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Operational review and commentary

The performance of the Assore group is largely dependent on global economic growth and the state of the global economy as a whole, 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. Global economic growth, in turn, drives inter alia US dollar prices for commodities and exchange rates, which are the two single most important factors underlying the group’s performance. Refer “Risks and opportunities” for further details on risks and opportunities.

The group

The group’s markets are located predominantly outside of southern Africa. In protecting the interests of all the group’s stakeholders, management strives to ensure that the customer base is developed in a manner that does not expose it to levels of unacceptable risk, principally in its activities to collect cash from the sales it has concluded. Management therefore ensures that the customer base is diversified on a global basis, taking into account regional economic stability and demand within the various economic regions, where acceptable levels of governance are in place. The impact of the factors that influence the volumes of product sold, and the performance of the group on a per-commodity basis, are more fully set out below. 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:

  2012 2011 Increase/
  metric metric (decrease)
  tons ’ 000 tons ’ 000 %
Iron ore 14 753 10 006 47
Manganese ore* 2 905 2 882 1
Manganese alloys* 270 218 24
Charge chrome 174 238 (27)
Chrome ore* 521 373 40

*Excludes intra-group sales to alloy plants.

The contributions of Assmang’s divisions to Assore’s turnover for the current and previous financial year are illustrated as follows:

Iron ore

Assmang’s Khumani Iron Ore Mine ramped up its production for the year to 14 million tons, which enabled additional sales volumes of iron ore. Iron ore sales for the year increased to 14,75 million tons (2011: 10,0 million tons). Continuing demand from China and a recovery of the Japanese steel industry after the March 2011 tsunami supported the growth in sales. An increased off-take from the South African steel industry also helped improve sales from Assmang’s Beeshoek Iron Ore Mine, which increased to 1,4 million tons (2011: 753 000 tons). European steel capacity utilisation has still not recovered to its previous levels and, with the ongoing sovereign debt issues in Europe and, to a lesser extent in the United States, these markets are expected to remain subdued for the short to medium term. Because of limited growth in some of the group’s traditional markets and the growing reliance on China, Assmang’s strategy to enter new markets, including those of India and Turkey, during the year, has now started to bear fruit.

In the past financial year, contract prices for iron ore were largely based on spot price indices, set retrospectively on a quarterly basis. Certain customers have elected to use monthly pricing. Only a small percentage of Assmang’s iron ore was sold on the spot market, as a result of the group’s strategy of building long-term relationships with a predictable and consistent customer base.

Although there was a reduction in the average realised selling price of iron ore, the increase in volume more than compensated for this and iron ore revenue increased by 47,1% to R15,3 billion (2011: R10,4 billion). Iron ore prices decreased by around 7% year-on-year in US dollar terms and, specifically, spot prices for iron ore delivered in China averaged US$160 per ton on a delivered basis, before dropping to around US$135/ton by year-end. The gradual fall in the iron ore price was driven by weaker demand from steel mills in the developed world as well as an increase of iron ore seaborne supply from Australia and Brazil.

The contribution to Assore’s headline earnings by Assmang’s Iron Ore division increased to R2 968 million (2011: R2 326 million). The proportion of iron ore sales on a per-region basis for the current and previous financial year is illustrated as follows:

The economic slowdown over the current calendar year in China, together with the overcapacity in steelmaking added to the price weakness for steel and iron ore. Iron ore prices in the short term are expected to remain under pressure as a lack of buying confidence and negative outlook for the downstream steel sector weighs heavily on spot prices. However, sales volumes for the next financial year are expected to remain at similar levels in line with the group’s current allocation on the Sishen/Saldanha dedicated iron ore rail line.

Capital expenditure during the year in Assmang’s Iron Ore division amounted to R3,3 billion (2011: R3,2 billion). Of this amount R3 billion was spent at the Khumani Iron Ore Mine (Khumani), with R1,3 billion being spent on the Khumani Expansion Project (KEP), designed to produce 16 million tons of ore per annum from July 2012. The KEP has been completed on schedule and within budget. A further R1,2 billion was spent on development of the mine, largely on waste-stripping. As part of the beneficiation optimisation at Khumani, the wet high-intensity magnetic separation (WHIMS) project was approved by Assmang’s board in the previous financial year. The total cost of the project amounts to R1,3 billion, and is expected to be commissioned on time, and within budget by the end of the 2013 financial year.

The iron ore expansion – a success story

Assore, through Assmang, has been mining iron ore at the Beeshoek Mine since 1960 and the first exports were done in 1964 through Durban port. The commissioning of the dedicated iron ore line from Sishen to the new iron ore terminal at Saldanha in 1976 changed the business and by 1979 the first exports of Beeshoek ore on this logistic channel took place.

From then, until the early part of this century, as the capacity on this channel increased, Assmang negotiated increases in rail allocation but it was apparent that Beeshoek had insufficient ore reserves to sustain the higher levels of production. Assmang had title to the mineral rights on the farms Bruce, King and Mokaning on which it undertook extensive exploration. A decision was made in December 2005 to commence with a multi-phase new mine, to be named Khumani, on these properties. Three issues were critical:

  • To secure the new order mining rights;
  • To negotiate with Transnet to secure sufficient rail capacity in each stage of the Sishen-Saldanha corridor expansion to justify the significant capital expenditures necessary for each phase of Khumani’s development; and
  • Through Ore & Metal, to gain market acceptance for the products from the new mine and to secure customers.

New order mining rights were obtained in November 2006 and construction started immediately. By 2008, when Assmang’s allocation had increased from 6 to 8,4 million tons per year, the first tonnages from Khumani were exported. A contract to export 10 million tons per year was signed in 2010 and with the Sishen-Saldanha corridor currently ramping up to 60 million tons per year, Assmang’s rail allocation has increased to 14 million tons per year. The final phase of the KEP (Khumani Expansion Project) has been completed on budget and before schedule.

The impact of this transformation on Assmang’s iron ore business in terms of sales volumes of iron ore has been significant. However, the fact that it coincided with a period of extremely high global prices for iron ore had an even more dramatic effect on Assmang’s iron ore turnover, as illustrated below:

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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 and Machadodorp 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. During the year under review, the two smallest highcarbon ferromanganese furnaces at the Cato Ridge Works became uneconomical to operate and were taken out of operation. Ore-feed for the works is almost exclusively sourced 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.

Demand for manganese ore from China, India and South Korea continued to increase during the year. Despite this increased demand, the world market remained oversupplied for most of the year under review, and as a result, the price of high-grade ore weakened further from US$5,30 per metric ton unit (mtu) to lows of US$4,60 per mtu. Supply from marginal miners reduced at this price level, resulting in a recovery in the price to just above US$5,00 per metric ton unit by year-end. The level of sales volumes of manganese ore was similar to that of the previous year, and sales on a per-region basis for the current and previous financial years are illustrated as follows:

Higher sales volumes were achieved for manganese alloys in the current year, due to additional volumes from the furnaces at Machadodorp recently converted from ferrochrome to ferromanganese production, with total sales volumes amounting to 270 000 tons (2011: 218 000 tons).

Despite stable demand in North America, manganese alloy prices in both North America and Europe weakened further during the year under review. The weakened demand in Europe resulted in production cuts by certain manganese alloy producers, which started to have a positive effect on prices for ferromanganese towards the latter part of the 2011 calendar year. However, the price gains were quickly eroded as supply increased and demand weakened further by the end of the year under review.

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

The contribution to Assore’s headline earnings from the Manganese division declined somewhat to R611 million in the current year (2011: R685 million). Capital expenditure during the year in Assmang’s Manganese division amounted to R886 million (2011: R656 million). R450 million was spent on the mines, mostly on replacement capital items and mobile mining equipment and includes R86 million of the R5,6 billion intended spend on the expansion of the manganese mines, initially from three to four million tons per annum, to be followed by further possible expansionary project work to five million tons per annum. R153 million was spent on the ongoing development of the Nchwaning Manganese Mine. A further R150 million was spent at Cato Ridge Works on environmental and other sustainability projects. The conversion of two chrome furnaces to ferromanganese furnaces at Machadodorp Works continues and it is expected that these will be commissioned in the third and fourth quarters of calendar 2012.

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Chrome ore and charge chrome

Chrome ore is mined at Assmang’s Dwarsrivier Mine near Lydenburg in the Mpumalanga province. The group also mines chrome ore near Rustenburg (Rustenburg Minerals) from established open-cast and underground operations. In addition the group is processing tailings from previous mining operations at Zeerust Chrome Mines Limited (Zeerust), which is located about 70 kilometre north of Zeerust in the North West province.

Rustenburg Minerals is 44% held by a black economic empowerment (BEE) partner, Mampa Investment Holdings (refer “Black economic empowerment status report”). Production from Rustenburg Minerals is supplied mainly to the local market.

The bulk of chrome ore mined worldwide is converted to ferrochrome and utilised in the production of stainless steel. Since the world economic turmoil in 2008, the world production of steel market has grown strongly and continued to grow in 2011 at a rate of 3% year-on-year. The stainless steel market, though, remains split into two geographic areas being Asia and Europe, each with very different dynamics. During the year under review, Chinese stainless steel production was approximately 13,8 million tons, up 11% year-on-year and accounted for approximately 41% of total world stainless steel production. Conversely, both the USA and Europe continue to lag China, with production in the United States reducing by 5,8% and European growth contained at 0,9% year-on-year. Total world production of stainless steel for 2012 is expected to be around 3% higher than 2011, at approximately 34,4 million tons (2011: 33,4-million tons). Chrome ore sales on a per-region basis for the current and previous financial years are illustrated as follows:

Despite reasonable levels of demand for charge chrome during the year under review, prices have been relatively range bound, with South African producers continuing to act as swing producers, operating their furnaces to suit market conditions. This has been exacerbated by the increased cost of electricity, and combined with the Eskom power buyback initiatives early in 2012, production was significantly reduced in the first half of the year. In conjunction with other increased input costs and continued weak selling prices, the increased electricity prices have influenced Assmang’s conversion of two additional ferrochrome furnaces to ferromanganese to be commissioned in the 2013 financial year, whilst the one remaining ferrochrome furnace, Furnace 1, has been taken out of production temporarily.

Assmang’s charge chrome sales decreased by 27% to 174 000 tons for the financial year (2011: 238 000 tons), while chrome ore sales increased by 40% to 521 000 tons (2011: 373 000 tons). The proportion of ferrochrome sales on a per-region basis for the current and previous financial years are illustrated as follows:

Rustenburg Minerals produced and sold approximately 201 000 tons (2011: 179 000 tons) run of mine, lumpy and concentrate grades and Zeerust produced and sold approximately 60 000 tons (2011: 19 000 tons). R39 million has been spent on the development of two underground chromite mines at Rustenburg Minerals, the scheduled commissioning of which is expected to meet their planned production volumes during calendar 2013.

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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, abrasive-resistant and filtration properties. The bulk of the material mined is beneficiated and reworked into finished components for export to the USA, the United Kingdom and the Far East. The 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 ceramic products. In addition, alumina wear-resistant tiles are produced by the Ceramox division of Wonderstone (Ceramox), most of which are supplied to the local tile installation market, which has shown significant sales growth over the past six years.

To date, mining has been undertaken in terms of old order mining right, which with effect from October 2012, has been successfully converted to a new order mining right.

Wonderstone’s turnover for 2012 was R54 million (2011: R48 million), while the profit after tax for the year amounted to R1,8 million (2011: R2,6 million), excluding the impact of the acquisition of Group Line Projects Proprietary Limited (Groupline). The increased turnover and profitability was mainly due to a more favourable sales mix of ceramic product, due to increased demand from the international synthetic diamond industry, resulting in marginally increased selling prices. In addition, demand for Wonderstone powder from the Far East and the United States has also increased.

The demand for Ceramox alumina tiles was depressed in the first half of the year, due to delays in projects locally, brought about by the lack of supply of structural steel in the local market.

Wonderstone acquired Groupline in October 2011, whose business includes specification, selection and installation of a range of lining products, including Ceramox alumina tiles, to assist in solving a range of industrial wear and flow problems. The acquisition of Groupline places Wonderstone in a favourable position to be able to offer wear tiles as well as their installation, in a single competitive offering for wear-resistant lining applications.

Wonderstone, through Groupline, secured major projects in the year under review, including Exxaro’s Grootegeluk Coal Mine expansion project (Phase 1), Assmang’s Khumani Iron Ore Mine and some maintenance work on the Moatize Coal Mine (Phase 1). As a result of a number of local wear tile-supplying and installation companies importing standard dimension tiles (mostly from China), prices for Ceramox’s standard wear tiles have come under pressure, and the sales prices for these tiles have reduced by an average of 15%.

Recent developments in the ceramic products market for Wonderstone are encouraging, with an increase by customers in the demand for synthetic diamond brought about by increased drill rig activity for oil and natural gas. In particular, there is an apparent increased level of demand from the local synthetic diamond sector, which requires both run-of-mine and machined components, while the pursuit of export opportunities for the sale of run-of-mine material to China is at an advanced stage, with promising feedback received on the testing of the product. As a result of increased pressure on prices for standard dimension wear tiles, Ceramox is increasing its focus on engineered wear tiles, and has also established relationships with key customers, including large local and international engineering works, in this respect. Ceramox will also be in a position to supply Groupline with its requirement for wear tiles, for those projects for which Groupline is successful in its tendering, which include the second phases of the Moatize and Exxaro projects. In the event success is achieved with these tenders, the advantages of establishing off site offices will be evaluated. Investigations into, and the formulation of, an appropriate business model to exploit the filtration properties of Wonderstone are currently under way. These products are expected to be used in the bulk filtration of hydrocarbon fuels and oils, amongst other applications. The Wonderstone business has recently relocated its offices to the industrial area of Spartan, which is better suited to all of its activities.

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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 R23,7 billion (2011: R19,1 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 over 70 years. Commission income is based on the value of sales negotiated during the year and, due mainly to increased sales volumes of iron ore throughout the year, trading profit after taxation increased to R255 million (2011: R188 million) for the year under review.

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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. Due to weaker demand for alloys and reduced alloy prices, the contribution by the company to the group’s attributable profit decreased to R6 million (2011: R11 million).

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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 increasing to R148 million (2011: R134 million), also due mostly to the increased selling prices for iron ore across the year.

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The group maintains a portfolio of listed shares which are selected and held in accordance with long-term investment criteria. In order to limit the group’s exposure to its recently incurred debt pursuant to the group’s third empowerment transaction (refer “Black economic empowerment status report”), it disposed of a significant portion of its investment portfolio, and applied the proceeds of R664 million against this debt. The cost of the shares sold was R191 million, and the group realised a profit of R460 million net of capital gains tax on the disposal. In accordance with IFRS, 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 R239 million (2011: R887 million) based on a cost of R167 million (2011: R358 million). Dividends received on the portfolio for the year were R28 million (2011: R38 million).

Other income includes interest received of R183 million (2011: R133 million) generated on cash in excess of current requirements which was invested on a short-term basis in the money market. The increased level of interest received is due to the strong cash generation by Assmang during the financial year, mainly as a result of its increased sales volumes of iron ore.