Review of the Year

Financial review

The 2004 financial year was a solid one for Implats, despite the challenges posed by the strength of the South African Rand. The gross operating margin for the group was a satisfactory 36%. Group profit of R2.96 billion was 13% lower than in FY2003.

Results for the year

Although sales remained steady in Rand terms at R11.81 billion, the Dollar amount was 32% up from $1.30 billion to $1.72 billion.

Of the major earnings drivers, volumes and metal prices resulted in positive variances, while the exchange rate had a significant negative variance effect on sales.

• Volumes: Platinum sales rose 9% in FY2004, while palladium and nickel sales volumes were 7% and 14% higher respectively, resulting in a positive variance of R1 billion.

• Metal prices: The increase in the Dollar price of platinum offset the lower palladium and rhodium prices, with the basket price (average Dollar revenue per platinum ounce sold) at $1 116/oz compared to $935/oz in FY2003. This resulted in a positive variance of R2.6 billion.

• Exchange rate: The stronger Rand resulted in reduced Rand prices received and a negative exchange rate variance of R3.6 billion was recorded. The average Rand price per platinum ounce sold in FY2004 was R7 678/oz compared to R8 471/oz the previous year, a decrease of 9.4%.

Cost of sales

Total cost of sales rose by 16% to R7.55 billion compared to R6.52 billion in FY2003 as a result of growth of 18% in PGM production. Total cash operating costs amounted to R5.35 billion, a 13.3% increase from R4.72 billion in the previous financial year. The group unit cost per platinum ounce rose by 4.1% to R4 132.

The exchange rate transaction loss for the period amounted to R216 million for the year versus R329 million the previous year.
The applicable exchange rate for the translation of debtors/advances on 30 June 2004 was R6.17/$ compared to R7.52/$ on 30 June 2003, a fall of 18%.

Contributions to earnings

Implats' income is derived from three distinct sources - mine-to-market operations, IRS and equity income from investments.

• Mine-to-market operations: Revenue is generated by operations owned and managed by Implats such as Impala Platinum, Marula Platinum, Zimplats and Mimosa. Margins for FY2004 were 41% for the Impala lease area, down from 52% for 2003. Zimplats only reflects a mine-to-matte margin (the balance of the margin is included in IRS) which for FY2004 was 36%. Mimosa's mine-to-concentrate margin of 51% shows its position as the lowest cost primary platinum producer. Margins at Marula, which is still in a ramp-up phase, cannot be compared.

• IRS: Income is generated by the processing of concentrate purchased and toll treatment. Margins are substantially lower than in the mine-to-market model, reflecting the reduced risks involved and lower capital intensity. Margins recorded during the 2004 financial year of around 19% were slightly higher than during the previous year, due to the toll treatment of material from Lonplats.

• Equity income: Income is generated by those companies in which Implats has equity accountable interests. This includes Lonplats, Aquarius Platinum and Two Rivers, which has not yet come into production. In FY2004, equity income amounted to R328 million.

Impala Platinum's mining operations continued to be the major contributor to earnings, accounting for 57% of group profit in FY2004. Following a 38% increase in platinum production through IRS this year, profit from IRS improved by 161% to R394 million. This represents 13% of group profit, compared to a contribution of 4% last year.

Contributions to profit by both Zimbabwe operations increased substantially. That from Mimosa increased from R11 million in FY2003 to R112 million. With its increased production levels, the contribution by Zimplats/Makwiro rose substantially from R46 million to a profit of R156 million, accounting for almost 5.3% of group profit.

Earnings from Implats' investment in Lonplats continue to make a contribution to group income. Attributable income declined by 55% to R290 million, and the contribution to group earnings decreased to 10% from 19% last year. Dividends received from this investment for the period under review were R285 million (R176 million in FY2003).

Aquarius Platinum (South Africa) increased its contribution in the 2004 financial period with a R39 million profit to the group, as compared to a contribution of R33 million in FY2003.

Earnings

Headline earnings per share for the year declined by 23% to 3 966 cents. This compares with 5 140 cents per share in FY2003. The 9.4% decrease in the Rand revenue per platinum ounce sold during FY2004 resulted in headline earnings per share decreasing by 1 174 cents. Without this impact, earnings per share would have been on par with FY2003. Given the contribution to profit of R322 million in June 2004 from the sale of Barplats, profit for the group as a whole declined by 13%.

The impact of a 10% change in the Rand revenue per platinum ounce sold (basket price) would result in a 30% change in headline earnings.

There was a slight increase in the number of weighted shares in issue to 66.58 million shares.

Dividends

The total dividend proposed for the year is 2 100 cents per share, comprising an interim dividend per share of 500 cents, which was paid in March 2004, and a final dividend per share of 1 600 cents. This is 21% lower than the total dividend declared and proposed in the last financial year of 2 650 cents a share.

Dividend cover remains at 1.9 times, which is in line with the board's stated dividend policy.

Exchange rate

The average Rand/Dollar exchange rate achieved for the 12 months to June 2004 was R6.88/$, 24% stronger than the average rate of R9.06/$ for the preceding 12 months. This was to Implats' disadvantage given that almost all of the group's earnings are generated in Dollars. Implats is generally unhedged with regard to currencies and metals.

Balance sheet, structure and cash flow

A strong balance sheet is maintained in order to meet working capital requirements and to provide internal funding for the bulk of the group's future capital projects. The group generated cash from operating activities of R1.8 billion ($262 million) during the financial year. After funding the group's capital expenditure programmes, dividends and investments, the net closing cash position at the end of the financial year was R636 million ($103million), down from R2.1 billion ($282 million) at the end of FY2003.

Implats continues to maintain a low gearing ratio and has substantial debt capacity. Consequently, the group's weighted average cost of capital (WACC) is not optimal. The group has short-term borrowings of R569 million. The use of these borrowings was driven by the attractive pricing available for shorter-term debt. The group will assume longer-dated debt during the first half of the next financial year.

With the receipt of the proceeds from the sale of Barplats, the group's net debt position as previously forecast did not eventuate.

Investing activities

Group capital expenditure amounted to R1 822 million ($265 million) in FY2004. Capital expenditure at the Impala Platinum lease area was R1 197 million ($174 million) compared to R1 079 million ($120 million) the previous year. This was largely accounted for by expenditure on the decline projects. An amount of R505 million ($74 million) was spent on Marula Platinum and R116 million ($17 million) on Zimbabwean operations.

The group invested R632 million in acquiring its additional stake in Zimplats.