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PAM
PAM
PAM - Palabora Mining Company Limited - Interim Report
Palabora Mining Company Limited
(Incorporated in the Republic of South Africa)
(Reg. No. 1956/002134/06)
JSE Code: PAM
ISIN: ZAE000005245
("Group" or "Palabora" or "the Company")
Interim Report
COMMENTARY
Overview
Matt Gili, the new Managing Director who took over from Keith Marshall in
March this year commented on the strong half year results as follows:
"I am pleased to report that Palabora has delivered another set of stellar
results in a safe operating environment. Palabora is maximizing the
operating value of the asset through its operational excellence program."
During this period under review, we witnessed national power supply
shortages which led to a marginal decline in our overall copper production.
However, since then we have also seen a record production as we achieved a
daily record of 40 344 tonnes hoisted during this period.
It is no secret that there are ever increasing cost pressures in today`s
market place. With the focus on quality and speed, we continue to improve
our processes and find optimal means of production in order to eliminate
waste; and therefore, contain cost pressures or reduce costs.
Group financial results
30 June 30 June 31
For the period ended 2008 2007 December
2007
Net profit for the period R464 R382 R1 861
million million million
Basic earnings per share 961 cents 791 cents 3 850
cents
Profit from continuing operations R3 179
before interest, tax depreciation and R852 R829 million
amortisation (EBITDA) million million
Headline earnings R466 R382 R721
million million million
Headline earnings per share 965 cents 790 cents 1 491
cents
Excess cash / (net debt) (excluding R381 (R283) R433
hedge) million million million
Dividends per share - - R3.10
Net profit
The net profit for the six months ended 30 June 2008 increased from R382
million in the comparable period in 2007 to R464 million. The basic earnings
per share increased from earnings of 791 cents per share to earnings of 961
cents per share.
Sales of products increased by R144 million (5%) to R3 257 million largely
as a result of the following:
- Higher realised prices of copper of R550 million, higher realised
prices for slimes, magnetite and vermiculite (+R30 million, +R16
million and +R14 million respectively), and a weakening US$/Rand
exchange rate of 7.65 in 2008 compared with 7.17 for the comparable
period in 2007 (+R208 million);
- The higher price effect was slightly offset by lower volumes of copper
sales (excluding revert and concentrate sales); 39 627 tonnes compared
with 45 784 tonnes for the first six months in 2007 (-R447 million);
- Reverts and low grade concentrate sales contributed an additional 5 040
tonnes of contained copper (2007: 11 750 tonnes). The lower volumes
sold resulted in a decrease in the sales of products of R274 million;
- Higher volumes of magnetite sales; 793 thousand tonnes compared with
586 thousand tonnes (+R62 million) in 2007.
The Group achieved an average realised selling price (post hedge) for copper
rod and cathode of R41 363 (2007: R39 182) and R40 522 (2007: R35 585)
respectively.
The increase in revenue was partially offset by realised hedging losses
resulting from the swap settlement of 23 thousand (2007: 22 thousand) tonnes
of copper ((-R886 million) 2007: (-R592 million)).
Total Group cost of sales decreased by R196 million, from R1 522 million in
the first six months of 2007 to R1 326 million for the comparable period
under review, representing a decrease of 13 % from the previous period. The
ratio of cost of sales to revenue reduced to 41% from 49% in the first half
of 2007. The decrease in cost of sales was as follows:
- Copper concentrate purchases decreased from 13.1 thousand tonnes in
2007 to 5.8 thousand tonnes in 2008 (-R274 million), offset by the LME
copper price impact on purchased concentrate of R65 million higher than
the comparable period under review in 2007;
- The effect of the revaluation of revert stock in 2007 which had an
impact when the stock was sold
(-R252 million) had no effect in the current period under review. The
particular revert stock were all sold in the prior year.
The decrease was offset by the following increases:
- Transportation costs were higher by R56 million than the comparable
period due to the reclamation of Palabora marginal ore stockpiles for
re-processing in 2008;
- Mobile fleet maintenance and higher steel prices increased the
maintenance expense by R23 million;
- Costs of major consumables increased during the first half of 2008 by
R36 million;
- Mine-wide payroll costs (excluding administration) increased by R23
million due to an increase in employees and the annual salary increase
compared with the first half of 2007;
- Additional depreciation of R108 million as a result of the impairment
reversal at 31 December 2007.
We shall remain disciplined and focused in order to optimise our
profitability and cashflow. We are aware that the commodity boom can lead to
structural cost increases and we seek to minimise or avoid any such costs.
The Group achieved a gross profit from continuing operations for the first
half of 2008 of R1 044 million, from a gross profit of R999 million for the
comparable period in 2007.
Earnings before interest, tax, depreciation and amortisation (EBITDA) were R
852 million compared with R829 million for the comparable period in 2007.
Palabora`s management now believes that EBITDA provide a more meaningful
comparison of the Company`s earnings from ongoing operations due to the
additional depreciation recognised in 2008 as a result of the impairment
reversal at 31 December 2007.
Selling and distribution costs increased by R71 million and administration
costs by R39 million. The increase in the selling and distribution costs
from R162 million in 2007 to R233 million for 2008 is mainly attributable to
the cost incurred for the export of vermiculite due to increased freight
costs and magnetite railage costs due to increased volumes sold.
The Group`s profit from continuing operations before interest and tax (EBIT)
was R623 million compared with R691 million in the first half of 2007, a
decrease of R68 million.
The decrease in finance costs of R47 million was due to reduced foreign
exchange losses on loans and lower interest cost following loan repayments
made during the second half of 2007 and first half of 2008.Finance revenue
increased by R32 million to R67 million (2007: R35 million) as a result of
interest earned and foreign exchange gains on debtors.
The decrease of R71 million in tax expenses from R218 million in 2007 to
R147 million in 2008 is a result of a R266 million decrease in taxable
temporary differences (from a deferred tax liability to a deferred tax
asset) offset by R195 million increase in current tax due to higher taxable
profits. (See notes 6 & 10).
Cash flow
Cash and cash equivalents at 30 June 2008 were R550 million compared with R1
006 million at 30 June 2007.
For the six months ended 30 June 2008, the Group recorded a net cash outflow
of R291 million compared with a net cash inflow of R335 million for the
comparable period in 2007.
Cash from operations of R735 million (2007: R812 million) was generated
mainly as a result of a significant increase in realised (pre-hedge) copper
rod and cathode prices (2008: 361.8; 2007: 308.8 Usc/lb) and the sale of
surface stockpile material of 5 040 tonnes of copper (2007: 11 750) and
improved efficiencies.
The Group invested R117 million in the business. Capital investment of R127
million was primarily spent on the underground mine (R66 million),
concentrator (R27 million) and refinery (R6 million). The expenditure
related mainly to purchase of new underground mobile equipment to enhance
throughput, upgrading the SCADA mine-wide system to enhance efficiencies,
head rope replacements for the service shaft, the South Paddock tailings dam
construction, the magnetite pipeline feasibility study and the ASARCO shaft
furnace replacement. The net cash outflow was offset by other investing
activities of R10 million.
The R274 million used in financing activities was for the repayment of the
principal and mandatory prepayments of the term facility agreement of R218
million and the full settlement of the Rio Tinto secured loan of R56
million.
Net Cash / (Debt)
Net debt decreased from R283 million (negative balance) in June 2007 to a
net cash balance of R381 million (positive balance) in 2008.
Total borrowings decreased by R1 119 million from R1 288 million at 30 June
2007 to R169 million in 2008.
Total borrowings decreased by R239 million from 31 December 2007. This was
as a result of:
- repayment of the Tranche A and B of the Term Facility for a total
amount of R218 million;
- settlement of the Rio Tinto secured loan in the amount of R56 million;
- offset by a foreign exchange loss of R35 million in the rand value of
US$ denominated debt due to the weakening of the Rand.
Cash balances decreased by R456 million to R550 million.
Payments in addition to loan repayments during the six month period that
decreased the cash balances included:
- dividend payment in March 2008 of R150 million;
- provisional income tax payments of R263 million;
- settlement of outstanding interest on the Rio Tinto Finance loan of
R169 million;
- settlement of outstanding interest on debentures that were held by Rio
Tinto of R48 million.
Magnetite
The company is in the process of validating the feasibility study performed
in the last decade to determine the optimal means of enhancing its revenue
stream by utilising its magnetite stockpiles. Palabora is estimated to
possess 240 million tonnes of magnetite. The work on evaluating the optimal
level of beneficiation continues.
Western extension
Development on the Western Extension, an addition of three production
crosscuts to the western area of current crosscut 20, commenced during the
period under review. The development of this area has the potential to add
two to three years to the life of mine.
Nickel plant
PMC entered into an agreement with Metals Finance Africa (previously Muva
Metals) for the evaluation and development of a new nickel plant. The
project is drawing to a close and hot commissioning of the plant is expected
in 2008. The agreement provides for the utilisation of the funds generated
from the nickel sulphate produced from this plant to pay for the capital,
and afterwards for a 60:40 split of the cash generated to Metals Finance
Africa: Palabora. The agreement is for a fixed period of five years from the
date the plant delivers an 85% recovery rate (limited to an eight month
period).
Black Economic Empowerment (BEE)
Palabora is committed to BEE and towards that end, anticipates completing a
BEE transaction as required by law. The Company has been engaging with all
the affected parties to ensure that it delivers a broad-based empowerment
scheme.
Pension Fund Surplus
The Company is still waiting a response from the Registrar of the Financial
Services Board (FSB) regarding the approval of the pension fund
distribution. While the Company is aware of an appeal to block this
distribution, it is unclear what the status of the process is. The Company
has engaged legal counsel to follow up with regards to the FSB adjudication
process. Only after the Registrar`s approval has been obtained, can the
Liquidator release the employer`s share of the surplus in the Fund. This is
estimated at approximately R204 million before tax and including accrued
interest.
Declaration of Dividend
A dividend that relates to the year ended 31 December 2007 and amounts to
R150 million was paid in March 2008. No dividend was proposed to
shareholders for the first half of 2008, as it will be assessed along with
the year-end results.
Corporate Governance
On 29 February 2008, Mr Keith Marshall, resigned as the Managing Director at
Palabora after four successful and productive years, to head up Ivanhoe
Mining Company as the Managing Director. Mr Marshall was seconded by Rio
Tinto to the Oyu Toigoi project in Mongolia, one of the largest undeveloped
copper projects in the world.
Mr Matt Gili, was appointed to the role of Managing Director at Palabora. Mr
Gili was the general manager of operations, responsible for the underground
and concentrator operations. Mr Gili has been a key member of the Palabora
team for the last three years and contributed significantly to the greatly
improved operational and safety performance.
On 31 March 2008, Mrs Jo-Ann Goh resigned as non-executive director at
Palabora. Mrs Goh was appointed to the role of general manager Commercial
within the Rio Tinto Copper projects team effective 1 February 2008. She was
replaced by Mr Philip Robinson as non-executive director appointed on 1
April 2008. Mr Robinson is Australian and is based in Rio Tinto`s London
office. Mr Robinson has had previous Finance, Accounting and Marketing
roles with Rio Tinto Coal, Comalco Aluminium and Rio Tinto Marketing Centre
(all Rio Tinto businesses). He is a chartered accountant and holds an MBA
from the Australian Graduate School of Management, together with a Bachelor
of Business degree from Southern Cross University.
Appreciation
We thank all stakeholders of the Company for their continued support.
GM Negota MD Gili CA Asubonten
Chairman Managing Director Finance Director
5 August 2008
UNAUDITED GROUP RESULTS
Income statement
Six Six Year
months months ended
ended ended 31
30 June 30 June December
2008 2007 2007
Not R`000 R`000 R`000
e
Continuing operations
Sales of products 3 256 3 113 6 177
786 074 954
Hedged loss realised (886 (592 (1 319
444) 047) 825)
Revenue 2 370 2 521 4 858
342 027 129
Cost of sales (1 325 (1 521 (2 993
975) 656) 587)
Gross Profit 1 044 999 371 1 864
367 542
Other income 2 19 340 14 278 21 290
Impairment (loss) / reversal 3 (2 767) - 1 690
156
Exploration cost 4 (3 269) (155) (3 257)
Selling and distribution costs (233 (162 (356
203) 311) 493)
Administration expenses (199 (160 (322
855) 559) 358)
Other expenses (2 101) (106) (1 634)
Profit from continuing operations 2 892
before tax and net finance costs 5 622 512 690 518 246
Finance costs (77 (125 (172
952) 274) 028)
Finance income 66 810 34 719 69 097
Profit before tax 611 370 599 963 2 789
315
Income tax expense and lease 6 (146 (217 (928
consideration 907) 617) 402)
Net profit for the period 464 463 382 346 1 860
913
Allocated as follows:
Equity holders of parent 464 463 382 346 1 860
913
Earnings per share (cents):
- Basic earnings per share 7 961c 791c 3 850c
- Diluted earnings per share 7 961c 791c 3 850c
Balance sheet
As at As at As at
30 June 30 June 31
2008 2007 December
2007
Not R`000 R`000 R`000
e
Assets
Non-current assets 5 413 3 100 5 059
898 252 788
Property, plant and equipment 3 471 1 888 3 576
412 256 481
Available-for-sale financial 306 898 304 908 312 052
assets
Deferred tax asset 10 1 635 907 088 1 171
588 255
Current assets 2 139 2 500 2 112
513 273 651
Stores 95 410 68 030 80 576
Product inventories 672 428 652 029 573 524
Trade and other receivables 821 807 774 685 627 441
Cash and cash equivalents 549 868 1 005 841 110
529
Total assets 7 553 5 600 7 182
411 525 439
Shareholders` equity and
Liabilities
Capital and reserves 39 396 (57 838) 849 097
Share capital and premium 11 629 551 629 551 629 551
Other reserves 11 (3 335 (1 639 (2 211
531) 581) 213)
Retained earnings 11 2 745 952 192 2 430
376 759
Total shareholders` equity 39 396 (57 838) 849 097
Non-current liabilities 5 311 3 311 4 321
437 825 770
Long-term borrowings 12 3 051 1 030 193 818
043
Derivative financial instrument 13 3 770 1 368 2 564
558 305 762
Provisions:
- Close-down and restoration 376 394 318 064 362 873
costs
- Post retirement medical 149 695 125 645 145 681
benefits
Deferred tax liabilities 10 1 011 469 768 1 054
739 636
Current liabilities 2 202 2 346 2 011
578 538 572
Trade and other payables 479 245 621 515 555 777
Derivative financial instrument 13 1 411 1 421 1 039
090 696 561
Current portion of long-term 12 165 553 258 323 214 082
borrowings
Current tax liabilities 58 810 457 119 737
Group companies - related parties 87 880 44 547 82 415
Total liabilities 7 514 5 658 6 333
015 363 342
Total equity and liabilities 7 553 5 600 7 182
411 525 439
Statement of recognised income and expenditure
Six months Six Year
ended months ended
30 June ended 31 December
2008 30 June 2007
2007
Not R`000 R`000 R`000
e
Available-for-sale investments:
- Valuation (loss) / gain taken to (5 878) 29 349 36 480
equity
Exchange differences on
translation of foreign operations 8 368 4 174 (5 701)
Cash flow hedges:
- Losses taken to equity (2 474 584) (928 848) (2 470 676)
- Over hedged ineffectiveness 9 411 - -
- Transferred to profit or loss 886 444 592 047 1 319 825
for the period
Actuarial losses on defined - - (18 821)
benefit plans
Unclaimed dividends and other 149 - (184)
Tax on items taken directly to or
transferred from equity 10 451 772 110 648 374 815
Net income recognised directly in (1 124 318) (192 630) (764 262)
equity
Net profit for the period 464 463 382 346 1 860 913
Total recognised income and (659 855) 189 716 1 096 651
expenses for the period
Attributable to:
Equity holders of the parent: (659 855) 189 716 1 096 651
Summarised cash flow statement
Six months Six months Year
ended ended ended
30 June 30 June 31 December
2008 2007 2007
R`000 R`000 R`000
Cash flows from operating activities 99 903 800 978 1 604 265
Cash generated from operations 734 731 812 133 1 733 032
Interest paid (234 339) (33 051) (172 028)
Interest received 12 501 26 890 54 891
Dividend paid (149 698) - -
Income tax paid (263 292) (4 994) (11 630)
Cash flows from investing activities (116 732) (56 055) (166 991)
Purchases of property, plant and (127 294) (64 320) (182 407)
equipment
Proceeds on disposal of property, 239 436 1 210
plant & equipment
Other investing activities 10 323 7 829 14 206
Cash flows from financing activities (274 413) (409 730) (1 266 500)
Payment of finance lease liability - (12 145) (12 145)
Long term loans repaid (274 413) (397 585) (1 254 355)
(Decrease) / Increase in cash and cash (291 242) 335 193 170 774
equivalents
At beginning of period 841 110 670 336 670 336
At end of period 549 868 1 005 529 841 110
CORPORATE INFORMATION
The consolidated financial statements of Palabora for the six months ended
30 June 2008 were authorised for issue in accordance with a resolution of
the Board of Directors passed on 5 August 2008.
The Group is incorporated and domiciled in South Africa. The Group has its
primary listing on the JSE Limited. The principal activities of the Group
are described in Note 9.
1. BASIS OF PREPARATION AND ACCOUNTING POLICIES
Basis of preparation
The interim financial report for the six months ended 30 June 2008 has been
prepared in accordance with International Accounting Standard (IAS) 34
(Interim Reporting). The report has not been audited or reviewed by the
company`s auditors.
The interim financial report does not include all the information and
disclosures required in the annual financial statements, and should be read
in conjunction with the Group`s annual financial statements as at
31 December 2007.
Significant accounting policies
The accounting policies adopted in the preparation of the interim condensed
consolidated financial statements are consistent with those followed in the
preparation of the Group`s annual financial statements for the year ended 31
December 2007.
The following new standards, amendments to standards or interpretations are
mandatory for the first time for the financial year beginning 1 January 2008
but are not currently relevant for the group:
- IFRIC 11: IFRS 2 - Group and treasury share transactions;
- IFRIC 12: Service concession arrangements;
- IFRIC 14: IAS 19 - the limit on a defined benefit asset, minimum
funding requirements and their interaction.
Presentational changes
Exploration cost, which was presented as part of cost of sales in prior
periods, is shown separately on the income statement. The comparative
figures of R155 thousand for the six months ended 30 June 2007 and R3
257 thousand for the year ended 31 December 2007 has similarly been
separately disclosed on the face of the income statement.
2. OTHER INCOME
The following items of an unusual nature have been included in other income
for the interim period:
Six Six Year
months months ended
ended ended 31
30 June 30 June December
2008 2007 2007
R`000 R`000 R`000
Profit on sale of property, plant 238 447 1 205
and equipment
Palabora Foundation donation - 6 555 6 555
provision reversal *
Hedge realisation of day 1 profit # 10 815 - -
# 2008: Derivative financial instrument (hedge) - the fair value of the
instrument is determined using valuation models for which not all inputs are
market observable. The financial instrument was initially recognised at the
transaction price, which is the best indicator of fair value, although the
value from the relevant valuation model may differ. This difference is
referred to as a "day-1 profit/loss". The day-1 profit is not allowed to be
recognised immediately in the income statement. Such gains and losses should
be recognised subsequently only to the extent that it arises from a change
in a factor (including time) that market participants would consider in
setting a price. Consequently, the profit will emerge over the life of the
instrument.
* 2007: Per an executive decision, the previous decision of 2002 was
rescinded, resulting in a reversal of the provision for the donation to the
Palabora Foundation. These funds will be rechanneled towards a community
related project.
3. IMPAIRMENT (LOSS) / REVERSAL
Six Six Year
months months ended
ended ended 31
30 June 30 June December
2008 2007 2007
R`000 R`000 R`000
Impairment (loss) / reversal (2 767) - 1 690 156
2008: The project for the construction of a high angle conveyor from the
auto mills to the no.3 ore stockpile was discontinued as a result
of a change in the operating strategy that now requires the
stockpile to be available for Foskor and PMC marginal ores. A
write off of unrecoverable costs accumulated up to date on the
project was recognised.
2007: In 2004 financial year, the company recognised an impairment loss
of R2 342 million before tax. A review of long-term assets is
carried out at each reporting date where there is an indication
that an impairment loss may no longer exist or may have decreased.
Following this review, management believes that the carrying value
of the company`s assets is not aligned with its recoverable value.
As a result, the maximum allowable impairment reversal of R1 690
million was recognised.
4. EXPLORATION COST
Six Six Year
months months ended
ended ended 31
30 June 30 June December
2008 2007 2007
R`000 R`000 R`000
Exploration cost (3 269) (155) (3 257)
The exploration costs refer to expenditure incurred on the Lift II pre-
feasibility drilling. The area known as Lift II is the copper mineralisation
area below the current footprint. This area is very large and requires
considerable diamond drilling to confirm its tonnage and grade. The Lift II
area has the potential to add at least ten years to the life of mine.
5. PROFIT FROM CONTINUING OPERATIONS BEFORE TAX AND NET FINANCE COSTS
Six Six Year
months months ended
ended ended 31
30 June 30 June December
2008 2007 2007
R`000 R`000 R`000
Included are:
Depreciation of property, plant and (229 (138 (286 698)
equipment 018) 060)
Amortisation of intangible assets - (325) (325)
6. TAXATION
The effective tax rate decreased from 36.27% at 30 June 2007 to 24.03% at 30
June 2008.
Deferred tax movements not recognised through the income statement, but
through equity totalled R452 million for the six months ended 30 June 2008
(2007: R111 million). This is related to the mark-to-market entries on the
hedge book that is recognised directly in equity.
The major components of income tax expense in the consolidated income
statement are:
Six Six Year
months months ended
ended ended 31
30 June 30 June December
2008 2007 2007
R`000 R`000 R`000
Current income tax
- South African
- Mining tax (185 - (116 771)
648)
- Non-mining tax (3 371) (2 344) (5 342)
- Foreign
- Current (13 235) (4 790) (10 719)
Deferred income tax
Relating to origination and reversal of
temporary differences :
- South African 55 347 (210 (795 570)
483)
- Foreign - - -
Income tax expense reported in the (146 (217 (928 402)
consolidated income statement 907) 617)
Tax rate reconciliation:
% % %
Current standard statutory rate 28.00 29.00 29.00
Adjusted for:
- Estimated State share (after tax) rate 3.60 4.92 3.60
- Disallowable expenditure (permanent
difference) / deductible temporary
differences for which no deferred income (1.43) 0.26 0.2
tax asset was recognised
- Tax rate differential of foreign (0.34) (0.33) -
subsidiaries
- Movement in capital (0.63) 0.85 (0.1)
- Actuarial loss amortisation - 0.01 -
- Adjustment to the basis for provision 0.01 1.43 -
from cost to market value
- Balance sheet movement on (0.18) - 0.4
rehabilitation investment
- Statutory rate change (5.25) - -
- Actual state share and state share 1.30 - -
deduction on mining tax
- Prior year under provision 0.12 - 0.4
- Other (1.17) 0.13 (0.2)
Effective tax rate 24.03 36.27 33.3
7. EARNINGS PER SHARE
Six Six Year
months months ended
ended ended 31
30 June 30 June December
2008 2007 2007
R`000 R`000 R`000
Reconciliation of net profit for
earnings per share
Net profit attributable to equity
holders from continuing operations 464 463 382 346 1 860 913
Net profit attributable to ordinary
shareholders from basic and diluted 464 463 382 346 1 860 913
earnings per share
Reconciliation of weighted average
number of ordinary shares
Weighted average number of ordinary 48 337 48 337 48 337
shares
8. RECONCILIATION OF HEADLINE EARNINGS PER SHARE
Taxation
Profit and lease
before considera Profit
tax tion after tax
R`000 R`000 R`000
Six months ended 30 June 2008
Profit per income statement 611 370 (146 907) 464 463
Profit on disposal of fixed assets (238) 57 (181)
Impairment loss 2 767 (665) 2 102
Headline profit for six months ended 613 899 (147 515) 466 384
30 June 2008
Six months ended 30 June 2007
Profit per income statement 599 963 (217 617) 382 346
Profit on disposal of fixed assets (447) 146 (301)
Headline profit for six months ended 599 516 (217 471) 382 045
30 June 2007
Year ended 31 December 2007
Profit per income statement 2 789 315 (928 402) 1 860 913
Profit on disposal of fixed assets (1 205) 401 (804)
and subsidiaries
Impairment reversal (1 690 550 896 (1 139
156) 260)
Headline profit for year ended 31 1 097 954 (377 105) 720 849
December 2007
Six Six Year
months months ended
ended ended 31
30 June 30 June December
2008 2007 2007
Headline earnings per share (cents) 965c 790c 1 491c
9. SEGMENT REPORTING
The Group`s primary reporting segment is its business segments and secondary
format is its geographical segments. The operating businesses are organised
and managed separately according to the nature of the products and services
provided, with each segment representing a strategic business unit that
offers different products and serves different markets. From a business
segment point of view, the only significant segments are copper, industrial
minerals, and by-products. Transfer prices between business segments are set
on an arm`s length basis in a manner similar to transactions with third
parties.
Business Segment
The following table`s present revenue and profit information regarding the
Group`s business segments for the periods ended 30 June 2008 and 2007
respectively. The primary product of the Group is copper, which is mined and
beneficiated in Phalaborwa. The Industrial Minerals division produces and
markets vermiculite. By-products include magnetite, nickel products, anode
slimes, and sulphuric acid.
Period ended 30 June 2008
Industrial By-
Copper Minerals Products Total
R`000 R`000 R`000 R`000
Revenue
Sales to external customers - 1 801 165 208 333 360 844 2 370 342
continuing operations
Segment Revenue 1 801 165 208 333 360 844 2 370 342
Results
Segment Results - continuing 414 816 30 227 184 866 629 909
operations
Impairment loss (2 767) - - (2 767)
Unallocated expenditure - - - (4 630)
Profit from operations before 622 512
tax and finance costs
Net finance costs (11 142)
Profit before income tax 611 370
Income tax expense (146 907)
Profit for the period 464 463
Period ended 30 June 2007
Industrial
Copper Minerals By- Total
Products
R`000 R`000 R`000 R`000
Revenue
Sales to external customers - 2 083 508 149 972 287 547 2 521 027
continuing operations
Segment Revenue 2 083 508 149 972 287 547 2 521 027
Results
Segment Results - continuing 535 831 36 767 123 431 696 029
operations
Unallocated expenditure (5 511)
Profit from operations before 690 518
tax and finance costs
Net finance costs (90 555)
Profit before income tax 599 963
Income tax expense (217 617)
Profit for the period 382 346
10. DEFERRED TAX
Six months Six Year
ended months ended
30 June ended 31 December
2008 30 June 2007
2007
R`000 R`000 R`000
Deferred tax assets and liabilities are offset when there is a legally
enforceable right to offset current tax assets against current tax
liabilities and when the deferred income taxes relate to the same fiscal
authority. The offset amounts are as follows:
Deferred tax assets:
- Deferred tax asset to be 1 076 301 399 719 781 375
recovered after more than 12
months
- Deferred tax asset to be 559 287 507 369 389 880
recovered within 12 months
1 635 588 907 088 1 171 255
Deferred tax liabilities:
- Deferred tax liability to be (968 810) (453 067) (1 086 224)
recovered after more than 12
months
- Deferred tax liability to be (42 929) (16 701) 31 588
recovered within 12 months
(1 011 739) (469 768) (1 054 636)
Net deferred tax asset 623 849 437 320 116 619
Deferred income taxes are calculated at the tax rates prevailing in the
different fiscal authorities where the asset or liability originates.
The gross movement on the deferred income tax account is as follows:
Beginning of period 116 619 537 147 537 147
Exchange adjustment on translation 111 8 -
of foreign subsidiaries
Tax charged to equity 451 772 110 648 374 815
Income statement charge 55 347 (210 483) (795 343)
Net deferred tax asset at the end 623 849 437 320 116 619
of the period
Deferred taxation relating to temporary differences is made up as
follows:
Assets
Provisions 82 192 56 008
Derivatives 1 635 587 907 088
Other (5 291) 15 734
1 712 488 978 830
Liabilities
Property, plant and equipment (1 088 639) (541 510)
(1 088 639) (541 510)
Net deferred tax asset 623 849 437 320
Included in the balance sheet as follows:
Deferred tax asset 1 635 588 907 088 1 171 255
Deferred tax liability (1 011 739) (469 768) (1 054 636)
Net deferred tax asset 623 849 437 320 116 619
Deferred income tax assets are recognised to the extent that future taxable
benefits are generated against which the deferred tax asset can be realised.
At 30 June 2008 the company had no unredeemed capital
(2007: R 146 million).
11. SHARE CAPITAL, SHARE PREMIUM AND RESERVES
Share Share Retained Other Reserves
Capital premium earnings Total
R`000 R`000 R`000 R`000 R`000
Balance at 1 48 337 581 214 569 846 (1 446 951) (247 554)
January 2007
Fair value on - - - 29 349 29 349
available for sale
investments
Currency - - - 4 174 4 174
translation
differences
Net loss on cash - - - (928 848) (928 848)
flow hedges
Hedge loss - - - 592 047 592 047
recycled to profit
and loss
Tax on items - - - 110 648 110 648
directly taken to
equity
Net profit for the - - 382 346 - 382 346
period
Balance at 30 June 48 337 581 214 952 192 (1 639 581) (57 838)
2007
Fair value on - - - 7 131 7 131
available for sale
investments
Currency - - - (9 875) (9 875)
translation
differences
Unclaimed - - - (184) (184)
dividends and
other
Net loss on cash - - - (1 541 828) (1 541 828)
flow hedges
Hedge loss - - - 727 778 727 778
recycled to profit
and loss
Tax on items - - - 264 167 264 167
directly taken to
equity
Actuarial loss on - - - (18 821) (18 821)
defined benefit
plans
Net profit for the - - 1 478 567 - 1 478 567
period
Balance at 31 48 337 581 214 2 430 759 (2 211 213) 849 097
December 2007
Fair value on - - - (5 878) (5 878)
available for sale
investments
Currency - - - 8 368 8 368
translation
differences
Unclaimed - - - 149 149
dividends and
other
Net loss on cash - - - (2 474 584) (2 474 584)
flow hedges
Over hedged - - - 9 411 9 411
ineffectiveness
Hedge loss - - - 886 444 886 444
recycled to profit
and loss
Tax on items - - - 451 772 451 772
directly taken to
equity
Dividends paid - - (149 846) - (149 846)
Net profit for the - - 464 463 - 464 463
period
Balance at 30 June 48 337 581 214 2 745 376 (3 335 531) 39 396
2008
12. NET (CASH) / DEBT
Description of Effective Maturity Six months Six months Year
loan interest ended ended ended
rate 30 June 30 June 31 December
% 2008 2007 2007
R`000 R`000 R`000
Non-current
Senior Term Libor+2.3% / 31.12.09 3 051 379 236 141 049
Facility Jibar+2.65%
Rio Tinto Libor+5% - 484 063 -
unsecured loan
Rio Tinto Libor+5% - 166 744 52 769
secured loan
3 051 1 030 043 193 818
Current
Senior Term Libor+2.3% / 31.12.09 59 108 157 696 115 668
Facility Jibar+2.65%
Revolving Libor+2.3% / 106 445 100 627 98 414
credit facility Jibar+2.65%
165 553 258 323 214 082
Total 168 604 1 288 366 407 900
borrowings
Cash and cash (549 868) (1 005 529) (841 110)
equivalents
Net (cash) / (381 264) 282 837 (433 210)
debt
Total equity 39 396 (57 838) 849 097
Total capital (341 868) 224 999 415 887
employed
Gearing (9.68) (4.89) (0.51)
Approximately 64% of the group`s existing borrowings is denominated in US$
for a total amount of US$14 million. The terms of repayments are consistent
with the information disclosed in the December 2007 annual financial
statements, except for the maturity date of the Senior term facility that is
brought forward due to the mandatory prepayments made during the period
under review.
Senior term facility agreement
Total principal repayments of R218 million were made on the senior term
facility during the six months ended 30 June 2008. This is made up of R83
million paid in accordance with the repayment schedule plus mandatory pre-
payments of R135 million on the term facility outstanding amount applied in
inverse order of maturity. The mandatory pre-payments resulted from the
restricted payment that was made to Rio Tinto Finance plc (R85 million pre-
payment) and the dividend payment made in March 2008 (R50 million pre-
payment). Mandatory pre-payments represent 33% of the rand equivalent of the
restricted payment as required by the facility agreement.
Rio Tinto secured loan
In January 2008, the Group made restricted payments as defined in the senior
term facility agreement to Rio Tinto Finance plc. Payment of the sum equal
to the US dollar equivalent of R56 million (US$7.8 million) was allocated
entirely to the repayment and settlement of the principal under the secured
loan agreement, which bears interest at LIBOR plus 5%.
Loan covenants
As part of the refinancing agreement, the Company is required to meet
certain covenants. On 20 January 2008 and 23 May 2008, the Company issued
Loan Compliance Certificates to the Lenders of the Senior Term Facility
Agreement showing no defaults.
13. DERIVATIVE FINANCIAL INSTRUMENTS
At 30 June 2008, the Group held a commodity swap contract designated as a
hedge of expected future sales under which the Group receives a fixed price
in Rand in relation to a monthly notional quantity of copper sales as
detailed below and pays a floating price based on the arithmetic average
(mean) of the US$ LME Cash Settlement Price. The net receipt/payment is
converted to Rand at the average US$/Rand exchange rate for the calculation
period. The cash flows paid under the terms of the hedging instrument are
designed to reduce variability in the Rand proceeds of the copper sales as
set out in the table below.
A hedge is considered to be highly effective if the results of the
retrospective and prospective effectiveness tests are within the range of
80% - 125%. Even if the effectiveness calculation falls within the 80% -
125% range, an ineffectiveness portion may arise if the change in the
hedging instrument exceeds the change in the hedged item (over-hedge). The
ineffective portion of the change in the fair value of the hedging
instrument is recognised directly in the income statement. As at 30 June
2008 the cashflow hedges of the expected future sales were assessed to be
highly effective and R 9 million over-hedged ineffectiveness was recognised
in the income statement.
The combined hedged book amounts to 122 437 tonnes of copper for a total
amount of R5 182 million as at 30 June 2008 spread over 5.25 years. The
mark-to-market revaluation of the hedge book resulted in a R2 392 million
increase (from R2 790 million at 30 June 2007 to R5 182 million at 30 June
2008) in the hedge liability. The terms of the contracts are as follows:
Derivative financial instrument: table of terms
Average
hedged Hedged Mark to
Maturity Quantity price value market
Year (t) ZAR/t R`000 loss/(gain
)
R`000
2008 18 692 19 242 359 664 961 343
2009 22 265 15 739 350 427 1 066 163
2010 22 188 15 739 349 219 982 082
2011 21 825 15 739 343 500 887 635
2012 21 137 15 739 332 668 789 387
2013 16 330 15 739 256 998 495 038
Total 122 437 1 992 5 181 648
476
Less: Non-Current portion 3 770 558
Current portion 1 411 090
14. RELATED PARTY TRANSACTIONS
Six Six Year
months months ended
ended ended 31
30 June 30 June December
2008 2007 2007
R`000 R`000 R`000
The following transactions were
carried out with related parties:
Recovery of travel and staff costs 3 552 582 6 840
Purchases of goods and services 59 235 36 553 84 483
Loans to related parties 15 641 39 684 43 435
Key management compensation 8 122 6 324 17 091
15. COMMITMENTS
Commitments contracted for at balance sheet date were R126 million (30 June
2007: R87 million). Capital expenditure that was approved by the board, but
not contracted for at 30 June 2008 amounts to R265 million (30 June 2007:
R164 million).
16. CONTINGENT LIABILITIES
Various CCMA and labour cases are in progress. The potential exposure is
approximately R 23 million for the six months ended 30 June 2008.
17. POST BALANCE SHEET EVENTS
On 30 July 2008, Palabora received notice from the lenders that the
Production completion test in terms of the Facility agreement was approved.
As a consequence, the margin on both the senior term loan and revolving
credit facility will reduce from 2.3% to 2.0%, with effect from that date.
18. GROUP SELECTED STATISTICS
Six months Six months Year
ended ended ended
30 June 30 June 31
2008 2007 December
2007
Revenue
Copper (net of hedge) R` million 1 801 2 084 3 921
Industrial minerals R` million 208 150 314
Other products R` million 361 288 624
Net profit before tax R` million 611 600 2 789
Copper
Ore hoisted millions of 5.73 5.98 11.84
tonnes
Average copper grade % Cu 0.717 0.716 0.705
Copper in concentrates `000 of 31.1 34.9 65.7
produced tonnes
Cathode produced `000 of 39.8 43.7 91.7
tonnes
Average copper price USc/lb 361.8 308.8 332.6
realised
LME Copper Price USc/lb 368.3 306.5 322.1
Average rand/dollar R/US$ 7.65 7.17 7.05
exchange rate
Average copper price R/tonne 61 041 48 793 51 706
realised (pre hedge)
Average copper price R/tonne 41 363 40 522 39 829
realised (post hedge)
Net cash cost R/tonne 20 916 16 328 15 952
Six months Six months Year
ended ended ended
30 June 30 June 31
2008 2007 December
2007
Copper Rod
Unit selling price pre USc/lb 365.6 318.4 342.5
hedge
Unit selling price post USc/lb 245.9 248.0 256.2
hedge
Sales tonnes 29 550 30 749 64 468
Cathode
Unit selling price pre USc/lb 328.0 292.5 319.9
hedge (local)
Unit selling price post USc/lb 220.6 227.8 239.3
hedge (local)
Sales (local) tonnes 9 576 7 309 13 148
Unit selling price pre USc/lb 388.4 286.0 302
hedge (export)
Unit selling price post USc/lb 261.2 222.7 225.9
hedge (export)
Sales (export) tonnes 501 7 726 15 230
Vermiculite
Vermiculite sold tonnes 101 917 85 499 181 254
Average vermiculite prices R/tonne 1 599 1 754 1 732
realised
Operational cash cost R/tonne 553.2 421.6 469.5
Magnetite
Magnetite sold tonnes 793 140 585 851 1 337 007
Average magnetite prices R/tonne 300 256 270
realised
Imported concentrate
Volumes Tonnes 5 803 10 077 19 322
copper
Cost R` million 357.5 468.7 920
Unit purchased price R/tonne of 61 613 46 506 46 860
copper
Marginal ore concentrate
Volumes Tonnes - 3 039 3 039
copper
Cost R` million - 98 98
Unit purchased price R/tonne of - 32 141 32 141
copper
Cash flow
Cash from operating R` million 99.9 801.0 1 604.2
activities
Cash in bank R` million 549.9 1 005.5 841.1
Costs
Production cost (excluding
concentrate purchases) R` million 641.5 812.2 1 753.9
Cost of sales R` million 1 326 1 521.7 2 993.6
Capital expenditure and
commitments
Capital expenditure R` million 127 64 182
Approved expenditure at end
of R` million 265 164 303
each period
Contracts placed at end of R` million 126 87 86
each period
Six Six Year
months months ended
ended ended 31
30 June 30 June December
2008 2007 2007
Investments
Fair value of unlisted R` million 307 305 312
investments
Share capital
Authorised ordinary shares R`000 100 000 100 000 100 000
of R1 each
Issued ordinary shares of R`000 48 337 48 337 48 337
R1 each
Net asset value per share R/share 0.82 (1.20) 17.57
Date: 05/08/2008 13:00:06 Produced by the JSE SENS Department.
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