Chief executive's review
	Our third year coincided with South Africa’s third democratic elections
	Kumba’s third year coincided with South Africa’s third democratic elections. To mark the occasion, Kumba was a major sponsor of the prestigious publication, South Africa The Good News 2014 – the story of our future. The sentiment in this publication reflects our confidence in the future of this country and recognises the determination of so many people to make a real difference in improving the quality of life of all our citizens.
	OVERVIEW
	The physical performance of Kumba’s businesses for the review period was excellent, particularly when facing markets characterised by the impact of a strong rand on prices for most of our commodities. While US dollar prices for iron ore, coal and zircon were good, the prices for titanium dioxide pigment and slag were slow to follow the upward price trend in commodities. The zinc price is recovering, which benefits our Rosh Pinah operation but to a lesser extent Zincor whose profitability is currently under pressure due to low zinc treatment charges and poor concentrate quality.
	Under these circumstances, Kumba’s financial performance was good, with revenue increasing by 15% due to higher production levels, higher sales volumes, increased commodity prices and the financial consolidation of our Australian subsidiary, Ticor Limited, from April 2003. Our financial results are detailed in the financial review.
	HIGHLIGHTS
	There were many highlights for Kumba during the review period, some of which the chairman has noted. Operationally, highlights of the year included: ISO 14001 and OSHAS 18001 certifications – Sishen, Grootegeluk, Thabazimbi, Tshikondeni, Ticor SA, Zincor, Glen Douglas and Ferrosilicon achieved this prestigious international accreditation during the review period. By world standards, these are remarkable achievements and a fitting challenge for our other business units. Record safety performance – Kumba has improved its safety levels every year, with the yearly target for lost-day injury frequency rate (per million man-hours worked) now at 1,75 from 2,5 in 2004. Regrettably, two people died during the year which is two too many. Unfortunately a further two fatalities occurred early in 2005. Our target remains zero fatalities, and we will continue to monitor safety standards very closely to ensure we achieve it. A waterfall last seen over 50 years ago flowed from the top of the Hlobane mountain in KwaZulu-Natal due to a successful rehabilitation process that focused on an integrated water management plan during the ongoing closure activities at our Hlobane mine. This waterfall, an environmental first in the history of mine rehabilitation, ensures the sustainability of one of the most important water catchment areas in the province. Towards the end of the year, expansion projects totalling over R500 million received board approval. At Grootegeluk, a new plant is being built to treat and beneficiate 700ktpa coal for the production of market coke. The plant is expected to be commissioned in July 2006. Expansions at Leeuwpan will add an additional 1Mtpa of power station coal to the product portfolio. It will be railed under a supply contract to Eskom’s Majuba power station from August 2005. The ramp up of the furnaces at Ticor SA – the first furnace was commissioned in March 2003 and the second was recommissioned in December 2004. Our investment in heavy minerals is now beginning to reap dividends, with production at the mine and minerals separation plant delivering excellent results. By 2006, this operation will be producing 250ktpa of titanium slag and 145ktpa of low manganese pig iron, adding volume and diversity to the existing heavy minerals product range. Thabazimbi iron ore mine received a gold award from the National Productivity Institute for its selective mining project and a project to beneficiate lower-grade ore is under way which could increase current production and extend the life of mine by more than 20 years. AlloyStream™ (formerly Ifcon™) is a process technology developed and patented by Kumba for the low-cost production of metals from a variety of feedstocks. During 2004, the process was tested in the production of ferromanganese. Promising results have prompted discussions with various participants in the industry to conduct feedstock-specific feasibility studies for a commercial scale plant. In China, the Chifeng zinc refinery in Inner Mongolia was expanded to double capacity to 50ktpa of zinc metal. Operating in China has presented a steep learning curve but the results reflect our ability to manage a foreign operation, specifically in China, which is the world’s most important market for base metals. Kumba continues to enhance its risk management systems, which are on par with best practice in our industry. Kumba’s numerous awards during the year are testimony to the calibre of our people and their commitment to achieving targets in challenging markets. Training and development – internally and externally, Kumba is touching the lives of thousands of people through skills development, from basic to advanced, from enterprise-focused to entrepreneurial. Notably, Kumba trained 24% of all apprentices in the mining industry during 2004.
	A business improvement programme will add R800 million to net operating profit from 2006
	BUSINESS ISSUES
	Kumba has proactively managed the risk of a strong currency, which has a substantial effect on our bottom line, by increasing efficiencies to support earnings. We believe the rand will remain strong for most of 2005. We welcome the improved stability of the currency which enables some form of forward planning and believe that with a better balance between the needs of importers and exporters, the latter should be able to prosper.
	Accordingly, towards the end of 2003 Kumba initiated a revised strategy which has been launched across the group to accelerate the improvement processes already under way. This was done in light of an adverse macro-economic environment created by a volatile commodities market, the sustained strength of the rand against the US dollar and cost escalations, many of which were beyond our control, particularly administered prices such as rail tariffs on the general freight lines and fuel prices.
	To enable the group to remain competitive and achieve its growth aspirations, the executive team re-examined the way the company is structured and managed. We wanted to ensure we have a robust group that is capable of dealing with adverse macro-economic conditions and one that is capable of capturing current and future growth opportunities.
	The result was an ambitious, but realistic, business improvement programme that will add R800 million to net operating profit in FY2006. This is based on achieving our required investment returns at an exchange rate of R7,00 against the US dollar and long-term commodity prices and sustaining viable operations at an exchange rate of R6,00 against the US dollar. The programme is comprehensive: it will achieve the target through a combination of cost reduction, increased throughput and revenue, and improved business processes. Unfortunately, a limited number of jobs may be affected, but as a responsible employer, we have a rigorous process in place to minimise this potential. This includes redeployment of affected people in light of the group’s growth opportunities, and natural attrition.
	The continued strength of the rand validates this strategic decision and the need for the programme. The magnificent response of Kumba’s people to the challenge, and the efforts of the dedicated business improvement programme team, has seen 1 001 ideas generated, of which 538 were implemented to contribute R400 million in the review period. Of this, R169 million consisted of savings. We are confident that all the programme’s targets will be met by December 2005.
	Transport and the associated infrastructure are key elements in Kumba’s ability to meet growing demand for our exports. Infrastructural expansion to manage the additional capacity is critical and the support of new management teams at state-owned enterprises, Transnet and its associated divisions, SA Port Operations, the National Port Authority and Spoornet, is most encouraging.
	As part of the government’s infrastructural expansion plan, 12Mtpa will be added to the capacity of the Sishen/Saldanha rail line and port facilities by 2009 to cater for the needs of Kumba. Studies are currently under way to evaluate the feasibility of a further 17Mtpa iron ore expansion. Once the Richards Bay Coal Terminal (RBCT) Phase V expansion is finally approved by Transnet, Kumba will also be able to export 2,5Mtpa of coal through the South Dunes Coal Terminal consortium.
	We are pleased that an agreement signed in March 2005 with Transnet provides a new contract for the transport and handling of export iron ore from Sishen through Saldanha. The contract caters for a rand-based tariff and capacity of up to 35Mtpa of exports by 2009. I acknowledge the sterling efforts made by Transnet group chief executive, Maria Ramos, Transnet executive director, Pradeep Maharaj, Kumba business operations director, Mike Kilbride, and their respective negotiating teams, to reach a mutually-beneficial agreement that signals a new era. The expansion of the export channel paves the way for the implementation of the Sishen expansion project, which received board approval in February 2005, and the development of the Sishen South project. These two projects will lift iron ore exports from the Northern Cape to over 40Mtpa.
		A train on the Sishen/Saldanha iron ore rail line.
	The advent of the RBCT Phase V expansion will also enable Kumba to initiate the Inyanda coal mine – a joint venture with empowerment company, Eyesizwe Coal – and increase coal exports to over 3Mtpa. These growth opportunities are detailed in this website.
	Expansion projects and opportunities will benefit from improved empowerment credentials for Kumba. Constructive discussions with Anglo about an empowerment partner for Kumba and the most appropriate model through which to achieve empowerment are well advanced.
	The chairman has noted the introduction of legislation that affects Kumba’s operations. There is an encouraging level of engagement between the industry and the Department of Minerals and Energy on technicalities that arise in the implementation of the Mineral and Petroleum Resources Development Act. For example, the implications of the Institution of Legal Proceedings Against Certain Organs of State Act, 2002 (ILPA), posed a potential problem for the industry. This was discussed with the department and satisfactorily resolved. Kumba has taken the decision that the assurances from government were adequate for Kumba to refrain from instituting possible claims for compensation in the event of expropriation under the act. Likewise, when uncertainty arose around the ownership requirements for unused state-owned mineral rights, this was also resolved through discussion with the department and labour.
	Sustainability is integral to the foundation values that guide the way we do business
	SUSTAINABILITY
	Kumba adopted triple bottom-line reporting in its 2003 annual report, which successfully integrated financial and non-financial reporting to stakeholders.
	For Kumba, sustainability is more than a business imperative, it is integral to the foundation values that guide the way we do business. It is evident in all our triple bottom-line practices and is part of our passion to improve the quality of life in the communities that give us our licence to operate.
	Both the 2004 and 2003 annual reports incorporate our sustainability reporting and are based on the internationally-recognised Global Reporting Initiative (GRI) guidelines. GRI guidelines for the mining sector are in draft form, and are expected to be finalised in 2005. These will be incorporated into Kumba’s sustainability reporting as we progress incrementally towards meeting GRI “in accordance” guidelines.
	Given the change in Kumba’s year end from June to December, in the latter half of 2004 we published an interim (1 July 2003 – 30 June 2004) sustainability review report on our website (www.kumbaresources.com) to update stakeholders on progress. In that period, we made good progress in many areas, specifically in training and development, job creation, HIV/Aids awareness projects and electronic environmental management systems.
	Our commitment to meeting and exceeding our targets is firm. Throughout the group, processes are under way to ensure that we can report measurable results and useful information to stakeholders to provide an informed understanding of Kumba’s impact on the economy, society and environment in which we operate.
	One of the benefits of being a young company is that we were able, from the outset, to create a contemporary company, one that considered global best practice and sustainability as equally-important performance indicators to profitability.
	We acknowledged then, in 2001, that our constituency was bigger than shareholders and adopted a multi-stakeholder approach, one that considers the rights of all who deal with Kumba, directly and indirectly, as we protect the rights of future generations.
	These acknowledgements are the bedrock of our future survival and we are ready to be measured by our triple bottom-line performance.
	Our commitment is reflected in the considerably broader scope of the independent review of our sustainability reporting, detailed on p94, and we will use KPMG’s assurance report findings in our developments in this arena.
	Importantly, as our international operations develop, our economic, social and environmental performance will be consistent across three continents, whether legislated or self-imposed, and aligned to GRI guidelines.
	During the year, we formalised our commitment to sustainability as an integral part of our business strategy with the development of a group-wide strategic sustainability framework. The responsibility for reporting to the board on sustainability issues rests with me and is an integral part of the chief executive’s report I prepare for board meetings. This monitors our progress towards targets in eight focus areas: Financial Governance, ownership and control Resource utilisation Workplace Environment Community and external stakeholders Suppliers Customers
	At each operation, sustainability issues are now integrated into the business plan against which performance is measured.
	A clearly-defined strategy underpins a common purpose
	STRATEGY
	Kumba’s strategy is clearly defined and well communicated. To grow and prosper, we will: Build a balanced portfolio of globally-competitive commodity businesses. Attract and retain a highly-skilled and motivated workforce. Promote innovation and employ appropriate technology. Nurture a culture of continuous improvement and operational excellence. Reward our shareholders with superior returns and capital growth. Integrate sustainability into all operations.
	Accordingly, Kumba will focus on growing its iron ore, coal and heavy minerals businesses. As the prognosis on zinc (base metals) is uncertain, the immediate challenge is to restore the business to a sound financial footing and make an appropriate decision when there is more clarity in this market. Kumba will also consider investing in other commodities such as manganese, given the potential synergies in the Northern Cape and the potential of our AlloyStream™ technology.
	Against the background of escalating costs and rand strength, the Kumba business improvement programme referred to earlier remains an integral part of our short- to medium-term strategy for all business units as well as the corporate office.
	INTERNATIONAL
	Attempts to resolve the withholding of approval of Anglo as controlling shareholder by Kumba’s partner in the Hope Downs iron ore project in Western Australia through discussions and mediation failed. The matter was then referred to arbitration in the second half of 2004. The arbitrators ruled in December 2004 that Hancock Prospecting (Pty) Limited (Hancock) has not withheld its approval unreasonably. Kumba has lodged a notice of appeal with the Supreme Court of Western Australia on legal advice to preserve its rights in the project.
	Concurrently, a process for determining an agreed fair value at which Hancock can acquire Kumba’s project interest has commenced. If agreement cannot be reached between Kumba and Hancock, an independent expert is to be appointed to determine a fair value. Kumba will continue to seek a solution in the best interests of all its stakeholders within the contractual framework governing its relationship with its partner.
	Our people have proven their passion for performance
	APPRECIATION
	The review period has been one of the most testing, but rewarding, in our short history. The way our people have risen to the challenge has been both humbling and inspiring. Throughout the group, at every level, individuals have given of their best consistently, proving their passion for performance and highlighting the considerable technical and managerial competencies that characterise Kumba’s operations. As a team, Kumba has developed a reputation for delivering solid operating results, irrespective of the impact the market has on our business. I thank every one of our employees for the obvious pride they take in their work and the energy they bring to our business.
	Kumba has developed strong relationships with customers around the world because of the quality of our products and service. I thank our customers for their loyalty and support and our suppliers who continue to play an important role in our supply chain.
	As far as our service providers are concerned, I express our sincere appreciation to KPMG for the professional and unbiased manner in which they have conducted the audit of our group since its listing in 2001. We welcome Deloitte who have become our auditors since the change in control of Kumba and thank them for the constructive manner in which they have engaged with us in performing the group’s audit for the period under review.
	Throughout the considerable changes and challenges we have faced during the year, our trade unions have participated constructively and added value to our engagements. These sound relationships augur well for our continued progress.
	On behalf of management, I thank our board of directors for their constructive contribution and counsel. In particular, our chairman, Dawn Marole, is playing a key role in Kumba’s interactions with government and in guiding our strategic development for which we thank her.
	OUTLOOK
	Kumba faces another challenging year, but a most exciting one as the planning and preparation of recent years begins to unfold and new projects come on stream.
	The board has approved over R3,4 billion for expansion projects, including those at Sishen, Grootegeluk and Leeuwpan. Our expansion in the Waterberg coalfield heralds the further development of the largest remaining reserves of coal in the country, a region which holds much further potential for Kumba and its customers such as Eskom. Once approval is obtained from Transnet for the expansion of the Richards Bay Coal Terminal, our Inyanda coal mine will go ahead immediately. The new contract with Transnet has also allowed us to start immediately with the Sishen expansion project.
	In the light of prevailing economic and supply/demand factors, commodity price forecasts for 2005/2006 have been revised upwards, with notable increases in coal and exceptional increases in iron ore. Growing demand from China is very positive for iron ore and coal. China is also now a net importer of refined zinc which should further underpin the recent increase in the price of zinc. However, the continued shortage of zinc concentrate will keep treatment charges depressed, impacting negatively on the results of Zincor although enhancing those of Rosh Pinah.
	Given our expectations for continued strength in the rand, the focus on our business improvement programme will proceed unabated in the new financial year and we are confident of achieving our targets. This initiative, together with stronger commodity markets, in particular the forecast 71,5% increase in the US dollar price of iron ore from April 2005, higher coal prices and further recovery in the US dollar price of zinc, will have a positive impact on the group’s results. However, earnings will continue to be affected by the rand.
	Dr Con Fauconnier
	Chief executive
	11 March 2005
	Back to top