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MLA
MLA
MLA - Mittal Steel South Africa Limited - Audited group annual financial
results and dividend announcement
for the year ended 31 December
2006
Mittal Steel South Africa Limited
Registration number 1989/002164/06
Share code: MLA & ISIN: ZAE000064044
("the Company" or "the Group")
Audited group annual financial results and dividend announcement for the
year ended 31 December 2006
* Headline earnings increased by 43% during second half
* Positive cash flow of R2,1 billion
* Local sales tonnes increased from 56% to 71% of total sales
FINANCIAL RESULTS
Headline earnings for the year remained strong at R4 646 million although
decreased by 8% compared to last year.
The decline was primarily driven by a significant increase in the cost of
input materials. This was partially offset by an increase in domestic sales
volumes and a weaker Rand/US Dollar exchange rate.
Year ended 31
December
2006 2005
Audited Audited
Rm Rm
Revenue 25 363 23 984
Profit from operations 5 833 6 894
Gains and losses on changes in 480 246
foreign exchange and financial
instruments
Net interest income/(finance costs): 193 (29)
- interest income 362 188
- interest on bank overdrafts, (68) (77)
borrowings and finance lease
obligations
- imputed interest on non-current (101) (140)
provisions
Income from investments 7 5
Income from equity accounted 195 294
investments
Income tax expense (2 062) (2 344)
Attributable earnings 4 646 5 066
Headline earnings 4 646 5 077
Headline earnings (US$ million) 680 806
QUARTERLY COMPARABLE HEADLINE EARNINGS
Headline earnings for the fourth quarter decreased by 14% compared to the
previous quarter mainly due to the seasonal slowdown in sales during the
December holiday period. However, compared to the corresponding quarter
last year, headline earnings increased by 45% driven by higher domestic
sales volumes and an increase in international steel prices.
Exchange
Quarter to US$m Rm rate
Average 2004 199 1 265 6,43
March 2005 264 1 578 5,97
June 2005 257 1 643 6,40
September 2005 152 987 6,50
December 2005 133 869 6,52
Average 2005 202 1 269 6,35
March 2006 112 684 6,13
June 2006 190 1 228 6,45
September 2006 205 1 470 7,16
December 2006 173 1 264 7,31
Average 2006 170 1 162 6,76
OPERATING RESULTS
Revenue Year ended 31
December
2006 2005
Audited Audited
Rm Rm
Flat Products 17 350 16 371
Long Products 7 691 7 161
Coke and Chemicals 1 033 1 057
Intergroup eliminations (711) (605)
Total 25 363 23 984
Operating profit Year ended 31
December
2006 2005
Audited Audited
Rm Rm
Flat Products 3 550 4 518
Long Products 2 100 2 109
Coke and Chemicals 184 301
Corporate and other (1) (34)
Total 5 833 6 894
Operating profit for the year declined by 15% compared to the previous
year. Flat products declined by 21% and Coke and Chemicals by 39% while
long products remained in line with the previous year.
The main reasons for the decline in operating profit for flat products
compared to a roll-over for long products were a higher increase in the
cost of input materials, especially the price increase of zinc, used in
galvanised flat products and imported iron ore pellets for Saldanha Steel.
Production interruptions also impacted more severely on the operational
stability of the flat product plants. Average selling prices, compared to
2005, were also higher for long products than flat products.
The decline in operating profit for the Coke and Chemicals business was
largely due to a sharp decline in the international market coke price.
Liquid steel production for the year of 7,055 million tonnes decreased by
3% compared to last year due to several production disruptions experienced.
These disruptions included a skip hoist failure at one of the blast
furnaces at Vanderbijlpark Steel, electricity and oxygen supply outages at
Saldanha Steel, two fire incidents at Vanderbijlpark Steel and a cut-back
in production, both at Vanderbijlpark Steel and Newcastle Steel,
necessitated by a lack of iron ore due to delivery problems.
MARKET REVIEW
International
Global steel consumption increased by 9% to about 1,12 billion tonnes
during 2006. The predominant drivers behind the increase were the
expansions in Euro countries and Japan while rapid growth continued in
China and India. Of concern is the growing output of China which now
represents more than a third of total world steel production. It is,
however, encouraging that China`s National Development and Reform
Commission aims to bring about restructuring of the greatly fragmented
industry and to phase out outdated production capacity. China was a net
exporter of 24.5 million tonnes of finished steel products during 2006.
Based on current trends, China`s net export position is expected to decline
during 2007.
Export volumes decreased by 35% during 2006 due to higher domestic demand.
Average export prices for hot rolled coil were 5% down on last year while
low carbon wire rod prices were up 4%. The upward trend in international
prices that started during the second quarter of 2006 resulted in the
average prices for hot rolled coil and low carbon wire rod during the
second half of 2006 to exceed the average prices obtained during the same
period last year by 24% and 22% respectively.
The lower volumes available for exports created the opportunity to withdraw
from less attractive markets which in return also impacted positively on
average export prices achieved.
Domestic market
Domestic demand during the year was very strong and increased by 26%
compared to prior year. Preliminary numbers issued by the South African
Iron and Steel Institute (SAISI) indicates a record apparent annual
domestic steel consumption of 5,8 million tonnes for 2006, which is 10%
higher than the previous record set in 1981. It also represents an increase
of about 27% over 2005.
Of significance is that steel consuming sectors related to the automotive,
furniture and appliances and other durable goods did exceptionally well.
Demand for steel was further driven by the need to alleviate infrastructure
bottlenecks which developed on the back of solid economic growth. The
growth in the construction sector was approximately 14% for 2006. The
depreciation of the Rand also supported the manufacturing sector by being
more competitive in the export market while increasing the scope for
domestic production to replace value-added imports.
COST
Cash cost per ton of hot rolled coil and billets increased by 10,3% and
8,8% respectively, compared to last year, driven by substantial increases
in the cost of metallurgical coking coal, imported iron ore pellets, tin,
nickel, aluminum and iron ore. The cost of hot rolled coil was further
negatively impacted by the production disruptions at the flat product
plants.
The cost of galvanised material increased by 36% compared to last year due
to the higher cost to produce hot rolled coils and an 131% increase in the
price of zinc.
CONTINGENT LIABILITIES
An Alternative Dispute Resolution (ADR) meeting was held with SARS on 1
December 2006 regarding the disallowance of the tax deduction of the
payments made in terms of the Business Assistance Agreement. The full
amount at risk is R403 million of tax plus interest. Although SARS still
have to respond to the outcome of the proceedings, it was considered
prudent to provide for 20% of the tax amount.
In the case at the Competition Tribunal on alleged excessive pricing
brought by the gold miners, Harmony and DRD Gold, closing arguments were
presented on 29 and 30 November 2006, with a ruling expected towards the
end of March 2007. We maintain our view, based on advice from senior
counsel that no significant exposure exists in this regard. No provision
has been raised and no contingent liability quantified in respect of this
and other subsequent complaints, referred to the Competition Tribunal,
after year end.
OUTLOOK QUARTER ONE 2007
International steel prices are expected to be stronger backed by a balance
supply and demand environment, high cost pressures and improved supply
discipline. Domestic demand is set to increase further, ahead of the
government`s multi- billion infrastructure development programme. This
includes the expansion of the electricity system, the upgrade and
construction of new rail infrastructure and the refurbishment and building
of stadiums for the 2010 Soccer World Cup.
It is expected that the results for the first quarter of 2007 will improve
compared to quarter four of 2006, mostly driven by higher domestic sales
volumes.
DIVIDEND ANNOUNCEMENT
In line with the company`s policy, the Board declared a final dividend of
204 cents, covered approximately three times by headline earnings.
Payment in South African Rands will be made on Monday, 26 March 2007 to
shareholders recorded in the register on Friday, 23 March 2007. The last
day to trade to qualify for the dividend will be Thursday, 15 March 2007
and the shares will trade ex-dividend from Friday, 16 March 2007. Share
certificates may not be dematerialised or rematerialised between Friday, 16
March 2007 and Friday, 23 March 2007 both days inclusive. Dividend
entitlements of less than ten rand will be donated to charity in terms of
the articles of association.
On behalf of the Board
EM Reato HJ Verster
(Chief Executive Officer) (Executive Director Finance)
19 February 2007
GROUP INCOME STATEMENT
Year ended 31
December
2006 2005
Audited Audited
Note Rm Rm
Revenue 25 363 23 984
Raw materials and consumables used (11 (8 325)
071)
Employee costs (2 243) (2 104)
Energy (1 332) (1 232)
Movement in inventories of 623 (24)
finished goods and work in
progress
Goodwill impairment (11)
Depreciation (1 150) (1 152)
Amortisation of intangible assets (16) (40)
Other operating expenses (4 341) (4 202)
Profit from operations 5 833 6 894
Gains and losses on changes in 2 480 246
foreign exchange and financial
instruments
Net interest income /(finance 3 193 (29)
costs)
Interest income 362 188
Finance costs (169) (217)
Income from investments 7 5
Net profit from equity accounted 195 294
investments before taxation
Profit before tax 4 6 708 7 410
Income tax expense 5 (2 062) (2 344)
Profit for the year 4 646 5 066
Attributable earnings per share
(cents)
- basic 1 042 1 137
- diluted 1 041 1 134
Additional Information
Reconciliation of headline
earnings
Profit attributable to ordinary 4 646 5 066
shareholders
Adjusted for:
- Goodwill impairment 11
Headline earnings 4 646 5 077
Reconciliation of earnings before
interest, taxation, depreciation
and amortisation (EBITDA)
Profit from operations 5 833 6 894
Adjusted for:
- Goodwill impairment 11
- Depreciation 1 150 1 152
- Amortisation of intangible 16 40
assets
EBITDA 6 999 8 097
Performance per ordinary share
Headline earnings per share
(cents)
- basic 1 042 1 139
- diluted 1 041 1 137
Dividend per share (cents)
- interim 143 240
- final 204 140
Net asset value per share (cents) 5 147 4 360
Ordinary shares (thousands)
- in issue 445 752 445 752
- weighted average number of 445 752 445 752
shares
- diluted weighted average number 446 449 446 625
of shares
Ratios (%)
EBITDA margin 27,6 33,8
Return on ordinary shareholders`
equity per annum
- attributable earnings 21,9 28,7
- headline earnings 21,9 28,7
Net cash to equity 30,9 22,9
Market capitalisation (Rm) 43 795 27 302
CONDENSED GROUP CASH FLOW STATEMENT
Year ended 31
December
2006 2005
Audited Audited
Rm Rm
Cash inflows from operating activities 3 463 2 616
Cash generated from operations 6 147 8 407
Net interest income 294 111
Dividend paid (1 261) (2 853)
Income tax paid (1 660) (2 977)
Realised foreign exchange movement (57) (72)
Cash outflows from investing activities (1 263) (1 559)
Investment to maintain operations (910) (1 250)
Investment to expand operations (536) (358)
Proceeds from disposals of property, 9 6
plant and equipment
Investment income - interest 7 5
Dividend from equity accounted 167 38
investments
Net cash inflow 2 200 1 057
Cash outflows from financing activities (89) (93)
Increase in cash and cash equivalents 2 111 964
Effect of foreign exchange rate changes 420 215
Cash and cash equivalents at beginning of 5 219 4 040
year
Cash and cash equivalents at end of year 7 750 5 219
GROUP BALANCE SHEET
As at 31
December
2006 2005
Audited Audited
Note Rm Rm
Assets
Non-current assets 15 675 15 317
Property, plant and equipment 14 526 14 260
Intangible assets 58 74
Investments in joint ventures - 6 953 912
unlisted
Non-current financial assets 134 61
Non-current loan receivables 7 4 10
Current assets 14 926 11 020
Assets classified as held for sale 6
Inventories 4 775 3 907
Trade and other receivables 2 088 1 732
Taxation 179 116
Current financial assets 128 46
Cash and cash equivalents 7 750 5 219
Total assets 30 601 26 337
Equity and liabilities
Shareholders` equity
Stated capital 6 389 6 389
Non-distributable reserves 684 609
Retained income 15 870 12 453
Ordinary shareholders` capital 22 943 19 451
Non-current liabilities 4 245 3 962
Interest-bearing borrowings 61 71
Non-current finance lease 502 596
obligations
Deferred income tax liability 2 355 2 007
Provision for post-retirement 8 6
medical costs
Non-current provisions 1 319 1 282
Current liabilities 3 413 2 924
Trade and other payables 3 041 2 637
Interest-bearing borrowings 10 10
Current finance lease obligations 93 89
Current provisions 269 188
Total equity and liabilities 30 601 26 337
GROUP STATEMENT OF RECOGNISED INCOME AND EXPENSE
Year ended 31
December
2006 2005
Audited Audited
Rm Rm
Profit for the year 4 646 5 066
Other recognised income and expenses
Exchange differences on translation of 102 68
foreign operations
Movement in gains and losses deferred to 23 25
equity on cash flow hedges
Share of other joint ventures hedging 1
reserve
Income tax on income taken directly to (5)
equity
Total recognised income and expense for 4 766 5 160
the year
Attributable to:
Equity holders of the company 4 766 5 160
Notes to the Audited Financial Statements
1. Basis of preparation
The announcement has been prepared in conformity with IAS34 Interim
Financial Reporting.
These audited group financial results for the year ended 31 December 2006
constitute a summary of the group`s audited financial statements. They have
been prepared on the historical cost basis, except for the revaluation of
financial instruments and conform to International Financial Reporting
Standards and Schedule 4 of the South African Companies Act 1973, as
amended. The announcement should be read in conjunction with the 31
December 2006 financial statements. The group has adopted all of the new
and revised Standards and Interpretations issued by the International
Accounting Standards Board (IASB) and the International Financial Reporting
Interpretations Committee (IFRIC) of the IASB that are relevant to its
operations and effective for accounting periods beginning on 1 January
2006.
The principal accounting policies are consistent with those applied in the
previous year except for the following:
Adoption of IFRIC 4, Determining whether an arrangement contains a lease
All arrangements that take the form of a lease have been recognised in
terms of IAS 17, Leases. The recognition of such leases requires a
retrospective adjustment to financial information.
The net carrying value of property, plant and equipment increased by R1 067
million (December 2005: R1 130 million) loan receivables decreased by R526
million (December 2005: R526 million), finance lease obligations increased
by R595 million (December 2005: R685 million), opening retained earnings,
as at 1 January 2005, decreased by R52 million, 2005 earnings decreased by
R3 million.
Accounting treatment of investment in Collect-a-Can (Pty) Limited
The group has re-assessed its accounting treatment of the investment in
Collect-a-Can (Pty) Limited and now accounts for it as a jointly controlled
entity, using the equity accounting method; previously this was accounted
for as a subsidiary. This treatment was retrospectively applied, resulting
in a restatement to opening retained earnings of R9 million at 1 January
2005. Retained earnings for 2005 decreased by R3 million. This resulted in
a decrease of net assets by R22 million (December 2005: R18 million).
Treatment of transport costs recovered from customers and settlement
discount allowed
The treatment of these costs, where transport costs recovered from
customers were deducted from revenue and settlement discount allowed was
not offset against revenue, was re-assessed. Transport costs recovered
from customers of R501 million are now included in revenue (December 2005:
R374 million) and the cost paid to transport contractors is included in
cost of sales. (December 2005: R374 million). Settlement discount allowed
is now deducted from revenue, R451 million (December 2005: R349 million).
These reclassifications have no impact on operating profits.
The prior year results have been restated in compliance with IAS 8,
Accounting policies, changes in accounting estimates and errors.
The new standards, IFRS 7, Financial Instruments: Disclosure and IFRS 8,
Operating Segments, effective for annual periods beginning on or after 1
January 2007 and 1 January 2009 respectively, have not yet been adopted.
Adoption of these standards will have no impact on financial results or
result in changes to the accounting policy of the group.
The group`s financial report for the year will be available by the end of
March 2007. The signed unmodified auditors` report issued by Deloitte &
Touche for the year is available for inspection at the company`s registered
address.
Year ended 31
December
2006 2005
Audited Audited
Rm Rm
2. Gains and losses on foreign 480 246
exchange and financial instruments
Gains on changes in foreign exchange 413 166
rates
Losses on changes in foreign exchange (2) (4)
rates
Losses on changes in the fair value of (124) (54)
derivative instruments designated as
fair value through profit and loss
Gains on changes in the fair value of 145 106
embedded derivative instruments
Fair value gains transferred from 48 32
equity on derivative instruments
designated as cash flow hedges
3. Net interest income/(finance costs) 193 (29)
Interest income 362 188
Interest expense on bank overdrafts (14) (21)
and borrowings
Interest expense on finance lease (54) (56)
obligations
Imputed interest on non-current (101) (140)
provisions
4. Profit before taxation is arrived at after
Directors` emoluments
- executive 8 7
- non-executive 1 1
Auditors` remuneration
- audit fees 9 9
- other services 1 1
5. Taxation 2 062 2 344
Company and subsidiaries 2 002 2 327
Equity accounted investments 60 17
6. Investments in joint ventures
Unlisted investments
- directors` valuation of unlisted 1 037 1 088
shares in joint ventures
7. Non-current loan receivables
Non-current interest free loan 4 10
receivables
8. Capital expenditure
- incurred 1 446 1 608
- contracted 960 740
- authorised but not contracted 769 486
9. Contingent liabilities 530 623
- guarantees 115 120
- litigation and claims 415 503
10. Operating lease commitments 44 69
- less than one year 5 25
- more than one year and less than 39 44
five years
11. Related party transactions
The Group is controlled by Mittal Steel Company N.V. which owns 52,02% of
the company`s shares. During the year the company and its subsidiaries, in
the ordinary course of business, entered into various sale and purchase
transactions with associates and joint ventures. These transactions
occurred under terms that are no less favourable to Mittal Steel South
Africa than those arranged with third parties.
12. Directors` share option benefits
Rights to options and shares held by Executive Directors in terms of the
Mittal Steel South Africa Management Share Scheme totalled 376 056 at 31
December 2006 (December 2005: 468 486), representing 0,08% (2005: 0,11%) of
the issued shares. During the period the directors sold a portion of their
options realising a gain of R3 million (December 2005: R0,9 million), which
was paid to them in terms of the Scheme during the year.
13. Corporate governance
The group subscribes to the Code on Corporate Practices and Conduct as
contained in the second King Report on corporate governance.
14. Listings requirements
This announcement has been prepared in compliance with the Listings
Requirements of the JSE Limited.
UNAUDITED SUPPLEMENTARY PHYSICAL INFORMATION
(`000 TONNES)
Year ended 31
December
2006 2005
Flat Steel Products
Liquid steel production 4 863 5 067
Sales 4 268 4 283
Long Steel Products
Liquid steel production 2 192 2 194
Sales 1 926 1 947
Total
Liquid steel production 7 055 7 261
Sales 6 194 6 230
- local 4 400 3 485
- export 1 794 2 745
Local sales as percentage of total sales 71 56
RECONCILIATION OF CHANGES IN EQUITY
Non-distributable reserves
Share- Attributable
Capital Mange- based reserves
redemp- ment pay of equity
Stated tion share ment accounted
capital reserve trust reserve investments
Rm Rm Rm Rm Rm
Balance at 1 6 389 23 (34) 2 449
January 2005
As previously 6 389 23 (34) 2 442
stated
Effect of
leased assets
recognised in
terms of IFRIC
4
Deconsolidation 7
of subsidiary
Changes in
equity for 2005
Total
recognised
income and
expense for the
year
Profit for the
year
Currency
translation
differences
Effect of cash
flow hedge
accounting
Share of joint
venture hedging
reserve
Management (42)
share trust
loss
Share options 8
charge: IFRS 2
Dividend
Transfer
movement of
insurance
reserve
Transfer of 237
equity
accounted
earnings
Balance at 31 6 389 23 (76) 10 686
December 2005
Total
recognised
income and
expense for the
year
Profit for the
year
Currency
translation
differences
Effect of cash
flow hedge
accounting (net
of income tax)
Management (30)
share trust
loss
Share options 17
charge: IFRS 2
Dividend
Transfer of (32)
equity
accounted
earnings
Balance at 31 6 389 23 (106) 27 654
December 2006
Non-distributable reserves
Joint Transla-
venture tion of Cash flow
hedging foreign hedge Insurance
reserve operations accounting reserve
Rm Rm Rm Rm
Balance at 1 (1) (114) (13) 1
January 2005
As previously (1) (114) (13) 1
stated
Effect of
leased assets
recognised in
terms of IFRIC
4
Deconsolidation
of subsidiary
Changes in
equity for 2005
Total 1 68 25
recognised
income and
expense for the
year
Profit for the
year
Currency 68
translation
differences
Effect of cash 25
flow hedge
accounting
Share of joint 1
venture hedging
reserve
Management
share trust
loss
Share options
charge: IFRS 2
Dividend
Transfer (1)
movement of
insurance
reserve
Transfer of
equity
accounted
earnings
Balance at 31 (46) 12
December 2005
Total 102 18
recognised
income and
expense for the
year
Profit for the
year
Currency 102
translation
differences
Effect of cash 18
flow hedge
accounting (net
of income tax)
Management
share trust
loss
Share options
charge: IFRS 2
Dividend
Transfer of
equity
accounted
earnings
Balance at 31 56 30
December 2006
Share-
Retained holders` Minority Total
income equity interest equity
Rm Rm Rm Rm
Balance at 1 9 139 15 841 15 841
January 2005
As previously 9 200 15 895 7 15 902
stated
Effect of (52) (52) (52)
leased assets
recognised in
terms of IFRIC
4
Deconsolidation (9) (2) (7) (9)
of subsidiary
Changes in
equity for 2005
Total 5 066 5 160 5 160
recognised
income and
expense for the
year
Profit for the 5 066 5 066 5 066
year
Currency 68 68
translation
differences
Effect of cash 25 25
flow hedge
accounting
Share of joint 1 1
venture hedging
reserve
Management (42) (42)
share trust
loss
Share options 8 8
charge: IFRS 2
Dividend (1 516) (1 516) (1 516)
Transfer 1
movement of
insurance
reserve
Transfer of (237)
equity
accounted
earnings
Balance at 31 12 453 19 451 19 451
December 2005
Total 4 646 4 766 4 766
recognised
income and
expense for the
year
Profit for the 4 646 4 646 4 646
year
Currency 102 102
translation
differences
Effect of cash 18 18
flow hedge
accounting (net
of income tax)
Management (30) (30)
share trust
loss
Share options 17 17
charge: IFRS 2
Dividend (1 261) (1 261) (1 261)
Transfer of 32
equity
accounted
earnings
Balance at 31 15 870 22 943 22 943
December 2006
Forward-looking statements
Certain statements in this release that are neither reported financial
results nor other historical information, are forward-looking statements,
including but not limited to statements that are predictions of or indicate
future earnings, savings, synergies, events, trends, plans or objectives.
Undue reliance should not be placed on such statements because, by their
nature, they are subject to known and unknown risks and uncertainties and
can be affected by other factors, that could cause actual results and
company plans and objectives to differ materially from those expressed or
implied in the forward-looking statements (or from past results).
This report is available on the Mittal Steel South Africa Website at:
http://www.mittalsteelsa.com.
Share queries: Please call the Mittal Steel Share care toll free on 0800
006 960
or +27 11 370 7850 if calling from outside South Africa.
Registered Office Transfer Secretaries
Mittal Steel South Computershare Investor Services
Africa 2004
Room N3-5 (Pty) Limited
Main Building 70 Marshall Street
Delfos Boulevard Johannesburg, 2001
Vanderbijlpark, 1911 PO Box 61051
Marshalltown, 2107
Directors:
Dr KDK Mokhele* (Chairman), EM Reato (Chief Executive Officer),
DK Chugh*, S Maheshwari*, JJA Mashaba, M Mukherjee*, MJN Njeke*,
HJ Verster, ND Orleyn*, M Wurth*.
Dr K Ngqula resigned as director on 31 December 2006 and Dr KDK Mokhele was
appointed as Chairman.
* Non-executive
* Citizen of India
Company Secretary: Xoliswa Motswai
Date: 21/02/2007 09:00:00 Produced by the JSE SENS Department.
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