DIRECTORS’ REPORT
FOR THE YEAR ENDED 31 DECEMBER 2011
DIRECTORS’ REPORT
COMPANY REGISTRATION NUMBER 2005/015852/06
The directors have pleasure in presenting the annual financial statements of Kumba and the group for the year ended 31 December 2011.
NATURE OF BUSINESS
Kumba was incorporated in South Africa on 16 May 2005 and commenced trading in November 2006 following the unbundling of Kumba from Exxaro Resources Limited (previously Kumba Resources Limited). Subsequent to unbundling, Kumba listed on the JSE Limited (JSE) on 20 November 2006 as the only pure play iron ore company on the JSE.
Kumba is a mining group of companies focusing on the exploration, extraction, beneficiation, marketing, shipping and sale of iron ore. Kumba produces iron ore in South Africa at Sishen and Kolomela mines in the Northern Cape Province and at Thabazimbi mine in the Limpopo Province. The Kolomela mine commenced commercial production on 1 December 2011, almost five months ahead of schedule.
The nature of the businesses of the group’s subsidiaries, associates and joint ventures is set out in annexures 1 and 2.
CORPORATE GOVERNANCE
The group subscribes to the Code of Good Corporate Practices and Conduct as contained in the King III report on corporate governance. The board has satisfied itself that Kumba has complied in all material aspects with the code as well as the JSE Listings Requirements throughout the year under review. The corporate governance report is set out in the Integrated Report 2011.
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Board of directors |
FINANCIAL RESULTS
The financial statements is set out fully the financial position, results of operations and cash flows of the group for the financial year ended 31 December 2011. The financial statements have been prepared under the supervision of Martin Poggiolini, CA(SA), acting chief financial officer.
Operating results for the year
Summary of the group’s key financial results for the year ended 31 December:
| Rand million | 2011 | 2010 | % Increase/ (decrease) |
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| Revenue | 48,553 | 38,704 | 25 | |||
| Operating profit | 31,966 | 25,131 | 27 | |||
| Cash generated from operations (excluding mineral royalties paid) | 34,331 | 26,965 | 27 |
The group’s total mining revenue (excluding shipping operations – R2.7 billion in 2011; R2.9 billion in 2010) of R45.8 billion for the year was 28% higher than the R35.8 billion of 2010 due to a weighted average increase of 26% in export prices.
Operating profit increased by 27% from R25.1 billion to R32.0 billion. The group’s operating profit margin increased marginally to 66%. Excluding the margin earned from providing shipping services to customers, the group’s mining operating margin remained stable at 69%. The operating profit achieved was impacted by an increase in operating expenses on the back of the growth in mining volumes across the group and above-inflation cost increases.
The group continued to generate substantial cash from its operations, with R34.3 billion (before the mineral royalty of R1.7 billion) generated during the year, 27% more than the R27.0 billion of 2010. These cash flows were used to pay aggregate dividends of R17.9 billion, taxation of R7.0 billion, Envision phase one of R2.7 billion and mineral royalties of R1.7 billion during 2011.
Attributable and headline earnings for the year were R53.11 and R53.13 per share respectively. Refer to note 20, ‘Per share information’, of the group annual financial statements for an analysis of movements in the group’s basic and headline earnings per share.
Financial position
Summary of the group’s financial position as at 31 December:
| Rand million | 2011 | 2010 | % Increase/ (decrease) |
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| Property, plant and equipment | 20,878 | 15,866 | 32 | |||
| Net working capital (excluding cash and cash equivalents) | 2,845 | 2,924 | (3) | |||
| Net cash | 1,551 | 1,670 | (7) | |||
| Net asset value per share (R) | 49.16 | 44.54 | 10 |
Property, plant and equipment
Capital expenditure of R5.8 billion was incurred. R2.7 billion was invested to maintain operations, mainly on Sishen mine’s fleet expansion programme to mitigate mining and production risks. A further R3.1 billion was incurred to expand operations, mainly on the development of Kolomela mine.
Excellent progress was made at Kolomela mine, which was brought into production ahead of schedule. The plant was successfully commissioned during 2011, delivering production of 1.2Mt during the fourth quarter, bringing total production for 2011 to 1.5Mt. Kolomela mine is on track to produce between 4Mt and 5Mt in 2012 during ramp up, before producing at full design capacity of 9Mtpa in 2013.
Working capital
Net working capital decreased by R79 million from 31 December 2010 to R2.8 billion. This decrease is due to an increase in payables as a result of the employees’ tax on the Envision payout, offset by the growth in the accounts receivable balance on the back of the higher export iron ore prices and an increase in sales volumes in December 2011 relative to December 2010.
Net cash
At 31 December 2011 the group was in a net cash position of R1.6 billion (R1.7 billion net cash at the end of 2010), with R3.2 billion of the total R8.6 billion long-term debt facilities drawn down to finance Kumba’s expansion. The R3.2 billion debt facility is due for repayment in 2012. Kumba was not in breach of any of its covenants during the year. The group had undrawn long-term borrowing and uncommitted short-term facilities at 31 December 2011 of R9.1 billion (2010: R9.3 billion).
ACCOUNTING POLICIES
The group adopted the following amendments to existing standards with effect from 1 January 2011.
IAS 24, Related party disclosures (amendment)
This amendment simplifies the definition of a related party, clarifying its intended meaning and eliminating inconsistencies from the definition and provides a partial exemption from the disclosure requirements for government-related entities. This amendment did not have a significant impact on the reported results for the year ended 31 December 2011.
Annual Improvements Project 2010
The group adopted the amendments to various issued accounting standards issued by the International Accounting Standards Board (IASB) as part of its Annual Improvements Project 2010 that are effective for reporting periods that commenced on 1 January 2011. These amendments have not had an effect on the reported results or the group accounting policies.
SHARE CAPITAL
Authorised capital
The company’s authorised share capital of 500,000,000 shares remained unchanged during the year.
Share movements
| Rand million | 2011 | 2010 | ||
| Balance at beginning of year | 153 | 208 | ||
| Total shares issued for cash consideration | 16 | 74 | ||
| Net movement in treasury shares under employee share incentive schemes | (139) | (129) | ||
| Purchase and treasury shares* | (278) | (191) | ||
| Shares issued to employees | 139 | 62 | ||
| Share capital and share premium | 30 | 153 |
During 2011, as part of the unwind and monetisation of Envision phase one, the company issued 5,377,770 Kumba shares for R2.68 billion and subsequently repurchased 5,230,867 of these Kumba shares for R2.67 billion.
| * | The group acquired 550,781 (2010: 515,241) of its own shares through purchases on the JSE during the year. The total amount paid to acquire the shares was R278 million (2010: R191 million). The shares are held as treasury shares and the purchase consideration has been deducted from equity. |
Unissued shares
The directors are authorised to issue unissued shares until the next annual general meeting. Shareholders will be asked to extend the authority of the directors to control the unissued shares of the company at the forthcoming annual general meeting, up to a maximum of 5% of the issued capital.
DIVIDENDS
An interim dividend of R21.70 per share was paid on 22 August 2011.
A final dividend of R22.50 per share was declared on
7 February 2012
from profits accrued during the financial year ended 31 December 2011.
The total dividend for the year amounted to R44.20 per share.
The estimated total cash flow of the final dividend of R22.50 per share, payable on 19 March 2012, is R7.2 billion for Kumba Iron Ore Limited.
The board of directors is satisfied that, after payment of the final dividend, the group is sufficiently liquid and solvent to support the current operations and to facilitate future development of the business.
SUBSIDIARIES, JOINT VENTURES AND ASSOCIATES
Full particulars of the group’s investment in subsidiaries, associates and joint ventures are set out in annexures 1 and 2.
EQUITY COMPENSATION PLANS
Refer to the detailed Remuneration report, note 22, ‘Equity-settled share-based payment reserve’, and Annexure 3 of the group annual financial statements for a detailed discussion and analysis of movements in the group’s various equity compensation plans available to executive directors and senior employees.
SEGMENT RESULTS
Refer to note 36, ‘Segment reporting’, for a detailed segmental analysis of the group’s operating results for the year ended and financial position as at 31 December 2011.
HOLDING COMPANY AND RELATED PARTIES
Anglo American plc is the group’s ultimate holding company. The interest in the group is held through a 65.22% holding by Anglo South Africa Capital (Pty) Limited (2010: 65.25%).
The analysis of ordinary shareholders is given in the Shareholder analysis and the Breakdown of non-public holdings.
MANAGEMENT BY THIRD PARTIES
None of the businesses of the company or its subsidiaries had, during the financial year, been managed by a third party or a company in which a director had an interest.
CONTINGENT ASSETS AND LIABILITIES
Falémé Project
Kumba initiated arbitration proceedings against La Société des Mines De Fer Du Sénégal Oriental (Miferso) and the Republic of Senegal under the rules of the Arbitration of the International Chamber of Commerce in 2007, in relation to the Falémé Project.
Following the arbitration award rendered in July 2010, a mutually agreed settlement was concluded between the parties. The parties agreed that the precise terms of the settlement agreement will remain confidential. The first settlement was paid by the Republic of Senegal in April 2011. The remaining settlement amount will be recovered in equal instalments from the Republic of Senegal over the remaining four-year period, on which contingent legal costs will be payable. A portion of the amount recovered was committed to social and community development projects to benefit the population of Senegal.
Environmental obligations
During the year Sishen Iron Ore Company (Pty) Limited (SIOC) issued financial guarantees to the Department of Mineral Resources (DMR) to the value of R286 million in respect of the environmental rehabilitation and decommissioning obligations of the group.
There have been no other significant changes in the contingent assets and liabilities disclosed at 31 December 2010.
LEGAL PROCEEDINGS
Sishen Supply Agreement arbitration – ArcelorMittal
SIOC notified ArcelorMittal on 5 February 2010 that it was no longer entitled to receive 6.25Mtpa of iron ore contract mined by SIOC at cost plus 3% from Sishen mine, as a result of the fact that ArcelorMittal had failed to convert its old order mining rights. This contract mining agreement, concluded in 2001, was premised on ArcelorMittal owning an undivided 21.4% interest in the mineral rights of Sishen mine. As a result of ArcelorMittal’s failure to convert its old order mining right, the contract mining agreement automatically lapsed and became inoperative in its entirety as of 1 May 2009.
As a result, a dispute arose between SIOC and ArcelorMittal, which SIOC has referred to arbitration. During 2011, three arbitrators were appointed and May 2012 was set as the date for the arbitration to begin. On 9 December 2011, SIOC and AMSA agreed to postpone the arbitration until the final resolution of the mining right dispute.
SIOC and ArcelorMittal reached an interim pricing arrangement in respect of the supply of iron ore to ArcelorMittal from the Sishen mine. This interim arrangement endured until 31 July 2011. SIOC and ArcelorMittal agreed to an addendum to the interim supply agreement which extended the terms and conditions of the current interim pricing agreement. The new interim pricing agreement, which is on the same terms and conditions as the first interim pricing agreement, commenced on 1 August 2011 and will endure to 31 July 2012.
21.4% undivided share of the Sishen mine mineral rights
After ArcelorMittal failed to convert its old order rights, SIOC applied for the residual 21.4% mining right previously held by ArcelorMittal and its application was accepted by the DMR on 4 May 2009. A competing application for a prospecting right over the same area was also accepted by the DMR. SIOC objected to this acceptance. Notwithstanding this objection, a prospecting right over the 21.4% interest was granted by the DMR to Imperial Crown Trading 289 (Pty) Limited (ICT). SIOC initiated a review application in the North Gauteng High Court on 21 May 2010 in relation to the decision of the DMR to grant a prospecting right to ICT.
The High Court Review, in which SIOC challenged the award of the 21.4% prospecting right over Sishen mine by the DMR to ICT, was presided over by Judge Raymond Zondo in the North Gauteng High Court in Pretoria, South Africa, from 15 – 18 August 2011.
On 21 December 2011, judgment was delivered in the High Court regarding the status of the mining rights at the Sishen mine. The High Court held that, upon the conversion of SIOC’s old order mining right relating to the Sishen mine properties in 2008, SIOC became the exclusive holder of a converted mining right for iron ore and quartzite in respect of the Sishen mine properties. The High Court held further that as a consequence, any decision taken by the DMR after such conversion in 2008 to accept or grant any further rights to iron ore at the Sishen mine properties was void. Finally, the High Court reviewed and set aside the decision of the Minister of Mineral Resources or her delegate to grant a prospecting right to ICT relating to the iron ore as a 21.4% share in respect of the Sishen mine properties. On 3 February 2012, both the DMR and ICT submitted applications for leave to appeal against the High Court judgment. SIOC has noted an application for leave to present a conditional cross appeal, in order to protect its rights. SIOC is awaiting a date for the hearing of the application for leave to appeal.
The High Court order does not affect the interim supply agreement between AMSA and SIOC, which will endure until 31 July 2012.
SIOC will continue to take the necessary steps to protect its shareholders’ interests in this regard.
Lithos Corporation (Pty) Limited
Lithos Corporation (Pty) Limited is claiming USD421 million from Kumba for damages in relation to the Falémé Project in Senegal. Kumba continues to defend the merits of the claim and is of the view, and has been so advised, that the basis of the claim and the quantification thereof is fundamentally flawed. The trial date has been postponed indefinitely. There have been no further developments in this matter.
COMPANY SECRETARY
The company secretary of Kumba is Mr VF Malie. His business and postal addresses are in the corporate information section under the administration.
DIRECTORS
The board of directors in office during the year and at the date of this report are set out in the the Integrated Report 2011. The remuneration and fees of directors as well as the directors’ beneficial interest in Kumba are set out in the detailed Remuneration report.
The board of directors of Kumba announced the following changes in Kumba’s directorate during the year:
| • | The appointment of Mr Litha M Nyhonyha as an independent non-executive director of Kumba on 14 June 2011. |
| • | Mr Vincent P Uren stepped down from his position as chief
financial officer from the end of December 2011. He will continue to be employed by Kumba in 2012 and will work exclusively on the legal issues until 30 June 2012. Mr Martin Poggiolini, the company’s head of finance, was appointed to act in the position of chief financial officer with effect from 31 December 2011. |
| • | Mr Peter B Matlare resigned as an independent non-executive director on 31 March 2012. |
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Board of directors |
PRESCRIBED OFFICERS
The names of the prescribed officers during the year and at the date of this report are set out in the Remuneration report, as are the remuneration and fees of the prescribed officers .
AUDITORS
Deloitte & Touche continued in office as auditors of Kumba and its subsidiaries. At the annual general meeting on 4 May 2012, shareholders will be requested to reappoint Deloitte & Touche as auditors of Kumba for the 2012 financial year.
SPECIAL RESOLUTION
On 6 May 2011, the shareholders of Kumba resolved that the company and any of its subsidiaries may from time to time be authorised to acquire of the company’s own shares subject to the articles of association of the company, the provisions of the South African Companies Act No 71 of 2008 and the Listings Requirements of the JSE.
GOING CONCERN STATEMENT
The directors have reviewed the group’s financial budgets with their
underlying business plans. In light of the current financial position
and existing borrowing facilities, they consider it appropriate that the
group and company annual financial statements be prepared on the
going-concern basis.