ARM Coal

ARM Coal was formed in July 2006 in partnership with global diversified mining group XCSA plc. The ownership structure is depicted below. In addition ARM Coal holds the following:

• access to Xstrata’s 20.9% interest and entitlement in the Richards Bay Coal Terminal (RBCT); and
• an export entitlement of 3.2 Mtpa in the phase V expansion at RBCT which is expected to be commissioned during the first half of 2009 calendar year.

Divisional structure

* ARM Coal holds the following: access to Xstrata’s 20.9% interest and entitlement in the Richards Bay Coal Terminal (RBCT); an export entitlement of 3.2 mtpa in the Phase V expansion at the RBCT which is expected to be commissioned during the second half of the 2009 calendar year.

** Participating Coal Business (PCB) refers to Xstrata Coal South Africa’s existing coal operations.

Operational review – F2009

ARM Coal experienced a challenging six months to June 2009, with the weak pricing environment being compounded by a range of operational challenges. Attributable cash operating profit in the current year increased by 18% compared to the previous financial year but attributable headline earnings declined by 23%. There was a substantial increase in the normal depreciation mainly due to depreciation of the capitalised value of the Douglas Tavistock JV off-take agreement. Saleable production for the year was 12% lower than the previous financial year, mainly due to a fire at the Tweefontein plant in November 2008, and abnormally high rainfall in the first quarter of the 2009 calendar year. This decrease was to some extent offset by an increase in saleable production from 1.6 mtpa to 2.5 mtpa at the Goedgevonden (GGV) open cast mine during the current financial year.

Total on-mine costs per tonne increased by 35% in F2009, mainly as a result of an increase in contractor and consumable costs and the reduction of 12% in saleable production. Commissioning of the GGV plant has been delayed from the first quarter to the third quarter of calendar 2009. This was mostly attributable to the abnormally high rainfall referred to above, as well as re-work on steel fabricated for use in the coal processing plant.

From January 2009 there was a marked reduction in demand for inland- and Eskom-quality coal. Although average prices achieved during the financial year were higher than the previous financial year, the last six months of F2009 experienced a decline of 30% for Eskom sale prices compared to the first six months of F2009.

The benefit that GGV enjoyed in the previous financial year, of a significant increase in sales volumes to Eskom, did not continue during F2009. Eskom’s purchases of coal on shortterm contracts decreased as the shortage of coal experienced by the utility was largely resolved in the second half of the 2008 calendar year. A long-term coal supply agreement with a oneyear ramp-up and a six-year supply was concluded with Eskom.

Export volumes were lower during F2009 due to a delay in the commissioning of the RBCT coal processing plant and logistical problems experienced with transporting coal to the port.

At GGV cash costs per sales tonne increased by 11% year-onyear to R89.66 as the long-term cost per saleable tonne (which is used to determine the amount of working costs to be capitalised) was recalculated. This first-time capitalisation of working costs was occasioned by large volumes of in-pit inventory being exposed during the development stage, which will benefit the operation in the future.

Operational overview – attributable to ARM

					Operational target F2010
Operations		F2009	F2008	% change
Attributable sales
PCB	Mt	3.8	4.9	22
Export	Mt	2.2	2.7	(18)
Domestic	Mt	1.6	2.2	(27)
GGV	Mt	0.5	0.7	(28)
Export	Mt	0.1	0.1	0
Domestic	Mt	0.4	0.6	(33)
ARM total	Mt	4.3	5.6	(17)
Export	Mt	2.3	2.8	(18)
Domestic	Mt	2.0	2.8	(28)
ARM Coal cash operating margin	%	38	37
Headline earnings attributable to ARM	R million	135	175	(23)