Kumba Annual Report 2003

OVERVIEW OF THE GROUP

OPERATING RESULTS

The group maintained strong production levels and sales volumes for the year. Depressed global commodity prices and the substantial strengthening of the rand, however, placed operating margins under pressure (table 1).

• Currency Impact

An average exchange rate of R9,01 to the US dollar was realised on export proceeds compared with R10,18 for the 2002 financial year while debtors and balances denoted in US dollar and derivative instruments were revalued at a closing spot rate of R8,42 on 30 June 2003, compared with R10,37 which prevailed on 30 June 2002. The group’s operating margin, excluding this currency effect, would have remained constant year on year (table 2).

*Table 1*

	2003	2002	2001¹	CAGR³
R million			Pro forma	%

Revenue	7 469	7 182	5 404	17,6
Net operating profit	1 212	1 683	793²	23,6
Depreciation	532	454	340
Earnings before interest, tax,
depreciation and amortisation
(Ebitda)	1 744	2 137	1 133	24,1

Operating margin (%)	16	23	15	3,3
Ebitda margin (%)	23	30	21	4,7

1.	As contained in the pre-listing statement of 29 October 2001.
2.	Net operating profit of R584 million adjusted for a non-recurring charge of R209 million for scrapping of plant.
3.	Compound annual growth rate.

Table 2

Adjustment for currency impact (R million)	2003	2002
Net operating profit	1 212	1 683
Unrealised revaluation loss/(gain)	73	(9)
Realised exchange rate effect	573
Net operating profit, excluding currency movement	1 858	1 674
Operating margin, excluding currency effect (%)	23	23

Segmental Results
Segmental results are shown in tables 3 and 4.

*Table 3*
Revenue
R million	2003	2002
Iron Ore	4 234	4 340
Coal	1 638	1 489
Base Metals	892	941
Heavy Minerals	587	227
Industrial Minerals	78	57
Other	40	128
Total	7 469	7 182

*Table 4*
Net operating profit
R million	2003	2002
Iron Ore	882	1 221
Coal	279	255
Base Metals	15	102
Heavy Minerals	59	54
Industrial Minerals	21	15
Other	(44)	36
Total	1 212	1 683

Revenue from iron ore for the 2003 financial year decreased marginally as the 9% average increase in iron ore prices in the last quarter and higher export volumes of 1Mt were more than offset by the lower prices in the first nine months (an average decrease of 4% from the previous year) and the strong rand. This, together with higher production volumes and increased stripping of overburden, insurance premiums and environmental provisions, resulted in a 28% decrease in net operating profit to R882 million

STRONG PRODUCTION LEVELS AND SALES VOLUMES AFFECTED BY DEPRESSED GLOBAL COMMODITY PRICES
AND A STRONG RAND

Higher coal prices accounted for a 10% increase in revenue as sales volumes were maintained despite a major generator failure at the Matimba power station. Net operating profit improved by 9% to R279 million notwithstanding the increased costs of planned maintenance programmes and higher insurance premiums.

Despite the record production and sales volumes at both the Rosh Pinah mine and the Zincor refinery, the stronger currency, a lower zinc price of 13% in rand terms together with substantially lower globally based zinc concentrate treatment charges paid to refineries, resulted in revenue decreasing by 5% to R892 million and net operating profit from R102 million to R15 million.

At the Ticor SA heavy minerals operation, production of ilmenite, zircon and rutile increased substantially with both zircon and rutile fully sold. Market conditions for ilmenite remained unfavourable and crude ilmenite was largely being stockpiled for smelting and processing into titanium slag and pig iron.

Revenue increased by 159% to R587 million mainly as a consequence of the consolidation of the Australian heavy minerals and pigment producer, Ticor. Net operating profit increased marginally from R54 million to R59 million as the consolidation effect of Ticor was largely offset by the impact of the stronger rand on Ticor SA, a higher depreciation charge and the costs of the mining operation being charged to the income statement as it was brought into substantial operating use.

Industrial minerals continued to benefit from favourable market conditions in the steel and construction sectors, resulting in a significant improvement in both revenue and net operating profit.

NET FINANCING COSTS

Net financing costs consist of interest expense, net of interest earned and interest capitalised on project developments.

The average monthly effective cost of borrowings increased from 10,5% pa to 12,63% pa in line with an upward interest rate cycle. Net financing costs increased marginally to R244 million and were covered seven times by Ebitda compared with nine times in the 2002 financial year.

Interest cost of R32 million was capitalised, mainly in respect of the project loan facilities taken up for the Ticor SA project, compared with no capitalisation in the 2002 financial year.

INCOME FROM EQUITY ACCOUNTED INVESTMENTS

Our share of attributable profit from investments, before tax, has decreased significantly as a consequence of the loss reported by AST Group Limited (AST) which offset other equity accounted income (table 5).

We have a 26,7% interest in AST which we acquired as part of the allocation of debt upon the unbundling of Kumba from Iscor Limited in November 2001. Although regarded as a non-core investment for our business, AST is an important information technology service provider to the Kumba group. Kumba, accordingly, together with AST’s banker and other creditors, agreed to a major business improvement and financial restructuring programme to restore AST to profitability with a focus on its core business areas.

*Table 5*
R million	2003	2002
Ticor Limited*	57	72
AST	(73)	(8)
Trans Orient
Ore Supplies	15	17
Other	3	2
Total	2	83

* Equity accounted for 9 months of the year.

Kumba will underwrite R35 million of a rights issue of R89 million to be undertaken by AST in October 2003 which could potentially increase our shareholding to 34,3% should all other shareholders of AST not follow their rights.

EARNINGS

A lower net operating profit and the significant reduction in income from equity accounted investments, offset to some extent by a lower tax charge, resulted in a decline in both attributable profit and headline earnings (table 6).

TAXATION

The tax charge for the year reduced to R229 million in line with the decline in operating profits.

The effective tax rate of 24% is mainly the result of a tax write-off on the acquisition of certain mining equipment.

*Table 6*
R million	2003	2002	%
Attributable earnings	718	976	(26)
Adjusted for:
• Net (surplus)/deficit on disposal or scrapping of operating assets	(3)	4
• Impairment charges	2	101
• Goodwill amortisation	21	(26)
• Our share of associates’ goodwill amortisation and exceptional items	45	52
• Tax effect on the above items	1	(9)
Headline earnings	784	1 098	(29)

DIVIDEND OF 60 CENTS PER SHARE DECLARED

CONSOLIDATION OF TICOR LIMITED

Following the increase of our shareholding in Ticor to 50,12% in March, we consolidated Ticor from 1 April 2003. The effect of the consolidation is shown in table 7.

We have subsequently increased our shareholding in Ticor to 51,38% as at 30 June 2003.

DIVIDENDS

The effect of the challenging market conditions on the group’s operating results and cash flow necessitated a review of the level of the maiden dividend of 85 cents per share that was declared in August and paid in September 2002, based on the group’s exceptional results in a weak currency environment in the 2002 financial year.

The board accordingly approved a dividend of 60 cents per share in South African currency for the financial year ended 30 June 2003 payable in September 2003. The dividend is covered 4 times by attributable earnings.

It remains our aim to declare regular dividends annually in August, payable in September. The level of dividend payments is reviewed against prevailing trading conditions, our balance sheet structure and available cash flow, taking cognisance of value adding growth opportunities.

CASH FLOW

The lower earnings before interest, tax, depreciation and amortisation, increased working capital requirements (mainly in respect of the Ticor SA project and as a consequence of the consolidation of Ticor), finance charges and dividend and tax payments, resulted in a reduced cash flow from operating activities from R2 184 million to R780 million (table 8).

Cash flow, before the investment into the Ticor SA project development, was R319 million positive.

*Table 7*
R million	Consolidated group	Ticor effect
Revenue	7 469	275¹
Net operating profit	1 212	35¹
Equity accounted income
before tax	2	57²
Attributable profit	718	49
Headline earnings	784	46
Net debt	2 374	432

1.	For the quarter ended 30 June 2003.
2.	For the nine months ended 31 March 2003.

Note 23 to the financial statements contains a detailed analysis of the business combination effect.

*Table 8*
R million	2003	2002
Cash flow from operating activities	780	2 184
Cash used in investing activities
• Capital expenditure – Ticor SA project	(923)	(631)
• Capital expenditure – other	(463)	(454)
• Proceeds on disposal of property, plant and equipment	44	25
• Increase in cash resources on acquisition of a
controlling interest in subsidiaries	366
• Acquisition of joint ventures and associates	(34)
Other	(8)	(59)
Net cash (outflow)/inflow	(238)	1 065

DIVESTMENT OF NON-CORE INTERESTS

Subsequent to 30 June 2003, we divested of our 30,13% interest in Mincor Resources NL, a listed Australian mining and exploration company into which our gold and exploration assets were vended in 1999. The proceeds of the sale, before tax, at a price of 41 Australian cents per share, were AUD21 million (R103 million).

Negotiations are presently taking place with the objective to sell our 40% interest in two bulk ore carriers while our position as a major shareholder in AST will be regularly reviewed.

FINANCIAL STRUCTURE

Net borrowings increased by R1 231 million to R2 374 million mainly as a result of the high level of capital investment in the Ticor SA project, and the consolidation of the net debt of Ticor Limited, Australia.

The group’s debt to equity ratio was 39% with net debt 1,4 times Ebitda.

The composition of Kumba’s net debt, and the redemption profile of the long term interest-bearing borrowings, is shown in table 9.

The group is presently assessing alternative funding sources with the objective of refinancing a portion of the loan maturities up to 2006 with a well spread redemption profile.

CAPITAL EXPENDITURE

Table 10 shows a comparison of estimated and actual capital expenditure for the 2003 year, together with an estimate for the next year.

The group’s capital expenditure over the last two financial years has been dominated by the investment in both the mining and smelting heavy minerals operations of the Ticor SA project in KwaZulu-Natal.

*Table 9*
			Redemption
	Drawn	Available	profile
Loan composition	Rm	Rm	Year	Rm
Long term
• Corporate	1 404		2004	407
• Ticor SA project	1 060	60	2005	697
• Ticor Ltd	744		2006	1 126

	3 208	60	2007	273
			Thereafter	705

				3 208

Short term	130	1 820
Total	3 338	1 880
Cash balances	(964)
Net debt	2 374

*Table 10*
	2004	2003		2002
R million	Estimate	Estimate*	Actual	Actual
Sustaining capital	347	446	247	283
Expansions	257	146	203	146
Environmental	47	43	13	25
Ticor SA project	480	1 156	923	631
Total	1 131	1 791	1 386	1 085
*2002 annual report estimate.

CAPITAL EXPENDITURE IN THE PAST TWO YEARS DOMINATED BY INVESTMENT IN TICOR SA

POST-RETIREMENT BENEFIT LIABILITY

The three accredited medical aid funds are structured to exclude any employer liability for post-retirement medical benefits in respect of either existing or past employees.

Our retirement benefit funds comprise a number of defined contribution funds and two closed defined benefit funds. These funds were adequately funded as per the last actuarial valuation.

SHARE PRICE PERFORMANCE

A year-on-year comparison shows that the volume weighted average share price for the year under review was R33,79 against R43,31 for the previous year, while daily trade in shares averaged 623 513 in 2003 compared with 1 268 534 in the corresponding period. In the current financial year, the share peaked at R49,05 in July 2002 (against a high of R59,00 in the previous financial year) and bottomed at R24,13 in April 2003.

Since listing, Kumba has outperformed both the Alsi 40 and Resources indices. However, during the second half of the year under review, the relative rand strength and volatility has had a negative impact on resource shares in general and our share price in particular, so much so that share price performance up to the 52-week low on 25 April 2003 (corresponding with a 2,5 year high in the rand against the US dollar) under-performed the JSE Resources index by 27%. Since then, relative rand stability and general investor appetite for resources shares have seen Kumba outperforming the index by 20%.

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