12.   TECHNICAL-ECONOMIC PARAMETERS

12.1.1  

Basis of Valuation and Technical – Economic Parameters

The valuation of the Material Properties as presented herein, has, inter alia, been based on the LoM Plans and resulting production profiles and associated revenue streams from saleable products operating costs and capital expenditure profiles (collectively referred to herein as TEPs) as provided to SRK by Kumba and Eyesizwe, reviewed and adjusted where appropriate by SRK. The generation of a LoM Plan requires substantial technical input and detailed analysis and is critically dependent upon assumptions of the long-term commodity prices and their impact on: cut-off grades; potential expansion or contraction of the Mineral Resource and Mineral Reserve Base and the return on capital expenditure programmes.

The basis of forward projections of operating costs for mature mining operations generally include an inflation adjusted cost, based on the previous financial year’s performance, with certain modifications for projected improvements in productivity and other cost-reduction initiatives. In the case of development projects, TEPs are invariably based on recently completed feasibility studies and modified where appropriate by detailed engineering.

Where warranted from their independent review SRK has, following discussions with Kumba and Eyesizwe, adjusted the assumed operating costs to assumed future operating conditions (i.e. tonnage contribution from various ore sources and mining methods, mineability and closure of mining assets) and the estimates of improved productivity initiatives.

Unless otherwise stated operating costs assumptions quoted below include the following:

• Cash operating cost components: namely direct mining costs, direct processing costs, direct general and administration costs, consulting fees, management fees, distribution and transportation costs, charges and non-production related sundry income;
  
• Total cash costs: the incremental components, including royalties (refer to Table 12.1 below) but excluding taxes paid, required to yield;
  
• Total working costs: the incremental components, including separation, reclamation and mine closure costs (the net difference of the total environmental liability and the current trust fund provision) but excluding non-cash items such as depreciation, depletion and amortisation, required together with cash operating costs and total cash costs to yield; and
  
• Total costs: the sum of total working costs, net movement in working capital and capital expenditure.

In anticipation of royalties proposed in the draft Minerals and Petroleum Royalty Bill, which had not been promulgated at the date of publication of this report, SRK have used the royalty assumptions indicated in Table 12.1 in the FMs, assuming royalties payable to the State from 1 May 2009.

Additional costs required to reflect the assumed expenditures as represented by the historical operating statistics in Section 2 are the projections of capital costs as given in Section 8. In addition to long-term capital projects, the LoM capital expenditure programmes generally include significant detail based on approved expenditure programmes (typically five years). Where warranted, SRK has made provision over and above these expenditures, specifically, for example, where no detail is available beyond this five-year period for additional infrastructure. On-going capital provisioning is discontinued two years prior to the projected closure dates.

Environmental costs have been included in the operating costs and are not quoted separately as they are confirmed as necessary contributions to the environmental fund. Over the LoM periods, however, it is likely that no significant expenditures will be incurred prior to cessation of operations. Consequently all closure costs are expended in the year of final production. Further, SRK considers that there will be potential opportunities to realise salvage values on closure, although owing to the indeterminate nature of estimating such values these have been excluded from the LoM projections included herein.

For certain Material Properties components of the total working costs are based either on revenues sourced from saleable products, Net Smelter Returns and/or equivalent components. In general these vary between 0% and 3% of the stated working costs. Consequently on the basis of materiality these have not been separately detailed in the TEPs and are referred to by means of a note to the relevant tables.

A separation cost equal to 2% of the annual employment cost times the number of years in the LoM is included in the last year of the LoM.

12.1.2 

Technical – Economic Parameters

The TEPs which have been provided to Kumba for inclusion in the FMs for deriving cash flow projections, include:

• saleable products;
  
• operating cost profiles (representing the total working costs as previously defined); and
  
• capital expenditure profiles.
  

These are detailed in Tables 12.2 to 12.26 for the Material Properties. All expenditures are stated in financial years and in 1 January 2006 money terms.

In accordance with their scope of work, SRK has been informed that there are no significant commodity hedging programmes currently in place at the Material Properties. Kumba has some zinc hedges in place, details of which are provided in Section 14.