Base metals review

Exxaro’s base metals business encompasses the operations of Rosh Pinah zinc and lead mine in southern Namibia (now 50,04% held), the Zincor zinc refinery in Gauteng, a 22% effective interest in the Chifeng zinc refinery in Inner Mongolia, China and, with effect from 1 November 2008, a 26% interest in Black Mountain Mining (Pty) Limited.

The interest in Black Mountain was acquired for an adjusted consideration of R221 million as fully disclosed in the financial review. The acquisition formed part of the empowerment transaction that led to the creation of Exxaro in November 2006 and has as strategic intent the possible supply of concentrate from the adjacent Gamsberg project to the Zincor refinery.

The record-high price environment in 2006 and 2007 has been followed by significantly lower zinc metal prices due to lower local and international demand. The average zinc price for the year of US$1 874 per tonne was 42% lower than the equivalent average of US$3 231 in 2007. Higher treatment charges only marginally offset the impact of lower prices.

Production of zinc metal at Zincor refinery of 87kt was 14% lower than 2007. This was due to limited power supply and a total plant blackout following a transformer failure that caused major delays and instability throughout the plant in the second half of 2008, as well as the extended shut and rebuild of two roasters in the acid plant.

Zinc metal sales, however, remained in line with 2007 despite a drastic reduction in the second half when the global economic crisis caused a sharp decline in the local market.

Production of zinc concentrate at Rosh Pinah mine of 94kt is in line with 2007 although lower metal content grades were recorded. This was caused by plant stoppages and instability from equipment failures at the crushing and flotation circuits of the plant and failures due to an unstable electricity supply. A capital replacement programme of the flotation circuit is planned for the second half of 2009 while the crushing circuit was fully refurbished in the second half of the review period.

Zinc concentrate railed from Rosh Pinah was 11% lower as problems with the availability of railway wagons led to lower imports of cement into Namibia and subsequent backhaul of concentrate. Lead sales were higher than 2007 due to rescheduled shipments.

The base metals business is expected to remain under pressure in 2009 given continued depressed market conditions and zinc prices.

Working capital management together with cost control and business improvement initiatives will be required to offset interim lower demand and price challenges.

STRATEGIC OBJECTIVES