year. Assore’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 core products relative to Assore’s headline earnings for the past year are manganese ores and alloys with 73,6%, iron ore with 14,1% and chrome ores and alloys with 12,3%. As longer-term readers will know, the past few years have seen a steadily increasing demand for these minerals and metals, fed largely by a rampant Chinese economy, which spurred sales volumes and prices. Assmang’s earnings, which are proportionately consolidated by Assore, increased Assore’s profit for the year by 315,7% to a record of R3,18 billion (2007: R803,4 million) for the year under review. The manner in which this growth escalated over the course of the year is highlighted by the fact that 78,7% of those earnings were achieved in the second half of the year.

A notable feature of the year was that the rand exchange rate, which has often played a key role in previous years’ performances, was relatively neutral. The average rand/US dollar exchange rate for the 2008 year of R7,27 was less than 1% above the previous year and the euro was barely 1,1% higher at R10,72, and that was more a factor of euro strength against most other major currencies than of rand weakness.

Other positive achievements during the year included the effective commissioning of the Khumani Iron Ore Mine, which commenced production in May 2008, and is on schedule to ramp up exports from 8,4 million to 10 million tons per annum with effect from the first quarter of 2010. The expansion of output by a further six million tons per annum, to 16 million tons at an estimated cost of R7,3 billion, is the subject of a feasibility sales study.

The public enquiry, opened by the Department of Labour in 2007, into the manganese dust exposure levels at the Cato Ridge Works has received some attention in the press in the past months. As the enquiry is still in progress, it would be premature to comment on the outcome other than to say that dust levels are monitored and recorded continuously in the Works to ensure they are maintained within legislated minimum requirements. A medical surveillance programme, which has been reviewed by a team of appropriate medical practioners, has been initiated at the Works and will be implemented at all group operations, during the forthcoming financial year.

Regretfully, Cato Ridge Works suffered seven fatalities during the year in two separate furnace explosions, which occurred in December 2007 and February 2008. On behalf of management and the company, I offer condolences to their relatives, and a trust is currently in the process of being set up to alleviate the financial situations of the families concerned. The damage caused by the incidents led to the shutdown of the entire plant for a short period, which has affected performance of the Manganese Division into the new financial year but, where possible, contractual sales have been met out of stock. Rebuilding of Furnace 6 has commenced and it is scheduled to come on line during October 2008.

SALES VOLUMES

Sales volumes for the year by commodity were as follows:

	Metric	Metric
	tons ’000	tons ’000
	2008	2007	% change
Iron ore	6 581	6 855	(4)
Manganese ore*	3 711	2 327	59
Manganese alloys*	247	251	(2)
Charge chrome	275	232	19
Chrome ore*	304	172	77
* Excludes intragroup sales

RESULTS FOR THE YEAR

Consequent upon the significant increases in sales, volumes and the higher prices achieved by Assmang,Assore’s turnover for the 2008 financial year rose by 113,3% to R9,16 billion while gross profit increased by 301,4% to R4,49 billion. Profit for the year was R3,18billion, representing a 295,6% rise, and headline earnings per share were 11362 cents, up by 317,7%. The total dividend per share in relation to these earnings was 1 250 cents (2007: 350 cents), an increase of 257,14%.

CAPITAL EXPENDITURE

The bulk of the group’s capital expenditure occurs in Assmang and is summarised by division for the year as follows:


	2008	2007
	Rm	Rm
Iron Ore Division	2 231	1 735
Manganese Division	511	297
Chrome Division	158	199
Total – Assmang	2 900	2 231

Of the R2,23 billion spent in the Iron Ore Division, R2,1 billion related to the construction of the Khumani Iron Ore Mine where production has already commenced and which is on schedule and within budget to produce at a rate of 10 million tons per annum, commencing during the first quarter of 2010. The remainder of the capital expenditure related to rebuilding and upgrading the furnaces at Cato Ridge (R102million) and replacement of equipment, expansion of housing facilities and upgrading of environmental projects.

MINING RIGHT CONVERSIONS

New order mining rights have already been obtained for the Khumani Iron Ore Mine and the chrome mine at Rustenburg. Applications were submitted during the year for the conversion of mining rights for the Wonderstone Mine and Assmang’s manganese and chrome mines as well as the Beeshoek Iron Ore Mine. Once these applications are finalised, all the group’s mining rights will be ‘new order rights’ as envisaged by the Minerals and Petroleum Resources Development Act (click here to refer to Black Economic Empowerment).

DISCLOSURE OF SPECIAL SHARE REPURCHASES

At a general meeting convened on 4 September 2008, shareholders approved all resolutions pertinent to the proposed repurchase of shares which were detailed in a circular to shareholders on 12 August 2008 and subsequently updated with the release of results for the financial year, dated 29 August 2008. These shares were acquired with the intention of being on-sold into a second BEE transaction in order to increase ownership of Assore shares by HDSAs from the current 15,3% to 26% as required by the charter by the year 2014.

Current stock market conditions, both locally and internationally, arerendering it extremely difficult to complete the envisaged transaction to take Assore’s empowerment to 26% in the short term. However, the group has the necessary cash flow to finance thecost of the preference shares which were issued on 15September 2008, which at current rates amounts to approximately R27 million per month. In all likelihood the group will be in a position to commence redeeming these shares out of cash resources during theforthcoming year.

DIVIDENDS

An increased interim dividend of 250 cents (2007: 150 cents) per share was declared on 18 February 2008 and paid to shareholders on
17 March 2008.

In line with the results for the year the board declared an increased final dividend of 1 000 cents (2007: 200 cents), making a total dividend for the year of 1 250 cents per share (2007: 350 cents). The final dividend will have been paid to shareholders on 22 September 2008 and is not included in the income statement as it was declared after year-end.

OUTLOOK

As I indicated at the beginning of this review, making any specific comments regarding the outlook for the next financial year in the prevailing economic conditions would be little more than a hazardous guess. Assore’s fundamental position is one of strength and remains so, going ahead, but it has to be borne in mind that our products are largely exported to countries whose demand for them could be significantly affected by the financial health of those countries, or the countries to which they sell after refining and processing.

Many of our sales are contractual – the iron ore on annual terms, manganese ore between three and six months, while alloy contracts are fixed quarterly. Had the world economic ‘meltdown’ not occurred, it is reasonable to say that we would have been looking at another good year.
I cannot be more specific than that.

Of potentially favourable consideration is the fact that the bulk of Assmang sales are paid in foreign currencies, mainly US dollars and that a weaker rand – already a fact at the time of writing – has a significantly beneficial effect on income, as it has done regularly in recent years.

APPRECIATION

Another record year highlights the persistent dedication and commitment of management and staff, for which I thank them, particularly since operating at high tempo places its own strains on resources. The part played by our customers, suppliers, shareholders and bankers has again contributed greatly and receives our appreciation.

Desmond Sacco

Chairman

29 October 2008