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.
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.
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 ARM Ferrous contribution to ARM’s headline earnings amounted to R3 736 million (F2013 restated: R3 194 million). This is an increase of 17% over the F2013 result and is largely due to the increased contributions from all its divisions.
- The ARM Platinum contribution, which includes the results of Nkomati Mine, was R883 million and represents a significant 68% improvement to the R527 million contribution for F2013. Improved results were achieved at Two Rivers and Nkomati driven by strong operational performances and good cost control.
- The ARM Coal result reduced by R268 million to a headline loss of R120 million (F2013: R148 million profit) as a result of reduced earnings from the PCB operations. The contribution from GGV remained positive at R122 million (F2013: R162 million).
- The ARM Copper result was a headline loss of R309 million (F2013: R135 million headline loss). In the comparative period, costs at the new Lubambe Copper Mine were capitalised to the end of April 2013. This result includes interest on shareholders loans of R131 million. The mine is in the process of ramping up to full production.
- The ARM Exploration costs amounted to R81 million (F2013: R88 million) and were largely expended on exploration at Rovuma in Mozambique as well as on staff costs.
- The ARM Corporate, other companies and consolidation segment shows a headline loss of R1 million for the year as compared to headline earnings of R27 million for F2013.
- ARM did not receive any dividends from its investment in Harmony during the year (F2013: R64 million).
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.
Consolidated income statement (abridged)
|12 months ended 30 June|
|Sales||10 004||7 342||36|
|Profit from operations (before exceptional items)||1 671||1 174||42|
|Income from investments||119||131||(9)|
|Loss from associate||(374)||(14)||–|
|Income from joint venture||3 549||3 063||16|
|Exceptional items excluding tax||(616)||(2 457)||–|
|Profit after tax and non-controlling interest||3 289||1 634||101|
|Headline earnings||4 108||3 737||10|
|Headline earnings (cents per share)||1 900||1 735||10|
ARM Platinum sales increased by 26%
ARM Ferrous sales increased by 11%
ARM Coal (GGV) sales increased by 3%
ARM Copper achieved sales of R1 085 million (F2013: R69 million)
Sales were impacted by the following variances:
- The 17% weakening of the Rand against the US Dollar accounting for a positive variance of R2.96 billion;
- A net negative variance of R103 million resulting from the fall in US Dollar commodity prices across ARM’s operations except for manganese ore and palladium. The nickel price rise which occurred in the latter portion of the financial year resulted in an unrealised mark-to-market gain at year-end of R220 million which is included in the net variance; and
- Sales volume increases for copper, Nkomati Mine chrome concentrate and nickel, GGV export coal and PCB Eskom coal were offset by lower volumes of iron ore and resulted in a positive volume variance of R922 million.
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:
- An average inflationary increase of 8.5% at operations before amortisation charges;
- Sales volume increases, especially at the Lubambe Copper mine (R964 million) as well as at the Nkomati Nickel and Two Rivers mines; and
- Additional cost increases which were above inflation across the group particularly for labour costs, fuel and power.
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|
|– Two Rivers||31||23||8|
|ARM Coal (Goedgevonden)||25||29||(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:
- An increase in mineral royalty tax of R196 million (F2014: R302 million; F2013 restated: R106 million) mainly at Nkomati as unredeemed capital expenditure was depleted in the year and at the Lubambe copper mine where sales increased significantly as the mine ramps up production;
- Increases in distribution costs at Nkomati and Lubambe;
- Share option costs increasing by R34 million in the ARM Corporate and Other segment; and
- Inflationary increases of approximately 5%.
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|
|Non-current assets||30 077||28 236|
|Property, plant, equipment and other||11 930||11 499|
|Investment in joint venture||14 305||12 506|
|Investments||3 386||3 811|
|Current assets||6 381||5 603|
|Cash and cash equivalents||2 150||1 965|
|Other||4 231||3 638|
|Total assets||36 458||33 839|
|Total equity||28 199||25 463|
|Long-term borrowings||2 420||3 293|
|Other||2 469||2 240|
|Short-term borrowings||1 082||699|
|Other||2 288||2 144|
|Total equity and liabilities||36 458||33 839|
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:
- Other investments, which largely comprise the 14.6% stake which ARM has in Harmony, amounted to R2.1 billion. The Harmony share price at 30 June 2014 was R31.15 (F2013: R35.75). ARM holds 63.6 million shares in Harmony;
- Within current assets the value of accounts receivable increased by R1 001 million in line with the increase in sales at Lubambe, Nkomati and Two Rivers. This impacted negatively on working capital requirements as reflected in note 34 to the financial statements whereas inventory levels remained fairly constant for the year;
- Total interest-bearing borrowings decreased by R490 million to R3.50 billion at 30 June 2014 mainly as a result of reduced borrowings at ARM company; and
- Cash and cash equivalents amounted to R2.15 billion (F2013 restated: R1.97 billion).
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.
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:
- R1 133 millon: capital expenditure
- R821 million: reduction of borrowings
- R27 million: other net outflows
- R96 million: retained
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:
- R1 510 million external bank debt
- R1 992 million partner loans
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.
Significant accounting matters
The new accounting standards IFRS 10, 11 and 12 became effective for financial years commencing after 1 January 2013 and have been implemented by ARM as previously explained.
Subsidiaries are fully consolidated; for joint operations ARM will recognises its share of assets, liabilities, income and expenses while joint ventures and associates are equity accounted.
The ARM investment in Assmang, which it jointly manages and controls with its partner Assore, is no longer proportionately consolidated as it is assessed to be a joint venture under the new accounting standards.
The Assmang investments in project Sakura and Cato Ridge Alloys are treated as joint ventures.
The accounting for entities is assessed at each reporting date.
The basic earnings were significantly impacted by the accounting for the mark-to-market adjustment of the investment in Harmony through the income statement. Increases in the Harmony share price above the lowest level which was recorded for 31 December 2013 at R25.90 per share will not reverse the F2013 and 31 December 2013 impairment charges in the Income Statement but will be made through the Statement of Comprehensive Income net of deferred capital gains tax. On the other hand should the Harmony share price in the future fall below the R25.90 per share market price, the mark-to-market adjustment will be made through the income statement net of deferred capital gains tax.
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.
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.
14 October 2014