Ferrous Division

About ARM Ferrous

ARM Ferrous' interests comprise a 50 percent stake in Assmang Limited's (Assmang) operations. Assmang is jointly controlled with Assore Limited (Assore).

Assmang comprises three operating divisions based on its three commodities:

• The Iron Ore division, comprising the Beeshoek mine and the Khumani project in the Northern Cape Province;
• The Manganese division, comprising the Nchwaning and Gloria manganese mines, also in the Northern Cape Province, and the Cato Ridge Ferromanganese Works in KwaZulu Natal Province. In addition, this division holds a 50 percent interest in Cato Ridge Alloys (Pty) Ltd, a joint venture between Assmang, Mizushima Ferroalloys Company Limited and Sumitomo Corporation.
• The Chrome division, comprising the Dwarsrivier Chrome mine and the Machadodorp Ferrochrome Works, both in the Mpumalanga Province.

The operations are managed jointly by ARM and Assore through a board-appointed Operations Committee. ARM is responsible for the technical and administration functions, while Assore performs the marketing function.

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Review of the markets

World crude steel production increased by 6 percent to a level of 1.13 billion tonnes in calendar 2005.

China's continued unrivalled demand for most commodities has largely continued during the financial year. China produced 349 million tonnes of crude steel in 2005, which was 25 percent above the 2004 level. The January to June 2006 figures reflect world production of 595.7 million tonnes, of which China produced 199.5 million tonnes.

More recently, there have been increasing concerns regarding the potential slowdown in Chinese demand, coupled with concerns regarding the macro-economic environment, particularly relating to higher interest rates and inflationary threats in the major global economies.

Assmang has experienced a mixed response with regards to volumes and prices in the products it sells.

Iron ore

The sea-borne iron ore trade in calendar 2005 was 670 million tonnes and this is expected to increase to at least 730 million tonnes in calendar 2006 as growth in world crude steel production continues.

Iron ore, which is benefiting in particular from strong demand but also a highly consolidated global industry, achieved record sales tonnages and significant price increases. The global iron ore benchmark price increased during the year under review by 71.5 percent (effective April 2005) and a further 19 percent increase was effected in April 2006.

Manganese ore

The higher prices achieved during calendar 2005 resulted in an oversupply of manganese ore to world steel markets. Some steel producers have increased their utilisation of lower grade manganese ore which has had a negative impact on high grade manganese ore demand and prices.

Manganese alloys

Robust carbon steel production, mainly in China, resulted in strong demand for manganese alloys. After an over-supply situation in early calendar 2006, production cutbacks brought the market back into balance and prices for manganese alloys increased across the board. Prices have now reached levels that are attractive to marginal producers and supply is increasing to the extent that prices could be negatively affected going forward.

Chrome ore and alloys

The bulk of chrome ore mined world-wide is converted to ferrochrome and utilised in the production of stainless steel. Global stainless steel production increased dramatically from the beginning of calendar 2006, reversing the significant cutbacks made by producers outside China in the second half of calendar 2005.The first half of calendar 2006 has seen very strong production of stainless steel at 13.3 million tonnes and total production for calendar 2006 is likely to reach at least 26 million tonnes (2005 calendar year: 24.6 million tonnes).

Owing to strong stainless steel demand in the latter part of the year the ferrochrome market has become balanced and, combined with a strengthening rand, the prices for ferrochrome finally increased in the second quarter of the calendar year after consistent reductions in the previous three quarters.

Review of the year

Assmang's turnover during FY2006 was maintained at R4.4 billion ($614 million), although attributable earnings decreased by 30 percent to R667 million ($93 million) (2005: R949 million; $133 million) mainly as a result of lower ferromanganese prices and lower manganese ore and ferrochrome volumes and prices which resulted in lower margins on all commodities with the exception of iron ore.

Key highlights of the year include:

• The construction of the 8.4 million tonne per annum Khumani iron ore mine, with an estimated capital expenditure of R3.2 billion ($446 million), was approved in February 2006 and construction started in June 2006. Production from this operation, which is expected to come on stream in July 2008, will substantially replace that from Assmang's Beeshoek operation.
• The Nchwaning III shaft system is now fully operational at a substantially lower production cost than Nchwaning II.
• The Dwarsrivier underground chrome mine was completed ahead of schedule and within budget and is building up to the required capacity to supply Assmang's ferrochrome smelter with all of its ore requirements. Chrome ore mining costs have increased as the mine moved from opencast to underground mining operations.

After the year-end Assmang and Transnet commenced negotiations to conclude an agreement in terms of which Assmang's existing 6 million tonnes per annum iron ore allocation through the Port of Saldanha will build up to 10 million tonnes per annum. These tonnages will initially be supplied from the Beeshoek and, finally, as build-up is achieved, the Khumani mines.

Major capital projects

During the year under review Assmang spent R705 million ($98 million) on capital expenditure. Of this:

• R346 million ($48 million) was spent in the iron ore division: at Khumani (R57 million or $8 million), and Beeshoek (R209 million or $29 million).
• A further R239 million ($33 million) was spent at the manganese division, of which R157 million ($22 million) was spent on mining operations and R82 million ($11 million) at the ferromanganese works.
• The chrome division accounted for R120 million ($17 million) of capital expenditure, which was spent mainly on the completion of the Dwarsrivier underground mine (R57 million or $8 million) and furnace rebuilds (R34 million or $5 million) at the ferrochrome works.

Outlook and growth

In FY2007 production and sales volumes are expected to increase slightly but earnings growth will largely be dependent on commodity prices and the rand/US dollar exchange rate. The division's R1.8 billion ($251 million) capital expenditure programme will continue during the year ahead, mainly on the construction of the Khumani iron ore mine (R1.2 billion or $168 million).

More detailed information is available in the ARM Ferrous (PDF 283KB) section of the annual report.