Kumba Annual Report 2003

It is with great pleasure that I present the chairman’s statement for Kumba in this, the second annual report since the group’s listing in November 2001.

Despite the tough market conditions which prevailed during the year under review, Kumba has delivered solid results. I am pleased that the board was able to declare a dividend of 60 SA cents per share. I believe these results are testimony to the ability of management to focus on the business and implement value-enhancing initiatives at a time when several macro and other issues potentially threatened that focus.

Legislation and regulation introduced during the year have redefined the industry, specifically the Mineral and Petroleum Resources Development Act (Minerals Act), with its attendant mining charter and scorecard, and the proposed Mineral and Petroleum Royalty Bill (Royalties Bill).

Kumba supports the underlying principles and objectives of the Minerals Act and the group’s commitment to empowerment is clear and focused. Our empowerment partners, Tiso Kgalagadi Consortium, came on board shortly after Kumba listed, well ahead of the current legislation. This has been followed by the formalisation of the company’s relationship with Eyesizwe Coal, a black-owned company, and the joint venture in the Kalbasfontein coal mining project. Our empowerment strategy strives to be integrated, balanced and takes a long-term view so that we can effectively measure our progress towards sustainable broad-based socio-economic empowerment. Opportunities for furthering empowerment are being pursued across the group, in all aspects of our business. In terms of the mining charter scorecard, I am pleased to report that substantial progress has been made to fulfil all the requirements of the charter.

The New Africa Mining Fund was launched in October 2002 as a private equity investment fund aimed at developing new sustainable junior mining opportunities on the African continent. An initiative of the mining industry and government, the fund facilitates access to capital for junior mining entrepreneurs, while providing investors with the prospect of competitive returns on the funds invested. Kumba pledged R20 million towards the fund, which now exceeds R560 million, to be drawn down over a six-year period.

On the proposed Royalties Bill, Kumba has been an active participant in the interaction with government and other interested parties to seek the most equitable form of royalty payments. However, Kumba believes it is more appropriate for royalties to be based on profit as opposed to revenue. Equally, the possibility of future variations needs to be clarified to instil long-term confidence in the process. It would be desirable that developing rural communities associated with the projects or resources from which it originates, benefit most from the royalty regime. This can be achieved by permitting investments made in “labour-sending” communities and those around mining operations, to be directly offset against royalty payments.

RESULTS AND PROGRESS REFLECT THE TALENT AND COMMITMENT OF KUMBA’S PEOPLE AT ALL LEVELS

Moving to currency issues – given that the bulk of Kumba’s revenue is US dollar-denominated, the iron ore strategic business unit in particular, and the group in general, are highly geared to the exchange rate. Most importantly, Kumba, the local minerals industry, and South Africa in general will benefit from a stable rand which underpins strong export growth and supports local expansion.

At the same time as the unprecedented rand strength, Kumba and the mining industry have also had to contend with non-negotiable cost increases, especially those emanating from parastatals. An example is the large increases in Spoornet’s general freight rail tariffs on certain domestic routes which affected our coal exports. Such input cost increases are daunting challenges to management at the operations at a time when cost reductions and increased productivity are the only controllable drivers to maintaining profitability.

The sharp increase in the oil price as a result of the ongoing conflict in Iraq has also had a major impact on Kumba’s performance, as the group is one of the country’s largest users of petroleum-related products – at a cost of some R300 million per year. The slower than anticipated return to normal production levels in Iraq since the end of the war may result in oil prices remaining high for some time.

As the largest iron ore operator in the Northern Cape, Kumba’s position on rationalisation in that industry is clear:

to capitalise on the considerable release of value in that area
to ensure optimal exploitation of the resource base in a sustainable manner
to realise the maximum synergies that exist between current regional assets and achieve the most effective use of the logistical infrastructure. In this regard, the resolve to enhance the transport capacity of the Sishen-Saldanha rail and the Saldanha port storage and loading infrastructure as well as the potential use of the Port of Ngqura (Coega) for iron ore exports, are of paramount importance.

At Richards Bay, the South Dunes Coal Terminal Company, in which Kumba is a major participant, negotiated an agreement with Richards Bay Coal Terminal to take up 6,5Mtpa from the terminal’s 10,0Mtpa Phase V coal export expansion project at the port. This breakthrough, largely facilitated by Kumba, will create the opportunity for access of more than 3Mtpa to export markets for empowerment-related coal production. Unfortunately, the go-ahead for the Phase V expansion project is currently being delayed by the dispute between the SA Ports Authority and Richards Bay Coal Terminal on the allocation of a small amount of current throughput capacity to black economic empowerment companies. Ironically, the unintended consequence of this impasse has led to an escalation in capital costs and could potentially jeopardise the viability of the entire project, to the detriment of the very people it was designed to benefit.

Anglo American Plc (Anglo) increased its shareholding in Kumba to 20,1% and acquired an option on a further 10,01%. For most of the year, this has been the subject of a highly-publicised dispute between Anglo and Industrial Development Corporation while under the consideration of the competition authorities.

The ruling of the Competition Tribunal has now provided greater clarity for the group. It is important that we continue to follow the consistent approach we adopted throughout the process, namely that the responsibility of the Kumba board and management is to consider the best interests of the group at all times. It is appropriate that I take this opportunity to commend board members and management on their ability to remain focused during this period to continue to run robust operations delivering maximum benefit from the group’s assets for all stakeholders.

DEVELOPMENTS IN AFRICA

The New Partnership for Africa’s Development (Nepad) heralds a new chapter in the emerging era of African self-determination. Nepad’s peer review mechanism will assist to ensure that a more attractive environment is created for investment in African economies. These developments are fully supported by Kumba. Kumba is pursuing business interests in Africa beyond South Africa and Namibia, which include the Faléme iron ore project in Senegal, the Kipushi zinc/copper and Kamoto copper/cobalt projects in the Democratic Republic of Congo, and a mineral sands development at Tulear in south-western Madagascar.

CONSULTATIVE HIV/AIDS POLICY IN PLACE, ANTI-RETROVIRAL THERAPY BEING PILOTED AT TWO SITES

SUSTAINABILITY REPORTING

This is Kumba’s first integrated report, covering the financial, environmental and social performance of the group. It demonstrates that consideration for people, the environment and the economy is closely tied to Kumba’s financial sustainability. We firmly believe that being a sustainable organisation makes business sense for the financial bottom line. In several areas of our non-financial reporting, targets have been set. In other areas, they are still being established. However, it is a process to which we are committed and a promise we make to all our stakeholders – that we care about minimising the impact of our operations and optimising the development of all the people around us.

HIV/AIDS

With the support of Kumba’s recognised unions, the board approved the group’s HIV/AIDS policy and the introduction of pilot anti-retroviral therapy programmes at the Grootegeluk colliery and Zincor refinery. If successful, the therapy will be implemented at remaining operations.

DIRECTORATE

Hans Smith retired as non-executive chairman and member of the Kumba board and I was appointed as non-executive chairman in November 2002. Hans was a key figure in Kumba’s formation and an enthusiastic supporter of Kumba’s proactive and dynamic approach. On behalf of the board, I thank him most sincerely for the wise counsel and support he gave Kumba in its critically important first period as an independent entity.

Kumba is proud of its board independence, with six of ten non-executive board members being independent.

APPRECIATION

Kumba has made great strides for a company in its infancy, progress that reflects the talent and commitment of its people at all levels. Particularly, I thank my fellow directors whose constructive views are so important in guiding the group, and the dedicated chairmen of the board committees. In Dr Fauconnier, Kumba is privileged to have a chief executive whose leadership is inspirational and who heads a management team that is arguably one of the best in the industry.

Since listing, we have established close relationships with senior members of relevant government departments and industry bodies, relationships that we value greatly and will continue to nurture.

PROSPECTS

It is my responsibility to help chart a course for this group that not only ensures superior shareholder returns, but is also beneficial to all other stakeholders, including the employees of Kumba.

We expect another year of solid performance in our underlying operations. The strength of the rand will pose greater challenges for some commodities than others, but we are confident that our people will continue to rise to these challenges. The initial success of our sizeable heavy minerals project also inspires confidence and bodes well for the future.

Investors have bought into Kumba because they perceive value in the company. We will continue to strive to create the environment which will deliver that value in the best interests of the company, its shareholders and its people.

Dawn Marole

Chairman

10 September 2003

Back to top


	CHAIRMAN’S STATEMENT



	It is with great pleasure that I present the chairman’s statement for Kumba in this, the second annual report since the group’s listing in November 2001.

	Despite the tough market conditions which prevailed during the year under review, Kumba has delivered solid results. I am pleased that the board was able to declare a dividend of 60 SA cents per share. I believe these results are testimony to the ability of management to focus on the business and implement value-enhancing initiatives at a time when several macro and other issues potentially threatened that focus.

	Legislation and regulation introduced during the year have redefined the industry, specifically the Mineral and Petroleum Resources Development Act (Minerals Act), with its attendant mining charter and scorecard, and the proposed Mineral and Petroleum Royalty Bill (Royalties Bill).

	Kumba supports the underlying principles and objectives of the Minerals Act and the group’s commitment to empowerment is clear and focused. Our empowerment partners, Tiso Kgalagadi Consortium, came on board shortly after Kumba listed, well ahead of the current legislation. This has been followed by the formalisation of the company’s relationship with Eyesizwe Coal, a black-owned company, and the joint venture in the Kalbasfontein coal mining project. Our empowerment strategy strives to be integrated, balanced and takes a long-term view so that we can effectively measure our progress towards sustainable broad-based socio-economic empowerment. Opportunities for furthering empowerment are being pursued across the group, in all aspects of our business. In terms of the mining charter scorecard, I am pleased to report that substantial progress has been made to fulfil all the requirements of the charter.

	The New Africa Mining Fund was launched in October 2002 as a private equity investment fund aimed at developing new sustainable junior mining opportunities on the African continent. An initiative of the mining industry and government, the fund facilitates access to capital for junior mining entrepreneurs, while providing investors with the prospect of competitive returns on the funds invested. Kumba pledged R20 million towards the fund, which now exceeds R560 million, to be drawn down over a six-year period. On the proposed Royalties Bill, Kumba has been an active participant in the interaction with government and other interested parties to seek the most equitable form of royalty payments. However, Kumba believes it is more appropriate for royalties to be based on profit as opposed to revenue. Equally, the possibility of future variations needs to be clarified to instil long-term confidence in the process. It would be desirable that developing rural communities associated with the projects or resources from which it originates, benefit most from the royalty regime. This can be achieved by permitting investments made in “labour-sending” communities and those around mining operations, to be directly offset against royalty payments.


	RESULTS AND PROGRESS REFLECT THE TALENT AND COMMITMENT OF KUMBA’S PEOPLE AT ALL LEVELS

	Moving to currency issues – given that the bulk of Kumba’s revenue is US dollar-denominated, the iron ore strategic business unit in particular, and the group in general, are highly geared to the exchange rate. Most importantly, Kumba, the local minerals industry, and South Africa in general will benefit from a stable rand which underpins strong export growth and supports local expansion.

	At the same time as the unprecedented rand strength, Kumba and the mining industry have also had to contend with non-negotiable cost increases, especially those emanating from parastatals. An example is the large increases in Spoornet’s general freight rail tariffs on certain domestic routes which affected our coal exports. Such input cost increases are daunting challenges to management at the operations at a time when cost reductions and increased productivity are the only controllable drivers to maintaining profitability.

	The sharp increase in the oil price as a result of the ongoing conflict in Iraq has also had a major impact on Kumba’s performance, as the group is one of the country’s largest users of petroleum-related products – at a cost of some R300 million per year. The slower than anticipated return to normal production levels in Iraq since the end of the war may result in oil prices remaining high for some time.

	As the largest iron ore operator in the Northern Cape, Kumba’s position on rationalisation in that industry is clear:
	to capitalise on the considerable release of value in that area to ensure optimal exploitation of the resource base in a sustainable manner to realise the maximum synergies that exist between current regional assets and achieve the most effective use of the logistical infrastructure. In this regard, the resolve to enhance the transport capacity of the Sishen-Saldanha rail and the Saldanha port storage and loading infrastructure as well as the potential use of the Port of Ngqura (Coega) for iron ore exports, are of paramount importance.

	At Richards Bay, the South Dunes Coal Terminal Company, in which Kumba is a major participant, negotiated an agreement with Richards Bay Coal Terminal to take up 6,5Mtpa from the terminal’s 10,0Mtpa Phase V coal export expansion project at the port. This breakthrough, largely facilitated by Kumba, will create the opportunity for access of more than 3Mtpa to export markets for empowerment-related coal production. Unfortunately, the go-ahead for the Phase V expansion project is currently being delayed by the dispute between the SA Ports Authority and Richards Bay Coal Terminal on the allocation of a small amount of current throughput capacity to black economic empowerment companies. Ironically, the unintended consequence of this impasse has led to an escalation in capital costs and could potentially jeopardise the viability of the entire project, to the detriment of the very people it was designed to benefit.

	Anglo American Plc (Anglo) increased its shareholding in Kumba to 20,1% and acquired an option on a further 10,01%. For most of the year, this has been the subject of a highly-publicised dispute between Anglo and Industrial Development Corporation while under the consideration of the competition authorities.

	The ruling of the Competition Tribunal has now provided greater clarity for the group. It is important that we continue to follow the consistent approach we adopted throughout the process, namely that the responsibility of the Kumba board and management is to consider the best interests of the group at all times. It is appropriate that I take this opportunity to commend board members and management on their ability to remain focused during this period to continue to run robust operations delivering maximum benefit from the group’s assets for all stakeholders.

	DEVELOPMENTS IN AFRICA
	The New Partnership for Africa’s Development (Nepad) heralds a new chapter in the emerging era of African self-determination. Nepad’s peer review mechanism will assist to ensure that a more attractive environment is created for investment in African economies. These developments are fully supported by Kumba. Kumba is pursuing business interests in Africa beyond South Africa and Namibia, which include the Faléme iron ore project in Senegal, the Kipushi zinc/copper and Kamoto copper/cobalt projects in the Democratic Republic of Congo, and a mineral sands development at Tulear in south-western Madagascar.

	CONSULTATIVE HIV/AIDS POLICY IN PLACE, ANTI-RETROVIRAL THERAPY BEING PILOTED AT TWO SITES

	SUSTAINABILITY REPORTING
	This is Kumba’s first integrated report, covering the financial, environmental and social performance of the group. It demonstrates that consideration for people, the environment and the economy is closely tied to Kumba’s financial sustainability. We firmly believe that being a sustainable organisation makes business sense for the financial bottom line. In several areas of our non-financial reporting, targets have been set. In other areas, they are still being established. However, it is a process to which we are committed and a promise we make to all our stakeholders – that we care about minimising the impact of our operations and optimising the development of all the people around us.

	HIV/AIDS
	With the support of Kumba’s recognised unions, the board approved the group’s HIV/AIDS policy and the introduction of pilot anti-retroviral therapy programmes at the Grootegeluk colliery and Zincor refinery. If successful, the therapy will be implemented at remaining operations.

	DIRECTORATE
	Hans Smith retired as non-executive chairman and member of the Kumba board and I was appointed as non-executive chairman in November 2002. Hans was a key figure in Kumba’s formation and an enthusiastic supporter of Kumba’s proactive and dynamic approach. On behalf of the board, I thank him most sincerely for the wise counsel and support he gave Kumba in its critically important first period as an independent entity.

	Kumba is proud of its board independence, with six of ten non-executive board members being independent.

	APPRECIATION
	Kumba has made great strides for a company in its infancy, progress that reflects the talent and commitment of its people at all levels. Particularly, I thank my fellow directors whose constructive views are so important in guiding the group, and the dedicated chairmen of the board committees. In Dr Fauconnier, Kumba is privileged to have a chief executive whose leadership is inspirational and who heads a management team that is arguably one of the best in the industry.

	Since listing, we have established close relationships with senior members of relevant government departments and industry bodies, relationships that we value greatly and will continue to nurture.

	PROSPECTS
	It is my responsibility to help chart a course for this group that not only ensures superior shareholder returns, but is also beneficial to all other stakeholders, including the employees of Kumba.

	We expect another year of solid performance in our underlying operations. The strength of the rand will pose greater challenges for some commodities than others, but we are confident that our people will continue to rise to these challenges. The initial success of our sizeable heavy minerals project also inspires confidence and bodes well for the future.

	Investors have bought into Kumba because they perceive value in the company. We will continue to strive to create the environment which will deliver that value in the best interests of the company, its shareholders and its people.


	Dawn Marole
	Chairman
	10 September 2003

	Back to top