REVIEW OF OPERATIONS
IRON ORE
Iron ore sales for the year reached a new record
level of 9,8 million tons (2009: 7,4 million tons), due
mainly to the continued demand from China and a
strong recovery in the Japanese and South Korean
steel industry. European and South African steel
capacity utilisation has not completely recovered
to the 2008 highs and these markets could remain
subdued in the short term. Despite the global
market uncertainty, the market fundamentals for
seaborne iron ore trade remain strong and spot
prices have recovered well over the past year.
The past financial year finally saw the demise of
the annual “benchmark price”, with a strong move
towards spot pricing, although pricing mechanisms
continue to evolve. Currently, Assmang’s prices are
negotiated quarterly. However, other producers are
using different periods, spot prices and a blend of
fixed and index pricing. The new pricing mechanism
follows the supply-and-demand dynamics of iron
ore more accurately and to some extent mitigates
the high volatility experienced previously. However,
steelmakers are wary of the uncertainty that this has
caused in their raw material costs as many of their
customers are accustomed to annual contracts, and
are considering the use of other mechanisms in
order to obtain pricing stability.
Post the end of the industry’s fiscal year (31 March),
when annual prices were still in place, prices for the
first quarter, effective from 1 April 2010, increased
substantially, with increases in excess of 95% for
both lumpy and fine grades. Prices for the new
financial year could remain at high levels, subject to
Chinese steel production being maintained and the
continued recovery of the developed economies.
Sales volume for next year is expected to increase
modestly in line with a better utilisation rate on
the iron ore rail line between the mine and the
Saldanha Bay port. Efficient utilisation of the rail
capacity for the transportation of iron ore to the
port remains the immediate challenge in the short
term.
Despite the prices increasing significantly in the last
financial quarter, the increased sales volumes did
not compensate fully for lower average prices for
the financial year, and the contribution to Assore’s
headline earnings by Assmang’s Iron Ore Division
amounted to R718 million (2009: R1 080 million).
Capital expenditure for the year in the Iron Ore
Division was R2,3 billion (2009: R2,2 billion) of
which R2,1 billion was spent on infrastructural items
for the expansion project at the Khumani Iron Ore
Mine. This project will increase the mine’s sales
capacity from 10 million tons to approximately
16 million tons of iron ore per annum, and is
expected to be completed by the scheduled date
of July 2012 and within budget.
MANGANESE ORE AND ALLOYS
Manganese ore is mined by Assmang in the Black
Rock area of the Northern Cape province and
manganese alloys are produced at the Cato Ridge
Works in KwaZulu-Natal (the Works). Cato
Ridge Alloys, a joint venture between Assmang,
Mizushima Ferroalloys Company Limited and
Sumitomo Corporation Limited (both of Japan),
produces refined ferromanganese by introducing
oxygen through a lance into a converter which
contains molten metal supplied by the Works,
producing product with a reduced carbon content.
Ore-feed for the Works is sourced from Assmang’s
manganese mines and the bulk of both ore and
alloy production is exported. Sales tonnages of
manganese ore and alloy for the year were as
follows:
Metric |
Metric |
|
tons ’000 |
tons ’000 |
|
2010 |
2009 |
|
| Manganese ore* | 3 095 |
2 152 |
| Manganese alloys* | 238 |
177 |
| *Excludes intragroup sales |
Manganese alloys are used in the production of steel. Demand for both manganese ore and alloy picked up during the year. For manganese ore the main importers were China and Asia. Imports of manganese ore into China were at record levels during the year and for the 12-month period under review amounted to 12,6 million tons. Prices recovered substantially from the very low levels that were reached at the bottom of the market in 2008, peaking at US$9,00 per manganese unit. However, towards the end of the period it was apparent that there was a substantial inventory build-up in China and there was reluctance from some buyers to commit to purchases. The availability of stock will negatively affect pricing going forward and both the large major western producers, and the new producers in countries such as Malaysia and Indonesia may have to adjust production levels, particularly if Chinese steel production continues to reduce.
Manganese alloy pricing reached its lowest point just before the end of the last financial year but recovered moderately during the period under review. As was the case with manganese ores, prices softened towards the end of the financial year, due to overproduction by some of the major alloy producers and a moderate decline in steel production. A structural change has occurred in the manganese alloys market, with China ceding its place as the largest global exporter to Ukraine, with the resultant removal of a substantial volume from the market. This decrease in China’s export volume comes on the back of power cost increases, reduced availability of power, changes to environmental legislation, declining domestic ore grades and a 20% Chinese export duty. In 2008, Chinese manganese alloy exports were over 1,1 million tons, but in 2009 were less than 200 000 tons. This trend has continued into 2010 and the only alloy which is being exported at similar levels to 2008 is medium carbon ferromanganese.
The lower prices for financial year 2010 together with the stronger rand, resulted in the contribution to the headline earnings of Assore from this division falling to R739 million (2009: R1 963 million). Capex spent during the year for the Manganese Division was R743 million (2009: R854 million) of which R150 million was spent on rebuilding ferromanganese furnaces, with a further R46 million spent on the conversion of a ferrochrome furnace to a ferromanganese furnace at the Machadodorp Works.
CHROME ORE AND CHARGE CHROME
Chrome ore is mined at Assmang’s Dwarsrivier Mine near Lydenburg in Mpumalanga province and production is used mainly to supply Assmang’s Ferrochrome Works at Machadodorp. The group also mines chrome ore near Rustenburg (Rustenburg Minerals Development Company (Proprietary) Limited) (RMDC) from established open-cast operations and a recently opened underground shaft, with a second underground shaft being commissioned by December 2011.
RMDC is 44% held by a black economic empowerment (BEE) partner (refer “Black economic empowerment” report). Production from RMDC is supplied mainly to the local market. Reprocessing of chromite tailings has commenced at Zeerust Chrome Mines Limited (Zeerust) north of Groot-Marico in the North West province, and limited open-cast operations on the chromite seams are anticipated to commence during the last calendar quarter of 2010.
The bulk of chrome ore mined worldwide is converted to ferrochrome and utilised in the production of stainless steel. Since the economic turmoil in 2008, this market has experienced a slow recovery, with production of stainless steel in 2009 approximately 4% lower than calendar 2008. The current stainless steel market is split into two geographic areas, each with very different dynamics. During the year under review, Chinese production was more than 10 million tons, making it by far the largest stainless steel producer in the world. On the other hand, both the USA and Europe, the previous core stainless markets, are still substantially below 2008 levels with little sign of any recovery, which will be dependent on economic growth, and in particular construction growth in these areas. Total world production for 2010 is expected to be 20% above that of 2009, at approximately 30,0 million tons (2009: 25,3 million tons).
Demand for ferrochrome was consequently much stronger than was anticipated a year ago and production restraint was exhibited by most South African producers. This resulted in pricing recovering strongly, with the European contract price recovered by more than 50% from its low point in 2008. However, with a cutback in stainless production in Asia towards the end of the period and little sign of improvement in the USA and Europe, there are concerns that there may be pressure on pricing going forward.
Assmang’s charge chrome sales increased by 48% to 152 000 tons for the financial year (2009: 103 000 tons), while chrome ore sales increased by approximately 6% to 272 000 tons (2009: 256 000 tons).
RMDC produced and sold approximately 216 000 tons (2009: 338 000 tons) run of mine, lumpy and concentrate, and Zeerust produced and sold approximately 4 000 tons concentrate in the financial year.
WONDERSTONE
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 of volcanic origin and displays unique corrosion, heat and abrasive resistant properties. The bulk of the material mined is beneficiated and reworked into finished components for export to the USA and the United Kingdom. The components are utilised in various hi-tech industrial applications, including the manufacture of synthetic diamonds and consumable products for the welding and electronics industries.
In addition, wear-resistant tiles are produced and are gaining acceptance in the chute-lining market of the mining industry.
In response to increasing market demand during the second half of the year, the company supplied customers with a range of high-precision components for use directly in their manufacturing processes. The sales volumes were also reduced and during the year, 745 000 (2009: 835 000) components were produced and sold.
US dollar prices for natural pyrophyllite remained unchanged during the year but failed to stimulate demand which had been depressed by the economic recession. The recession heavily impacted sales volumes during the first half of the year, however, these improved during the second half of the year. Sales volumes for the year reduced to 347 tons (2009: 444 tons).
In addition, Wonderstone is produced in powder form to customer-specific particle size distribution requirements. This specified powder can be supplied in natural or calcined form. Customers for these products benefit from the high degree of technical support with regard to both the products performance characteristics and its technical applications.
In the wear and corrosion resistance division, Ceramox, wear-resistant tiles and pre-engineered products (eg pump plungers and laboratory ware) are produced. The market for wear and corrosion-resistant products is diverse and includes coal-fired power generation, abrasive materials handling, minerals processing and iron and steel manufacturing. Turnover has increased by 30,9% in the past year to R19 million due to increased investment in South Africa’s coal mining industry by Eskom to secure supply for the new power generation network being built.
Total turnover for the year reduced to R36 million (2009: R39 million) due to pricing pressure and reduced sales volumes. The strong rand also negatively impacted the company’s earnings and, with increasing mining and manufacturing costs, the company’s profitability shrunk, eroding previously existing levels of profitability, and accordingly reported a net loss of R4,3 million (2009: R6,8 million profit).
Capital expenditure for the year amounted to R0,5 million (2009: R13,6 million), most of which was spent on additional plant for the manufacturing operations.
XERTECH
Due to aggressive competition in the market from the Far East, it has been decided to exit the synthetic diamond market and accordingly the assets of Xertech have been written down by R16,7 million in the current year (refer page).
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, India and the Far East, and products with a market value of approximately R11,9 billion (2009: R14,2 billion) were marketed and distributed in these regions during the year. The company is an established supplier to the steel and allied industries worldwide and has operated effectively in these markets for over 70 years. Commission income is based on the value of sales negotiated during the year and, due mainly to the depressed market conditions for Assmang’s products in the first half of the year, trading profit after taxation decreased to R127 million (2009: R170 million) for the year under review.
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 and chrome alloys, and trades in other commodities related to the steelmaking industry. The contribution by the company to the group’s attributable profit amounted to R17 million, representing a significant turnaround from the loss of R13 million incurred in 2009, mainly due to improved trade in the second half of the financial year.
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 based on turnover and commodity prices, with trading net profit after taxation for the year declining to R82 million (2009: R121 million), due to the depressed market conditions in the first half of the year.
INVESTMENTS
The group maintains a portfolio of listed shares which are selected and held in accordance with long-term investment criteria. Additions were made to the portfolio during the year at a cost of R21 million (2009: R118 million). The portfolio is valued in the financial statements at market value and the difference between cost and market value is transferred to other reserves net of any capital gains tax which would arise on eventual disposal. At year-end the market value of the portfolio was R603 million (2009: R415 million) based on a cost of R316 million (2009: R296 million). Dividends received on the portfolio for the year were R19 million (2009: R20 million).
Other income includes interest received of R189 million (2009: R367 million) generated from cash in excess of current requirements which was invested on a short-term basis in the money market. Lower interest rates and cash reserves, brought about mainly by the redemption of R500 million of preference shares, resulting in the 49% reduction of interest income referred to above.
