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Coal Division

ARM Coal

Review of operations

PDF iconARM Coal (PDF - 285KB)


About ARM Coal

The creation of ARM Coal in February signalled the birth of a new major South African coal mining company in a transaction valued at some R2.4 billion ($335 million), with the effective date being after the 2006 financial year end.

ARM Coal, which is 51 percent owned by ARM and 49 percent held by global diversified mining group Xstrata, holds the following assets:

Subsequent to the financial year end, the ARM board approved the exercise of an option held by ARM to acquire a further 10 percent direct participating share in Xstrata's South African coal operations, for R400 million, as from 1 September 2006.

Enlarge ARM Coal map Enlarge map

Transactional structure

On 28 February 2006,ARM and Xstrata announced the establishment of a new major South African coal mining company, ARM Coal. With the establishment of ARM Coal, both shareholding parties, namely, ARM and Xstrata South Africa, subscribed for their interests through respective contributions of R400 million ($56 million) and R384 million ($54 million). In terms of the transaction ARM Coal subscribed for a 20 percent participating interest, in the form of participating preference shares, in Xstrata Coal South Africa for R784 million ($109 million). ARM Coal also acquired a 51 percent controlling stake (for R765 million or $107 million) in the Goedgevonden (unincorporated) joint venture. The ARM board has approved the exercise of an option held by ARM to acquire a further 10 percent in Xstrata's South African coal operations, directly, for R400 million as from 1 September 2006.

Transactional structure

Transactional structure flow chart Enlarge flow chart

ARM and Xstrata South Africa have undertaken to offer all opportunities to participate in any prospecting or mining for thermal coal in South Africa to ARM Coal.

The transaction's financial returns have been significantly enhanced through a capital and interest standstill agreement as well as a dividend upstream principle. Xstrata will provide a loan of R765 million ($107 million) to ARM Coal in order to purchase its 51 percent interest in Goedgevonden as well as the project finance to build the Goedgevonden project.

Xstrata will continue to perform the coal marketing function for export coal produced by both the existing operations and the Goedgevonden joint venture on a fee-based payment structure.

Management

Through the structure of ARM Coal, ARM will not only have a significant stake in these operations but will actively contribute to the management of these businesses. ARM will participate in management at three levels:

Key funding terms on initial transaction
Xstrata Coal
South Africa Debt
Goedgevonden project funding ARM Coal
Debt
Interest holiday (years) 5 8
Interest rate Prime Prime Prime
Capital repayment holiday (years) 5 8
Term (years) 15 18 20
Value R4.1 billion
(existing allocated)
Estimated at time of transaction R2.3 billion R765 million
Cash upstream principle (5 years) 20% of operating cash flow directly to ARM Coal shareholders as a dividend. Balance used to service debt 80% of operating cash flow utilised to service project funding. Balance upstreamed to JV parties 80% of free cash flow received from Goedgevonden utilised to service ARM Coal debt. Balance upstreamed as a dividend

Growth

The Goedgevonden project represents a significant growth opportunity for both ARM and Xstrata South Africa. The operation is planned to produce 3.2 million tonnes a year for the export market and a further 3.4 million tonnes a year for the domestic market. (See below for further information on the Goedgevonden project).

RBCT, in which Xstrata has a 20.9 percent stake, announced an expansion from its existing 72 million tonnes to 91 million tonnes a year. This includes the Phase 5 expansion, at a total cost of approximately R1 billion ($140 million), which is expected to be completed during July 2008.

The precise phasing of the incremental export tonnage is subject to colliery and rail infrastructure developments and will be determined once the projects that will utilise the increase in terminal capacity have been identified. Initial estimates indicate that the full rail and mine capacity will only be available after 2009.

More detailed information is available in the ARM Coal (PDF 285KB) section of the annual report.

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® 2006 African Rainbow Minerals Limited