Anglo Platinum business report 2008 - Market review 4/4
MARKET REVIEW
RECORD HEADLINE EARNINGS
Record headline earnings were achieved in 2008. Market conditions and commodity prices deteriorated materially in the latter part of 2008.
In response, Anglo Platinum has initiated a range of cost-management initiatives, including a reduction in capital spend and in the number of contract employees.
Ms Cordelia Vanda is the first female trainee section manager at Union Mine. She joined Anglo Platinum in October and was previously an Anglo American trainee. Anglo Platinum has a number of Companywide initiatives to promote women participation in mining..
FINANCIAL PERFORMANCE
Anglo Platinum’s headline earnings for the year ended 31 December 2008 increased by 8% to R13.3 billion. Factors contributing to this increase were higher US dollar prices realised on metals sold, a rand/US dollar exchange rate that was on average weaker during 2008, and a lower effective tax rate. Lower sales volumes, significant increases in key input costs and an increase in the cost of purchasing metal from joint-venture partners adversely impacted headline earnings.
The high global demand for resources in 2007 continued to increase during the first nine months of 2008, resulting in abnormal increases in labour, contractor, raw materials, energy and other input costs. Together with lower production, this increase in key input costs resulted in an increase of 41% in the cash operating cost per refined platinum ounce to R11,445 in 2008.
The global financial crisis, partly caused by speculative disinvestment, experienced in the last quarter of 2008 curbed demand for platinum group metals (PGMs) and prices declined significantly. Reduced revenue and higher debt levels required immediate action to reduce capital spend in 2009, and also significant cost-reduction interventions.
FINANCIAL RESULTS
Key financial indicators of performance included those shown in the table below:
2008 R million
2007 R million
% change
Net sales revenue
50,765
46,616
8.9
Cost of sales
33,682
27,519
22.4
Gross profit on metal sales
17,083
19,097
(10.5)
Headline earnings
13,292
12,325
7.1
Headline earnings per ordinary share (cents)
5,609
5,239
8.4
Gross profit margin (%)
33.7
41.0
(17.8)
Net sales revenue increased by R4.1 billion, to R50.8 billion. The increase was the result of higher US dollar metal prices achieved on all metals sold, contributing R4.2 billion of the increase and a weaker average rand/US dollar exchange rate of R8.08, compared with R7.04 in 2007, increasing revenue by R6.6 billion. This was offset by lower volumes of metals sold, which reduced revenue by R7.0 billion.
Sales volumes for 2008 were 2.22 million platinum ounces, some 10% or 259,000 ounces less than in 2007. Sales volumes were lower as a result of a decrease in refined platinum production casused by smelter outages and unsold metal at the end of the year.
The average prices achieved on platinum, palladium and nickel sales for the year were US$1,570 per ounce, US$355 per ounce and US$9.79 per pound respectively. Anglo Platinum successfully renegotiated the sales terms for rhodium in the first quarter of 2008. As a result of revised contract terms, the specific details of which are subject to contractual confidentiality, the sales price of rhodium moved closer towards market prices during 2008. The average price achieved on rhodium sales for the year was US$5,174 per ounce.
Net sales revenue has grown at an annual compounded rate of 27% over the past five years. This upward trend in net sales revenue was strongly supported by the average rand basket price achieved, which had an annual growth rate for the same period of 31%. The 2008 average rand basket price achieved was R22,348 per platinum ounce.
Cost of sales increased by 22% or R6.2 billion to R33.7 billion as a result of the following:
•
The cost of purchases of metal increased by 62% to R9.0 billion owing to higher metal prices and an increase in the volume of metals purchased.
•
Cash mining, smelting and refining costs rose by 24% to R23.0 billion, with the cash operating cost per equivalent refined platinum ounce rising by 36% to R11,093. The increase in unit costs is attributable primarily to above-inflation pressures experienced in key input costs, including labour, diesel, chemicals, steel grinding media, explosives and cement, exacerbated by reduced production.
•
Depreciation increased by 20% to R3.3 billion as a result of the significant increase in capital expenditure.
•
Other costs increased by 8%, or R140 million, to R1.8 billion.
•
These increases were partly offset by the increase in the net value of metals in inventory of R3.5 billion in 2008. This is attributed to an increase in stocks within the process pipeline mainly associated with smelter outages, higher refined stocks and an increase in the unit costs of metal inventory, which includes the impact of higher costs in respect of metals purchased.
The Group’s taxation charge decreased to R4.5 billion reflecting a reduction in the effective tax rate from 34.4% in 2007 to 23.4% in 2008. The reduction includes:
•
the reduction in the South African company tax rate from 29% to 28% (R144 million);
•
revaluation of the deferred tax liability owing to the above change (R318 million);
•
reduced STC on the lower dividends paid (R167 million);
•
reduction in the South African STC rate from 12.5% to 10.0% (R329 million); and
•
the election of an STC exemption in respect of the 2007 final dividend paid to Anglo American (R877 million).
Both headline earnings and headline earnings attributable to ordinary shareholders increased during 2008. Headline earnings per ordinary share increased by 7% to 5,609 cents. The average number of ordinary shares in issue for 2008 was 237.1 million shares compared with 236.4 million in 2007.
Split of gross sales revenue by metal
KEY RISKS AFFECTING FINANCIAL PERFORMANCE
Anglo Platinum’s earnings and cash flows are affected by non-controllable external factors that have a material impact on the financial performance of the business. The most significant of these are metal prices, foreign currency risk, liquidity risk and fiscal risk.
METAL PRICES
Metal price risk arises from uncertainty caused by fluctuations in metal prices which may have adverse effects on current or future earnings. The ability to place forward contracts is restricted owing to the limited size of the financial market in PGMs. Forward contracts enable the Group to obtain a predetermined price for delivery at a future date. No such contracts existed at year end.
FOREIGN CURRENCY
Anglo Platinum operates in the global business environment and many transactions are priced in a currency other than the South African rand. Accordingly, the Group is exposed to the risk of fluctuating exchange rates, which can have a significant impact on turnover, earnings, costs and capital expenditure. At 31 December 2008, the Group had R87 million of purchased forward exchange contracts maturing within 12 months, with a net fair value of R5 million.
LIQUIDITY RISK
Liquidity risk is the risk that the Group may not be able to meet its liabilities as they fall due. The Group’s policy on liquidity is to ensure that there are sufficient committed facilities in place which, when combined with cash resources, are to meet funding requirements. At 31 December 2008, the Group had R19.0 billion of committed facilities and R2.0 billion of uncommitted facilities, callable on demand, in place. During January 2009, Anglo American extended committed facilities to the value of R7.0 billion to Anglo Platinum.
FISCAL RISK
Government fiscal policy will impact on Group profitability. The Mineral and Petroleum Resources Royalty Act will come into effect in South Africa on 1 May 2009 and will have an impact on the Group’s operating profit in 2009.
IMPACT OF CHANGES IN ACCOUNTING POLICIES AND ESTIMATES
There were no changes in accounting policies or estimates in the current year. The Group adopted various amendments and interpretations to International Accounting Standards during the year, but none of these had any impact on the financial results for the current period. However, the early adoption of the amendments to IAS 1 – Presentation of Financial Statements did have an impact on the presentation of the financial statements. As a result, the Group has presented a ‘statement of comprehensive income’ that replaces the income statement and also includes all non-owner changes in equity. All changes in equity resulting from transactions with owners in their capacity as owners are presented in the ‘statement of changes in equity’.
BLACK ECONOMIC EMPOWERMENT TRANSACTIONS
On 4 September 2007, Anglo Platinum, Anooraq Resources Corporation (Anooraq) and Mvelaphanda Resources Limited (Mvela) announced transactions that would result in the creation of two significant and sustainable historically disadvantaged South African (HDSA) managed and controlled platinum group metal producers.
Owing to the significant deterioration in global market conditions, coupled with a material decline in platinum group metal (PGM) prices and constrained debt and equity capital markets, the transaction with Anooraq has been under critical review. Anglo Platinum and Anooraq remain committed to concluding the transaction as soon as possible. As this transaction was not yet effective on 31 December 2008, IFRS 5 – Non-current assets/liabilities held for sale and discontinued operations still applies to the assets of Lebowa Platinum Mine, Ga-Phasha, Boikgantsho and Kwanda. Consequently, these assets and associated liabilities are disclosed as ‘non-current assets/liabilities held for sale’ in the annual financial statements, requiring a change in the measurement basis for these assets.
The sale of Anglo Platinum’s shares in Northam to Mvela was finalised in August 2008 and consequently the profit after tax on this transaction of R1.0 billion has been recognised. The only remaining condition for the final implementation of the disposal of Anglo Platinum’s interest in Booysendal to Mvela, is consent from the Minister of Minerals and Energy, which is expected in the first half of 2009. At 31 December 2008 Booysendal was reflected as an asset held for sale.
Shareholders voted on 31 March 2008 to implement the Anglo Platinum Kotula Employee Share Participation Scheme (ESOP). The ESOP has been designed and structured in consultation with Anglo Platinum’s unions. An independent trust, the Anglo Platinum Kotula Trust, effectively managed by the unions, was set up to administrate the ESOP. The ESOP is broad-based and at its inception included some 51,000 employees who had not been participating in any other company share ownership scheme. In terms of value and number of beneficiaries, the scheme represented, at the time it was approved, the largest ownership transaction facilitating broad-based employee share participation in the mining industry at the time of implementation. All current beneficiaries were paid their first dividend of R1,441 per Kotula share in November 2008.
In October 2008, Anglo Platinum and Royal Bafokeng Holdings (RBH), the investment arm of the Royal Bafokeng Nation (RBN), agreed to restructure their 50:50 Bafokeng-Rasimone Platinum Mine Joint Venture (BRPM JV), which includes the Styldrift Platinum project, to create an HDSA-controlled PGM producer. A new company, controlled by the RBH, will manage and assume control of the BRPM JV. This new company will be listed within three years of closing the transaction, which closing is expected in mid-2009. Prior to listing, Anglo Platinum will retain its effective 50% interest in the BRPM JV.
CAPITAL EXPENDITURE
Total capital expenditure for 2008 was R14.4 billion, an increase of 35% or R3.8 billion over 2007. Project capital expenditure amounted to R7.0 billion and expenditure to maintain operations was R6.1 billion. Capitalised interest amounted to R1.3 billion. Capital expenditure during 2008 included the Mogalakwena North expansion project, the Paardekraal 2 shaft replacement project, the Amandelbult East Upper UG2 expansion project, the Base Metals Refinery’s 33,000 tonne nickel project and the Lebowa Brakfontein Merensky replacement project.
The downturn being experienced in the world economy has impacted global demand for commodities causing Anglo Platinum to reassess some of its planned capital expenditure going forward. The availability of capital funding and the increased cost of capital finance have also been taken into consideration when performing the capital expenditure review.
Consequently the total capital expenditure for 2009 has been reduced to R9.1 billion, including R5.6 billion on projects, through deferral of expenditure on several major projects, including Amandelbult No 4 Shaft, Twickenham, Styldrift and the Slag-Cleaning Furnace No 2 at Waterval, all of which were approved during the year.
The Mogalakwena Mine North expansion project is progressing and commissioning of the concentrator has been completed and the relocation of the neighbouring Ga-Puka and Ga-Sekhaolelo communities from the Mogalakwena Mine proposed mining area is nearing completion.
CASH FLOWS
The Group’s net debt position at 31 December 2008 amounted to R13.5 billion, compared with the R4.1 billion net debt position at 31 December 2007. Cash generated from operations amounted to R19.3 billion, 7% below that recorded in 2007, mainly due to higher payments to suppliers and employees. Cash outflows consisted of capital expenditure of R14.4 billion (including capitalised interest of R1.3 billion), taxation payments amounting to R4.5 billion and dividend payments of R14.3 billion. Dividends paid consisted of R13.8 billion ordinary dividends and R8 million preference dividends. In addition, cash distributions of R421 million were made to minorities.
SHAREHOLDING AND DIVIDEND
SHAREHOLDER RETURNS
The shareholders in Anglo Platinum consist of ordinary and preference shareholders. The shareholders are companies, individuals, pension and provident funds, insurance companies, banks, nominees, finance companies, trust funds, investment companies and other corporate bodies.
At 31 December 2008, the Company had 237,078,836 issued ordinary shares, of which resident shareholders held 213,670,921 (90.13%) and non-residents held 23,407,915 (9.87%). The shareholding of Anglo South Africa Capital (Proprietary) Limited increased to 79.64% from 76.53% in 2007.
Resident preference shareholders held 706,843 shares (78.41%) and non-resident preference shareholders 194,599 shares (21.59%) of the Company’s issued 901,442 preference shares as at 31 December 2008.
During the preceding three years, shareholders in Anglo Platinum have enjoyed positive returns, both in terms of dividends and share-price appreciation. During 2008, ordinary shareholders received an interim dividend of R35 per ordinary share. Supported by buoyant markets throughout the first half of 2008, the share price reached a 12-month high of R1,480 per share.
The sudden global economic downturn during the last quarter of 2008 resulted in the share price falling substantially, and ending the year at R518 per share.
DIVIDENDS
Ordinary dividends are declared after consideration of current and future funding requirements, and are paid out of cash generated from operations.
Anglo Platinum paid an interim ordinary dividend of 3,500 cents per share and a preference dividend of 320 cents per preference share during the second half of 2008. Due to the current economic climate and low to short-term recovery expectations, the Board has decided not to declare a final ordinary dividend for 2008, resulting in a dividend cover ratio of 1.6 on full-year headline earnings.
Anglo Platinum business report 2008 - Board of directors
BOARD OF DIRECTORS
TSHAMANO MOHAU FREDERIK (FRED) PHASWANA (64)
BCom (Honours) (Energy Economics) Chairman Non-executive director
Joined Anglo American in 2002 and was appointed director and chairman of Anglo Platinum in 2006
Fred joined the Board of Anglo American South Africa in June 2002. He is chairman of the Nomination Committee and a member of the Governance Committee. He attends the Audit Committee by invitation. He is currently chairman of Transnet and a director of Naspers, and was previously BP regional president: Africa; a director of BP Oil (Benelux); an associate president of BP Netherlands; and chairman and chief executive of BP Southern Africa. His other appointments include the South African Institute of International Affairs.
NEVILLE FRANCIS NICOLAU (49)
BTech (Mining Engineering), MBA Chief executive Executive director
Appointed a director and chief executive in June 2008
Neville joined Anglo American Corporation in January 1979, working in the Gold and Uranium Division at different managerial levels in all the major operating areas in South Africa. In 2000 and 2001 he was the technical director of AngloGold’s South American operations in Brazil. He became the chief operating officer (Africa) of AngloGold Ashanti in 2005 and finally the chief operating officer of AngloGold Ashanti in August 2007. Neville was appointed chief executive of Anglo Platinum in June 2008. He is a director of subsidiaries of the Anglo Platinum Group.
BONGANI NQWABABA (42)
(Appointment subsequent to 31 December 2008) BAcc (Honours) (University of Zimbabwe), CA (Zimbabwe), MBA (University of Manchester and Wales) Executive director: Finance
Appointed a director in January 2009
From September 2004 to September 2008 Bongani served as finance director of Eskom Holdings Limited. Prior to joining Eskom, he served as treasurer and chief financial officer of Shell Southern Africa. In January 2009 he was appointed chief financial officer of Anglo Platinum. Bongani is currently a non-executive director of Old Mutual plc and chairman of the South African Revenue Service Audit Committee. He trained as an accountant with PricewaterhouseCoopers.
CYNTHIA BLUM CARROLL (52)
BSc (Geology), MSc (Geology), MBA Non-executive director
Appointed a director in 2007
Cynthia is chief executive of Anglo American plc. Before joining Anglo American in January 2007 she was president and chief executive of Primary Metal Group, and an officer of Alcan Inc, located in Montreal, Canada. Prior to assuming this position in January 2002 she was for three years the president of Bauxite, Alumina and Speciality Chemicals. She is also a director of De Beers Société Anonyme (DBsa) and a non-executive director of BP plc.
KUSENI DOUGLAS DLAMINI (40)
Bachelor of Social Science (Honours), MPhil Non-executive director
Appointed a director in September 2008
Kuseni is head of Anglo American South Africa and a member of the Executive Committee of Anglo American plc. From December 2005 to June 2008 he was the executive chairman of Richards Bay Coal Terminal Company Limited. Kuseni previously held a number of senior management positions at the operations in South Africa and the London offices of De Beers Consolidated Mines Limited, and at AngloGold Ashanti’s corporate office in Johannesburg. In March 2008, he was named a Young Global Leader by the World Economic Forum. In the same month, Miningmx selected him as one of the 100 most influential people in South African mining.
RENÉ MÉDORI (51)
Doctorate in Economics Non-executive director
Appointed a director in 2007
René is the finance director of Anglo American plc, a member of Anglo American plc’s Executive Committee and chairman of the investment committee of the Board. He is a former finance director of BOC Group plc, and a non-executive director of Scottish and Southern Energy plc. René is also a director of De Beers Société Anonyme (DBsa) and DB Investments SA.
RUSSELL JOHN KING (51)
BA (Honours) (Politics) Non-executive director
Appointed a director in 2007
Russell joined Anglo American plc in 2001 and is the Chief Strategy Officer. He is a member of Anglo American plc’s Executive Commitee. Russell previously had a variety of business and functional responsibilities with Imperial Chemical Industries plc (ICI) in the UK and Australia.
RICHARD MATTHEW WINGFIELD DUNNE (60)
CA(SA) Independent non-executive director
Appointed a director in 2006
Richard was the chief operating officer of Deloitte & Touche in South Africa until he retired in 2006. He serves on the board of Investec Bank Limited and on the boards and audit committees of Tiger Brands Limited and AECI Limited.
BONGANI AUGUSTINE KHUMALO (56)
DAdmin (hc), MA, MBA, Diploma in Management, AEP Independent non-executive director
Appointed a director in 2003 Bongani is the chairman and chief executive of Gidani (Proprietary) Limited, and the chairman of Grey Africa (Advertising), MediaCompete, EDS South Africa and the Graduate School of Business Leadership at the University of South Africa (Unisa). He is a patron of the South African Business Coalition on HIV/AIDS and Professor Extraordinaire at the Africa Centre for HIV/AIDS Management, University of Stellenbosch. He is a member of the Council of Unisa.
MOHAMMED VALLI MOOSA (51)
BSc (Mathematics and Physics) Independent non-executive director
Appointed a director in January 2008
Valli is a non-executive director of Sanlam Limited, Imperial Holdings Limited, Real Africa Holdings Limited and Sun International Limited. He is chairman of Lereko Investment Holdings (Proprietary) Limited. Valli is a member of the Auditor-General’s Advisory Committee and of the National Executive Committee of the African National Congress. He was a cabinet minister from 1994 to 2004. He was also chairman of the United Nations Commission on Sustainable Development during 2002 and 2003.
SONJA EMILIA NCUMISA SEBOTSA (37)
MA Economic Policy Management, LLB (Honours) (International Law) Independent non-executive director
Appointed a director in January 2008
Sonja is a founder and principal partner of Identity Partners, an investment, financing and advisory firm. She was previously an executive director of WDB Investment Holdings (Proprietary) Limited. She was vice president, Investment Banking, Deutsche Securities Inc., from 1997 to 2002. Sonja is a non-executive director of other companies on the JSE, including Discovery Holdings Limited and Mr Price Group Limited, and is a member of the Association of Black Securities and Investment Professionals (ABSIP).
THOMAS ALEXANDER WIXLEY (68)
BCom, CA(SA) Deputy chairman Independent non-executive director
Appointed a director and non-executive deputy chairman in 2001
Tom is the retired chairman of Ernst & Young in South Africa. He served for many years on the Accounting Practices Board and other professional bodies, and is a non-executive director of Avusa Limited (previously Johnnic Communications), Clover Industries Limited, New Corpcapital Limited, Sanlam Developing Markets Limited and Sasol. Tom is the co-author, with Professor Geoff Everingham, of the book entitled Corporate Governance.
Group view
TSHAMANO MOHAU FREDERIK (FRED) PHASWANA (64)
NEVILLE FRANCIS NICOLAU (49)
BONGANI NQWABABA (42)
CYNTHIA BLUM CARROLL (52)
KUSENI DOUGLAS DLAMINI (40)
RENÉ MÉDORI (51)
RUSSELL JOHN KING (51)
RICHARD MATTHEW WINGFIELD DUNNE (60)
BONGANI AUGUSTINE KHUMALO (56)
MOHAMMED VALLI MOOSA (51)
SONJA EMILIA NCUMISA SEBOTSA (37)
THOMAS ALEXANDER WIXLEY (68)