BUSINESS OPERATIONS REVIEW
 
  OVERVIEW
  The positive operational results of the five strategic business units (SBUs) reflect the strong drive for people performance and operational excellence.
   
  Very high levels of world steel production, supported by phenomenal growth in Chinese iron ore imports, resulted in strong demand for iron ore. Good domestic demand from the steel, ferroalloy and power utility sectors supported the strong sales of coal and industrial minerals products.
   
 
The heavy minerals business enjoyed good sales of zircon and, during the year, offtake agreements for titanium dioxide slag were finalised. The zinc business remained depressed, with metal prices and treatment charges at record lows, exacerbated by the strength of the rand.
 
   
The safety, health, environmental and quality performance reflects a substantial improvement and the number of fatalities has been halved to four from the previous year’s eight. The goal remains an injury-free environment and the loss of four colleagues is deeply regretted.  
   
Several of our operations have now been accredited with international standards for safety, OSHAS 18001, and environment, ISO 14001, and a programme to have all operations accredited is under way, with completion scheduled for December 2004.  
   
  OPERATIONAL EXCELLENCE
  Achievements: The programme to improve performance through initiatives focused on people, processes and operational excellence brought about a number of excellent results:
 
  • Record iron ore production output of 26,2Mt from Sishen mine
  • Record of 26,1Mt of iron ore railed from Sishen to the Saldanha port
  • The ramp-up of the first furnace at the Ticor SA heavy minerals business is progressing according to schedule
  • Record annual coal sales at the Grootegeluk mine
  • Record annual production of zinc metal of 115 000 tonnes from Zincor
  • Record annual production of zinc concentrate of 91 229 tonnes from the Rosh Pinah mine
  • Increased sales volumes to the value of R429 million
  • Cost containment below inflation
   
  Targets: Challenging targets have been set:
 
  • Increase in sales tonnages of 2% to the value of R426 million in the 2004 financial year
  • A reduction in real production costs of 2% to the value of R123 million in the 2004 financial year
  • Business improvement programmes at Base Metals to realise value of R115 million by the 2005 financial year
   
  IRON ORE
 
 
2003
Y-O-Y
Physical information
000t*
% 
Total production
28 557
+1 
Total sales
29 716
+6 
  Exports
20 946
+5 
  Domestic
8 770
+7 
Capital expenditure (R million)
211
-17 
  * = metric tonnes
Y-O-Y = year-on-year
   
  The iron ore strategic business unit (SBU) is one of the world’s major high-grade lump iron ore producers. It operates two mines in South Africa, Sishen in the Northern Cape and Thabazimbi in Limpopo. Sishen accounts for 4% (21Mt) of global seaborne trade and 85% of local production, while all of Thabazimbi’s production is supplied to Iscor on a cost recovery basis plus a management fee of 3% of such cost. Actual tonnage sold for the year increased by 6% due to high demand and the good performance of the total business logistical chain.
 
   
  During the review period, Sishen and Thabazimbi produced record tonnages of iron ore with Sishen accounting for 92% of the total production. Sishen exported 76% of its production through Saldanha Bay to 34 major steel producers in 12 countries around the world, while 24% was railed to Iscor, Saldanha Steel mill and other domestic consumers.
   
 
 
In April 2003, global iron ore prices increased by 9,0% for fine and 8,9% for lump ore, reflecting the influence of Chinese demand and were fixed for 12 months. China is the most important growth factor in the iron ore market and has indicated a demand for increased quantities of Sishen iron ore. Sishen ore is highly sought after as it improves the quality of the raw material feedstock into furnaces when blended with other ores due to its high iron content and superior physical properties.
 
Sishen continuously focuses on maximising production and distribution volumes. Having implemented sophisticated production management systems and through plant modifications, Sishen is expected to reach 27Mtpa capacity by December 2004. The new up-current classifier plant will add 300 000tpa of fine ore capacity. The utilisation of improved primary feed systems as well as focused measurement of the production process will facilitate a further 700 000tpa capacity. These initiatives will also improve the ore extraction efficiency and the mine’s competitive position.
 
Concurrently, the rail and port infrastructure associated with exports is being upgraded by Transnet. Negotiations between Kumba and Transnet for additional rail line and iron ore export capacity through the port of Saldanha Bay started during the year. A project team will determine the ultimate capacity of the infrastructure before the allocation of capacity can be finalised. Technical studies are under way to evaluate and determine the feasibility of a number of options to increase local iron ore production by up to 8,5Mtpa within five years.
The domestic and other growth opportunities in Australia are discussed in the
Growth Opportunities Review.
   
  RECORD PRODUCTION FROM ONE OF THE WORLD’S MAJOR HIGH-GRADE LUMP IRON ORE PRODUCERS
   
  Cost containment is an ongoing priority at Sishen and various programmes have been launched. Selective mining techniques that will have a positive effect on waste removal have been implemented, and ore gains have already been experienced. Programmes to contain the cost of maintenance, especially the cost of wear and tear and consumption of steel in the crushers as well as wear on the conveyer belts, have been successfully implemented.
   
  Highlights of the review period include a decrease in the lost day injury rate at Thabazimbi from 2,86 to 1,21 and final approval of the Sishen environmental management plan. Sishen also received a golden award from the National Productivity Institute, while its mine sampling laboratory received internationally-recognised ISO 17025 accreditation.
   
 
  Iron ore operations at the Thabazimbi mine.
   
 
CAPITAL EXPENDITURE
 
Actual
Estimate
R million
2003
2004
Sustaining
76
166
Environmental
2
24
Expansion
133
51
Total
211
241
   
  COAL
 
 
 
2003
Y-O-Y
Physical information
000t*
%
Total production
18 012
-1
Total sales
18 000
0
   Eskom
13 051
-1
   Other domestic
3 821
+3
   Exports
1 128
-4
Capital expenditure (R million)
125
+26
  * = metric tonnes
Y-O-Y = year-on-year
   
  The coal SBU operates three collieries in South Africa and is the country’s fifth-largest coal producer. Grootegeluk mine in Limpopo and Leeuwpan in Mpumalanga, are conventional open-pit operations. Tshikondeni, in Limpopo, is an underground mine that supplies its entire production to Iscor at cost plus a management fee of 3% of such cost.
 
   
  During the year, the collieries produced 18Mt of thermal, metallurgical and coking coal with Grootegeluk accounting for 90% of the total production.
   
  Overall, both operational and financial performance were boosted by a continued focus on cost efficiency resulting in an annual average decrease in costs of 1,9% (real) for the past three years. The SBU also focused on maximising throughput to higher margin market segments, such as the metals market, into which record sales were realised.
   
  Production at Grootegeluk was affected by a turbine failure on one of the six units at Matimba, one of Eskom’s major power stations, which persisted for the greater part of the year. The relatively high volumes of thermal coal supplied to this market despite the turbine failure were achieved through improved availability and utilisation of power station supply equipment. A strong focus in improving the efficiencies of a logistical rail bottleneck at Grootegeluk has resulted in a record volume of coal dispatched of some 3,1Mt against a previous record of 2,8Mt.
   
  Leeuwpan recorded a solid performance in terms of operations and cost control despite the negative impact on production, having encountered an unexpected area of devolatilised coal seams during the year.
   
  Tshikondeni’s re-engineering programme has led to the development and implementation of a new mine plan, which is on schedule.
   
  The SBU is strategically positioned in the market to supply coal to Eskom and is the fourth-largest supplier to the utility. The geographical location of Leeuwpan relative to the Majuba and Thutuka power stations which experienced shortages of coal supply and the mine’s ability to supply timeously a product of consistent quality, has resulted in Eskom showing an interest in coal supply from Leeuwpan. As an interim arrangement the mine has started to supply the power station with coal during the last quarter of the financial year.
   
  Total sales to the metals segment were 1,5Mt for the year, which were in line with sales for the previous year. Some 64% of sales prices are US dollar-based and an average increase of 4% in dollar terms was realised during the year. On the remaining 36% of sales that are rand-based, an increase of 8% was realised.
   
  Export volumes of 1,1Mt were in line with the previous year. Average US dollar prices were approximately 9% higher, but rand income was lower due to the stronger exchange rate, higher distribution costs and the cost of export allocation through the Richards Bay Coal Terminal.
   
  A brownfield project planned by the SBU is a second-stage beneficiation project at Grootegeluk where suitable products will be produced for ultimate consumption in the coke market sector.
   
 
CAPITAL EXPENDITURE    
 
Actual
Estimate
R million
2003
2004
Sustaining
96
84
Environmental
8
21
Expansion
21
100
Total
125
205
   
 
    Left: The Grootegeluk mine with the Matimba power station in the distance.
   
  BASE METALS
 
 
2003
Y-O-Y
Physical information
000t*
%
Total production
228
+10
   Zinc concentrate
91
+21
   Zinc metal
115
+10
   Lead concentrate
22
-21
Total sales
   Zinc metal
112
+4
   Domestic
92
-2
   Exports
20
+43
   Lead concentrate
30
+20
Capital expenditure (R million)
73
-19
  * = metric tonnes
Y-O-Y = year-on-year
   
  The base metals SBU comprises the Zincor and Rosh Pinah operations. Rosh Pinah in southern Namibia is an underground lead zinc mine that produced a record of 91 229 tonnes of zinc-containing concentrates. These concentrates account for 37% of Zincor’s annual requirements. Lead-containing concentrates, which amounted to 30 000 tonnes during the year, were exported through Walvis Bay. Increased production resulted primarily from higher feed grades and de-bottlenecking.
   
  The global zinc market remained in oversupply throughout the year, resulting in weak US dollar prices, which traded between $740 and $800 per tonne. During the first half of the year, the SBU was shielded from the effect of a low price by a weaker local currency. The strengthening of the rand resulted in a sharp reduction in the realised rand zinc price to approximately R6 200 per tonne.
   
  Although local zinc metal sales were relatively soft during the year, increased exports resulted in record sales for Zincor while Rosh Pinah achieved higher sales of lead concentrates.
   
  The Zincor zinc refinery has long-term offtake agreements with its major customers, and produced 115 000 tonnes of zinc metal during the year. This capacity will increase as de-bottlenecking activities continue. The record production was achieved through the utilisation of imported concentrates with higher grades and increased plant availability. Zincor is the leading supplier of zinc in east Africa, with well-established markets in Kenya and Tanzania.
   
  In an effort to increase the per capita consumption of zinc in South Africa, the SBU has been instrumental in founding the southern African branch of the International Zinc Association (IZASA). The aim is to promote the use of zinc through various technical and marketing initiatives into the primary industries that consume zinc metal.
   
  ONE OF THE FEW INTEGRATED ZINC MINING AND SMELTING OPERATIONS IN THE WORLD
   
  To protect declining margins resulting from the continued depressed zinc price and the strength of the rand, the SBU has embarked upon a business improvement programme. This cost reduction and revenue enhancement initiative targets an operating profit improvement of some R115 million by June 2005.
   
 
CAPITAL EXPENDITURE    
 
Actual
Estimate
R million
2003
2004
Sustaining
22
19
Environmental
3
2
Expansion
48
106
Total
73
127
   
  The higher capital expenditure in respect of project developments is mainly as a consequence of the expansion of the Hongye refinery in China which is dealt with in the growth opportunities review. 
   
 
      Base metals operations at the ZnERGY plant.
         
  HEAVY MINERALS
 
           
Physical information
Ticor SA
Ticor Ltd1
 
2003
Y-O-Y
2003
Y-O-Y
Total production
000t*
 
%
000t*
%
  Ilmenite
91
+107%
428
-4%
  Zircon
53
+18%
80
+4%
  Rutile
20
+5%
36
+24%
  Low manganese
  pig iron (LMPI)
3
100%
  Leucoxcene
26
+44%
  Synthetic rutile
179
+1%
  Pigment
94
+3%
 
Total sales
  Ilmenite
50
+39%
126
-22%
  Zircon
60
+82%
83
-5%
  Rutile
19
+58%
28
-3%
  Leucoxcene
19
-21%
  Synthetic rutile
81
-13%
  Pigment
81
-9%
   
  1.Tonnages reflect 100% of the production and sales volumes of the Tiwest joint venture in which Ticor Ltd has a 50% interest.
* = metric tonnes
Y-O-Y = year-on-year
   
  Through its strategic investment in Ticor Limited and Ticor SA, the SBU is positioned to become the third largest producer of slag feedstock by 2005, when both furnaces at Ticor SA are at full production.
   
  During the year under review, the SBU had to contend with the continued downturn in the world economy and ongoing downward pressure on titanium feedstock prices. Demand for zircon remained strong, with significant potential in the Chinese market. Sales of zircon and rutile from Ticor SA increased by 82% and 58% year-on-year respectively. Ilmenite prices were negatively affected by the depressed market conditions and competition from Indian producers, although sales for the year were higher. A long-term off-take agreement for ilmenite was concluded early in 2003.
   
  At the Ticor SA operations, most of the crude ilmenite continued to be stockpiled for feedstock to the smelter. The increase in production of the various products was the result of the successful commissioning of the up-front desliming cyclone and increased efficiencies at the primary wet and mineral separation plants.
   
  The first furnace of the smelter was commissioned in March 2003 and its ramp-up programme is on schedule. The construction of the second furnace is more than 95% complete.
   
  Phase 1 of the Ticor SA project, consisting of the Hillendale mine and the mineral separation plant, has reached full production capacity and was completed on schedule and within its budget of R738 million. The first furnace (phase 2 of the project) has also been completed on schedule and within its budget of R916 million. Construction of the second furnace is on schedule and within its budget of R361 million.
   
  The project’s total funding requirements of R3 500 million, which includes the development of the Fairbreeze mine and working capital requirements, are funded by:
   
 
 
R million
Shareholders:
2 200
Kumba
1 300
Ticor Ltd
900
Project finance
loans
1 300
Funding
requirements
3 500
   
  The operations of Ticor Ltd in Australia include a mine at Cooljarloo, a synthetic rutile plant at Chandala, a pigment plant at Kwinana and a cyanide plant at Gladstone. The cyanide plant is 100% owned while the heavy minerals operation consists of the mine, and synthetic rutile and pigment plants which are owned jointly with Kerr McGee. The Tiwest joint venture is one of the few fully integrated mines to pigment producers.
   
  ON TRACK TO BE THE THIRD-LARGEST PRODUCER OF HEAVY MINERALS FEEDSTOCK BY 2005
   
  During the year Ticor Ltd completed the acquisition of Magnetic Minerals Ltd through which it secured additional heavy minerals reserves in Western Australia. This will extend the life of mining operations of Ticor Ltd.
   
  Ticor SA continues to evaluate resources in the Eastern Cape (Centane) and in KwaZulu-Natal (Port Durnford), and the prospect of acquiring prospecting rights in Madagascar (Tulear).
   
  Market consensus is that feedstock demand is expected to grow at 2,6% pa with the main growth in the chloride slag sector, which is anticipated to remain in oversupply until 2005. Ticor SA has concluded long-term off-take agreements for the major portion of its chloride slag production.
   
 
    Ticor SA’s Empangeni operations.
   
  Ticor SA is on schedule to deliver its first consignment of chloride slag towards the second quarter of the 2004 financial year. The first shipment of low manganese pig iron (LMPI) occurred in August 2003.
   
 
CAPITAL EXPENDITURE    
 
Actual
Estimate
R million
2003
2004
Sustaining
28
32
Environmental
–
–
Expansion
923
480
Total
951
512
   
  INDUSTRIAL MINERALS
 
 
2003
Y-O-Y
Physical information
000t*
%
Total dolomite production
1 327
+3
Total dolomite sales
1 321
+1
   Metallurgical
642
+15
   Aggregate
585
-10
   Lime
94
0
 
Total ferrosilicon production
5
0
Total ferrosilicon sales
5
+25
Capital expenditure (R million)
5
+56
* = metric tonnes
Y-O-Y = year-on-year 		   
   
  The SBU comprises the Glen Douglas open-cast mine producing metallurgical dolomite, aggregate and small quantities of agricultural lime; a ferrosilicon plant in Pretoria producing a superior gas-atomised ferrosilicon powder; and a 50% interest in the Bridgetown dolomite mining joint venture in the Western Cape.
   
  The Glen Douglas mine supplies the requirements of the domestic steel industry, in particular the demand for metallurgical dolomite from Iscor, and maintains its market share of some 10% in the aggregate business in southern Gauteng. The operations benefited from positive growth in the steel and construction industry during the year.
   
  The Bridgetown joint venture supplies dolomite to the Saldanha Steel mill.
   
  The ferrosilicon operations are strategically positioned to meet the beneficiation needs of Kumba’s iron ore mines with some 75% of output supplied to the mines and an increased market penetration in the diamond, chrome and export markets.
   
  OPERATIONS BENEFITED FROM POSITIVE GROWTH IN THE STEEL AND CONSTRUCTION INDUSTRY
   
 
    The Glen Douglas dolomite mine situated in Gauteng.