Kumba Annual Report 2004

Financial review

Solid financial performance
Revenue up 15%
Net operating profit up 41%
Net debt decrease by R669 million
Strong financial metrics

CHANGE IN FINANCIAL YEAR AND COMPARATIVE ANALYSIS

Following the acquisition of a majority shareholding by Anglo American plc in Kumba in December 2003, the group changed its year end from 30 June to 31 December and is presenting audited financial results for the 18 months ended 31 December 2004. Interim results reviewed by the group’s auditors were published for the six months to 31 December 2003 and the 12 months to 30 June 2004.

Unaudited financial results and physical information for the 12-month periods to 31 December 2004 and 2003 respectively, which are aligned with the group’s new financial year, are given on p102 to p103, and in the fold-out.

Comments are for comparative purposes based on an analysis of the group’s results for these periods. P102 and p103 also contain a comparison of the group’s unaudited financial results for the six months ended 31 December 2004 compared with the reviewed corresponding period ended 31 December 2003.

OVERVIEW OF GROUP OPERATING RESULTS

The 12-month period to December 2004 was characterised by excellent operational performance, higher sales volumes, increased US dollar commodity prices and ongoing business improvement initiatives. These factors offset the impact of a stronger rand. As a result, revenue increased by R1 117 million to R8 708 million and net operating profit by R404 million to R1 380 million, with a significant improvement in the group’s operating margin (Table 1).

Table 1


18-months ended		12-months ended
	31 December	31 December
R million	2004	2004	2003
Revenue	12 599	8 708	7 591
Net operating profit	1 855	1 380	976
Adjusted for non-recurring impairment
charges and net deficit/(surpluses) realised
on disposal of assets and investments ^{1, 2}	11	53	(46)
Adjusted net operating profit	1 866	1 433	930
Depreciation and amortisation	971	652	613
Earnings before interest, tax, depreciation
and amortisation (Ebitda)	2 837	2 085	1 543
Operating margin (%)	15	16	13
Ebitda margin (%)	23	24	20

Impairments, including reversal of earlier impairment on disposal of assets.
Net surplus on the disposal of assets and investments.

SEGMENTAL RESULTS

Segmental results are shown in tables 2 and 3

Table 2


Revenue	18-months ended	12-months ended
	31 December	31 December
R million	2004	2004	2003
Iron ore	6 064	4 250	3 789
Coal	2 733	1 878	1 678
Heavy minerals	2 438	1 662	1 211
– Ticor SA	668	514	314
– Ticor Limited	1 770	1 148	897
Base metals	1 212	811	808
Industrial minerals	138	95	82
Other	14	12	23
Total	12 599	8 708	7 591
R/US$ exchange rate realised	6,67	6,51	7,64

Table 3


18-months ended			12-months ended
	31 December		31 December
Net operating profit	2004	2004		2003
(Rm)/Margin (%)	Rm	Rm	%	Rm	%
Iron ore	1 119	820	19	664	18
Coal	548	430	23	272	16
Heavy minerals	206	254		(6)
– Ticor SA	(19)	(10)		(6)
– Ticor Limited	225	264		23
Base metals	(151)	(116)		(80)
Industrial minerals	30	20	21	21	26
Other	103	(28)		105
Total	1 855	1 380	16	976	13

IRON ORE

Revenue for the 12 months to 31 December 2004 increased by 12% and net operating profit by 23% over the comparative period as higher US dollar average prices of 18,62% from 1 April 2004 (compared with a price increase of 9% on average from 1 April 2003), and stronger sales volumes together with an ongoing cost focus, offset the effect of the stronger rand. The international US dollar prices for iron ore are set from 1 April until 31 March the following year.

COAL

Revenue increased by 12% over the comparative period as a result of high sales prices and volumes. The higher revenue together with cost containment initiatives resulted in a substantial improvement in net operating profit of 58%.

HEAVY MINERALS

TICOR SA

Revenue increased by 64% over the comparative period due to higher sales of titanium slag and pig iron together with stronger zircon, pig iron and rutile prices. The stronger currency and shut-down of furnace 2 led to an operating loss of R10 million.

TICOR LIMITED

Ticor Limited, through its 50% joint venture in Tiwest, increased revenue by 28% over the comparative period as a result of higher sales and better mineral prices. Ticor Limited was fully consolidated into Kumba’s accounts from 1 April 2003. A contribution of R264 million was made to the group’s net operating profit due to the higher revenue, cost savings and the non-recurring impairment charge of R89 million relating to Ticor Chemicals raised in 2003, which offset its net operating profit in that year.

BASE METALS

Revenue increased marginally as the realisation of a lead sales order of Rosh Pinah which moved into 2005, negated the effect of a 7,8% increase in the average rand price of zinc over the comparative period.

Lower treatment charges, an increase in the environmental rehabilitation provision on mine closure according to the standards applicable to the group’s South African operations and non-recurring impairment charges, resulted in an operating loss of R116 million for the past 12-month period.

Table 4: Base metals adjusted net operating profit


18-months ended		12-months ended
	31 December	31 December
R million	2004	2004	2003
Net operating (loss)	(151)	(116)	(80)
Adjusted for:
• Impairment of ZnERGY (Pty) Limited ¹	26	26
• Impairment of preference shareholding in
Rosh Pinah Mine Holdings (Pty) Limited ²	9	9
• Environmental rehabilitation provision	25	25
• Other provisions	15	15
Adjusted net operating (loss)	(76)	(41)	(80)
Depreciation and amortisation	69	45	58
Adjusted earnings before interest, tax,
depreciation and amortisation	(7)	4	(22)
The impairment of the investment in ZnERGY (Pty) Limited, a zinc air fuel battery component manufacturing plant, was due to the liquidation of its technology provider and critical component supplier, Zoxy Energy Systems AG. The impairment was raised against a preference share investment made in 2000 in a strong US dollar and zinc price environment to facilitate a 5% empowerment interest in Rosh Pinah Zinc Corporation (Pty) Limited.

Heavy minerals now contributing 19% to group revenue

The revenue and net operating profit (EBIT) contribution of the various businesses is as follows:

Revenue contribution

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 decreased from 12,5% per annum to 11,3% per annum in line with lower interest rates. At 31 December 2004, 65% of our corporate borrowings were at fixed interest rates while all of the Ticor SA project loans bear interest at fixed rates.

Net financing costs increased marginally to R271 million and were covered eight times by Ebitda compared with six times in the 12 months to 31 December 2003.

Interest cost of R118 million was capitalised, mainly in respect of the project loan facilities taken up for the Ticor SA project, compared with R96 million in the comparative period. Capitalisation of interest on the project loans for the mine operation of Ticor SA ceased in December 2001 and for the smelter operation on 31 December 2004.

INCOME FROM EQUITY ACCOUNTED INVESTMENTS

Our share of attributable losses from investments, before tax, has reduced significantly as a consequence of an anticipated lower loss to be reported by AST Group Limited (AST) and a first contribution from our investment in the Chifeng-Kumba-Hongye Zinc Refinery in China (Table 5).

Table 5: Income from equity-accounted investments


18-months ended		12-months ended
31 December		31 December
R million	2004	2004	2003
Ticor Limited ¹			8
AST	(43)	(23)	(64)
Transorient Ore Supplies ²	20	13	14
Chifeng Zinc Refinery ³	10	9	1
Total	(13)	(1)	(41)
Equity-accounted until 31 March 2003; consolidated from 1 April 2003. Incorporated joint venture for the distribution of iron ore sales into east Asia. Production commenced in December 2003.

EARNINGS

The substantial increase in net operating profit and the reduction in the equity-accounted loss from that reported for the comparative 12-month period, offset to some extent by a significantly higher tax charge, resulted in profit attributable to ordinary shareholders increasing by 21% to R677 million. Headline earnings were 34% higher at R774 million or 258 cents per share.

Table 6: Earnings


18-months ended		12-months ended
31 December		31 December
R million	2004	2004	2003
Attributable earnings	942	677	559
Adjusted for:
• Net (surplus)/deficit on disposal or
scrapping of operating assets	(24)	110	(138)
• Impairment charges after reversal of
prior period impairment of assets¹	35	(57)	92
• Closure cost	35	35
• Goodwill amortisation	(6)	(4)	7
• Our share of associates’ goodwill
amortisation and exceptional items	47	29	50
• Tax effect	(12)	(16)	7
Headline earnings	1 017	774	577


1. Impairment charges raised:
•	Ticor Chemicals cyanide plant in Australia resulting from unfavourable market conditions and the stronger Australian dollar	89		89
•	Investment in ZnERGY (Pty) Limited	26	26
•	Preference share investment in Rosh Pinah Mine Holdings (Pty) Limited	9	9
•	Reversal of impairment of shipping assets sold in September 2003	(90)	(90)
•	Other	1	(2)	3
	Total impairments	35	(57)	92

TAXATION

The tax change for the 12-month period to 31 December 2004 increased to R341 million in line with the improved net operating profit.

The effective tax rate is 30,8%. The rate of 21,7% in the comparative period was mainly due to a tax writeoff on the acquisition of mining equipment.

Final dividend of 90 cents per share

DIVIDENDS

The board reviewed our policy of declaring annual dividends and approved the payment of interim dividends from the end of the group’s 2003 financial year.

Period ended:	Dividend (cps)	Declared	Paid/Payable
31 December 2003	20	February 2004	March 2004
30 June 2004	35	August 2004	September 2004
31 December 2004	90	February 2005	March 2005

Dividends declared for the 12 months to 30 June 2004 were 3,2 times covered by attributable earnings and 2,15 times for the 18 months to 31 December 2004.

Our policy remains to declare regular dividends. The level of dividend payments is reviewed against prevailing trading conditions and our balance sheet structure and available cash flow, taking cognisance of value-adding growth opportunities.

CASH FLOW

Higher earnings before interest, tax, depreciation and amortisation resulted in an increase in cash flow from operating activities of R160 million to R1 432 million over the comparative period.

Table 7: Cash flow


18-months ended		12-months ended
31 December		31 December
R million	2004	2004	2003
Cash flow from operating activities	1 605	1 432	1 272
Cash used in investing activities
• New capacity	(826)	(487)	(988)
• Other capital expenditure	(570)	(399)	(348)
• Net impact of Ticor Limited consolidation			366
Asset and investment disposals	238	50	224
Share issue¹	132	(1)	133
Other movements ²	(114)	74	(1 240)
(Increase)/decrease in net debt	465	669	(581)

Proceeds from the issue of shares under the management share scheme after the mandatory offer by Anglo American plc in November 2003. Primarily non-cash flow movements in net debt arising from currency translation differences and the acquisition of a controlling interest in Ticor Limited on 1 April 2003.

DIVESTMENT OF NON-CORE INTERESTS

In line with the group’s strategy to remain focused on its core commodity businesses and to consider other commodities which could be complementary, we divested during the past 18-month period of certain non-core investments.

Following a rights issue undertaken by AST Group Limited (AST) in October 2003 as part of a business improvement and financial restructuring programme, our interest in AST reduced from a shareholding of 26,7% and an outstanding loan of R35 million to 26,4% and a secured loan of R24 million.

In terms of a recently announced restructuring of AST, it will, subject to shareholders’ approval, acquire the businesses of Gijima Info Technologies Afrika (Pty) Limited as its black economic empowerment partner and simultaneously undertake a rights issue of R160 million. Kumba will underwrite the rights issue to the extent of R20 million by converting a portion of its secured loan into shares. Should we subscribe for shares to the full extent of our underwriting commitment, our shareholding of 22,34% and secured loan of R41 million at 31 December 2004 will nevertheless reduce to 12% and a secured loan exposure of R21 million. The restructuring is expected to restore AST’s profitability. AST is an important information technology supplier to the Kumba group. We will continue to pursue opportunities to divest from our residual interest.

	Pre-tax proceeds	Book value	Pre-tax surplus
Divestment	(Rm)	(Rm)	(Rm)
• 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	103	31	72
• 40% interest in two bulk ore carriers	73	27	46

FINANCIAL STRUCTURE

Net debt decreased by R669 million to R1 909 million at 31 December 2004 as a result of the stronger cash flow generated and lower capital expenditure.

The group’s net debt to equity ratio was 30% with net debt 0,9 times Ebitda compared with 41% and 1,7 times Ebitda at 31 December 2003.

The redemption profile of our long-term interest-bearing borrowings is well spread with significant undrawn facilities and a low utilisation of short-term bank lines
(Table 8).

CAPITAL EXPENDITURE

Table 9 contains a comparison of capital expenditure for the 12-month periods ended 31 December 2004 and 2003 together with an estimate for the 2005 financial year. Our investment in the Ticor SA project has dominated our capital expenditure into new production capacity over the past two calendar years while the approved Sishen expansion and coal projects account for 56% of the 2005 estimated capital expenditure.

Table 8: Debt structure

R million	Drawn	Undrawn	Maturity profile
Long term			2005	784
Corporate	1 503	282	2006	556
Heavy minerals project finance	1 017		2007	865
Ticor Limited	595		2008	234
	3 115		After 2008	676
Short term	52			3 115
Total debt	3 167
Cash and cash equivalents	(1 258)
Net debt	1 909

Capital expenditure dominated by investment in Ticor SA in past two years

Table 9: Capital expenditure

	Financial	18-months ended	12-months ended
	year 2005	31 December	31 December
R million	Estimate	2004	2004	2003
Sustaining and environmental	476	570	399	348
Expansion
• Iron ore	767	79	38	137
• Coal	401	81	66	30
• Heavy minerals	164	624	351	779
• Base metals	28	42	32	40
• Other	–	–	–	2
Total	1 836	1 396	886	1 336

HEDGING

Our hedging of export earnings is focused on short-term forward periods within board-approved policy parameters. Hedging contributed R60 million for the past 12 months and R100 million for the 18-month period to 31 December 2004.

BUSINESS IMPROVEMENT PROGRAMME

The chief executive in his review on p13 sets out the imperative for, and details of, the business improvement programme launched by the group. The target set in 2004 of an R800 million sustainable contribution to net operating profit from our 2006 financial year will be rigorously tracked and reported. Some R665 million of this R800 million, expressed in 2005 money terms, is expected to realise in 2005.

The graph depicting EBIT comparison shows that the benefits of the business improvement processes have already started to flow through to the group’s results for the past 12 months which reflect higher sales volumes and cost savings.

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.

Kumba is a participating employer in a number of defined contribution funds and two closed defined benefit funds. These defined benefit funds were adequately funded as per the latest actuarial valuations on 31 December 2003 and 31 December 2002 respectively.

SHARE PRICE PERFORMANCE

A year-on-year, 12 months to 31 December comparison shows that the volume weighted average share price was R40,07 against R32,47 for the previous year, while the daily trade in shares averaged 271 247 in 2004 compared with 671 310 in the corresponding period. In the year under review, the share peaked at R49,00 in November 2004 (against a high of R39,95 in the previous financial year) and bottomed at R32,35 in June 2004 versus a low of R24,10 in April 2003. Following a solid set of results and news of the first iron ore price settlements for 2005, Kumba’s share reached a new high of R70,40 on 4 March 2005.

Since listing on 26 November 2001, Kumba has outperformed both the ALSI 40 (+25%) and Resources (+35%) indices. The acquisition of a majority shareholding by Anglo in the group in December 2003 resulted in the liquidity and tradeability of the share decreasing significantly. Although this has affected its rating, Kumba’s share price nevertheless, in the year under review has outperformed the JSE Resources index by 14% but underperformed the ALSI 40 index by 3%. This can be compared to a performance in line with the ALSI 40 in 2003 and a 5% outperformance of the Resources index over the same period.

Table 10: Share price analysis (SA cents per share)
Year-end 31 December

	High	Low	Median
2004	4 900	3 235	4 007
2003	3 995	2 410	3 247
2002	5 850	3 001	4 158
2004
First quarter	4 363	3 711	4 164
Second quarter	4 450	3 235	3 781
Third quarter	4 920	3 325	4 007
Fourth quarter	4 900	3 950	4 462
2003
First quarter	3 425	2 510	3 098
Second quarter	3 390	2 410	2 873
Third quarter	3 995	3 000	3 345
Fourth quarter	3 799	3 380	3 649