Ladies and gentlemen, welcome to the annual results presentation for the year ended June 2005.
Welcome too to any participants we may have through the tele-conference call and webcast.
You have in your hand-out a copy of the annual report, press releases and this slide presentation. For those of you who would like a more detailed segmental analysis, we have provided this on our website at www.implats.co.za.
I will be handling the overview, the marketing and operational reviews, and touching on topical corporate issues and prospects. David Brown will deal with the financial issues.
2005 was a very good year for Implats and was characterized by an excellent safety and operational performance, particularly at Impala. Group safety once again recorded a best ever performance.
Headline platinum production was up 5% with the main contributor Impala Platinum achieving best ever production of 1.115 Moz. Unit costs were well controlled at Impala and only increased by 5.3% to R4,251. Group unit cost increases at 9.7% (8.3% including export credits) were disproportionately affected by the impact of the fixed exchange rate in Zimbabwe.
On the back of a 6% increase in PGM sales volumes, sales revenue grew by 6% to R12.5bn. Net profit increased by 78% to R5.2bn but note that this includes the proceeds of the Lonplats sale net of the Marula impairment write-off. Headline earnings were up 10% to R43.25. The Board has declared a final dividend of R18 per share resulting in a total dividend for the year of R23 per share-up 9%.
Headline earnings for the year were up 10% to R43.25 per share. This compares with R39.34 per share in FY2004 and marks a turnaround in earnings which have suffered at the hands of a strong appreciating Rand in recent years. It is also worth noting that compared with the first six months of the year, earnings for the second half were up 70% giving some insight into the strength of the underlining business.
We have weathered the storm brought about by 4 years of decreasing Rand metal prices and are now well geared for any upside that a weaker currency trend may offer.
This chart shows the Rand basket price in blue bars (left hand axis) and Dollar basket in red line (right hand axis). While dollar revenue per platinum ounce increased by 15% to $1279 / oz, the 10% strengthening of the rand resulted in rand revenues only increasing by 3% to R7930 / oz. The significant feature of this chart is that FY2005 represented a turnaround in Rand basket prices for the first time in five years.
This chart shows the net surplus or deficit (blue bars) and platinum price in red line. Detailed supply and demand analysis is provided in our annual report. Five consecutive years of deficit in the platinum market which mopped up above-ground stocks ended in 2004 with the market moving back to balance as South Africa supply growth outpaced a more modest increase in demand. In essence the outlook is for a balanced market going forward with our Pt price forecast in the range $800-$900/oz.
The automotive industry continues to be the main driver of demand where its main use is in the control of emissions from diesel vehicles. A combination of rising diesel car sales in Europe and tightening emission legislation has been behind the recent surge in demand.
The outlook is one of strong growth going forward further supported by:
This could be further aided by:
Palladium demand grew strongly in 2004, primarily as a result of its introduction in jewellery in China. Despite this, a surge in supply driven by further de-stocking of Russian metal, resulted in the market registering a 1Moz surplus.
Although the demand fundamentals for palladium continue to improve through the switch back to palladium formulations in gasoline vehicles and the palladium jewellery initiatives, above-ground stocks in Zurich (estimated at 6m ozs) and in the Russian Central Bank will cap the price in the medium term.
Price forecast $150-$200/oz
The supply of rhodium has been virtually unchanged whereas strong demand from both the automotive and glass industries resulted in the market moving close to balance with a concomitant strengthening of the price. The tightening NOx emission regulations worldwide will be the main driver of future demand. It is a brave man who attempts to forecast the rhodium price with any certainty, hence our wide forecast range of $1250 - $2000 per ounce for the next few years.
A combination of strong demand, primarily from the stainless steel industry, and lower than anticipated supply growth resulted in prices remaining firm throughout the period.
Looking forward, the fundamentals for nickel remain positive with supply struggling to keep pace with anticipated demand. It is in this light that we announced our participation in the Ambatovy nickel project in Madagascar. We believe this low-cost laterite project provides an ideal platform to participate in the opportunity to supply into this projected shortfall.
Good afternoon ladies and gentlemen and thank you Keith.
We start our financial review with the income statement and highlight several points:
Net forex transaction gains/losses
As Keith has already outlined, this was the first period in some time in which we had a foreign exchange gain as opposed to a foreign exchange loss.
Profit of associates
No financial results presentation nowadays, unfortunately, would be complete without a comment on changes in accounting policies.
In 2004, the Group undertook the early-adoption of certain accounting policies and again in 2005, we undertook the early adoption of certain IFRS standards and the relevant interpretations (IFRIC). The 2005 accounts reflect these changes.
The adoption of these standards has had little or no effect on the results.
The only one I would like to highlight is IFRS 2: that is the one concerning share-based payments.
The early adoption of IFRS 2 has resulted in a change in accounting policy for share-based payments. Since June 2004, the cost of all non-vested share options outstanding and issued since 7 November 2002 is to be expensed though the income statement.
Consequently, the early adoption of IFRS 2 has resulted in:
| 2005 | 2004 | |||
|---|---|---|---|---|
| Increase in remuneration expenses (Rm) | } | Decrease in earnings | 22.3 | 21.7 |
| Decrease in earnings per share (cps) | 41 | 32 |
Looking forward, a similar amount is expected for share based plans in FY2006
| (Rm) | FY05 | FY04 | Notes |
|---|---|---|---|
| Impala | 2 201 | 1 678 | Impala Platinum's mining operations benefited from strong growth in volumes and metal prices and continued to be the major contributor to group earnings, accounting for 77% of group profit in FY2005. |
| IRS | 466 | 394 | Profit from IRS improved by 18% to R466m as it benefited from a forex gain of R113 million. This represents 16% of group profit compared to a contribution of 15% last year. |
| Zimbabwean Operations | 185 | 268 | Contributions to profit by both Zimbabwean operations declined due to increased operating costs as a result of the managed exchange rate and the effect on local costs of high local inflation |
| Marula | (105) | (23) | Contribution by Marula reflects the state of this entity which is still in a ramp-up phase. |
| Other | 114 | 302 | This is largely from Lonplats and Aquarius and includes the final contribution of R208 million from the sale of the Lonplats equity stake. |
| Headline earnings | 2 861 | 2 619 | Headline earnings per share for the year increased by 10% to 4 325 cents. |
| Extraordinary items | 3 227 | 322 | The 2004 figure includes the sale of Barplats while the 2005 figure includes profit on the sale of Lonplats of R3 155 million and on the sale of Messina IRS contract to Lonmin for R72 million. |
| Marula impairment | 850 | The advised charge for the period ending December was slightly higher at approximately R1.2 billion (after tax) – this has been reduced to R850 million. This is largely a result of a change in the fundamental outlook of metal prices (particularly platinum and rhodium for which the outlook is a lot more positive). | |
| Net profit | 5 238 | 2 941 |
| FY05 | FY04 | Notes | |
|---|---|---|---|
| From operating activities | 2 801 | 1 780 | This is largely from Impala, and was positively impacted by the higher rand prices achieved and lower royalties (due to the higher capex) and lower taxes paid. |
| From investing activities | 2 499 | (1 751) | This amount is positive for the first time in several years and includes the sale of Lonplats – R4.9 billion – less capital expenditure of R2.0 billion and loans granted in terms of the Incwala transactionof R617 million. |
| From financing activities | (2 503) | (1 167) | This is made up of three items:
|
| Net increase/ (decrease) in cash | 2 797 | (1 138) | Net impact of this was an increase in cash for the period which ... ... |
| Cash balance per cash flow | 3 984 | 1 187 | |
| Cash net of short-term debt | 3 981 | 636 | ... left cash at end of year of close on R4 billion. |
It is important to overlay the cash position of the group with planned group capital expenditure going forward.
In 2004, capital expenditure was recorded at R1.8 billion. Total capital expenditure for 2005 was close on R2 billion. The major expenditure item was at the Impala Lease Area at R1.7 billion, mostly on the completion of the decline projects and 16 and 20 shafts. In 2006, capex of R3.3 billion is planned with expenditure at the Impala Lease Area is expected to be R1.9 billion for FY2006 (mainly on the new 16 Shaft and 20 Shaft).
The increase in FY2006 capital expenditure at Zimbabwean operations relates to the Mimosa and Zimplats expansions. Regarding Zimplats, this includes the switch from opencast to underground mining. Of the approved $46 million vote for this change-over, $4.5 million had been spent by the end of FY2005. However this amount does not include Zimplats potential which could be significantly larger, depending on the ramp-up schedule.
There is potential investment of $2.25 billion in the Ambatovy project, in which Implats has a 37.5% share, 50% to be debt funded. If this project goes ahead, this investment (in Rand millions) will kick in from 2008/2009 as follows:
| FY06 | FY07 | FY08 | FY09 |
|---|---|---|---|
| 395 | 594 | 2 252 | 2 920 |
And now I would like to hand back to Keith.
Operational review.
The focused emphasis on safety continued across the group with further improvements in both Fatal and Lost Time Injury rates. Fatal rates and Lost Time rates decreased by 34 and 26% respectively. Regrettably, we recorded 7 fatal accidents, 4 at Impala, 1 at Zimplats and 2 at Marula. Although we have achieved significant improvements our target remains a zero fatality rate.
A quick look at how we benchmark with the major global players in the mining industry. Our performance is significant given that deep level narrow reef operations such as ours have traditionally proved to be the most dangerous environment in which to work... and here I am specifically referring to other large scale mechanized open cast operations. Not shown here but it is a feature of the mining industry is that generally, Fatal rates are decreasing year-on-year.
The engine put in another sterling performance. Platinum production increased by 2% to 1.115Moz despite the industrial action in October with associated loss of production of 44,000oz.
Under the circumstances, cost control at Impala was good. Despite the volumes lost as a result of industrial action and the 8% wage increase implemented in July 2004, unit cost increases were held to a most creditable 5.3% increase. This achievement resulted from a combination of higher volumes primarily as a result of improved recoveries, ongoing cost control initiatives and a reduction in non-production labour of some 600. The jump in capital expenditure reflects the start of the construction of 16 and 20 shafts.
Productivity continues to benefit from the implementation of best practices and the DDT roll-out. As measured in centares per panel employee efficiency increased by 2.3% from 39.2 to 40.1 over the last financial year.
Productivity in terms of platinum ounces produced per employee increased by 4.5% as a result of the dual effect of higher production plus the 2% reduction in the number of employees. Overall concentrator recoveries rose to a record level of 84.3% despite the increased throughput. This increase was equivalent to 13,500 ounces of platinum for the year (equivalent to R50 million of gross profit) and was primarily due to the implementation of the high-energy flotation technology at the UG2 plant. The tails scavenging plant continued to deliver and contributed more than 1% to overall recoveries.
The refineries continued to perform optimally in spite of significant construction interference on site as part of their expansion program to 2m platinum ounces. The BMR expansion is nearly complete and the PMR will be complete early next year.
Five years ago we advertised Impala as having a 30 year life of mine. Five years later we still have sufficient resources to support operations for 30 years. This was brought about by optimization of our infrastructure and resources, through the mining of previously abandoned areas, opencast mining and the exploitation of resources previously considered unprofitable.
This has enabled us to defer major projects and thus extend the life of the lease area by at least 5 years, further contributing to our growth profile. Expressed another way, this is equivalent to 5 million ounces of platinum which will generate huge value in the future. Note the important contribution of 16 and 20 shafts which collectively will produce around 30% of total output.
16 Shaft will be 1650 metres deep and will produce in the region of 225,000 tonnes per month. The concrete headgear will be 108 metres high, which,I am informed, is the tallest in the world. It will house the 2 friction winders known as Koepe winders, one to hoist men and material and the other rock.
The first blast took place on Monday.
20 Shaft is shallower with a depth of 1 050 metres and will be the first A-frame headgear at Impala. Production will be 185,000 tonnes per month.
First blast here is taking place today.
At Marula, a new hybrid mining method, incorporating both conventional stoping and mechanized strike development has been developed and is being implemented with a dramatic increase in grade compared to the fully mechanized operation. The other major change namely the switch from contractor mining to owner mining has been completed. The production ramp up continued as can be seen in the table above with platinum production close to 30000 oz last year.
The number of trained panel teams is increasing and the panel efficiencies are showing steady improvement with an average of 14m face advance and the top 25% of the teams achieving over 22m face advance / month. Full production of 140,000 oz of platinum is now anticipated in FY2009.
Photo showing DDT drill jig which is proving successful in delivering faster drilling rates, higher advance per blast, higher quality mining (safety, grade)
Another sound operational performance at Zimplats with platinum production up 2% at 86,800 ounces.
The only disappointment was the 23% increase in unit costs mainly as a result of rampant inflation and the fixed exchange rate as well as the increase in the cost of opencast contract mining.
Note that if one credits the export incentives to cost, then unit costs have only increased by 10.9%. It can be argued that the export incentive is a form of compensation for the skewed exchange rate. Along with the recent devaluations, the Government announced the scrapping of the export incentive which will be mitigated substantially by the recent devaluations.
Capital expenditure of $46 million has been approved to extend the underground mine as a cost savings initiative.
The feasibility study for expansion to 145,000 ounces of platinum is nearing completion but this expansion will still be subject to sufficient clarity and certainty regarding the socio-political issues in that country. I am, however, pleased to report that the extension of our special mining lease covering the Southern portion of the resource has been obtained, along with the fiscal provisions contained therein – and this resource is able to sustain a significant expansion for 20 years.
Mimosa delivered an outstanding performance with platinum production up 8.6% to 66,700 ounces. As was the case with Zimplats, costs suffered due to the fixed exchange rate. Subject to debt funding, a $13.6m expansion to 80,000 ounce of platinum per annum has been approved by both shareholders.
The decision to proceed with the project was taken in June 2005. Capital expenditure is expected to be in the region of R1.2bn of which 50% will be funded by the partners and the balance has been raised in the form of debt finance. First concentrate production is scheduled for the second half of 2006 and full production of 120,000 ounces of platinum approximately one year later.
The trial mine has provided a substantial extent of mine development with a sizeable stockpile being built up ahead of the completion of the concentrator. This will provide a rapid ramp-up to steady state operation.
Just to update you on the status of this project which was announced in May. When we announced our participation in the Ambatovy project we indicated that we would be looking for a third partner to take up a 25% stake in the project and who would also be a significant nickel off-taker. You will no doubt have seen the announcement that Sumitomo Corporation of Japan is to take that stake as well as guaranteeing a minimum off-take of 30,000 t of nickel for the first 15 years.
The detailed engineering and feasibility studies are both expected to be completed by February 2006, after which a decision as to whether to proceed with the project will be taken.
We believe that this project comprises a unique set of partners. Dynatec is an offspring from Sherritt-Gordon who were the technology providers for our existing Base Metals Refinery and have been closely involved with the successful MOA Bay Nickel laterite project in Cuba, owned by Sherritt.
We have also had a long standing commercial relationship with Sumitomo Corporation of Japan and their involvement as an off-take partner brings with it a strong degree of financial / market underpin to the project.
As mentioned, this is a good opportunity for Implats to grow a low cost Nickel base into a market that is projected to be hungry for more metal.
Our growth profile as illustrated remains on track. Our medium term target of 2.3m ounces is largely driven by incremental expansions in South Africa, i.e. Two Rivers, Marula, Impala, etc. In addition to our growth in South Africa, the Zimbabwean resource represents a small expansion with significant blue sky should the investment climate improve.
We have enough on our plates to keep management busy! Delivery on our capital programme involving two deep level shafts at the same time is an obvious imperative.
In addition, we are delivering significant value from continued focus on efficiencies and productivity – all of which culminates in a satisfactory cost control track record. The new drilling technology (DDT) has proven itself and we are confident of other efficiencies that our SAP systems roll-out will deliver.
I have already covered the growth story. With respect to empowerment, we have submitted conversion applications to the DME for both Impala and Marula and are in constant contact with their regional offices.
Implats estimates its HDSA holding to be 9% (7.5% from the sale of our stake in Lonplats and the 1.5% stake by the RBN). The RBN are the obvious partner and constructive discussions are being conducted regarding their possible participation as a strategic partner.
We are confident that a combination of equity participation by our own employees and a strategic partner would enable us to meet the 15% target in 5 years and in combination with credits achieved from the sale of our stake in Lonplats would position us well to meet the 26% in 10 year target all attributable at the Impala level.
In conclusion, the fundamentals for PGMs and nickel remain firm.
As I have just mentioned, our targets of 2.3 million ounces of platinum in 2010 are on track. This represents compound growth of around 5% per year.
As you are well aware cost management has been a key area of focus for the group since the mid-1990s. We are happy with the recent two-year wage settlement that was signed recently and believe we can contain costs at levels around inflation going forward.
The one area where costs are partially outside our control is in Zimbabwe due to the managed exchange rate. The recent slide in the Z$ from 6,500 to 24,000 against the US$ has significantly improved the situation and bodes well for the future. Based on expected exchange rates and metal prices, headline earnings are expected to increase by 10-15% in FY2006.
Thank you.
Bob Gilmour
Investor Relations Executive
Tel: +27 11 731-9013
Bob.Gilmour@implats.co.za
Alice Lourens
Tel: +27 11 731-9033
Alice.Lourens@implats.co.za
