ARM Ferrous

ARM Ferrous
    The Ferrous Division performed well in the year, despite extremely volatile market conditions. Higher prices in the first half were followed by an unprecedented reduction in manganese and chrome volumes sold in the second half.

Divisional structure

Divisional structure

Jan Steenkamp
Jan Steenkamp
Chief Executive: ARM Ferrous

Scorecard

  F2009 objectives       F2009 performance       F2010 objectives  
  Iron ore                  
  Complete commissioning of the second phase of the 10 mtpa Khumani Mine.       The 10 mtpa Khumani Mine was commissioned on time, within budget.       Achieve 10 mtpa production on an ongoing basis.  
  Complete feasibility study for Khumani Mine expansion, to 16 mtpa.       Feasibility study completed and project approval received from all boards.       Continue expanding Khumani Mine, ensuring project remains on time and within budget.  
  Finalise additional 4 mtpa iron ore export contract with Transnet.       4 mtpa export contract with Transnet not finalised; changes to type of locomotives necessitated a review of parameters.       Finalise the Transnet contract for the additional 4 mtpa export allocation.  
  Finalise life-of-mine plan for Beeshoek Iron Ore Mine, for local contract sales.       Life-of-mine plan not finalised due to uncertainty of local market requirements.       Explore options for Beeshoek Mine in terms of local market opportunities.  
  Manganese                  
  Finalise manganese export contract beyond 2009 with Transnet.       Manganese export contract not finalised. Transnet commenced a new process of allocating capacity via Port Elizabeth harbour.       Finalise manganese export contract with Transnet to commence in November 2009.  
  Complete Nchwaning Plant feasibility study (+ 1.5 mtpa).       Feasibility study completed. Board approval received and construction commenced.       Complete construction of new processing plant to take total manganese ore production capacity to 5 mtpa.  
  Cato Ridge Works to commence environmental impact assessment process for the construction of an additional furnace (No 7).       Environmental impact assessment process delayed due to reassess - ment of economic viability of furnace and an accident at the operations.       Re-evaluation of economic viability of additional furnace (No 7), and finalisation of EIA process.  
  Chrome                  
  Commence process of converting Dwarsrivier Chrome Mine from contractor-operator to owneroperator.       Conversion successfully completed.       Establish ARM/Assmang culture with new workforce and improve operational efficiencies.  

Operational overview – attributable to ARM

                                  Operational  
                                  target  
  Sales volumes         F2009       F2008       % change     F2010  
  Manganese ore   000t     1 076       1 856       (42)        
    Nchwaning*   000t     794       1 641       (52)      
    Gloria*   000t     282       215       32        
                                     
  Ferromanganese*   000t     59       124       (52)      
  Iron ore   000t     3 704       3 291       12        
    Khumani   000t     2 908       557       422      
    Beeshoek   000t     796       2 734       (71)        
                                     
  Chrome                                  
    Dwarsrivier chrome ore*   000t     128       152       (16)      
    Machadodorp charge chrome   000t     72       138       (48)        
  ARM Ferrous operating margin   %     63       55                
  ARM Ferrous cash operating margin   %     68       61                
  Headline earnings attributable to ARM   R million     3 150       2 775       14        

* Excludes intra-company sales.

Review of the year

The Ferrous Division performed well in the year, increasing headline earnings attributable to ARM by 14% to R3 150 million, despite extremely volatile market conditions. In the first six months of the year, a commodity bull run supported prices of the division's products, with an unprecedented reduction in volumes sold during the second six-month period. Under these very difficult conditions, the Ferrous Division succeeded in widening cash operating margins from 61% to 68%.

With the exception of iron ore, volumes sold in all the division's commodities decreased compared to the previous financial year. However, revenue rose to R15.26 billion from R14.83 billion for F2008 because of higher US Dollar prices and a weaker Rand. Iron ore sales increased from 6.58 mtpa to 7.41 mtpa mainly due to an increase in iron ore volumes sold from the new Khumani Mine.

The operating costs of all operations, except iron ore, increased at rates in excess of inflation as a result of the rapid downturn in the economy which led to a significant reduction in sales volumes. The costs of the iron ore business decreased by 7%, due mostly to an increase in volumes sold.

The construction and commissioning of the 10 mtpa Khumani Mine was completed in February 2009, 7% below budget and ahead of schedule.

F2009 ARM Ferrous earnings per commodity (100% basis)
F2009 ARM Ferrous earnings per commodity (100% basis)

Assmang cost and EBITDA margin performance

    F2009 cost   F2009  
    increases   EBITDA  
  Commodity group R/tonne   margin (%)  
  Iron ore (7)   70  
  Manganese ore 19   81  
  Manganese alloys 38   62  
  Charge chrome 37   22  

ARM Ferrous sales volumes from 2005 to 2012 (100% basis)

Manganese ore* (000t)   Ferromanganese* (000t)
Manganese ore* (000t)   Ferromanganese* (000t)
     
Charge chrome (000t)   Iron ore (000t)
Charge chrome (000t)   Iron ore (000t)

* Excluding intra-group sales.

Iron ore

The iron ore division achieved contractual sales of 7.41 mpta due mainly to robust Chinese demand. The Khumani Mine has commenced the ramp-up to production of 10 mtpa by July 2011, which is aligned with the Transnet capacity expansion programme.

The Beeshoek Iron Ore Mine reduced production in line with total contracted sales and export capacity allocation. Most of the workforce employed at the Beeshoek operation has been successfully trained and redeployed to the Khumani Iron Ore Mine. Most mining activities at Beeshoek Mine ceased and production was achieved from previous stockpiles and dumps established during the mining life of Beeshoek.

Manganese

In line with demand, sales of manganese ore decreased from 3.7 mtpa in F2008 to 2.2 mtpa in F2009. Production volumes were largely steady at 3.13 mtpa (F2009) from the previous year's 3.15 mtpa. The strategy to maintain production was to restock, due to the high volumes sold during F2008. After achieving critical stockpile levels, production was cut back in line with demand in the last quarter of F2009. Management of the manganese mines engaged with the workforce to commence a process of redeploying employees to the iron ore division which required additional people for the increased production as part of the ramp-up of the Khumani Mine.

 
Khumani plant at night

Operating costs at the manganese mines increased by 19% year-on-year. This was due to higher electricity prices and an increase in production tonnage from the more expensive Nchwaning 2 mine to ensure availability of high quality product for an over-supplied market. Excessive labour costs also contributed to the increased costs due to the recruitment of additional labour for the introduction of continuous operations which was halted when the demand slowed.

Profit margins in the steel industry came under pressure in the year, prompting a shift towards lower-grade, less costly manganese. As a result, sales tonnes from the low-grade Gloria Manganese Mine increased by 31%, with a similar increase in production volumes. This facilitated below inflation cost increases at Gloria.

At the Cato Ridge Works production volumes were reduced in line with the significant drop in demand and some furnaces were shut down, equating to approximately 40% of capacity shut down since October 2008. Tonnages sold decreased by 52% from 247 000 in F2008 to 117 000 in F2009. However, the cost of pro duction increased by 38% due to sharp electricity cost increases and the reduction in volumes produced. A decision was made to accelerate capital expenditure related to improving furnace efficiencies and environmental legislation compliance while some furnaces were shut down. As part of the group-wide cost-optimisation exercise, management at Cato Ridge Works have identified a number of areas where operating costs could be reduced, such as reducing the number of full-time employees and contracting labour as well as improving the efficiencies of the furnaces.

Chrome

The performance of the chrome division was materially affected by the decrease in demand for chrome ore and charge chrome, which are used in the production of stainless steel.

Dwarsrivier Chrome Mine was successfully converted from a contractor-operated to an owner-operated mine. During the last quarter of the financial year both the Machadodorp Works and the Dwarsrivier Mine engaged with the workforce in a process to reduce the total number of employees as part of a major cost-reduction exercise in an attempt, in the short-term, to minimise operating losses.

At Machadodorp Works production capacity was reduced in line with lower demand for charge chrome. This resulted in furnaces being shut down, which also led to a reduction in production levels at the Dwarsrivier Chrome Mine.

Mining rights status

The 10 mtpa Khumani Iron Ore Mine, operating under a new order mining licence, is in the process of updating its licence to operate a 16 mtpa mine. All conversion applications for the Ferrous Division's operating mines - Dwarsrivier Chrome Mine, Nchwaning Manganese Mine, Gloria Manganese Mine and Beeshoek Mine - were submitted prior to the 1 May 2009 deadline.

Safety and health

The Ferrous Division achieved its safety targets at most of its operations during F2009. These included achieving 1.3 million fatality free shifts at Machadodorp Works and 2.8 million fatality free production shifts at Black Rock Mine. The division achieved an overall lost time injury frequency rate (LTIFR) of 3.29 in F2009 compared to 4.9 in F2008. Beeshoek Iron Ore Mine and Machadodorp Works had an excellent year in terms of safety, with the last fatalities at these operations in March 2003 and January 2004 respectively. Both achieved in excess of one million fatality free shifts. Beeshoek Iron Ore Mine and Machadodorp Works were placed second and third respectively in the 'Excellence in Safety' competition in the ARM Group. Cato Ridge Works' safety record improved significantly in the year and was placed second in the competition.

Regrettably, four fatalities occurred during the year: two at Khumani Mine, one at Black Rock Mine and one at Dwarsrivier Mine. A contract security guard at Khumani died from smoke inhalation from a fire he made in a mobile guard room. A driver was fataly injured when his dump truck collided with a similar vehicle on the Bruce haulroad at Khumani Mine. Two employees were fataly injured in separate fall of ground incidents at Black Rock and Dwarsrivier Mines.

All operations conduct medical surveillance of employees in accordance with the requirements of relevant legislation. An inquiry into possible causes of manganism has been completed and a report from the chairman of the inquiry is expected in the near future.

Logistics

The contractual agreement with Transnet to increase iron ore exports to 14 mtpa through the port of Saldanha Bay is being finalised. Along with other producers and Transnet, ARM Ferrous is investigating the possible expansion of the iron ore corridor to handle in excess of 60 mtpa.

ARM Ferrous is also participating with Transnet in a capacity allocation process to finalise future manganese export tonnages. It is anticipated that the short-term allocation process will be completed towards the end of the 2009 calendar year, while the long-term allocation process will be finalised during 2010.

Capital expenditure

Assmang's total capital expenditure was R2.8 billion of which R1.4 billion was attributable to ARM (F2008: R2.9 billion). The main expenditure items include the completion of the new Khumani Mine (R924 million) and construction of the Nchwaning benefication plant (R161 million), which is expected to be commissioned in March 2010. At Cato Ridge, R296 million was spent on rebuilding furnaces and on control of fume emissions at the Cato Ridge and Machadodorp Works, R383 million on mining fleet enhancements, R191 million on housing and R165 million on various capital replacement items.

Prospects

The downturn in the world economy, with the resultant reduction in demand for steel, has had a significant impact on the earnings generated by the Ferrous Division. This is likely to continue to be the case. However, there are early signs of increased demand and production will be ramped up accordingly.

F2009 ARM Ferrous capital expenditure per division (100% basis)
F2009 ARM Ferrous capital expenditure per division (100% basis)

Iron ore sales volumes for the new financial year are expected to reach 9.8 million tonnes, with all export volumes coming from Khumani and local sales being sourced from Beeshoek.

The Ferrous Division will continue with its growth strategy, albeit at lower margins in the short-term, helped by steps taken in the past seven years to make the business more efficient. These include capital spent on more cost-effective infrastructure development (such as Nchwaning 3, Dwarsrivier Mine, Khumani Mine, and the upgrade of furnaces) as well as prudent investment in human resources and equipment. These capital investments have significantly improved operating efficiencies, resulting in the operations being well benchmarked on the cost curve for comparable global producers.

The Ferrous Division is also working to become an employer of choice over the next two years. To achieve this, a number of criteria need to be further enhanced through defined actions which cover areas such as community investment and involvement, remuneration and housing.

A key objective remains the further expansion of the Khumani Iron Ore Mine to 16 mtpa, within budget and on schedule.

The future earnings of the manganese division are dependent on the export capacity allocation it receives from Transnet and the short-term allocation (2009 - 2013) will only be decided towards the end of the 2009 calendar year. Demand from potential new manganese producers is unclear and so it is uncertain how much capacity will be allocated to the Ferrous Division through Port Elizabeth. Assmang, Transnet and other producers are currently evaluating various options to increase manganese export capacity from South Africa.

Market review

The past financial year was a tale of two halves. Until October 2008, when the extent of the global financial and economic crisis first became apparent, sales volumes were strong and prices for our commodities were at high levels. Thereafter, production of both carbon and stainless steel dropped sharply, affecting demand for the products from all three divisions. Two of our main markets, the USA and Europe, have recently started to show signs of stabilisation after months of decline. China - after several months of reduced production - successfully stimulated its economy and by June 2009 production of steel was again running at record levels.

Iron ore

Spot prices for iron ore in China fell dramatically after the start of the financial crisis which meant that much high-cost domestic Chinese iron ore capacity could no longer compete and was mothballed. This then pushed up demand for imported ore.

Pricing in the iron ore market is in a state of transition. The traditional annual benchmark pricing system is under threat, particularly in China. Settlements over the last two years have included quarterly and index pricing in addition to spot sales. Major iron ore producers are split on their views as to whether an indexing pricing method should replace the benchmark. For the last quarter of the year under review, provisional prices were agreed at levels 45% and 33% lower than the previous year for lump and fines respectively. Although negotiations are still continuing we expect that these levels - especially in China - will prevail for contractual tonnages for the first three quarters of the new financial year.

Ferrous pricing trends for F2009

Managanese ore 48%/50% (CIF) (US$/mtu)   Iron ore lump price bencjmark (FOB) (Usc/ltu)
Managanese ore 48%/50% (CIF) (US$/mtu)   Iron ore lump price bencjmark (FOB) (Usc/ltu)
     
Ferrochrome benchmark spot (CIF) (US$/lb)   Ferromanganese benchmark 78% (CIF) (US$/t)
Ferrochrome benchmark spot (CIF) (US$/lb)   Ferromanganese benchmark 78% (CIF) (US$/t)

Manganese

The change in the fortunes of the manganese division was dramatic. Requirements for ore and alloy virtually disappeared for a period while our customers reduced their production levels as demand evaporated. There was also a period of de-stocking when apparent demand was even lower than actual demand and our customers tried to reduce their stocks of high-cost raw materials. Demand for manganese ore then picked up in the last quarter of the financial year, with substantial exports into China and the rest of Asia. This trend appears sustainable as purchasers in the rest of the world are now also indicating that they need to replenish stocks. During the year, manganese ore prices plunged to less than 25% of the record levels that were reached in mid 2008. However, recently there have been signs of a slow price recovery as high-cost, marginal producers have exited the market.

Manganese alloys were also badly affected by the credit crisis, and production and sales volumes, as well as prices, fell steeply. The alloy industry responded quickly and decisively as producers closed or cut production. Towards the end of the final quarter we saw increased demand and some minor price recovery. The outlook for our manganese alloys in the new year is dependent on both a recovery of steel production outside China and continued production restraint from major Western alloy producers. However, the low prices have meant that China has sharply reduced alloy exports to the West.

Ferrochrome

Like manganese, the chrome division was badly affected. Stainless steel production for the second half of calendar 2008 was down over 26% and was even lower in the first half of calendar 2009. Production now seems to have bottomed out, but only China and some of the other Asian economies are producing strongly.

This significant reduction in stainless steel production had a catastrophic effect on the ferrochrome market, with demand by late 2008/early 2009 dropping to almost zero for a period, and prices falling by well over 60%. As a result, ferrochrome production - particularly in South Africa - was slashed to balance the market. The earlier-than-expected upturn in the stainless steel market, particularly in China, then coincided with the South African winter electricity tariff increase. This has meant that a significant number of furnaces were out of operation for maintenance and the ferrochrome market has tightened, with stocks low. However, there are concerns that an expected rapid ramp-up of production after the winter period may coincide with Chinese stainless steel production being moderated to reflect real consumption.

Stockpiling of iron ore prior to railing at Khumani Iron Ore Mine
 
Drill-rig and crew at
Khumani Iron Ore Mine

ARM Ferrous Operational Statistics

Iron Ore Division

Beeshoek and Khumani Iron Ore Mines

  Management   Jointly managed by ARM and Assore, through Assmang. ARM provides management, administration and technical services, while Assore performs the sales and marketing function as well as technical consulting services.
  Reserves and Resources   Beeshoek   109.7 million tonnes at 63.71% iron
  - Measured and Indicated   Khumani   632.9 million tonnes at 64.56% iron
  Reserves and Resources   Beeshoek   45.2 million tonnes at 64.95% iron
  – Proved and Probable   Khumani   565.8 million tonnes at 64.49% iron
  Total labour   2 003 (including 1 012 contractors)

Refer to page167 for Iron Ore segmental information.

                        F09/08  
        F2006   F2007   F2008   F2009   % change  
  Attributable headline earnings R million   199   340   390   1 080   177  
  Operating margin %   39   44   39   60      
  Total iron ore sales 000t   5 926   6 855   6 582   7 409   13  
  Beeshoek Iron Ore Mine                        
  Iron ore produced 000t   5 536   6 675   4 493   2 658   (41)  
  Iron ore sold 000t   5 926   6 855   5 466   1 593   (71)  
  Sales revenue R million   1 411   2 164   2 282   1 284   (44)  
  Total costs R million   857   1 197   1 218   361   (70)  
  Operating profit R million   554   967   1 064   923   (13)  
  Capex R million   346   94   100   160   60  
  Khumani Iron Ore Mine                        
  Iron ore produced 000t       1 848   6 646   260  
  Iron ore sold 000t       1 115   5 817   422  
  Sales revenue R million       493   3 733   657  
  Total costs R million       478   1 576   230  
  Operating profit R million     (6)   15   2 157   14 280  
  Capex R million     1 641   2 131   1 369   (36)  

Khumani expansion project

Khumani expansion project

Manganese Division

Nchwaning and Gloria Manganese Mines and Cato Ridge Ferromanganese Works

  Management     Jointly managed by ARM and Assore, through Assmang. ARM provides management, administration and technical services, while Assore performs the sales and marketing function as well as technical consutling services.
            Tonnes   Mn%   Fe%         Tonnes   Mn%   Fe%  
        Nchwaning                 Gloria              
  Reserves and Resources     Seam 1   130.6   45.1%   9.04%     Seam 1   53.3   38.2%   5.5%  
  – Measured and Indicated     Seam 2   180.5   42.4%   15.50%     Seam 2   29.4   29.9%   10.1%  
  Reserves and Resources     Nchwaning   109.4   45.1%   9.04%                    
  – Proved and Probable     Gloria   41.0   38.2%   5.50%                    
  Total labour     2 943 (including 834 contractors)

Refer to page167 for Manganese segmental information

                        F09/08  
        F2006   F2007   F2008   F2009   % change  
  Attributable contribution to headline                        
  earnings R million   163   288   2 043   1 963   (3)  
  Operating profit margin %   25   33   64   78      
  Manganese ore                        
  Manganese ore produced 000t   2 572   2 847   3 154   3 138   (1)  
  Manganese ore sales* 000t   1 678   2 327   3 711   2 152   (42)  
  Revenues* R million   994   1 310   6 796   6 308   (7)  
  Total costs R million   586   858   2 060   1 355   (34)  
  Operating profit R million   408   452   4 736   4 943   5  
  Capex R million   156   174   218   567   160  
  Manganese alloys                        
  Manganese alloys produced 000t   309   347   261   216   (17)  
  Manganese alloys sold 000t   260   251   247   117   (53)  
  Sales revenues R million   1 015   1 380   2 756   2 128   (23)  
  Total costs R million   915   931   1 332   883   (34)  
  Operating profit R million   100   449   1 424   1 246   (13)  
  Capex R million   83   123   293   286   (2)  

* Excluding intra-group sales.


Khumani Iron Ore Mine
Khumani Iron Ore Mine

Chrome Division

Dwarsrivier Chrome Mine and Machadodorp Ferrochrome Works

  Management   Jointly managed by ARM and Assore, through Assmang. ARM provides management, administration and technical services, while Assore performs the sales and marketing function as well as technical consutling services.
  Reserves and Resources   53.2 million tonnes at 39.56% Cr2O3%
  - Measured and Indicated    
  Reserves and Resources   39.6 million tonnes at 39.5% Cr203%
  – Proved and Probable    
  Total labour   1 471 (including 269 contractors)

Refer to page167 for Chrome segmental information.

                        F09/08  
        F2006   F2007   F2008   F2009   % change  
  Attributable headline earnings R million   (32)   38   342   107   (69)  
  Operating profit margin %   (3)   9   38   15      
  Dwarsrivier chrome ore                        
  Chrome ore produced 000t   526   710   849   684   (19)  
  Chrome ore sold* 000t   178   172   304   256   (16)  
  Sales revenues* R million   68   79   177   337   90  
  Operating profit R million   (6)   (12)   (3)   45   1 600  
  Capex R million   59   122   68   127   87  
  Machadodorp charge chrome                        
  Charge chrome produced 000t   230   242   270   169   (37)  
  Charge chrome sold 000t   210   232   275   144   (48)  
  Sales revenues R million   870   1 195   2 331   1 473   (37)  
  Total costs R million   893   1 069   1 382   1 242   (10)  
  Operating profit R million   (23)   126   949   231   (76)  
  Capex R million   61   77   90   270   200  

* Excluding intra-group sales.


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