Notes to the annual financial statements

33.
  

EMPLOYEE BENEFITS

Retirement funds

• Exxaro Selector Pension Fund and Exxaro Selector Provident Fund, both operating as defined contribution funds.
•  Iscor Employees’ Provident Fund, operating as a defined contribution fund.
• Mine Workers Provident Fund, operating as a defined contribution fund.
• Sentinel Mining Industry Retirement Fund, operating as a defined contribution fund.
• Mittal Steel South Africa Pensioenfonds (previously Iscor Pension Fund), operating as a defined benefit fund. This fund is closed to new entrants.
• Iscor Retirement Fund, operating as a defined benefit fund. This fund is closed to new entrants.

The Selector funds were renamed in line with the change in name from Kumba Resources Limited to Exxaro Resources Limited.

Due to the acquisition of Eyesizwe Coal (Pty) Limited effective 1 November 2006, the Exxaro group is now a participating employer in additional defined contribution funds, of which the Mine Workers Provident Fund is the main fund of choice of the former Eyesizwe employees.

In compliance with the Pension Fund Act after the unbundling of Kumba Iron Ore Limited, Sishen Iron Ore Company employees will be transferred to the newly created Kumba Iron Ore Selector Pension and Provident Fund once all regulatory approvals have been obtained.

Members pay a contribution of 7%, with the employer’s contribution of 10% to the above funds, being expensed as incurred.

All funds registered in the Republic of South Africa are governed by the South African Pension Funds Act of 1956.

Defined contribution funds

Due to the nature of these funds the accrued liabilities by definition equates to the total assets under control of these funds.

Defined benefit funds

Funded status

The pension plan assets consist primarily of equity (local and offshore), interest-bearing stock and property.

The actual return on the assets in the Mittal Steel South Africa Pensioenfonds at 31 December 2005 amounted to R579 million (2004: R1 339 million) and in the Iscor Retirement fund to R137 million.

Principle actuarial assumptions (expressed as weighted averages) at 31 December 2005 and 2004 respectively, were as follows:

Future pension increases were allowed to the extent that the investment return exceeds the post-retirement discount rate.

Medical funds

Equity compensation benefits

As Sishen Iron Ore Company was a wholly-owned subsidiary of Kumba Resources before the unbundling of Kumba Iron Ore Limited, senior employees and directors of Sishen Iron Ore Company were eligible to participate in the Kumba Resources management share incentive plans.

In order to place, as far as possible, all participants in the Kumba Resources Management Share Option Scheme in the position they would have been in if they were shareholders of Kumba Resources at the time of the implementation of the empowerment transaction, the schemes continued in Exxaro and in Kumba Iron Ore, subject to certain amendments that were made to the Kumba Resources Management Share Option Plan.

Kumba Resources operated the Kumba Management Deferred Purchase Share Scheme and the Kumba Management Share Option Scheme for senior employees and executive directors of Kumba.

The Kumba Management Deferred Purchase Share Scheme consisted of a combination of an option scheme, a purchase scheme and a deferred purchase scheme and governed to maturity the share scheme rights and obligations of employees which were in existence at the time of transfer of the employees from Iscor to Kumba on unbundling of Kumba effective July 2001. Participants of the Exxaro and Kumba Iron Ore Management Deferred Purchase schemes who have been granted deferred purchase shares received an Exxaro share and a Kumba Iron Ore share for every deferred purchase share held under the original purchase agreement.

The Kumba Management Share Option Scheme consists of the granting of options in respect of ordinary Kumba shares, at market value, to eligible participants.

The aggregate number of shares in the issued share capital of Exxaro (previously Kumba) which may at any time be purchased by or allocated and issued to the trustees of both the Exxaro (previously Kumba) Management Deferred Purchase Share Scheme, the Exxaro (previously Kumba) Management Share Option Scheme, long-term Incentive Plan and Deferred Bonus Plan may not exceed 10% in total of the ordinary shares then in issue in the share capital of Exxaro (previously Kumba).

The maximum number of Exxaro (previously Kumba) shares to which any one eligible participant is entitled in total in respect of all schemes albeit by way of an allotment and issue of Exxaro (previously Kumba) shares and/or the grant of options shall not exceed 1% of the shares then in issue in the share capital of Exxaro (previously Kumba).

Shares and/or options held in terms of Exxaro Management Deferred Purchase Share Scheme are released in five equal tranches commencing on the second anniversary of an offer date and expire on the ninth anniversary of an offer date.

• 10% after first anniversary of offer date
• Additional 20% after second anniversary of offer date
• Additional 20% after third anniversary of offer date
• Additional 25% after fourth anniversary of offer date
• Additional 25% after fifth anniversary of offer date

Participants of the Exxaro and Kumba Iron Ore Management Share Option schemes exchanged each of their Kumba Resources options for an Exxaro option and a Kumba Iron Ore option. The strike price of each Kumba Resources option was apportioned between the Exxaro option and the Kumba Iron Ore option with reference to the volume weighted average price (VWAP) at which Exxaro and Kumba Iron Ore traded for the first 22 days post the implementation of the empowerment transaction. The VWAP was calculated as 32,81% for Exxaro and 67,19% for Kumba Iron Ore.

• the date that the original options would have vested; or
• 24 months from the date of unbundling.

According to the rules of the long-term Incentive Plan (LTIP) executive directors and senior employees of Exxaro Resources and its subsidiaries are awarded rights to a number of ordinary Exxaro shares. The vesting of LTIP awards are conditional upon the achievement of group performance levels (established by the human resources and remuneration committee of the board) over a performance period of three years. The extent to which the performance conditions are met governs the number of shares that vest. The performance conditions set for the initial grant were as follows:

• the total shareholder return (TSR) condition: the Exxaro TSR will be compared to the TSR of a peer group over the three-year performance period, averaged over a six-month period. The peer group comprises of at least 16 members.
• the return on capital employed (ROCE) condition: the ROCE measure is a return on capital employed measure with a number of adjustments.

Targets are set by the committee based on existing ROCE performance in the base year of an LTIP and planned ROCE performance in the final year of the LTIP performance period.

Kumba, at its election would have settled the conditional awards by issuing new shares or by instructing any third party to acquire and deliver the shares to the participants. Kumba however, elected to collapse the scheme before the implementation of the empowerment transaction, since it would have been difficult to firstly measure the performance post the unbundling and also to take into account that employees of both Exxaro and Kumba Iron Ore needed to be compensated for accrued/vested benefits up to the date of the unbundling.

The extent to which the conditions were satisfied up to the date of the unbundling, determined the number of shares deemed to vest for each participant. The cash settlement amount payable to each participant was determined by multiplying the number of shares deemed to vest in each participant by the 30-day VWAP of Kumba Resources shares as at the last practicable date prior to the posting of the transaction documentation to Kumba shareholders.

According to the Deferred Bonus Plan (DBP) rules, executive directors and senior employees of Kumba and its subsidiaries had the opportunity to acquire shares (“pledged shares”) on the open market with 50% of the after tax component of their annual bonus. After the pledged shares have been acquired, the shares are held by an Escrow Agent for the absolute benefit of the participant for a pledge period of three years.

A participant may at its election dispose of and withdraw the pledged shares from Escrow at any stage. However, if the pledged shares are withdrawn from escrow, before the expiry of the pledge period, the participant forfeits the matching award. The participant will qualify for a matching award at the end of the pledge period on condition that the participant is still employed and the pledged shares are still in escrow. The matching award entitles a participant to a number of shares equal in value to the pledged shares. Upon vesting, the pledged shares and the matching award are transferred and released to the participant and rank pari passu in all respects with the existing issued shares of Exxaro.

The company may settle the matching award by issuing new shares or alternatively, instruct any third party to acquire and deliver the shares to the participant. The scheme was also collapsed before the implementation of the empowerment transaction. Participants received 6 012 matching shares in total.

• Awards of “phantom options” were made, with the grant price, vesting dates, and lapse periods set to be the same as those of the options awardable.
• On exercise, the participants are paid (in cash) the difference between the market price (volume weighted average price on the day preceding exercise) and the grant price.
• All other rules and arrangements in respect of the amended Kumba Resources Management Share Option Scheme were replicated for the Kumba Resources Phantom Share Option Scheme.
• The Kumba Resources Phantom Share Option Scheme was replicated for Kumba Iron Ore.
• Exxaro and Kumba Iron Ore entered into an agreement that facilitates the settlement of obligations towards participants of the Phantom Option Schemes.

Accounting costs for Exxaro and Iron Ore Phantom Option Schemes require recognition under IFRS 2 using the treatment for cash-settled share-based payments. This treatment is more volatile than that of the conventional (equity-settled) scheme and the liability will require marking to market at each reporting period. Under the above scheme 98 140 shares were outstanding at 31 December 2006.

A total of 35,1 million shares of the company, representing 10% of the issued shares, were approved and allocated by shareholders for purposes of the Schemes. Of the total of 35,1 million shares, 28,7 million shares are available in the share scheme for future offers to participants, while 6,4 million shares (1,8 % of the issued shares) were allocated as options, long-term incentive plan, deferred bonus payment or deferred purchase shares to participants.

Details are as follows:

At 31 December 2006 the company’s loan to the Exxaro Management Share Trust amounted to R96 741 038 (2005: R50 130 578).

The loan is interest free and has no fixed repayment terms. This amount is reflected as an inter-company loan in the company’s accounts and eliminated at group level.

The market value of the shares available for utilisation at the end of the year amounted to R1 605 933 336 (2005: R1 670 565 282).

Details of the schemes and plans are:

The exercise prices of the options held by Exxaro employees in Exxaro and Kumba Iron Ore respectively at 31 December 2006, have been recalculated with reference to the VWAP split of 32,81% for Exxaro and 67,19% for Kumba Iron Ore.

The last date for exercising these options is 2 May 2010.

Terms of the options and deferred purchase shares outstanding at 31 December 2005 are as follows:

Directors’ interests in shares
For details refer to the report of the directors

Fair value of equity-settled share-based payment transactions with employees

In determining the fair value of services received as consideration for equity instruments, measurement is referenced to the fair value of the equity instruments granted.

The group applied the transitional provisions of IFRS 2 and applied the principles to grants that were granted after 7 November 2002.

Kumba Resources listed on 26 November 2001 and the volatility of its share price since then has been used to determine the calculations.

The changes to the schemes brought about by the empowerment transaction were treated as a modification. The services received were measured at the grant date fair value of the original equity instruments granted. Any incremental increase in the fair value of the equity instruments granted is recognised over the revised vesting period.

The fair value of the options issued under the Management Share Option Scheme was determined immediately before and after the modification using the Black-Scholes option pricing model.

The weighted average incremental fair value granted per option at the original strike price as a result of the modification amounted to R12,55 while the incremental fair value for a repriced option amounted to R14,93.