12.   TECHNICAL-ECONOMIC PARAMETERS

12.25.1 

General Risks and Opportunities

SRK has included its view on the achievement of the LoM Plans and the appropriateness of the Mineral Reserve statements when presenting technical and financial data in this CPR. As of the Effective Date stated in this CPR, SRK considers these projections to be achievable.

In all likelihood many of the identified risks and/or opportunities will have an impact on the cash flows as presented in Section 14, some positive and some negative. The impact of one or a combination of risks and opportunities occurring cannot be specifically quantified to present a meaningful assessment. SRK has however provided sensitivity tables for single and twin parameters.

The sensitivity range covers the anticipated range of accuracy in respect of commodity prices, operating expenditures and capital expenditure projections. In this way the general risks are, with the aid of sensitivity tables, adequately covered.

The Material Properties are subject to certain inherent risks associated with mining operations, which apply to some degree to all participants of the industry. These include:

Commodity Price Fluctuations: Changes in the market price for commodities which may be influenced, inter alia, by market supply and demand;

Exchange Rate Fluctuations: Specifically related to the relative strength of the USD, the currency in which commodity prices are generally quoted;

Inflation Rate Fluctuations: Specifically related to the macro economic policies of the individual countries;

Country Risk: Specific country risk including political and economic stability in the longer term as indicated by the International Country Risk Grade (“ICRG”);

Legislative Risk: Specifically changes to future legislation (tenure, mining activity, labour, health and safety and environmental) within South Africa, Australia and Namibia;

Exploration Risk: Resulting from the elapsed time between discovery of deposits, development of economic feasibility studies to bankable standards and associated uncertainty of outcome;

Environmental Liability Risk: The inability of the Material Properties to fund the balance of their environmental liabilities from estimated operating cashflows, should operations cease prior to that stated in the LoM. This would result in an outstanding liability since the estimated rehabilitation expenditure exceeds the amounts available in the respective rehabilitation trust funds (ZAR265m) as at 1 January 2006. As at 1 January 2006 the total outstanding liability remaining to be funded is estimated between ZAR1,065 – ZAR1,432m;

Occupational Health Risk: The medium and longer-term impact of the HIV/AIDS pandemic given the high rate of infection in South Africa (30%);

Mining Risks: Specifically Ore Reserve estimate risks, uninsured risks, industrial accidents, labour disputes, unanticipated ground water conditions, human resource management and safety performance;

Project Risks: Specifically technical risks associated with projects for which Feasibility Studies have been completed but for which construction, development and production has not commenced; and

Inferred Mineral Resources in LoM Plan: The risk associated with inclusion of Inferred Mineral Resources in the LoM Plans.

In addition to those stated above, the Material Properties are subject to certain specific risks and opportunities, which independently may not be classified to have material impact (i.e. likely to affect more than 10% of the Material Properties’ annual pre-tax profits), but in combination may do so.

12.25.2

Operational Specific Risks and Opportunities

In addition to those stated above, the Material Properties are subject to certain specific risks and opportunities, which independently may not be have a material impact (i.e. likely to affect more than 5% of the Material Properties annual pre-tax profits), but in combination may do so.

The following operational specific risks have been identified:

• A degree of risk associated with the non-achievement of production targets as compared to historical performance. Broadly the impact of non-achievement can be assessed by consideration of the valuation sensitivity tables as presented in Section 14. In this instance SRK consider that the –10% reduction in revenue (production) and the +5% increase in operating expenditures reflects this risk;
  
• A degree of risk associated with the assumption that mining costs as incurred at the South African assets during 2005 are not reliable as a base for forward projection. SRK has used the costs achieved during 2005 as the base for forward projection. In this regard SRK consider that the +10% on cost sensitivity best reflects this situation;
  
• The risk for Sishen South Project and the SEP project that Transnet may not meet the additional capacity requirements on the Sishen–Saldanha railway line. Should the additional capacity not materialise this may result in reduced sales;
  
• The risk that projected Eskom price increases do not maintain parity with the South African Producer Price Index. Some 60% of revenues at Grootegeluk Mine and 100% of revenues at Arnot Colliery and Matla Colliery are derived from Eskom Sales. Should this materialise this may result in a reduction in the operating profit;
  
• The risk that The Matimba Power Station may not renew its contract with Grootegeluk Mine beyond 2025, which may create revenue uncertainty beyond 2025 as Grootegeluk Mine has a LoM of 40 years up to 2045;
  
• The risk that Leeuwpan Mine may not achieve productivity improvements incorporated into budget forecasts, which may affect future financial performance;
  
• The risk that Tshikondeni Mine may not be able to mine 20% of Goni shaft due to 20% of the shaft lying outside the lease area;
  
• The risk to Tshikondeni Mine that Mittal Steel will secure an alternative and cheaper source of supply. Should this materialise then this may result in the cessation of operations at Tshikondeni Mine;
  
• The risk that Zincor will not be able to source zinc concentrate at competitive prices once operations at Rosh Pinah and Black Mountain are discontinued;
  
• The risk of higher closure costs at Zincor and Glen Douglas. Both operations have no closure plan; and
  
• The risk that Eyesizwe’s Material Properties will not meet production targets.
  

The following operational specific opportunities have been identified:

• The potential to increase iron ore exports should the capacity of the Sishen–Saldanha line be expanded;
  
• The potential to increase iron ore resources by 2.9 billion tonnes by including SEP <60%Fe material and iron ore reserves by 1.0 billion tonnes by re-optimising pits to include SEP material <60%Fe;
  
• The potential to increase iron ore resources and reserves by completing pre-feasibility and feasibility studies on Phoenix Project (+60Mt) and Sishen South Phase II (+103Mt);
  
• The potential to reduce operating expenditure by considering synergies between Sishen Mine and Sishen South Project and the potential to reduce capital expenditure by maximising synergy between Sishen South Project and SEP infrastructure;
  
• The potential for Grootegeluk Mine to realise significant productivity improvements from the addition of the Sintel Char Plant;
  
• The potential for Grootegeluk Mine to increase export sales due to an increased allocation from the Richards Bay Coal Terminal;
  
• The potential for Grootegeluk Mine to increase efficiencies by changing haul routes and making waste disposal more efficient;
  
• The potential for Leeuwpan Mine to reduce costs and washing plant yields further by optimising the use of the jig during processing;
  
• The potential for Leeuwpan Mine to realise improved efficiencies in mining from replacing old trucks/loaders, productivity improvement initiatives and optimising the haul road layout;
  
• The potential for Tshikondeni Mine to share cost and productivity gains with Mittal Steel;
  
• The potential for Grootegeluk Mine, Arnot Colliery and Matla Colliery to increase their respective LoMs by extending the lives of the The Matimba Power Station, Arnot and Matla power stations;
  
• The potential for Arnot Colliery to increase revenue by reducing contamination;
  
• The potential for North Block Complex to exploit the contiguous underground reserves (2Mt);
  
• The potential for North Block Complex to increase coal resources and reserves from Belfast, Eerstelingsfontein and Strathrae;
  
• The potential for Rosh Pinah to prove up a 10-year Mineral Reserve; and
  
• The potential for Zincor to import zinc concentrate.