Assore

Headline earnings increased by 25% to a record high of R6,4 billion in FY19 compared to R5,1 billion in FY18. Assmang's headline earnings increased by 41% to R10,0 billion, with Assore's 50% share in Assmang contributing R5,0 billion towards Assore's headline earnings. In accordance with International Financial Reporting Standards (IFRS), Assmang is classified as a joint venture and accordingly, its financial results are equity accounted. The rest of the group's operations reported headline earnings that were 13% lower than FY18, at R1,4 billion (FY18:R1,6 billion). The contribution to the group's results from Dwarsrivier was R516 million (FY18: R875 million), while fees and interest earned made up most of the balance. Attributable earnings amounted to R5,9 billion, 16% higher than FY18, representing a third consecutive annual record.

The average SA rand/US dollar (ZAR/USD) exchange rate for FY19 was R14,12, 10% weaker than the level that prevailed during FY18. The weaker exchange rate, higher iron ore prices, elevated but steadily declining manganese ore prices and higher sales volumes of manganese ore, resulted in a notable increase in attributable earnings.

Production and sales volumes achieved by the group were as follows:

Strong cash generation in the group resulted in group net cash increasing by 14% to R9,0 billion (FY18: R7,9 billion). A final dividend of R14,00 per share has been declared, bringing the total dividend for FY19 to R24,00 (FY18: R22,00) per share.

World crude steel production grew by 4,5% in the 2018 calendar year (CY18), while Chinese demand for crude steel remained firm due to continued economic stimulus. Production in China is expected to grow by 5,7% in the 2019 calendar year (CY19). China produces more than half of the world's supply of crude steel, and continues to report high levels of crude steel production, reaching almost 89 million tons in May 2019, which represented an all-time monthly record. The circumstances above maintained strong levels of demand for ores, with increased prices for iron ore and stable prices for manganese ore. Sustained, tight environmental controls continue to drive demand for the group's high-grade raw materials.

The trade conflict between the USA and China had a negative impact on consumer confidence and resulted in a lower than expected demand for stainless steel. As a result, prices for stainless steel and subsequently chrome ore prices weakened throughout FY19. This occurred despite an increase in world production of stainless steel for CY18, which increased by 5,4% from the 2017 calendar year (CY17) and which continued at similar levels in the first half of CY19.

Assmang's attributable earnings increased by 29% over FY18 to R9,1 billion (100% basis), driven mostly by increased sales revenue, which was 29% up on FY18 to R35,6 billion. Iron ore delivered earnings of R6,8 billion (FY18: R3,3 billion), an increase of 106%, while those of the manganese division decreased by 39% to R2,3 billion (FY18: R3,8 billion). This was brought about by impairment charges amounting to R1,0 billion relating to the investment in Sakura Ferroalloys (Sakura) (refer "impairment" below).

Capital expenditure in Assmang amounted to R4,4 billion for FY19 (FY18: R3,1 billion). The Iron Ore division spent R2,1 billion, an increase of 18% on FY18, relating mostly to the replacement of mining fleet machinery. The Manganese division's capital expenditure increased by 77% to R2,3 billion (FY18: R1,3 billion), mainly due to R662 million capital spent on the modernisation and optimisation of Gloria Mine as well as a new slimes dam and thickeners for water recovery at the Nchwaning operations. At the end of FY19, approximately 93% of the approved and revised R6,9 billion capital expenditure on the Black Rock Expansion Project was committed or spent and 25% of the approved capital of approximately R2,7 billion for the Gloria Mine modernisation and optimisation was spent.

Iron ore

The increase in attributable profit for FY19 is due to the increase in prices and the weaker ZAR/USD exchange rate over the financial year. The average market price for iron ore increased over FY19 from USD69 per ton (62% iron content, "fines" grade, delivered in China) to USD80 per ton. A tragic tailings dam failure in Brazil, as well as weather disruptions in northern Brazil and Western Australia, resulted in reduced seaborne supply of iron ore. Furthermore, improved levels of demand for steel in China, mainly as a result of economic stimulus measures, changed what was anticipated to be an oversupplied market into an undersupplied market. The strong demand for the group's product, together with an increase of approximately 60% in the average level of the "lumpy" premium, to USD21 for FY19 (FY18: USD13) per ton, contributed to the increase in revenue of 39%.

Manganese ore and alloys

Despite growth in steel production, the manganese ore market was characterised by significant changes in the Chinese ferroalloy industry which saw silico-manganese production increase by 30% in CY18. This was driven by an increase in the unit consumption of silico-manganese due to changes in the Chinese rebar quality steel standards implemented in early 2018, requiring an increase of manganese ore in rebar from 8kg/ton to approximately 11kg/ton. The market continued to witness the decline in Chinese domestic manganese ore production.

Demand for manganese ores remained firm throughout FY19, resulting in stable index prices, despite some weakness in Chinese ferroalloy prices towards the end of FY19.

The FY19 average index price for the high-grade "lumpy" ore (44% manganese content) was USD6,68 per dry metric ton unit (dmtu), delivered (CIF) in China (FY18: USD6,88 per dmtu), while the average medium-grade "lumpy" ore price index (37% manganese content) for FY19 was USD5,55 per dmtu, free on board (FOB) from South Africa (FY18: USD5,59 per dmtu).

The stable prices together with the 8% increase in sales volumes and the weak ZAR/USD exchange rate resulted in the increased earnings from manganese ore. Production volumes decreased by 8% due to the shut at the Gloria Mine for its modernisation and optimisation initiative.

Despite the strong steel production and demand in the United States, due to the tariffs levied on imported steel, the manganese alloy market has remained oversupplied. This resulted in continued price weakness and poor profitability for ferroalloy producers, with pressure on non-integrated producers being exacerbated.

The attributable profit for FY19 decreased by 41% to R516 million (FY18: R875 million), due to lower prices for chrome ore and increased operating costs. The reduced profit was compounded by a labour strike suffered by the mine in March 2019, which accounted for the decrease of 4% in production volumes. The cost management performance was disappointing, with unit costs increasing by 14% over FY18. The oversupply of ferrochrome in the group's main market resulted in a decrease in demand for chrome ore, which saw the average index market price decreasing to USD187 per ton from USD224 in FY18 (44% chrome content material, delivered in China). The weaker ZAR/USD exchange rate and sales volumes of 1,6 million tons (similar to FY18) partially negated the decrease in prices, with revenue decreasing by 4% to R3,6 billion. Capital expenditure amounted to R480 million (FY18: R300 million), mostly on ongoing projects aimed at increasing plant efficiency.

Marketing fees earned by the group increased by 27% over FY18, in line with the increase of 24% in the combined turnover of Assmang and Dwarsrivier. Interest earned on the group's cash resources amounted to R557 million (FY18: R502 million).

FY19 saw several major ferroalloy producers announce production cuts in an attempt to curb losses and accelerate the clearing of the oversupplied ferroalloy market. The uncertain economic environment continued to affect alloy demand in the markets outside China, with elevated input costs and weak alloy prices placing pressure on profit margins which are not expected to recover in the short term. Accordingly, by way of using a discounted cash flow model, management at Sakura have recorded an impairment charge against its property, plant and equipment of Malaysian ringgit (MYR) 338 million, of which Assmang's equity-accounted portion (54,36%) amounts to R625 million. In addition, management at Assmang have assessed Assmang's equity-accounted carrying value of its investment in Sakura, by comparison to its determined fair value (less cost to sell) and have recorded an additional impairment charge in this respect of R388 million. Assore's 50% share of the sum of these charges amounts to R507 million.

During the year, the group disposed of its indirect interest (50%) in Assmang's Machadodorp Works, and its interest in Rustenburg Minerals and Zeerust Chrome Mines which were loss-making. Subsequent to the year-end, Group Line Projects was sold, the impact to the group's results is expected to be immaterial.

The group holds a 31,12% interest in IronRidge Resources Limited (IronRidge), an Australian minerals exploration company listed on London's Alternative Investment Market (AIM). IronRidge has a portfolio of gold, lithium, bauxite, titanium and iron ore prospects in Africa and Australia. During FY19, the activities of IronRidge continued to focus mainly on lithium and gold exploration in Ghana, Chad and Ivory Coast. The equity accounted loss for FY19 amounted to R23 million (FY18: R14 million).

Global growth is expected to slow in the period ahead. The pace of expansion in the global economy witnessed in the past few years has now been affected by geopolitical risks that are weighing on the global commodity markets.

Any abrupt tightening of global financial conditions will reduce expenditure on steel for development needs across the world and hence a decline in demand for steel overall.

China has, in response to the trade tariffs imposed by the United States, ramped up its fiscal and monetary stimulus, embarked on a new round of major infrastructure projects and announced various tax cuts. China's economy expanded by 6,3% in the first half of CY19, and although this was marginally below market forecasts, it is expected to remain at this level for the remainder of the year. This continued growth in China should support prices for the group's products in the near term.

The mining industry in South Africa continues to face a high level of regulatory uncertainty and increased expectations from its various stakeholders. Further to the factors noted above, the results of the group remain significantly exposed to underlying commodity prices for steel-making ingredients and fluctuations in exchange rates.

This outlook and any forward looking statements have not been reviewed and reported on by the group's external auditors.

The board of directors of Assore (the board) takes full responsibility for the preparation of this announcement and for the correctness of the financial information extracted from the underlying financial statements. The financial results for the year under review have been prepared under the supervision of Mr RA Davies, CA(SA) and in accordance with IAS 34 – Interim Financial Reporting and comply with IFRS, the SAICA Financial Reporting Guides as issued by the Accounting Practices Committee, the Financial Pronouncements as issued by Financial Reporting Standards Council, the Listings Requirements of the JSE Limited (JSE) and the Companies Act No 71 of 2008, as amended. The accounting policies applied are consistent with those adopted in the financial year ended 30 June 2018 except for IFRS 9 – Financial instruments and IFRS 15 – Revenue from contracts with customers which the group adopted on 1 July 2018, as described in the results for the half-year ended 31 December 2018 and published on 26 February 2019. The announcement can be obtained on the Assore website: https://www.assore.com/interim-and-final-results/.

Ernst & Young Inc, the group's independent external auditors, have reviewed the condensed consolidated provisional results included in this announcement and their unmodified review report is available for inspection at the registered office of the company. The review was conducted in terms of ISRE 2410 – Review of Interim Financial Information Performed by the Independent Auditor of the Entity.

The auditor's report does not necessarily report on all of the information contained in this announcement. Shareholders are therefore advised that in order to obtain a full understanding of the nature of the auditor's engagement they should obtain a copy of the auditor's report together with the accompanying financial information from the company's registered office.

IFRS 16 was issued in January 2016 and it replaces IAS 17 – Leases and its related interpretations and sets out the principles for the recognition, measurement, presentation and disclosure of leases and requires lessees to account for all leases under a single on-balance sheet model similar to the accounting for finance leases under IAS 17. The group intends to adopt IFRS 16 using the modified retrospective approach, with its application becoming effective from 1 July 2019, with the cumulative impact of its adoption to 30 June 2019 recognised as at 1 July 2019, without restatement of comparative results.

In 2019 a detailed impact assessment and implementation analysis of IFRS 16 was initiated, focusing on reviewing contracts, aggregating data to support the evaluation of the accounting impacts and identifying where key policy decisions were required. The impact of the standard is being considered and is not expected to have a material impact on the group's financial statements.

The operating leases recorded in the group's results for FY19 will under IFRS 16 be classified as a right of use asset. The contracts with suppliers were considered and the agreements have either been classified as short term (less than 12 months), considered as low value assets or the lease payment terms were based on a variable consideration, resulting in no right of use asset requiring recognition.

Shareholders are advised that on 4 September 2019, the board approved final dividend number 125 (the dividend), of 1 400 cents per share (gross) for the year ended 30 June 2019.

In terms of paragraph 11.17 of the Listings Requirements of JSE Limited, shareholders are advised of the following with regard to the declaration:

1. The dividend has been declared from retained earnings
2. The local dividend tax (dividend tax) rate of 20% will apply
3. The net local dividend amount is 1 120 cents per share for shareholders liable to pay the dividend tax
4. The issued ordinary share capital of Assore is 139 607 000 shares, of which 36 459 925 (FY18: 36 445 970) shares are accounted for as treasury shares in terms of IFRS and are therefore excluded from earnings per share calculations
5. Assore's income tax reference number is 9045/018/84/4.

The salient dates are as follows:

On behalf of the board

5 September 2019