On all fronts – commodity markets, sales volumes, cost control, margin increase and organic growth – it has been a record-breaking year for ARM. Importantly, it is one where we have made significant progress in delivering on the promises that we have made to shareholders and where we have set an excellent platform for both growth and diversification of our asset base in South Africa and Africa.
ARM today has four focus areas: PGMs and nickel; ferrous metals (iron ore, manganese and chrome); coal; copper and cobalt and growth in Africa through TEAL. ARM also has a substantial interest in Harmony.
Each division is run autonomously, with dedicated and experienced managers involved in the operations. The underlying operations are managed closely in conjunction with our partners who make valuable contributions to each and are key to their success. In each of these focus areas the group is actively executing an organic growth programme.
We intend remaining entrepreneurial and fleet-footed to take advantage of new opportunities. We believe that our suite of metals and minerals is geared towards commodities with strong long-term market fundamentals in all of our market segments. The implementation of our diversification strategy, cost control and operational efficiencies and our focus on key commodities is expected to provide ARM with consistent and sustainable growth in profits.
In seeking to develop greater critical mass in Africa, ARM has set up a dedicated African team under the leadership of executive, Dan Simelane, to actively pursue opportunities in this attractive sector which are not in conflict with TEAL’s activities. A feature of every current and new endeavour for ARM is its practice and intention of seeking partnerships with industry and sector leaders and to itself be a partner of choice, providing on-the-ground know-how, access to orebodies and a strong balance sheet.
The year under review proved to be a record for ARM in almost all respects. Headline earnings per share increased significantly, by 158% to 580 cents per share (2006:225 cents per share).
The ARM EBITDA margin has increased from 34% for the 2006 financial year to 47% for the 2007 financial year.
Operational highlights for the year include:
In line with the ARM strategy of increasing operational efficiencies to ensure competitiveness of its operations, management continues to focus on operational cost control.
Volume increases, together with ARM’s organic growth projects, are in line with the company’s strategy to grow, and to double production from 2005 levels by 2010 in key commodities. ARM’s organic growth projects with its partners remain on schedule and within budget, with ARM having spent R2.0 billion (attributable) on capital expenditure during the year:
ARM continues to invest aggressively in building its future growth platform in Africa. In accordance with ARM’s accounting policy on exploration expenditure TEAL’s exploration costs in F2007 continue to be expensed. As a result, the impact of TEAL on group headline earnings increased to a negative R126 million in F2007 from a negative R47 million in F2006.
ARM has agreed to assist TEAL by increasing its current US$20 million guarantee to US$50 million. This will ensure that bridging facilities will be in place beyond the end of the current financial year or until major feasibility studies are completed thereby creating sufficient flexibility for the company to maximise value from its existing portfolio. Specific focus will be on the Konkola North Copper Mine and Kalumines mine and smelter copper projects, as well as the Otjikoto Gold Project. Appropriate funding to refinance the bridging facilities and fund the developmental expenditure at Konkola North, Kalumines and Otjikoto will be arranged by TEAL after the completion of the feasibility studies.
In total, 13 632 employees (including contractors) were employed at ARM-managed operations at year-end. Ensuring the health and safety of these employees is a primary responsibility for our group, and one which we endeavour to carry out in close association with our employees, their union representatives, government and other stakeholders.
It is with regret that we report the occurrence of two fatalities during the course of the year: On 9 February 2007, Mr Wycliff Malusi was fatally injured as a result of a truck collision at the Khumani Iron Ore Mine.On 30 March 2007, a fatal accident occurred at the Two Rivers Platinum Mine in which Mr Michael Thosa, a rockdrill operator, lost his life in a fall of ground accident. The company extends its sincere condolences to the bereaved families and friends of the deceased.
On the positive side, we are pleased to report an improvement in safety statistics at all our divisions during the year. In particular I would like to single out the performance of:
Assmang and the Department of Labour are investigating possible manganism cases at the Cato Ridge Works. A comprehensive improved medical surveillance and employee support programme has been introduced and developed to suit current and future needs.
Our overall view of the commodities markets remains positive, and generally speaking, we believe that they will stay strong but we anticipate a moderate decline over time in some commodities. We are very conscious of the fact that commodity markets are cyclical and management is focussed on increasing production volumes while reducing future unit costs of production. Examples include the emphasis on lower cost long-term growth at Khumani Iron Ore Mine, Two Rivers Platinum Mine and Nchwaning Manganese Mine. We work closely with our partners in understanding current market circumstances when developing our business, projects and growth plans.
Improving operational efficiencies remains a fundamental driver of ARM’s business model, and an area in which we have achieved much success. The chart below illustrates our efficiency in cost control during the year under review. We generally have contained increases to within the inflation rate.
We have set ourselves the target of doubling attributable production by 2010, from 2005 levels, through the construction and commissioning of new mines and the upgrading of current operations. We are well placed to meet these targets and, in some areas, to exceed them.
Many of these projects have come about as a result of organic growth, and will steer our production profile beyond 2010.We have been in the very fortunate position of being able to develop high-quality, long-life projects from our current asset base without having to resort to acquiring high-cost projects in the market.
Our current growth projects are: Nkomati Nickel Large Scale Expansion Project, Khumani Iron Ore Mine and Goedgevonden Coal Project in South Africa and Kalumines in the DRC and Konkola North in Zambia.
The Nkomati Nickel Large Scale Expansion Project bankable feasibility study has been completed and approved for release by the respective shareholders’ boards. This expansion will transform Nkomati Mine from a high-grade, low-volume Massive Sulphide Body (MSB) mine to a low-grade, high-volume Main Mineralised Zone (MMZ) operation. The operation is expected to mill 625 000 tonnes per annum at two separate plants.At steady-state, the mine is expected to produce 20 500 tonnes of contained nickel and 110 000 ounces of PGMs for 18 years, with one million tonnes of chrome ore per annum for approximately four years.
The Khumani Iron Ore Mine began mining operations in May 2007 with its first blast exposing 600 000 tonnes of ore. Construction commenced in 2006. Excellent progress has been made to date with around R2.5 billion already committed, out of the total capital requirement of R4 billion. Khumani will start processing its own ore by April 2008. We also concluded positive negotiations with Transnet, securing our initial 20-year 10 million tonne per annum line capacity, and we are positive about this project’s ongoing expansion potential to 16 million tonnes per annum.
In July 2007,we announced the development of a major new greenfield, open cut, thermal coal mine at Goedgevonden, at a total capital cost of R2.9 billion (excluding the RBCT allocation). At full production, the mine will produce 6.7 million tonnes per annum of thermal coal, almost 50% of which will be exported with the balance being suitable for the domestic thermal markets. Commissioning of the new mine is planned for the first half of 2009, with full production from 2011. Xstrata Coal is facilitating the funding required to reach commissioning and, for ARM Coal’s share, this will be on preferential financial terms.
ARM Coal also reached a significant milestone by successfully obtaining a 3.2 million tonne per annum export allocation for the Goedgevonden Coal Project in the Phase V expansion of RBCT.
Through TEAL, our 65%-held subsidiary, we are making very exciting progress at the copper-cobalt projects in Sub-Saharan Africa. The start of an initial small-scale (10 000 tonnes of blister copper per annum) mining operation at Kalumines is a good first step in building up our copper production. Drilling is continuing at Kalumines and current indications are that there are strong blue sky opportunities for the future. Good progress has also been made at Konkola North, where a mining licence was granted during the year and the technical feasibility study completed in July 2007.
| Operation (100% basis) | Project stage | Volumes in F2007 | At steady state | Life-of-mine (years) | |
|---|---|---|---|---|---|
| Production | Financial Year | ||||
| ARM Platinum | Sales | ||||
| Modikwa Platinum Mine | Approaching steady state | 274 174oz PGMs | 350 000oz PGMs | 2008 | 30 on UG2 |
| Two Rivers Platinum Mine | Approaching steady state | 184 099oz PGMs | 220 000oz PGMs | 2008 | 20 on UG2 |
| Nkomati Interim Expansion | Ramp-up | 4 418t Ni | 5 500 Ni | 2008 | 10 without release of large scale expansion |
| 2 788t Cu | 2 500 Cu | ||||
| 46 101oz PGMs | 21 000 PGMs | ||||
| Nkomati Large Scale Expansion | Bankable feasibility complete
Project released in September 2007 | n/a | 20 500t Ni | 2010 | 18 |
| 9 000 Cu | |||||
| 110 000oz PGMs | |||||
| Nkomati Chrome Mine | Steady state | 584 177t | 1 000 000t | 2007 | 4 |
| Kalplats PGM project | Exploration | n/a | n/a | n/a | n/a |
| ARM Ferrous | Production | ||||
| Nchwaning Manganese Mine | Steady state | 2.418Mt | 3Mt | Dependent on market demand and logistics | 30 |
| Gloria Manganese Mine | Steady state | 0.429Mt | 0.6Mt | Dependent on market demand and logistics | 30 |
| Dwarsrivier Chrome Mine | Approaching steady state | 0.710Mt | 1.5Mt | 2009 | 30 |
| Beeshoek Iron Ore Mine | Downscaling | 6.675Mt | 6Mt | Declining production | 7 |
| Khumani Iron Ore Mine | Development and ramp-up | 10Mt | 1 Mt by 2008 | 30 | |
| 10 Mt by 2010 | |||||
| Khumani Expansion (potential) | Feasibility | 16Mt | Dependent on logistics | 30 | |
| ARM Coal | Sales | ||||
| Xstrata Coal South Africa 65% export/ 35% domestic | Steady state | 21.6Mt | > 20Mt | Current | 20 |
| Goedgevonden Coal Project 48% export / 52% domestic | Ramp-up | 1.5Mt | 6.7Mt | 2011 | 32 |
| Percentage held | JV partners | Resources grade | Resources contained metal | |
|---|---|---|---|---|
| TEAL | ||||
| Kalumines, DRC * | 60% | Gécamines | 3.51% Cu | 462 Mlb Cu |
| Mwambashi, Zambia | 70% | Korea Zinc | 2.03% Cu | 344 Mlb Cu |
| Konkola North, Zambia** | 100% | ZCCM (20% option) | 2.36% Cu | 1 292 Mlb Cu |
| Otjikoto, Namibia | 100% | 1.25 g/t | 1.76 Moz Au | |
| Exploration properties in DRC and Zambia | Gécamines, Korea Zinc, BHP Billiton | |||
* Lupoto deposit only
** East and South (exclAreaA) Measured and Indicated Resources only
We continue to unlock value in two ways: first, through the operational assets and investments that we manage and second, through our exploration portfolio. In the first instance, our delivery of, for example, the export capacity allocation at RBCT has been the trigger for the development of the Goedgevonden project, and speaks for itself. At another level though we seek to add value where our resources and experience have positioned us well.
On the exploration front, we have continued our aggressive exploration campaigns in Africa, through TEAL,and in South Africa,at our various operations.
Particularly at the Otjikoto Gold Project in Namibia we have made excellent progress,having announced a further advancement in the mineral resource post year-end, along with our plans to complete a feasibility study in the coming year. In South Africa, drilling and other exploration work at Modikwa Platinum Mine and Two Rivers Platinum Mine gives us cause to anticipate further growth at these operations in the near future. At ARM, we place a strong emphasis on developing the large, long-term orebodies we already have access to and are confident that they will continue to deliver substantial organic growth opportunities.
Finally, we continue to be on the lookout for opportunities to develop partnerships, but at a price and with the benefits that will make this value-accretive to shareholders. The ARM Coal/Xstrata transaction was completed during F2007, as was the Xstrata acquisition of the 50% stake in the ATC and ATCOM collieries.
Going forward, we anticipate attributable capital expenditure as a result of our growth programme, particularly relating to Khumani Iron Ore Mine, Goedgevonden Coal Project and the Nkomati Nickel Large Scale Expansion Project, remaining relatively high.
In respect of safety, health and environmental issues we have again undertaken an extensive external audit of our managed operations. Further detail on sustainable development issues may be found on pages 87 to 91 of this report. Another issue which bears special mention is the relationship with the Modikwa community which has at times been portrayed in the media as adversarial. We have continued to work closely with the communities at Modikwa and have achieved an excellent working relationship with five of the six community groupings in the area. We have continued to engage with the final grouping in an attempt to resolve potential conflict with the company.
In our community engagement, ARM takes a very active yet pragmatic approach. We were one of the first companies to involve the community at a significant level of ownership in new projects, even before legislation required us to do so. The structures that we put in place and the issues that we have had to deal with have, in many respects, set the ground rules for many such transactions that have followed. We are confident and comfortable that we, as a company, have taken the right steps in ensuring that the community will benefit substantially from the mineral resources that it has on its doorstep and anticipate that the Modikwa community in particular will see a real financial benefit flowing from their shareholding now that the operation has reached a level of profitability. Up until now, the community has benefited from a range of corporate social investment initiatives, including small business development, job creation and infrastructural development and education support projects.
During the coming financial year we will continue our strong focus on the projects currently underway – Khumani Iron Ore Mine, Goedgevonden Coal Project, Nkomati Nickel Large Scale Expansion, Kalumines Copper Cobalt Project and Konkola North Copper Project. We are confident of our ability to deliver these projects on time and within budget.In particular we will seek to contain project costs in the current super-inflationary construction and engineering environment, where both a skills and materials shortage has the ability to lead to large project over-runs, both in time and costs.
We will focus too on delivering improved operational efficiencies not only by bringing on stream more productive and efficient operations, but also by ensuring that we achieve real and lasting improvements from our existing operational base.In this respect we are not afraid to spend capital at the right time to refurbish and replace and to invest in new technology.Our programme of upgrading our Ferrous division smelters in recent years is an example of this and one which is starting to pay dividends.
We also believe in investing in our human resources. We want people who want to be part of our group. Our people must feel they belong and that they add value, and they must be rewarded appropriately for this. We are proud of our track record in attracting and retaining excellent people at ARM and know that there is a significant shortage of skills in the current environment. We want to remain an employer of choice and will continue to focus on offering competitive remuneration, incentivising people appropriately and identifying and measuring their performance in areas that are critical to our business.
André Wilkens
Chief Executive Officer
5 October 2007
© 2007 African Rainbow Minerals Limited
Platinum ore on a conveyor belt at Two Rivers