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Chairman's review

 

In October 2008, the extent of the world economic turmoil became apparent, with demand for carbon and stainless steels plunging, seriously impacting the prices and sales volumes for all of our divisions . . .


I cannot recall a financial year in Assore’s history where the trading conditions in the constituent half-year periods have been so markedly different. Breaking these periods into fiscal quarters further crystallises the results of the group in relation to trading conditions experienced during the year under review.

THE YEAR UNDER REVIEW
Despite the world economic turmoil which ensued in October 2008, the past financial year again produced record earnings for the group, and headline earnings of R3 266 million were 6,8% higher than the previous 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.

In excess of 52% of headline earnings were recorded in the first quarter of the year, with the exceptionally high commodity prices and firm demand seen at the end of the previous year, continuing into the first quarter of the year. In October 2008, the extent of the world economic turmoil became apparent, with demand for carbon and stainless steels plunging, seriously impacting the prices and sales volumes demand for all divisions, except for iron ore, where sales driven mostly by demand from China, remained firm throughout the year, but at lower prices. In the second quarter, the SA rand weakened from an average of R7,79 in the first quarter to R9,39, assisting the group in maintaining high profitability levels, on the back of the consistent iron sales volumes.Trading conditions showed signs of improvement during the fourth quarter, with improving sales volumes in manganese ores and alloys.The SA rand strengthened over the second half of year, averaging R9,03, reducing reported revenues.

The contribution from Assmang’s divisions relative to Assore’s headline earnings for the past year are manganese ores and alloys with 60,1% (2008: 73,6%), iron ore with 33,1% (2008: 14,1%) and chrome ores and alloys with 3,3% (2008: 12,3%). Assore proportionately consolidates the results of Assmang, which reported increased headline earnings of R6,3 billion for the year to June 2009 (2008: R5,5 billion).The impact of the increased iron ore volumes is reflected in these ratios, and further assists the group in being able to generate stable cash flows.

From an operational perspective, the most significant achievement for the year was the completion of the expansion project at Assmang’s Khumani Iron Ore mine to 10 million tons per annum, which was completed on time, within budget and to specification. The board of Assmang has approved a further expansion project that is expected to increase capacity to 16 million tons, following commitment received from Transnet to increase Assmang’s annual export allocation on the Sishen/Saldanha rail corridor to 14 million tons.The balance of the production is to be sold in the local market.

Regretfully, four fatalities occurred at the Assmang operations during the year. Our condolences are extended to their families and friends, and we reiterate our commitment to a culture of safety, and we strive for an environment where no serious safety incidents occur. The Departmental inquiry into the explosion that occurred at furnace 6 at Cato Ridge in February 2008 has commenced, and in the interim,Assmang has set up a trust fund to financially assist the dependants of the employees who were fatally injured in the explosion.

SALES VOLUMES
Sales volumes for the year by commodity were as follows:

     Metric     Metric       
     tons ‘000     tons ‘000      
    

2009  

  2008     % change  
Iron ore   7 409     6 581     13  
Manganese ore*   2 152     3 711     (42) 
Manganese alloys*   117     247     (53) 
Charge chrome   144     275     (48) 
Chrome ore*   256     304     (16) 
* Excludes intragroup sales            

With the exception of iron ore, all sales volumes were significantly lower due to the world economic turmoil that started in the second fiscal quarter.

RESULTS FOR THE YEAR
Assore’s net profit for the year was R3,27 billion, 2,8% up on the previous year, due mainly to Assmang’s increased earnings, which was largely attributable to the strong markets in the first fiscal quarter, and the weaker SA rand in the second quarter.

Turnover decreased marginally by 3,7% to R8,82 billion, and gross profit increased by 7,7%, to R4,83 billion. Headline earnings per share were 13 772 cents, up by 21,2%, mainly as a result of not including the impact of treasury shares held by a wholly owned subsidiary company. The total dividend per share in relation to these earnings was 2 000 cents (2008: 1 250 cents), an increase of 60%.

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

       2009      2008  
       Rm      Rm  
Iron ore division      1 529      2 231  
Manganese division      854      511  
Chrome division       397      158  
Total – Assmang      2 780      2 900  

The major capital expenditure for the year occurred in the iron ore and manganese divisions. A total of R924 million was spent on infrastructural items at the recently commissioned Khumani Iron Ore Mine; R161 million was spent on the ore treatment plant at the Nchwaning Manganese Mine and R63 million at the Dwarsrivier Chrome Ore Mine. Furnace rebuilding and emission reduction projects, totalling R296 million, were undertaken at Cato Ridge Works and at Machadodorp Works. Apart from the expenditure in Assmang, R48 million has been spent on the development of 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 areas surrounding the mining operations.The estimated expenditure to complete this development is R60 million, which will be incurred in the following financial year.

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 previous year for the conversion of the group’s existing mining rights to ‘new order’ mining rights, as envisaged by the Minerals and Petroleum Resources Development Act.

DIVIDENDS
An increased interim dividend of 1 000 cents (2008: 250 cents) per share was declared on 17 February 2009 and paid to shareholders on 16 March 2009.

In line with the results for the year, the board declared an unchanged final dividend of 1 000 cents (2008: 1 000 cents), making a total dividend for the year of 2 000 cents per share (2008: 1 250 cents).The final dividend was paid to shareholders on 21 September 2009 and is not included in the income statement as it was declared after year-end.

OUTLOOK
Assore’s results remain linked to conditions in the global economy. As was cautioned in the results announcement in August, it is still not possible at this stage to predict the extent of a possible recovery in the global economy with sufficient certainty.Trading conditions have shown some signs of improving, however, the current weakness of the US dollar, and the volatility of the SA rand are creating additional uncertainties in predicting earnings and cash flows.

Manganese ore sales are being seriously restricted by insufficient rail and shipping capacity through the terminal at Port Elizabeth. Discussions are being held with the relevant authorities to resolve this problem but there appears to be no short-term solution.

Recent reports of significant increases in the future cost of electricity will necessitate a review of the business models of our alloy production, however, we remain confident that these operations will retain their ability to increase shareholder value.

APPRECIATION
Another record year highlights the persistent dedication and commitment of management and staff, in particular in these challenging circumstances, for which I express my gratitude and thanks. Further, I wish to extend my thanks to the roles played by our customers, suppliers, shareholders and bankers which have again contributed greatly and receives our appreciation.


Desmond Sacco
Chairman
28 October 2009