During the 2007 financial year we made significant progress towards achieving our primary objective of building ARM to be a globally competitive and profitable company.
ARM delivered excellent financial results and is paying its first dividend. Our growth is on track and within budget and the commitment we made in 2005 in terms of our stated 2 x 2010 strategy of doubling the production of the company by 2010 is proceeding well.
Our shareholders, 86% of whom are in South Africa, and 14% abroad, have been further rewarded with a substantial increase in the ARM share price, translating into a rise of 160% in the market capitalisation during the year, from R9.96 billion at the beginning of July 2006 to R25.90 billion at the end of June 2007 and outperforming the FTSE/JSE Mining Index by 90%. (See graph below.)
This year’s performance has been characterised by:
What is particularly pleasing is the increasing diversification in our earnings contributions across commodity groupings. The contribution to earnings before interest and tax (excluding exploration and corporate costs) for the 2007 financial year for ferrous metals was 43%, while that of platinum was 37% and nickel 20%. Although ARM Coal’s contribution remains small, we expect to see increasing contributions from this division as efficiencies are realised from the Xstrata Coal South Africa (XCSA) operations and as the Goedgevonden Coal Project ramps up to full production.
In addition to our existing commodity portfolio, we believe our continued investment in Africa will result in increased diversification, with copper being added in the next few years.
I must, at this stage, pay tribute to our partners in our South African assets, namely Assore, Anglo Platinum, Implats, Xstrata and, more recently, Norilsk who has become a partner in the Nkomati project through its acquisition of LionOre.
While in some cases we operate our assets directly, in others we operate these assets jointly with partners who are leaders in their respective commodity sectors. This strategy has given us a swift and solid entry into key commodities and also allows us to create value for our shareholders.
In our 2006 annual report we indicated four group-level objectives, namely:
In every sphere we have continued to deliver; meeting our objectives of developing new platforms for earnings and growth, in alignment with our continued strategy to develop joint venture partnerships with major leading global companies.
At the root of our “we do it better” management philosophy is a focus on operational efficiency to ensure that our projects operate optimally and at robust margins. In all the operations which we manage, partner or influence, we strive to make this an objective for management and employees alike. Almost all of our divisions and commodities have demonstrated exceptional cost control during the year; delivering either a reduction in unit costs, as is the case in nickel, coal and platinum; or reporting below inflation cost increases like in our manganese ore and alloys and charge chrome operations. Inflation, or CPIX, was reported at 6.3% at 30 June 2007.
ARM’s volume increases together with our organic growth projects, are in line with our 2 x 2010 strategy of growth in key commodities with high margin operations. ARM’s organic growth projects, undertaken with our partners, remain on schedule and within budget. The ARM share of capital expenditure in F2007 was R2 billion.
Our project pipeline remains exciting, and consists of the Khumani Iron Ore Mine, thermal coal at the Goedgevonden Coal Project and nickel at Nkomati Mine. At all our operations we continue to assess value creating expansion opportunities, especially given the scale of resources over and above our mineable reserve base.
I wish to highlight our commitment to invest in our businesses for the future. Together with our partners we will be spending approximately R10 billion on capital expenditure during the next three years. We are confident that we will fund our share from our improving cash flow emanating from our operations and by utilising debt facilities within the group.
Some of these projects are funded at the business unit level, such as the Khumani Iron Ore Mine and the Goedgevonden Coal Project.
Harmony’s performance has been the subject of much scrutiny during the year. After their financial year-end, the Chief Executive Officer (CEO) and Chief Financial Officer of Harmony resigned. Graham Briggs, previously Managing Director of Harmony’s Australasian operations, has been appointed Acting CEO and Frank Abbott, ARM’s Financial Director, has been appointed Interim Financial Director. André Wilkens, ARM’s CEO, who has significant gold mining experience and who was Chief Operating Officer of Harmony after the merger of Harmony and ARMgold, has been appointed a non-executive director on the Harmony Board.
Harmony experienced a number of operational challenges. This, combined with unsatisfactory cost control and systems, resulted in various operational areas underperforming during the financial year. In terms of safety, the recent shaft incident at Elandsrand, which resulted in the heroic rescue of some 3 000 employees was a stark reminder that we must re-focus and continue to improve on our health and safety standards at all our mines.
On the positive side, Harmony has made excellent progress in creating flexibility at its existing operations. Substantial progress has been made at its five world-class projects which are expected to transform the company into a global player, with better quality and lower cost assets.
There is currently a process at Harmony of re-focusing and re-motivating management, and reverting to the “Back to Basics” Harmony management style. We are confident that Harmony will be re-positioned as a globally competitive company.
We expect the 2008 financial year to build on the good performance and results of 2007.
We own large-scale, good quality assets that we are able to develop organically without being forced into acquisitive growth in an environment where price expectations for producing operations are high.
ARM is also well positioned as the partner of choice in South Africa and the rest of Africa, and management is confident that we will meet our growth strategies.
The long-term political and economic stability of South Africa requires that as many South Africans as possible participate in and benefit from the growth and development of our economy. With this objective in mind, the ARM Broad-based Economic Empowerment Trust (the BBEE Trust), which was created in April 2005 and which is fully funded, has now completed a rigorous process of allocating 20.4 million shares – equivalent to 10 percent of ARM’s issued share capital – to various trust beneficiaries. The beneficiaries include a number of church groups, trade union companies, seven broad-based provincial upliftment trusts, several community, business and traditional leaders and a broad-based women upliftment trust, as is required under the various empowerment laws and regulations.
The health and safety of all ARM employees, including contractors, remains a primary area of focus. ARM and its partners will continue to work towards achieving zero fatalities at all its operations, something which can only be achieved with close cooperation between management, employees, union representatives, government and other stakeholders.
Notwithstanding some exceptional safety achievements, I need to report with deep regret the occurrence of two fatal accidents during the year. The Board and management of the company extend their condolences to the families and friends of the deceased.
It is pleasing that safety performance has improved across our divisions, specifically at Modikwa Platinum Mine and Black Rock Manganese Mine, at Beeshoek Iron Ore Mine as well as Nkomati Mine.
We extend our appreciation and recognition to our various partners, stakeholders, and the numerous community groups with whom we work. I would also like to express my gratitude to the board, our management and our employees who deserve praise for their sacrifices and continuous commitment to build ARM into a globally competitive company.
Patrice Motsepe
Executive Chairman
5 October 2007
© 2007 African Rainbow Minerals Limited
Nkomati MineARM has achieved exceptional results, is paying its first dividend and is delivering on its growth strategy
