Financial Director’s report

Headline earnings for the year to 30 June 2014 at R4.1 billion were 10% higher than the prior year headline earnings (F2013: R3.7 billion).

This equates to headline earnings per share of 1 900 cents per share (F2013: 1 735 cents per share). The weighted average number of shares in issue at 30 June 2014 is 216 268 000 shares (30 June 2013: 215 357 000 shares).

The Board declared and paid an increased annual dividend of 600 cents per share (F2013: 510 cents per share) after the year-end.

ARM’s basic earnings for F2014 were R3 289 million (F2013: R1 634 million) and were negatively impacted by exceptional items of R819 million after tax (F2013: R2 103 million loss after tax). The largest exceptional item relates to the unrealised mark-to-market loss of R510 million after tax on the Harmony investment made through the income statement. Other exceptional items mainly comprise smelter and pelletising plant impairments in ARM Ferrous as well as impairments of plant and equipment in ARM Coal. The reconciliation of basic earnings to headline earnings is provided in note 33 of the financial statements.

Headline earnings variance analysis by division (R million)
Headline earnings variance analysis by division

As disclosed in the 2013 Integrated Annual Report and the 31 December 2013 Interim Results report, the new accounting standard, IFRS 11 Joint Arrangements, became effective for ARM on 1 July 2013. The adoption of the new standard requires a change in the manner in which joint arrangements should be accounted for and prior period comparative IFRS results must be restated to reflect a consistent application of the new accounting policy. This change has primarily impacted the manner in which ARM accounts for its joint arrangement investment in Assmang, which ARM jointly manages and controls with its partner, Assore. Assmang is no longer proportionately consolidated because IFRS 11 requires joint arrangements classified as joint ventures to be accounted for using the equity method. ARM’s share of its joint ventures is now disclosed as single line items in the consolidated Income Statement as “income from joint venture” and as “investment in joint venture” on the consolidated Statement of Financial Position. The consolidated Cash Flow Statement now only includes a single line for dividends received from joint venture.

While the change in accounting policy has a significant impact on the presentation of the consolidated financial statements, there is no impact on headline earnings, basic earnings or net assets. The segment reporting has been expanded to include more detail on the Assmang results.

The key drivers which impacted on the results for the year were a 17% weaker Rand/US Dollar exchange rate, sales volume increases, sales volume related cost increases and inflationary cost increases (refer to the profit variance analysis below).

The three-year compound annual growth rate in headline earnings for ARM since June 2011 was 6.7%.

The average gross profit margin of 25% (F2013 restated: 20%) is higher than that for the corresponding period largely due to improved profit margins at Nkomati and Two Rivers. The margins achieved at each operation may be ascertained from the detailed segment reports provided in note 2 to the financial statements as well as in the operational reviews.

Earnings were positively impacted by the weakening of the Rand against the US Dollar. The F2014 average Rand/US Dollar of R10.36/US$ was 17% weaker than the average of R8.83/US$ for F2013. For reporting purposes the closing exchange rate was R10.63/US$.

Realised US Dollar commodity prices for platinum, rhodium, copper, nickel, chrome concentrate, ferromanganese and export coal, were lower than in F2013; export iron ore and manganese ore prices remained constant and palladium prices were higher than in F2013. Refer to the graph below.

F2014 vs. F2013 US Dollar realised commodity prices and exchange rate changes (%)
F2014 vs. F2013 US Dollar realised commodity prices and exchange rate changes

Details of the ARM divisional segment financial results may be obtained from the segment reports in note 2 of the financial statements. In addition each division’s report under Operational review contains detailed information on its operational performance.

The profit variance analysis provided on a segmental basis below indicates how ARM’s results were impacted by various factors during the year at the level of profit from operations before exceptional items.

Profit variance analysis – Profit from operations before exceptional items (segmental analysis) (R million)
Profit variance analysis – Profit from operations before exceptional items (segmental analysis)

Consolidated income statement (abridged)

 12 months ended 30 June
 2014
Rm
Restated
2013
Rm
% change
Sales10 0047 34236
Profit from operations (before exceptional items)1 6711 17442
Income from investments119131(9)
Finance costs(259)(199)(30)
Loss from associate(374)(14)
Income from joint venture3 5493 06316
Exceptional items excluding tax(616)(2 457)
Taxation(546)84
Non-controlling interest(255)(148)
Profit after tax and non-controlling interest3 2891 634101
Headline earnings4 1083 73710
Headline earnings (cents per share)1 9001 73510

Sales were impacted by the following variances:

The negative cash cost variance of R2.49 billion is due to an absolute increase in mining costs when compared to F2013. This increase has the following key attributes:

The increased non-cash costs of R168 million were largely due to an increase in amortisation charges of R148 million.

The average gross profit margins for the individual operations on a segmental basis are:

 12 months ended 30 June
 20142013% change
ARM Ferrous44413
ARM Platinum   
– Two Rivers31238
– Modikwa813(5)
– Nkomati301911
ARM Coal (Goedgevonden)2529(4)
ARM Copper (in ramp-up)3 3

Other operating income, which largely comprises management fee income and foreign exchange gains, decreased by R31 million to R961 million from R992 million in F2013.

Other operating expenses increased by R469 million in comparison to F2013 restated. This increase is largely due to the following items:

As a result of the increased gross profit and the combined impact of the previously mentioned changes in other income and other expenses profit from operations before exceptional items increased to R1.7 billion from R1.2 billion in F2013 restated.

Income from investments amounted to R119 million for the year (F2013 restated: R131 million) and mainly comprises interest received on cash balances. The F2013 amount included a dividend of R64 million from Harmony.

Finance costs at R259 million were R60 million more than those incurred in F2013 restated largely due to finance costs at Lubambe copper mine on shareholder loans and bank funding.

The loss from associate, being the equity accounted results for the PCB operations, increased significantly by R360 million to R374 million and includes an impairment charge of R132 million. This result is fully described in the section on ARM Coal.

The income from joint venture represents the equity accounted earnings for ARM Ferrous.

The net cash/(debt) position at 30 June 2014 amounts to net debt of R1 352 million as compared to the net restated debt position of R2 027 million at 30 June 2013. This positive change mainly occurred within the net cash position at ARM Corporate.

The investment in joint venture of R14.3 billion represents the interest in ARM Ferrous which is now reflected separately as previously explained.

Consolidated statement of financial position (abridged)

 12 months ended 30 June
 2014
Rm
Restated
2013
Rm
Non-current assets30 07728 236
Property, plant, equipment and other11 93011 499
Investment in joint venture 14 30512 506
Investments 3 3863 811
Other456420
Current assets6 3815 603
Cash and cash equivalents 2 1501 965
Other 4 2313 638
Total assets36 45833 839
Total equity28 19925 463
Non-current liabilities   
Long-term borrowings2 4203 293
Other2 4692 240
Current liabilities   
Short-term borrowings1 082699
Other2 2882 144
Total equity and liabilities36 45833 839

The ARM consolidated financial position remains robust and ungeared with the consolidated position at year-end being net cash of R640 million excluding partner loans (F2013 restated: Net cash R13 million).

Total assets increased by R2.6 billion to R36.5 billion largely as a result of R1.2 billion capital expenditure during the year and increased profits, net of dividends in ARM Ferrous.

Additional key features include:

Consolidated statement of cash flows

Cash generated from operations was R2.07 billion or R508 million more than the F2013 restated amount of R1.57 billion and is reported after working capital requirements of R959 million (F2013 restated: R990 million). The largest increase occurred at ARM Platinum and amounted to R388 million.

Dividends received from the ARM Ferrous joint venture increased to R1.75 billion (F2013 restated: R1.50 billion).

The consolidated net cash inflow from operating activities increased by R308 million to R2 077 million despite a higher dividend payment in October 2013 and slightly higher tax payments.

Net cash outflow from investing activities amounted to R1 222 million (F2013 restated: R1 720 million) and was largely spent on capital expenditure.

Cash flow from financing activities amounted to an outflow of R759 million (F2013 restated: R474 million inflow) and mainly comprise reduction in borrowings at ARM Corporate and ARM Coal.

Financial capital

ARM’s operational cash flows, net of tax, together with cash and cash equivalent balances and external funding sources constitute its primary financial capital. This capital is used to (i) maintain existing operations, (ii) expand new and existing operations, (iii) fund working capital and (iv) make new investments. This utilisation of financial capital is balanced by the Board against its commitment that ARM as a globally competitive company return capital to shareholders as dividends.

Just as the mineral resources and reserves of ARM’s operations are valuable assets so too is its financial capital. Financial capital needs to be responsibly managed to ensure that the funding of the Company is not unduly stressed thereby ensuring a sound financial basis for its continued operation and future plans.

For the F2014 financial year the ARM funding position remained robust on the following levels:

Cashflow and capital allocation for the year

The cash generated from operating activities amounted to R2 077 million. This was allocated as follows:

The capital allocation is considered prudent given the continuing volatility in commodity prices and exchange rates.

Net gearing and borrowings

As at June 2014 total interest bearing borrowings amounted to R3 502 million or 12% of total equity. These borrowings comprise:

It is evident that at both a consolidated and a segmental level ARM does not have high levels of debt. At an entity level however the ARM Coal investment into GGV and PCB is highly geared by shareholder funding provided as vendor facilitated funding from Glencore. These high debt levels impact on the bottom line profitability of the coal division. The retirement of this debt will be achieved as free cash flow from the coal operations improves.

Segmental analysis

Significant accounting matters

Events after reporting date

The Company paid a dividend of of approximately R1.3 billion on 6 October 2014.

Financial risk management

ARM has an established risk management programme which is more fully described in the Risk report section.

Specific risks which have a financial bias include currency, commodity price, interest rate, counterparty, credit and acquisition risks.

A sensitivity analysis is provided in note 37 of the Annual Financial Statements of the financial statements. In particular, the sensitivity analysis includes the closing prices used in the provisional valuation at year-end of accounts receivable for the ARM Platinum and Nkomati Nickel operations.

The ARM corporate facility is due for repayment or refinancing in August 2015. The ARM Finance Company SA US$80 million loan facility is guaranteed by ARM with quarterly loan repayments scheduled to commence on 31 December 2014 and is more fully described in note 16 of the financial statements.

The Company is therefore well positioned to continue to grow. The Company is not risk averse and while it does not have a fixed policy on gearing, ARM targets a net gearing threshold of 30% for external funding subject to the ability to meet debt service requirements.

Commitments in respect of capital expenditure amounted to R366 million at 30 June 2014. It is anticipated that this expenditure, which relates to mine development and plant equipment, will be financed from operating cash flows and utilising available cash and borrowing resources.

Dividend

Dividends are declared after consideration of the solvency and liquidity of the Company in accordance with the requirements of the Companies Act 71 of 2008 as amended, and with due regard to the current funding status of the Company, future funding requirements and estimated cash flows.

The eighth annual dividend declared by ARM on 4 September 2014 of 600 cents per share represented an 18% increase compared to the F2013 dividend and is consistent with ARM’s commitment as a globally competitive company to pay dividends to shareholders while simultaneously maintaining the ability to fund growth of the Company in the future.

Mike Arnold
Financial Director

14 October 2014