A N N U A L R E P O R T 2 0 0 5 A N N U A L R E P O R T 2 0 0 5 c o n t e n t s Foldout: Group review at a glance Summary of business operations Kumba’s geographical locations Group operational structure Group profile Our values Approach to sustainable development Business objectives Chairman’s statement Chief executive’s review Empowerment transaction Macro-economic review Commodity review Financial review Business operations review Growth Review of mineral resources and reserves Legislative compliance Executive committee Directorate Corporate governance Risk management Shareholders’ information Shareholders’ analysis Sustainable development summary Economic summary Safety, health and environment management summary Social summary Assurance report Index to Global Reporting Initiative indicators Group cash valued added statement Supplementary financial information Selected group financial data translated into US dollars Definitions Annual financial statements Notice of annual general meeting Biographies of directors seeking re-election Form of proxy Administration and shareholders’ diary 1 2 4 5 8 9 12 16 20 21 23 32 44 47 53 56 58 60 66 69 70 72 73 74 80 104 107 115 116 118 119 120 192 196 197 IBC G R O U P R E V I E W A T A G L A N C E Abridged financial statements INCOME STATEMENTS Revenue Net operating profit (including impairment charges and goodwill amortisation) Net financing costs Investment and equity income/(loss) Taxation Minority interest Add back items for headline earnings Headline earnings Headline earnings per share (cents) (restated) Dividends per share (cents) 3 Average realised exchange rate (R/US$) CASH FLOW STATEMENTS Cash flow from normal operations Proceeds on sale of property, plant and equipment Capital expenditure (Acquisition)/disposal of intangible fixed assets Increase in cash resources on disposal/acquisition of a controlling interest in subsidiaries Investments realised/(acquired) Ticor minority buy out Foreign currency translations Share issue proceeds Unbundling costs Non-cash increase in loans due to joint ventures now consolidated Cash flows included above relating to non-interest-bearing debt Non-cash flow movements in net debt of the group arising from currency translation differences Non-cash flow movements in net debt of the group arising from special purpose entities Increase in net debt on acquisition of a controlling interest in subsidiaries Loans from/(to) minority shareholders Decrease/(increase) in net debt GROUP BALANCE SHEETS Assets Non-current assets Property, plant and equipment Biological assets Intangible assets Goodwill Investments in associates and joint ventures Deferred taxation Financial assets Current assets Inventories, trade-and other receivables Cash and cash equivalents Non-current assets classified as held for sale Total assets Equity and liabilities Capital and reserves Shareholders’ equity Minority interest Total shareholders’ interest Non-current liabilities Interest-bearing borrowings Other long-term payables Non-current provisions Deferred taxation Current liabilities Interest-bearing borrowings Other Total equity and liabilities Net debt ANALYSIS PER SHARE Number of shares in issue (million) Weighted average number of shares in issue (million) (restated) Earnings per ordinary share – Attributable earnings (cents) (restated) – Headline earnings (cents) (restated) Dividend per ordinary share (cents)3 Dividend cover (times)4 Net asset value per ordinary share (cents) Attributable cash flow per ordinary share (cents) 12-months ended 12-months ended 31 December 31 December 20041 Unaudited Restated2 Rm 2005 Audited Rm Compound annual growth rate5 % Years ended 30 June 2003 Restated2 Rm 2002 Audited Rm 19,3 11 962 8 709 7 469 7 182 48,3 40,7 36,1 13,5 4 887 (231) 7 (1 412) (61) (817) 2 373 781 540 6,36 1 407 23 (1 044) (11) 2 1 176 (1 174) 80 128 (1) (109) 2 479 1 368 (287) (23) (330) (90) 96 734 245 125 6,51 1 455 50 (886) 3 (10) (79) 185 (22) (3) 693 1 189 (244) 2 (229) 66 784 265 60 9,01 1 608 (242) 83 (465) (8) 122 1 098 385 85 10,18 780 44 (1 386) 2 184 25 (1 085) (50) (9) 393 (44) (16) 366 (34) (8) 2 (181) (18) (891) 95 (1 231) 1 398 At At 31 December 31 December 20041 2005 Audited At 30 June 2003 Restated2 Rm Restated2 Rm 8 476 31 71 (53) 85 258 286 2 713 1 297 8 205 29 98 (80) 118 154 272 2 679 964 Rm 8 826 28 61 95 339 392 3 547 1 483 11 At 30 June 2002 Audited Rm 5 710 23 1 184 423 212 1 977 679 15,6 14 782 13 164 12 439 10 208 19,8 17,2 7 377 9 7 386 1 963 604 727 1 006 911 2 185 5 289 1 197 6 486 2 331 609 599 1 040 836 1 263 4 895 1 191 6 086 2 801 388 355 1 055 537 1 217 4 816 487 5 303 882 178 389 1 204 940 1 312 15,6 (12,5) 14 782 1 391 13 164 1 870 12 439 2 374 10 208 1 143 306 304 1 049 781 540 1 2 411 436 302 300 213 245 125 2 1 751 446 297 297 244 265 60 4 1 648 266 297 285 343 385 85 5 1 622 762 1. Following the acquisition of a majority shareholding by Anglo American plc, the group changed its year end from 30 June to 31 December. 2. Restated for prior year adjustments and changes in accounting policies in 2005. 3. Dividends are disclosed according to the period to which they relate and not according to date of declaration. 4. Dividend cover in relation to headline earnings 5. Calculated from 1 July 2001. Hope Downs settlement proceeds excluded. h i g h l i g h t s • Record production and buoyant sales volumes • Revenue up 37% • Net operating profit up 171%, excluding Hope Downs settlement • Headline earnings per share up 219% • Final dividend of 160 cents per share (540 cents per share for the financial year including the special dividend) • Net debt to equity ratio of 19% 12-months ended 12-months ended 31 December 31 December 2004 2005 Years ended 30 June 2003 2002 RATIOS Profitability and asset management Return on net assets (%)* Return on ordinary shareholders’ equity - Attributable earnings (%)* - Headline earnings (%) Return on invested capital (%) Return on capital employed (%) Operating margin (%)* Solvency and liquidity Net financing cost cover (times) – EBIT* Net financing cost cover (times) – EBITDA* Current ratio (times) Net-debt-to-equity (%) Net debt to earnings before interest, tax depreciation and amortisation (times) Number of years to repay interest-bearing debt Productivity Average number of employees Revenue per employee (R’000) 59 33 37 49 59 31 16 20 2 19 0,3 1 26 12 14 14 17 16 5 7 2 29 0,9 2 25 15 16 14 17 16 4 7 2 39 1,3 3 42 24 27 23 27 22 7 9 1 22 0,5 1 10 097 1 185 9 691 899 10 574 706 9 636 745 1. Ratios for previous years have been adjusted to reflect changes in accounting standards and definitions. * Hope Downs settlement proceeds excluded. Operating margin* Revenue and total assets Net financing cost cover – EBITDA* % 35 30 25 20 15 10 5 0 n o i l l i m d n a R 16 000 14 000 12 000 10 000 8 000 6 000 4 000 2 000 0 2004 2005 2004 2005 s e m i T 25 20 15 10 5 0 Revenue Total assets 2004 2005 Net debt and net debt to equity ratio Return on equity, invested capital and capital employed Net debt to EBITDA ) m R ( t b e d t e N 2 000 1 800 1 600 1 400 1 200 1 000 800 600 400 200 0 35 30 25 20 15 10 5 0 ) % ( o i t a r y t i u q e o t t b e d t e N % 65 60 55 50 45 40 35 30 25 20 15 10 5 0 s e m i T 1.0 0,9 0,8 0,7 0,6 0,5 0,4 0,3 0,2 0,1 0,0 2004 2005 Net debt Net debt to equity ratio 2004 2005 2004 2005 Return on equity* Return on capital employed Return on invested capital * Hope Downs settlement proceeds excluded. S U M M A R Y O F B U S I N E S S O P E R A T I O N S ’000 tonnes IRON ORE Production Sishen Thabazimbi Total Sales Sishen exports COKING COAL Production Grootegeluk Tshikondeni Total THERMAL COAL (Eskom) Production Sales to Eskom THERMAL/METALLURGICAL COAL Production Grootegeluk Leeuwpan Total HEAVY MINERALS – TICOR SA1 Production Ilmenite Zircon Rutile Low manganese pig iron (LMPI) Scrap pig iron Chloride slag Sulphate slag HEAVY MINERALS – TICOR PTY LIMITED2 Production Ilmenite Zircon Rutile Leucoxene Synthetic rutile Pigment ZINC Production Rosh Pinah (zinc concentrate) Zincor (zinc metal) Chifeng (zinc metal)3 Rosh Pinah (lead concentrate) GLEN DOUGLAS Production Dolomite Aggregate Lime KUMBA FERROALLOYS Production Atomised ferrosilicon 12-months ended 31 December 2005 12-months ended 31 December 2004 12-months ended 31 December 2003 Years ended 30 June 2003 2002 28 458 2 529 30 987 27 609 2 503 30 112 27 110 2 484 29 594 26 168 2 389 28 557 25 903 2 421 28 324 22 113 20 923 20 446 20 946 19 916 1 859 414 2 273 14 573 14 703 1 551 1 442 2 993 356 47 23 89 8 134 30 220 35 16 12 111 53 126 102 15 25 689 666 26 6 1 972 437 2 409 14 383 14 356 1 403 1 249 2 652 262 49 20 63 5 96 40 236 38 18 11 112 53 124 104 12 27 653 705 73 1 781 381 2 162 13 869 14 097 1 323 1 610 2 933 176 50 17 25 6 27 20 217 40 17 16 97 48 108 111 3 31 668 579 76 1 830 377 2 207 13 036 13 051 1 313 1 456 2 769 91 53 20 3 214 40 18 13 90 47 91 115 22 642 586 99 1 670 404 2 074 13 351 13 198 1 194 1 631 2 825 44 45 19 223 39 15 9 89 46 75 105 28 543 650 95 6 5 5 4 1. Project in ramp-up phase. 2. Ticor Limited was consolidated from 1 April 2003. The production tonnes reflect Ticor’s 50% interest in its Tiwest joint venture. Physical information provided for periods prior to consolidation are for comparative purposes only. Ticor Limited was delisted in November 2005 and is now a private company. 3. The effective interest in the physical information of the Chifeng (Hongye) refinery has been disclosed. K U M B A A N N U A L R E P O RT 2 0 0 5 K U M B A ’ S G E O G R A P H I C A L L O C A T I O N S Amsterdam (Netherlands) 18 Chifeng Beijing Hong Kong Falémé (Senegal) 4 Kipushi (DRC) Namibia South Africa 19 China 15 Toliara (Madagascar) Tiwest 10 Australia Perth 14 Moranbah South Operations Growth projects Representative offices NAMIBIA 17 1 3 6 7 5 2 20 21 16 8 9 11 12 13 SOUTH AFRICA 22 Southern African operations Base metals 16 Zincor 17 Rosh Pinah 18 Chifeng 19 Kipushi (JV) Industrial minerals 20 Glen Douglas 21 Kumba FerroAlloys 22 Bridgetown (JV) Iron ore 1 Sishen 2 Thabazimbi 3 Sishen South 4 Falémé 5 Zandrivierspoort (JV) Coal 6 Grootegeluk 7 Tshikondeni 8 Leeuwpan 9 Inyanda (JV) 10 Moranbah South (JV) Heavy minerals 11 Empangeni smelter 12 Hillendale 13 Fairbreeze 14 Tiwest (JV) 15 Toliara K U M B A A N N U A L R E P O RT 2 0 0 5 G R O U P O P E R A T I O N A L S T R U C T U R E SISHEN IRON ORE THABAZIMBI GROOTEGELUK LEEUWPAN COAL KUMBA RESOURCES BRIDGETOWN 50% HEAVY MINERALS BASE METALS INDUSTRIAL MINERALS KUMBA FERROALLOYS TSHIKONDENI TICOR SA (SMELTER) TICOR LTD (AUSTRALIA) TICOR SA (MINE) CHIFENG 30,6% (CHINA) ZINCOR GLEN DOUGLAS ROSH PINAH 89,5% (NAMIBIA) H a r n e s s i n g t h e P o w e r o f t h e E a r t h * Kumba holds 100% unless otherwise indicated 1 K U M B A A N N U A L R E P O RT 2 0 0 5 G R O U P P R O F I L E Iron ore – the Sishen and Thabazimbi mines produced some 31Mtpa of lumpy and fine iron ore, of which 22Mtpa was exported. Sishen is one of the largest single open-pit mines in the world, known for its high grade and consistent product quality. The 861km rail system that links Sishen to the dedicated deepwater port and bulk-loading facility at Saldanha Bay is one of the most efficient in the world and has advanced logistical systems for handling and loading iron ore. Coal – collectively, Grootegeluk, Leeuwpan and Tshikondeni mines produce 20Mtpa of thermal, metallurgical and coking coal, most of which (thermal) is consumed by the national power utility, Eskom. Grootegeluk is one of the lowest-cost and most efficient mining operations in the world. The mine also operates the world’s largest coal beneficiation complex. Heavy minerals – Kumba’s wholly-owned subsidiary Ticor in Australia produces 111kt of synthetic rutile, 35kt of zircon and 53kt of pigment attributable to Ticor in a joint venture with Tronox Inc. The Ticor SA heavy minerals operation near Empangeni in KwaZulu-Natal uses innovative techniques in this highly-specialised industry to make Kumba one of the three largest heavy mineral producers globally. The smelter complex at Empangeni, comprising two furnaces, can produce 250kt of slag and 140kt of low-manganese pig iron per year at full production. Base metals – the Rosh Pinah lead/zinc mine in southern Namibia and Zincor refinery in Gauteng are one of the few integrated zinc mining and refinery operations in the world. The Zincor electrolytic refinery is also one of the lowest-cost producers of zinc metal in the global market place. In addition to South Africa and Namibia, this division also has an interest in the Chifeng zinc smelter in China. Industrial minerals – a dedicated plant in Pretoria manufactures high-quality atomised ferrosilicon which plays a strategic role in the beneficiation process of iron ore. The Glen Douglas dolomite quarry in Gauteng provides a range of products to steelworks and other consumers. The Bridgetown mine joint venture in the Western Cape produces dolomite for domestic consumption. Note: Products pictured, from top: iron ore, coal, zircon, zinc ingots and dolomite. 2 K U M B A A N N U A L R E P O RT 2 0 0 5 % export 72 84 33 10 22 92 100 100 100 100 100 100 100 100 100 100 12 5 100 100 Sales for 12 months to December 2005 ’000 tonnes 17 608 11 149 1 198 1 331 14 163 1 883 1 586 1 420 540 394 47 18 60 150 41 79 36 18 13 59 14 104 139 119 35 15 8 691 668 22 6 172 Operations Regional location Ownership Iron ore Sishen mine Northern Cape Division of Sishen Iron Ore Company (Pty) Limited Thabazimbi mine Limpopo Division of Sishen Iron Ore Company (Pty) Limited Products Lump ore Fine ore Lump ore Fine ore Coal Grootegeluk mine Limpopo Division of Kumba Coal (Pty) Limited Leeuwpan mine Tshikondeni mine Mpumalanga Limpopo Division of Kumba Coal (Pty) Limited Division of Kumba Coal (Pty) Limited Heavy minerals Ticor South Africa KwaZulu-Natal Kumba Resources Limited (100%) Ticor Pty Limited 1 Australia Indirect investment by Kumba Resources Limited (100%) Base metals Zincor refinery Gauteng Rosh Pinah Namibia mine Division of Kumba Base Metals Limited Subsidiary of Kumba Base Metals International (BV) (89,5%) Chifeng refinery 2 China Associate (30,62%) Industrial minerals Glen Douglas Gauteng mine Subsidiary of Kumba Resources Limited Thermal coal (Eskom) Semi-soft coking coal Metallurgical coal Metallurgical coal (other) Thermal coal (Eskom) Coking coal Zircon Rutile Ilmenite Chloride slag Sulphate slag Low manganese pig iron (LMPI) Zircon Rutile Ilmenite Synthetic rutile Leucoxene Zinc metal Sulphuric acid Zinc concentrate Lead concentrate Zinc metal Sulphuric acid Metallurgical dolomite Aggregate Lime Atomised ferrosilicon Gauteng Subsidiary of Kumba Resources Limited Western Cape Unincorporated joint venture Metallurgical dolomite of Kumba Resources Limited Kumba FerroAlloys Bridgetown dolomite mine joint venture 1. Sales tonnes disclosed reflect Ticor Pty Limited’s 50% interest in the Tiwest joint venture. 2. Sales tonnes disclosed represent the effective interest in the physical information of the Chifeng (Hongye) refinery. 3 K U M B A A N N U A L R E P O RT 2 0 0 5 O U R V A L U E S O U R V A L U E S Kumba Resources Limited is a diversified South African mining company with world-class assets and operations. O U R V A L U E S The foundation values that guide us in the conduct of our business are: INTEGRITY RESPECT ACCOUNTABILITY FAIRNESS CARING These values provide the foundation for our behaviour and embrace our commitment to teamwork, continuous improvement and performance excellence: PEOPLE MAKE IT HAPPEN WE DO IT TOGETHER LET’S DO IT WE DO IT BETTER EVERY TIME O U R V I S I O N Kumba’s vision is to outperform the mining and mineral sector in creating value for all stakeholders through exceptional people and superior processes. T H E K U M B A W A Y This programme, launched in 2002, is ongoing and aimed at developing a Kumba culture in support of our vision to outperform the mining and mineral sector in creating value for all stakeholders through exceptional people and superior processes. It focuses on: • A common vision and set of values, creating an open, positive and trusting environment • Governance processes that provide the framework and tools to challenge and measure the performance of all employees • Operational excellence by identifying best practices across and beyond the organisation and implementing these. Current Kumba Way initiatives include: • People performance • Continuous improvement • Target setting and tracking • Capital and project management • Mineral resource management • Physical asset management. Every aspect of the Kumba Way process is closely aligned to the business strategy. Business objectives are divided into measur- able components and cascaded down into individual performance contracts. The Kumba Way required examining existing processes, conducting surveys and analysing results for an accurate understanding of business methods. The key principles – practices that would lead to the most substantial results if implemented – became the basis of the detailed design for each initiative. New processes implemented at pilot sites were closely monitored, reviewed and refined where necessary, and implemented across the group. Both progress and processes are continually measured. Kumba business improvement programme To counter fluctuations in the rand exchange rate, remain competitive and meet its growth aspirations, Kumba initiated a wide-ranging business improvement programme in 2004 with the objective of contributing over R1 billion to net operating profit by 2006 through revenue-enhancement and cost-saving initiatives. Through extensive consultation, brainstorming and drawing on collective wisdom, suggestions began to flow. By May 2005, the ideas generated and implemented through this programme had reached an annualised value of R766 million. By December 2005, that figure was revised to R1 422 million. The business improvement programme has underscored the corporate culture that permeates Kumba – setting and achieving challenging targets through performance to deliver attractive returns for investors and ensure a sound future for the group and its stakeholders. 4 K U M B A A N N U A L R E P O RT 2 0 0 5 A P P R O A C H T O S U S T A I N A B L E D E V E L O P M E N T In line with its strategic framework for sustainable development, Kumba reports to stakeholders on an integrated triple bottom- line basis as part of its annual reporting. Our first two integrated reports (2003 and 2004) were well received but, more importantly, the feedback from stakeholders on these reports and discussions at all levels have prompted a more detailed approach this year. and development In formulating a group-wide approach to sustainable its inextricable component of local economic development, Kumba has been guided by the considerations of South African legislation, recommendations on corporate governance and international benchmarks such as the Global Reporting Initiative. is to approach government’s Sustainable development – a model for delivery Kumba’s sustainable development begins at the top – in our country and in our group. Given our belief that sustainable development the foundation on which our future rests, we have developed a tiered approach to ensure that our sustainable development initiatives complement identified priorities. A sustainable development steering committee comprising senior management, reporting directly to the executive committee and board, provides strategic direction while a overall sustainable development team monitors initiatives and action teams are in place at each business unit. Management information then feeds back to senior level to create a virtual circle of development that is both sustainable and meaningful because it responds to identified needs. task We have consulted with all stakeholders for their feedback on our formal stakeholder charter, which helped us determine targets for specific initiatives. Our approach synthesises all these elements into a framework that is both practical for Kumba and meets the unique needs of our stakeholders. Underpinning this framework is a clear understanding of what we want to achieve and how we will do so. K E Y E L E M E N T S I N S U S T A I N A B L E D E V E L O P M E N T • Social impact management – Kumba’s direct and indirect effects on community and society (operations, social stability and influence on family life, housing and living conditions) • Employment equity – Kumba’s equitable recruitment and employment practices for legislative to meet employing and developing individuals from designated groups. targets • Natural environment – Understanding our impact on the physical environment and conforming to nationally- and internationally-recognised standards, policies and measures to negate or address detrimental environmental effects, and to ensure sustainable development operations. Kumba’s management of environmental issues is well structured, both by legislated requirements and the internal systems established to manage these. our of • HDSA ownership and control – Managing the black economic empowerment imperative in South Africa through ownership control and management participation. • Stakeholder engagement – Implementing effective and transparent engagement, communication and independently- verified reporting arrangements with stakeholders. • Natural resource management – Responsible use of non-renewable mineral and other natural resources. • Business sustainability – Ensuring our long-term financial viability; contributing value to all stakeholders; and accounting for the distribution of value created through business activities. 5 K U M B A A N N U A L R E P O RT 2 0 0 5 • Mine closure – Ensuring we leave good infrastructure, skilled people and self- sufficient communities after mine closure. • Social development/national social priorities – In balancing our interests with those of our various stakeholders, specific areas are guided by the social needs of the community, and by the national social priorities of society at large, including: – Education, development training and skills – Healthcare promotion, particularly HIV/Aids programmes – Job creation – SMME and other business opportunity development – Conservation of environment, including awareness programmes – Infrastructure development, including schools, clinics, etc. • HIV/Aids – Kumba’s approach to the pandemic on two levels: as a workplace issue preventative, educational and clinical support practices including anti-retrovirals) and as a community issue. (specifically • Health and safety in the work environment – Going beyond legislative compliance on workplace conditions for employees to greater workplace satisfaction, efficiency and productivity. facilitate • Labour relations – Managing representatives, the relationship with our employees and their foster appropriate engagement, a climate of trust and widespread participation on issues of mutual interest. to • Corporate governance – The extent and sophistication of Kumba’s board, executive management and governance structures supporting our practice of triple bottom-line risk management. • Human resource development – The range and extent of training and skills development practices, moving beyond current job training requirements to include future and potential work orientation, personal skills development, and training in corporate citizenship and sustainable development. • Shareholders’ rights – Equal treatment of all shareholders and protecting their rights specifically minority shareholders – through equal accurate and timeous disclosure. – • Supplier relations/developmental procure- ment – Managing procurement processes and, in South Africa, nurturing small disadvantaged enterprises individuals, and developing suppliers through preferential procurement. and • Human rights – Ensuring that basic human rights are respected and adhered to by all direct and indirect operations. peer group, in our sector of operation, in our country and against international benchmarks and standards. • Product stewardship – Managing the impact of our products or services on the marketplace and society at large. • Supply chain compliance – Ensuring that business partners in our supply chain are themselves responsible corporate citizens. • Leadership in sustainability – Demonstrating our leading role in promoting and implementing corporate citizenship and sustainability as a business philosophy in our industry Relevance and urgency in Kumba’s context We separate our key elements on the basis of urgency and relevance to Kumba, including the impact on our business and the inherent risk. Some are already well developed and performance needs to be maintained. In others, such as stakeholder and engagement economic development (detailed on p85-89) significant progress is being made to bring performance to appropriate levels. local Sustainable development elements Urgent and immediate focus Continuation/maintenance Develop in longer term Social impact management Mine closure Supply chain compliance Employment equity Social development/national social priorities Product stewardship Natural environment HIV/Aids Leadership in sustainability HDSA ownership and control Health and safety in the work environment Stakeholder engagement Labour relations Natural resource management (including mineral resources) Business sustainability (financial, operational) Corporate governance Human resource development Shareholder rights Supplier relations/developmental procurement Human rights Economic Social Environmental Note: The colour coding used in this table aligns Kumba’s key sustainable development elements with the accepted triple bottom-line framework. Kumba’s responses to these elements, highlighting specific initiatives and progress through case studies from across the group, are detailed on p91-101. 6 K U M B A A N N U A L R E P O RT 2 0 0 5 1. A 730E haul truck uses a test ramp at Sishen coated with the Dust-a-side product which is designed to improve road quality, extend vehicle tyre life and reduce dust emissions. 2. The new northern ramp at Grootegeluk is designed to optimise travelling distances between the mine’s operational and beneficiation sections, resulting in efficiencies and cost savings. 3. Fikile Ngidi, radiation environment monitor, checks a vehicle at the Ticor plant to ensure no residual radiation leaves the site. 4. Discussing the HIV/Aids programme at Tshikondeni are from left, Titus Makuya, James Buthelezi, Nelson Maiwashe, Bethuel Marubini, and Dorcas Mukwevho. 3 1 2 4 7 K U M B A A N N U A L R E P O RT 2 0 0 5 B U S I N E S S O B J E C T I V E S Financial targets • Return on equity (ROE) (%) • Return on capital employed (ROCE) (%) • EBITDA interest cover (times) Target Page 251 Foldout 281 Foldout >4 Foldout Actual 2005 33 59 20 Actual 2004 12 17 7 Actual 2003 12 12 6 Operational targets • Business improvement programme (revenue-enhancement and cost-saving initiatives) Non-financial targets • Safety – number of fatalities – lost-time injury frequency rate (per 200 000 hours) • Safety, health and environmental certification (number) • Employment equity – management (2008) (%) – women (2008) (%) • HIV/Aids voluntary testing and counselling at pilot sites (2006) (%) • Human resources development (% spend of payroll) • Procurement from HDSA companies (%) • HDSA ownership (%) 2008 2014 29 735 initiatives implemented Additional 538 initiatives implemented – value – value of R400 million Cost increases below inflation R1 022 million R800 million contribution to net operating profit from FY2006. (Revised to R1 422 million in 2005) 0 0,35 10 40 10 95 6,0 18 15 26 74 74 74 80 80 81 82 82 16 16 4 0,52 10 32 13 54 6,3 24 58† 58† 2 4 0,51* 0,42* 8 28 12 40 5,7 16 2 20 10 – 5,7 – 1 Benchmarked against the upper quartile of a peer-group comparison. * Recalculated per 200 000 hours worked. † Projected ownership once empowerment transaction is finalised in 2006. 8 K U M B A A N N U A L R E P O RT 2 0 0 5 C H A I R M A N ’ S S T A T E M E N T ALLEN MORGAN – CHAIRMAN I N T R O D U C T I O N This is my first report to shareholders but not my first involvement with Kumba as I have been an independent, non-executive director since its inception in 2001. In April 2005, I had the privilege of taking over the chairmanship from Dawn Marole, who stepped down to pursue other business interests. I considered the chairmanship a great honour given that the Kumba board is made up of distinguished and competent directors, each with a different, yet complementary, set of skills which make it a very effective unit in providing innovative and visionary leadership. I believe Kumba is a role model of governance in the mining industry for which it has received wide recognition. The responsibility to continually improve our corporate governance is a Kumba-wide team effort. We are all the custodians of Kumba’s assets on behalf of our shareholders and we need to ensure that they earn good returns on their investment in a sustainable and socially-acceptable manner – to the benefit of all our stakeholders. Assuming the chairmanship in the middle of Kumba’s restructuring and transfor- mation process was a challenge, but I believe we have managed the process as fast and as smoothly as possible, with minimal disruption to our people and our operations, as results for the year demonstrate – and thanks to an extremely competent management team. The South African mining industry compares favourably with the best in the world. We have great technical and managerial competence and our practices and technologies are world-class. The challenge facing the domestic industry is meeting the requirements of the mining charter and allowing a broad base of previously disadvantaged South Africans access to ownership of viable and sustainable mining businesses. Hand in hand with this must go the development of appropriate technical and managerial skills. the result flagship Newco In both respects, Kumba is meeting and exceeding its obligations – the transforma- tion and unbundling process (summarised below and detailed on p16) will, with shareholder approval, in an empowered and sustainable iron ore company, Kumba Iron Ore, while the creation of (a temporary name) will by far exceed legislative requirements and deadlines. Kumba also plays a leading role in developing skills because we firmly believe that the best form of empower- ment is training people: we estimate that Kumba trains almost 12% of engineering learners in South Africa, a commendable accomplishment for a single company. But much more must be done to address the shortage of skills that will prevent our country reaching its full potential. The shortage of technically-trained women is a particular challenge for the mining industry. and related K U M B A ’ S T R A N S F O R M A T I O N In October 2005, we announced that Kumba would be split into two companies by placing its iron ore assets (Sishen, Thabazimbi offshore companies) into Kumba Iron Ore, and housing the balance of our existing assets in Newco. Newco’s asset base will be supplemented by the coal assets of Eyesizwe Coal and options on heavy minerals and zinc assets from the Anglo American portfolio to create the country’s biggest empowerment mining group, 9 K U M B A A N N U A L R E P O RT 2 0 0 5 valued at approximately R16 billion. Newco will retain a 20% shareholding in the South African iron ore assets, with as majority Anglo American plc shareholder in Kumba Iron Ore (p16). In essence, Both companies will be listed on the JSE Limited to optimise value for existing and this new shareholders. transaction presents shareholders and all stakeholders with two listed companies with exciting investment cases – both role models in legislative compliance and governance standards, both responsible custodians of South Africa’s natural resources and both significant contributors to our country’s growth and prosperity. Transformation was the catalyst behind this transaction but the accelerant was our duty to enhance shareholder value as custodians of R30 billion in stakeholder assets. In recent years, that custodial role has evolved beyond merely protecting and enhancing assets for stakeholders. We also needed to fulfil our commitment to comply with for empowerment and adhere to global standards in corporate governance. legislated targets We believe this transaction accomplishes both objectives. Firstly, and well ahead of deadline, Newco will exceed the ownership targets set out in the mining charter with our empowerment partners and a broad base of employees owning an estimated 58% stake in South Africa’s largest, listed, black-owned, controlled Bold transformation to create two exciting listed companies marketplace, where it must seek most of its investment and where it sells its products • The socio-economic challenges facing the industry are addressed in a significant and meaningful way. The economic landscape during the year was characterised by strong global commodity demand, particularly from China, supporting higher metal and mineral prices and by a domestic currency that showed a robust performance. do better advance The rand gained 1,24% against the US dollar in 2005 and was one of the top performers against the US currency for the year. Compared with currency fluctuations in 2004, greater stability in the rand is a welcome feature that enables companies to planning. The average spot exchange rate for 2005 was R6,36 compared with R6,44 for 2004 which, however, continued to constrain the competitiveness of South African exporters. The strong currency also enhances the attractiveness of imports into South Africa, ultimately affecting our ability to create jobs. At the same time, the escalating deficit on the current account and the continuous need for net foreign capital inflows to finance this deficit could pose a risk to the outlook for business confidence in the year ahead. We trust that the South African Reserve Bank will continue to achieve success in keeping inflation within its target range, while allowing interest rates to remain at levels that support South Africa’s economic growth. Kumba’s strategic plan to mitigate the effects of currency strength has paid off, as our results show. We believe currency strength is a variable that must be managed. Managing it well will ensure a stronger, more viable organisation. The government’s R180 billion extended infrastructure development programme is welcomed as is any acceleration of its momentum, which will do much to fuel job creation in this country and support 1 0 K U M B A A N N U A L R E P O RT 2 0 0 5 the national goal of a 6% growth rate. As elaborated by the chief executive, the lack of artisan skills in South Africa has the potential to cripple many industries and ultimately the economy. D I R E C T O R A T E In April 2005, Dawn Marole stepped down as Kumba’s chairman due to the time constraints of her other business interests. She played a valuable role during her term of office for which we thank her. We wish her well in her future endeavours. Richard Wadley retired early in June 2005 to pursue personal interests. He leaves a valuable legacy for Kumba and we thank him for his considerable contributions. H I V / A I D S Kumba’s comprehensive and proactive HIV/Aids strategy is regarded as one of the best in the country. Programmes in place at all business units and the corporate office include counselling and voluntary testing, anti-retroviral treatment, peer education, wellness programmes and community-based initiatives and treatment of sexually- transmitted diseases. Although the prevalence rate in Kumba is lower than the mining industry, we believe a proactive approach focusing on education, awareness, prevention and appropriate treatment regimes is the best option in managing the potential impact of the pandemic. from A C H I E V E M E N T S A N D A W A R D S • Tshikondeni received the Millionaire trophy the Department of Minerals and Energy for one million fatality-free shifts (achieved over two years and eight months). This is an excellent achievement, particularly for an underground operation of 1 100 the people commitment to safety excellence. The mine also the Safety received Achievement Flag from the Mine Health and Safety Council. testimony and to • Thabazimbi has recorded zero fatalities for three years while Sishen has recorded three million hours without a and managed diversified mining company. Secondly, by transferring 80% of our interest in our iron ore assets to Kumba Iron Ore, and unbundling it to existing shareholders, all shareholders will be able to participate in the anticipated value the enhancement while addressing potential for a conflict of interest between Kumba and Anglo American plc in their overlapping asset bases. The underlying transaction is a complex one, which has been developed in conjunction with various stakeholders. We thank the teams from Anglo American, the Industrial Development Corporation (IDC), government, our empowerment partners and our investment bankers for their invaluable contributions and cooperation in structuring the transaction. The Kumba transformation team deserves special thanks for an unstinting effort as do all our own people for their patience while the transaction was finalised. Kumba’s transformation process is a bold and creative one, which I believe sets a new standard in South Africa. We trust it will serve as an example for broader and imaginative transformation in our country, taking the true benefits of democracy to more citizens. B U S I N E S S E N V I R O N M E N T The Mineral and Petroleum Resources Development Act (Minerals Act), promulgated in 2004, sets the timeline for the conversion of mineral rights. Kumba believes it satisfies the requirements of the act and is currently engaged in the process necessary to convert its mining and prospecting rights. Kumba fully supports this legislation which is intended to change the ownership profile of the industry, as its own reflected empowerment transaction. As an industry, however, we reiterate our caution that the objectives of the Minerals Act, as well as those of the broad-based socio-economic empowerment charter for the industry (see p53, Legislative compliance), will best be realised if the following criteria are met: in • South Africa’s mining succeeds in the industry international lost-time injury. Glen Douglas, Saldanha and Sishen South recorded no lost-time injuries for 2005. Ticor’s Hillendale mine reached the one-year injury-free target in January 2006. • Kumba’s integrated annual report for 2004 was ranked a joint fourth in the country in the inaugural Ernst & Young Excellence in Corporate Sustainability Reporting awards, sharing the top five places with Anglo Platinum, Nedbank, BHP Billiton and Sasol. As this was only our second annual report integrating sustainable development elements, this award was both an honour and a challenge. • Kumba was first in the interim results category of the annual Business Day Financial Advertising Awards compe- tition, judged on level of disclosure and clear communication. • The company was again a constituent of the JSE Socially Responsible Investment Index, ranking companies on corporate governance, economic, social and environmental criteria. • Kumba retained its sectoral first place in the Deloitte/Financial Mail survey of best companies to work for – for the third consecutive year – and was included in the Corporate Research Foundation’s Best Companies to Work for in South Africa – for the third time. • Sishen and Grootegeluk mines’ corporate videos were rated among the best in the world at the 39th Annual US International Film and Video Festival. These are singular achieve- ments in an event that attracts thousands of entries from around the contributions during the year, and the dedicated chairmen of the respective board committees who ensured that it was business as usual at a time of great corporate activity. The support of senior members and their respective teams in several government departments during the year reflects the solid relationships we have built over time. We will continue to strengthen these relationships in the best interests of our industry and our country. P R O S P E C T S The first half of the 2006 financial year should see the finalisation of our multi- faceted transformation process and the listings of Kumba Iron Ore and Newco. Our expansion plans are firmly under way in iron ore and coal, and the benefits of our unrivalled growth pipeline will continue to unfold. Between 1 January and 31 December 2005, Kumba’s share price has appreciated by 132%, clear indication of the value perceived in our group by investors. We firmly believe that value will increase as the group completes its transformation. world each year, with the producer paying special tribute to the unstinting assistance from divisional personnel. • At industry level, Kumba’s people continue to make their mark. Willem van Niekerk, managing director of Zincor, was elected president of the SA Institute of Mining and Metallurgy, and Kenneth Kgomo of our supply chain management unit as chairman of the SA Mining Preferential Procurement Forum. A P P R E C I A T I O N The people of Kumba have set the group apart in its industry since inception. They are the bedrock of its culture and its commitment to continuous improvement. Our results in a year characterised by the management focus on our empowerment transaction clearly demonstrate the calibre and dedication of all our people. of outcome favourable our The transformation initiative is testimony to the innovation and passion of our management team and the inspirational leadership of Dr Con Fauconnier, whose tenacity and visionary approach have left an indelible stamp on Kumba and the history of the mining industry in South Africa. Collectively, the spirit, skill and determination of our executive team have created our country’s for empowerment and set the standard that others must follow. flagship I thank my fellow board members for their wise counsel and constructive Allen Morgan Chairman 2 March 2006 1 2 1. The I Care Rules safety programme is actively followed at all operations. Here Gerhard Lemmer, head of safety, uses a visual presentation to communicate the programme at Glen Douglas. 2. The people of Kumba have set the group apart . . . Head of drilling and blasting at Grootegeluk, Londolani Rampfumedzi. 1 1 K U M B A A N N U A L R E P O RT 2 0 0 5 C H I E F E X E C U T I V E ’ S R E V I E W CON FAUCONNIER – CHIEF EXECUTIVE It’s not often that a four-year-old company performs its swansong while its share price is still flying, but then Kumba Resources is not your average four-year-old company. As the financial year drew to a close, Kumba was one of the five best-performing companies in South Africa on share price appreciation of 132% for the year, having already taken the accolade as best mining company to work for – for the third year running. O V E R V I E W Kumba has proved its ability to deliver shareholder value in widely varying market conditions. Operational excellence has become a hallmark of our group and was again demonstrated during the review period, with several divisions exceeding records set in the previous year and others setting new benchmarks for performance. Across the group, our ongoing focus on the programme improvement business initiated two years ago paid off in better efficiencies, processes and productivity. Kumba’s people rose to this challenge with characteristic spirit, enthusiasm and innovation – another hallmark of our group. The strong market demand that fuelled increased commodity prices across all business segments, together with the realisation of the revenue-enhancement and cost-saving benefits of our business improvement programme, more than offset a persistently stronger currency. Against this background, and proving that our business can counter currency fluctuations, Kumba’s financial per- formance was excellent, with revenue increasing by 37% to R11 962 million and net profit from operations by 171% to R4 887 million on the previous year. Our financial results are set out in the financial review on p23. T R A N S F O R M A T I O N However, the biggest headlines of the year for Kumba were devoted to the decision to split the company into a focused iron ore company – Kumba Iron Ore – and a views Resources diversified commodity mining company – still called Newco at the time of writing. The genesis of this lies in our 2001 prelisting statement where we said, “Kumba black economic empowerment as a fundamental prerequisite for the long-term development and stability of the South African economy. Therefore, a distinguishing feature of its strategy is to commit the company to meaningful sustainable black economic empowerment initiatives in all facets of its business. Progressive empowerment policies, the setting of aggressive employment equity targets and black economic empowerment are integral components of the company’s value system and code of conduct.” and Between 2001 and 2005, Kumba has grown from the fledgling R8,5 billion Iscor mining offshoot to a strong, independently-managed and diversified group valued at R30 billion and active in eight countries on three continents. For the past 18 months, many parties have worked to construct an empowerment transaction that best serves Kumba’s strategy, includes stakeholders at all levels, contributes to national growth and transformation and meets legislative requirements. Subject to shareholder approval in mid-2006, we will have created the country’s flagship empowerment mining company and its largest black-owned, controlled and managed business, detailed on p16. We will also have materially exceeded the mining charter’s empowerment ownership requirements. More importantly, for us, the transaction 1 2 K U M B A A N N U A L R E P O RT 2 0 0 5 embodies the spirit – the very essence – of sustainable transformation. It was this spirit that characterised much of the negotiations surrounding our empowerment transaction – a transaction described by one of the merchant bankers involved as the most complex in his 22 years of experience. Yes, we were fulfilling a legal requirement to qualify for new-order mining rights and, yes, we had to address governance issues in our shareholding structure. But we were also realising a dream that was older than Kumba – the dream of creating a truly South African, large-scale empowerment mining company, the dream of the synergies that could be derived and the benefit to the country of such a deal. At that stage, in the closing years of the 20th century, much of our idea seemed “pie in the sky” but the seeds were planted back then and the fruits are becoming reality today – a reality crafted by the willing co- operation of teams from Anglo American plc, the IDC, government and our empowerment partners. As we move into 2006, many formalities are being completed and approvals granted, but an active working relationship is being built with the key participants in the transaction, particularly Sipho Nkosi and his team from Eyesizwe Mining, and we will keep shareholders updated on our progress in finalising South Africa’s flagship empowerment mining company. H I G H L I G H T S Apart from our empowerment transaction, the review period contained many other notable highlights, some internal and others external but all important to our business: • Kumba has submitted its applications for the conversion of old-order to new- order mining the appropriate ownership structure soon to be in place, applications should be ratified once our empowerment transaction is finalised. rights. With • Good progress by state transport utility, Transnet, in expanding its product range and improving service levels. We welcome the appointment of our former Iscor colleague, Louis van Niekerk, to the Transnet executive which is fast becoming a formidable team focused on turning this critical component of the economy into a productive national asset under the capable leadership of Maria Ramos. • The appointment of Lindiwe Hendricks as Minister of Minerals and Energy, who has rapidly demonstrated her confidence in the contribution the mining industry can make to the economy. • The consolidation of our heavy minerals interests by completing our the Ticor Limited acquisition of minority shareholdings, which I deal with further on p14. • The Phase V expansion of the Richards Bay Coal Terminal received its long- awaited approval during the year. Kumba Coal is a shareholder in this expansion with a 2Mtpa export entitlement. In addition, expansion at Richards Bay also enables Kumba and Eyesizwe Coal to proceed with their joint venture Inyanda coal mine, a new 1Mtpa export thermal coal mine near Witbank. • ISO 14001 and OHSAS 18001 certifications – our aim was to have all operations certified by the end of 2005. This goal has been achieved. By a world commendable achievement in less than two years. At operational level, it is even more noteworthy – achieving this was standards, and maintaining world-class standards to support our goal of being a global mining group. our practices and in our passion to improve the quality of in the communities that enable us to trade. life • Safety – While intensely disappointed that we did not achieve our goal of zero fatalities or meet our target for the lost- time injury frequency rate (see p74), several individual operations achieved excellent results as highlighted by the chairman. • Training and development – Kumba spent almost 6% of total payroll on training and development during the year, well above the stipulated level of 1%. To quantify that, Kumba trained almost 28% of all engineering learners in the mining industry which, in turn, trains almost half the engineering learners in the country. Given that in the past 30 years, South Africa’s annual intake of apprentices has plummeted from 30 000 to 3 000, this is an issue we must address urgently and with sufficient resources to prevent it becoming a national crisis. Kumba willingly played its part in developing a national pool of skills, and will continue to do so in its new form as Kumba Iron Ore and Newco. of assessment • Sustainable development – While the independent our commitment to sustainable development in a multi-stakeholder model that placed us among the top five in the country is gratifying (p11), we acknowledge that this is a journey – one that unfolds wherever we operate and that the balance between financial performance and a demonstrable commitment to the societies and environments we touch is pivotal to our future. safely S U S T A I N A B L E D E V E L O P M E N T Sustainable development is our lifeblood – the interaction with stakeholders and their input underpins our ability to run our and efficiently, operations productively. Kumba therefore reports on the triple bottom line to stakeholders, integrating financial and non-financial issues. Sustainable development is far more than a business imperative, it is an integral part of our foundation values and the way we do business. It is evident in all 1 3 K U M B A A N N U A L R E P O RT 2 0 0 5 Kumba’s integrated sustainable develop- ment annual report is based on the internationally-recognised Global Reporting Initiative (GRI) guidelines. Additional GRI recommendations for the mining sector in 2005 and were published early sustainable incorporated development reporting as we incrementally progress towards being “in accordance with” GRI guidelines. into our This report is aligned with the 2002 GRI Guidelines and represents a balanced and reasonable presentation of our organisation’s economic, environment and is report social performance. Our independently reflecting assured, considerable progress since we began this reporting journey in 2003. The scope of the independent review of our sustainable development reporting has again been broadened (p104), and we have included earlier assurance report findings and stakeholder feedback in our processes. the During review period, Kumba continued to make progress in many areas of reporting on sustainable development, specifically in training and development, job creation, HIV/Aids awareness projects and environmental management. sustainable to meeting and Our commitment exceeding our targets – legislated or self- imposed – is firm. The establishment of a dedicated development division at corporate level, headed by an experienced senior manager who is accountable for setting and achieving stated objectives, is testimony to that commitment. The lessons learned and good practices developed will guide us as we unbundle the group into its new format, ensuring that we continue to report measurable results and meaningful for an information informed understanding of our impact on the economy, society and environment in which we operate. As our international to stakeholders Empowerment targets exceeded and sizeable expansion under way continue to capitalise on the growth of the iron ore market, and significantly expand our coal and heavy minerals interests. In its unbundled form, Kumba enters a new era as a forerunner in the national strategy for empowerment and the premier mining house in South Africa. In Kumba Iron Ore, shareholders have the opportunity to participate in the JSE’s first pure iron ore stock and its solid growth potential. In Newco, shareholders have exposure to a diversified, balanced portfolio of growth commodities, exciting technology and a growth pipeline whose potential is beginning to unfold. In both companies, shareholders can expect a continuation of our strategic imperative of superior returns and capital growth, underpinned by the focus on sustainable development that considers the rights of all stakeholders. I N T E R N A T I O N A L Hope Downs On 1 July 2005, and after exhausting all legal avenues to preserve its rights, Kumba received a A$231,4 million (R1,2 billion) pre-tax settlement from Hancock Prospecting for its interest in the Australian Hope Downs project. While we were disappointed that we would no longer be a partner in this excellent project, shareholders’ interests were very well served with a more than fourfold return on the initial investment. We wish Hancock Prospecting and its new partner, Rio Tinto, every success in this promising venture. Ticor Limited During the year, Kumba made excellent progress in its longer-term strategy to enhance its position in the heavy minerals market by buying out the minorities in the Australian listed group, Ticor Limited. To contextualise this, Kumba first invested in Ticor in 1995 with an initial interest of 35% to begin to understand the market and to gain access to some heavy minerals technology that was relevant to the resources we owned in KwaZulu-Natal. Over the years, we have been supportive of Ticor Limited and played a material role in refocusing the company as a vertically- integrated titanium dioxide feedstock and pigment producer. In turn, Ticor Limited has been an in establishing the Ticor SA venture in Empangeni. important partner Our objectives in buying out Ticor minorities were to simplify Kumba’s group structure and create a significantly larger heavy minerals business with greater geographic and product diversification. Regulatory approval for the scheme of arrangement was received on 1 November 2005 for Kumba to buy out minority shareholders for A$226 million (R1 174 million) to take its holding from 51,54% to 100%. This has consolidated and streamlined our heavy minerals holdings and given us direct ownership in a sector we believe is a key component of Kumba’s asset portfolio. We believe this transaction provided an attractive and opportune exit strategy for Ticor Limited’s minority shareholders, who operations develop, our economic, social and environmental reporting will be consistent across three continents, whether legislated or not, and aligned to GRI guidelines. As an integral part of our business strategy, Kumba has an approved group- wide strategic sustainable development framework. The responsibility for reporting to the board on sustainable development issues rests with me and is an integral part of the report I prepare for each board meeting. This monitors our progress towards targets in eight focus areas: • Financial • Governance, ownership and control • Resource utilisation • Workplace • Environment • Community and external stakeholders • Suppliers • Customers. At each operation, sustainable development issues are integrated into the business plan against which performance is measured, and will be an intrinsic part of the due diligence investigations now under way to finalise our empowerment transaction. S T R A T E G Y As South Africa’s mining industry continues to transform itself to meet the challenges of best practices in a global marketplace, Kumba’s clearly-defined strategy is now unfolding. We have previously stated that to grow and prosper, we will: • Build a balanced portfolio of globally- competitive commodity businesses • Attract and retain a highly-skilled and motivated workforce • Promote innovation and employ appropriate technology • Nurture a culture of continuous operational and improvement excellence • Reward our shareholders with superior returns and capital growth sustainability • Integrate operations. into all Through our empowerment transaction and other corporate activity, we will A twilight view of the South concentrator at Ticor Limited in Western Australia. Kumba’s heavy minerals expansion through the Ticor transaction offers the company greater exposure to the pigment and synthetic rutile markets. 1 4 K U M B A A N N U A L R E P O RT 2 0 0 5 were constrained by a lack of liquidity in the shares, and we thank the Ticor board for the constructive manner in which it fulfilled its fiduciary duties since the start of negotiations. We can now look forward to a closer working relationship with the people of Ticor – a continuation of our ten-year association that will provide important continuity as a wholly-owned subsidiary. We also look forward to developing a deeper working relationship with our partners in the Tiwest joint venture, Tronox Inc (the recently-listed chemical division of Kerr McGee Corporation). For Kumba’s shareholders, our heavy minerals expansion through the Ticor transaction offers more exposure to the pigment and synthetic rutile markets and better scale and balance in our overall product mix. Our heavy minerals portfolio is now arguably one of the few global portfolios to span zircon, low-manganese pig iron, rutile, titanium dioxide slag, synthetic rutile and pigment. If the option is exercised on the acquisition of the zircon-rich asset base of Namakwa Sands, this will balance our portfolio even more, entrenching Kumba as one of the three largest heavy minerals producers in the world. A P P R E C I A T I O N Personally, in my capacity as Kumba’s chief executive and as the outgoing president of the Chamber of Mines, I thank the former Minister of Minerals and Energy, Phumzile Mlambo-Ngcuka, who played such a constructive role in our industry’s ongoing transformation. We wish her well in her important new post as our country’s deputy president, firmly believing she is the right person for the time. My two years as president of the Chamber of Mines during a time of rapid and far- reaching change were made easier by an extremely capable chief executive, Zoli Diliza, and his committed team. I also thank the Kumba board for affording me the incredible opportunity to play a part, albeit small, in the history of the South African mining industry. Under the leadership of my successor as president of the Chamber of Mines, Lazarus Zim, I am confident that our industry will continue to contribute to the development of our country and South Africa’s role in the global marketplace. In 2005, we bade farewell to our chairman, Dawn Marole, and executive director, Richard Wadley, while this year non-executive director Tom de Beer will retire. They have added considerable value in their respective roles, for which we thank them most sincerely. In its short history, Kumba has proved that it is an exceptional company, largely because it has exceptional people at every level. From our chairman and board members, to our management teams and all our people, you have crafted the ethos and culture that epitomise our group and have underpinned its success and I thank every one of you. I believe this same spirit, tenacity, experience and enthusiasm will characterise our unbundled group in future. in O U T L O O K Kumba and its empowerment partners are on track to complete the proposed unbundling towards mid-2006 which will result listed and two exciting, empowered mining companies. We are confident that Kumba Iron Ore and Newco will benefit from the competent and experienced management and staff who will then be in place and that both companies will be as successful as focused, independent entities as they have been under the Kumba banner. Kumba is fortunate to have one of the most attractive growth pipelines in the resources sector: expansion projects worth over R4 billion are under way and there are projects worth a similar amount under detailed consideration. In the iron ore portfolio, there is the 10Mtpa Sishen expansion project and the Sishen South project which has the potential of ramping up to 9Mtpa. In the coal portfolio, initiatives the char project, Grootegeluk and Leeuwpan’s expansions, and the new Inyanda mine. Our expansion include 1 5 K U M B A A N N U A L R E P O RT 2 0 0 5 for Kumba and in the Waterberg coalfield marks the further development of the country’s largest remaining coal reserves in a region with much potential its customers such as Eskom. Agreement was reached after the year end to investigate the development of a coal deposit in the Mmamabula central coal resource in Botswana. In heavy minerals, we are finalising approval for a new mine, Fairbreeze in KwaZulu-Natal, and are in the final stages of evaluating a world-class resource, Toliara Sands in Madagascar. We have acquired the minority interests in Ticor Limited, with the opportunity of, in conjunction with our joint venture partner, expanding its synthetic rutile and pigment production with minimal capital outlay. In base metals, agreement has been reached with our partners to more than double the capacity of the Chifeng zinc smelter in China. The outlook for Kumba’s commodities is somewhat mixed, with supply/demand factors implying another year of price increases in iron ore, zinc and zircon. Conversely, the continued shortage of zinc concentrate will maintain pressure on treatment charges, which affects Zincor’s results. With the supply surplus in the titanium dioxide feedstock market increases are persisting, no price expected. Greater balance in the coal market should see coal prices declining somewhat from their record levels. Kumba has broken much ground in its short time as a listed company. It has achieved ambitious targets and earned its place as a reputable business, a rewarding investment and a caring citizen – a past journey we view with pride and a future journey we embrace with excitement. Dr Con Fauconnier Chief executive 2 March 2006 E M P O W E R M E N T T R A N S A C T I O N Kumba’s transformation into two empowered and focused companies has far-reaching benefits for stakeholders and the national economy. transaction with On 13 October 2005, stakeholders were advised that Kumba would be split into two companies – Kumba Iron Ore and Newco – far-reaching in a consequences and benefits the for empowerment process in South Africa, our industry, stakeholders and the national economy. To properly fulfil our custodial role over such sizeable stakeholder assets, comply with legislated targets for empowerment and adhere to global standards in corporate governance, we worked closely with our major shareholders in developing an appropriate solution to: • • • • • Create a flagship, black-controlled, diversified mining company Embody the spirit of sustainable transformation Enhance value for shareholders Increase the asset base through acquisitions Create sustainable and exciting investment cases. In essence, this transaction presents shareholders and all stakeholders with two listed companies with exciting investment cases – both role models in legislative compliance and governance standards, both responsible custodians of South Africa’s natural resources and both significant contributors to our country’s growth and prosperity. Although the underlying transaction is a complex one developed in conjunction with various stakeholders, we believe this is one of the most innovative and sustainable BEE transactions and that it will significantly benefit all stakeholders and the country as a whole. Current structure Minorities Anglo American* IDC 19,8% 66,2% 14% Kumba Resources* Iron ore C o a l H e a v y m i n e r a l s O t h e r 100% Sishen Iron Ore (SIOC) * Listed on the JSE Simplistically, the transaction is unfolding as follows: 1 Kumba will transfer 80% of its iron ore assets (housed in the Sishen Iron Ore Company) to Kumba Iron Ore, which will be unbundled to existing shareholders and listed on the JSE. Newco will retain a 20% stake in Sishen Iron Ore. Kumba Iron Ore will sell 3% in Sishen Iron Ore to the Northern Cape Community on a vendor-funded basis and Sishen employees will acquire a 3% stake in their company through an employee share ownership plan. Kumba Iron Ore will have an enterprise value of over R14 billion (based on the Kumba share price of R82 at which the transaction was concluded) and black ownership of 26% from inception. 2 Newco will enhance its coal asset portfolio by acquiring Eyesizwe Coal 1 6 K U M B A A N N U A L R E P O RT 2 0 0 5 for R1 582 million. As separate transactions, Newco has the option to acquire 100% of Anglo American’s heavy minerals operation, Namakwa Sands, and a 26% stake in the Black Mountain zinc mine and Gamsberg zinc project for R2 125 million and R180 million respectively. In addition, Kumba acquired the 48,5% of Ticor Australia it did not already own in November 2005. These transactions will significantly enhance the Newco investment case, giving it critical mass and leading market positions in its core operations of coal and heavy minerals. 3 The shareholders of Eyesizwe Coal will inject the majority of the cash received into the black empowerment vehicle (BEE Holdco – a temporary name) in return for a stake in BEE addition, Tiso and Holdco. In Structure post-unbundling 8 5 % Minorities 14% I D C Eyesizwe S P V E y a b a n t u S P V Ti so SPV 19,8% 15% 54,48% 9,76% 9,76% B E E Wo m e n ’s S P V 11%# Kumba Iron O r e * 66,2% Anglo American* BEE Holdco Newco ESOP 55% 17% N e w c o * 3% 25% Iron ore C o a l H e a v y m i n e r a l s O t h e r Northern Cape community g r o u p 74% 3% S I O C 3% SIOC ESOP † 20% * Listed on the JSE # 17,8% effective holding 58% black-owned and controlled on day one 26% black-owned and controlled on day one Employee share ownership plan † Eyabantu will inject R250 million each for a stake in BEE Holdco. The IDC will facilitate the purchase by a women’s group – Basadi Ba Kopane – of a stake in BEE Holdco. Finally, the IDC will inject its residual Newco shares into BEE Holdco to facilitate the resultant shareholding in BEE Holdco will be as follows: transaction. The • Eyesizwe • Tiso • Eyabantu • Basadi Ba Kopane • IDC 54,48% 9,76% 9,76% 11,00% (plus 6,8% indirect stake) 15,00% All final shareholdings and asset valuations are subject to change after the due diligence process. 4 5 In addition to the equity injected by the BEE parties, BEE Holdco will raise R1,6 billion of senior debt and R2,1 billion of mezzanine finance to acquire Newco shares from Anglo American and Newco to achieve a 55% stake in Newco. As part of the transaction, Newco will undertake a share buyback at a discount to market value which will be offered to all shareholders but underwritten by Anglo American. In addition, Newco employees will acquire a 3% stake in Newco through an employee share ownership plan. Finally, Newco has an option to acquire a portion of Anglo American’s residual Newco shares to facilitate the increase in Newco’s free float to 25%. In addition, Anglo American has committed to retaining a 10% stake in Newco for 1 7 K U M B A A N N U A L R E P O RT 2 0 0 5 seven years as a sign of its belief in and continued support for the company. E M P O W E R M E N T P A R T N E R S • Eyesizwe Mining (through Eyesizwe SPV) – Diversified and sustainable resource and energy company, with greenfield and brownfield expansion plans – Significant player in domestic and international coal markets – Broad-based empowerment • • Eyabantu Capital – 100% black-owned and managed investment company – Expertise in mining, engineering and finance Tiso Group – Majority black-owned and controlled – Investments in resources, industrial and financial services Creating South Africa’s R16 billion flagship empowerment mining company • Northern Cape Community Group Newco estimated attributable EBITDA 2005 – Broad-based group representing some 200 000 individuals empower – Will disadvantaged regional communities – Will acquire 3% interest in Sishen Iron Ore Company • Basadi Ba Kopane – Women’s comprising grouping various broad-based groups, led by the South African Women in Mining Investments Holdings – Will own shares directly and indirectly through respective BEE groups B E N E F I T S T O S H A R E H O L D E R S As part of the unbundling, all Kumba shareholders will receive their pro-rata entitlement to Kumba Iron Ore shares. The company will be focused on developing its existing iron ore assets with strong growth prospects and a proven management team. As a result of the transaction, Kumba Iron Ore will be empowered which will enable it to participate in the country’s infrastructural development, export-led growth and progress towards government targets for job creation and the alleviation of poverty. to The business case for the bulked-up Newco is equally compelling. Newco will have a diverse portfolio in coal, heavy minerals, zinc and iron ore, one that will balance fluctuations in economic and provide conditions commodity sustainable growth prospects its in existing businesses and new projects. The merging of the Kumba and Eyesizwe coal assets will make Newco the fourth largest South African producer with an annual capacity of some 45Mt. Newco will become a significant market player in the coal and heavy minerals arena and provide a unique listed investment opportunity into these commodities. Iron ore Coal 22% 46% Heavy minerals Base minerals 24% 8% and exciting Significant growth opportunities and expansion projects identified across Newco totalling over R4 billion have been approved and are under way in the coal, heavy minerals and zinc strategic business units (p44). Newco will have an enterprise value of over R16 billion – based on the Kumba share price of R82 at which the transaction was concluded – and net debt of R0,8 billion (prior to the potential exercising of the Namakwa Sands and Black Mountain/Gamsberg options and R3,25 billion if those options are exercised). Newco’s management will be a blend of the best of both Kumba and Eyesizwe – two companies with proven track records, established and experienced management teams and a reputation for enhancing stakeholder value. P R O G R E S S S I N C E O C T O B E R 2 0 0 5 Since the announcement, a team of almost 300 people, comprising all parties to the transaction, Kumba’s execution teams and various advisors, have been working on the details of the transaction and its implementation. The transaction framework agreement signed by all parties is a binding contract the containing key fundamentals of 1 8 K U M B A A N N U A L R E P O RT 2 0 0 5 steps, transaction such as the structure and preliminary implementation valuations of the companies and assets involved, timelines the process and for any subsequent adjustments after detailed due diligence work, certain funding arrangements and relationship agreements. To implement the transaction, the parties agreed to a period of 90 days to complete the due diligences, after which funding for the transaction will have to be finalised and regulatory and the necessary shareholder approvals obtained. The implementation stage, which started immediately following the signing of the agreement, involves a number of phases and processes running concurrently. Due diligence phase – The transaction is based on values that are determined by a high-level due diligence on the assets of the parties. The detailed due diligence exercise will confirm these values to finalise the transaction. It involves a detailed technical, environmental, legal and financial due diligence as well as assessments of all other transactional risks and opportunities. Competent person’s report – Running simultaneously to the due diligence is the compilation of a competent person’s report, which is required in terms of JSE listings conditions. This report is compiled by an external consultant and offers an analysis of the parties’ mineral resources and reserves as well as other aspects of their operations, including plant and equipment and expected future profitability. Legal process – To give effect to the transaction, the transaction framework agreement is being converted into detailed legal agreements. Five law firms and legal teams from all the parties are involved in drafting and reviewing more than 100 agreements. F U N D I N G T H E T R A N S A C T I O N This is a critical aspect in finalising the transaction. More than R8 billion will be raised at Newco, Kumba Iron Ore and BEE Holdco level. Various banks have been invited to participate in the fundraising process which to be completed by March 2006. is expected S H A R E H O L D E R S A N D L I S T I N G In the first half of 2006 a circular will be dispatched to Kumba’s shareholders to inform them of the proposed transaction, its details and to give notice of a general meeting where shareholders will be required to approve the transaction. Included will be a prelisting statement for Kumba Iron Ore and a revised listing statement for Newco. C O M P E T I T I O N C O M M I S S I O N A N D O T H E R R E G U L A T O R Y A P P R O V A L S The transaction requires competition approvals or ratifications in various jurisdictions which are in process. O T H E R A C T I V I T I E S To ensure a smooth unbundling and integration, Kumba and Eyesizwe management, in conjunction with the Kumba board and the implementation teams, are attending to a number of related issues such as the companies’ organisational structures, compositions of new boards, corporate governance and staffing as well as retirement fund implications and appropriate share incentive plans. Above: At the announcement of the empowerment transaction are, from left, Geoffrey Qhena, CEO of IDC; Dr Con Fauconnier, Kumba’s chief executive; Lindiwe Hendricks, Minister of Minerals and Energy; Lazarus Zim, Anglo American South Africa’s chief executive; Pinkie Ncetezo, who represents the BEE women’s groups; and Sipho Nkosi, chief executive of Eyesizwe Mining. Below: Branding used during the announcement of the empowerment transaction. in and government W A Y F O R W A R D Throughout the 18 months it took Kumba and Anglo, together with our BEE partners and the IDC, to construct this deal, we made a point of continually briefing key players key departments on our thinking and progress with the project. We had constructive input and support at national and provincial level and a clear indication that the authorities view this as an important transaction which they would like to see progress to full conclusion as soon as possible. For that support we are extremely grateful. At the time of writing, we still expect to complete the transaction before mid-2006 and to have Kumba Iron Ore and Newco listed as two separate entities on the JSE. At all times, we have done our best to creatively address many of the pitfalls we identified and tried to learn from other transactions. Given of cooperation among the parties to the transaction, we are confident that, in Kumba Iron Ore, we will have one of the great iron ore companies of the world and, in Newco, we will indeed create South Africa’s flagship empowerment company. spirit true the 1 9 K U M B A A N N U A L R E P O RT 2 0 0 5 M A C R O - E C O N O M I C R E V I E W Following on strong world GDP growth of 4,0% in 2004, economic expansion proved remarkably resilient in 2005, growing 3,5% – despite record-high oil prices and the impact of major natural disasters, such as the December 2004 Asian tsunamis and some of the worst hurricanes on record in the US during the second half of the year. The US and China remained the engines of growth of the world economy, but global growth has broadened significantly since the middle of 2005 with, for example, economic expansion increasing in Japan and Europe due to greater domestic demand strength. Despite significant monetary tightening by some major central banks, global monetary conditions remained accommodative, with relatively low real interest rates. Real gross domestic product growth rates Given the broader base of economic expansion and the fact that the pace of growth in the US and China is expected to decline only moderately, above-trend global economic growth of 3,4% or more can again be expected in 2006. Leading indicators and surveys of economic purchasing managers from around the world confirm the view that the global growth momentum will continue in 2006. Although the value of the US dollar strengthened against the euro in 2005, based on a rising interest rate differential in favour of US assets, it is expected to weaken again in 2006 due to the anticipated increasing US fiscal deficit and trade gap. Oil prices are expected to decline only slowly and to remain well above real long-term historical averages, primarily due to robust demand from China. The major risks to the global economy remain high oil prices, its overdependence on American household spending and the continued reliance of the US on massive foreign inflows to finance its twin deficits. In South Africa, strong economic growth was experienced in 2005, projected to be about 5,1%. Inflation during the year was well within the South African Reserve Bank’s target range of 3-6%, aided by a modest appreciation of the rand against the US dollar and persistent monetary and fiscal discipline. These positive economic conditions are expected to continue in 2006. The strength of the rand continued to have a negative impact on export earnings of the mining and manufacturing industries, albeit that the mining industry operated in an environment of robust commodity prices. ) % ( h t w o r g P D G d l r o W 20 15 10 5 0 -5 Forecast 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 China World South Africa Source: Global Insight 2 0 K U M B A A N N U A L R E P O RT 2 0 0 5 C O M M O D I T Y R E V I E W Strong materials-intensive economic growth in China and other Asian countries continued to have a positive impact on global commodity demand and prices in 2005. In addition, supply bottlenecks in many commodities supported high price levels. The base metals price cycle was reminiscent of that of the late 1980s and internationally-traded bulk commodity prices generally increased to record levels. Projections of global steel production indicate that crude output increased by 60Mt, or about 7%, to 1 131Mt in 2005. However, output increased by some 66Mt in China, indicating declining aggregate production in the rest of the world. Production was cut back particularly in North America and Europe to maintain a balanced market in those regions. in the Due to a very tight iron ore market in 2005, resulting from significant barriers long to entry industry and development lead times, benchmark contract iron ore prices were negotiated at 71,5% higher than 2004. These tight market conditions are expected to continue in 2006, as indicated by the fact that spot prices in China were appreciably above contract prices during 2005, leading to expectations of additional price increases for iron ore. This will be counteracted to an extent by the spectre of significant overproduction of steel in China and lower profitability in the steel industry. Contract iron ore prices are thus expected to increase more moderately. constraints Prices for contract hard coking, semi-soft coking and steam coal increased in 2005 by 127%, 85% and 20%, respectively. Extremely tight market conditions at the beginning of 2005 for all metallurgical coals have since eased considerably as supply caught up with demand and infrastructure lessened, especially for the lower-ranked coals, like semi-soft and PCI coals. A decrease of about 10% for 2006 in the hard coking coal mine price has been negotiated, while larger declines are anticipated for semi- soft and PCI coals (about 30%). Spot steam coal prices declined during 2005 from about US$52/t to below US$40/t, leading to expectations that contract thermal coal prices will decline in 2006 and be settled about 15% lower. Spot steam coal prices, however, have started increasing again and are expected, on average, to attain levels similar to 2005. average in 2004. This was driven by good market fundamentals, reflected in a refined zinc supply deficit of about 500kt, and investment fund-based activity. LME zinc stocks declined 37% during 2005. The supply deficit is expected to persist in 2006, resulting in forecasts that zinc could attain an average price as high as US$2 000 during the year – the early part of 2006 has already seen prices surge to US$2 300. The very tight market for zinc concentrates is also expected to continue in 2006. This will result in treatment charges falling even lower than the severely-depressed levels of recent years. dioxide pigment Titanium prices increased in 2005 (up to 20% in certain regions), with the market remaining in near balance. However, titanium dioxide feedstock prices rose only moderately during to oversupply in the chloride-grade feedstock market. This surplus in supply over demand is expected to increase in 2006, leading to forecasts of a flat trend in feedstock prices. the year, due primarily The LME cash zinc price rose from US$1 214/t at to US$1 915/t at the end of 2005 (p22). The average zinc price in 2005 was US$1 382/t, some 31,8% higher than the the beginning In contrast, a significant supply deficit in the zircon market resulted in prices increasing by more than 20%. Given that this deficit is expected to persist in 2006, more price increases are expected. Historical Chinese iron ore imports and nominal iron ore prices ) u t m / c S U ( s e c i r p e r o n o r I 90 80 70 60 50 40 30 20 300 250 200 150 100 50 0 ) t M ( s t r o p m i i a n h C 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 China imports Lump prices Fines prices Source: IISI, BGS, AME and CRU 2 1 K U M B A A N N U A L R E P O RT 2 0 0 5 markedly during 2005, following an expansion of about 6% in the world bulk fleet capacity. Significant new capacity is also due to be delivered during the next few years. Estimates of global exploration expenditure in 2005 indicate an increase of some 34% over 2004, as could be expected during a period of high commodity prices. This trend is anticipated to continue into 2006. In time, this will result in increased mineral supply and contribute to the downward progression of the commodity price cycle. Heavy minerals markets ) e n n o t / $ U n o c r i Z ( 700 650 600 550 500 450 400 350 2 000 1 800 1 600 1 400 1 200 1 000 ) e n n o t / $ A t n e m g P ( i 2002 2003 2004 2005 Zircon Pigment* The US dollar generally weakened against the currencies of the major commodity- exporting countries in 2005. Commodity price increases in the currencies of these countries were thus lower than in dollar terms. For example, the 71,5% increase in iron ore prices in dollar terms in 2005 resulted in only a 66% increase in Australian dollar, a 43% increase in Brazilian real and 69% increase in rand terms. The US dollar is expected to weaken further against the currencies of most commodity-producing countries, again impacting negatively on local currency export receipts, although a weaker dollar tends to support commodity prices. factor Another that should support commodity prices is the significant increase in mining costs and mining project capital costs experienced during 2005. The elevated commodity prices of 2004 and 2005 resulted in numerous new mining projects being initiated, both brownfield and greenfield. This, in turn, led in to a shortage of capacity contractors, equipment and mining professionals worldwide. High energy costs have added to the problem. rates freight Global bulk increased significantly in 2003 and 2004, primarily due to growth in commodity import demand from China. These rates declined Above: Iron ore operations at Sishen, which feeds a large portion of its production to the Chinese market. Below: Growth in commodity import demand in China continued in 2005. 2 2 K U M B A A N N U A L R E P O RT 2 0 0 5 F I N A N C I A L R E V I E W Record production and buoyant sales volumes, with revenue up 37% C H A N G E I N F I N A N C I A L Y E A R A N D C O M P A R A T I V E A N A L Y S I S Kumba changed its financial year end from 30 June to 31 December in 2004 and is presenting its audited financial results for the 12-month period to 31 December 2005. Kumba’s previous audited financial results were for the 18-month period from 1 July 2003 to 31 December 2004. Comments are for comparative purposes based on an analysis of the group’s audited financial results and physical information for the 12 months ended 31 December 2005 against the corresponding unaudited information for the 12-month period ended 31 December 2004. Interim results reviewed by the group’s auditors were published for the six months to 30 June 2005. Audited financial results and physical information for the 12-month period to 31 December 2005 and the corresponding unaudited information for the 12-month period to 31 December 2004 respectively, are provided on p116 and p117 for comparative purposes. O V E R V I E W O F G R O U P O P E R A T I N G R E S U L T S The 12-month period to December 2005 was marked by continued excellent operational performance, strong commodity prices and the continued realisation of benefits from the ongoing business improvement programme. Revenue increased by R3 253 million to R11 962 million and net operating profit, adjusted for the Hope Downs non-recurring settlement proceeds and other non-recurring charges, by R2 222 million to R3 643 million, resulting in an improved operating margin of 30% compared with 16% for the comparative period (table 1). An average exchange rate of R6,36 to the US dollar was realised compared with R6,51 for the previous corresponding 12-month period. Table 1 R million Revenue Net operating profit (Ebit) Adjusted for: – Hope Downs pre-tax settlement proceeds – Non-recurring (surpluses)/net deficits and impairment charges realised on disposal of assets and investments Adjusted net operating profit Depreciation and amortisation Earnings before interest, tax, depreciation and amortisation (Ebitda) Operating margin (%) Ebitda margin (%) 12 months ended 31 December 2005 11 962 4 887 (1 179) (65) 3 643 898 4 541 30 38 2004 8 709 1 368 53 1 421 652 2 073 16 24 18 months ended 31 December Restated 2004 12 600 1 845 11 1 856 971 2 827 15 22 2 3 K U M B A A N N U A L R E P O RT 2 0 0 5 Net operating profit up 171%, excluding Hope Downs settlement 12 months ended 31 December 2005 2004 18 months ended 31 December 2004 6 638 2 203 1 928 839 1 089 1 070 106 17 11 962 6,36 12 months ended 31 December % 42 25 28 6 25 Restated 2004 833 430 254 (10) 264 (116) 20 (53) 4 250 1 878 1 662 514 1 148 812 95 12 8 709 6,51 % 20 23 23 21 41 1 368 16 6 065 2 733 2 438 668 1 770 1 212 138 14 12 600 6,67 18 months ended 31 December Restated 2004 1 134 544 203 (22) 225 (153) 27 90 1 845 2005 2 767 554 227 (79) 306 69 26 1 179 65 4 887 S E G M E N T A L R E S U L T S Segmental results are shown in tables 2 and 3. Table 2 R million Revenue Iron ore Coal Heavy minerals – Ticor SA – Ticor Australia Base metals Industrial minerals Other Total R/US$ exchange rate realised Table 3 R million Net operating profit (Rm)/margin (%) Iron ore Coal Heavy minerals – Ticor SA – Ticor Australia Base metals Industrial minerals Other – Hope Downs – Other Total I R O N O R E Revenue increased significantly by 56% to R6 638 million and net operating profit by 232% to R2 767 million, with the operating margin improving to 42%. This was due to the excellent operational performance, business improvement results, record-breaking iron ore price settlements of 71,5% on average effective 1 April 2005 and a higher-margin sales product mix which more than offset the effects of higher petroleum and labour costs. The international US dollar prices for iron ore are set from 1 April until 31 March the following year. 2 4 K U M B A A N N U A L R E P O RT 2 0 0 5 C O A L Revenue increased by 17% to R2 203 million due to increased sales volumes at higher prices. Higher revenue together with business improvement initiatives resulted in net operating profit improving by 29% to R554 million despite increased stripping costs and petroleum prices. H E A V Y M I N E R A L S Ticor SA Total production and sales increased in line with the ramp-up of the furnaces. This, together with higher sales prices for zircon and low manganese pig iron, resulted in revenue increasing by 63% to R839 million. The stronger currency, increased raw material costs and the cessation of capitalisation of costs and interest during the construction period more than offset improved revenues, resulting in a net operating loss of R79 million for the year. Ticor Australia Kumba acquired the minority shareholding in Ticor Limited resulting in it becoming a wholly-owned subsidiary and being delisted from the Australian Stock Exchange (ASX) on 22 November 2005. As a result, Ticor’s 40% holding in Ticor SA was restructured into a direct holding by Kumba. Revenue decreased by 5% over the comparative period to R1 089 million as a result of the effects of the final closure of Ticor’s chemical business in May 2004. Net operating profit, however, increased by 16% to R306 million due to higher pigment and zircon prices, the elimination of losses recorded by the chemicals business, the ongoing success of margin-improvement initiatives and favourable hedging programmes. B A S E M E T A L S The sale of an additional 23kt of lead and a significant increase in the LME-traded zinc price from an average of US$1 048 per tonne in the comparative period to US$1 382 per tonne in 2005 resulted in revenue improving by 32% to R1 070 million despite continued low treatment charges and a stronger currency. Net operating profit, which improved to R69 million from a loss of R116 million during the comparative period, was due to increased revenues, non-recurrence of impairment charges raised in the comparative period and the benefits from the business improvement programme. A provision of R182 million, representing the business unit’s best estimate for the environmental rehabilitation of a residue disposal site at the Zincor refinery, was raised against its prior year’s retained income. Investigation of viable reclamation alternatives is continuing. The provision at 31 December 2005 amounted to R191 million. The revenue and net operating profit contribution of the various businesses is as follows: Revenue contribution 12 months 2005 12 months 2004 56% 18% 16% 9% 1% Iron ore Coal Heavy minerals Base metals Industrial minerals and other 49% 22% 19% 9% 1% 2 5 K U M B A A N N U A L R E P O RT 2 0 0 5 Net financing cost covered 20 times by EBITDA EBIT contribution (excluding Hope Downs proceeds) 12 months 2005 12 months 2004 74% 15% 6% 2% 3% Iron ore Coal Heavy minerals Base metals Industrial minerals and other 54% 28% 17% 0% 1% N E T F I N A N C I N G C O S T S Net financing costs consist of interest expense, net of interest earned and interest capitalised on project developments. The average monthly effective cost of borrowings decreased from 11,3% per annum to 10,6% per annum in line with lower interest rates. At 31 December 2005, 56% of our corporate borrowings, inclusive of the Ticor SA project finance loans, carried interest at fixed rates. Net financing costs decreased by R56 million to R231 million and were covered 20 times by EBITDA compared with 7 times in the 12 months to 31 December 2004. No interest cost was capitalised during the current financial year compared with R118 million in the comparative period. Capitalisation of interest on the project loans for the mine operation of Ticor SA ceased in December 2001 and for the smelter operation on 31 December 2004. I N C O M E F R O M E Q U I T Y - A C C O U N T E D I N V E S T M E N T S Our share of attributable profits from investments, after tax, increased as a consequence of a higher contribution from our investment in the Chifeng zinc refinery and the divestment from GijimaAST Limited. Table 4 R million AST 1 Chifeng zinc refinery Total 12 months ended 31 December 2005 (5) 12 7 18 months ended 31 December 2004 (52) 10 (42) 2004 (32) 9 (23) 1. Equity accounting discontinued on 3 May 2005 after AST’s rights issue and business combination with Gijima Info Technologies Afrika (Pty) Limited, which diluted Kumba’s interest to 4,6% in the newly formed GijimaAST Limited. Guma Investment Holdings (Pty) Limited exercised its option to also acquire Kumba’s remaining interest in GijimaAST Limited prior to 31 December 2005. Investments in incorporated joint ventures that were previously equity accounted have been proportionally consolidated from 1 January 2005 (refer note 2 of the annual financial statements). Comparatives have been restated. The change does not impact on attributable or headline earnings. E A R N I N G S The significant improvement in net operating profit and a non-recurring settlement of R1 179 million pre-tax for the acquisition of Kumba’s interest in the Hope Downs project, after accounting for net finance charges of R231 million and a higher taxation charge of R1 412 million, resulted in attributable earnings increasing by 400% to R3 190 million for the financial year. Headline earnings were 223% higher at R2 373 million or 781 cents per share. 2 6 K U M B A A N N U A L R E P O RT 2 0 0 5 Final dividend of 160 cents per share (540 cents per share for the financial year including special dividend) Table 5 R million Attributable earnings Adjusted for: • Net (surplus)/deficit on disposal or scrapping of operating assets and investments • • • • Our share of associates’ goodwill amortisation and exceptional items • Minority share adjustment • Impairment charges* Closure cost Excess over cost of acquisition of minority interest** Tax effect Headline earnings Ticor Chemicals cyanide plant in Australia Investment in ZnERGY (Pty) Limited Preference share investment in Rosh Pinah Mine Holdings (Pty) Limited *Impairment charges raised: • • • • Reversal of impairment of shipping assets sold • • • Other Impairment of intangible assets in Ticor Limited Impairment of investment in joint venture Total impairments ** Refer p29 12 months ended 31 December 2005 3 190 (1 177) 28 (95) (1) 428 2 373 20 7 1 28 18 months ended 31 December 2004 891 (24) 35 35 (6) 47 (12) 966 89 26 9 (90) 1 35 2004 638 110 (57) 35 (4) 29 (17) 734 26 9 (90) (2) (57) T A X A T I O N The tax charge for the 12-month period to 31 December 2004 increased by R1 082 million to R1 412 million in line with the improved net operating profit. The effective tax rate is 30,3% compared with 31,2% for the comparative period. D I V I D E N D S Our policy remains to pay regular dividends. The level of dividend payments is considered half-yearly against prevailing trading conditions, our balance sheet structure and available cash flow, taking cognisance of value-adding growth opportunities. The board accordingly approved the following dividends for the 12-month period ended 31 December 2005. Period ended 30 June 2005 1 July 2005 (special) 31 December 2005 Total cps 160 220 160 540 Dividend Rm 487 670 490 Rm* Declared Paid/payable 548 754 551 August 2005 August 2005 February 2006 September 2005 September 2005 March 2006 1 647 1 853 * Includes standard tax levied on dividends paid by companies. The non-recurring post-tax receipt for Kumba’s interest in the Hope Downs project was declared as a special dividend in August 2005. Total dividends (excluding STC) for the 12 months to 31 December 2005 are covered 1,94 times by attributable earnings. 2 7 K U M B A A N N U A L R E P O RT 2 0 0 5 Net debt to equity ratio of 19% C A S H F L O W Cash retained from operations was R1 829 million higher over the comparative period and, together with the Hope Downs project settlement, was applied to settle finance charges of R189 million, higher cash taxes of R821 million, increased dividends of R1 447 million and the acquisition of the minority interest in Ticor Limited, Australia for R1 174 million. This, together with capital expenditure of R1 044 million, of which R655 million was invested in new production capacity, resulted in a net cash inflow of R459 million for the financial period under review. Table 6 R million Net cash retained from operations Net financing cost, taxation and dividends Cash used in investing activities • New capacity • Other capital expenditure • Acquisition of Ticor Limited’s minority interest Asset and investment disposals 1 Share issue 2 Other movements 3 Decrease in net debt 12 months ended 31 December 2005 3 864 (2 457) (655) (389) (1 174) 1 202 128 (40) 479 2004 2 035 (581) (487) (399) 50 75 693 18 months ended 31 December 2004 2 661 (1 029) (825) (571) 238 132 (114) 492 1. Includes the R1 179 million proceeds from the Hope Downs Project. 2. Proceeds from the issue of shares under the management share scheme. 3. Non-cash flow movements in net debt arising primarily form currency translation differences. F I N A N C I A L S T R U C T U R E Net debt decreased to R1 391 million with a net debt to equity ratio of 19% at 31 December 2005, from R1 870 million and a net debt to equity ratio of 29% at the previous financial year-end close of 31 December 2004. Net debt was 0,3 times Ebitda compared with 0,9 times Ebitda at 31 December 2004. The redemption profile of our long-term interest-bearing borrowings is satisfactorily spread with significant undrawn facilities and a low utilisation of short-term bank lines. This, together with new term facilities, will adequately cover any refinancing that may be required in 2006 and 2007 Table 7: Debt structure R million Long-term Corporate Ticor SA project finance Ticor Pty Limited, Australia Short-term Total debt Cash and cash equivalents Net debt Drawn Undrawn Maturity profile 316 171 487 2006 2007 2008 2009 After 2009 685 934 484 218 328 2 649 1 191 869 589 2 649 225 2 874 (1 483) 1 391 2 8 K U M B A A N N U A L R E P O RT 2 0 0 5 C A P I T A L E X P E N D I T U R E Table 8 contains a comparison of capital expenditure for the 12-month periods ended 31 December 2005 and 2004 together with an estimate for the 2006 financial year. In contrast to the previous financial years where our investment in the Ticor SA project dominated our capital expenditure into new production capacity, iron ore and coal expansion projects attracted most of the capital expenditure for the period under review. The approved Sishen expansion project (p44), will account for 41% of the 2006 estimated capital expenditure. Table 8 Capital expenditure R million Iron ore Coal Sustaining and environmental Expansion • • • Heavy minerals • Base metals • Other Total Financial year 2006 estimate 824 1 665 377 144 12 months ended 31 December 2005 389 274 311 66 2 2 3 010 1 044 18 months ended 31 December 2004 571 78 81 624 42 1 396 2004 399 38 66 351 32 886 H E D G I N G ( r e f e r n o t e 3 0 . 1 t o t h e a n n u a l f i n a n c i a l s t a t e m e n t s ) Our hedging of export earnings continues to focus on short-term forward periods within board approved policy parameters. Hedging activity approximated the spot rates over the 12-month period compared with a contribution of R100 million for the 18-month period to 31 December 2004. In line with our policy on foreign currency commitments, R92,6 million of our capital commitments on the Sishen expansion project were covered at an average exchange rate of R6,82 to the US dollar, R16,9 to the yen and R8,35 to the euro at 31 December 2005. This represents 62% of the anticipated import content, which is 4% of the estimated capital expenditure of the project. C H A N G E S T O I N T E R N A T I O N A L F I N A N C I A L R E P O R T I N G S T A N D A R D S ( I F R S ) The majority of listed companies in South Africa faced the challenge of full IFRS compliance for years ending on or after 1 January 2005. Kumba, even though already reporting in terms of IFRS since 1 July 2001, was required to ensure compliance with the numerous improvements to existing International Accounting Standards, most notably the following: • the adoption of IFRS 2, Share-based Payments, having an impact of R38 million and R30 million on profit and loss for the 12- and 18-month periods to 31 December 2005 and 2004 respectively; and • the adoption of IFRS 3, Business Combinations, in terms of which the recognition of negative goodwill was discontinued. This resulted in R53 million being adjusted against opening retained income at 1 January 2005, and a further R95 million excess amount over the cost of acquisition of the minority interest in Ticor Limited, Australia, being recognised in the current year’s earnings. B U S I N E S S I M P R O V E M E N T P R O G R A M M E To counter fluctuations in the exchange rate, remain competitive and meet its growth aspirations, Kumba launched a comprehensive business improvement programme in 2004, consisting of a combination of increased throughput and revenue, improved business processes and cost reductions. The target set in 2004 of an R800 million sustainable contribution to net operating profit from our 2006 financial year is being rigorously tracked and reported. The initial target of R800 million has been revised to a target of R1 422 million in 2005, the full amount of which was realised in 2004 and 2005. 2 9 K U M B A A N N U A L R E P O RT 2 0 0 5 Share price outperforms indices The graph below depicting our Ebit comparison year-on-year demonstrates that the benefits of the business improvement initiatives, net of once-off implementation costs, have already started to flow through to the group’s results for the two 12-month periods. Ebit comparison 1 368 T I B E 4 0 M 2 1 2 399 45 851 3 656 (331) (495) (181) 1 231 4 887 e c i r p d n a e m u l o V e t a r e g n a h c x E n o i t a l f n I e m u l o V Production cost t s o c n o i t u b i r t s i D s e v i t a i t i n i t n e m e v o r p m i s s e n i s u B T I B E ” e r o C “ s m e t i g n i r r u c e r - n o N T I B E 5 0 Y F Ebit for the 12-months to 31 December 2004 included a contribution of R400 million from the business improvement programme of which R169 million realised in cost savings, with a further net amount of R851 million in the period under review of which R260 million consists of cost savings. P O S T - R E T I R E M E N T B E N E F I T L I A B I L I T Y The three accredited medical aid funds are structured to exclude any employer liability for post-retirement medical benefits in respect of either existing or past employees. Kumba is a participating employer in a number of defined contribution funds and two closed defined benefit funds. These defined benefit funds were adequately funded as per the latest actuarial valuations on 31 December 2004 and 31 December 2002 respectively. S H A R E P R I C E P E R F O R M A N C E A year-on-year, 12 months to 31 December comparison shows that the volume weighted average share price was R74,59 against R40,07 for the previous year, while the daily trade in shares averaged 428 399 in 2005 compared with 271 247 in the previous period. During the year under review, the share peaked at R109,13 in December 2005 (against a high of R49,00 in the previous financial year) and bottomed at R44,06 in January 2005 versus a low of R32,35 in June 2004. Following the announcement of the empowerment transaction and speculation of a higher-than-anticipated iron ore price settlement for 2006, Kumba’s share reached a new high of R126,58 on 19 January 2006. In the four years since listing, Kumba has significantly outperformed both the JSE overall index (+49%) and JSE resources index (+57%). The acquisition of a majority shareholding by Anglo American plc in Kumba in December 2003 resulted in the liquidity and tradability of the share decreasing substantially. Although this has affected its rating, Kumba’s share price has nevertheless, in the review period, outperformed the JSE overall index by 42% and the JSE resources index by 40%. This can be compared to an outperformance of the JSE resources index by 14% in 2004 and a 3% underperformance of the JSE overall index over the same period. In fact, Kumba was the best- performing ALSI 40 share in 2005 with an annual appreciation of some 132%. A comparison with its peers shows that during the year under review Kumba outperformed both BHP Billiton and Anglo American plc by 38% and 45% respectively. 3 0 K U M B A A N N U A L R E P O RT 2 0 0 5 Table 9: Share price analysis (SA cents per share) Year end 31 December 2005 2004 2003 2002 2005 First quarter Second quarter Third quarter Fourth quarter 2004 First quarter Second quarter Third quarter Fourth quarter Share price against daily traded volumes 4 000 000 3 500 000 3 000 000 2 500 000 2 000 000 1 500 000 1 000 000 500 000 0 High 10 913 4 900 3 995 5 850 7 108 6 997 9 830 10 913 4 363 4 450 4 920 4 900 Low 4 406 3 235 2 410 3 001 4 406 5 492 5 892 8 752 3 711 3 235 3 325 3 950 Median 7 459 4 007 3 247 4 158 5 805 6 283 7 811 9 936 4 164 3 781 4 007 4 462 120 100 80 60 40 20 0 Jan 04 Feb 04 Mar 04 May 04 Jun 04 Aug 04 Sep 04 Nov 04 Dec 04 Jan 05 Mar 05 Apr 05 Jun 05 Jul 05 Sep 05 Oct 05 Nov 05 Volume traded (millions) Share price (R per share) Source: Datastream Share price against daily traded volumes B M K o t d e s a b e R 140 130 120 110 100 90 80 70 60 50 40 30 20 10 0 Jan 04 Jan 04 Mar 04 Mar 04 Apr 04 May 04 Jun 04 Jul 04 Aug 04 Sep 04 Oct 04 Nov 04 Dec 04 Jan 05 Feb 05 Mar 05 Apr 05 May 05 Jun 05 Jul 05 Aug 05 Sep 05 Oct 05 Nov 05 Dec 05 Jan 06 KMB JSE Overall JSE Resources Source: Datastream 3 1 K U M B A A N N U A L R E P O RT 2 0 0 5 B U S I N E S S O P E R A T I O N S R E V I E W o p e r a t i o n s Kumba recorded another year of good operational results, with numerous production records achieved and a gratifying improvement in safety performance in the second half of the year. Iron ore and coal continued to enjoy buoyant market conditions due to soaring demand for steel-making raw materials largely as a result of strong growth in the Chinese steel industry. Iron ore demand in Japan and Europe remained steady at high levels. Iron ore prices are expected to remain at the current high levels until at least 2007. Heavy minerals experienced very strong demand for zircon, with China’s ceramic and chemical sectors booming. Increases in world zircon production are not expected in the short term and the supply shortfall should support current strong prices. Pigment and titanium dioxide slag achieved modest price increases in 2005. The zinc business enjoyed a recovery in metal prices due to strong global demand driven mainly by China and the zinc inventory on the London Metal Exchange (LME) which reduced by 235kt this year. Treatment charges remain depressed due to the global shortage of concentrate from the mines. S A F E T Y Regrettably, during the year, we experienced four fatalities, one of which was a public road vehicle accident. Another two fatalities were recorded in January 2006. Any loss of a colleague is very distressing and we remain committed to achieving a working environment where no serious injuries occur. There have been commendable safety achievements at several of our mines, most notably Tshikondeni receiving the national award of the Department of Minerals and Energy for South Africa’s most improved coal mine. We congratulate those divisions that are making progress towards our safety goal, but overall we are dissatisfied and improving our safety performance is a priority. The I Care Rules programme, an initiative to enhance hazard awareness by focusing on key risk areas (p75), is yielding positive results in the early stages of roll-out. IRON ORE COAL KUMBA RESOURCES HEAVY MINERALS BASE METALS INDUSTRIAL MINERALS 3 2 K U M B A A N N U A L R E P O RT 2 0 0 5 focus on O P E R A T I O N A L P E R F O R M A N C E The continued improving performance, supported by programmes on leadership style, people development and performance management remains the cornerstone of our operational successes. Achievements: There have been several notable achievements during the year: • All our business units now have international certification on environmental (ISO 14001) and safety (OHSAS 18001) standards • Tshikondeni received the Millionaire Shield Award and the national safety achievement flag for coal mines from the Department of Minerals and Energy • The iron ore businesses have reduced the number of lost time-injuries by 42% • Record performances from our iron ore operations included: – Sishen mine production of 28,5Mt – Iron ore exports of 22,1Mt – Railed tonnage to Saldanha of 24Mt • Coal operations continued to excel: – Record production from Grootegeluk and Leeuwpan, which achieved 17,5Mt and 2,0Mt respectively – The R95-million jig project was successfully commissioned at Leeuwpan in August 2005 • Our heavy minerals division continued to increase output: – Furnaces in South Africa continued to ramp up successfully. The chloride slag ratio improved to 82% – Tiwest operations in Australia maintained strong levels of output while successfully relocating the North mine concentrator. Challenging targets play a key role in our business successes Some exciting challenges have been identified for the year ahead: • A key focus area will be fully capturing the benefits of our business improvement programme initiated in 2004 and building on the successes achieved to date • Subject to shareholder approval, the integration of the envisaged Newco business operations and harvesting the potential synergies of its constituent assets and people will be a key objective. 1 2 3 K U M B A R E S O U R C E S ’ f o o t p r i n t 4 1. The Ticor SA smelter in Empangeni, KwaZulu- Natal, where furnaces continued to ramp up successfully. 2. Tshikondeni received the Millionaire Shield Award and the national safety achievement flag for coal mines from the Department of Minerals and Energy. 3. A Sishen drum reclaimer at dusk. 4. A record production of 17,5Mt was achieved at Grootegeluk in 2005. We are creating a sustainable future by ensuring the development of our people and the communities in which we operate We are measured on our triple bottom-line performance 3 3 K U M B A A N N U A L R E P O RT 2 0 0 5 B U S I N E S S O P E R A T I O N S R E V I E W I R O N O R E Physical information Total production Total sales – Domestic – Exports Capital expenditure (Rm) * = metric tonnes Y-O-Y = year-on-year O V E R V I E W Kumba’s iron ore division is a leading high- grade lump ore producer and the fourth- largest supplier of iron ore in the global seaborne industry. Iron ore assets comprise the mines at Sishen and Thabazimbi, in South Africa’s Northern Cape and Limpopo respectively. These mines provinces produce 31Mtpa of iron ore – 81% of the country’s total production and 4% of global seaborne trade – and their combined resources exceed two billion tonnes of high-quality iron ore. Sishen is contracted to supply 6,25Mtpa and Thabazimbi all its iron ore production to Mittal Steel South Africa (Mittal) at cost plus a 3% management fee. following improvement The division recorded an exceptionally strong operating performance in 2005, largely due to capacity expansions and improved efficiencies the business programme. Supported by a favourable 60/40 lump:fine ore ratio and record international iron ore price settlements effective 1 April 2005, export volumes rose and the revenue was further enhanced. Thabazimbi maintained its excellent safety record and Sishen improved on its 2004 safety levels. During the year, Sishen set new records, increasing final product output by 3% to 28,5Mt. The 10% increase in production volumes over the past four years is indeed a commendable achievement with several strategic initiatives, including selective mining practices, coming to fruition over the period. Export sales were up 6%, driven by buoyant global demand for iron ore and boosted by strong operational performances and capacity expansions on the export channel. Domestic sales volumes declined by 2% on the back of decreased Mittal demand, and surplus production was redeployed to export markets. Tonnage domestic 2005 000t* 2004 000t* 30 987 31 285 9 172 22 113 404 30 112 30 294 9 371 20 923 172 Y-O-Y % 3 3 (2) 6 135 railed from Sishen mine to the port of Saldanha rose by 9% in line with new contractual tonnages. Tonnage shipped to customers and the offshore stockpile at Qingdao rose by 7%. Structural defects on ship-loaders during July 2005 necessitated rescheduling vessels. Following an unfavourable outcome to arbitration proceedings stemming from a dispute between Kumba and its partner, Hancock Prospecting, in the Hope Downs iron ore project in Western Australia, the latter was granted an option and purchased Kumba’s interest on 1 July 2005, resulting in A$231,4 million being paid to Kumba in full settlement of the issue. The iron ore business is pursuing four strategic thrusts: • Reducing or containing operating expenses to increase the operating margin and return on capital employed a and in high- • Establishing sustaining preferred-supplier status margin markets • Growing domestic and international capacity by developing new business ventures • Being a responsible corporate citizen. P R O S P E C T S The tight supply/demand situation in the iron ore industry in recent years is being Part of the Sishen mine in the Northern Cape. 3 4 K U M B A A N N U A L R E P O RT 2 0 0 5 EXPORT REVENUE CONTRIBUTION China Japan UK 39% 22% 12% Germany Austria Other 10% 11% 6% maintained by capacity restrictions and ever-increasing demand from China, prompting expansion plans by major iron ore producers that continue to produce at record levels. The iron ore division aims to sustain 2005’s record production levels, while expansions at Sishen will begin delivering product by mid-2007 ramping up to full capacity of 10Mt by the beginning of 2009. Led by China, Asia will continue to be the growth market for iron ore while the traditional major markets of Europe and east Asia (excluding China) are expected to remain stable. Global crude steel production increased by 7% in 2005 (China 24,6%), with further growth expected until 2010. This is supported by ambitions to significantly expand their steel industries with blast furnace upgrades, new furnaces and greenfield projects. India and Brazil in The unprecedented price increase in benchmark contract prices of 71,5% in 2005 has encouraged steelmakers and iron-ore producers to enter into long-term contracts to ensure supply and reduce reliance on the spot market. Significant differentials between spot and benchmark contract prices, albeit at lower levels than the previous year (average of US$70/tonne delivered price into China for Indian ore against US$55/tonne contract price into China for Australian ore), are still prevalent which indicates a buoyant market in 2006. Additional shipping capacity from 2006 should improve the freight market. The division’s current pipeline includes 13 projects, ranging from implementation to potential study phase, representing 83Mt of production capacity that can be brought on line should market demand warrant those investments. In addition, exploration activities and technology developments will continue to identify new opportunities. Capital expenditure R million Sustaining Environmental Expansion Total Actual 2005 Estimate 2006 113 17 274 404 257 66 1 665 1 988 1 F O C U S O N S T A K E H O L D E R p r o s p e r i t y 2 1 Our vision, values and governing principles ensure that stakeholder value is enhanced 4 We will continue to create wealth for stakeholders by doing what we do better than anyone else and better than before 3 5 K U M B A A N N U A L R E P O RT 2 0 0 5 3 1. A haul truck tips its load at the primary crusher at Sishen. Water sprays are automatically activated to ensure efficient dust control. 2. The Komatsu WA1200 in use at Sishen is reported to be the largest mechanical drive front-end loader in South Africa. 3. A rope shovel in action at Thabazimbi. 4. With the recently commissioned floculant preparation plant at Thabazimbi are Lucas Daffue, production foreman, and right, Emil de Villiers, process engineer. B U S I N E S S O P E R A T I O N S R E V I E W C O A L Physical information Total production Total sales – Eskom – Other domestic – Exports Capital expenditure (Rm) * = metric tonnes Y-O-Y = year-on-year O V E R V I E W Kumba’s coal division is currently South Africa’s fifth-largest producer, operating three collieries: the open-pit Grootegeluk (Limpopo) and Leeuwpan (Mpumalanga) mines; and underground Tshikondeni mine (Limpopo) that supplies all its production to Mittal at cost plus a management fee of 3%. This division offers significant growth opportunities for the group. The division has consistently improved operational performance with record throughput at Grootegeluk and Leeuwpan, with the latter benefiting from the commissioning of the jig plant during the year. Driven mainly by demand from the metals and power-generation sectors, the three collieries produced 19,8Mt of thermal, coking coal and semi-soft coking coal, a 2% increase on the previous year and posting new production and sales records at Grootegeluk and Leeuwpan. More product was placed in the valuable metals market, improving revenues to record levels. Production levels for 2006 are expected to increase by 11% as expansion projects at Grootegeluk and Leeuwpan come on stream and demand from Eskom increases. Overall production was marginally higher at Grootegeluk due to better throughput after de-bottlenecking projects. 2005 000t* 19 839 19 986 14 703 4 174 1 109 347 2004 000* 19 444 19 558 14 356 4 112 1 090 171 Y-O-Y % 2 2 2 2 2 103 the Blue Flag award from the Department of Minerals and Energy for most improved safety performance from a coal mine in South Africa over a three-year period. Tshikondeni and Grootegeluk unfortunately recorded a fatality each in December 2005 and January 2006 respectively. While overall demand during the year was good, warmer winter conditions resulted in lower-than-expected demand from Eskom. Dispatches from Grootegeluk were below the record levels achieved in 2004 due to lower sales volumes, but the efficiency of rail flows was maintained with another commendable performance from Spoornet. Capital expenditure for the year more than doubled to R346 million, primarily for the Grootegeluk and Leeuwpan expansion projects. This will rise again in 2006 due to increased replacements in line with the life cycle of physical assets and approved expansion projects. Sales into the export market remained at 1,1Mt and are only set to increase materially when the RBCT Phase V project is commissioned. Prices obtained were some 67% higher than the previous year. TOTAL SALES Eskom Exports 74% 5% Domestic 21% Good commodity prices countered a slightly stronger exchange rate in the review period. This division is less sensitive to exchange-rate fluctuations, given that 74% of its total sales are to Eskom. P R O S P E C T S With clearly-defined goals for growth – based on operational efficiency, market positioning, organic and inorganic growth – the coal division’s target is to effectively double production to 40Mtpa by 2010 (excluding Eyesizwe Coal tonnage). Medium- and longer-term strategic objec- tives have also been set and a high-quality pipeline of growth projects developed to realise these objectives. Much focus has been placed on demonstrating to all stakeholders the potential of the Waterberg coal fields and the role this region could play in alleviating the imminent power-generation capacity shortfall expected in South Africa by 2009. Kumba’s coal division is well positioned to play a vital role in supplying additional coal for more power-generation capacity in this region. Higher diesel prices, incentive provisions following better operating results and to increased alleviate the backlog of the previous year at Grootegeluk contributed to higher production unit costs for 2005. overburden stripping Leeuwpan and Tshikondeni received ISO 14001 and OHSAS 18001 accreditation during the year, with Tshikondeni receiving Stockpiles and the load-out area at Leeuwpan. 3 6 K U M B A A N N U A L R E P O RT 2 0 0 5 The announcement of the expansion project at RBCT presents significant financial benefit in the medium term for the coal division and will also enable the establishment of the Inyanda coal mine. The board’s approval of the Sintel Char project (p45) signals the division’s initial move downstream into the reductant market to expand its portfolio of value- added products. Although global coal prices peaked during 2004 and 2005, Kumba’s coal division is well placed to increase the proportion of higher-value coal products in its portfolio. This should enable the division to increase margins during 2006. Capital expenditure R million Sustaining Environmental Expansion Total Actual 2005 Estimate 2006 26 10 311 347 93 34 377 504 1 A S T E P P I N G S T O N E O F o p p o r t u n i t y 2 F O R S O U T H A F R I C A 3 4 Kumba is firmly anchored in South African soil and our commitment to the country allows us to act as a stepping stone to a brighter future through the development of our country’s people 1. The beneficiation complex at Grootegeluk. 2. The Grootegeluk stacking and reclaiming operations set against a backdrop of Eskom’s Matimba power station. 3. Flotation cells at Tshikondeni’s beneficiation plant. 4. Stoffel Pitse, hauling operator at Grootegeluk. 3 7 K U M B A A N N U A L R E P O RT 2 0 0 5 B U S I N E S S O P E R A T I O N S R E V I E W H E A V Y M I N E R A L S Physical information Ticor SA Ticor Limited** Australia Y-O-Y % 2005 000t** 2004 000t Y-O-Y % Total production Ilmenite* Zircon Rutile Low manganese pig iron (LMPI) Synthetic rutile Pigment Chloride slag Sulphate slag Total sales Ilmenite Zircon Rutile Synthetic rutile Low manganese pig iron Chloride slag Sulphate slag 2005 000t 377 47 23 2004 000t 459 49 20 (18) (4) 15 89 63 41 134 30 60 47 18 79 150 41 96 40 27 48 17 58 84 24 40 (25) 122 (2) 6 36 79 71 220 35 16 111 53 13 36 18 59 236 38 18 112 53 30 38 21 50 (7) (9) (14) (1) – (57) (5) (14) 18 * = Ilmenite at Ticor SA refers to crude ilmenite. ** = Tonnages reflect 50% of the production and sales volumes of the Tiwest Joint Venture Y-O-Y = year-on-year Ilmenite, O V E R V I E W Heavy minerals is a highly-specialised industry whose primary outputs are used for quality-of-life products with many, often invisible, applications. for example, is used to produce titanium slag and synthetic rutile as feedstock for pigment plants. Titanium dioxide pigment is used in the paper, paint and plastics industries, while zircon is used to produce a wide range of industrial and domestic products from to ceramics, refractories, and TV and computer screens. Kumba’s heavy minerals smelter complex is under commission at Empangeni, KwaZulu- Natal, and it has a joint venture (Tiwest) in titanium dioxide Australia producing products and heavy minerals concentrate including ilmenite and zircon. tiles and sanitaryware The heavy minerals division aims to become a global leader in the titanium dioxide industry and the following major steps were taken in 2005 to realise this objective: • The A$226 million acquisition of the minorities in Australian-listed Ticor Limited at A$1.875 per share effective 15 November 2005. • In December 2005, Kumba acquired Ticor’s 40% shareholding in Ticor SA and the Madagascar project. • Significant progress in ramping up the smelter at Ticor SA to 85% of design capacity, leading to chloride slag and low manganese pig iron production and 41% increasing by 40% respectively in 2005. The proportion of chloride slag increased from 71% in 2004 to 82% in 2005. Good progress was made in operating the furnace 1 pre-heater, with commissioning of the furnace 2 pre-heater scheduled to commence early in 2006. Furnace 2 was successfully recommissioned in January 2005 after a shutdown for repairs and design improvements during the last four months of 2004. This furnace is now operating at close to name-plate capacity and set production records in March, May and August of 2005. Furnace 1 is planned to be shut temporarily in 2006 to effect modifications and improvements that were successfully made to furnace 2. Reduced in-situ ore grades at both South African and Australian operations have marginally reduced the production of ilmenite and zircon, although rutile at Ticor SA increased following operating performance gains from the focus on continuous improvement. Production of minerals at Australian operations was also impacted by a scheduled five-day shutdown of the dry mill which occurs every three years. At Ticor SA, the 3 8 K U M B A A N N U A L R E P O RT 2 0 0 5 TOTAL SALES (Ticor SA) Ilmenite Rutile Chloride slag 17% 5% 34% Zircon Sulphate slag Low manganese pig iron 13% 11% 20% stockpile of crude ilmenite is expected to rapidly decrease as the furnaces reach full capacity. To maintain long-term supplies of ilmenite for the smelter, the Fairbreeze mine is planned to be commissioned during the second half of 2008, subject to board approval. the Tiwest operation In Australia, successfully completed the relocation of its North mine concentrator within budget and ahead of schedule. Pigment production was in line with the prior year’s record, despite to an unscheduled unplanned and extended maintenance at the contractor’s oxygen plant. This shutdown was to some extent offset by record pigment production in December. shutdown due Zircon and low manganese pig iron price escalation continued as a result of strong demand. Prices are expected to remain firm in 2006. Modest price increases were achieved for pigment in 2005. Sales of chloride slag and low manganese pig iron increased as a result of the ramp-up of the furnaces, while zircon sales were lower due to reduced ore grades. Operating results for the heavy minerals division were again impacted by the relative strength of the Australian dollar and rand against the US dollar, as well as raw material cost increases, particularly for energy-related consumables and labour. for Price synthetic rutile and chloride slag but, with a number of potential new projects coming on line in the near future, an over-supply position is anticipated in the medium term. increases were negotiated The business improvement programmes at Ticor SA and Tiwest are an integral part of becoming a global leader in the heavy minerals business. Tiwest’s business improvement programme continued to deliver results through improved operating performance, lower costs and increased efficiencies. The business improvement programme at Ticor SA delivered significant cost savings further benefits during 2005, with expected to be realised by the end of 2006. Following the implementation of a focused safety programme, Ticor SA has substantially safety improved performance and, by January 2006, had achieved one year without a disabling injury at the Hillendale mine. its P R O S P E C T S The business improvement programme at Ticor SA is generating the expected results, with the full benefits to be realised by the end of 2006. Tiwest is planning to further increase synthetic rutile and pigment production with minimal capital outlays and by using projects that are part of the firmly- entrenched improvement culture. After the successful completion of the pre- feasibility study on the Toliara Sands project in Madagascar during early 2005, a bankable feasibility study has started. Current estimates show that the reserve will be capable of feeding the Ticor SA smelter for more than 30 years, providing the long-term feedstock requirement for this business. Capital expenditure R million Sustaining Environmental Expansion Fairbreeze Total Actual 2005 Estimate 2006 123 1 – 66 190 166 – 86 58 310 1. Operations at the Ticor SA smelter. 2. Hydraulic mining techniques in use at Ticor SA’s Hillendale mine. 3. Ticor Limited’s North mine concentrator was successfully relocated within budget and ahead of schedule. 1 2 a n e w g e n e r a t i o n 3 M I N I N G C O M P A N Y As a leading diversified South African-based resources company, Kumba has taken its place at the forefront of innovation and technology To entrench this position, we will continue to develop solutions that generate shared rewards 3 9 K U M B A A N N U A L R E P O RT 2 0 0 5 B U S I N E S S O P E R A T I O N S R E V I E W B A S E M E T A L S Physical information Total production Zinc concentrate Zinc metal Lead concentrate Total sales Zinc metal Domestic Exports and other Lead concentrate sales * = metric tonnes Y-O-Y = year-on-year 2005 000t* 2004 000t* Y-O-Y % 126 117 25 119 92 27 35 124 116 27 119 91 28 12 2 1 (7) – 1 (4) 192 O V E R V I E W Kumba’s base metals division comprises the operations of Rosh Pinah (southern Namibia) and Zincor (Gauteng) and its interest in Chifeng (China). sales are to domestic Chinese markets. Demand was strong but favourable zinc prices were largely countered by the extreme shortage of zinc concentrate which had an adverse effect on profits. zinc prices have In line with the rest of the base metals suite, increased substantially and traded between an intra- year low of US$1 165 and a 15-year record of US$1 915 per tonne in December 2005. The global refined zinc market recorded a deficit for 2005, with the LME inventory decreasing steadily to 394kt, some 37% lower than in 2004. This is expected to continue in 2006. Rosh Pinah is an underground zinc/lead mine that produced 126kt of zinc- containing concentrates for the review period, accounting for 55% of Zincor’s annual requirements. Approximately 23kt of lead-containing concentrates were exported through Walvis Bay during the year. The Zincor refinery produced 102kt of zinc metal during the review period. Zincor is the only zinc supplier to the South African market and the leading supplier of zinc in east Africa, with well-established markets in Kenya and Tanzania. Zinc production remained under pressure due to the lower quality of concentrates from the refinery’s main suppliers. its built The Chifeng refinery in Inner Mongolia, China, successful on commissioning in the previous year with Kumba’s attributable production for the 12 months to December increasing to 15kt of zinc metal. As the division exercises joint control over the refinery, our interest is equity accounted. All metal South African demand was robust during the year and sales at Zincor were higher despite lower production levels. Zinc concentrate production at Rosh Pinah remained firm. Sales for lead concentrates were higher than 2004 and prices remained high. Zinc market fundamentals are sound and future growth looks healthy. The division has therefore revised its strategy from optimising current operations to a more focused growth strategy in zinc and possibly other base metals commodities. The biggest challenge for the base metals business, and where much attention will be in future, is to secure local zinc concentrates both for the Zincor and Chifeng smelters. A major objective in this regard is to progress the finalisation of the agreement on the Democratic Republic of the Congo (DRC). the Kipushi zinc mine in In the Inner Mongolia region of China, we are participating in the Chifeng Phase 3 expansion and are considering zinc- mining opportunities. The Chifeng smelter capacity will be increased from the current 50ktpa to 110ktpa. Kumba will participate in the expansion by swapping some of its shareholding in the Phase 2 Company into the new Phase 3 Company. The enlarged smelter will benefit from better economies of scale and by producing value-added products. 4 0 K U M B A A N N U A L R E P O RT 2 0 0 5 TOTAL SALES – ZINC METAL Domestic 77% Exports and other 23% Zincor will continue to focus on regaining its global low-cost producer status and on generating more revenue by increasing premiums and by-product recoveries, as well as ensuring that Zincor is the preferred supplier in our markets. Accordingly, various initiatives are under the high- further way performance culture at Zincor. improve to At Rosh Pinah, a major focus will be the intensive exploration and exploration development strategy to find additional resources to increase the current mine life of approximately six years to eight years and beyond. P R O S P E C T S The outlook for prices in 2006 remains good, although some corrective price action is expected from the high levels prevailing at the beginning of 2006, particularly with a view to the impact of investment funds on prices. The market actions of the funds remain a source of great uncertainty. The International Lead and Zinc Study Group, at its annual session in London, forecast that zinc consumption would increase by 5,7% in 2006, to 11,12Mt. It expects global zinc mine supply to increase by only 4,2% during the same period, with refined output expected to rise by an even smaller 3,5%. If this should happen, the outlook for treatment charges could start improving. Treatment charges for 2006, however, will probably be even lower than in 2005. Capital expenditure R million Sustaining Environmental Expansion Total Actual 2005 Estimate 2006 66 3 2 71 81 19 100 3 2 1 b a l a n c e C R E A T I N G I N O U R E N V I R O N M E N T As we extract value from our diverse operations, we replenish natural resources by rehabilitating our land We develop our communities today, so that together we can create a sustainable planet for tomorrow 1. Zinc-containing concentrate is loaded at Rosh Pinah, prior to being transported to the Zincor operation. 2. One of the new autostacker machines at Zincor’s electro-winning area. The machine provides enhanced safety and efficiency. 3. Underground ore loading at Rosh Pinah. 4 1 K U M B A A N N U A L R E P O RT 2 0 0 5 B U S I N E S S O P E R A T I O N S R E V I E W I N D U S T R I A L M I N E R A L S 2005 000t* 2004 000t* Y-O-Y % 1 381 172 6 065 1 381 172 6 110 1 431 180 5 653 1 441 180 5 408 (3) (4) 7 (4) (4) 13 included increased sales to the diamond and chrome markets. Bridgetown volume sales were down due to a decrease in hot metal production at Saldanha Steel. P R O S P E C T S The current low interest rate environment in South Africa and increased government spending on physical infrastructure should underpin strong growth in the civil and construction industry and thus support the aggregate industry. Kumba FerroAlloys’ ferrosilicon sales are expected to benefit from high iron-ore production activity and an expanding external market. Capital expenditure R million Sustaining Environmental Expansion Total Actual 2005 Estimate 2006 5 – 2 7 9 – 3 12 Physical information Production Glen Douglas Bridgetown Kumba FerroAlloys (t) Sales Glen Douglas – Domestic Bridgetown – Domestic Kumba FerroAlloys – Domestic (t) * = metric tonnes Y-O-Y = year-on-year O V E R V I E W Kumba’s industrial minerals interests comprise the Glen Douglas open-cast mine in Gauteng, (metallurgical dolomite, aggregate and small quantities of agricultural lime), the Kumba FerroAlloys plant in Gauteng (superior gas-atomised ferrosilicon powder), and 50% of the Bridgetown (Western Cape) dolomite mine joint venture. Lower sales volume from Glen Douglas reflect reduced demand from the civil and construction industry due to a decline in projects in southern Gauteng and a significant fall in lime sales to the agricultural sector. Mittal continued to underpin in metallurgical dolomite, an important raw material for the steel industry. The profitability of Glen Douglas benefited from the focus on product recoveries from the waste dump which reduced stripping and mining costs and improved product market prices. sales growth volume The ferrosilicon operations at Kumba FerroAlloys are strategically and profitably positioned to meet the beneficiation needs of iron ore mines, with some 70% of output sold to Kumba’s Sishen and Thabazimbi mines. Increased market penetration during the period reflects favourable unit production cost, higher production and strong demand due to growth in iron ore production. Additional benefits from an external sales strategy Dolomite loading operations at Glen Douglas. 4 2 K U M B A A N N U A L R E P O RT 2 0 0 5 1. Reclaimer operations at Glen Douglas. One of the mine’s products is metallurgical dolomite, an important raw material used in the steel industry. 2. Lancing the furnace at the Kumba FerroAlloys plant is George Pasha. Raw product is melted to atomise ferrosilicon to produce the final powdered product. 3. Learners at the Daleside School – the school was built by Glen Douglas on its property and donated to the community. The mine continues its involvement and support of school projects. 1 2 D E T E R M I N E D T O u p l i f t O U R P E O P L E 3 We will create a sustainable future by ensuring the development of our people and the communities around our operations 4 3 K U M B A A N N U A L R E P O RT 2 0 0 5 G R O W T H Several projects in Kumba’s pipeline of growth opportunities are now being developed, exciting opportunities are at various stages of investigation. while other I R O N O R E Sishen Expansion Project After completion of the detailed feasibility study for the 10Mtpa Sishen expansion project, an in investment decision was made February 2005. The project applies jig technology, new to Sishen but extensively used in the iron ore industry, to extract additional ore from existing run-of-mine and previously stockpiled material. The 16Mtpa feed to the new plant, incorporating jigging technology, will produce about 10Mtpa of saleable ore with an average iron content of 64%. The project is currently in early implementation phase and construction has commenced. Production will begin by mid-2007, ramping up to full capacity by the beginning of 2009. Improvements identified during the detailed design phase of the project together with higher commodity and labour costs in the construction industry led to a revision in the capital estimate of the project from R3,0 billion to R3,6 billion. A study is also under way for the expansion of the project to deliver an additional 3Mtpa of output. Export Logistics Expansion Project Kumba and Transnet concluded an agreement to expand the Sishen-Saldanha export channel in February 2005. The agreement allows for an additional 11,5Mtpa of iron ore to be exported from Saldanha Bay. This will bring Kumba’s iron ore rail allocation to Saldanha Bay to 35,0Mtpa by 2009. Of this, 33,2Mtpa will be exported. Sishen South Project This project involves the development of a greenfields open- cast operation on a group of iron ore bodies some 90km south of Sishen mine, and immediately to the west of the current mining operations of Assmang’s Beeshoek mine. export Due to export logistics constraints, a phased approach for developing the mine is currently being studied. The first phase of 3Mtpa will form part of the current 35Mtpa Sishen-Saldanha agreement concluded with Transnet. The project will produce a range of products similar to the Sishen expansion project. Kumba is expected to make a final investment decision on the estimated R1 billion first phase in the current year following approval of the mining right application. Expansion of the mine to some 9Mtpa during a second development phase will be synchronised with further expansion of export logistics capacity. Discussions with Transnet are advanced and are expected to be concluded during 2006. Although the 420Mt Sishen South resource allows for the 9Mtpa phase 1 and 2 developments to deliver non- beneficiated ore, a study is also under way on further expansion of the mine – involving to 12-15Mtpa. ore beneficiation – Phoenix Project The objective of the Phoenix project is to extend by some 20 years the life of mine at Thabazimbi, which is in Limpopo province and provides Mittal with lumpy and fine ore. This will be achieved by exploiting the in situ low-grade banded ironstone formation, which, when combined with high-grade hematite, provides an economically viable ore feed. Based on test work and similar technology for the Sishen expansion project, a flow sheet has been developed with sufficient flexibility to produce the required tonnages and quality of lumpy and fine product. The project is currently in the bankable feasibility phase. An investment decision on the project could be made during 2,5-3,0Mtpa production 2006 with beginning in 2009. Falémé Project The Falémé deposit, located in the south-eastern corner of Senegal, is owned by the Senegalese government company, Miferso. Kumba and Miferso concluded a development 4 4 K U M B A A N N U A L R E P O RT 2 0 0 5 preliminary agreement in 2004 for the two parties to explore the potential to create an export-oriented iron ore mine at Falémé. It is envisaged that up to 12Mtpa of high-grade ore will be mined over a 20-year period and transported to a new terminal to be built on the Atlantic coast south of the capital, Dakar, for sale mainly into the European market. Kumba exercised its option to acquire an 80% interest in the project during November 2005 and has approved the commencement of a bankable feasibility study for the integrated development of the mine and infrastructure. This is envisaged to be completed in 2007. If viable, construction is planned to begin in the second quarter of 2007 and first production towards the end of 2008. Miferso has recently put Kumba’s rights to the project in dispute. Kumba will pursue the legal actions available to it to preserve its contractual rights. a by the potential Sishen Expansion Project II A study confirmed value of further expanding Sishen 10-20Mtpa. This expansion will further exploit the lower-grade material used by the Sishen expansion project. The current focus of the project is to determine potential products and to analyse alternatives for capacities, mine plans and mining technology. A final feasibility study for this project will be completed in 2007 and production could start by 2011. Zandrivierspoort Project Kumba acquired a 50% interest in the Pietersburg Iron Ore Company (PIC) in the 1980s. This company owns the Zandrivierspoort iron ore mineral and surface rights, 30km north of Polokwane, and has conducted extensive exploration and technical studies to develop the project. Phelps Dodge sold its 50% interest in PIC to Mittal in December 2004. Since then, the parties have developed a framework to conduct a pre-feasibility started exploration activities in 2005. During 2006 and 2007, alternative processing study which and final product options will be evaluated and the parties intend to commit to a detailed bankable feasibility study in 2008, if interim studies prove a viable business case. Kumba submitted an application for the conversion of the old- order prospecting permit to a new-order prospecting right in December 2005. Hope Downs Project Following an unfavourable outcome of arbitration proceedings stemming from a dispute (relating to Anglo American acquiring control of Kumba in December 2003) between Kumba and its partner, Hancock Prospecting, in the Hope Downs iron ore project in Western Australia, the latter was granted an option to acquire Kumba’s interest in the project. Hancock exercised this option and purchased Kumba’s interest on 1 July 2005, resulting in A$231,4 million being paid to Kumba in full settlement. C O A L Leeuwpan Jig The Leeuwpan jig plant, at a capital cost of R97 million, was commissioned during the third quarter of 2005, with full ramp up scheduled for the first quarter of 2006. It will increase the annual supply to Eskom by approximately 1Mt of power station coal. Potential also exists to further increase supply to Eskom by 0,4Mtpa. Grootegeluk 6 (GG6) Construction of the board-approved GG6 plant started in 2005 and is due for commissioning in the second half of 2006. This plant is an extension of the washing circuit of the existing GG2 plant and will treat and beneficiate coal previously sent untreated to the adjacent Matimba power station. The GG6 plant will extract a semi-soft coking coal fraction from the run-of-mine material and will supply 530ktpa to the coking plants being refurbished by Mittal at its Newcastle facility. The capital cost of this project is R323 million. Inyanda Coal Mine An important milestone was achieved during the year with the the long-awaited announcement of expansion of the Richards Bay Coal Terminal (RBCT) coal export terminal. This now paves the way for joint venture partners Kumba and Eyesizwe Coal to begin developing the Inyanda Coal project. Inyanda will be a new 1Mtpa export thermal coal mine near Witbank (Mpumalanga) at a capital cost of some R184 million. Construction is expected to start in the last quarter of 2006, with for July 2008. commissioning set However, the project plan will be adjusted and phased according to the construction schedule of RBCT Phase V. Richards Bay Coal Terminal Kumba Coal is a 12,5% shareholder in the Phase V expansion of RBCT. The RBCT board announced the approval of the Phase V expansion in November 2005. Construction of the facility is expected to start in March 2006 and will span 27 months. This expansion will give Kumba Coal a 2,5Mtpa export allocation, which will be filled by production from the new Inyanda coal mine, as well as from expanded output at Kumba’s Leeuwpan and Grootegeluk mines. Sintel Char A feasibility study on the viability of producing char for the ferroalloy industry from benches 11 and 13 in the Grootegeluk pit was completed during the year. It received conditional board approval in August 2005 and start of construction is planned for April 2006. It is envisaged that production from the char plant will begin at 80ktpa and ramp up to 160ktpa by 2008. The capital estimate for the project is R210 million. The project team is currently finalising offtake agreements and awaiting the environmental impact assessment record- of-decision from the relevant authorities. Coal supply for Matimba power station expansion A number of projects and studies are under way that would increase utilisation of Kumba’s Waterberg coal reserves. Among these is the possible expansion of Grootegeluk mine to supply power station coal to an expanded Matimba power station. A pre-feasibility study was completed in 2005 and the project has 4 5 K U M B A A N N U A L R E P O RT 2 0 0 5 moved into the feasibility phase, which should be completed by mid-2006. Construction is planned to commence in 2008 and production from the expanded facility could begin by early 2010. Moranbah South In December 2004, Kumba concluded an agreement with Anglo Coal Australia to jointly explore the potential to develop a greenfields hard coking coal mine on the adjacent properties of Moranbah South and Grosvenor South, near the town of Moranbah in the central Bowen Basin coalfield of Queensland, Australia. The deposit contains substantial resources of high-grade coking coal. During 2005, good progress was made in exploring the shallow potential resources and the parties envisage completing exploration and beginning the feasibility study for this during 2006. Exploration on the deeper potential resources will continue during 2006. Energy opportunities South Africa and its Southern African Development Community neighbours are expected to face an energy shortage in the near future as demand outpaces the ability to supply. The bulk of the region’s energy supply will remain coal- based, but the need for more environ- mentally-friendly sources of energy places emphasis on clean-coal technologies, with the challenge of retaining the regional advantage of low-cost energy. Kumba is investigating a number of energy-related projects and technologies that could contribute to the region’s energy supply in a sustainable, economical and environ- mentally-friendly manner. Following the year end, Kumba agreed with Magaleng, a Botswana company, to investigate the development of a coal deposit with scope for some 2,5Mtpa of thermal coal. The deposit is in the Botswana Mmamabula Central Coal Resource. H E A V Y M I N E R A L S Fairbreeze Project The Fairbreeze deposit is south of Ticor SA’s existing Hillendale mine near Mtunzini in KwaZulu-Natal. The project, at a capital expenditure estimate of R645 million, is designed to supplement mining output with that from Fairbreeze as Hillendale’s grades decline Robust pipeline of growth opportunities throughout the group in future and the crude ilmenite stockpile draws closer to its minimum level. Detailed engineering is almost complete and the pre-construction phase has started to prepare for construction in mid- 2006. Start of construction will be subject to board approval, planned for the first half of 2006. The mining plant is envisaged to be in operation in July 2008 with an approximate life of mine of ten years. This project Toliara Sands Project comprises two exploration areas in south- western Madagascar, known as Ranobé and Monombo-Marombe respectively. These are held under an option agreement with Madagascar Resources NL (MRNL), a junior Australian exploration company, which gives Kumba the option to purchase MRNL’s interest in the project after completion of an exploration programme and bankable feasibility study. Should the final option with MRNL be exercised, the Toliara project offers Kumba’s heavy minerals division access to a long- term ilmenite feedstock supply source for its Empangeni smelter. In addition to smelter- grade ilmenite, the deposit contains significant by-products, namely high-TiO2 ilmenite, for synthetic rutile production, rutile, zircon and leucoxene. The Ranobé pre-feasibility study was completed in June 2005 after exemption had been obtained from the 2004 Protected Areas Decree. Kumba has taken over full management control from Ticor Limited for the project feasibility study, which began in July 2005. It is envisaged that this study will be completed early in 2007 after which a development decision will be made. As part of the study, different options for electricity supply to the project are also being investigated. Further delineation drilling, as well as exploration on the northern tenements, was undertaken towards the end of 2005. This should confirm an indicated resource of 553Mt, enable the conversion of a significant part of this into the measured resources category and further quantify the potential of the Monombo- Marombe area. Dongara Project Ticor Limited acquired the Dongara Project in March 2003 as part of its takeover of Magnetic Minerals. Located 90km south of Geraldton in Western Australia, the 20Mt reserve containing 10% heavy minerals will provide supplementary feedstock for Tiwest’s mineral separation plant and synthetic rutile facility. The first stage of development started this year with the conversion of the exploration tenements to mining licences. As part of feasibility study, an the bankable extensive botanical survey has also begun in preparation for infill resource and metallurgical drilling. Production is planned to start at the end of 2009. B A S E M E T A L S Chifeng Kumba Hongye Zinc Refinery Kumba has a 60% interest in the 25ktpa Phase 2 module at the Chifeng refinery in Inner Mongolia, China, which was successfully commissioned in 2004. A decision has been made to also participate in the Chifeng Phase 3 expansion, in which smelter capacity will be increased further to 110ktpa. Kumba will participate in the expansion by swapping some of its shareholding in the Phase 2 company into the new Phase 3 company. The enlarged smelter will benefit from better economies of scale and by producing value-added include products. Further activities investigations of possible zinc mining opportunities in the region. recent increase Rosh Pinah Exploration Following the in zinc significant concentrate production at the Rosh Pinah mine in southern Namibia, an accelerated exploration programme was instituted to define new resources. projects in the Democratic Republic of Congo (DRC): the Kamoto copper/cobalt mine and the Kipushi zinc/silver/lead mine, both located in south-eastern Katanga province and previously mined by the state mining company, Gécamines. The Kamoto project has recently been allocated to a third party on commercial terms similar to that proposed by Kumba. Kumba is assessing its contractual position with the aim of preserving its rights. A scoping study for the Kipushi project was completed in November 2005 in conjunction with Kumba’s partner in the project, Adastra Minerals. It will be used as a basis for concluding a new heads of agreement with Gécamines and the DRC government, which will be aligned to the new mining code and ensure security of tenure. A L L O Y S T R E A M ™ AlloyStream™ is a process technology developed and patented by Kumba in terms of which fine metalliferous ore is converted directly to the metal or ferroalloy, using cheaper reductants and less electric power than conventional technology, and with lower environmental impact. During the year, the process has been tested specifically in the production of ferromanganese, using a purpose-built, sub-commercial scale furnace at Kumba’s pilot plant facility in Pretoria. An extensive campaign in the latter part of the year demonstrated technical and commercial viability and provided the project team with valuable inputs for the design of the first industrial furnace. The demonstration campaign used a blend of South African manganese ores as intended for use in the first commercial facility. Negotiations with a strategic partner for use of the technology with manganese are well advanced. This agreement will form the basis of a feasibility study for the first smelting complex using the technology. Democratic Republic of Congo projects Kumba has long been associated with two Growth opportunities are pictorially presented on p52. 4 6 K U M B A A N N U A L R E P O RT 2 0 0 5 R E V I E W O F M I N E R A L R E S O U R C E S A N D R E S E R V E S The mineral resources and ore reserves attributed to Kumba’s current operations and growth projects are summarised in the tables on p48 to p51. Note that mineral resources are reported inclusive of ore reserves and at 100% irrespective of the percentage attributable to Kumba. Mineral resources and ore reserves were estimated by competent persons on an operational basis and in accordance with the SAMREC Code (2000) for South African properties and the JORC Code (2004) for Australian properties. All competent persons have sufficient relevant experience in the style of mineralisation, the type of deposit, mining method and in the activity for which they have taken responsibility to qualify as a “competent person” as defined in these codes. They have signed off their respective estimates in the original mineral resource and ore reserve statements for the various operations and consent to the inclusion of the information in this report in the form and context in which it appears. A list of Kumba’s competent persons is available from the company secretary on written request. The processes and calculations associated with the estimates have been audited by internal independent competent persons and, on a three- to four-year cycle basis, by external consultants. In addition, note that all operations and projects were externally audited as part of the Kumba/Newco due diligence process. The person within Kumba designated to take for mineral corporate resources and ore reserves, HJ van der Berg, the undersigned, has reviewed and endorsed the estimates reported. responsibility C O M M E N T Kumba’s tenure over its mineral assets as listed in the tables was audited and is confirmed, with the following modifications and considerations. As of 15 November 2005, Kumba owns 100% of Ticor Australia and Ticor SA and therefore all the mineral resources and ore reserves in these companies. As cautioned in the previous annual report, Kumba no longer owns a 50% share in the Australian Hope Downs project and these iron ore resources are not reported. New-order prospecting rights applications based on mineral rights ownership on several farms included in the Leeuwpan and Strehla mineral resource figures have been the Department of Minerals and Energy (DME). An appeal has been lodged and senior legal counsel is of the opinion that the decision will be reversed; therefore the affected mineral resources and ore reserves are still reported. refused by consultants Kumba fully supports the objectives of the Minerals Act and has submitted applications to convert its old-order mining licences to new-order mining rights for all its mines except Leeuwpan, which will be submitted during 2006. The applications were audited by independent external and declared compliant with the requirements of the act and other regulations. All applications have been accepted by the DME and the administrative process will now follow its course. Three new mining rights applications were submitted during the year: Sishen South (iron ore); Inyanda (coal) and Fairbreeze C Extension (heavy minerals). The granting of these mining rights will allow notable production growth or extension of the productive mine life in these commodities. relevant HJ van der Berg MSc (Geology), BSc (Hons) Pr Sci Nat (400099/01) Manager, Mineral Assets The objective to optimise the use of mineral resources is being driven by the application of good mineral resource 4 7 K U M B A A N N U A L R E P O RT 2 0 0 5 management principles and innovative approaches. Upgrading medium-grade iron ore through technology has proved viable and will be incrementally implemented at Sishen mine. This breakthrough has a significant impact on ore definition and therefore on both mineral reserve resource and ore estimation at Sishen (see DMS and jig plant material in tables). An extensive programme is under way to re-interpret the geology according to the changed ore definition and revise the modelling at Sishen South and Thabazimbi to evaluate the potential of medium-grade iron ore At excluded. deposits Grootegeluk, extensive drilling programme is in progress on five farms adjacent to the present mining licence area. Eskom’s reported expansion in electricity generation and the buoyant market for char and coke necessitate upgrading Kumba’s coal resources to reserves in the Waterberg coalfield. previously an An effective exploration programme at Rosh Pinah has extended the mine’s life to eight years compared to the five to six years reported in 2004. The better zinc price has also created the opportunity to that was lower-grade ore consider previously excluded reserves. from Through innovative exploitation, these ores can make a significant difference to the mine’s future. These options are being pursued as a priority. Although security of tenure has not yet been satisfactorily resolved, the second season of exploration has commenced in Senegal, with drilling on a number of ore bodies in the north of the Falémé iron ore area. Kumba has also started heavy minerals exploration on the Port Durnford prospecting right in KwaZulu-Natal and a drilling programme on the Ranobé heavy minerals project in Madagascar. is under way Table 1: Kumba’s mineral resource estimates for 2004 and 2005 (Mineral resource estimates reported here are inclusive of ore reserve estimates reported in table 2. They have been estimated in accordance with the SAMREC and JORC codes for South African and Australian operations/projects respectively) 2005 2004 % attributable to Kumba Resource category Tonnes (million) Commodity Operation Iron ore Sishen Iron Ore Mine (1) – DMS + jig plant Sishen Iron Ore Mine (1) – additional resources Thabazimbi Iron Ore Mine (2) – within current pit layouts Thabazimbi Iron Ore Mine (2) – additional resources Sishen South (3) – advanced project Zandrivierspoort – project 78,6 78,6 100,0 100,0 100,0 50,0 Coal Grootegeluk Coal Mine 100,0 Leeuwpan Coal Mine (4) 100,0 Tshikondeni Coal Mine (5) 100,0 Moranbah South, Australia 100,0 Inyanda Coal Strehla (6) 50,0 100,0 Heavy minerals Hillendale Mine + Braeburn (7) 100,0 Fairbreeze A+B+C+C Ext (8) 100,0 Gravelotte sand KwaZulu-Natal – Block P (9) – Fairbreeze D (9) 100,0 100,0 100,0 Measured Indicated Inferred Total Measured Indicated Inferred Total Measured Indicated Inferred Total Measured Indicated Inferred Total Measured Indicated Inferred Total Measured Indicated Inferred Total Measured Indicated Inferred Total Measured Indicated Inferred Total Measured Indicated Inferred Total Measured Indicated Inferred Total Measured Indicated Inferred Total Measured Indicated Inferred Total Measured Indicated Inferred Total Measured Indicated Inferred Total Measured Indicated Inferred Total Measured Indicated Inferred Total Measured Indicated Inferred Total 1 477 480 29 1 986 94 223 153 469 10,9 3,9 3,0 17,9 12,4 14,3 16,8 43,4 140,4 107,5 42,3 290,2 – 447 – 447 1 428 2 075 2 513 6 016 169,1 9,8 – 178,9 25,7 10,1 – 35,8 – 586 124 710 15,3 – – 15,3 – 22,5 – 22,5 48,7 – – 48,7 202 27 – 229 75,1 – – 75,1 – 40,6 – 40,6 – 9,2 – 9,2 Grade %Fe 57,4 56,5 55,9 57,2 Tonnes (million) 754 636 249 1 639 Grade %Fe 65,2 64,8 64,2 64,9 were reported inclusive of Sishen resources in 2004 64,9 Additional underground resources 64,7 64,5 64,7 62,1 61,6 61,7 61,9 63,1 62,4 62,1 62,7 51,0 20,6 24,0 95,6 62,1 61,3 60,0 61,0 65,4 64,4 62,0 64,6 – 34,9 – 34,9 Raw coal Raw coal Raw coal Raw coal Raw coal Raw coal Raw coal – Raw coal Raw coal Raw coal – Raw coal – Raw coal Raw coal Raw coal Raw coal – – Raw coal – Raw coal – Raw coal % Ilmenite 3,8 – – 3,8 3,7 2,5 – 3,6 9,1 – – 9,1 – 3,1 – 3,1 – 2,5 – 2,5 Additional resources were reported inclusive of Thabazimbi resources in 2004 145,6 146,9 118,5 411,0 – 447 – 447 1 463 2 075 2 513 6 052 186,9 9,8 – 196,7 27,2 10,1 – 37,3 – 586 124 710 15,3 – – 15,3 – 22,5 – 22,5 56,0 – – 56,0 196 27 – 223 75,1 – – 75,1 – 40,6 – 40,6 – 9,2 – 9,2 65,4 64,6 63,5 64,5 – 34,9 – 34,9 Raw coal Raw coal Raw coal Raw coal Raw coal Raw coal Raw coal – Raw coal Raw coal Raw coal – Raw coal – Raw coal Raw coal Raw coal Raw coal – – Raw coal – Raw coal – Raw coal % Ilmenite 3,7 – – 3,7 3,7 2,5 – 3,5 9,1 – – 9,1 – 3,1 – 3,1 – 2,5 – 2,5 % change 21,17 49,81 (35,91) (29,38) – (0,59) (9,05) (3,97) – – – (13,06) (2,69) – – – 4 8 K U M B A A N N U A L R E P O RT 2 0 0 5 Commodity Operation % attributable to Kumba Resource category Tonnes (million) Heavy minerals (continued) Eastern Cape – Nombanjana, Ngcizele, Sandy Point old and recent Limpopo sand – Gravelotte pebbles and Letsitele sand Limpopo rock – Gravelotte rock and Letsitele rock Ranobé, Madagascar (10) – Upper Sand Unit Tiwest, Australia – Cooljarloo Tiwest, Australia (11) – Jurien Ticor, Australia (12) – Dongara* Base metals Rosh Pinah (13) (zinc and lead) Industrial minerals Glen Douglas Dolomite Mine (14) 100,0 100,0 100,0 100,0 50,0 50,0 100,0 89,5 100,0 Measured Indicated Inferred Total Measured Indicated Inferred Total Measured Indicated Inferred Total Measured Indicated Inferred Total Measured Indicated Inferred Total Measured Indicated Inferred Total Measured Indicated Inferred Total Measured Indicated Inferred Total Measured Indicated Inferred Total Measured Indicated Inferred 2005 2004 Grade % Ilmenite 4,5 – – 4,5 10,5 – 4,0 5,9 – 25,9 20,7 22,4 – 4,6 – 4,6 % THM 2,7 2,4 1,8 2,5 – 6,0 – 6,0 6,9 6,6 – 6,6 % Zn % Pb 10,1 2,3 8,1 2,6 8,8 2,4 9,2 2,4 Tonnes (million) 232,9 – – 232,9 12,5 – 31,3 43,8 – 53,6 112,3 165,9 Grade % Ilmenite 4,5 – – 4,5 10,5 – 4,0 5,9 – 25,9 20,7 22,4 The Ranobé heavy minerals project was not reported in 2004 137 322 28 487 44,0 9,1 – 53,1 1,3 75,4 – 76,7 2,3 3,5 0,6 6,5 % THM 3,2 2,4 1,9 2,6 4,6 5,5 – 4,8 6,9 6,6 – 6,6 % Zn % Pb 8,2 2,2 11,0 3,0 9,0 3,8 9,8 2,8 232,9 – – 232,9 12,5 – 31,3 43,8 – 53,6 112,3 165,9 – 553 – 553 157 302 25 484 – 25,6 – 25,6 1,3 75,4 – 76,7 3,5 2,3 1,1 6,9 Metallurgical dolomite Metallurgical dolomite 142,3 – 163,9 306,2 % SiO2 <2,5 – <2,5 <2,5 Aggregate Raw material 40,1 Raw material – 145,1 Raw material – 185,6 – 117,3 302,9 % SiO2 <2,5 – <2,5 <2,5 Aggregate Raw material – – 145,0 Raw material 12,2 – % change – – – (0,55) (51,79) – 6,32 1,07 Bridgetown Dolomite Mine (15) 50,0 Total 185,2 Raw material 157,2 Raw material 17,79 Metallurgical dolomite Metallurgical dolomite Measured Indicated Inferred Total 7,3 – 3,8 11,1 <2,5 <2,5 <2,5 <2,5 8,0 – 3,8 11,8 <2,5 – <2,5 <2,5 (6,42) The tonnages are quotes in metric tonnes and million tonnes is abbreviated as Mt. Rounding of figures may cause computational discrepancies. Figures reported at 100% irrespective of percentage attributable to Kumba. Note that ALL operations and projects were externally audited in 2005 as part of the Kumba/Newco due diligence process. 1 The significant increase is due to the inclusion of jig plant ore (Sishen expansion project); lower Fe-grade rocks that can be beneficiated to a saleable product using jig technology. Additional resources with a grade >60% Fe that have underground mining potential outside of the optimised Sishen expansion project pit are reported separately in 2005. 2 Reclassification of 37,6Mt from 2004 mineral resources to mineral inventory partly explains the decrease in 2005. Note, the estimate reported in the 2004 report excluded 8,2Mt 55 to 60% Fe low-grade ore for the whole operation and 3,2Mt high-grade ore from one of the pits. 133Mt of inferred mineral resources were reclassified to mineral inventory. 3 4 Additional drilling led to an updated geological model and resulted in a decrease of coal resources (18Mt). See note 20 under ore reserves for comment on prospecting right. 5 6 7 Mineral resources decreased by 6,3Mt as a result of additional drilling and subsequent deposit boundary revision. 8 The coal resources formerly reported for a portion not included in mine lease area have been excluded in the 2005 estimate (0,3Mt). The mineral resources occur in an area for which the prospecting rights are under appeal; they are quoted pending the outcome of the appeal (SAMREC 5.5.1). Fairbreeze C and C Ext were updated with new data (0,2Mt, Fairbreeze C). The 2005 Fairbreeze C Ext mineral resource includes a 100m boundary zone, which was excluded in 2004 (5,8Mt). See note 23 under ore reserves for comment on mining licence. 9 Block P and Fairbreeze D were reported as a combined figure in 2004. 10 Mineral resources were not reported for Ranobé in 2004. 11 Resources are based on a pit boundary where revenues are 150% of current values. Deep deposits (27,5Mt) have been reclassified as mineral inventory. Certain resources were downgraded to ‘indicated’ because drilling is too widely spaced in places. 12 Reported as Magnetic Minerals in 2004. The Dongara geological models were updated with new mineralogical information. 13 The net increase in mineral resources at Rosh Pinah is the result of intensive exploration, which added 0,4Mt over and above losses to mineral inventory (0,6Mt) and mining depletion (0,6Mt). 14 Part of the measured metallurgical dolomite resource was reclassified as inferred. Updates and pit redesign resulted in increases in metallurgical and aggregate dolomite resources in 2005. 15 Bridgetown’s mineral resources have been decreased because of exploration and subsequent geology and model updates (0,4Mt) and mining depletion (0,3Mt). 4 9 K U M B A A N N U A L R E P O RT 2 0 0 5 Table 2: Kumba’s ore reserve estimates for 2004 and 2005 (Ore reserve estimates reported here are included in the mineral resource estimates reported in table 1. They have been estimated in accordance with the SAMREC and JORC codes for South African and Australian operations/projects respectively) 2005 2004 Commodity Operation Iron ore Sishen Iron Ore Mine (16) – DMS + jig plant Thabazimbi Iron Ore Mine (17) % attributable to Kumba 78,6 100,0 Sishen South (18) 100,0 Coal Grootegeluk Coal Mine (19) 100,0 Leeuwpan Coal Mine (20) 100,0 Reserve category Proved Probable Total Proved Probable Total Proved Probable Total Proved Probable Total Proved Probable Total Tshikondeni Coal Mine (21) 100,0 Proved Inyanda Coal 50,0 Probable Total Proved Probable Total ROM tonnes (million) 727 294 1 021 10,3 3,8 14,1 100,5 66,4 166,9 673 67 740 95,1 47,6 142,7 6,9 – 6,9 14,6 – 14,6 % attributable to Kumba Reserve category ROM tonnes (million) Commodity Operation Heavy minerals Hillendale Mine (22) (excluding Braeburn) Fairbreeze A+B+C+C Ext (23) 100,0 100,0 Proved Probable Total Proved Probable Total Proved Probable Total Proved Probable Total Proved Probable Total Proved Probable Total 30,0 – 30,0 137,4 44,1 181,5 52,4 – 52,4 25,0 149,0 174,0 – 15,7 15,7 – 20,2 20,2 Gravelotte sand 100,0 Tiwest, Australia – Cooljarloo Tiwest, Australia – Jurien (24) Ticor, Australia – Dongara (25) 50,0 50,0 100,0 Saleable product Iron ore (Mt) 843 @ 65,2% Fe 9 @ 64,1% Fe 3 @ 63,6% Fe 13 @ 63,9% Fe N/A N/A N/A Coking coal 41,9 6,3 Thermal coal 245 25 48,2 270 Metall coal 38,4 0,7 39,2 N/A N/A N/A 3,6 – 3,6 45,8 27,1 72,9 N/A N/A N/A A-grade export steam coal 10,1 – 10,1 2005 Total heavy mineral (THM) composition THM composition % Ilm % Rut % Zir % Leu 1,6 – 3,6 – 60 – 8 – 60 60 61 60 85 – 85 60 61 61 – 54 54 – 50 50 3,5 3,1 3,4 3,3 N/A – N/A 4,8 4,5 4,6 – 6,8 6,8 – 6,7 6,7 8 8 8 8 N/A – N/A 10 10 10 – 10 10 – 9 9 1,6 1,4 1,8 1,7 N/A – N/A 2,7 3,1 3,0 – 2,3 2,3 – 1,3 1,3 ROM tonnes (million) 510 208 717 15,2 1,2 16,3 Grade %Fe 63,6 63,7 63,6 60,9 61,5 60,9 706 67 773 111,2 47,6 158,8 7,1 – 7,1 14,6 – 14,6 ROM tonnes (million) 41,4 – 41,4 137,9 20,4 158,3 52,4 – 52,4 43 131 174,0 13,9 1,9 15,8 – 22,1 22,1 – – – – – – – – – – – – Grade % THM 6,6 – 6,6 6,1 4,2 5,9 13,0 – 13,0 2,9 2,5 2,6 6,3 6,6 6,3 – 10,0 10,0 Grade %Fe 59,3 58,1 59,0 61,2 60,2 60,9 64,8 63,3 64,2 – – – – – – – – – – – – Grade % THM 6,9 – 6,9 6,1 7,2 6,4 13,0 – 13,0 3,7 2,7 2,8 – 7,9 7,9 – 10,2 10,2 Saleable product % change Iron ore (Mt) 436 @ 66,3% Fe 178 @ 66,1% Fe 614 @ 66,3% Fe 42,33 13 @ 63,5% Fe 1 @ 64,1% Fe 14 @ 63,5% Fe (13,44) Not reported in 2004 Coking coal 35,1 5,0 Thermal coal 264 26 Metall coal 40,0 0,7 40,1 290 40,7 (4,32) N/A N/A N/A 4,1 – 4,1 56,9 23,2 80,1 N/A N/A N/A A-grade export steam coal 10,1 – 10,1 2004 (10,12) (3,00) – Total heavy mineral (THM) composition % change THM composition % Ilm % Rut % Zir % Leu – 0,9 – 3,2 58 – – 7 58 60 49 59 85 – 85 60 61 61 55 54 55 – 48 48 3,2 – 3,3 3,3 N/A – N/A 4,5 4,1 4,2 8,4 6,1 8,1 – 7,0 7,0 7 – 8 8 N/A – N/A 10 10 10 11 7 11 – 10 10 0,9 – 1,6 1,6 N/A – N/A 3,0 3,4 3,3 2,1 1,6 2,1 – 2,0 2,0 (27,53) 14,67 – – (0,63) (8,60) 5 0 K U M B A A N N U A L R E P O RT 2 0 0 5 Commodity Operation % attributable to Kumba Reserve category ROM tonnes (million) Grade Saleable product ROM tonnes (million) Grade Saleable product % change 2005 2004 Base metals Rosh Pinah Mine (26) (zinc and lead) Industrial minerals Glen Douglas Dolomite Mine (27) Bridgetown Dolomite Mine (28) Glen Douglas Dolomite Mine (27) Bridgetown Dolomite Mine (28) 89,5 100,0 50,0 100,0 50,0 Proved Probable Total Proved Probable Total Proved Probable Total Proved Probable Total Proved Probable Total % Zn % Pb 2,4 11,1 2,3 7,7 9,7 2,4 2,7 1,9 4,6 40,3 – 40,3 7,3 – 7,3 % SiO2 <2,5 – <2,5 ~1,0 – ~1,0 13,0 Raw dolomite – – 13,0 Raw dolomite – – Plant fines – Plant fines Zn metal (kt) 300 148 448 Pb metal (kt) 65 44 110 Metallurgical dolomite (Mt) 38,3 – 38,3 4,0 – 4,0 Aggregate (Mt) 12,3 – 12,3 3,3 – 3,3 % Zn % Pb 2,7 2,6 9,5 10,9 10,6 2,7 1,0 2,7 3,7 33,8 – 33,8 7,7 – 7,7 % SiO2 <2,5 – <2,5 ~1,0 – ~1,0 12,2 Raw dolomite – – 12,2 Raw dolomite – – Plant fines – Plant fines Zn metal (kt) 91 299 390 Pb metal (kt) 26 72 98 Metallurgical dolomite (Mt) N/A – N/A 4,6 – 4,6 Aggregate (Mt) N/A – N/A 3,1 – 3,1 24,81 19,28 (5,85) – 5,93 The tonnages are quoted in metric tonnes and million tonnes is abbreviated as Mt. Rounding of figures may cause computational discrepancies. Figures reported at 100% irrespective of percentage attributable to Kumba. Note that ALL operations and projects were externally audited in 2005 as part of the Kumba/Newco due diligence process. 16 Ore reserves have increased significantly (42%) by the inclusion of jig plant ore (only DMS plant ore was reported in 2004). Note that 492Mt of the total mineral resource is banded iron formation (BIF) material of which about 55% can be blended for the jig plant; the remainder will be stockpiled. All stockpiled BIF at the end of the mine’s life is excluded from the reported ore reserves. The 2005 total saleable product comprises the following: 600Mt @ 65,7% Fe from the DMS plant and 243Mt @ 64,0% Fe from the jig plant. 17 Mining depletion of 3Mt accounts for most of the decrease in ore reserves. 2,95Mt inferred mineral resources are included in the pit shells – these are not included in the ore reserve figures reported. 18 Not reported in 2004. Estimates are for a 9Mt per annum open-pit operation. 19 There is a 7,8Mt increase in the saleable coking coal and 20,2Mt decrease in the saleable thermal coal tonnages due to a re-configuration of the beneficiation capabilities of Grootegeluk mine to create a higher-value product. 20 The reserve estimate includes 53,4Mt proved and 16,2Mt probable coal reserves that occur in an area where prospecting rights are under appeal. These reserves are quoted pending the outcome of the appeal (SAMREC 5.5.1). The decrease in coal resources resulted in a concomitant decrease in coal reserves. 21 Coal reserves formerly reported for a portion not included in the mine lease area have been excluded (0,2Mt) from the 2005 estimate. 22 Mining depletion (8,2Mt) and modification of the mining boundary in relation to the mining fence (2,2Mt) explain the decrease in ore reserves from 2004 to 2005. Leucoxene was not reported in 2004. 23 Fairbreeze C Ext is included pending the approval of the mining right application. As the mining right has not yet been granted, the measured mineral resources have been converted to probable ore reserves (SAMREC 5.1.1). Note that Fairbreeze C Ext ore reserves were estimated using a cut-off of 3% ilmenite not the 1,5% ilmenite used for Fairbreeze C. All valuable heavy minerals for Fairbreeze C and C Ext. and ilmenite for Fairbreeze A and B can be estimated with the highest confidence (proved). Fairbreeze A and B zircon, rutile and leucoxene are estimated with lower confidence (probable). Therefore, the 2005 proved and probable grades for zircon, rutile and leucoxene relate to 17Mt and 164Mt respectively. Leucoxene was not reported in 2004. 24 Proved ore reserves have been downgraded to probable ore reserves with the updating of the geological models and new mineral resource estimates. 25 Reported as Magnetic Minerals in 2004. 26 Mining depletion (0,6Mt) and the addition of ore reserves from the conversion of mineral resources delineated during the intensive exploration programme in 2005 explain the increase in ore reserves at Rosh Pinah in 2005. 27 The deepening and subsequent redesign of the pit resulted in increases of 7,7Mt (metallurgical) and 1,2Mt (aggregate) dolomite reserves. 28 The ore reserve was depleted by mining activities (0,3Mt), however, changes in saleable tonnes are due to an increase in fines production at the plant. Note the 2004 saleable aggregate tonnage was incorrectly reported as 3,9Mt instead of 3,1Mt. 5 1 K U M B A A N N U A L R E P O RT 2 0 0 5 1 2 g r o w t h 5 3 4 1. The Leeuwpan jig plant was commissioned in 2005 and will increase the annual supply to Eskom by about 1Mt of power station coal. 2. Construction of the Sishen expansion project primary crusher is under way. Production will begin in mid-2007, ramping up to full capacity by the start of 2009. 3. Drilling at the Moranbah South project in Queensland, Australia. This is a joint venture between Kumba and Anglo Coal Australia. 4. Lilian Matengu, a geologist at Rosh Pinah, records samples taken during an accelerated exploration programme that has started at the mine following the recent significant increase in zinc concentrate production at the mine. 5. The Grootegeluk 6 plant is being constructed at a capital cost of R323 million. 5 2 K U M B A A N N U A L R E P O RT 2 0 0 5 L E G I S L A T I V E C O M P L I A N C E P R O G R E S S A G A I N S T S C O R E C A R D F O R T H E B R O A D - B A S E D S O C I O - E C O N O M I C E M P O W E R M E N T C H A R T E R F O R T H E S O U T H A F R I C A N M I N I N G I N D U S T R Y R E Q U I R E M E N T S P R O G R E S S S E C T I O N Human resources development • Has the company offered the opportunity to be • Fully company-sponsored, voluntary ABET functionally literate and numerate by the year 2005 and are employees being trained? • Has the company implemented career paths for HDSA employees including skills development plans? • Has the company developed systems through which empowerment groups can be mentored? Employment equity • Has the company published its employment equity plan and reported on its annual progress in meeting that plan? programmes running at all mines (except where employees are 100% literate – Ticor SA, Leeuwpan and corporate office) • Screening and counselling undertaken of all ABET candidates for informed decisions about participation • Incentive scheme to make ABET more attractive implemented • Human resources development (HRD) policy in place dealing with accelerated development • Formal succession planning and individual development plans rigorously used for all management and professional categories • HDSA employees receive special career planning consideration and mentor support • A 50% joint venture with Eyesizwe Coal for development of Inyanda coal reserves includes skills transfer through mentorship and service level agreement • Kumba trains 26% of all apprentices in the South African mining industry, mostly HDSA • Plans submitted to Department of Labour. Policy published in annual report • Has the company established a plan to • Employment equity plans in place, supported by achieve a target for HDSA participation in management of 40% within five years and is it implementing the plan? strategies in HRD policy • Measured and monitored quarterly up to board level • Plans monitored per division • HDSA overall: 31,5% • HDSA senior management: 33% • HDSA middle management: 27% • HDSA first-line management: 33% • HDSA board: 26% Social summary – workplace issues Social summary – workplace issues Social summary – workplace issues Social summary – workplace issues • Has the company identified a talent pool and is it fast-tracking it? • Has the company established a plan to achieve the target for women participation in mining of 10% within five years and is it implementing the plan? • Formal performance management and succession- planning processes facilitate fast-tracking all management levels • HDSA talent pool catered for in succession-planning Social summary – workplace issues process • Current recruitment plans achieving results • Women currently 13% of workforce Social summary – workplace issues – board: 0% – senior management: 13% – middle management: 20,7% – first-line management: 12,8% 5 3 K U M B A A N N U A L R E P O RT 2 0 0 5 Ahead of compliance targets in several instances P R O G R E S S A G A I N S T S C O R E C A R D F O R T H E B R O A D - B A S E D S O C I O - E C O N O M I C E M P O W E R M E N T C H A R T E R F O R T H E S O U T H A F R I C A N M I N I N G I N D U S T R Y continued R E Q U I R E M E N T S P R O G R E S S • Recruitment policy is non-discriminatory • Few if any foreign migrant workers employed • Emphasis on local recruitment S E C T I O N N/A Migrant labour • Has the company subscribed to government and industry agreements to ensure non-discrimination against foreign migrant labour? Mine community and rural development • Has the company co-operated in the formulation of integrated development plans and is the company co-operating with government in the implementation of these plans for communities where mining takes place and for major labour-sending areas? • Collaborated on integrated development plans for Thabazimbi, Mutale and Vhembe councils and Kgalagadi Development Node • Range of interventions are all aligned with Social summary integrated development plans and register of community needs • Has there been effort on the side of the • Participating in local economic development Social summary company to engage the local mine community and major labour-sending area communities? forums at business units • Stakeholder engagement forums established at Social summary Housing and living conditions • For company-provided housing, has the mine, in consultation with stakeholders, established measures for improving the standard of housing, including upgrading hostels, conversion of hostels to family units and promoted home ownership options for mine employees? all business units • Skills and ABET provided for unemployed, skills training for government institutions, training-of trainers-programmes, capacity building • Partnership with MQA in Kgalagadi and Newcastle to train ex-mineworkers • Company spent R15 million during the financial year on local economic development programmes Social summary • Company housing policy in place, focusing on home ownership Social summary – workplace issues • 1 351 employees (22%) live in affordable rental units • More than R10 million will be spent to upgrade hostels to family units and single quarters over four years • 763 employees assisted to become owners of company housing • 1 895 housing units to be made available for home ownership over four years • For company-provided nutrition, has the mine • Mechanisms exist for employees to engage N/A established measures for improving the nutrition of mine employees? management and suppliers • Quality of food contractually regulated – human resources policy stipulates quality requirements 5 4 K U M B A A N N U A L R E P O RT 2 0 0 5 P R O G R E S S A G A I N S T S C O R E C A R D F O R T H E B R O A D - B A S E D S O C I O - E C O N O M I C E M P O W E R M E N T C H A R T E R F O R T H E S O U T H A F R I C A N M I N I N G I N D U S T R Y continued R E Q U I R E M E N T S P R O G R E S S S E C T I O N Procurement • Has the company given HDSAs preferred supplier status? • Policy, guidelines and systems in place to promote Social summary – procurement from HDSA companies • Preference given to black-owned and black-empowered suppliers supply chain management • Has the company identified current level of • An auditable system in place and performance Social summary, p101 procurement from HDSA companies in terms of capital goods, consumables and services? tracked • Has the company indicated a commitment to a progression of procurement from HDSA companies over a three- to five-year time frame in terms of capital goods, consumables, and to what extent has the commitment been implemented? Ownership and joint venture • Has the mining company achieved HDSA participation in terms of ownership for equity or attributable units of production of 15% in HDSA hands within five years and 26% in ten years? • Kumba has had policies in place since 2001 and is committed to a progression over time • Co-founder of South African Mining Preferential Procurement Forum • Supports facilitation of regional and provincial collaboration as initiated by Department of Minerals and Energy • 24% discretionary procurement from HDSA companies (black-owned and black-empowered) during the year (target of 18% and 30% by 2008) • Empowerment objectives will be exceeded following the implementation in 2006 of Kumba’s empowerment transaction (announced in October 2005) with 58% black ownership of coal/heavy minerals/zinc assets and 26% of iron ore assets • 50% joint venture development of Inyanda coal mine with Eyesizwe Coal Social summary – Supply chain management, p101 Chairman’s report, CE’s review, Empowerment transaction Beneficiation • Has the mining company identified its current level of beneficiation? • Baseline level established for various commodities • New beneficiation projects identified and evaluation N/A • Has the mining company established its of potential ongoing baseline level of beneficiation and indicated the extent that this will have to be grown to qualify for an offset? • Kumba has a specific case to make for beneficiation credits based on its unique supply agreements with the steel industry, covering iron ore, coal, zinc and dolomite Reporting • Has the company reported on an annual basis its progress towards achieving its commitments in its annual report? • Extensive reporting on progress through the scorecard, internet site, annual report Business objectives, CE’s review, SHE summary, social summary 5 5 K U M B A A N N U A L R E P O RT 2 0 0 5 E X E C U T I V E C O M M I T T E E DR CON FAUCONNIER Dr Fauconnier has spent his entire career in the mining industry and has been instrumental in the transformation of the industry in South Africa. He is responsible for ensuring Kumba’s sustainable growth in creating value for all stakeholders. MIKE KILBRIDE Mike Kilbride has 28 years’ experience in mining. He is responsible for creating value for stakeholders by executing the strategic direction approved by the board. CHARLES MEINTJES Charles Meintjes, a chartered accountant by profession, is responsible for corporate services – including engineering, projects and research and development – that support Kumba’s sustainable growth by achieving set business goals and objectives. DIRK VAN STADEN Dirk van Staden has 26 years’ experience in finance, nine of those in the mining industry. His mandate is to achieve Kumba’s business objectives and goals through effective strategies and planning. RICHARD WADLEY Richard Wadley has 35 years’ experience in exploration, marketing and business development. Prior to taking early retirement in June 2005, he was responsible for formulating and implementing effective strategies to ensure Kumba’s growth. 5 6 K U M B A A N N U A L R E P O RT 2 0 0 5 FROM FAR LEFT: Con Fauconnier, Mike Kilbride, Charles Meintjes, Dirk van Staden, Richard Wadley, Trevor Arran, Fergus Marupen, Ras Myburgh and Marie Viljoen. TREVOR ARRAN BSc (Geology) BSc (Hons)(Econ Geology), AMP, BEP, Dip Project Management, general manager corporate affairs and investor relations, is responsible for positioning Kumba as a corporate citizen with good governance practices, supportive of effective community development, and proactive stakeholder relations. FERGUS MARUPEN BA (Hons Psych), BEd, MDip (HR) (MBA), general manager human resources, is mandated to develop and implement an effective human resources strategy that supports Kumba’s business strategy by applying leading-edge practices and technology. RAS MYBURGH BEng (Elec), BSc (Hons) (Energy Studies), MBA, EDP, general manager transformation and empowerment, is responsible for formulating and coordinating the implementation of Kumba’s business improvement and empowerment transformation strategies. Subsequent to the year end, he was appointed general manager of Sishen Iron Ore Company and chief executive officer designate of Kumba Iron Ore, which is planned to be listed by mid-2006. MARIE VILJOEN Marie is company secretary and has 19 years’ experience in the field. She assumes responsibility for the group’s secretarial administrative business and corporate governance services to ensure that Kumba meets its statutory and legal responsibilities. 5 7 K U M B A A N N U A L R E P O RT 2 0 0 5 D I R E C T O R A T E AJ Morgan – Allen (58) Non-executive chairman BE Davison – Barry (60) Non-executive director MJ Kilbride – Mike (54) Executive director, business BScB Eng (Electrical), Pr Eng BA (Wits), Graduates Commerce operations Appointed 15 April 2005 Diploma (Birmingham University), BSc (Hons) (Min Eng) (RSM), Advanced CIS Diploma, Advanced Senior Executive Programme Dr CJ Fauconnier – Con (58) Executives Programme (UNISA) (London Business School) Chief executive Pr Eng (Int), BSc (Eng) (Mining), TL de Beer – Tom (70) BSc (Hons) (Eng), MSc (Eng), Non-executive director Dr D Konar – Len (51) Non-executive director DEng (Pretoria), MBA (Oregon), BCom, CA(SA), Executive BCom, CA(SA), MAS, DCom DSc (honoris causa) (UFS), Strategic Programme in Business Leadership Programme (Oxford), (Columbia USA) CF Meintjes – Charles (43) Senior Executive Finance Programme Executive director, corporate services (Oxford) JJ Geldenhuys – Jurie (63) BCom Acc, BCompt (Hons), CA(SA), Non-executive director Advanced Management Programme PM Baum – Philip (51) Non-executive director BSc (Eng) (Electrical); BSc (Eng) (Wharton) (Mining); MBA (Stanford); BCom, LLB, Higher Diploma in Professional Engineer Tax Law Note: Dawn Marole resigned as chairman and member of the board on 15 April 2005. Richard Wadley resigned as executive director on 30 June 2005. 5 8 K U M B A A N N U A L R E P O RT 2 0 0 5 WA Nairn – Bill (61) Non-executive director BSc (Eng) SA Nkosi – Sipho (51) Non-executive director Dr NS Segal – Nick (65) Non-executive director PL Zim – Lazarus (45) Non-executive director BSc (Eng), PhD (Phys Chem) BCom, BCom (Hons), MCom (Rand), DPhil (Economics) (Oxon) F Titi – Fani (43) BCom, BCom (Hons) (Econ), MBA, Non-executive director Diploma in Marketing Management BSc (Hons), MA, MBA CML Savage – Cedric (67) Non-executive director DJ van Staden – Dirk (56) Executive director, finance BSc Eng, Pr Eng, MBA, ISMP BJuris, LLB, Advanced Management (Harvard) Programme (Insead) 5 9 K U M B A A N N U A L R E P O RT 2 0 0 5 C O R P O R A T E G O V E R N A N C E At the 2004 International Corporate Citizenship Conference in San Francisco, Jeff Immelt (CE of General Electric) named “ten principles of a leading company that wants to do good”. Among others, this served as an informal benchmark to determine the extent to which Kumba adheres to governance-related principles in the broader framework of creating value for stakeholders. Kumba received “the best company to work for” award in the mining industry in 2005 for the third consecutive year. This would not have been possible without a commitment to achieving a balance between conformance and performance. We demonstrate how Kumba measures up against Immelt’s ten principles. Principle 1: Set exceptional governance standards at board level Principle 2: Set high standards for financial performance Principle 3: Make compliance a core operating principle Principle 4: Commit to openness and transparency Principle 5: Create a culture where the company always comes first Principle 6: Create leaders who are provided with the right incentives for performance and values Principle 7: Commit to people and develop trust Principle 8: Make a business out of solving the world’s toughest problems Principle 9: Give back to the community Principle 10: Teach people to compete by making them confident Source: Jeff Immelt, CE – General Electric of P R I N C I P L E 1: S E T E X C E P T I O N A L G O V E R N A N C E S T A N D A R D S A T B O A R D L E V E L “Corporate governance is the system that rights, the balance maintains relationships, roles and responsibilities of shareholders, directors and management in the direction, conduct, conformance and control of the sustainable performance of the company with honesty and integrity in the best long-term interests of the company, shareholders and both business and community stakeholders.” Business governance handbook by John and Leigh Hendrikse This translates into Kumba’s commitment to corporate governance principles and an independent rating well into the upper half of 52 companies analysed by Deutsche Securities. Kumba’s governance performance was achieved despite having a controlling shareholder for the review period, which is generally considered a constraint on the independence of any board. The Kumba board is responsible for: • Directing and controlling the business of the company to achieve sustained levels of prosperity and to act in the best interests of Kumba • Monitoring, guiding and supervising executive management performance against key performance indicators • Ensuring the company manages its business with integrity and in line with best-practice standards strategic and monitoring budgeting and operational performance • Adopting plans • Providing a risk management strategy and policy framework 6 0 K U M B A A N N U A L R E P O RT 2 0 0 5 • Approval of financial statements • Presenting annual financial statements, interim reports and related disclosure requirements • Delegating board authority committees and executive management • Administering appointments to and to removals from the board • Overseeing succession planning and director selection • Evaluating board performance • Overseeing compliance with laws and regulations • Ensuring effective stakeholder communication. Board composition The board comprises 16 directors, of whom five are independent non-executives and four are executives. The chairman, Mr Allen Morgan, is an independent non-executive director. To ensure efficient staggering of director rotation, directors are subject to retirement and may be nominated for re-election every three years. The retirement age for non- executive directors is 70 years, becoming effective at the annual general meeting after the date on which they turned 70. The chairman’s committee – comprising the respective chairmen of the safety, health and environment, human resources and remuneration and audit committees – appraises the performance of the chief executive annually. Late in 2005, the committee also assessed the performance of the remaining executive directors which was considered exemplary. The committee met once in 2005. A company policy on attendance by Kumba directors and board committee chairmen at shareholder meetings is in place. Directors Kumba’s directors are credible, skilled and experienced appropriate and bring judgement to bear on the main issues. Non- executive directors understand the company’s mission, strategy and business and add specialist expertise to the company. Directors have, in terms of company policy, free access to the company secretary, and to independent professional advisers, whether in legal, technical or accounting areas, at the group’s expense. All directors have unrestricted access to all company information and records, as well as to management. The company secretary operates well- established practices and procedures to familiarise directors with the group’s operations, senior management, and the business environment and to induct them in their fiduciary duties and responsibilities. Directors can visit operational centres to acquaint themselves better with business operations. Board meetings The board meets at least five times a year. Between 1 January and 31 December 2005, the board met eight times. Board committees Specific responsibilities have been delegated to three committees to support the functioning of the board: • Audit committee • Human resources and remuneration committee (HR and REM) • Safety, health and environment committee (SHE) These committees serve under written, board approved terms of references, which are reviewed and updated annually. The board addresses the performance of the committees as part of an assessment process. The minutes of all board committee meetings are presented to the board for information. Experienced, knowledgeable, independent non-executive directors chair all Kumba board committees. These committees are free to take independent, professional, external advice. • Asset valuations and revaluations • General and specific provisions • Basis for the going-concern assumption. committee Audit committee This three independent non-executive directors – Dr D Konar (chairman), Mr TL de Beer and Dr NS Segal. comprises Composition and proceedings It is required that the committee meets four times per year, which was the case in 2005. Meetings are attended by the external and internal auditors and, by invitation, the chairman and members of executive management. Internal and external auditors have unrestricted access to the committee. At the interim and year- end meetings, time is reserved for confidential between committee members, and separately with the external and internal auditors. discussions interim and annual Role of the committee The audit committee assists the board with the preparation of Kumba’s financial statements and its subsidiaries and ensures financial that statements, and any other formal announcements on the company’s financial performance, comply with all statutory and JSE Listings Requirements. The focus is particularly on: • Integrity of financial reporting • Compliance with legislation and regulations • Matters relating to financial and internal control, accounting policies, reporting and disclosure • Reviewing and recommending to the board interim and year-end financial statements and dividend announcements • Ensuring that all risks to which the group is exposed are identified and managed in a well-defined process • Monitoring values and ethics • Security and fraud controls • Evaluation of the performance of the external and internal auditors • Reviewing and approving external audit plans, findings, reports and fees 6 1 K U M B A A N N U A L R E P O RT 2 0 0 5 Human resources and remuneration committee Members This committee comprises four non- executive directors of whom the first two are independent – Mr TL de Beer (chairman), Messrs JJ Geldenhuys, F Titi and PM Baum and the chief executive, Dr CJ Fauconnier. Meeting proceedings The executive director: finance and general manager: human resources attend meetings by invitation. Together with the chief executive, they recuse themselves from discussions and decisions regarding their own remuneration and benefits. Four meetings are scheduled annually, with special meetings called as required. Six meetings were held during 2005. Role of the committee The committee has a mandate from the board to: for their • Ensure that the group’s chairman, directors and senior executives are rewarded individual contributions to overall performance • Ensure that the group’s remuneration strategies, packages and schemes are related to the achievement of business objectives and the delivery of shareholder value • Ensure appropriate human resources strategies, policies and practices • Review executive and non-executive director succession planning and recommend candidates for positions to the board. Non-executive directors receive fees for their contribution to the committees on which they serve. After considering comparable fee structures and market practices, human resources management annually recommends proposed fees for consideration and recommendation by the committee and for approval by the board, subject to final approval by shareholders. Risk management is integral to good management and the control environment R E C O R D O F A T T E N D A N C E A T D I R E C T O R S ’ M E E T I N G S F O R T H E F I N A N C I A L Y E A R E N D E D 3 1 D E C E M B E R 2 0 0 5 Board/special meetings (8#) Chairman’s committee (1#) Audit committee (4#) Safety, health and environment committee (3#) Human resources and remuneration committee (6#) Board of directors Attendance Composition Attendance Composition Attendance Composition Attendance Composition Attendance AJ Morgan†(cid:54) Dr CJ Fauconnier* PM Baum BE Davison TL de Beer† JJ Geldenhuys† MJ Kilbride* Dr D Konar† MLD Marole†^ CF Meintjes* WA Nairn SA Nkosi CML Savage Dr NS Segal† F Titi DJ van Staden* RG Wadley*‡ PL Zim 8 7 Chairman Member 7 By invitation 6 Member Member Member 8 7 8 6 3 8 6 7 5 6 6 8 4 6 1 By invitation 1 By invitation 1 1 1 1 Member By invitation Chairman By invitation Member By invitation Member Member Chairman Member Member Member 3 4 4 3 4 4 4 4 2 By invitation Member 2 Member Chairman Member Member 3 3 2 3 Member By invitation 3 6 6 6 5 1 4 4 Independent non-executive director. Executive director. # Number of meetings per annum. † * ^ Individual resigned as a non-executive director and chairman from the Kumba board on 15 April 2005. (cid:54) Individual, a non-executive director on the Kumba board, was appointed as non-executive chairman on the board on 15 April 2005. ‡ Individual resigned as executive director from Kumba on 30 June 2005. Safety, health and environment (SHE) committee Members This committee comprises non-executive directors – Messrs JJ Geldenhuys (chairman), AJ Morgan, SA Nkosi and WA Nairn, of whom the first two are independent; and two executive directors, Dr CJ Fauconnier and Mr MJ Kilbride. The general manager: SHE attends all meetings by invitation. Members of the executive general managers of the business units attend meetings by invitation. Three meetings were held in 2005. committee and Role of the committee It formulates and recommends policies, strategies and programmes in all matters affecting safety, health and environment on behalf of the group for submission to the board. The committee is responsible for ensuring that these policies and programmes are in accordance with legislation, are effectively implemented and that SHE performance is continuously measured and evaluated. At Kumba, the risk management process integral part of both good is an management and the control environment. It encompasses: P R I N C I P L E 2 : S E T H I G H S T A N D A R D S F O R F I N A N C I A L P E R F O R M A N C E Kumba sets specific targets (p8) against which the financial performance of the group is regularly measured and reported on. The company uses a broad range of channels financial to communicate information, such as the JSE’s news service, SENS, the internet for its interim and annual results, presentations to fund managers and analysts, road shows to shareholders, paid advertisements, the annual report and news releases to newspapers and news agencies. The board believes financial operational information is of outstanding quality. and 6 2 K U M B A A N N U A L R E P O RT 2 0 0 5 • Identifying, analysing and mitigating risks that will prevent achievement of business objectives • Putting initiatives in place to manage risk throughout the group • Developing fraud and risk management plans which cover activities such as: – reviews of operating performance – information technology and manage- ment information systems – increased competition and contestability – contracting out and outsourcing – performance management and information – professional development – staff appraisal including client surveys – reconciliations of accounts – approvals – segregation of duties. principles of the Code of Corporate Practices and Conduct (the Code) through: Control activities to mitigate risk are designed and implemented and relevant information regularly collected and communicated, throughout the group. Management monitors performance to ensure objectives are being achieved and control activities are operating effectively. Directors are required to identify business risks, as well as potential opportunities, and ensure that management establishes appropriate processes and practices to manage all risks associated with the company’s operations. The board is made aware of major trends impacting on the company and its major risks and opportunities at biannual discussions through presentation and discussion of its strategy and business plans. Kumba is committed to developing and maintaining an integrated, enterprise-wide risk management programme (ERM). A logical, systematic and repetitive methodology that will identify, analyse, assess, treat and monitor all risks, whether they are insurable or not, is applied. We communicate accurate and timeous information to those employees tasked with minimising losses and maximising opportunities, in achieving their strategic objectives (See risk management, p68). assist them to The complexity and diversity of risks that face Kumba are recognised and we integrate our efforts to maximise opportunities and minimise exposures to risk and to reduce them, where necessary, levels commensurate with our risk appetite. to P R I N C I P L E 3 : M A K E C O M P L I A N C E A C O R E O P E R A T I N G P R I N C I P L E The chief executive and executive management acknowledge the need to conduct the business of Kumba and its entities according to the spirit and • Acknowledging the our communities responsibility towards and environment and the broader society in which the group operates • Continually examining our management structures, culture, policies and strategies and the ways in which we deal with stakeholders to effect best practice • Implementing systems that will meet the requirements relative to governance demands, ethical behaviour, risk management and performance stability. P R I N C I P L E 4 : C O M M I T T O O P E N N E S S A N D T R A N S P A R E N C Y Kumba sees good governance as a distinguishing feature of the company, underpinned by a multi-stakeholder approach. Stakeholders include share- the holders, employees, customers, community, government and resource and service providers. resources and Kumba’s board of directors, employees and unions have endorsed the group’s code of ethics. Compliance with Kumba’s code of ethics is monitored by the general manager: human the company secretary. Awareness of ethical behaviour is encouraged by regular communication with employees. The board accepts its duty to address matters of significant interest and concern to all stakeholders, taking into account greater demands for accountability, and recognising and balancing the interests of all stakeholders for the collective good of the group. Besides Kumba’s other compliance and enforcement, a fraud prevention policy has been established as a mechanism through which all stakeholders can report suspected fraud or corruption with guaranteed anonymity. During the year, 27 cases of suspected fraud were reported of which eight complaints were received through the toll-free fraud hotline. Two disciplinary cases resulted in dismissals, and one investigation resulted in criminal prosecution. 6 3 K U M B A A N N U A L R E P O RT 2 0 0 5 Kumba recognises the need for full, equal and timeous disclosure to all stakeholders as prescribed by the JSE Listings Requirements and guidelines, and various policies governing communication and conduct with stakeholders. All necessary information and facilities are made available to shareholders to enable them to: • Attend annual general meetings • Submit proxy forms sent along with of convening meetings notices shareholders • Receive announcements and circulars in accordance with the JSE Listings Requirements. Non-executive directors are not bound by service contracts, and there are no service contracts exceeding six months relating to the position of any executive director. is There full disclosure of various remuneration matters for executive directors in the remuneration report on p125. P R I N C I P L E 5 : C R E A T E A C U L T U R E W H E R E T H E C O M P A N Y A L W A Y S C O M E S F I R S T Kumba’s board subscribes to long-term sustainability of corporate capital, as well as a triple bottom-line emphasis on financial, environmental and social performance. The board also focuses on maintaining a balance between the interests of stakeholders and the collective good of the group, accepting that it is ultimately accountable for the affairs of the company. Kumba’s corporate governance approach provides an integrated strategic management the framework necessary performance standards required to operate in the best interests of its stakeholders, profitability and the environment. to achieve The group has various policies and procedures to address conflicts of interests which cover areas such as shareholdings Good governance is a hallmark of our group guide the moral way of responsible behaviour without which business cannot be sustained. It is supported by team work which, throughout Kumba, is widely accepted as a way of living. Kumba’s code of ethics provides a basis for consistent ethical behaviour and gives guidance its to employees to: the company and • Comply with industry standards and codes of conduct • Act with honesty in performing duties • Apply due care in the use of company information, equipment and facilities • Exercise consideration and sensitivity in dealings with stakeholders. P R I N C I P L E 8 : M A K E A B U S I N E S S O U T O F S O L V I N G T H E W O R L D ’ S T O U G H E S T P R O B L E M S Kumba is accountable to a large body of stakeholders. This broad view of responsibility and accountability underpins the concept of Kumba’s triple bottom-line reporting. its Kumba harmonises social and environmental responsibilities with its business pursuits. These cover trade practices, environmental policies, energy and waste policies, employee welfare and safety, and community relations. A selection of these principles includes: • Ensuring that the business is ecologically sustainable, meeting the needs of the present without compromising the future • Aiming for maximum commercial benefit but realising that the livelihood of employees and intermediaries depends on paying them a fair market price • Supporting long-term, sustainable partnership-based relationships with the communities in which the group’s businesses operate • Promoting respect for human rights on the part of suppliers • Contributing to communities and national projects through donations, social investment and partnerships. and directorships of Kumba directors in companies with which Kumba has contractual relationships as well as outside interests by managers which could possibly lead to conflicts of interests. As defined in the JSE Listings Requirements, the group has a procedure in place to restrict dealing in its securities by directors, officers and other selected employees during closed periods. P R I N C I P L E 6 : C R E A T E L E A D E R S W H O A R E P R O V I D E D W I T H T H E R I G H T I N C E N T I V E S F O R P E R F O R M A N C E A N D V A L U E S The relationship between Kumba’s stakeholders and those entrusted to manage the group’s resources is based on the qualities of leadership, accountability and of Kumba’s transparency strategies and processes. the leading include The responsibilities of executives and managers through developing, implementing and monitoring business strategies based on corporate values, ethical conduct and quality service delivery. Executive action and supervision are directed by a variety of governance structures. The executive committee is chaired by the chief executive and comprises the executive directors, general manager: corporate affairs and investor relations; general manager: human resources and the company secretary. The general managers of Kumba’s iron ore, coal, heavy minerals, base metals and industrial minerals operations as well as the general manager: SHE attend by invitation. Formal meetings are held monthly with weekly informal caucuses. The aim of the group’s remuneration policy is to ensure that executive directors and employees are rewarded in a way that enables the group to attract and retain employees of the highest quality – people who are motivated to achieve performance superior to competitors, which serves the best interests of shareholders. and remuneration committee, positions the total remuneration of executive directors and employees at or near the median compared with companies with which it is competing for talent. Employees who accept the challenge of our business objectives and who excel in accomplishing them achieve above-average rewards and career advancement. A significant part of the remuneration of employees is linked to personal and company performance. All employees, including executive directors, are entitled to take part in an annual bonus and gain-share scheme, based on achieving and exceeding performance targets set by the human resources and remuneration committee. Senior management and staff specialists are eligible to participate in the Kumba management share option scheme, and long-term incentive deferred bonus plans. In business activities and succession planning, executive skills are mapped against the objectives of the board and the strategic direction of the company. The board is satisfied that the group’s procedures and practices for succession planning ensure the best potential managers are identified, developed and suitably fast-tracked. P R I N C I P L E 7 : C O M M I T T O P E O P L E A N D D E V E L O P T R U S T Integrity is reflected in Kumba’s decision- making practices and procedures and in the quality and credibility of its reporting. In pursuit of Kumba’s vision to outperform the mining and mineral sector in creating value through exceptional people and superior processes, the conduct of its businesses and its employees is characterised by the following fundamental values: stakeholders for all • Integrity • Respect • Accountability • Fairness • Caring. Kumba’s performance-driven remuneration policy, governed by the human resources These values have been developed for the benefit of the group and its employees to 6 4 K U M B A A N N U A L R E P O RT 2 0 0 5 Kumba is among the first group of companies listed on the JSE All Share Index to comply with the requirements of the JSE Socially Responsible Investment (SRI) Index, demonstrating that it meets the requirements of the corporate governance, economic, social and environmental criteria. The data provider index, Sustainability Research and Intelligence, commended Kumba for its disclosure level of quantitative and qualitative information for the areas measured. the for the with P R I N C I P L E 9 : G I V E B A C K T O T H E C O M M U N I T Y At Kumba, building long-term and mutually beneficial our relationships stakeholders is a business imperative. Within the corporate affairs department, the group manages its relations through its investor relations unit to ensure appropriate communication with investment community; the sustainable development function is responsible for local economic development, sustainable development principles and stakeholder engagement and is managed through a three-tier approach, namely corporate, regional and mine specific. Contact is maintained with domestic and international institutional shareholders, fund and asset managers and analysts through investor road shows, presentations to the investment community as well as liaison with major shareholders. At a Kumba business/government dinner held at Richards Bay on 23 May 2005, the chief executive, Dr Fauconnier, expressed the company’s commitment to community involvement when he said: “… we will never lose sight of the expectations of all our stakeholders, from national to provincial to local government, from communities to the environment. At all times, and in all operations, we will strive to maintain the quality of life of future integrating economic development with best practice environmental and social activities.” generations by P R I N C I P L E 1 0 : T E A C H P E O P L E T O C O M P E T E B Y M A K I N G T H E M C O N F I D E N T Kumba has proven itself as a sustainable South African-based mining company, one that people are proud to be associated with and want to work for. Kumba has achieved the following since November 2001: • Best new listing on the JSE: 2001 • Best mining company to work for: 2003, 2004, 2005 • Best empowerment company in mining: 2004 • Best annual report: third in RSA: 2004 • JSE Sustainability Index: 2004 • Boss of the Year®: 2004 Considering these achievements in a highly competitive business arena, Kumba has proudly created a company which is beneficial to all its stakeholders. As demonstrated in this annual report, good governance permeates Kumba’s businesses. We continually compare our standards against our peers and companies regarded as global leaders in corporate governance to ensure that our business is managed to protect and enhance stakeholder value. 6 5 K U M B A A N N U A L R E P O RT 2 0 0 5 R I S K M A N A G E M E N T integrated, enterprise-wide R I S K P H I L O S O P H Y In line with its vision, Kumba maintains an risk management programme (ERM). Kumba applies a logical, systematic and repetitive methodology to identify, analyse, assess, treat and monitor all risks whether they are insurable or not. and The effectiveness of the ERM process is measured by how well it aligns the key fundamentals of governance, business objectives, ethics, policies, standards, strategies compliance. Kumba recognises the complexity and diversity of risks that face all its operational activities and integrates all efforts to maximise opportunities and minimise exposures to risk and to reduce them, where necessary, to levels commensurate with its risk appetite. R I S K A P P E T I T E The board, guided and assisted by the audit and executive risk management committees, defines and approves Kumba’s risk appetite or risk-tolerance capacity. The challenge for the board is to determine how much uncertainty it is willing to accept in its endeavours to grow stakeholder value. Kumba’s risk-bearing capacity (tolerance) is a function of its ability to endure unexpected losses and the effect such losses may have on the company’s share value. Risk-bearing capacity is not a static value and constantly changes due to: The main objective in determining risk- bearing capacity is to establish Kumba’s optimal risk-tolerance capacity. its risk appetite The most effective way for the board to demonstrate (and commitment to the ERM programme) is to exceed shareholders’ expectations on performance. Through its actions and proven commitment, the board can clearly demonstrate: • How much risk will be allowed to be taken to achieve strategic business objectives • That risks which could impact on performance have been identified, tracked and monitored • How the process could potentially increase shareholder value. A centralised ERM hub, dedicated to strategic direction and policy development, and risk committees operating at business- unit level to implement ERM policy, reflect an embedded ERM programme in Kumba. Prominent governance failures in global companies and the resulting reputational damage have given wider prominence to corporate ethics and compliance issues. In Kumba, the focus is on bringing these fundamental components of the ERM process ever closer to operational risk management processes. Our ERM approach is aimed at: • Minimising losses caused by adverse events • Reducing earnings surprises and speedily identify and rectify any deviation. Promoting a risk-conscious culture is a constant focus throughout the company and proactively supports achieving our strategic business objectives. Each risk owner is responsible for continuously monitoring the existing and ever-changing risk profile of the company. Divisional and business-unit risk committees play an important role in identifying operational risk and in the development and application of generic mitigating strategies. They also have a risk oversight function by virtue of being closer to activities that could have adverse results. Each committee is chaired by the head of the business centre and meets quarterly. The group risk manager attends all meetings. R I S K M A N A G E M E N T O B J E C T I V E S The risk management process is continuous, with well-defined steps which, when taken in sequence, support better decision- making by contributing a greater insight into risks and their impacts. Risks from all sources are identified and once they pass the materiality threshold, a formal process begins in which causal factors and consequences are identified and the correlation with other risks and the current risk-mitigating strategy is reviewed. One of the challenges is to ensure that mitigating strategies are geared to deliver reliable and timely risk information to support better decision-making. • International supply and demand for reputational damage Kumba’s products • Contributing to the protection of • Production cost which in turn is influenced by changes in input costs • The quantity and value of fixed and current assets used in the production process. shareholder value. R I S K C U L T U R E Kumba’s policy is zero tolerance for compliance failures and its aim is to 6 6 K U M B A A N N U A L R E P O RT 2 0 0 5 ESTABLISH THE CONTEXT • The strategic context • The organisational context • The risk management context • Set and communicate business objectives • Consider internal and external business objectives IDENTIFY THE RISKS Headline risk areas Evolving risks ANALYSE RISKS DETERMINE EXISTING CONTROLS Determine likelihood Determine impact Estimate level of risk E VA L U AT E R I S K S Compare against criteria Set risk priorities Consider control measures Risk acceptable Y E S Accept N O Reduce likelihood Reduce impact Transfer in full or in part Terminate Consider feasibility costs and benefits Recommend treatment strategies Select treatment strategy Prepare treatment plans Reduce likelihood Reduce impact Transfer in full or in part Terminate N O Risk acceptable Y E S Retain E T A C I N U M M O C Identify treatment options Assess treatment options Prepare treatment plans Implement treatment plans W E I V E R D N A R O T I N O M 6 7 K U M B A A N N U A L R E P O RT 2 0 0 5 Integrated management of complex and diverse risks Impact High Likelihood Control measures Medium Judicious hedging policy; continuous margin improvement initiatives with rigorous tracking. Medium High Secure alternate suppliers and long-term concentrate offtake agreements from foreign mines. Maximise Rosh Pinah and Black Mountain offtake. Load-sharing agreement exists between heavy industry and utility supplier in region to reduce outages to minimum. Analysis of TiO2 market forces; cost-reduction initiatives; sustained focus on continuous improvement and ramp up furnaces to full capacity. Monitor whether rising oil prices are jeopardising world economic growth; initiate projects to save on consumption of fuel. T O P R I S K S Risk • Foreign exchange: Impact of continued rand and Australian dollar strength on profitability. • Counterparty: Insufficient availability of zinc concentrates of acceptable quality and cost. • Impact of power interruptions on Medium Medium production at smelter operations – one-second outage equates four-hour restart procedure. • Commodity price: Sluggish titanium Medium High slag market recovery affecting heavy mineral division’s profitability. • Operational performance: Rising energy Medium Medium costs (oil and power) increase production cost. • Availability of large (oversize) tyres negatively affecting throughput at open-cast mines. Medium Medium Eighteen-month window for planning comprehensive tyre management programme and road quality management. • Capital projects: Increase in cost of Medium Medium capital projects as a result of buoyant construction market. • Mergers and acquisitions: Ineffective Medium Low management of integration of new coal and heavy mineral assets post- transformation transaction. • Employees: Availability and loss of Low Medium skills (especially artisans) impacting on current production and future growth. • Reserves and resources: Failure of High Low transformation transaction resulting in Kumba not being able to convert existing rights to new-order rights. Segment projects into major commodity items, ie steel, labour, civil, electrical, etc, and apply escalation per commodity drivers; constantly update database on escalations on own experience and industry trends. Steering committee established consisting of senior Kumba and Eyesizwe management to monitor and guide merger integration, planning and process; integration team established that consists of Kumba and Eyesizwe team members to plan and execute integration – reports to steering committee on a regular basis. Maintain networks, effective recruitment, training and retention strategies; competitive remuneration to retain skills; benchmarking and maintain alliances. Empowerment transaction announced 13 October 2005 and implementation planned for second quarter of 2006 will satisfy ownership requirements on mining charter; Documentation for conversion of rights has already been submitted and accepted by the Department of Minerals and Energy. 6 8 K U M B A A N N U A L R E P O RT 2 0 0 5 S H A R E H O L D E R S ’ I N F O R M A T I O N M A R K E T L I S T I N G S A N D O T H E R I N F O R M A T I O N The principal market for Kumba Resources Limited is the JSE. As a constituent of the All Share Top 40 index (ALSI 40 index), Kumba shares trade through the STRATE system. STRATE is the authorised central securities depositary (CSD) for equities in South Africa that incorporates an electronic settlement system. STRATE achieves secure, electronic settlement of share transactions on the JSE and for off-market trades. Shares in companies listed on the JSE can no longer be bought or sold unless they have been dematerialised on to the STRATE system. This process involves submitting paper share certificates to a custodian bank or JSE member firm (broker) for conversion into an electronic record, an exercise referred to as dematerialisation. increase in daily The introduction of the Johannesburg Equity Trading (JET) system a few years ago highlighted the deficiencies in the JSE’s paper-based settlement system. Shares were no longer traded on a trading floor, and this contributed to a massive leap in the number of trades each day. Back-office support services were incapable of handling this transactions efficiently in a paper-based environment. The transition to an efficient settlement system has increased market activity and will certainly improve the international perception of the South African market by reducing settlement and operational risk in the market, increasing efficiency and ultimately reducing costs. Accordingly, by heightening investor appeal, STRATE enables South Africa to compete effectively with other international markets, and not just those of emerging countries. For additional information please refer to the STRATE website: www.strate.co.za. Closing JSE share prices are published in most national and regional SA newspapers and are available during the day on the Shareholders can obtain details about their own shareholding on the internet. Full details, including how to gain secure access to this personalised enquiry facility, are provided on the Computershare website: www.computershare.com. Consolidation of share certificates If your certificated shareholding in Kumba is represented by several individual share certificates, you may wish to have these replaced by one consolidated certificate; there is no charge for this service. You should send your share certificates to Computershare together with a letter of instruction. P U B L I C A T I O N O F F I N A N C I A L S T A T E M E N T S Shareholders wishing to receive the annual report and/or interim report in electronic rather than paper form should register their instruction on the Kumba website at www.kumbaresources.com. S H A R E H O L D E R I N F O R M A T I O N Major shareholders As of 31 December 2005, the two entities known to Kumba as owning more than 10% of its shares were Anglo American plc and Industrial Development Corporation of South Africa (IDC) with 201 092 500 and 41 498 615 shares representing 65,69% and 13,55% respectively. As of 31 December 2005, the total number of the voting securities owned by the directors of Kumba was 22 448 ordinary shares representing approximately 0,01% of the number of shares in issue. Kumba and other websites. Share prices are also available on I-Net Bridge, Reuters and Bloomberg. Kumba has an over-the-counter (OTC) sponsored American depositary receipt (ADR) facility with the Bank of New York (BoNY) under a deposit agreement. A D R H O L D E R S ADR holders may instruct the BoNY as to how the shares represented by their ADRs should be voted. Registered holders of ADRs will have the annual and interim reports mailed their to recorded address. Brokers or financial institutions, which hold ADRs for shareholder clients, are responsible for forwarding shareholder information to their clients and will be provided with copies of the annual and interim reports for this purpose. them at D I V I D E N D D E T E R M I N A T I O N Dividends are determined in South African rand (ZAR) and are then declared payable in the same currency by the group. ADR shareholders are paid in US dollar by the group’s ADR bank, BoNY. BoNY effects the conversion of ZAR-determined dividend in US dollars on behalf of its US ADR shareholders. Contact Computershare or BoNY for further details. enquiries S U P P L E M E N T A R Y I N F O R M A T I O N General shareholder enquiries Computershare is the registrar for Kumba. All correspondence and concerning shareholding (other than shares held in ADR form) should be directed to the registrar. Computershare’s contact details are on p199. Shareholders must notify Computershare promptly in writing of any change of address. All enquiries concerning shares held in ADR form should be directed to the BoNY, whose contact details are also given on p199 or alternatively visit their website at: www.adrbny.com. 6 9 K U M B A A N N U A L R E P O RT 2 0 0 5 S H A R E H O L D E R S ’ A N A L Y S I S R E G I S T E R D A T E : 3 0 D E C E M B E R 2 0 0 5 Issued share capital: 306 162 251 shares Shareholder spread 1 – 1 000 shares 1 001 – 10 000 shares 10 001 – 100 000 shares 100 001 – 1 000 000 shares 1 000 001 shares and over Distribution of shareholders Banks Close corporations Endowment funds Holding company Individuals Insurance companies Investment companies Medical aid schemes Mutual funds Nominees and trusts Other corporations Pension funds Private companies Public companies Share trusts Public/non-public shareholders Non-public shareholders Directors and associates of the company holdings Strategic holdings (more than 10%) Share trusts Public shareholders Beneficial shareholders’ holding of 3% or more Anglo American Corporation Industrial Development Corporation Stimela Mining (Pty) Limited Public Investment Commissioners Number of shareholders 8 944 1 444 292 86 11 % 82,99 13,40 2,71 0,80 0,10 Number of shares 2 707 184 4 332 056 9 166 883 26 014 626 263 941 502 % 0,88 1,41 2,99 8,50 86,21 10 777 100,00 306 162 251 100,00 Number of shareholders 130 111 51 1 8 289 41 18 7 194 1 409 106 208 194 16 2 % 1,21 1,03 0,47 0,01 76,91 0,38 0,17 0,06 1,80 13,07 0,98 1,93 1,80 0,15 0,02 Number of shares 55 457 385 86 010 221 436 169 999 200 4 649 302 2 808 001 4 431 673 43 796 10 946 776 5 013 653 210 675 18 764 491 32 248 007 1 277 512 4 334 % 18,11 0,03 0,07 55,53 1,52 0,92 1,45 0,01 3,58 1,64 0,07 6,13 10,53 0,42 0,00 10 777 100,00 306 162 251 100,00 Number of shareholdings 9 4 3 2 10 768 10 777 % Number of shares 0,08 242 665 767 0,04 0,03 0,02 70 318 242 591 115 4 334 99,92 63 496 484 % 79,26 0,02 79,24 0,00 20,74 100,00 306 162 251 100,00 Number of shares 169 999 200 41 498 615 31 093 300 11 895 809 % 55,53 13,55 10,16 3,89 7 0 K U M B A A N N U A L R E P O RT 2 0 0 5 B R E A K D O W N O F N O N - P U B L I C H O L D I N G S Directors Fauconnier, CJ Fauconnier, CJ Fauconnier, AM Konar, D Konar, D Wadley, RG Wadley, RG Total Strategic holdings (more than 10%) Anglo American Corporation Industrial Development Corporation Stimela Mining (Pty) Limited Total Share trusts Kumba Management Share Trust Kumba Management Share Trust Total Beneficial breakdowns Public Investment Commissioners – Stanlib Asset Management – RMB Asset Management – Public Investment Commissioners – Old Mutual Asset Management – Public Investment Commissioners % of shares 0,01 0,00 0,02 0,03 % of shares 55,53 13,55 10,16 79,24 % of shares 0,00 % of shares 3,89 Number of shares 22 280 21 880 400 168 168 47 870 47 870 70 318 Number of shares 169 999 200 41 498 615 31 093 300 242 591 115 Number of shares 2 167 2 167 4 334 Number of shares 11 895 809 5 600 000 2 962 628 2 246 059 740 887 346 235 7 1 K U M B A A N N U A L R E P O RT 2 0 0 5 S U S T A I N A B L E D E V E L O P M E N T S U M M A R Y Sustainable development underpins the way Kumba does business. It is reflected in a formal charter that defines our goals and commitment to stakeholders; in the structures that ensure sustainable development policies are cascaded throughout the group; in the integration of sustainable development as a measurable performance indicator in the economic, social and environmental aspects of our business. S U S T A I N A B L E D E V E L O P M E N T V I S I O N To be the vehicle through which stakeholder interests are integrated into Kumba’s mining activities to ensure that all mineral resources are responsibly and ethically managed for the benefit of current and future stakeholders. M I S S I O N The Kumba sustainable development function will: • Ensure that effective stakeholder engagement occurs at national, regional and local levels and • Ensure integration between all departments to manage the social, economic environmental impacts throughout Kumba’s sphere of influence among our national, regional and local stakeholders • Ensure that effective socio-economic development occurs at all levels by providing meaningful and significant technical, financial and in-kind resources • Ensure that Kumba’s image as a socially-responsible company is enhanced in the global community. S U S T A I N A B L E D E V E L O P M E N T P O L I C Y Kumba understands the importance of long-term business sustainability and guarding against a short-term focus to survive in the modern global business world. As a mining group, the challenge we face is to demonstrate that the way we approach our business contributes to sustainable development: that social, environmental and economic impacts of mining – both positive and negative – are in a accounted transparent and accountable way. for and managed A formal policy sets out the Kumba standards and guidelines for sustainable development, focused on: • Financial • Governance, ownership and control • Resource utilisation • Workplace • Environmental • Community and external stakeholders • Suppliers • Customers. G U I D I N G P R I N C I P L E S Kumba has adopted a set of guiding principles, compiled from research into best practices and debate with Kumba leadership. These principles apply to existing business units and will apply to all new business units and mining projects: • Balance responsibility with financial returns and affordability • Follow a value-driven approach • Be proactive but practical about transparency • Use consultation to create a better outcome • Create short- and long-term benefits • Be consistent throughout the company • Implement global principles with local projects • Balance the interests of different stakeholders • Acknowledge the role of government • Co-operate with other companies and organisations • Sustainability should enhance the corporate brand • Manage the cost/benefit relationship to ensure affordability. 7 2 K U M B A A N N U A L R E P O RT 2 0 0 5 E C O N O M I C S U M M A R Y In terms of GRI guidelines, the direct economic impact of certain economic performance indicators are disclosed below. Direct economic impact Indicator Details Customers Net sales • rand value of revenue • tonnage Geographic breakdown of markets • Iron ore • Coal • Heavy minerals • Base metals • Industrial minerals • Group Cost of all goods, materials and services purchased Percentage of contracts paid in accordance with agreed terms Supplier breakdown per organisation and country – suppliers from whom purchases represent 10% or more of the total purchases in the period Payroll and benefits broken down by region (12 months to December 2005) Suppliers Employees p130 Business operations review on p32 to p42 Summary of business operations in fold-out Business operations review on p34 Predominantly South Africa Predominantly outside South Africa Predominantly South Africa Predominantly South Africa Segmental report on p177 and p178 Summary of business operations review in fold-out Note 5 on p146 – Supplier base > 5 000 – Kumba aims to timeously effect >90% of payments to supplies in accordance with contractual arrangements. 99% of payments meet this target. Spoornet a division of Transnet is being paid in excess of 10% of the total Africa Australia Europe China Total (Rm) 2 038 25 5 4 2 072 Providers of capital Distributions (interest and capital) to providers of capital Note 6 on p147, note 24 on p161, Annexure 1 on p187 Increase/decrease in retained earnings Refer to group statement of changes in equity on p133 and p134 Public sector Tax paid per type and per country Note 9 on p149 Subsidies received per country or region Donations in cash to communities, societies, etc Zero p86 7 3 K U M B A A N N U A L R E P O RT 2 0 0 5 S A F E T Y , H E A L T H A N D E N V I R O N M E N T A L M A N A G E M E N T S U M M A R Y The review period was characterised by progress in safety, health and environmental issues. While celebrating our (SHE) achievements, however, we are always mindful of our goals of an injury-free working environment and zero tolerance for non-compliance or unsafe behaviour. Our focus in environmental management remains on ensuring rights of stakeholders to an environment – now and in future – that is not harmful to their health and well-being. the to continuously Kumba is a mining company: as such, we aim improve SHE performance and management systems in all our operations as an integral part of our commitment to sustainable development. An important element of our compliance with all relevant SHE legislation and international obligations is our commitment to consult with stakeholders, achieve high standards of environmental performance, and implement internationally-accepted standards for occupational health, safety and environmental management. The Kumba board has overall responsibility for SHE monitoring and performance, exercised through the SHE committee and consulting forums at corporate level and each division. Policies and standards cover all operational aspects and activities that could affect the safety and health of people and the environment: a duty of care that covers the life cycle of each division, from exploration and planning to operation, closure, decommissioning, remediation and rehabilitation and post-closure care that focuses mainly on ensuring that environmental sustainability is achieved. Developed in consultation with relevant stakeholders and mandatory for all Kumba operations, SHE policy and management standards aim to: • Provide a risk-based SHE management system, consistent with national legislation, the Kumba SHE policy, ISO 14001, OHSAS 18001, and other internationally-recognised standards that support the implementation of SHE best practice across all Kumba operations • Provide a Kumba-wide framework to effect SHE legal compliance • Ensure the progressive development and implementation of more specific and detailed SHE management systems at all levels of Kumba operations • Provide performance criteria against which SHE management systems across Kumba can be measured • Provide a basis from which to drive SHE continuous improvement • Integrate SHE elements into all relevant existing Kumba policies and practices. by well-established The SHE management process is largely driven risk management principles. Processes and working areas are broken down into units, assessed for baseline risks and then issue- based risks. All operational teams are trained to apply risk assessment on new projects and tasks. Control measures implemented to systematically according to the following risk parameters: reduce risk are • Engineering design • Engineering control and SHE systems • Early warning systems • Administrative control (eg procedures, training and inspections) • General protective mechanisms and processes. O H S A S 1 8 0 0 1 A N D I S O 1 4 0 0 1 All operating business units were certified for ISO/OHSAS management systems (ie to OHSAS 18001 and ISO 14001 standards) during the period. Some, such as Tshikondeni and Kumba FerroAlloys, have fully-integrated SHE risk management systems, with ISO/OHSAS management tools combined in a single system to avoid duplication, resource wastage, and fragmented solution options and decision making. S A F E T Y A N D H E A L T H The focus in health and safety management is on minimising major occupational risks in the work environment including: • Self-propelled mobile equipment • Fire and explosives • Fall of ground • Electricity and other sources of energy • Human behaviour • Noise exposure 7 4 K U M B A A N N U A L R E P O RT 2 0 0 5 • Airborne pollutant exposure, particularly silica dust • Radiation and ventilation. In line with the International Labour Organisation (ILO) code of practice and South African legislation and selected industry parameters, occupational safety and health incidents and trends are reported to the relevant authorities. Monthly and biannual incident analysis helps determine contributing factors; lessons learned and proactive measures implemented are shared throughout the group to prevent further incidents. As part of the ISO/OHSAS certification process, all business units are subject to legal assessment and have a legal register. No for non-compliance occurred during the review period. legal action Where possible, Kumba keeps disabled employees in service, including alternative positions. Safety Four fatalities were recorded in 2005 and we mourn with the families and friends these lost colleagues. Our target is of zero fatalities and any loss of life is unacceptable. The injury frequency rate (LTIFR) for the 12 months ending 31 December 2005 was 0,52 against a 2005 target of 0,35. lost-time While we were extremely disappointed to have missed our safety target for the year, several divisions recorded exceptional performance: • Tshikondeni was awarded the Millionaire Shield by the Department of Minerals and Energy and the Mine Health and Safety Council’s Safety Achievement Flag for coal mines • Thabazimbi mine has been fatality-free for three years • Glen Douglas, Saldanha, Research and Development and Sishen South had no lost-time injuries in 2005 while Ticor’s Hillendale operation reached this milestone just after the year end • Sishen recorded three million lost- time-injury-free hours for the first time since Kumba’s establishment. LTIFR rate per 200 000 man-hours: 2005 Projected target 2006 (0,25) 2005 target (0,35) e t a r y c n e u q e r F 0,7 0,6 0,5 0,4 0,3 0,2 0,1 0 02 03 04 05 Note: Kumba is standardising the reporting of man- hours across the group. and exceeding A major initiative during the year was the launch of the I Care rules to improve hazard identification and risk awareness of employees at all divisions. In line with Kumba’s aim to achieve an injury-free work environment legal compliance standards, the rules are non- negotiable and focus on safety in confined spaces, working at heights, energy and machine isolation, vehicle safety, lifting and handling of material and site-specific rules. The I Care rules augment other safety rules by spotlighting hazards in specific high-risk areas. The implementation of this programme is producing encouraging early results. Independent corporate safety audits are being conducted at all divisions. Focusing on corporate requirements, the primary objective is to analyse the application and effectiveness of selected corporate imperatives at operational level. SHE managers have been trained as internal integrated auditors and are registered with the South African Auditor and Training Certification Association (SAATCA). As part of the drive to manage safety awareness across the group, a proactive index is being developed which considers positive and negative safety performance to develop leading indicators that will ultimately guide future behaviour. The first concrete example of this approach is a guide to managing operator fatigue, developed with input from all divisions and sister companies in the Anglo American group. This guide is available on the Kumba intranet. The following safety targets and objectives have been set for 2006: • Kumba aspires to a zero-injury rate at all its activities. To reach that goal, we aim for zero fatalities and a 30% improvement on the 2005 lost-time injury target of 0,35 • Complete safety audits at all business units and monitor corrective action to ensure sustainable safety standards. Conduct regular follow-up audits • Entrench and monitor the culture of incident management • Establish best practice in contractor management • Manage safety with foresight through leading indicators. Health In line with sectoral developments, the focus during the review period was on risk reduction and implementing proactive indicators to support the elimination of two key occupational health risks – noise- induced hearing loss by 2008 and silicosis by 2013. There were 34 suspected occupational disease cases reported in 2005 compared to 41 reported in 2004. There were 29 cases of noise-induced hearing loss (NIHL); one case of occupational lung disease; one of work-related tuberculosis; one case of hand- arm vibration syndrome; one case of silicosis; and one case of occupational asthma. These cases have been submitted in for Occupational Injuries and Disease Act to Rand Mutual Assurance the Compensation Commissioner for evaluation. The silicosis, occupational asthma and six cases of NIHL were submitted to the Namibian Social Security Commissioner. the Compensation terms of and 7 5 K U M B A A N N U A L R E P O RT 2 0 0 5 Occupational disease cases reported in 2005 Noise-induced hearing loss Work-related turbuculosis Silicosis 85% 3% 3% Occupational lung disease Hand-arm vibration syndrome Occupational asthma 3% 3% 3% All occupational health targets are regularly reviewed against legislation and other industrial commitments to meet the following targets for future reporting periods: • Air quality index of <1 for 80% of exposed employees by 2006 • Risk-based medical surveillance to be performed by December 2006. Kumba business units have already introduced risk-based medical surveillance. Hygiene measurements are used to classify and quantify employee risk and the periodicity of medical examinations for each employee • By December 2008, 95% of all exposure measurement results below the occupational exposure limit for respirable crystalline silica of 0,1mg/m3 • After December 2008, hearing conservation programmes implemented by industry must ensure there is no deterioration in hearing greater than 10% among occupationally-exposed individuals • After December 2013, using present diagnostic techniques, no new cases of silicosis will occur among previously unexposed individuals • By December 2013, total noise emitted by all equipment installed in any workplace must not exceed a sound pressure level of 110dB (A) at any location in that workplace. Occupational hygiene is an integral part of our occupational health management Meaningful environmental reporting benchmarks now in place launch of an environmental centre of excellence, an integrated management service with three legs: environmental specialist services, land management and rehabilitation. By these functions, Kumba will further standardise policies, strategies and guidelines to ensure consistent compliance with legislation and environmental performance. integrating During the year, Kumba was a signatory to the energy efficiency accord developed by the Department of Minerals and Energy. The accord is part of a broader national integrated energy initiative focused on and management which planning examines various interventions for optimal energy planning and use. Under this accord, Kumba is committed to reducing energy use by 0,5% per annum (p92). Kumba welcomes the establishment of the environmental compliance and enforcement inspectorate, which is empowered to enforce environmental compliance from the government’s perspective, particularly legislation on biodiversity, protected areas and air quality. An updated environmental management policy acknowledges all stakeholders’ constitutional rights to an environment that is not harmful to their health and well-being. The right of future generations to use the environment to their advantage is continually considered during business planning cycles, including operational, decommissioning and closure and post- closure phases. Kumba is committed to promoting good and open relationships and through enhancing local communities where we operate. consultative capacity forums the in Land management Land management data has not changed since the previous reporting period. In line with new GRI reporting indicators for mining companies, Kumba’s land for production activities or extractive use is as follows: • Total land disturbed – 18 045ha • Total land rehabilitated in period versus agreed end use – 4 532ha. In 2006, the focus will be on initiatives to minimise land-holding costs and developing 7 6 K U M B A A N N U A L R E P O RT 2 0 0 5 an integrated and proactive rehabilitation strategy to address all closure requirements. Environmental risks During 2005, one environmental fine was received for a Ticor truck that accidentally spilled dust. Rehabilitation The planned mine-closure rehabilitation activities for 2005 were completed at the Durnacol colliery in KwaZulu-Natal during the review period. At Hlobane colliery, closure plans for 2005 were carried out as scheduled. The project initiated in the previous year to seal surface fractures has resulted in the Hlobane waterfall flowing again after more than 50 years (p92). This is part of an integrated water management plan to manage decanting mine water volumes and improve downstream water quality. Monitoring of waterflow is ongoing. Major experiments to enhance rehabi- litation slopes are currently being performed at Sishen and Grootegeluk. liabilities All mining operations have updated estimated final closure liabilities as well as immediate closure (where applicable). Provision for the cost of closure and post-closure liabilities for all mines is managed through an independent rehabilitation trust fund and is externally audited and verified. E N V I R O N M E N T A L O B J E C T I V E S While some progress regarding energy efficiency was made in 2005, we expect further efficiencies to be achieved in controllable energy use across the group in 2006. This process will be driven as part of Kumba’s continuous improvement programme. Typical areas include fixed- energy consumers such as processing plants and buildings. Kumba will develop a robust water-monitoring reporting regime in 2006 that will identify areas to be prioritised for water efficiency. The aim is to bring such consumption to at least below the 2004 water-use baseline. programme to ensure that the work supports high health environment standards. All mandatory codes of practice in terms of the Mine Health and Safety Act (29 of 1996) are in place. Kumba has formal health committees in place at all operations with management and worker representation. Health managers hold quarterly meetings which provide a platform for sharing lessons and successful interventions. The following primary health objective has been set for 2006: • Refining the strategy to meet sector targets by 2013, primarily noise- induced hearing loss and silicosis. E N V I R O N M E N T Kumba has an integrated, enterprise- wide risk management programme in place, which evaluates environmental management risks. All South African sites have approved environmental management plans and environmental management systems in place. Following the installation of an electronic environmental management system in the prior year to consolidate environmental data and statistics, a specialist has been appointed to manage environmental costs and reporting to stakeholders. This electronic system has now been rolled out to all operations and benchmarked nationally. Believed to be the best of its type in South Africa, it supports ISO 14001 and will enable Kumba to make stakeholder reporting more meaningful and comparable. The benefits of achieving ISO 14001 certification for our divisions are numerous; the most important of these is risk profiling and managing significant risks in a standardised system. In future, comparative results will be published. project, A highlight of the review period was the implementation of the environmental scoping comprehensive environmental management improvement process to determine levels of risks, enhance our performance and reporting levels. Pivotal to this strategy was the a Electricity, diesel, gas consumption and water use per business unit: 1 January 2005 to 31 December 2005 Business unit Electricity (Gj) Diesel (l) Diesel (Gj) Gaskor Gas (Gj) Water (m3) Total energy use (Gj) Product (kt) Energy per tonne Electricity per tonne Diesel per tonne Water per tonne Iron ore Sishen Thabazimbi Coal Grootegeluk Tshikondeni Leeuwpan 1 141 068 57 770 750 2 212 909 1 009 238 131 830 49 829 634 7 941 116 1 908 724 304 184 1 033 740 24 189 024 926 561 836 791 138 394 58 554 17 286 120 1 251 209 5 651 695 662 145 47 928 216 488 Industrial minerals 46 933 3 213 051 123 076 Glen Douglas 46 933 3 213 051 123 076 Base metals 1 750 428 2 503 282 Zincor Rosh Pinah 1 606 579 143 849 823 355 1 679 927 Heavy minerals 1 995 607 1 915 850 1 995 607 1 915 850 Ticor SA Total 95 888 31 539 64 350 73 387 73 387 0 0 0 0 0 0 0 0 0 0 0 0 8 647 291 3 353 977 31 217 996 5 904 818 2 742 473 2 917 963 436 014 28 687 650 2 530 346 2 103 983 19 574 538 19 574 538 1 848 705 178 408 76 870 1 498 936 186 322 275 042 17 241 936 412 400 1 920 202 1 957 954 170 009 1 363 672 1 957 954 170 009 1 363 672 2 625 348 1 846 316 256 069 1 394 132 1 231 216 1 638 118 208 198 102 090 153 979 398 001 8 199 102 2 466 995 299 583 398 001 8 199 102 2 466 995 299 583 0,11 0,10 0,17 0,10 0,09 0,45 0,14 0,12 0,12 7,21 16,05 1,35 8,23 8,23 0,19 0,04 0,04 0,05 0,05 0,05 0,34 0,03 0,03 0,03 6,84 15,74 0,93 6,66 6,66 0,11 1,85 1,74 3,14 1,24 1,00 3,03 2,94 2,36 2,36 9,78 8,06 10,91 6,40 6,40 1,71 0,28 0,21 1,08 0,11 0,11 0,43 0,04 1,44 1,44 10,25 13,66 8,00 27,37 27,37 0,45 5 978 388 90 023 401 3 448 346 398 001 23 569 904 9 824 735 52 711 858 * Kumba totals include smaller operations not listed on the table. The operations are Hlobane, Durnacol and Kumba FerroAlloys. ** Total energy figures comprise electricity, diesel and Gaskor gas Environmental incidents: 1 January 2005 to 31 December 2005 Business unit Iron ore Sishen Thabazimbi Coal Grootegeluk Tshikondeni Leeuwpan Industrial minerals Glen Douglas Base metals Zincor Rosh Pinah Heavy minerals Ticor SA Total Level 3 Level 2 Level 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 4 4 0 39 39 43 192 146 46 482 302 44 136 35 35 126 101 25 284 284 1 119 Level 1 Environmental incidents not covered in Level 2 and Level 3. Level 2 Environmental incidents and fines for non-compliance with potential liability exceeding R10 000. Level 3 Environmental-related incidents with a high or potentially high significance (major impact, long-term or extensive effect) and a probable negative impact on shareholder value. 7 7 K U M B A A N N U A L R E P O RT 2 0 0 5 Greenhouse gas emissions from processes prioritised for 2006 Current changes in air quality management legislation have necessitated reviewing performance on air quality. Accordingly, Kumba will initiate air quality baseline studies at business units that fall within the demarcated air quality priority areas, such as Gauteng. This will ensure compliance with the draft ambient air quality standards. Recognising the environmental challenges facing South Africa and the international community from the negative impacts of greenhouse gases and ozone-depleting substances, Kumba has begun monitoring contributors of CO2, one of the significant greenhouse gases, within the group. The primary focus has been on CO2 emissions related to electricity, diesel and Sasol gas as energy sources. Currently CO2 emissions from consumption of Sasol gas are 18 069,31 tonnes at Ticor SA. Areas prioritised for reporting improvement in 2006 are greenhouse gas emissions from processes. This will be done through the air quality baseline studies scheduled for some business units in 2006. These baseline studies will indicate the entire noted air quality inventory which will include both greenhouse gases and ozone- depleting substances. The ecology services expertise available to Kumba through the newly-established environment centre of excellence will be used to drive biodiversity baseline studies needed to comply with new legislation. Waste management strategies will be developed with the aim of driving down hazardous waste produced per tonne of product at the Zincor, Rosh Pinah and Sishen business units. The following environmental objectives have been set for 2006: • Monitoring the implementation of environmental management plan reporting • Implementing the hydrocarbon strategy of affected centres • Further developing the centre of excellence to focus on environmental risks • Finalisation of a group land rehabili- tation strategy • Finalisation of closure plans for in closure mines • Disposal of inactive properties CO2 from electricity purchased (tonnes): 2005 CO2 from diesel (tonnes): 2005 Business unit Iron ore Sishen Thabazimbi Coal Grootegeluk Tshikondeni Leeuwpan Industrial minerals Glen Douglas Base metals Zincor Rosh Pinah Heavy minerals Ticor SA Total MWh 316 963 280 344 36 619 287 150 232 442 38 443 16 265 13 037 13 037 486 230 446 272 39 958 554 335 554 335 Tonnes Business unit 305 236 Iron ore 269 971 35 264 Sishen Thabazimbi 276 525 Coal 223 842 37 020 15 663 Grootegeluk Tshikondeni Leeuwpan 12 555 Industrial minerals 12 555 Glen Douglas 468 239 Base metals 429 760 38 480 Zincor Rosh Pinah 533 825 Heavy minerals 533 825 Ticor SA 1 660 663 1 637 620 Total Litres 57 770 750 49 829 634 7 941 116 24 189 024 17 286 120 1 251 209 5 651 695 3 213 051 3 213 051 2 503 282 823 355 1 679 927 1 915 850 1 915 850 90 023 401 Tonnes 155 403 134 042 21 362 65 068 46 500 3 366 12 203 8 643 8 643 6 734 2 215 4 519 5 154 5 154 242 163 7 8 K U M B A A N N U A L R E P O RT 2 0 0 5 1 5 4 1. Peet Herbst, mining and technical services manager at Glen Douglas, examines growth on one of the rehabilitated slopes at the mine. 2. Silver Monageng, during an inspection at a Thabazimbi mine nursery where indigenous plants are cultivated for use in the mine’s rehabilitation programme. 2 3. Kumba’s occupational health management programme includes regular medical check-ups for employees. At Rosh Pinah, Edwin Daniels and Rónel Pretorius monitor Theo Ickua’s performance on the ECG test. 4. Dawid Kruger, senior environmental technician at Sishen, directs the planting of indigenous trees at the mine’s rehabilitation slope trials. 5. Experiments to enhance rehabilitation are under way at Grootegeluk. Stefan Adamski, senior mining engineer, checks progress on the storage of topsoil at the mine. 3 7 9 K U M B A A N N U A L R E P O RT 2 0 0 5 S O C I A L S U M M A R Y W O R K P L A C E I S S U E S For the third consecutive year, Kumba was ranked “best company to work for” in the mining sector in a comprehensive independent survey by Deloitte. Key parameters of the survey reinforce the causal link between the performance of human capital and financial performance of a company, and support our focus on transforming our group into a high-performance organisation. The results of this survey, in which 121 South African companies participated, were used by our divisions and corporate service departments to formulate their high-performance roll-out plans. the remains a priority. At 31 December 2005, 62% of the workforce was black, coloured and Asian – down from 66% due to unavoidable terminations such as, among others, medical boarding and the business improvement programme. Kumba reports against the mining charter definition of HDSA, which refers to people from a historically disadvantaged background (ie blacks, coloureds, Asians and white females) and those with physical disabilities. The status of HDSA representation in our management and professionally-qualified categories as well as representation by women (at all levels) is illustrated below. Employment At 31 December 2005, Kumba had 8 915 permanent employees, excluding those of Ticor Limited, Australia. The figure has dropped slightly compared to 2004 due to, among others, non-work related deaths, normal retirement, normal resignations and the Kumba business improvement programme streamlining operations by reducing costs, increasing production and revenue and improving processes while minimising job losses. aimed at Various contractors and suppliers support Kumba’s operations, creating 4 500 additional jobs, mainly due to the Sishen expansion project. With the extensions to mining operations taking place at Grootegeluk and Sishen, further jobs could be created. Kumba has embarked on reporting net job creation per region as required by GRI and results will be detailed in the 2006 annual report. Employment equity Kumba has an employment equity policy for the development and promotion of historically disadvantaged South Africans (HDSAs), women and people with disabilities. Detailed employment equity plans are in place at every business unit to ensure we achieve our goals. Progress is actively managed, in management categories where 26% of the board and 40% of general managers are currently employment equity candidates. Increasing the number of equity candidates, particularly at middle management levels, particularly in targets Firstly, the graph indicates Kumba’s overall performance on progress against the employment equity management category. This has increased steadily each year and is currently at 31,5% compared to 28% in the previous period, despite limited retrenchments resulting from the business improvement programme. Secondly, the graph also indicates Kumba’s overall performance against targets for women. This has increased from 12% in 2004 to 13% in 2005 and is already 3% above the national government target of 10% in the mining charter. Employment equity progress % 45 40 35 30 25 20 15 10 5 0 00 01 02 03 04 05 06 07 08 Target for HDSAs (blacks, coloureds, Asians and white women) Target for women in management HDSA progress against target (blacks, coloureds, Asians and white women) Progress against target (women in management) Blacks (Africans, coloureds and Asians, excluding white women) 8 0 K U M B A A N N U A L R E P O RT 2 0 0 5 HIV/Aids Kumba’s HIV/Aids initiatives continued steadily at business unit and corporate level during the year. The main objectives of Kumba’s HIV/Aids strategy are to: • Prevent more people from becoming infected with HIV/Aids • Extend the lives of those infected for as long as possible to the benefit of the company and society at large • Ensure the impact of HIV/Aids on the company is managed to enable Kumba to grow and contribute to South Africa’s developing economy. Acknowledged as one of the most proactive strategies in South Africa, Kumba’s HIV/Aids programme will be an important element for consideration in the transformation process under way in the new financial year. Stakeholders will be informed of progress on Kumba’s intranet and the official Kumba internet site. Measurement A knowledge, attitude and practice survey was conducted at all business units in 2002, 2003 and 2004. A financial impact analysis estimated the effect of HIV/Aids on the entire business by using Kumba’s risk management matrix. The analysis showed that significant savings (cumulatively R348 million) could be realised through a prevention and treatment programme. As Kumba is underexposed relative to the mining industry, the impact at this stage is relatively low and expected to remain static while anti-retroviral treatment (detailed below) is distributed to affected groups. Kumba’s awareness initiatives continued during the year and the company’s participation in the United Nations-sanctioned International World Aids Day was a resounding success. HIV/Aids management Programmes in place at all business units and the corporate office include voluntary counselling and testing, peer education, wellness programmes and community- based treatment of sexually-transmitted diseases. initiatives and The successful anti-retroviral pilot programme implemented at selected business units in 2003 and the corporate centre in 2004 has been extended to more operations, including Ticor SA, Zincor and Rosh Pinah. A total of 133 HIV-positive employees have now enrolled on the programme, and 419 on the wellness programme. In 2005, 2 878 employees were voluntarily tested, bringing the total to 4 813. initiatives Community programme Kumba commissioned an independent study on the status of HIV/Aids programmes and the Thabazimbi in community in Limpopo in 2003. The intention of the pilot was to strengthen and extend the group's HIV/Aids approach to host communities, with a strategy focused on several key interventions: • Conducting HIV/Aids prevention programmes in and around the mining community • Conducting voluntary counselling and testing projects • HIV/Aids awareness and education programmes • Initiating comprehensive community home-based care programmes for families whose members are already infected • Initiating income-generating projects indigent communities around for Kumba mines. of include benefits numbers community members benefiting from voluntary counselling. Other improved disclosure cases, increased availability of condoms, effective condom usage, strengthened capacity of community- based organisations, better public-private partnership networks and increased awareness of HIV/Aids. Kumba will continue to fund this initiative in 2006. the Employee management relations Relationships between various employers in the Kumba group and recognised trade unions remained sound and positive during 2005 and wage agreements were settled without discord. Kumba’s commitment to freedom of association to join a union of choice and constructive engagement of all stakeholders on issues relating to the employment relationship underpins sound employee relations. The following trade unions have recognition, subject to the criteria of respective agreements, at the various operations to bargain on behalf of their members in the bargaining units: United Association of South Africa (UASA); National Union of Mineworkers (NUM); National Union of Metalworkers in South Africa (NUMSA); Solidarity; Building, Allied Mine and Construction Workers Union (BAMCWU) and Mineworkers Union of Namibia (MUN). Employees have the right to elect shop stewards of their choice. The success of this initiative became more apparent during the year with greater About 60% of Kumba employees are unionised, with the breakdown as follows: Undergoing voluntary HIV/Aids testing at Glen Douglas. From left, Ronel Rossouw, occupational health nurse; Themba Pebe, loader operator; and Phindile Ngwenya, a councillor from the Midvaal Local Authority. 8 1 K U M B A A N N U A L R E P O RT 2 0 0 5 NUM (80%), Solidarity NUMSA/BAMCWU/UWASA (5%). (15%), and Collective agreements between the various employers in Kumba and the trade unions regulate the relationship. These include: • Recognition agreements • Full-time shop stewards’ agreement • Full-time health and safety representative agreements • Communication and participative structure agreements • Agency shop agreement. Conditions of employment for employees in bargaining units are centrally negotiated each year. Through collective bargaining, employees receive several benefits that exceed minimum legislative (Basic Conditions of requirements Employment Act). These include: leave (including a leave bonus), sick leave, maternity leave and family responsibility leave. Allowances are paid for housing, standby, call outs and shift work. Regular meetings with employee repre- sentatives (trade unions) at operations and centrally are held to inform them on relevant issues such as business and financial results. Trade unions are consulted on any new or revised policies and procedures. Agreements on changes in operations are negotiated or consulted with the respective trade unions centrally, or at the relevant operations. There is transparent and continuous communication of relevant information to all employees. Human rights As a responsible corporate citizen with a stakeholder charter, Kumba complies with all labour legislation in South Africa, eg the Constitution of the Republic of South Africa, Labour Relations Act, Basic Conditions of Employment Act, Employment Equity Act, Skills Development Act, Unemployment Insurance Act, Mine Health and Safety Act, Compensation for Occupational Injuries and Training and development funding double industry average Diseases Act. Kumba also complies with International Labour Organisation guidelines. Kumba ensures that child labour is not tolerated and that forced or compulsory labour is not practiced. Kumba conducts induction programmes for employees to ensure they are educated about human rights. Policies on discrimination, harassment and racism as well as structures, such as equity committees, are in place to protect employees’ human rights in the workplace. Agreements with security providers aim to ensure that their employees are educated about human rights. Regular meetings are held with security providers and their employees are able to raise human rights issues with Kumba. To date, there have been no incidents relating to human rights issues. Employee training on human rights is implemented the Jay Hall through Leadership Training programme, diversity management and entrenching foundational and motivational values through the Kumba Way programme. Work environment Since listing in 2001, Kumba has regularly been rated by credible, independent publications and institutions as one of the top 40 companies in South Africa on elements such as salary and benefits, incentive schemes, and education, training and development. Human resources development The combined figure for investment in human resources development as a percentage of payroll rose from 5,7% to 6,3% (R94,4 million). Research conducted for the Mining Qualifications Authority (MQA) in May 2005 indicates that the average for mining companies is 3,2% of payroll. Training and development (% of payroll) 7 6 5 4 3 2 1 0 MQA average 3,2 03 04 05 From table 1 below it is clear that in Kumba: • With the exception of services, workers and labourers and related workers, more than 75% of employees were beneficiaries of training during the year • Beneficiaries of training in all job categories were exposed to more than one training intervention during the training period. The number of interventions is especially high in the Table 1: Beneficiaries of training (expressed as % of staff in the particular job category) Job category Legislators, senior officials and managers Professionals Technicians and associated professionals Clerks Service, shop and market sales workers Craft and related trade workers Plant and machine operators/assemblers Labourers and related workers Average number of interventions per beneficiary 1,9 1,7 2,6 1,6 2,0 3,8 4,4 2,2 Total 98,1% 93,1% 92,9% 79,8% 60,7% 76,9% 89,5% 31,2% 8 2 K U M B A A N N U A L R E P O RT 2 0 0 5 categories of plant operators (4,4), craft and related trade workers (3,8) and technicians and associated professionals (2,6). residents Recruitment A policy of non-discrimination is applied with all staffing and recruitment practices. Generally local communities are employed at business units, except in areas where specific skills are not available. About 70% of employees at the various business units are recruited from local communities. from Housing Kumba’s housing strategy, focused on home ownership, is in place at each division and the current status is summarised below. Description Home owners Rental units Hostels and single quarters Other Total Number of employees 1 360 1 351 2 940 1 066 6 717 % 18 22 39 21 100 The housing programme complies with the requirements of the mining charter and will be fully implemented by 2008. Rental houses will be sold at market value to employees and, where feasible, hostels converted into single units. Prior to the review period, R17 million was spent on housing to comply with the charter. In 2004, Kumba issued a guarantee of R10 million towards a housing development project (at Sishen). A further R8 million was made available for the development of infrastructure and R5 million was spent on developing services in 2005. Supply chain management Kumba’s policy of supporting suppliers that, in turn, support transformation is delivering clear benefits, with HDSA procurement (black-owned and black- empowered suppliers only) ahead of the 18% target at 24% of discretionary spend for the year or R863 million compared to R128 million in 2002. Kumba was a founding member of the South African Mining Preferential Procurement Forum which is proving an important catalyst in helping smaller mining companies meet legislative requirements through their own initiatives and through supplier development. A Kumba representative was appointed chairman of this forum for 2006. Preferential procurement (Rm) 900 800 700 600 500 400 300 200 100 0 02 03/04 05 Communities of practice Kumba has communities of practice for effective development and sharing of knowledge, best practices and lessons across the group. The focus is primarily on the core competencies required for Kumba’s sustainability. In practice, these communities have lowered the risk of losing key knowledge workers, and brought new people up to speed faster than before. A team of dedicated knowledge management practitioners proactively facilitates and serves these communities of practice, to ensure maximum value from knowledge sharing. The aim of the team is to value Kumba’s intangible assets to ensure these are safeguarded into the future. The ongoing success of Kumba’s communities of practice continues to generate much interest, with many organisations visiting the group to learn about the processes and concepts being implemented. Kumba also hosts relevant forums to bring experts together in an environment conducive to exchanging knowledge. Professionals-in-training, bursars programme and bridging school To counter the critical shortage of skills in South Africa, Kumba is working to ensure a steady supply of highly-qualified professional employees by hosting an intensive training and development programme for bursars and professionals in training. Kumba has also funded a bridging school since 1995 where high-potential candidates are given the opportunity to improve their academic school-leaver results. This prepares them for tertiary studies in engineering, geology and related disciplines. From 2006, tuition at the bridging school will be done by the University of Pretoria and form part of the foundation year programme offered by this university. Bursars are granted bursaries to fund their engineering and geology studies from first year to honours level after which they enter the professionals-in-training programme at Kumba. Trainees embark on a formal three- they are year programme intensively evaluated and monitored by a team of coordinators, coaches and the staffing department. in which There are currently 108 Kumba bursars studying at South African tertiary institutions. Of these bursary holders, 79% are HDSA of whom 19% are women. The very low drop-out rate of under 6% for Kumba students reflects the success of this initiative and the support given to these students. Currently, 52 graduates are in the professionals-in-training programme. Of these graduates, 73% are HDSA of whom 23% are women. In 2005, 44 graduates successfully completed the programme and were placed in permanent positions in Kumba divisions. 8 3 K U M B A A N N U A L R E P O RT 2 0 0 5 The graphs below illustrate the progress Kumba has made in the advancement of professionals-in-training compared to the previous period. Comparison: bursary and professionals-in- training pool: 2004 and 2005 HDSA %: Bursars Managed HDSA numbers and intake % 80 75 70 65 60 55 2004 2005 HDSA %: Professionals-in-training Managed HDSA numbers and intake % 74 72 70 68 66 64 62 60 2004 2005 Learnerships The total number of learnerships in Kumba in 2005 was 503. For the first time, learners were also trained in mining, plant and skills learnerships. Engineering learnerships (previously apprenticeships) totalled 448. Due to these additional categories, the total number of learnerships rose by 38% against the previous period and represents 26% of all apprentices trained in the mining industry. Of these Kumba trains 26% of learners in the mining industry Table 2: Total learnerships in 2005 Number of learners Engineering learnerships Mining learnerships Plant learnerships Skills learnerships Total learnerships African Coloured Asian White Total M 203 17 6 7 233 F 24 4 – 2 30 M 99 1 7 6 113 F 3 1 3 – 7 M – – – – – F – – – – – M 118 – – 1 119 F 1 – – – 1 448 23 16 16 503 that high standards are set and met in the these training and development of candidates. Twelve trainees are currently enrolled in the programme, of whom ten are black, coloured or Asian. through membership MQA involvement Kumba’s human resources development professionals are contributing significantly to the national and sectoral transformation and process participation in bodies such as Business Unity, Chamber of Mines’ committee for education and training, and the MQA sector skills planning committee. Kumba professionals also play a prominent role in the MQA’s unit standards generation and qualification design processes. * Total percentage HDSAs (without white women) = 76,3% learners, 76% are black, coloured or Asian, and 8% are women. Kumba’s technical training centres at Lephalale (Ellisras) and Sishen are accredited as training providers by the MQA. Costs and accommodation, some R40 million per annum, are borne by Kumba. to develop imperatives. Divisions contract with these service providers competencies through management programmes, development centres, further education at tertiary institutions and training and workshops in a range of leadership development areas. In 2006, a comprehensive report will be tabled on progress to date. Kumba’s commitment to learnerships exceeds its own requirements – deliberately so to build the pool of skills for the industry and train unemployed people in line with national growth and development targets. The breakdown of learnerships is shown above in table 2. Kumba is also represented on the sector skills planning committee of the MQA. Several Kumba employees are members of MQA technical reference groups assisting with unit standard and qualifications development. senior management Leadership development and succession planning Formal leadership development initiatives and succession planning workshops involving and employees continued during 2005. Building and retaining a pool of current and future leaders is a priority for Kumba and appropriate initiatives include a succession planning comprehensive process strategic enhancing and leadership competencies. School of Finance The Kumba School of Finance is an accredited training organisation with the South African Institute of Chartered Accountants. to It provides employees studying for the chartered accountant (CA) qualifications. A skilled team of coordinators and coaches ensures training 1. Fish Rithuri, at the controls of a reclaimer at Glen Douglas. 2. Kumba is a leader in the training and development of its employees. It has also made good progress in exceeding the industry target for women employees. Lucia Naikuwa, apprentice diesel mechanic at Rosh Pinah, is seen here with Ernest Witbooi, maintenance foreman. 2 Kumba’s suite of leadership competencies is aligned with the company’s strategic 1 8 4 K U M B A A N N U A L R E P O RT 2 0 0 5 S U S T A I N A B L E D E V E L O P M E N T : F O C A L A R E A S S U S T A I N A B L E D E V E L O P M E N T S U S T A I N A B L E D E V E L O P M E N T S T A K E H O L D E R E N G A G E M E N T L O C A L E C O N O M I C D E V E L O P M E N T Objective Ensure that sustainable practices are embedded in the Kumba Way. Objective Ensure the effective engagement of all Kumba stakeholders. Desirable outcomes • Business unit-specific sustainable development plans must be aligned with sustainable development plan the Kumba • Implementation and task teams with relevant experts to ensure effective sustainable development plans. W H A T I S S U S T A I N A B L E D E V E L O P M E N T ? Sustainable development is defined as “development that meets the needs of the present without compromising the ability of future generations to meet their own needs”. Sustainable development encompasses a balance between three pillars, namely economy, environment and society. The requirements of each must be considered and integrated into all activities to achieve sustainable development. Drivers for sustainable development International guidelines and standards, including: – Organisation for Economic Co- operation and Development (OECD) guidelines – Extractive Industry Transparency Initiative announced at the World Sustainable Summit Development in 2002 on – International Standards Organisation Management Environmental Standard (ISO 14001) – Global Reporting Initiative (GRI) – AA1000 series and framework Desirable outcomes • Correctly identify all stakeholders who have an interest in Kumba and in which Kumba has an interest • Ensure that stakeholder engagement is conducted effectively. – Social Accountability 8000 (SA8000) – a voluntary international standard for auditing and certifying labour practices – United Nations codes on labour and environment – World Bank social and environmental protocols for its projects • The level of activism directed at mining companies • Reputation management to maintain our social licence to operate, access new mineral wealth, finance and other business opportunities • The need to attract investors. International banks and financing institutions are concerned with the social risk of investment decisions. South African drivers • Legislation on human rights and labour relations, including: – Constitution of the Republic of South Africa – Employment Equity Act – Skills Development Act – Promotion of and Prevention of Unfair Discrimination Act Equality 8 5 K U M B A A N N U A L R E P O RT 2 0 0 5 Objective Establish Kumba as an active participant in sustainable local socio- economic development. Desirable outcomes • Ensure that projects are aligned with Kumba’s strategy • Invest only in projects which can be sustained by the community in future approach/strategic • Integrated partnerships. – Legislation on health and safety which mandates employers to create working environments that are safe and risk-free to the health of employees – Occupational Health and Safety Act – Mine Health and Safety Act. • The mining charter, issued under the Mineral and Petroleum Resources Development Act, stipulates the requirements for mines to retain their mining rights, including environmental, social and empowerment issues • The SAEF Excellence Model for managing performance, including employees, customers and society as stakeholders, and suppliers • The King Reports on Corporate Governance (1994, 2002) • The JSE Socially Responsible Investment Index provides a way to identify best practice in corporate social responsibility and measures constituents’ share price performance in a benchmark index. Selection criteria include environmental sustainability, positive relationships with stakeholders and upholding universal human rights. Sustainable development is a group-wide commitment at Kumba Building on the substantial progress made since 2002, Kumba has refined its at all Kumba centres, including corporate and international operations. approach to sustainable development and incorporated local economic development as an integral part of the process of accountability to stakeholders. Accordingly, our reporting for 2005 concentrates on the policies and structures being put in place to achieve these goals. Drivers for stakeholder engagement Building long-term, stable and mutually- beneficial relationships with stakeholders is a business imperative for Kumba. Stakeholder engagement is therefore governed by the following protocols: • The King II Report on Corporate Our approach to sustainable development Governance is summarised on p72. Case studies of our approach in action appear on p91-101. • Global Reporting Initiative (GRI) • The Mineral and Petroleum Resources Development Act. Kumba has committed considerable expenditure to the management of the sustainable development elements (p5), and local economic development expenditure for 2005 totalled R15 million. In future reports, detailed expenditure on other elements will be reported. S U S T A I N A B L E D E V E L O P M E N T Sustainable development is a group-wide commitment at Kumba. At senior executive level, we liaise with national and provincial government departments to ensure our initiatives align with national priorities. Our business units liaise with their municipal counterparts in implementing these strategic plans and feedback is given to senior management to ensure that stated objectives are met. S T A K E H O L D E R E N G A G E M E N T Identifying and communicating with stakeholders was prioritised during the year to ensure open dialogue on issues of common interest. Feedback has been positive and constructive and will form an important part of our actions in the future. At Kumba, stakeholder engagement is the process of ensuring that we create a transparent dialogue between ourselves and internal and external parties about our operations and the consequences of those operations. Our stakeholder engagement policy defines the concept of stakeholders and the nature of engagement with those stakeholders, and applies to all employees Effective stakeholder engagement designed to: is • Provide Kumba with an opportunity to explain at local, regional and national level the nature of its decisions and the financial, environmental and social consequences of those operations • Sensitise Kumba to concerns that may exist within the communities or investor bodies, and to address those issues • Enable Kumba to influence govern- ment and other stakeholders • Provide the opportunity to brand Kumba externally and facilitate more accurate and favourable reporting in the media • Facilitate the ability to raise capital for projects by providing investors with better information and understanding • Facilitate decision-making inside and outside Kumba by ensuring the flow of accurate information. S T A K E H O L D E R I D E N T I F I C A T I O N A stakeholder is defined as any person or body with a direct or indirect interest in Kumba operations, or with the ability to affect Kumba operations, or who is required to be informed of our operations. Internal stakeholders • Employees – All employees and their representative bodies • Kumba board – Kumba’s board is required to make strategic decisions on 8 6 K U M B A A N N U A L R E P O RT 2 0 0 5 direction, and must be well-informed on factors which may affect its decisions and impact on represented interests. External stakeholders • Local, provincial and national government bodies – National government bodies make decisions and formulate policies that impact directly on our operations government bodies – Provincial regional growth and develop development with strategies consequences for Kumba centres in that region – Local government bodies are primarily concerned with the impact of Kumba operations in the local community. These bodies affect our operations as they control land zoning and service provision, including water and electricity supplies • Media – Greatly influences the image of Kumba in the outside community, making it imperative to ensure the media has accurate information on our operations • Investors – Include shareholders, fund managers and analysts. Investors have a direct financial interest in our revenue and profitability, and are thus concerned about the sustainability of operations, making it crucial that they are well informed of our policies, strategy and operations • Customers – Prefer to deal with a company with a good track record in product stewardship. An understanding of our policy and strategy helps to develop long-term relationships with customers and products • Suppliers – Prefer to work with a company that will deal responsibly with their services. Stakeholder engagement ensures we inform suppliers of our ethical and governance standards and avoid potential damage to our reputation • Business partners – Companies need to understand the strategy, ethics and governance of their partners to develop a business relationship. Inaccurate • Non-government organisations – NGOs include charities, pressure groups, environmental groups and other non- profit structures whose objective is to influence policy and decisions on a particular subject. Interaction with NGOs ensures we are aware of each other’s concerns • Other industry players – Organised competitors, chambers, business employer research associations, organisations and standards-generating bodies. Industry players need to interact with one another on standards, benchmarking, lobbying and other activities of mutual interest. information can partnerships consequences result with in failed damaging • Local communities – Are directly affected by Kumba operations (work opportunities, environmental impact opportunities). and development Interaction is essential 1 2 3 4 1. Trainees develop bricklaying competency at Thabazimbi’s Iterileng Skills Centre. Members of the local community are trained in various skills each year. 2. Enterprise development is one of Kumba’s local economic development goals and the Kgalagadi Fire Wood project at Sishen is an example of how a new business can be developed to create jobs and a sustainable and independent future. 3. Learners from a local school examine one of the exhibits at a mobile science centre, partly sponsored by Ticor SA. 4. The Iterileng Crèche in the Marapong area near Grootegeluk was built and equipped by Kumba, and its staff were trained by the company. Here Janet Peletona, a caregiver at the crèche, teaches children the basics of numeracy. 8 7 K U M B A A N N U A L R E P O RT 2 0 0 5 Identifying and communicating with stakeholders is prioritised M U L T I - S T A K E H O L D E R M O D E L Kumba’s approach to sustainable development rests on a multi-stakeholder model, acknowledging that our primary responsibility is to investors but that this duty cannot be fulfilled without a considered regard for the interests of other stakeholders, including: Stakeholder National government Provincial and local government Representative/s Primary issues Department of Minerals and Energy Department of Trade and Industry Department of Education Department of Agriculture Department of Labour Regional Department of Minerals and Energy office Department responsible for growth and development Land Bank • Compliance with mining charter • Alignment with national growth and development strategies • Partnerships in enterprise development • Employment opportunities through local economic development • Partnerships in formal education support • Employment equity and other labour- related issues • Compliance with mining charter • Partnerships/assistance with local economic development • Employment opportunities created through local economic development • Agricultural local economic development projects Local municipality • Local economic development Media Investors Customers Suppliers National broadcasters Media groups, including financial press Anglo American Minority shareholders Eskom Transnet Other vendors Business partners and industry participants Chamber of Mines Chamber of Commerce Communities, non-governmental bodies and community organisations • Newsworthy items, particularly empowerment activities • Reputation management • Financial performance from investors’ perspective • Sale of iron ore assets • Return on investment • Major coal purchaser • Major supplier • Transportation of raw material • Any developments that affect Kumba requirements and thus their own income • Sole suppliers • Preferential procurement • Economic development in southern Africa • Socio-economic development • Environmental issues Internal stakeholders Employee representatives • Service conditions, employer relations, socio-economic development 8 8 K U M B A A N N U A L R E P O RT 2 0 0 5 C O M M U N I C A T I N G W I T H S T A K E H O L D E R S Kumba initiates numerous activities to engage stakeholders at a national level. Description Audience National Kumba stakeholder engagement forum Stakeholder forum reports Kumba internet site One-on-one meetings Annual report National forum chaired by senior manager, covering sustainability focus areas Summarised report of topics and discussions from stakeholder engagement forum Stakeholder forum reports Share prices News releases Meetings with specific stakeholders on pertinent issues Publication that covers progress in all areas of sustainability for the preceding year All national and regional stakeholders Frequency Quarterly Distribution/location Kumba Corporate Centre All national and regional stakeholders Quarterly Posted/emailed one week after forum meeting All stakeholders Ongoing Electronic www.kumbaresources.com Determined by requirement As needed As needed All national and regional stakeholders Annual Posted L O C A L E C O N O M I C D E V E L O P M E N T In line with our strategy, national government imperatives and international protocols, we are establishing Kumba as an active participant in sustainable local socio-economic Our approved policy applies to all employees at all business units. It sets out Kumba standards and guidelines on local economic development in: development. • Formal education • Skills development • Enterprise development, including small-scale mining • Health and welfare • Environment • Infrastructure • Agriculture • Tourism • Sports and recreation. All local economic development projects are guided by predetermined principles, regardless of the focus area: • Sustainability • Project management • Branding • Partnerships • Selection of vendors. Local economic development forums It is the responsibility of local government to establish a local economic development (LED) forum in each area. The purpose of the forum is to engage all local community stakeholders to assist local government in meeting for creating economic growth. its mandate Kumba’s LED managers are mandated to play an important role in participating on this forum. Where a forum does not exist, or local government does not have the capacity to create one, Kumba’s LED manager will facilitate the establishment of the forum. LED forums include representatives from: • Local and district municipality • Chamber of commerce • Provincial government bodies, eg tourism • Large industries in the area • Labour representatives • Non-government organisations. Our initiatives, segmented in line with our triple bottom-line approach, are detailed on p91-101. 8 9 K U M B A A N N U A L R E P O RT 2 0 0 5 Balancing the needs of the economic, social and environmental pillars By emphasising collaborative local economic development, we align our initiatives to national priorities to ensure we build meaningful partnerships with all stakeholders. T H E W A Y F O R W A R D F O R S U S T A I N A B L E D E V E L O P M E N T In recent years, we have crystallised many elements of our approach to sustainable from an approved development – framework that guides all our operations to the creation of a focused, centralised unit to maximise the beneficial impact Kumba has on its stakeholders. some signal There have been significant achievements and lessons. Most importantly, we have developed a deeper understanding of the different elements that must combine to produce real transformation for present and future generations. As we enter our own transformation phase, these lessons will guide us as we distill our best practices and well developed elements and then re-combine these with the best practices of our new partners to create a world-class approach to sustainable development and stakeholder reporting. Empowerment is a fundamental pre- requisite for the long-term development and sustainability of the South African economy. This firm belief underpinned our decision to split a successful company into two, knowing that separately there would be greater benefit and economic prosperity for more stakeholders and, by association, more people of our nation. is a K U M B A F O U N D A T I O N trust The Kumba Foundation controlled by a board of trustees with the objective to ensure effective management of for community development by monitoring progress through the project-monitoring system and procedures. funds allocated The foundation also funds through Kumba’s bridging school (p83). learners M O N I T O R I N G A N D E V A L U A T I N G T O E N S U R E S U S T A I N A B L E P R O J E C T S We believe sustainability is a process of development – one that is dynamic, ongoing and guided by community involvement in decision-making. We focus on building capacity but have set entry and exit points, and the process is driven by a formal project management system. 1 2 3 1. Members of the Rosh Pinah Community Development Centre produce concrete bricks which are used in the construction of houses for mine employees and other stakeholders. 2. Computer-based induction classes at the Tshikondeni Training Centre. 3. Mike Hood of the Grootvaly/Blesbokspruit Conservation Trust which is involved in the environmental education of local children, in discussion with Isaac Tlali of Zincor. Zincor supports the trust, which is also involved in the conservation of the Grootvaly/Blesbokspruit site, a wetland of international importance and acknowledged by Ramsar. 9 0 K U M B A A N N U A L R E P O RT 2 0 0 5 P R O G R E S S O N E L E M E N T S The case studies that follow highlight our response to many of the group’s key sustainable development elements, some group-wide and others focused at business units. • Stakeholder engagement – Imple- menting effective and transparent engagement, communication and independently-verified reporting arrangements with stakeholders (p86) Effective stakeholder engagement at Ticor Ticor SA is the result of a joint venture between an established Australian company and a fledgling South African business. As a mineral sands operation, Ticor SA understood from the outset that its business strategy had to meet the expectations of all stakeholders and maintain quality of future integrating economic generations by development with environmental and social considerations. The company challenged its operating units to integrate those principles into their day-to-day operations and to align their businesses with the commitments set out in a sustainable business strategy. life for Accordingly, development partnerships have been pivotal in integrating Ticor SA’s business and social values. The company’s experience in working with local people to address their health, education and the development needs highlights importance of: • Integrating social and community issues into local business models and cultures • Establishing effective local partnerships based on common business and community interests • Developing practical and capacity to address local community development needs skills performance • Developing management systems – drivers, including accountabilities, and information and communications systems – which enable business units to interpret corporate sustainability strategy in the specific circumstances confronting local operations • Demonstrating positive business and development outcomes. In assessing the communities around Ticor SA’s Hillendale mine and Empangeni central processing complex in KwaZulu- Natal, the high incidences of HIV/Aids, low levels of education and limited local business capacity clearly impact negatively on both community sustainability and the company’s ability to operate successfully. Ticor’s education, health and business development programmes – developed in partnership with regional communities and government agencies – address critical community needs while supporting the company’s business and operational objectives. • Natural environment – Understanding our impact on the physical environment and conforming to nationally- and internationally- recognised standards, policies and measures to negate or address detrimental environmental effects, to ensure sustainable development of our operations. Kumba’s management of environmental issues is well structured, both by legislated requirements and the internal systems established to manage these Better than before Working with the North West University, Kumba is implementing an extensive set of rehabilitation experiments at the Sishen mine. The outcome will ultimately form the framework for rehabilitation and mine closure plans. Acknowledging that current rehabilitation trials were not delivering the desired result of zero ecological impact because the material being used to encourage new vegetation lacked sufficient suitable organic matter, Sishen began producing its own organic compost in 2003. Currently, all compost used during the trials is supplied by an organic plant constructed on the mine. The compost consists of a mixture of sewerage sludge, chipped invader plant species, horse manure and shredded paper. Earthworms are used to accelerate the biological breakdown process. For the experimental phase, over 700m3 of compost was made. surface water Special attention is also being paid to aspects that could influence the success of rehabilitation, including different forms of run-off control, alternative types and formulations of fertiliser and methods of seed application. Current trials are being repeated on slopes angled at 18, 24 and 35 degrees. By removing exotic plant species which have to be eradicated by law, Sishen is now fully conforming to environmental legislation for complete rehabilitation while ridding the area of unwanted alien vegetation. Biodiversity management at Grootegeluk The first black rhino calf to be born at the Manketti Biosphere at Grootegeluk arrived in July 2005. This conservation project is a good example of Kumba’s commitment to responsible mining and the protection of biodiversity. The Grootegeluk mine lies within the transition zone of the Manketti Biosphere and is an intrinsic component of the long-term sustainability of both this zone and the biosphere as a whole. Sishen has been mining iron ore in the remote Kathu region of the Northern Cape for over 50 years. Part of its commitment to mining in a socially acceptable and ecologically sustainable manner is now legislated, but Sishen made the original commitment in 1950. Black rhino, an endangered species, is extremely difficult to breed successfully in captivity. Manketti is one of very few private conservation areas in South Africa that has black rhino and currently houses six black and 36 white rhinos. It is a 22 000-hectare social responsibility and 9 1 K U M B A A N N U A L R E P O RT 2 0 0 5 Social impact assessments identify socio-economic and environmental needs conservation project formed in 1995 with the primary goal of conserving biodiversity. The biosphere is a self-contained habitat with very little management interference. One of its purposes is to breed endangered species and make them available for reintroduction to suitable habitats. • Social impact management – Kumba’s direct and indirect effects on community and society (operations, social stability and influence on family life, housing and living conditions) By conducting comprehensive social impact assessments at all operations, Kumba has a clear understanding of its impact on the immediate socio-economic and environmental circumstances. This has guided the development of its social and labour plans submitted to the authorities. The case studies shown here are some examples of how Kumba is addressing the identified needs. Dust control at Sishen Following the successful implementation of dust suppression trials at its Northern Cape mine, Sishen extended testing processes to Transnet’s Port of Saldanha operation, working with a division of the parastatal, Significant SAPO-BTS. improvements in dust levels have led to the project’s implementation by the port authorities. Water management at Hlobane Last year, we reported that the Hlobane waterfall near Vryheid in KwaZulu-Natal was flowing again following Kumba’s restorative work to address decades of underground activity by a variety of mining companies. Rain that mingled with water run-off from Hlobane mountain became contaminated after seeping into massive mining-induced cracks and through three coal seams before decanting into nearby water catchments. With that, the 40-metre Hlobane waterfall stopped flowing. On closing Hlobane mine some six years ago, Kumba devised a solution to minimise mine-related water pollution. After rejecting easier options because of their environ- mental implications, Kumba opted for a more complex solution: to plug the cracks with a flexible, durable and non-toxic seal, underlined with a mixture of available soil and bentonite clay (the bitumen film seal is non-toxic and bentonite is a naturally occurring substance). The seal was covered with rocks and soil and vegetated to prevent erosion, marking the first time this kind of project had been successfully carried out anywhere in the world and attracting interest from global water management experts. Uniquely, it is also part of an integrated water management system. South African law requires the minimisation or prevention of water pollution prior to the issue of a mine closure certificate. Kumba went well beyond legal requirements in its restorative work at Hlobane mountain. To date, Kumba has sealed one kilometre (or 1 200 hectares) of cracks. During 2005, Kumba achieved its objective of keeping clean water clean for local communities by minimising the exposure of Hlobane mountain's water to pollutants. Ongoing monitoring will maintain that status and keep the waterfall flowing. Mmebane upgrading Thabazimbi’s programme for converting traditional hostels into single or family units is making good progress. In the process, traditional hostels with 60 employees living in one block are converted into 14 two- and three-bed flats or family units. In total, five of 16 planned conversions have been completed. The balance will be converted by 2007. Refuse removal at Vukuzenzele informal settlement Vukuzenzele is an informal settlement close to Zincor where some of the the refinery’s employees settlement is not a proclaimed residential area and the local municipality does not provide refuse removal services, Zincor live. As 9 2 K U M B A A N N U A L R E P O RT 2 0 0 5 assists in the removal of refuse for this community to provide a cleaner, healthier environment. • Natural resource management – Responsible use of non-renewable mineral and other natural resources Energy efficiency Most of the world’s energy comes from burning fossil fuels, such as coal, oil or natural gas. This results in high levels of air pollution, particularly greenhouse gases, which contribute to climate change. Since 1971, global energy use has increased by 70% and is expected to rise by 2% per year over the next 15 years. In 2005, Kumba signed the Department of Minerals and Energy’s energy efficiency accord, part of a broader national planning and management process towards optimal energy use. The vision of this strategy is to contribute to affordable energy for all and to minimise the negative effects of energy use on human health and the environment by encouraging sustainable energy development and use through efficient practices. The national strategy sets a target for energy efficiency improvement of 12% by 2015. This target is expressed in relation to forecast national energy demand at that time and allows for current expectations of economic growth. Our goal is therefore to reduce our baseline energy use in line with national targets. In 2004, we defined baseline energy use per operation, with cumulative electricity, diesel and gas use as our selected performance indicator being by far the major source of energy for operations. Based on these values, Kumba has set an internal savings target of 0,5% per annum. Kumba’s 2004 cumulative energy and cumulative tonnage of product produced gave a baseline figure of 0,11275Gj per tonne. The group’s comparative ratio for 2005 is 0,18639Gj. Missing the target since signing the accord was disappointing and largely due to limited awareness about energy consumption across the group. Over the next few months, the E-team (the Kumba team focused on energy efficiency) will use these results to raise awareness at divisional level on the imperative to reduce energy used per product, supported by the introduction of government incentives for energy-efficiency programmes. Income from invader plants The Kgalagadi charcoal and firewood project was started in partnership with commercial farmers in the Deben area near Sishen in 2003 to eradicate the invader black thorn that reduces grazing capacity on farms. The project comprises a depot responsible for marketing and management and work teams for cutting down and processing the black thorn wood into different products. Contracts are in place to supply charcoal to a leading supermarket chain and wood to merchants in Springbok and Upington. Contracts are currently being negotiated with merchants in the Cape and Gauteng. two initially teams of There were disadvantaged people working on two different farms. These teams were trained in removing the plant according to regulations from the Department of Forestry, as well as safety regulations to prevent injury. Sishen supplied safety equipment and assigned a safety officer to ensure that safety issues were addressed. The teams, with six people each, were self- employed and worked on a contract basis, determining their own working hours and income per week. After the necessary training, existing teams were split up to lead new teams. By January 2005, there were 109 people generating products and 12 in the distribution depot. • Business sustainability – Ensuring our long-term financial viability; contributing value to all stakeholders; and accounting for the distribution of value created through business activities to unfold with Partnership in action – Sishen South A new iron ore mine near Postmasburg in the Northern Cape has been on Kumba’s drawing board for some time. In 2005, the reality began the development of Sishen South. Together with expansion of Kumba’s nearby Sishen mine, the intent is to double the volume of iron ore exported from the Northern Cape. The effect for Postmasburg and neighbouring communities will be substantial. Sishen South will be an important element in the new Kumba Iron Ore – one of the companies to be unbundled from the existing Kumba – the world’s first pure iron ore company with an international shareholder in Anglo American plc and the empowerment credentials to participate in numerous opportunities for iron ore in South Africa. The first phase of Sishen South is a R1 billion investment in the Postmasburg region – a greenfields opencast mine with a confirmed resource base of over 424Mt, meaning a life of mine of over 22 years – and opportunities for the local community. The mine will produce 3Mt of export iron ore in phase 1, ultimately rising to 9Mtpa. Sishen South is planned to start in 2006, with mining operations beginning in 2007 and full production by 2012. The project is expected to create some 1 660 direct, indirect and induced job opportunities by the end of phase 1, of which over 300 will be permanent positions. Job creation will translate into significant amounts of money flowing from wages into the local economy each month, which Kumba estimates at some R30 million per annum at full production. 9 3 K U M B A A N N U A L R E P O RT 2 0 0 5 Working smarter Zincor has in the past used lime to neutralise spent magnesium electrolyte bleed (a solution containing acid) and to treat all effluent streams before they reach the tailings dam. Using lime as a neutralising agent, however, is extremely expensive due to the transport and slaking costs involved. the end of 2003, Zincor Towards management decided that the smelter would now use calcium carbonate for these CSIR-developed technology indicates that, with simple calcium operational carbonate is as effective as slaked lime and a two-phase project to switch from lime to calcium carbonate was initiated in 2003 and completed in 2005. adjustments, processes. This technology has resulted in significant cost savings and confirmed Zincor’s position as one of the top global zinc companies in cost efficiency and technological advancements. • Mine closure – Ensuring we leave good infrastructure, skilled people and self-sufficient communities after mine closure Social plan for Durnacol closure As the chief employer in a remote rural area in KwaZulu-Natal, Kumba understood the importance of developing a far- reaching social plan to mitigate the impact of mine closure for Durnacol from 2001. The R24,4 million social plan encompassed jobs (a combination of redeployment, alternative employment and a R3 million training programme to develop skills), developing a self-sustainable town and a home-ownership programme. To realise its goals, Kumba has worked closely for almost 10 years with the Department of Minerals and Energy, the National Union of Mineworkers, the DNC Community Forum (a section 21 company focused on the interests of residents), the 1 4 3 1. An extensive set of rehabilitation tests are being conducted at Sishen mine in conjunction with the North West University. A unique compost developed on the mine, different forms of surface run-off control, and alternative types of seed application form part of the trials. 2. The Kgalagadi Fire Wood project near Sishen mine provides employment for local disadvantaged people while at the same time helping to eradicate the invader black thorn tree. 3. Calcium carbonate mixing at Zincor – the slurry is used as an environmentally friendly neutralising reagent. 4. Kumba has sealed one kilometre of cracks in Hlobane mountain which has ensured that water remains clean for local communities. 2 9 4 K U M B A A N N U A L R E P O RT 2 0 0 5 Mineworkers Development Agency and the Dannhauser Transitional Local Council. In September 2003, Durnacol was proclaimed a town, with attractive assets – from buildings and equipment to sports and medical facilities – donated by Kumba. In the process, over 400 people are now homeowners, some assisted by the government’s RDP fund, with the proceeds of sales of Kumba-owned mine houses reinvested in community projects. Kumba also infrastructural funded upgrades required for a functioning town, from the electricity network, sewage plants and water treatment works to roads and storm-water drains. Mine closures can have a devastating impact on communities, given that operations are often in remote areas with little or no other economic activity. Durnacol proves this does not have to be the case. Apart from the skills training that has enabled many people to start their own businesses, a cultural village is being planned, the business plan for a welding workshop has been approved and an agricultural project is under way on 200ha of land donated by Kumba, in conjunction with the Department of Agriculture. Kumba is finalising the appointment of a development company to provide an integrated for development consideration and approval by all stakeholders in Durnacol. Durnacol is today a vibrant community, capitalising on the many opportunities identified, and energised about its future. plan • Social development/national social priorities – In balancing our interests with those of our various stakeholders, specific areas are guided by the social needs of the community, and by the national social priorities of society at large, including: – Education, training and skills development – Healthcare promotion, particularly HIV/Aids programmes – Job creation – SMME and other business opportunity development – Conservation of environment, including awareness programmes – Infrastructure development, including schools, clinics, etc E D U C A T I O N , T R A I N I N G A N D S K I L L S D E V E L O P M E N T Ticor maths and science improvement project at high schools Ticor SA implemented a programme in 1999 at eight rural high schools in its operational area to counter the lack of science laboratories in local schools. In association with Kumba and the University of Johannesburg/Somerset Education, Ticor SA developed micro-science kits that can be easily transported to remote rural schools. With these kits, learners can execute any basic science experiment on the class desk. Manuals for guiding teachers and learners alike are included. Teacher workshops and training are part of the programme to ensure a better quality of education in these fields. Teacher skills are improved through workshops in partnership with the local education department. In a separate initiative, a science academy has been established in partnership with a local private school to give high achievers a chance to excel. Twenty-six learners are part of the academy and are tutored by teachers of the private school. Learners’ performance grades at their respective schools are monitored and improvements are recorded annually. Problem areas are 9 5 K U M B A A N N U A L R E P O RT 2 0 0 5 identified through feedback sessions with teachers and the education department and follow-up sessions are arranged to address these areas. Furthering maths and science education in rural communities Grootegeluk operates near the 110 000- strong town of Lephalale in Limpopo. As one of only three major employers in an area with an unemployment rate of about 45%, Grootegeluk has concentrated on job creation and education, specifically maths and science. There is high demand at Grootegeluk for school leavers who have passed maths and science, key subjects for further training in engineering and other disciplines at the mine. In line with the requirements of the mining charter, Grootegeluk also has targets for employing black graduates, and these are the school leavers it aims to train further. Faced with the challenge of creating local employment with a severely limited local pool of skills, the mine is working with the regional education department and other partners to build this pool of qualified matriculants every year. Maths Olympiad In 2004, Grootegeluk and the Department of Education launched a Maths Olympiad for grade 4 to 11 learners in 91 surrounding schools. Simplistically, the Olympiad is a process of prepared and supplied revision and support material culminating in tests to determine the standard of maths education. This was the first project of its kind in the region, and the results offered valuable lessons for both Grootegeluk and the Department of Education. For the Maths Olympiad 2005, Grootegeluk’s partici- pation will increase to include training the teachers. Based on audits of surrounding schools, Grootegeluk has supplied some with computer and laboratory equipment, and will also offer managerial training to headmasters. Winter School This Grootegeluk flagship project is run in Various projects are geared to improve maths and science potential partnership with the local Department of Education to improve the quality of teaching material available to schools, and to complement learning with practical and laboratory work to which learners wouldn’t ordinarily have access. Established in 1998, the project aimed to set up a joint resource and learning school that would be a shared asset for initial surrounding schools. As an contribution, Grootegeluk provided a building on one of its existing properties, and donated seed capital to set up the programme, now a teaching facility, known as the Bosveld Education Resource Centre, supplying material for maths, science and biology. While the pass rate of schools in Limpopo has been increasing steadily over several years (from 32% in 1997 to 70% in 2002), schools in the Palala district now achieve a pass rate of 80%. Although it is difficult to measure the results of the Bosveld Centre project directly, they appear to have played a role in these improved results. Tshikondeni winter school Tshikondeni has been running an educational winter enrichment programme for the past eight years, which has helped many schools in Limpopo, especially those with very low pass rates. Pass rates have now improved to 90% to 100% and learners are encouraged to register for mathematics and science to bridge the gap in these disciplines. With a better understanding of the importance of these subjects in the working world, interest and enrolments have risen sharply. Learners are informed about opportunities available through the Kumba bridging school when they register for Winter School classes. The Department of Education is playing an important role in encouraging all learners to attend the Winter School. With increased enrolments, additional Winter School centres have been introduced. Iterileng Skills Development Centre The Iterileng Skills Development Centre, in the town of Thabazimbi (Limpopo) and near Kumba’s mine of the same name, has been running since 2003 and is focused on improving local capacity and promoting preferential development by empowering residents, creating jobs and improving qualifications. Training for predominantly unskilled and unemployed people ranges from general training such as life skills, adult basic education and computer literacy to specialised technical skills and entrepreneurship. In the life skills area, basic training is provided in pottery, découpage and jewellery while the clothing factory produces overalls to SABS standards. In the technical area, students receive basic training in welding, civil construction, plumbing and carpentry. All Iterileng students complete a basic entrepreneurial course to learn the skills needed to start their own businesses. J O B C R E A T I O N Local economic development in KwaZulu-Natal Around 45% of people in KwaZulu-Natal, now the country’s most populous province, are just jobless. Ticor SA employs 364 permanent employees and approxi- mately 256 contractors, and can only assist indirectly to create more job opportunities. By creating indirect job opportunities through implementing sustainable small, medium and micro enterprises (SMMEs), Ticor SA demonstrates the value of its role as a responsible corporate citizen. Various small businesses have been established with the assistance of Ticor SA. One of the most successful is the Dube Village project for women. In 2002, the company started with eight women who had no business knowledge. Since then, a successful, professional company has been built with a directorate of the eight original women and a profit base of R200 000 per annum. The main products include items made of beads, sewing and catering. The company has now bought a 40% share of an enterprise producing 9 6 K U M B A A N N U A L R E P O RT 2 0 0 5 safety and mine uniforms, which could lead to a contract with Ticor SA to provide work clothing in future. A factory has been established that permanently employs 30 people and Dube Village is employing another 20 women in beading production. In only three years, the success of this business is remarkable, attracting new investments from other established companies. Local development through tourism Limpopo province has great potential for tourism, particularly as a springboard to the world-famous Kruger National Park. Recognising the initiative shown by local youths who wanted to create a community cultural village in the Bend Mutale region near the park, Tshikondeni mine enlisted the support of the Kumba Foundation and the participation of local authorities in a project that supported local economic development and job creation. The young people involved had all completed their schooling but were unable to find employment in the area. receive With four traditional huts now constructed and fencing under way, the seven young entrepreneurs behind the cultural village will also the Department of Tourism on project management to give life to their dream of a marketable accommodation attraction on the north-eastern border of the Kruger National Park. training from Tshono turns leather into profits Sishen’s Tshono leather craft and tannery project has progressed from struggling start-up to a self-sustaining project with money in the bank. The project was launched near the mine in Deben, Northern Cape, in 2002 to stimulate regional job creation by training women in leather-making. Initially, the women battled to generate profits in a remote rural area. Following a the main market study production line was shifted from souvenirs to décor products and the breakthrough came when they exhibited their handiwork in 2005, at Decorex, South Africa’s biggest interior décor show. Increased awareness about these designer products translated into greater demand and a rush of orders that has tested productivity to its limits. With a talented craft facilitator at their side, and plans to expand the capacity of the tannery, these women are now able to design, manufacture and market their new product range and Sishen was able to proudly hand over the Tshono project to the crafters, who will run it as a privately owned business. Working their own land The Manyeding agricultural farming project, driven by Sishen, is aimed at disadvantaged people living in very poor conditions in the Manyeding area near Kuruman, North West. The agricultural land earmarked for the development belongs to the Baga Jantje tribe whose members will be the sole beneficiaries in the joint venture between Kumba, Kgalagadi District Municipality, North West Department of Agriculture, Moshaweng Municipality, Siyathusa Consultants, Northern Cape Department of Agriculture and Rand Merchant Bank as governing body. The business plan provides for 200 permanent jobs and up to 450 part- time jobs during harvesting. Jewels in the crown The benefits of public-private partnerships are epitomised in the Kgabane programme in Northern Cape – supported by the Kumba Foundation and the Department of Minerals and Energy and spearheaded by Sishen – which is teaching 15 unemployed locals to make jewellery in an accredited learnership. Learners use precious and semi-precious stones mined in the province. Boitirelo Jewellery (meaning handmade) recently had the opportunity to display their jewellery – already known for its stylishness and affordability – at an exhibition held in parliament. Boitirelo pieces were later modelled at a prestigious function at Spier Estates in Stellenbosch. With effective marketing and partnerships based on identified community needs, the talent of the most inherent rural communities can, indeed, be harnessed and developed to reach metropolitan stages. S M M E A N D O T H E R B U S I N E S S D E V E L O P M E N T Makuya multi-purpose centre When Tshikondeni and the Limpopo local development forum identified the need for a multi-purpose centre in the village of Hamakuya, the strength of their business plan secured seed funding from the Kumba Foundation and additional funds from the Vhembe District Municipality of over R4 million. Launched by the premier of Limpopo in February 2006, the centre will serve the community in many ways: providing offices for home affairs, social and labour departments to facilities for internet access and training in computer literacy. The Vhembe district municipality will provide security and appoint an interim centre manager. Future plans include establishing small infrastructures for SMME development. The centre demonstrates an effective public-private partnership between the mine and other stakeholders, reflected in good relationships with effective governance underpinned by sustainable development. Springs Business Linkage Centre As part of its commitment to developing business enterprises, Zincor supports the Springs Business Linkage Centre which focuses on: • Developing the capacity of business training and through enterprises related development initiatives • Establishing business linkages and developing opportunities with bigger business • Implementing systems to support business enterprises. clay is being used to build a viable business for students in the area. Vuk’uzenzele Art & Craft Enterprise is a trendy cultural business producing upmarket clay, art and concrete products. It is part of a creative initiative by the Kathu Technical College in which 32 learners are being trained in fine arts and different techniques of making ceramic products. These learners will also provide services surrounding and communities. The project is focused on using natural clay from Sishen to produce a range of to decorative, and provides an outlet for the students’ fine art. functional training items, skills from in A project to establish a brick-making factory near Sishen mine is under way. local Strategic local and economic development forum Thabazimbi initiated a strategic local and economic development forum which and includes representatives following from sectors: mining, tourism, manufacturing, agriculture, health and welfare education, sport and recreation. The primary objective is to assist local government in the greater Thabazimbi area to promote local economic development. government the Thabazimbi projects in the community currently include: • Sponsorship of first-line managerial and leadership interventions to principals and deputy principals of surrounding schools and municipal directors • Sponsoring transformational leadership and team-building interventions for schools • Appropriate software courses for the mayor and councillors of Thabazimbi municipality • Sponsoring a science/maths schools programme and supplying two schools with water. Clay time at Sishen Turning waste into business, having fun and generating income at the same time is proving possible at Sishen where waste Iterileng Mining Iterileng Mining is a vehicle to accelerate transformation empowerment and processes in the local community around 9 7 K U M B A A N N U A L R E P O RT 2 0 0 5 1 4 1. The Iterileng Skills Development Centre at Thabazimbi is focused on training predominantly unskilled and unemployed members of the local community. 2. Grootegeluk supports the development of maths skills among local learners, and together with the Department of Education, launched a Maths Olympiad in the area. 3. Ticor SA is active in developing the maths and science potential of local learners. Besides sponsoring a mobile interactive exhibition as pictured here, Ticor SA also runs a programme in eight rural high schools and a science academy established in partnership with a local private school. 4. Limpopo province has great potential for tourism and the natural environment such as the Unwa Dam pictured here, in the Tshikondeni region, is being marketed to this end. 2 3 9 8 K U M B A A N N U A L R E P O RT 2 0 0 5 Thabazimbi mine through a small-scale mining project that ensures jobs to some 50 people annually. The project is an agreement Thabazimbi’s between controlling shareholder, Sishen Iron Ore Company, and Iterileng Mining which will supply 6kt of previously surplus ore per month. Reclaiming surplus ore increases the annual tonnage sold to clients and generates significant revenue for the mine and the project. Iterileng Mining will have 26% or more black ownership in a self-sustainable project with a lifespan of six to eight years. Employees have been recruited from the local union consultation and local government and will be sponsored in MQA learnerships to ensure the development of skills and entrepreneurial ability. community through C O N S E R V A T I O N O F E N V I R O N M E N T This includes supporting transfrontier conservation areas for sustainable economic development, such as the Peace Parks Foundation. Kumba has committed to donating R10 million over ten years for the development of the transfrontier parks initiative. Development through Ticor’s gardening project Soil and water conservation and correct planning methods in rural areas are lacking largely due to people who have never been educated in this field. Ticor SA has implemented a garden programme at 12 primary schools in its area. The focus is to educate learners and teachers on soil and water conservation and instill improved agriculture techniques through the development of vegetable garden programmes at the schools. The second focuses on the project phase of entrepreneurship, product marketing and basic financial management. The money generated pays the school fees of underprivileged children, buys school clothes and provides fresh vegetables to HIV/Aids sufferers. The ultimate aim is that the knowledge will be taken home to teaching educate parents and that community vegetable gardens will be implemented. To date, three successful community vegetable gardens have been established. Poverty alleviation is one of the main drivers of the local development plan, and positive partnerships have been formed between Ticor SA and local government with this project. The district municipality is a partner in the establishment of nurseries at the same schools to encourage the entrepreneurship stage of the project. Ultimately, improved farming techniques will provide a positive legacy for local communities long after Ticor operations have ceased. Grootvaly Blesbokspruit Conservation Trust With mining and other industrial activities in the area and the resultant pollution, wildlife in the Blesbokspruit sanctuary, near Springs (Gauteng) was threatened to the point of extinction. In support of sustainable development initiatives in the area, Kumba’s Zincor refinery and other stakeholders teamed up to restore the environment. Today, the Blesbokspruit sanctuary has been given international status as a RAMSAR site. Birdlife has been restored and a variety of bird species – some rare, others migratory – inhabit the site. Indigenous fauna and flora has also been restored. The Grootvaly Blesbokspruit Conservation Trust now boasts an educational centre to cater for local schools, youth groups, environmental bodies and members of the public. Some jobs have been created and the centre is becoming a popular tourist attraction. I N F R A S T R U C T U R E D E V E L O P M E N T Learning curve for crèche A few years ago, Grootegeluk helped establish Iterileng Crèche in Marapong, near Lephalale, Limpopo. Although the crèche filled an important need in the area, the building has slowly deteriorated as the level of poverty in the area reduced support for the project from the local community. 9 9 K U M B A A N N U A L R E P O RT 2 0 0 5 After re-evaluating the need and the project’s status, Grootegeluk initiated a comprehensive programme to completely revitalise the crèche. In line with Kumba’s collaborative approach, the principal and parent committee were consulted. Their support was secured and they are all now actively involved in the programme. Maintenance issues have been addressed and a training provider appointed for teacher training and support. Management systems were installed and new teaching aids and classroom furniture acquired. By the end of 2005, the crèche was again fully functional and self-sufficient. The lesson for the mine was that capacity building, as with most sustainable development initiatives, is an essential element to ensure long-term success and that corporate support must remain in place until this increased capacity is well established. Safe house opened In remote rural areas, with serious unemployment and the rampant social problems that brings, the need for facilities usually found only in metropolitan areas becomes much starker. “Can you imagine what it must feel like to try to hang onto a counter in a police station with nowhere to go while struggling to cope with the trauma you have experienced?” This was the question posed by Captain Mabote, on behalf of the Lephalale Police Station and the station commander, when he thanked Grootegeluk for creating a facility to assist victims of abuse, most commonly domestic violence. The safe house was officially opened in February 2005 to temporarily accommodate people while the Department of Welfare assists in creating a safer environment for them. It has operated at capacity almost since then, underscoring the real need in the community. This “proudly Lephalale” project was implemented using upcoming black economic empowerment contractors, which also introduced the local labour force to the Kumba tender process. Grootegeluk’s sustainable development Kumba operations initiate projects to support the immediate environment To date, 50 000 people have been educated and 20 000 education manuals distributed by 10 permanent HIV/Aids trainers. Ticor’s workforce is informed about the training programme, providing a platform for employees to share knowledge on HIV/Aids with their families and communities. Volunteering programmes, where employees interact with communities in sharing knowledge, have also been implemented. Although a solution to the HIV/Aids pandemic is not imminent, the Bayethe campaign is raising awareness and understanding of the disease in rural communities and is seen as a key element in the fight against Aids in KwaZulu-Natal. The partnership with the king plays an important role in the image Ticor SA portrays as a good corporate citizen in rural communities and his authority gives credence to the programme and its aim. • Health and safety in the work environment – Going beyond legislative compliance on workplace conditions for employees to facilitate greater workplace satisfaction, efficiency and productivity Ticor’s I Care safety project During commissioning and ramp-up phase, Ticor SA had an exemplary safety record, reaching 3,2 million lost-time injury-free hours in December 2002 and 483 days worked without a lost-time injury. Then injuries increased significantly, causing the 12-month rolling injury ratio to rise from zero in December 2002 to 1,19 in December 2004, the worst performance since inception despite a number of measures implemented by Ticor’s senior management to bring injuries under control. At the end of 2004, Ticor management decided a new approach was necessary to establish the causes for the operation’s poor safety performance, the so-called I Care breakthrough project. A team was assembled from operational and maintenance personnel to investigate the causes of the problem 1 0 0 K U M B A A N N U A L R E P O RT 2 0 0 5 using a three-phase approach: analysis, idea generation and implementation over a period of seven weeks. During safety the analysis phase, performance was broken down into the key drivers that impacted on performance and indicators developed. Information gathered during this phase formed the basis of the idea-generation phase. Ideas were gathered from site visits, sessions with plant personnel and from brainstorming sessions. Since the implementation of I Care, safety performance has improved from the low of 1,19 in December 2004 to 0,61 in October 2005, Ticor’s best performance in two years. A top-down commitment to safety, the willingness to try new methods and the understanding that safety is a daily concern has paid off for Ticor, with lessons learned being rolled out throughout the group. Zincor safety stacks up Zincor recently commissioned the first of four auto-stackers to increase the safety of employees and reduce costs. Until recently, stacking zinc sheets after stripping them from the cathodes was done manually, which often led to hand and back injuries. This technological improvement has significantly reduced risk, increased productivity and reduced energy use. Tshikondeni – safety first For one million shifts – or eight million hours – the teams at Tshikondeni focused on safety. That’s two years and eight months of unrelenting concentration – by 1 100 people, most of whom work underground in this Limpopo coal mine. One million shifts without a fatality is “an outstanding achievement in a challenging operating environment”, as acknowledged by the chief inspector of mines for the Department of Minerals and Energy who presented the Millionaire floating trophy to the mine in June 2005. Tshikondeni also received the Safety Achievement Flag team managed the project and was actively involved with the materials list, skills training and quality assurance. Nstwe Tshipi Nursery School Although a nursery school for pre-primary children has been running from the community hall years, Thabazimbi’s newly built facility provides care and education for over 60 children from the community, under the guidance of two trained teachers. three for H I V / A I D S Bayethe Aids programme sponsored by Ticor With 6,3 million HIV-positive South Africans at the end of 2004, including 3,3 million women and nearly 11 000 babies, HIV/Aids is a national pandemic in South Africa and the highest percentage of HIV-positive people (40,7%) live in KwaZulu-Natal. The majority of those testing positive to the virus are between 15 and 35 years – the age of young adults studying and entering the business world. In 2002, a partnership was formed between Ticor SA and King Goodwill Zwelithini to educate communities at grassroots level through cultural awareness. Selected community representatives were trained to educate the maidens (young girls) in the communities who, in the traditional cultural values of the Zulu, are subservient to men. Education includes knowledge about HIV/Aids, prevention, addressing cultural values and how to take care of their bodies. In 2005, Kumba funded the initiation of a second phase of the programme, training boys in the communities on the dangers of unprotected sexual intercourse and how to prevent HIV/Aids. The king annually facilitates important cultural events which are attended by thousands of maidens and young boys from all over KwaZulu-Natal. These events provide the ideal platform to promote the programme and distribute education manuals. The king’s address enhances the message of the education programme. from the department as the winner of the coal mines division for most improved safety performance over three years. These achievements clearly reflect the ability of the Tshikondeni team to manage their considerable underground challenges exceedingly well to ensure that the mine is a safe place to work. It is also a good example of Kumba’s commitment to safety excellence which is a non-negotiable part of our business performance. • Supplier relations/developmental procurement – Managing procurement processes and, in South Africa, nurturing small enterprises and disadvantaged individuals, and developing suppliers through preferential procurement South African Mining Preferential Procurement Forum When the mining charter was released, little was said about procurement although four elements were reflected as requirements: • Determine current levels of HDSA spend • Actively encourage existing suppliers to transform • Indicate commitment to progression of procurement from HDSA companies • Assist HDSA companies to develop. Ready to comply, mining companies soon recognised the need to clarify definitions and adopt a unified approach to make reporting more meaningful. A process that sounds simple was immeasurably complicated by the different interpre- tations applied by individual companies to items as diverse as discretionary spending to classifying spare parts. This was the genesis of the SA Mining Preferential Procurement Forum of which Kumba was a founding member and which includes most of the major and minor mining houses. The forum’s community involvement goes beyond including members on the panel. Provincial forums share opportunities in to other provinces, provide links empowerment partners and a network for interacting with mine procurement officers. The forum has made considerable progress in just three years, but still faces significant challenges including its own transformation from a narrow mining- based approach to a national database for accredited suppliers. Kenneth Kgomo, Kumba’s manager of commercial equity developments, was elected chairman of the forum for 2006, and tasked with restructuring the forum to reflect its empowerment status and preference for doing empowered companies, as well as clarifying legislative terminology with government. business with Supplier development Kumba’s supplier development programme has helped small companies tender to supply goods and services to large groups. It has trained suppliers in ways to run effective businesses. Just as importantly, it has been the catalyst for the transformation of much larger, established businesses in its operational areas. In 2004, some 150 entrepreneurs were trained in the Northern Cape, Gauteng, Limpopo and North West. In 2005, 26 suppliers were trained in the Lephalale (Grootegeluk mine’s area of district operation). The majority of these companies are small enterprises. Through workshops, meetings, lectures, seminars, conferences and information sessions, topics ranged from starting a business, marketing, tendering and business administration to dealing with failure. Kumba’s supplier development programme has shown excellent incremental growth since its establishment, with preferential procurement from spending R128 million in 2002 to R863 million in 2005. rising Valuable lessons have been learned through this process: • Supplier development programmes that combine central and divisional skills and resources are most effective 1 0 1 K U M B A A N N U A L R E P O RT 2 0 0 5 • Emerging entrepreneurs benefit more from personal interaction combined with workshops and lectures • Multilingual facilitators make inter- actions more meaningful • Companies must accept that many of the entrepreneurs trained are not necessarily looking for opportunities in the mining industry. In addition, some are only looking for jobs • Access to funding continues to be a barrier, especially in rural areas • There are not enough opportunities for all entrepreneurs • Many expectations have been created with the promulgation of empowerment laws, and these must be carefully managed. To generate direct benefit through supply opportunities and training on business- related issues to community members around the mine, Kumba has engaged local municipalities in its operating areas in the process. Community members become in the programme through their local municipal office, organised forums and structures as well as through community leaders. involved • Leadership in sustainability – Demonstrating our leading role in promoting and implementing corporate citizenship and sustainability as a business philosophy in our industry peer group, in our sector of operation, in our country and against international benchmarks and standards At industry, regional and societal level, Kumba participates in a number of initiatives to develop common standards for measuring effective and sustainable development projects. It was the first company to submit its integrated annual report review by an independent industry NGO. Kumba is an active member of the Chamber of Mines’ sustainability committee. for critical 1 1. The I Care safety project is supported throughout the group. At Zincor from left, are Danie Oosthuizen, electrical artisan; Daniel Mthombeni, electrical aide; and Jabulani Ncubame, boilermaker assistant. 2. The auto-stackers at Zincor increase the safety of employees. 3. Grootegeluk helped establish Iterileng crèche in Marapong, near Lephalale. 2 3 1 0 2 K U M B A A N N U A L R E P O RT 2 0 0 5 R E P O R T S C O P E Contact person Reporting period Hilton Atkinson +27 12 307 4843 hilton.atkinson@kumbaresources.com www.kumbaresources.com 1 January 2005 – 31 December 2005 Date of most recent previous report Published March 2005 for period ended 31 December 2004 Boundaries of report and any specific limitations on the scope Significant changes in size, structure, ownership or products/services since previous report Basis for reporting on joint ventures, partially-owned subsidiaries, leased facilities, outsourced operations and other situations that can significantly affect comparability from period to period and/or between reporting organisations Explanation of the nature and effect of any restatements of information provided in earlier reports, reasons (eg change of base year/periods, measurement methods) Kumba’s non-financial reporting is currently limited to southern African operations. It does not include the heavy minerals operations of Ticor Limited in Australia nor the base metals operations of Chifeng Zinc Smelter in China. Reporting is in English only, given that this language accommodates the majority of Kumba’s stakeholders. In October 2005, Kumba announced that it will be split into two companies: Kumba Iron Ore and Newco (p16). Kumba’s approach to sustainable development reporting is aligned with those adopted by its major shareholder Anglo American plc. Fully disclosed in notes 2 and 17 in the annual financial statements on p143 and p157 respectively or available on www.kumbaresources.com International Financial Reporting Standards improvements effected 1 January 2005. 1 0 3 K U M B A A N N U A L R E P O RT 2 0 0 5 A S S U R A N C E R E P O R T objectives in respect of SD performance and for designing, implementing and maintaining appropriate performance management and internal control systems to record, monitor and improve the accuracy, completeness and reliability of SD data reported information is derived. from which the R E S P O N S I B I L I T Y O F T H E A S S U R A N C E P R O V I D E R Our responsibility is to express our conclusions to Kumba Resources, based on our independent assurance engagement, performed in accordance with the International Standard on Assurance Engagements (ISAE 3000): Assurance engagements other than audits or reviews of historical financial information. This standard requires us to comply with ethical requirements and to plan and perform our assurance engagement to obtain reasonable or limited assurance, expressed below, regarding the subject matter of the engagement. B A S I S O F W O R K A N D L I M I T A T I O N S The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the subject matter and the purpose of our engagement. In making these assessments we have considered internal controls relevant to the company’s ‘selected 2005 SD performance indicators’. The reliability of SD performance indicators is subject to inherent limitations given their nature and methods for determining, calculating or estimating such data. It is important to understand the ‘selected 2005 SD performance indicators’ and related statements in the report, in the context of these limitations. We planned and performed our work to obtain all the information and explanations that we considered necessary to provide sufficient appropriate evidence to provide a basis for our reasonable or limited assurance conclusions expressed below, for each aspect of the report that was the subject of our assurance engagement. We do not express any assurance in relation to SD performance indicators at sites not visited by us, or in respect of the remaining 2005 SD performance indicators included in the report, but not selected by us, for purposes of our assurance engagement. Where a limited assurance conclusion is expressed, our evidence gathering procedures are more limited than for a reasonable assurance engagement, and therefore less assurance is obtained than in a reasonable assurance engagement. We believe that our work performed as set out below provides an appropriate basis report Independent assurance the Directors of Kumba Resources Limited on aspects of the sustainability sections in the 2005 Annual Report to I N T R O D U C T I O N We have performed our independent assurance engagement of Kumba Resources Limited’s (Kumba Resources) sustainability sections included in the 2005 annual report (the report), set out on p72 to p114 in the report, with respect to the following sustainability aspects of the report: • ‘Selected 2005 Sustainable Development (SD) performance indicators’ at selected sites, indicated below; and • Whether the report complies with the ‘in accordance with’ requirements of the 2002 Global Reporting Initiative (GRI) Sustainability Reporting Guidelines (the 2002 GRI Guidelines). This report is made solely to Kumba Resources in accordance with the terms of our engagement. Our work has been undertaken so that we might state to Kumba Resources those matters we have preparation and presentation of for our conclusions. been engaged to state in this report and information in the report, in order to for no other purpose. To the fullest extent design procedures appropriate for S E L E C T E D 2 0 0 5 S D permitted by law, we do not accept or gathering sufficient evidence to determine P E R F O R M A N C E I N D I C A T O R S assume responsibility to anyone other than that the aspects indicated above are not Subject matter and criteria Kumba Resources, for our work, for this materially misstated or misleading. Our The SD performance indicators selected report, or for the conclusions we have assessment of relevant internal controls is by KPMG, in conjunction with Kumba reached. R E S P O N S I B I L I T I E S O F D I R E C T O R S for The directors of Kumba Resources are the preparation and responsible presentation of the report for 2005 and the information and assessments contained within it; for determining the group’s not, however, for the purpose of expressing Resources, to be the subject of the a conclusion on the effectiveness of the assurance engagement were determined company’s internal controls. by considering Kumba Resources’ key SD Kumba Resources applies the Anglo and American plc Safety, Health Environmental (SHE) Reporting Guidance as the recognition and measurement of the for determining the criteria 1 0 4 K U M B A A N N U A L R E P O RT 2 0 0 5 risks, identifying those SD indicators considered relevant to management and stakeholder decision-making processes, and our experience of the risks associated with reporting SD performance indicators, and the systems and processes in place, to • A response has been given to each core indicator in Section 5 of Part C of the 2002 GRI Guidelines; • The company’s response to each of the principles in Part B of the 2002 GRI Guidelines, as set out in the ‘GRI In Accordance With Self-Assessment’ (p114) is not materially misstated; and ‘in accordance with’ statement signed by the CEO. includes a GRI • The report Conclusion Based on the work described above, in our opinion, Kumba Resources does not fully meet the requirements for stating that the sustainability sections of the Report are in compliance with the ‘in accordance with’ requirements of the 2002 GRI Guidelines. KPMG Services (Pty) Limited Johannesburg 2 March 2006 mitigate those risks. These are collectively referred to as the ‘selected 2005 SD performance indicators’. a) The 2005 SD performance indicators selected for purposes of expressing reasonable assurance were: Total number of work-related fatalities (p74). b) The 2005 SD performance indicators selected for purposes of expressing limited assurance were: Lost time injury frequency rate (LTIFR) (p74); New cases of occupational diseases (p75); Number of employees receiving anti-retroviral treatment (ART) (p81); Number of employees on wellness programmes (p81); Number of employees that have had voluntary counselling and testing (p81); Total energy used (p77); Carbon dioxide (CO2) emissions from electricity purchased (p78); CO2 emissions from diesel consumed (p78); Water used for primary activities (p77); Number and level of environmental incidents (p77); and rand value of HDSA procurement (p83). The internally developed Anglo American plc (SHE) Reporting Guidance was used as the criteria for assessing the selected 2005 SD performance indicators. Work performed Our work consisted of: • Obtaining an understanding of the systems used to generate, aggregate and report the selected 2005 SD performance indicators based on Anglo American plc (SHE) Reporting Guidance for the selected 2005 SD performance indicators at four selected sites (Sishen, Grootegeluk, Ticor SA and Rosh Pinah) to assess the associated reliability of the selected 2005 SD performance indicators; • Conducting interviews with manage- ment at the four selected sites visited, to obtain an understanding of the consistency of the reporting processes compared with prior years and to obtain explanations performance trends; and for SD • Reviewing the consistency between the selected 2005 SD performance indicators and related statements in the report, in light of the findings from the site visits and our analytical review. Conclusion Based on the work described above, in our opinion: • The selected 2005 SD performance indicators set out in (a) above, at the selected sites, for the year ended 31 December 2005, are properly presented in all material respects on the basis of the Anglo American plc SHE Reporting Guidance; and • Nothing has come to our attention that causes us to believe that the selected 2005 SD performance indicators set out in (b) above, at the selected sites, for the year ended 31 December 2005, are not properly presented in all material respects on the basis of the Anglo American plc SHE Reporting Guidance. C O M P L I A N C E W I T H T H E 2 0 0 2 G R I G U I D E L I N E S Subject matter and criteria Our limited assurance engagement was to determine whether the sustainability sections of the report comply with the ‘in accordance with’ requirements of the 2002 GRI Guidelines. the contents of Work performed We the compared sustainability sections of the Report to specific 2002 GRI Guidelines, to assess whether the sustainability sections of the Report met the requirements for stating that it is ‘in accordance with’ the 2002 GRI Guidelines. Our procedures performed enabled us to determine whether: • Kumba Resources adequately reports on the 44 numbered elements in Sections 1 to 3 of Part C of the 2002 GRI Guidelines; • The report includes a GRI Content Index; 1 0 5 K U M B A A N N U A L R E P O RT 2 0 0 5 1 2 3 4 1. A truck uses the pantograph system at Grootegeluk designed to reduce diesel consumption by switching to alternative electric power. 2. Bass Lake near Glen Douglas is a popular recreation area. The lake is a disused pit which now generates tourism-related employment. 3. Dube Village is one of the successful businesses started by Ticor SA in KwaZulu-Natal. The initiative employs some 50 local women. 4. The Iterileng skills centre is run by Thabazimbi mine to provide skills training in a range of disciplines to local men and women. 1 0 6 K U M B A A N N U A L R E P O RT 2 0 0 5 I N D E X T O G L O B A L R E P O R T I N G I N I T I A T I V E I N D I C A T O R S I n c l u d i n g F e b 2 0 0 5 s u p p l e m e n t f o r m i n i n g a n d m i n e r a l s s e c t o r GRI ELEMENT TOPIC FY2003 FY2004 FY2005 PAGE Vision and strategy 1.1 Vision and strategy 1.2 Profile 2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8 2.9 2.10 2.11 2.12 2.13 2.14 2.15 2.16 2.17 2.18 2.19 2.20 2.21 2.22 Governance structure and management systems 3.1 3.2 3.3 3.4 3.5 3.6 3.7 3.8 3.9 3.10 3.11 3.12 3.13 3.14 Key elements of report including language policy Name Major products Operational structure Major divisions and joint ventures Countries of operation Nature of ownership Nature of markets served Scale of organisation Stakeholders Contact details Reporting period Date of previous report Boundaries of report Significant changes on prior year Basis reporting on joint ventures, etc Explanation of restatements Decisions not to apply GRI principles Definitions Significant changes in measurement methods on key economic, environmental and social information Policies, practices to ensure accuracy Policy, practice on independent assurance ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ n/a n/a ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ n/a n/a ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ n/a n/a ✓ ✓ ✓ ✓ Additional information web web web Governance structure Independent non-executive directors Expertise of board members Supervisory board processes Link between executive compensation and achievement of goals Organisational structure and key responsible individuals Principles and policies on economic, environment and social performance Mechanisms for shareholder interaction with board members Identification of stakeholders Stakeholder consultation Information ex stakeholder consultation Use of information from stakeholder consultation Precautionary approach External principles endorsed ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ (cid:54) (cid:54) (cid:54) ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ (cid:54) (cid:54) (cid:54) ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ 4, 14 Contents, 4, 14, 103 OFC 1, 2 1 Foldout, 1 Foldout 3 2 3 88 103 103 103 103 103 103 47 – 51 74 – 78 80 – 84 5, 13, 104 60 60 60 60 61 56 72, 73 – 78, 80 62 86 – 89 86 86 86 – 89 60 13, 81, 104 ✓ – sufficient disclosure (cid:54) – partial disclosure n/a – not applicable na – not available 1 0 7 K U M B A A N N U A L R E P O RT 2 0 0 5 GRI ELEMENT TOPIC FY2003 FY2004 FY2005 PAGE ✓ (cid:54) (cid:54) – (cid:54) ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ (cid:54) ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ (cid:54) (cid:54) – (cid:54) ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ (cid:54) ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ 3.15 3.16 MM5 3.17 3.18 3.19 Industry, business and advocacy organisations Upstream and downstream impacts – outsourcing/supplier management – product and service stewardship Materials stewardship Policies for assessing product eco-efficiency and sustainability attributes (eg recyclability, material use, energy use, toxicity, etc) Indirect impacts Major changes in locations or operations Programmes and procedures in economic, environmental and social performance – priority and target setting – major improvement programmes – internal communication and training – performance monitoring – internal and external audit – senior management review 3.20 Certification of management systems 4.1 GRI index Index Performance indicators Economic EC1 Customers Net sales EC2 EC3 EC4 EC11 EC5 EC6 EC7 EC8 EC9 EC10 EC12 EC13 MM1 Geographic breakdown Suppliers Cost of procurement Percentage paid on contracted terms Supplier breakdown Employees Total payroll and benefits Providers of capital Distributions Retained earnings Public sector Total taxes paid Subsidies received Donations Total spent on non-core business infrastructure development na na Indirect impacts Indirect economic impacts Revenue capture, management and distribution Identify sites where local economic contribution and development impact is of particular significance and interest to stakeholders (eg remote sites). ✓ – ✓ – ✓ ✓ ✓ na (cid:54) n/a ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ (cid:54) ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ Zero na ✓ na 84, 85 82 6 Investigation under way 74 5 – 6 4, 13 83 83 72, 86 61, 62 60,74 106 3, 8 34, 73 83 73 73 73, 81 73 73 73 73 73 Systems being developed to monitor 9 – 15 Contained in social impact assessments and labour plans. Reporting will begin in 2006 Will report in 2006 MM2 Value added disaggregated to country level – – na ✓ – sufficient disclosure (cid:54) – partial disclosure n/a – not applicable na – not available 1 0 8 K U M B A A N N U A L R E P O RT 2 0 0 5 GRI ELEMENT TOPIC FY2003 FY2004 FY2005 PAGE Environmental EN1 MM4 Materials used other than water Percentage products from secondary materials EN2 EN3 EN4 Materials waste from external sources Direct energy use Indirect energy use EN17 Renewable energy sources EN18 EN19 EN5 EN20 EN21 EN22 EN6 EN7 EN23 MM3 Energy consumption Indirect (up/downstream) energy use Total water use Water use and ecosystems affected Withdrawals of ground and surface water Recycling of water Land in biodiversity-rich habitats Impacts on biodiversity in terrestrial, fresh water and marine habitats Land for production activities or extractive use 1. Land disturbed 2. Land rehabilitated in period vs agreed end use Biodiversity management ✓ – na ✓ na na ✓ na ✓ na na na na na ✓ – MM6 Large-volume mining and mineral processing waste – EN24 Impermeable surface of land na ✓ – na ✓ na na ✓ na ✓ (cid:54) (cid:54) na (cid:54) na ✓ – – (cid:54) ✓ – na ✓ na na ✓ na ✓ (cid:54) (cid:54) na na na ✓ ✓ na na (cid:54) 77 Kumba produces no products from secondary materials Kumba uses no wastes from external sources 77 Kumba suppliers do not publish this information Kumba does not currently use renewable energy sources 76, 77 Energy consumption investigation initiated 77 Investigations under way 76 Investigations under way Zincor adjacent to Ramsar site and Rosh Pinah next to national conservation area Investigations under way 76 76 Under way. All sites will have biodiversity action plans on completion Test case in progress. To be refined in 2006 to enable full reporting Available but not yet reported – negligible portion of land ✓ – sufficient disclosure (cid:54) – partial disclosure n/a – not applicable na – not available 1 0 9 K U M B A A N N U A L R E P O RT 2 0 0 5 GRI ELEMENT TOPIC FY2003 FY2004 FY2005 PAGE EN25 Impacts on protected, sensitive areas EN26 EN27 EN28 EN29 EN8 Changes to natural habitats from activities/habitats protected or restored Objectives for protecting and restoring ecosystems Protected species with habitats in operational areas Business units in or around protected or sensitive areas Greenhouse gas emissions na na na na ✓ na (cid:54) (cid:54) (cid:54) (cid:54) (cid:54) (cid:54) na na ✓ na ✓ na EN9 Ozone-depleting substances na na na EN10 EN11 EN12 EN13 EN30 EN31 EN32 Other significant air emissions Waste by type and definition Discharges to water Spills of chemicals, oils and fuels Indirect greenhouse gas emissions Hazardous waste Ecosystems/habitats affected by water run-off na na na na ✓ na na (cid:54) na na (cid:54) na (cid:54) na na na na ✓ na na na Under control and stable. Investigations under way Investigations under way Under development Available but not yet reported Zincor and Rosh Pinah (EN6) Calculated but not yet reported as additional parameters are being integrated into the model for FY2006 Air quality baseline studies initiated at select business units Projects under way to comply with legislation Waste stream analysis initiated at Sishen and Ticor. Project to be rolled out to group by end FY2006 See EN11 Handled and reported under incidents p77 Air quality baseline studies initiated at select business units Studies under way Biodiversity action plans being developed ✓ – sufficient disclosure (cid:54) – partial disclosure n/a – not applicable na – not available 1 1 0 K U M B A A N N U A L R E P O RT 2 0 0 5 GRI ELEMENT TOPIC FY2003 FY2004 FY2005 PAGE EN33 Performance of suppliers ✓ na na EN14 Impacts of products and services na na na EN15 Products reclaimable na na na EN16 Fines for environmental non-performance nil nil ✓ EN34 EN35 Social LA1 LA2 LA12 LA3 LA4 LA13 LA5 MM13 LA6 LA7 LA8 Impacts of transportation used for logistical purposes na Total environmental expenditure by type Employment Breakdown of workforce Net job creation and average turnover segmented by region/country Employee benefits beyond legal mandate Labour/management relations Employees represented by trade unions, bona fide employee representatives or covered by collective bargaining agreements Information, consultation and negotiation with employees over changes in operations Formal worker representation in decision-making or management, including corporate governance Health and safety Recording and notification of occupational accidents and diseases Number of new cases occupational disease by type. Programmes to prevent occupational disease. Formal health and safety committees with management and worker representation Standard injury, lost-day and absentee rates and work-related fatalities (including sub-contracted workers) Policies or programmes on HIV/Aids – prevalence na ✓ (cid:54) na ✓ ✓ ✓ ✓ – ✓ ✓ ✓ na na na na ✓ (cid:54) ✓ ✓ ✓ ✓ ✓ – ✓ ✓ ✓ ✓ (cid:54) ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ Work to be initiated with hydro carbon suppliers at select business units Kumba has no interaction with end users to measure this indicator Kumba has no interaction with end users to measure this indicator Ticor, R2 000 – uncovered transport vehicle resulted in dust spillage Not a SHE Indicator Limited to water, electricity and diesel as reported 80 80 81 81 81 81 75 75 75 75 80 – 81 ✓ – sufficient disclosure (cid:54) – partial disclosure n/a – not applicable na – not available 1 1 1 K U M B A A N N U A L R E P O RT 2 0 0 5 GRI ELEMENT TOPIC FY2003 FY2004 FY2005 PAGE LA14 LA15 LA9 LA16 LA17 LA10 LA11 HR1 HR2 HR3 HR8 HR4 H5 HR6 HR7 HR9 HR10 HR11 HR12 HR13 HR14 SO1 MM7 MM8 MM9 MM10 Compliance with ILO guidelines Agreements with trade unions or employee representatives covering health and safety at work Training and education Average hours of training per year per employee by category Programmes to support continued employability of employees and to manage career endings Programmes for skills management or lifelong learning Diversity and opportunity Equal opportunities and monitoring systems Senior management, corporate governance bodies, including male/female ratio, cultural diversity Human rights Human rights and operations, including monitoring mechanisms Human rights impacts on investment and procurement Human rights within supply chain including monitoring systems Employee training on human rights in operations Non-discrimination Discrimination in operations Freedom of association and collective bargaining Freedom of association Child labour Forced and compulsory labour Disciplinary practices Appeal practices Non-retaliation Security practices Human rights training for security personnel Indigenous rights Needs of indigenous people Jointly-managed community grievance mechanisms Share of operating revenues redistributed to local communities Community Communities affected by operations – R value of CSI contributions Significant incidents affecting communities during reporting period, grievance mechanisms used to resolve incidents and outcomes. Programmes that address artisanal and small-scale mining (ASM) Resettlement policies and activities Operations with closure plans, covering social (including labour transition), environmental, economic aspects. ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ na ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ na (cid:54) – – – – ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ – – – – ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ (cid:54) (cid:54) (cid:54) ✓ 82 74 82 81 81 80 80 80 81 81 81 81 81 81 81 81 81 81 81 85 86 86 86 86 86 86 ✓ – sufficient disclosure (cid:54) – partial disclosure n/a – not applicable na – not available 1 1 2 K U M B A A N N U A L R E P O RT 2 0 0 5 GRI ELEMENT TOPIC FY2003 FY2004 FY2005 PAGE MM11 MM12 SO4 SO2 SO3 SO5 SO6 SO7 PR1 PR2 PR7 PR8 PR9 PR10 PR3 PR11 86 74 10 – 13, 65 63 63 63 Process for identifying local communities’ land and customary rights, including indigenous peoples’, grievance mechanisms to resolve disputes. Approach to identifying, preparing for and responding to emergency situations affecting employees, communities, environment. Awards for social, ethical and environmental performance Bribery and corruption Policy Political contributions Political lobbying and contributions Money paid to political bodies Competition and pricing Court decisions on anti-trust and monopoly regulations Mechanisms to prevent anti-competitive behaviour Customer health and safety Customer health and safety during use of products and services Products and services Product information and labelling Non-compliance on product information and labelling Customer satisfaction Advertising Advertising Breaches of advertising and marketing regulations Respect for privacy Consumer privacy Breaches of consumer privacy – – ✓ ✓ ✓ ✓ n/a ✓ n/a n/a n/a n/a na zero na zero – – ✓ ✓ ✓ ✓ n/a ✓ n/a n/a n/a n/a ✓ ✓ ✓ ✓ zero n/a ✓ n/a n/a n/a n/a zero zero zero zero ✓ – sufficient disclosure (cid:54) – partial disclosure n/a – not applicable na – not available 1 1 3 K U M B A A N N U A L R E P O RT 2 0 0 5 GRI “in accordance with” self-assessment Requirement 4: The company must ensure that the report is consistent with the principles in part B of the guidelines Requirement Comments/conclusion Principle 1 – Transparency Does the report provide full disclosure of the processes, procedures, and assumptions in report preparation? Principle 2 – Inclusiveness Does the reporting organisation systematically engage its stakeholders to help focus and continually enhance the quality of its reports? Principle 3 – Auditability Is the reported data and information recorded, compiled, analysed and disclosed in a way that would enable internal auditors or external assurance providers to attest to its reliability? Principle 4 – Completeness Does the report include all information that is material to users for assessing the organisation’s economic, environmental and social performance in a manner consistent with the declared boundaries, scope and time period? Principle 5 – Relevance Does the report clearly define the degree of importance assigned to particular indicators, including the threshold at which the information becomes significant enough to be reported? Principle 6 – Sustainability context Does the report provide an overview of the context in which the data is reported relative to the larger ecological, social or economic constraints? Principle 7 – Accuracy Does the report achieve a high degree of exactness, or a low margin of error, such that users can make decisions with a high degree of confidence? Principle 8 – Neutrality Does the report avoid bias in selection and presentation of information, and provide a balanced account of the organisation’s performance? Principle 9 – Comparability Does the report maintain consistency with previous reports in the boundary and scope of indicators? Alternatively, are any changes of boundary or scope, or re-statements of previously disclosed information, adequately disclosed? Principle 10 – Clarity Does the report make the reported information available in a manner that is responsive to the maximum number of users while still maintaining a suitable level of detail? Principle 11 – Timeliness Is the report being released in a manner that is consistent with a regular schedule that meets user needs? Chief executive’s review (p12), approach to sustainable development, social summary Ongoing engagement initiatives (p85) address all elements of our integrated sustainability reporting. Feedback is noted and incorporated where appropriate Report compiled to meet auditability requirements relating to aspects of which KPMG’s independent assurance report (p104) gives assurance over, and our internal audit processes for SHE data review Kumba’s executive committee has reviewed the content of this report and is satisfied that the information it contains is sufficient to enable analysis p103 (Report Scope) As stated by our chief executive and enumerated in our targets (p8), all information in this report is considered significant to our diverse stakeholders The report scope and introductions to each core section identify the context of the data being reported Aspects of this report have been reviewed by internal auditors and external assurance providers to ensure that the data is presented as accurately as possible This report reflects Kumba’s commitment to providing a balanced and objective account of our economic, social and environmental impacts – positive and negative. Our impartiality includes references to underperforming areas or missed targets Apart from the impact on comparability due to a change in financial year end, this report underscores our commitment to continuous improvement in sustainable development reporting and the value we place on stakeholder feedback at every level Kumba’s aim to provide a report that is as comprehensive as economically possible is reflected in the additional case studies included this year. Our commitment to clarity, consistency and ease of use is reflected in structural changes designed to ease readership and will ultimately be tested by stakeholders Kumba’s annual report is provided in accordance with our published financial year-end reporting guidelines and will be distributed to stakeholders at all operations 1 1 4 K U M B A A N N U A L R E P O RT 2 0 0 5 G R O U P C A S H V A L U E A D D E D S T A T E M E N T f o r t h e y e a r e n d e d 3 1 D e c e m b e r 2 0 0 5 The value added statement shows the wealth the group has created through mining, benefication, trading and investing operations. The statement below summarises the total cash wealth created and how it was disbursed among the group’s stakeholders, leaving a retained amount which was re-invested in the group for the replacement of assets and further development of operations. Cash generated Cash derived from sales and services Income from investments and interest received Paid to suppliers for materials and services Cash value added Cash utilised to: Remunerate employees for services Pay direct taxes to the state Provide lenders with a return on borrowings Provide shareholders with cash dividends Cash disbursed among stakeholders Cash retained in the group to maintain and develop operations NOTES TO THE GROUP VALUE ADDED STATEMENT 1. Taxation contribution Direct taxes (as above) Value added taxes levied on purchases of goods and services Regional service council levies Rates and taxes paid to local authorities Gross contributions 2. Additional amounts collected by the group on behalf of government Value added tax and other duties charged on turnover Employees’ tax deducted from remuneration paid 12-months ended 31 Dec 2005 Rm 11 261 (5 137) 6 124 Wealth created % Restated 18-months ended 31 Dec 2004 Rm 12 568 (7 214) Wealth created % 100 5 354 100 49 6 8 7 70 30 2 110 821 339 1 447 4 717 1 407 821 963 23 19 1 827 852 439 1 292 34 13 6 24 77 23 2 646 313 402 361 3 722 1632 313 1 169 19 21 1 522 985 416 1 401 Cash disbursed among stakeholders 2005 2004 45% 17% 7% 31% Remunerate employees for services Pay direct taxes to the state Provide lenders with a return on borrowings Provide shareholders with cash dividends 71% 8% 11% 10% 1 1 5 K U M B A A N N U A L R E P O RT 2 0 0 5 S U P P L E M E N T A R Y F I N A N C I A L I N F O R M A T I O N INCOME STATEMENTS Revenue Operating expenses Net operating profit Net financing costs Share of profit/(loss) from equity accounted investments Profit before taxation Taxation Profit for the year Attributable to: Equity holders of the parent Minority interest Ordinary shares (million) – in issue – weighted average number of shares – diluted weighted average number of shares Attributable earnings per share (cents) – basic as previously reported – basic restated – diluted as previously reported – diluted restated Dividend per share for the year (cents) Reconciliation of headline earnings Net profit attributable to ordinary shareholders Adjusted for: – Impairment charges – Share of associates’ goodwill amortisation – Goodwill amortisation – Share of associates’ exceptional items – Net deficit on disposal or scrapping of property, plant and equipment – Net surplus on disposal of investment in joint venture and associates – Closure cost Minority interest on adjustments Taxation effect of adjustments Headline earnings Headline earnings per share (cents) – basic as previously reported – basic restated – diluted as previously reported – diluted restated CASH FLOW STATEMENTS Cash flows from operating activities Cash flows from investing activities Cash flows from financing activities Net increase in cash and cash equivalents Adjusted opening balance Increase in cash and cash equivalents due to proportionate consolidation of joint ventures Cash and cash equivalents at beginning of year 12-months ended 31 Dec 2005 Audited Rm Restated 12-months ended 31 Dec 2004 Unaudited Rm 11 962 (7 075) 4 887 (231) 7 4 663 (1 412) 3 251 3 190 61 3 251 306 304 311 1 049 1 026 540 3 190 28 (95) 2 (1 179) (1) 428 2 373 781 763 1 407 (948) (273) 186 1 297 39 1 258 8 709 (7 341) 1 368 (287) (23) 1 058 (330) 728 638 90 728 302 300 302 226 213 224 211 125 638 (57) 10 (4) 19 109 1 35 (17) 734 258 245 256 243 1 455 (921) (266) 268 1 029 14 1 015 Cash and cash equivalents at end of year 1 483 1 297 1 1 6 K U M B A A N N U A L R E P O RT 2 0 0 5 As at 31 Dec 2005 Audited Rm Restated As at 31 Dec 2004 Unaudited Rm 8 826 28 61 95 339 392 9 741 1 481 2 066 1 483 5 030 11 8 476 31 71 (53) 85 258 286 9 154 1 348 1 365 1 297 4 010 14 782 13 164 2 940 54 4 383 7 377 9 7 386 1 963 604 727 1 006 4 300 1 388 911 773 24 3 096 2 812 (39) 2 516 5 289 1 197 6 486 2 331 609 599 1 040 4 579 1 061 836 182 20 2 099 14 782 13 164 1 391 1 870 BALANCE SHEETS Assets Non-current assets Property, plant and equipment Biological assets Intangible assets Goodwill Investments in associates and joint ventures Deferred taxation Other financial assets Total non-current assets Current assets Inventories Trade and other receivables Cash and cash equivalents Total current assets Non-current assets classified as held for sale Total assets Equity and liabilities Capital and reserves Share capital Non-distributable reserves Retained income Ordinary shareholders’ equity Minority interest Total shareholders’ interest Non-current liabilities Interest-bearing borrowings Other long-term payables Non-current provisions Deferred taxation Total non-current liabilities Current liabilities Trade and other payables Interest-bearing borrowings Taxation Current provisions Total current liabilities Total equity and liabilities Net debt 1 1 7 K U M B A A N N U A L R E P O RT 2 0 0 5 S E L E C T E D G R O U P F I N A N C I A L D A T A T R A N S L A T E D I N T O U S D O L L A R S INCOME STATEMENT Revenue Operating expenses Net operating profit Net financing costs Income from equity accounted investments Profit before taxation Taxation Profit for the year Attributable to: Equity holders of the parent Minority interest Attributable earnings per share (US cents) Headline earnings Headline earnings per share (cents) BALANCE SHEET Assets Non-current assets Property, plant and equipment Biological assets Intangible assets Goodwill Investments in associates and joint ventures Deferred taxation Financial assets Current assets Cash and cash equivalents Other Non-current assets classified as held for sale Total assets Equity and liabilities Shareholders’ funds Minority interest Non-current liabilities Interest-bearing borrowings Deferred taxation and provisions Current liabilities Interest-bearing borrowings Other Total equity and liabilities Net debt (refer to definitions on p119) CASH FLOW STATEMENT Cash available from operations Proceeds on disposal of assets Investments – Acquisition of joint ventures and associates – Proceeds from disposal of investment – Increase in investment in subsidiaries – buy out of Ticor Ltd minorities Capital expenditure – Other Net cash inflow 12-months ended 31 Dec 2005 USD million Restated 18-months ended 31 Dec 2004 USD million Restated 12-months ended 31 Dec 2004 USD million 1 897 (1 122) 2 229 (1 901) 1 370 (1 155) 775 (37) 1 739 (224) 515 505 10 515 166 376 124 1 395 4 10 15 54 62 234 561 2 328 (75) (7) 246 (75) 171 160 11 171 56 171 60 1 500 5 13 (9) 15 46 51 229 479 2 337 2 329 1 166 1 310 369 144 347 2 337 220 223 4 187 (186) (166) 11 73 936 212 412 398 148 223 2 329 331 289 24 18 (247) (28) 56 215 (45) (4) 166 (52) 114 100 14 114 34 115 40 229 8 (2) (139) (12) 84 The group statements on this page have been expressed in US dollars for information purposes. The average US dollar/rand of US$1: R6,3047 (for 31 December 2004 18-month year US$1: R5,6534 and 12-month year US$1: R6,35565) has been used to translate the income and cash flow statements, while the balance sheet has been translated at the closing rate at the last day of the reporting year US$1: R6,3250 (2004: US$1: R5,6525). 1 1 8 K U M B A A N N U A L R E P O RT 2 0 0 5 RETURN ON INVESTED CAPITAL Net operating profit plus income from non- equity accounted investments plus income from investments in associates as a percentage of the average invested capital RETURN ON NET ASSETS Net operating profit plus income from non-equity accounted investments plus income from investments in associates as a percentage of the average net assets REVENUE PER EMPLOYEE Revenue divided by the average number of employees during the year TOTAL ASSET TURNOVER Revenue divided by average total assets WEIGHTED AVERAGE NUMBER OF SHARES IN ISSUE The number of shares in issue at the beginning of the year, increased by shares issued during the year, weighted on a time basis for the year which they have participated in the income of the group. In the case of shares issued pursuant to a share capitalisation award in lieu of dividends, the participation of such shares is deemed to be from the date of issue D E F I N I T I O N S ATTRIBUTABLE CASH FLOW PER ORDINARY SHARE Cash flow from operating activities after adjusting for minority participation therein divided by the weighted average number of ordinary shares in issue during the year CAPITAL EMPLOYED Total shareholders’ equity plus net debt minus non-current asset investments financial CASH AND CASH EQUIVALENTS Comprise cash on hand and current accounts in bank, net of bank overdrafts liquid any together with investments readily convertible to known amounts of cash and not subject to significant risk of changes in value highly CURRENT RATIO Current assets divided by current liabilities DIVIDEND COVER Headline earnings per ordinary share divided by dividends per ordinary share DIVIDEND YIELD Dividends per ordinary share divided by the closing share price on the JSE Limited EARNINGS PER ORDINARY SHARE – Attributable earnings basis Earnings attributable to ordinary shareholders divided by the weighted average number of ordinary shares in issue during the year – Headline earnings basis to ordinary Earnings attributable shareholders adjusted for profits and losses on items of a capital nature recognising the taxation and minority impacts on these adjustments, divided by the weighted average number of ordinary shares in issue during the year FINANCING COST COVER – Ebit Net operating profit (before interest and tax) divided by net financing costs – Ebitda Net operating profit (before interest, tax, depreciation, amortisation, impairment charges and net deficit/ surplus on sale of investments and assets), divided by net financing costs HEADLINE EARNINGS YIELD Headline earnings per ordinary share divided by the closing share price on the JSE Limited INVESTED CAPITAL Total shareholders’ equity, interest-bearing debt, non-current provisions and net deferred taxation less cash and cash equivalents NET ASSETS Total assets less current and non-current liabilities less minority interest which equates to ordinary shareholders’ equity NET DEBT TO EQUITY RATIO Interest-bearing debt less cash and cash equivalents as percentage of total shareholders’ equity NET EQUITY PER ORDINARY SHARE Ordinary shareholders’ equity divided by the number of ordinary shares in issue at the year end NUMBER OF YEARS TO REPAY INTEREST-BEARING DEBT Interest-bearing debt divided by cash flow from operating activities before dividends paid OPERATING MARGIN Net operating profit as a percentage of revenue OPERATING PROFIT PER EMPLOYEE Operating profit divided by the average number of employees during the year RETURN ON CAPITAL EMPLOYED Net operating profit plus income from non-equity accounted investments plus income from investments in associates as a percentage of average capital employed RETURN ON ORDINARY SHAREHOLDERS’ EQUITY – Attributable earnings Attributable earnings to ordinary shareholders as a percentage of average ordinary shareholders’ equity – Headline earnings Headline earnings attributable to ordinary shareholders as a percentage of average ordinary shareholders’ equity 1 1 9 K U M B A A N N U A L R E P O RT 2 0 0 5 A N N U A L F I N A N C I A L S T AT E M E N T S CONTENTS ANNEXURES Directors’ responsibility for financial reporting Certificate by company secretary Report of the independent auditors Report of the directors Directors’ remuneration Income statements Balance sheets Cash flow statements Group statement of changes in equity Company statement of changes in equity Notes to the annual financial statements Page 121 121 122 123 125 130 131 132 133 135 136 1. Non-current interest-bearing borrowings 2. Investments in associates, joint ventures and other investments 3. Investments in subsidiaries 187 188 190 1 2 0 K U M B A A N N U A L R E P O RT 2 0 0 5 D I R E C T O R S ’ R E S P O N S I B I L I T Y F O R F I N A N C I A L R E P O R T I N G TO THE SHAREHOLDERS OF KUMBA RESOURCES LIMITED The directors of the company are responsible for maintaining adequate accounting records, the preparation of the annual financial statements of the company and group and to develop and maintain a sound system of internal control to safeguard shareholders’ investments and the group’s assets. In presenting the accompanying financial statements, South African Statements of Generally Accepted Accounting Practice and International Financial Reporting Standards have been followed, applicable accounting policies have been used and prudent judgements and estimates have been made. In order for the directors to discharge their responsibilities, management has developed and continues to maintain a system of internal control aimed at reducing the risk of error or loss in a cost-effective manner. Such systems can provide reasonable but not absolute assurance against material misstatement or loss. The directors, primarily through the audit committee which consists of non-executive directors, meet periodically with the external and internal auditors, as well as executive management to evaluate matters concerning accounting policies, internal control, auditing and financial reporting. The group’s internal auditors independently evaluate the internal controls and coordinate their audit coverage with the external auditors. The external auditors are responsible for reporting on the financial statements. The external and internal auditors have unrestricted access to all records, property and personnel as well as to the audit committee. The directors are not aware of any material breakdown in the functioning of these controls and systems during the year under review. The directors are of the opinion, based on the information and explanations given by management and the internal auditors, and on comment by the external auditors on the results of their audit conducted for the purpose of expressing their opinion on the annual financial statements, that the internal accounting controls are adequate, so that the financial records may be relied on for preparing the financial statements and maintaining accountability for assets and liabilities. The directors have reviewed the group’s financial budgets with their underlying business plans for the period to 31 December 2006. In light of the current financial position and existing borrowing facilities, they consider it appropriate that the annual financial statements be prepared on the going-concern basis. Against this background, the directors of the company accept responsibility for the annual financial statements, which were approved by the board of directors on 17 February 2006 and are signed on its behalf by: AJ Morgan Chairman Dr CJ Fauconnier Chief executive DJ van Staden Executive director, Finance 17 February 2006 The external auditors have audited the annual financial statements of the company and group and their unmodified report appears on p122. C E R T I F I C AT E B Y C O M P A N Y S E C R E T A R Y In terms of the Companies Act 61 of 1973 of South Africa, as amended, I, MS Viljoen, in my capacity as company secretary, confirm that for the year ended 31 December 2005, the company has lodged with the Registrar of Companies all such returns as are required of a public company in terms of this Act and that all such returns are true, correct and up to date. MS Viljoen Company secretary 17 February 2006 1 2 1 K U M B A A N N U A L R E P O RT 2 0 0 5 R E P O R T O F T H E I N D E P E N D E N T A U D I T O R S TO THE SHAREHOLDERS OF KUMBA RESOURCES LIMITED We have audited the annual financial statements and the group annual financial statements of Kumba Resources Limited set out on p123 to p191 for the year ended 31 December 2005. These financial statements are the responsibility of the company’s directors. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements present fairly, in all material respects, the financial position of the company and the group at 31 December 2005 and the results of their operations and cash flows for the year then ended in accordance with South African Statements of Generally Accepted Accounting Practice, International Financial Reporting Standards and in the manner required by the Companies Act 61 of 1973 of South Africa, as amended. Deloitte & Touche Registered Accountants and Auditors Chartered Accountants (SA) 17 February 2006 Sandton 1 2 2 K U M B A A N N U A L R E P O RT 2 0 0 5 R E P O R T O F T H E D I R E C T O R S The directors have pleasure in presenting the annual financial statements of Kumba Resources Limited (“Kumba”) and the group for the year ended 31 December 2005. SHAREHOLDERS An analysis of shareholders and shareholdings appears on p70 of the annual report. CHANGE OF YEAR END The group changed its year end from 30 June to 31 December in the prior year to be in line with the year-end of its majority shareholder, Anglo American plc and is consequently reporting an 18-month comparative period. Refer to p116 and p117 where unaudited supplementary information is provided for comparative purposes. NATURE OF BUSINESS Kumba, incorporated in South Africa, is a mining group of companies focusing on extracting and processing a range of minerals and metals including iron ore, coal, heavy minerals, base metals and selected industrial minerals. CORPORATE GOVERNANCE The board endorses the Code of Corporate Practice and Conduct as set out in the King II Report on Corporate Governance and has satisfied itself that Kumba has complied throughout the period in all material aspects with the King II code and the listings requirements of the JSE. A detailed report appears on p60. REGISTRATION DETAILS Kumba is a listed company on the JSE Limited. The company registration number is 2000/011076/06. The registered office is Roger Dyason Road, Pretoria West, Republic of South Africa, 0183. ACTIVITIES AND FINANCIAL RESULTS Detailed reports on the activities and performance of the group and the various divisions of the group are contained in the reports on p23 to p31 and in the business operations review on p32 to p42. These reports are unaudited. PROPERTY, PLANT AND EQUIPMENT Capital R1 044 million (2004: R1 396 million). expenditure for the period amounted to SHAREHOLDERS’ RESOLUTIONS At the fourth annual general meeting of shareholders, held on 15 April 2005, the following resolutions were passed: • renewal of the authority that the unissued shares be placed under the control of the directors; • general authority to issue shares for cash; • approval of Kumba Resources Long-Term Incentive Plan 2005 (LTIP) and Kumba Resources Deferred Bonus Plan 2005 (DBP); and • special resolution to authorise directors to repurchase company shares. Kumba and its subsidiaries have passed no other special or ordinary shareholders’ resolutions of material interest or of a substantive nature. SHARE CAPITAL The total number of shares in issue increased during the year to 306 162 251. The increase can be summarised as follows: Date of issue Number of shares Opening balance Issued in terms of the Management Share Option Scheme due to options exercised at prices ranging from R39,25 to R100,10 21 February 2005 to 29 December 2005 301 854 211 4 308 040 306 162 251 DIVIDEND PAYMENTS Dividend number 2 Kumba paid a final dividend of R177 million on 29 September 2003 for the year ended June 2003. The STC amounted to R22 million. Dividend numbers 3 and 4 On 29 March 2004 and 13 September 2004 the company paid interim dividends of R60 million and R105 million to R8 million and respectively, R13 million. the STC amounted Dividend number 5 Final dividend number 5 of 90 cents per share was declared in South African currency in respect of the period ended 31 December 2004. The dividend was paid on Monday, 14 March 2005 to shareholders recorded in the books of the company at the close of business on 11 March 2005. To comply with the requirements of STRATE the last day to trade cum dividend was Friday, 4 March 2005. The shares commenced trading ex dividend on Monday, 7 March 2005 and the record date was Friday, 11 March 2005. Dividend number 6 Interim dividend number 6 of 160 cents per share was declared in South African currency in respect of the period ended 30 June 2005. The dividend was paid on Monday, 12 September 2005 to shareholders recorded in the books of the company at the close of business on Friday, 9 September 2005. To comply with the requirements of STRATE the last day to trade cum dividend was Friday, 2 September 2005. The shares commenced trading ex dividend on Monday, 5 September 2005 and the record date was Friday, 9 September 2005. Dividend number 7 Final dividend number 7 of 160 cents per share was declared in South African currency in respect of the period ended 31 December 2005. The dividend was paid on Monday, 13 March 2006 to shareholders recorded in the books of the company at the close of business on Friday, 10 March 2006. To comply with the requirements of STRATE the last day to trade cum dividend was Friday, 3 March 2006. The shares commenced trading ex dividend on Monday, 6 March 2006 and the record date was Friday, 10 March 2006. Special dividend number 1 Special dividend number 1 of 220 cents per share was declared in South African currency from the after-tax settlement proceeds received for the company’s interest in the Hope Downs project, Australia. The special dividend was paid on Monday, 12 September 2005 to shareholders recorded in the books of the company at the close of business on Friday, 9 September 2005. To comply with the requirements of STRATE the last day to trade cum dividend was Friday, 2 September 2005. The shares commenced trading ex dividend on Monday, 5 September 2005 and the record date was Friday, 9 September 2005. 1 2 3 K U M B A A N N U A L R E P O RT 2 0 0 5 R E P O R T O F T H E D I R E C T O R S c o n t i n u e d INVESTMENTS AND SUBSIDIARIES The financial information in respect of investments and interests in subsidiaries of the company is disclosed in annexures 2 and 3 to the financial statements. diligence investigations and are in the process of finalising the valuations and the requisite legal agreements. It is envisaged that the transaction will be implemented in the second quarter of 2006 (refer to p16 for detail). Kumba acquired the minority shareholding in Ticor Limited resulting in Ticor Limited becoming a wholly owned subsidiary from 15 November 2005. Ticor Limited was subsequently delisted from the Australian Stock Exchange (ASX) on 22 November 2005. Kumba’s remaining indirect holding in Ticor SA (Pty) Limited and Ticor SA KZN (Pty) Limited is now held directly by Kumba. Hancock Prospecting (Pty) Limited, Kumba’s partner in the Hope Downs project, exercised its option to acquire Kumba’s interest in the project by paying A$231,4 million on 1 July 2005 in addition to the earlier option payment of A$5,1 million. The post-tax proceeds were declared and paid as a special dividend on 12 September 2005. Kumba consequently has no further interest in the project. The investment in AST was equity accounted up to 3 May 2005 being the date of the rights issue and subsequent business combination of AST with Gijima Info Technologies Afrika (Pty) Limited which diluted Kumba’s equity interest of 22,34% at 31 December 2004, to 4,6% on 3 May 2005 in the newly formed GijimaAST Limited. In December 2005 Guma Investment Holdings (Pty) Limited exercised its option to acquire the remaining 4,6% held by Kumba in GijimaAST group. Kumba consequently has no further equity interest in GijimaAst Limited. TRANSPORT AGREEMENT WITH TRANSNET Subsequent to the heads of agreement signed in December 2004, Kumba and Transnet concluded a definitive agreement on the expansion of the Sishen-Saldanha export channel providing for an additional 11,5Mtpa of iron ore to be exported from Saldanha by 2009. Kumba’s iron ore rail allocation will be 35Mtpa by 2009 of which 33,2Mtpa will be exported. The definitive agreement also provides for a rand-based rail tariff for the transport and handling of iron ore from the Northern Cape through the Sishen-Saldanha export channel and to provide for growth in Kumba’s iron ore exports. The previous agreement between the parties provided for the transport and handling of iron ore at a tariff determined by reference to the US dollar-denominated iron ore price and the prevailing rand/US dollar exchange rates. TRANSFORMATION TRANSACTION On 13 October 2005 Kumba, its holding company Anglo American and Eyesizwe Mining, together with the Industrial Development Corporation, the Tiso Consortium, the Eyabantu Consortium, a Northern Cape Community Group and the South African Women in Mining Association, jointly announced the largest empowerment transaction to be implemented to date in South Africa. The parties have completed their due SUBSEQUENT EVENTS The directors are not aware of any matter or circumstance arising since the end of the financial period, not otherwise dealt with in this report or in the group financial statements that would significantly affect the operations or the results of the group. DIRECTORATE The names of the directors in office at the date of this report are set out on p58. During the current financial year, the following resignations and appointment took place: MLD Marole resigned as chairman and director appointed as chairman resigned as director AJ Morgan RG Wadley 15 April 2005 15 April 2005 30 June 2005 The following directors are required to retire by rotation in terms of clause 16.1 of the articles of association: BE Davison SA Nkosi CML Savage F Titi At the forthcoming annual general meeting the directors mentioned above will retire and, being eligible, offer themselves for re-election. It is recorded that Mr TL de Beer will retire at the forthcoming annual general meeting. The retirement age for a non- executive director is 70 years of age, becoming effective at the annual general meeting after the date on which he/she turned 70. COMPANY SECRETARY The company secretary is MS Viljoen. The company secretary’s registered address is: Roger Dyason Road Pretoria West 0183 Republic of South Africa PO Box 9229 Pretoria 0001 Republic of South Africa INDEPENDENT AUDITORS The auditors of the company, Deloitte & Touche, will continue in office in accordance with section 270(2) of the Companies Act, 1973, of South Africa. CHANGE IN ACCOUNTING POLICIES The accounting policies are consistent with those applied in the annual financial statements for the period ended 31 December 2004 except for the changes disclosed in note 2 to the financial statements. 1 2 4 K U M B A A N N U A L R E P O RT 2 0 0 5 D I R E C T O R S ’ R E M U N E R A T I O N This report on remuneration and related matters covers issues which are the concern of the board as a whole in addition to those which were dealt with by the remuneration committee. REMUNERATION POLICY The human resources and remuneration committee has a clearly defined mandate from the board aimed at: • ensuring that the company’s chairman, directors and senior executives are fairly rewarded for their individual contributions to the company’s overall performance; and • ensuring that the company’s remuneration strategies and packages, including the incentive schemes, are related to performance, suitably competitive and give due regard to the interests of the shareholders and the financial and commercial health of the company. DIRECTORS’ SERVICE CONTRACTS All executive directors’ normal contracts are subject to six calendar months’ notice. Non-executive directors are not bound by service contracts. There are no restraints of trade associated with the contracts. SUMMARY OF REMUNERATION for the year ended 31 December 2005 Name Executive directors Dr CJ Fauconnier MJ Kilbride CF Meintjes DJ van Staden RG Wadley3 Basic salary R Fees for services R 2 927 187 1 594 384 1 539 004 1 557 136 806 554 Less gains on share scheme Add share-based payment expense Total remuneration paid by Kumba Non-executive directors PM Baum4 BE Davison4 TL de Beer JJ Geldenhuys Dr D Konar MLD Marole5 AJ Morgan6 (chairman) WA Nairn4 SA Nkosi CML Savage Dr NS Segal F Titi PL Zim4 165 850 133 750 240 750 230 050 219 350 87 212 255 017 165 850 165 850 133 750 176 550 165 850 137 258 Perfor- mance bonuses1 R 454 144 276 242 249 314 262 778 113 334 Benefits and allow- ances2 R 188 064 344 367 152 477 264 111 190 773 Retire- ment Medical fund fund contri- contri- butions butions R R 191 547 166 654 182 211 88 405 21 369 14 993 15 913 27 745 7 451 Compen- sation on retirement from share on executive office scheme R R Gains 1 358 785 Other R Total R 3 278 3 594 042 2 467 2 424 000 2 365 2 125 727 2 400 2 296 381 1 288 2 566 590 7 215 4 950 10 421 9 599 6 648 1 480 5 371 5 877 6 421 5 206 5 258 4 978 13 006 740 2 973 434 15 980 174 173 065 138 700 251 171 239 649 225 998 88 692 260 388 171 727 172 271 133 750 181 756 171 108 142 236 2 350 511 1. All incentive schemes are performance related and were approved by the board. The three-tier incentive scheme includes the incentive linked to the Kumba business improvement programme initiatives and applies to all employees throughout the group. 2. Include travel and entertainment allowances. 3. Resigned as executive director on 30 June 2005. 4. Fees paid to their respective employers and not to them as individuals. 5. Resigned as a non-executive director and chairman from the Kumba board on 15 April 2005. 6. Non-executive director who was appointed as non-executive chairman of the board on 15 April 2005. Retirement amounts paid or receivable by executive directors are paid or received under defined contribution retirement funds. 1 2 5 K U M B A A N N U A L R E P O RT 2 0 0 5 D I R E C T O R S ’ R E M U N E R A T I O N c o n t i n u e d SUMMARY OF REMUNERATION for the 18-months ended 31 December 2004 (restated) Perfor- mance bonuses1 R Benefits and allow- ances2 R 352 292 872 890 213 825 1 040 905 486 172 192 761 641 224 199 653 779 890 203 669 Retire- ment fund contri- butions R 248 793 216 692 232 020 229 731 Name Executive directors Dr CJ Fauconnier MJ Kilbride CF Meintjes DJ van Staden RG Wadley Basic salary R Fees for services R 3 251 761 1 799 401 1 777 820 1 760 764 1 623 352 Less gains on share scheme Add share-based payment expense Total remuneration paid by Kumba Non-executive directors PM Baum4 BE Davison4 TL de Beer JJ Geldenhuys GS Gouws6 Dr D Konar MLD Marole (chairman) AJ Morgan WA Nairn4 SA Nkosi CML Savage NS Segal F Titi5 PL Zim4 124 167 156 250 337 500 322 500 14 203 307 500 470 000 232 500 119 167 232 500 187 500 247 500 224 167 124 167 5 672 3 974 14 982 16 511 1 361 10 549 15 052 5 811 4 099 9 156 873 12 040 4 099 fund Gains on share Medical contri- butions R scheme3 Other R R Total R 18 456 22 712 1 450 612 24 764 1 180 505 22 764 3 268 325 1 775 103 4 055 3 206 3 101 3 107 3 127 4 499 454 4 779 454 3 881 815 6 127 857 4 614 872 23 903 452 (7 674 545) 2 129 633 18 358 540 129 839 160 224 352 482 339 011 15 564 318 049 485 052 238 311 123 266 241 656 187 500 248 373 236 207 128 266 3 203 800 Include travel and entertainment allowances. 1. All incentive schemes are performance related and were approved by the board. These incentives apply to all employees throughout the group. 2. 3. As set out on p129. 4. Fees paid to their respective employers and not to them as individuals. 5. Fees paid to respective employer during period 1 July 2003 to October 2003 (R33 333), thereafter paid directly to individual (R190 834). 6. Resigned during October 2003, fees and allowances paid to respective employer and not to the individual. Retirement amounts paid or receivable by executive directors are paid or received under defined contribution retirement funds. 1 2 6 K U M B A A N N U A L R E P O RT 2 0 0 5 Beneficial Non-beneficial Indirect Direct Indirect Beneficial Non-beneficial Indirect Direct Indirect Directors’ interest in Kumba shares At 31 December 2005 Director Dr CJ Fauconnier MJ Kilbride CF Meintjes DJ van Staden PM Baum BE Davison TL de Beer JJ Geldenhuys Dr D Konar AJ Morgan (chairman) WA Nairn SA Nkosi CML Savage NS Segal F Titi PL Zim Directors’ interest in Kumba shares At 31 December 2004 Director Dr CJ Fauconnier MJ Kilbride CF Meintjes DJ van Staden RG Wadley PM Baum BE Davison TL de Beer JJ Geldenhuys GS Gouws Dr D Konar MLD Marole (chairman) AJ Morgan WA Nairn SA Nkosi CML Savage NS Segal F Titi PL Zim Direct 21 880 168 Direct 21 880 47 870 168 There has been no change to the interest of directors in share capital since the year end. On 31 December 2005 no director had direct or indirect interests of more than 1% in the share capital of the company. 1 2 7 K U M B A A N N U A L R E P O RT 2 0 0 5 D I R E C T O R S ’ R E M U N E R A T I O N c o n t i n u e d Directors’ share options and restricted share awards The following options and rights in shares in the company were outstanding in favour of directors of the company under the company’s share option schemes: Management share option scheme For the year ended 31 December 2005 Options held at 31 Exercise December 2005 price R Exercisable period Proceeds if exercisable at 31 December 2005 R Pre-tax gain if exercisable at 31 Options December exercised Exercise 2005 R during the year price R Sale price/ market price R Pre-tax gain R Date exercised 28,05 35,00 41,50 18,74 28,05 35,00 41,50 18,50 18,74 28,05 35,00 41,50 18,74 28,05 35,00 41,50 28,05 35,00 41,50 307 520 65 440 92 880 465 840 35 840 151 320 40 710 50 750 278 620 20 490 24 890 135 640 35 220 48 040 264 280 37 080 141 350 35 630 49 730 263 790 209 280 39 020 44 380 292 680 2008/12/03 2009/11/01 2011/03/16 31 367 040 22 741 104 6 674 880 9 473 760 4 384 480 5 619 240 47 515 680 32 744 824 3 655 680 15 434 640 4 152 420 5 176 500 2 984 038 11 190 114 2 727 570 3 070 375 28 419 240 19 972 097 2 089 980 2 538 780 1 710 915 2 072 341 13 835 280 10 030 578 3 592 440 4 900 080 2 359 740 2 906 420 26 956 560 19 079 994 3 782 160 14 417 700 3 634 260 5 072 460 3 087 281 10 452 833 2 387 210 3 008 665 26 906 580 18 935 989 2010/07/25 2008/12/03 2009/11/01 2011/03/16 2009/01/04 2010/07/25 2008/12/03 2009/11/01 2011/03/16 2010/07/25 2008/12/03 2009/11/01 2011/03/16 2008/12/03 2009/11/01 2011/03/16 Name Executive directors Dr CJ Fauconnier Total MJ Kilbride Total CF Meintjes Total DJ van Staden Total RG Wadley** Total Based on a share price of R102,00 which prevailed on 31 December 2005. * ** Options as held on 30 June 2005 when Mr Wadley retired. In terms of the rules of the schemes, all options vest on retirement and must be exercised within three years from retirement. On 18 November 2005 all the options were exercised and the shares sold. 1 2 8 K U M B A A N N U A L R E P O RT 2 0 0 5 Management share option scheme For the 18-months ended 31 December 2004 Name Executive directors Dr CJ Fauconnier Total MJ Kilbride Total CF Meintjes Total Options held at 31 December 2004 307 520 65 440 92 880 465 840 35 840 151 320 40 710 50 750 278 620 20 490 24 890 135 640 35 220 48 040 264 280 Proceeds if exercisable at 31 December 2004 R Pre-tax gain if exercisable at 31 December 2004 R Exercise price R Exercisable period 28,05 35,00 41,50 2008/12/03 2009/11/01 2011/03/16 13 530 880 2 879 360 4 086 720 4 904 944 588 960 232 200 20 496 960 5 726 104 18,74 28,05 35,00 41,50 2010/07/25 2008/12/03 2009/11/01 2011/03/16 1 576 960 6 658 080 1 791 240 2 233 000 905 318 2 413 554 366 390 126 875 Options exercised during the year Exercise price R Sale price/ market price R Pre-tax gain R Date exercised 23 880 64 840 18,74 28,05 37,10 37,10 438 437 586 802 2003/12/03 2003/12/03 12 259 280 3 812 137 88 720 1 025 239 18,50 18,74 2009/01/04 2010/07/25 901 560 1 095 160 522 495 628 721 28,05 35,00 41,50 2008/12/03 2009/11/01 2011/03/16 5 968 160 1 549 680 2 113 760 2 163 458 316 980 120 100 5 120 8 290 8 290 58 120 18,50 18,74 18,74 28,05 41,80 44,45 41,80 37,30 119 296 213 136 191 167 537 610 2004/02/19 2004/04/28 2004/04/28 2003/12/09 11 628 320 3 751 754 79 820 1 061 209 DJ van Staden 37 080 18,74 2010/07/25 1 631 520 936 641 141 350 28,05 2008/12/03 6 219 400 2 254 533 7 915 1 345 20 570 40 000 18,74 18,74 28,05 28,05 42,00 41,80 41,80 42,00 184 103 31 015 282 838 558 000 2004/03/01 2004/03/01 2004/03/01 2004/03/01 Total RG Wadley Total 35 630 49 730 263 790 209 280 39 020 44 380 292 680 35,00 41,50 2009/11/01 2011/03/16 1 567 720 2 188 120 320 670 124 325 11 606 760 3 636 169 69 830 1 055 956 28,05 35,00 41,50 2008/12/03 2009/11/01 2011/03/16 9 208 320 1 716 880 1 952 720 3 338 016 351 180 110 950 12 877 920 3 800 146 Management deferred purchase share scheme – Kumba shares For the 18-months ended 31 December 2004 Name Executive directors Dr CJ Fauconnier MJ Kilbride CF Meintjes DJ van Staden Total RG Wadley Total Options held at 31 December 2004 Exercise price R Exercisable period Proceeds if exercisable at 31 December 2004 R Pre-tax gain if exercisable at 31 December 2004 R Options exercised during the year Exercise price R Sale price/ market price R Pre-tax gain R Date exercised 16 780 11,75 37,10 425 373 2003/12/09 5 120 18,50 41,80 119 296 2004/02/19 20 000 15 000 16 510 10 000 27 030 88 540 982 60 908 61 890 10,00 10,00 10,00 11,75 11,75 35,50 35,51 35,52 35,50 36,20 510 000 2003/12/18 382 650 2003/12/18 421 335 2003/12/18 237 500 2003/12/19 660 884 2003/12/19 2 212 369 8,42 8,42 37,20 37,10 28 262 2003/12/09 1 746 841 2003/12/09 1 775 103 1 2 9 K U M B A A N N U A L R E P O RT 2 0 0 5 I N C O M E S T A T E M E N T S f o r t h e y e a r e n d e d 3 1 D e c e m b e r 2 0 0 5 GROUP COMPANY 12-months ended 31 Dec 2005 Rm Restated 18-months ended 31 Dec 2004 Rm 12-months ended 31 Dec 2005 Rm Restated 18-months ended 31 Dec 2004 Rm Notes 586 (693) (107) 27 (145) 1 552 1 327 (187) 1 140 1 140 1 140 721 (707) 14 18 (290) 650 392 (51) 341 341 341 REVENUE Operating expenses NET OPERATING PROFIT Interest income Interest expense Income from investments Income/(loss) from equity accounted investments PROFIT BEFORE TAXATION Taxation PROFIT FOR THE PERIOD Attributable to: Equity holders of the parent Minority interest ATTRIBUTABLE EARNINGS PER SHARE (CENTS) – basic (2004 as previously reported) – basic restated for December 2004 – diluted (2004 as previously reported) – diluted restated for December 2004 Dividend paid per share (cents) in respect of the previous financial period Dividend paid per share (cents) in respect of the interim period Special dividend paid per share (cents) in respect of the interim period Final dividend declared per share (cents) in respect of this financial year Dividend paid per share (cents) in respect of the first interim period Dividend paid per share (cents) in respect of the second interim period Final dividend declared per share (cents) in respect of the 18-month period 4 5 6 6 7 17 9 10 11 11 11 962 (7 075) 12 600 (10 755) 4 887 150 (381) 7 4 663 (1 412) 3 251 3 190 61 3 251 1 049 1 026 90 160 220 160 1 845 47 (471) (42) 1 379 (423) 956 891 65 956 314 297 312 295 60 20 35 90 1 3 0 K U M B A A N N U A L R E P O RT 2 0 0 5 B A L A N C E S H E E T S a t 3 1 D e c e m b e r 2 0 0 5 ASSETS Non-current assets Property, plant and equipment Biological assets Intangible assets Goodwill Investments in associates and joint ventures Investments in subsidiaries Deferred taxation Financial assets Total non-current assets Current assets Inventories Trade and other receivables Cash and cash equivalents Total current assets Non-current assets classified as held for sale Total assets EQUITY AND LIABILITIES Capital and reserves Share capital Non-distributable reserves Retained earnings/(loss) Ordinary shareholders’ equity Minority interest Total shareholders’ interest Non-current liabilities Interest-bearing borrowings Other long-term payables Non-current provisions Deferred taxation Total non-current liabilities Current liabilities Trade and other payables Interest-bearing borrowings Taxation Current provisions Total current liabilities Total equity and liabilities Net debt Notes 13 14 15 16 17 18 27 19 20 21 22 23 24 25 26 27 28 24 26 1 3 1 K U M B A A N N U A L R E P O RT 2 0 0 5 GROUP COMPANY Restated At 31 Dec 2004 Rm At 31 Dec 2005 Rm Restated At 31 Dec 2004 Rm At 31 Dec 2005 Rm 8 826 28 61 95 339 392 8 476 31 71 (53) 85 258 286 9 741 9 154 1 481 2 066 1 483 5 030 11 1 348 1 365 1 297 4 010 59 45 3 849 21 50 3 979 46 505 551 31 4 476 21 54 4 627 68 126 194 14 782 13 164 4 530 4 821 2 940 54 4 383 7 377 9 7 386 1 963 604 727 1 006 4 300 1 388 911 773 24 3 096 2 812 (39) 2 516 5 289 1 197 6 486 2 331 609 599 1 040 4 579 1 061 836 182 20 2 099 14 782 13 164 1 391 1 870 2 944 72 (25) 2 991 2 812 32 265 3 109 2 991 3 109 1 044 1 112 16 15 1 060 1 127 204 304 (29) 479 4 530 843 216 368 1 585 4 821 1 354 C A S H F L O W S T A T E M E N T S f o r t h e y e a r e n d e d 3 1 D e c e m b e r 2 0 0 5 CASH FLOWS FROM OPERATING ACTIVITIES Cash retained from operations Income from equity accounted investments Income from investments Net financing costs Normal taxation paid Dividends paid CASH FLOWS FROM INVESTING ACTIVITIES Investments to maintain operations Investments to expand operations Investment in intangible assets Proceeds from disposal of property, plant and equipment Proceeds from disposal of associate Investment in other non-current assets Proceeds from disposal of subsidiaries Proceeds from disposal of investments Foreign currency translations NET CASH INFLOW/(OUTFLOW) CASH FLOWS FROM FINANCING ACTIVITIES Non-current interest-bearing borrowings raised Non-current interest-bearing borrowings repaid Current interest-bearing borrowings raised/(repaid) Proceed from issuance of share capital Increase in loans from minority shareholders NET INCREASE IN CASH AND CASH EQUIVALENTS ADJUSTED CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR Increase in cash and cash equivalents due to proportionate consolidation of joint ventures Cash and cash equivalents at beginning of year as previously stated CASH AND CASH EQUIVALENTS AT END OF YEAR CALCULATION OF MOVEMENT IN NET DEBT Net cash inflow as above Add: – Shares issued – Loans from/(to) minority shareholders – Non-cash increase in loans due to joint ventures now consolidated – Non-cash flow movement in net debt applicable to special purpose entities – Non-cash flow movements in net debt applicable to currency translation differences of transactions denominated in foreign currency – Non-cash flow movements in net debt applicable to currency translation differences of net debt items of foreign entities DECREASE IN NET DEBT Notes 29.1 29.2 29.3 29.4 29.5 29.6 29.7 29.8 29.9 GROUP COMPANY 12-months ended 31 Dec 2005 Rm Restated 18-months ended 31 Dec 2004 Rm 12-months ended 31 Dec 2005 Rm Restated 18-months ended 31 Dec 2004 Rm 3 864 2 661 36 1 552 (117) (216) (1 430) (175) (13) 650 (265) (54) (344) (26) (25) (16) 96 (1) 70 (105) 786 (368) (65) 132 485 380 126 126 506 (159) (4) (179) (205) 565 (445) (78) 133 175 (30) 156 156 126 (189) (821) (1 447) 1 407 (389) (655) (11) 23 (1 177) 2 1 179 80 (948) 459 360 (827) 66 128 (273) 186 1 297 39 1 258 1 483 459 128 2 (1) (355) (313) (361) 1 632 (571) (825) 138 100 (96) (63) (1 317) 315 967 (1 139) 47 132 (1) 6 321 976 12 964 1 297 315 132 (1) (22) (96) 101 29.9 (13) 479 (33) 492 1 3 2 K U M B A A N N U A L R E P O RT 2 0 0 5 G R O U P S T A T E M E N T O F C H A N G E S I N E Q U I T Y f o r t h e y e a r e n d e d 3 1 D e c e m b e r 2 0 0 5 Non-distributable reserves Attribu- table reserves Shares of equity held by accounted invest- ments Rm Share Trust Rm Foreign currency trans- lation Rm Financial instru- ments revalu- ation Rm Equity- settled reserve Rm Insur- ance Retained income Rm reserve Rm Attribu- table to equity holders of the Minority interest parent Rm Rm Total equity Rm Share Share capital premium Rm Rm OPENING BALANCE AT 1 JULY 2003 Prior year adjustments: (refer note 2) – environmental rehabilitation provision – deferred tax asset – share-based payments Restated opening balance Net (losses)/gains not recognised in income statement1 Currency translation differences Transfer (from)/to currency translation reserve Share-based payments movement Financial instruments fair value movements recognised in equity Deferred taxation Minority share of reserve movements Realised in associates and joint ventures Net profit1 Dividends paid Reduction in dividends paid to Management Share Trust Issue of share capital Movement in shares issued to Management Share Trust Transfer of equity accounted earnings Transfer from insurance reserve BALANCE AT 31 DECEMBER 2004 3 2 677 (33) 11 153 61 5 2 018 4 895 1 191 6 086 3 2 677 (33) 11 153 61 (136) 93 (4) (136) 93 (136) 180 87 5 1 971 4 852 1 278 6 130 4 4 (22) (294) (13) 30 27 (272) (129) (401) (6) (257) (23) (286) (133) (419) (9) 9 30 (15) 51 (41) 30 51 (56) 30 51 (56) 4 4 (16) (13) 18 (11) 132 33 31 891 (344) 891 (344) 65 (17) 2 132 33 2 (31) (11) 956 (361) 2 132 33 3 2 809 20 (141) 48 34 2 516 5 289 1 197 6 486 (5) (5) (5) 1 3 3 K U M B A A N N U A L R E P O RT 2 0 0 5 G R O U P S T A T E M E N T O F C H A N G E S I N E Q U I T Y c o n t i n u e d f o r t h e y e a r e n d e d 3 1 D e c e m b e r 2 0 0 5 Non-distributable reserves Attribu- table reserves Shares of equity held by accounted invest- ments Rm Share Trust Rm Foreign currency trans- lation Rm Financial instru- ments revalu- ation Rm Equity- settled reserve Rm Insur- ance Retained income Rm reserve Rm Attribu- table to equity holders of the Minority interest parent Rm Rm Total equity Rm Share Share capital premium Rm Rm BALANCE AT 31 DECEMBER 2004 Adjustments to opening balances – transfer of attributable reserves of equity accounted investments – negative goodwill adjustment – decommissioning asset restated 3 2 809 20 (141) 48 34 2 516 5 289 1 197 6 486 (20) 20 53 18 53 18 53 7 (11) Restated opening balance 3 2 809 (141) 48 34 2 607 5 360 1 186 6 546 Net gains/(losses) not recognised in income statement1 Currency translation differences Minority share of reserve movements Share-based payments movement Financial instruments fair value movements recognised in equity – recognised in current year income – recognised in equity – fair value adjustment Deferred taxation Net profit1 Dividends paid2 Issue of share capital Movement in shares issued to Management Share Trust Minority share-buy out BALANCE AT 31 DECEMBER 2005 112 (53) 38 153 3 16 16 113 (37) 76 172 60 232 (97) (97) 38 38 38 (8) (95) 2 45 (41) (8) (95) 2 4 (8) (95) 2 4 3 190 (1 430) 3 190 (1 430) 132 61 (17) 10 3 251 (1 447) 142 16 12 (1 194) 12 (1 194) 132 (4) 3 2 937 (29) (5) 88 4 383 7 377 9 7 386 1. Total recognised gains and losses R3 302 million (2004: R619 million). 2. The company paid a dividend relating to the 2004 financial year of R273 million during March 2005, the STC applicable was R34 million. During September 2005 the company paid dividends of R1 157 million, the STC applicable was R145 million (R487 million interim dividend plus R670 million special dividend). Foreign currency translation reserve The foreign currency translation reserve comprises all foreign exchange differences arising from the translation of the financial statements of foreign entities that are not integral to the operations of the group. Financial instruments revaluation reserve The financial instruments revaluation reserve comprises the effective portion of the cumulative net change in the fair value of cash flow hedging instruments where the hedged transaction has not yet occurred. Equity-settled reserve The equity-settled reserve represents the fair value of services received and settled by equity instruments granted. Insurance reserve The insurance reserve represents the unrealised portion of commission receivable from reinsurers. 1 3 4 K U M B A A N N U A L R E P O RT 2 0 0 5 C O M P A N Y S T A T E M E N T O F C H A N G E S I N E Q U I T Y f o r t h e y e a r e n d e d 3 1 D e c e m b e r 2 0 0 5 Non-distributable reserves OPENING BALANCE AT 1 JULY 2003 Prior year adjustments: (refer note 2) – unrealised exchange difference of net investment in foreign operations – share-based payments Restated opening balance Net (losses)/gains not recognised in income statement1 Currency translation differences Unrealised exchange difference of net investment in foreign operations adjusted to profit or loss Share-based payment movement Financial instruments fair value movements recognised in equity Net profit1 Dividends paid Issue of share capital BALANCE AT 31 DECEMBER 2004 Net gains not recognised in income statement1 Share-based payments movement Financial instruments fair value movements recognised in equity Net profit1 Dividends paid2 Issue of share capital Share capital Rm Share Foreign currency premium translation Rm Rm Financial instruments revaluation Rm Equity- settled reserve Rm Retained income Rm Total Rm 3 2 677 120 (7) 151 2 944 (120) (2) 2 3 2 677 132 3 2 809 4 4 30 30 34 38 38 120 (3) 268 341 (344) 1 2 945 35 (2) 2 30 5 341 (344) 132 265 3 109 40 38 2 (7) 5 5 (2) 2 2 132 2 941 1 140 (1 430) 1 140 (1 430) 132 72 (25) 2 991 BALANCE AT 31 DECEMBER 2005 3 1. Total recognised gains and losses R1 180 million (2004: R376 million). 2. The company paid a dividend relating to the 2004 financial year of R273 million during March 2005, the STC applicable was R34 million. During September 2005 the company paid interim dividends of R1 157 million, the STC applicable was R145 million (R487 million interim dividend plus R670 million special dividend). 1 3 5 K U M B A A N N U A L R E P O RT 2 0 0 5 N O T E S T O T H E A N N U A L F I N A N C I A L S T A T E M E N T S f o r t h e 1 2 - m o n t h s e n d e d 3 1 D e c e m b e r 2 0 0 5 1. ACCOUNTING POLICIES Principal accounting policies The principal accounting policies of the group and the disclosures made in the annual financial statements conform with South African Statements of Generally Accepted Accounting Practice and comply with International Financial Reporting Standards effective for the group’s financial year. The financial statements are prepared on the historical cost basis modified by the restatement of financial instruments and biological assets to fair value. Where comparative financial information is reported, the accounting policies have been applied consistently for all periods. Changes to comparatives are set out in note 2. Basis of consolidation The group annual financial statements present the consolidated financial position and changes therein, operating results and cash flow information of the company and its subsidiaries. Subsidiaries are those entities in which the group has an interest of more than one half of the voting rights or the power to exercise control so as to obtain benefits from their activities. The results of subsidiaries are included for the duration of the period in which the group exercises control over intercompany the subsidiary. All transactions and resulting profits and losses between the group companies are eliminated on consolidation. Where necessary, accounting policies for subsidiaries are changed to ensure consistency with the policies adopted by the group. If it is not practical to change the policies, the appropriate adjustments are made on consolidation to ensure consistency within the group. The company carries its investments in subsidiaries at cost less accumulated impairment losses. The results of special purpose entities that, in substance, are controlled by the group, are consolidated. Goodwill Goodwill is reflected at cost less accumulated impairment losses, if any. It represents the excess of the cost of a business combination over the fair value of the group’s share of the identifiable net assets of that entity at the date of acquisition. Goodwill is assessed for impairment on an annual basis. This is a change in accounting policy. Goodwill was previously amortised using the straight line basis over its estimated useful is applied prospectively. life. This policy The gain or loss on disposal of an entity includes the balance of goodwill relating to the entity. The excess of the fair value of the net identifiable assets and contingent liabilities of the entity, acquired over the cost of acquisition, is recognised immediately in profit or loss. In line with the transitional provisions of IFRS 3 Business Combinations, the carrying amount of negative goodwill at the beginning of the financial year that arose from a business combination for which the agreement date was before 31 March 2004 was derecognised at the beginning of the period with a corresponding adjustment to the opening balance of retained earnings. Investments in associates and joint ventures The company carries its investments in associates and joint ventures at cost less accumulated impairment losses. An associate is an entity over which the group has the ability to exercise significant influence, but which it does not control. A joint venture is an entity jointly controlled by the group and one or more other venturers in terms of a contractual arrangement requiring unanimous consent for strategic financial and operating decisions. It may involve a corporation, partnership or other entity in which the group has an interest. income Investments in associates are accounted for in the group financial statements using the equity method for the duration of the period in which the group has the ability to exercise significant influence. Equity accounted group’s proportionate share of profits of these entities and the share of taxation thereon. The retained earnings of an associate, net of any dividends, are classified as distributable reserves. This is a change in accounting policy, these earnings were previously transferred to a non-distributable reserve. Prior periods have been restated to reflect this change. represents the Where the group’s share of losses of an associate exceeds the carrying amount of the associate, the associate is carried at nil. Additional losses are only recognised to the extent that the group has incurred obligations in respect of the associate. Investments in joint ventures are accounted for in the group financial statements using the proportionate consolidation method. This is a change in accounting policy as far as incorporated joint ventures are concerned. Investments in incorporated joint ventures were previously accounted for using the equity method while investments in unincorporated joint ventures were proportionately consolidated. Where necessary, the results of associates and joint ventures are restated to ensure consistency with group policies. Unrealised profits and losses are eliminated. 1 3 6 K U M B A A N N U A L R E P O RT 2 0 0 5 The group’s interest in associates and joint ventures is carried in the balance sheet at an amount that reflects its share of the net assets and the unimpaired portion of goodwill on acquisition. Goodwill on the acquisition of associates and joint ventures is treated in accordance with the group’s accounting policy for goodwill. Property, plant and equipment Land and extensions under construction are stated at cost and are not depreciated. Buildings, including certain non-mining residential buildings and all other items of property, plant and equipment, are reflected at cost less accumulated depreciation and accumulated impairment losses. Depreciation is charged on a systematic basis over the estimated useful lives of the assets after taking into account the estimated residual value of the assets. Useful life is either the period of time over which the asset is expected to be used or the number of production or similar units expected to be obtained from the use of the asset. Moulds and refractory furnace relines are depreciated based on the usage thereof. Items of property, plant and equipment are capitalised in components where components have a different useful life to the main item of property, plant and equipment to which the component can be logically assigned to. The estimated useful lives of assets and their residual values, are re-assessed periodically with any changes in such accounting estimates being adjusted in the current financial year of re-assessment and applied prospectively. The estimated useful lives of items of property, plant and equipment are: 2005 Iron ore Coal Heavy minerals Buildings and infrastructure (including residential buildings) Mineral properties Fixed plant and equipment Mobile equipment, built-in process computers, underground mining equipment and reconditionable spares Loose tools and computer equipment Development costs Refractory relines Site preparation, mining development and exploration 5 – 25 years 10 – 25 years 4 – 25 years 2 – 25 years 5 years 5 – 6 years 5 – 25 years 5 – 25 years 5 – 25 years 16 000 – 40 000 hours or 5 – 15 years 5 years 8 – 20 years 5 – 25 years 9 – 25 years 4 – 40 years 10 – 25 years 2,5 – 25 years 2,5 – 20 years 2,5 – 10 years 4 – 10 years 2 – 5 years 3 – 25 years Base metals Industrial minerals Other Buildings and infrastructure (including residential buildings) Fixed plant and equipment Mobile equipment, built-in process computers, underground mining equipment and reconditionable spares Loose tools and computer equipment Site preparation, mining development and exploration 8 years – indefinite 8 – 25 years 2 – 15 years 5 years 10 – 25 years 5 – 25 years 5 – 15 years 5 years 3 – 25 years 5 – 10 years 5 years 5 years 5 years 1 3 7 K U M B A A N N U A L R E P O RT 2 0 0 5 N O T E S T O T H E A N N U A L F I N A N C I A L S T A T E M E N T S c o n t i n u e d f o r t h e 1 2 - m o n t h s e n d e d 3 1 D e c e m b e r 2 0 0 5 The estimated useful lives of items of property, plant and equipment were: 2004 Iron ore Coal Heavy minerals Buildings and infrastructure (including residential buildings) Mineral properties Fixed plant and equipment Mobile equipment, built-in process computers, underground mining equipment and reconditionable spares Loose tools and computer equipment Development costs Refractory relines Site preparation, mining development and exploration 5 – 25 years 10 – 25 years 4 – 25 years 2 – 25 years 5 years 5 – 6 years 5 – 25 years 5 – 25 years 5 – 25 years 30 000 hours or 5 – 15 years 5 years 8 – 20 years 5 – 25 years 10 – 25 years 5 – 40 years 10 – 25 years 2,5 – 20 years 2,5 – 20 years 2,5 – 10 years 4 – 10 years 8 years 3 – 25 years Base metals Industrial minerals Other Buildings and infrastructure (including residential buildings) Fixed plant and equipment Mobile equipment, built-in process computers, underground mining equipment and reconditionable spares Loose tools and computer equipment Site preparation, mining development and exploration 8 years – indefinite 8 – 25 years 2 – 15 years 5 years 10 – 25 years 5 – 25 years 5 – 15 years 5 years 3 – 25 years 5 – 10 years 5 years 5 years 5 years Maintenance and repairs which neither materially add to the value of assets nor appreciably prolong their useful lives are charged against income. Direct attributable expenses relating to mining and other major capital projects, site preparations and exploration are capitalised until the asset is brought to a working condition for its intended use. These costs include dismantling and site restoration costs to the extent that these are recognised as a provision. Financing costs directly associated with the construction or acquisition of qualifying assets are capitalised at loans specifically raised for that purpose, or at the average borrowing rate where the general pool of group borrowings was utilised. Capitalisation of borrowing costs ceases when the asset is substantially complete. interest rates relating to Directly attributable costs associated with the acquisition, development and installation of certain software are capitalised. Such assets are depreciated using the amortisation methods and periods applicable to computer equipment. Surpluses and deficits on the disposal of property, plant and equipment are taken to profit or loss. Leased assets Leases involving plant and equipment whereby the lessor provides finance to the group with the asset as security and where the group assumes substantially all the benefits and risks of ownership are classified as finance leases. Assets acquired in terms of finance leases are capitalised at the lower of fair value and the present value of the minimum lease payments at inception of the lease and depreciated over the useful life of the asset. The capital element of future obligations under the leases is included as a liability in the balance sheet. Each lease payment is allocated between the liability and finance charges so as to achieve a constant rate on the finance balance outstanding. The interest element of the finance charge is charged against income over the lease period using the effective interest rate method. For a sale and leaseback transaction that results in a finance lease, any excess of sales proceeds over the carrying amount is deferred and recognised on the straight-line basis over the period of the lease. Leases of assets to the group under which all the risks and benefits of ownership are effectively retained by the lessor, are classified as operating leases. Payments made under operating leases are charged against income on the straight-line basis over the period of the lease. Biological assets Biological assets are measured on initial recognition and at each balance sheet date at their fair value less estimated point-of-sale costs and any change in value is included in the net profit or loss for the period in which it arises. Plantations are measured at their fair value less estimated point-of-sale costs. The fair value of the plantations is determined by an independent 1 3 8 K U M B A A N N U A L R E P O RT 2 0 0 5 appraiser, based on the Faustman Formula as applied within the forestry industry. Livestock are measured at their fair value less estimated point-of-sale costs, fair value being determined by the age and size of the animals and market prices. Market price is determined on the basis that the animal is sold to be slaughtered. Livestock held for sale is classified as consumable biological assets. Game is measured at their fair value less estimated point-of-sale costs, fair value being determined as market price. Market price is determined on the live auction selling prices. Game held for sale is classified as consumable biological assets. Intangible assets An intangible asset is recognised at cost if it is probable that future economic benefits will flow to the enterprise. Amortisation is charged on a systematic basis over the estimated useful lives of the intangible assets. The estimated maximum useful lives of patents, licenses and franchises are 20 years. Subsequent expenditure on capitalised intangible assets is capitalised only if it increases the future benefits embodied in the specific asset to which it relates. Research, development and exploration costs Research, development and exploration costs are charged against income until they result in projects that are evaluated as being technically or commercially feasible, the group has sufficient resources to complete development and can demonstrate how the asset will generate future economic benefits, in which event these costs are capitalised and amortised on the straight-line basis over the estimated useful life of the project or asset. The carrying amounts are reviewed at each balance sheet date to determine whether there is any indication of impairment. Impairment of assets The carrying amounts of assets mentioned in the accounting policy notes are reviewed at each balance sheet date to determine whether there is any indication of impairment. If any such indication exists, the recoverable amount is estimated as the higher of the net selling price and the value in use. In assessing value in use, the expected future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. An impairment loss is recognised whenever the carrying amount exceeds the recoverable amount. For an asset that does not generate cash inflows largely independent of those from other assets, the recoverable amount is determined for the cash generating unit to which the asset belongs. An impairment loss is recognised whenever the carrying amount of the cash generating unit exceeds its recoverable amount. A previously recognised impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount, however, not to an amount higher than the carrying amount that would have been determined (net of depreciation) had no impairment loss been recognised in prior years. For goodwill a recognised impairment loss is not reversed. Financial instruments Measurement Financial instruments are initially measured at cost, which includes transaction costs. Subsequent to initial recognition these instruments are measured as set out below. Investments Marketable securities are carried at market value, which is calculated by reference to stock exchange quoted selling prices at the close of business on the balance sheet date. Other investments are shown at fair value. Gains and losses are recognised in profit or loss. Trade and other receivables Trade and other receivables originated by the group are stated at amortised cost less provision for doubtful debts. Cash and cash equivalents Cash and cash equivalents are measured at fair value. Financial liabilities Financial liabilities are recognised at amortised cost, namely original debt less principal payments and amortisations, except for derivatives which are subsequently measured at fair value. If a financial liability is designated as a hedged item, it is subject to measurement under hedge accounting provisions. Derivative instruments Derivative instruments are measured at fair value. Gains and losses on subsequent measurement Gains and losses on subsequent measurement are recognised as follows: • Gains and losses arising from a change in the fair value of financial instruments that are not part of a hedging relationship are included in net profit or loss for the period in which they arise • Gains and losses from measuring fair value hedging instruments, including fair value hedges for foreign currency denominated transactions, are recognised immediately in net profit or loss • The effective portion of gains and losses from instruments, remeasuring cash flow hedging 1 3 9 K U M B A A N N U A L R E P O RT 2 0 0 5 N O T E S T O T H E A N N U A L F I N A N C I A L S T A T E M E N T S c o n t i n u e d f o r t h e 1 2 - m o n t h s e n d e d 3 1 D e c e m b e r 2 0 0 5 including cash flow hedges for forecast foreign currency denominated transactions and for interest rate swaps, are initially recognised directly in equity. Should the hedged firm commitment or forecast transaction result in the recognition of an asset or a liability, then the cumulative amount recognised in equity is adjusted against the initial measurement of the asset or liability. For other cash the cumulative amount recognised in equity is included in net profit or loss in the period when the commitment or forecast transaction affects profit or loss flow hedges, • When a hedging instrument or hedge relationship is terminated but the hedged transaction is still expected to occur, the cumulative unrealised gain or loss at that point remains in equity and is recognised in accordance with the above policy when the transaction occurs. If the hedged transaction is no longer probable, the cumulative unrealised gain or loss recognised in equity is recognised in the income statement immediately. Offset Where a legally enforceable right of offset exists for recognised financial assets and financial liabilities, and there is an intention to settle the liability and realise the asset simultaneously, or to settle on a net basis, all related financial effects are offset. Inventories Inventories are valued at the lower of cost, determined on a moving average basis, and net realisable value. The cost of finished goods and work-in-progress comprises raw materials, direct labour, other direct costs and fixed production overheads, but excludes interest charges. Fixed production overheads are allocated on the basis of normal capacity. Write-downs Write-downs to net realisable value and inventory losses are expensed in the period in which the write- downs or losses occur. Foreign currencies Transactions and balances Transactions denominated in foreign currencies are translated at the rate of exchange ruling at the transaction date. Monetary items denominated in foreign currencies are translated at the rate of exchange ruling at the balance sheet date. Gains or losses arising on translation are credited to or charged against income. Foreign entities The financial statements of foreign entities are translated into South African rand as follows: • Assets and liabilities at rates of exchange ruling at balance sheet date • Goodwill and fair value adjustments arising on acquisition at rates of exchange ruling at balance sheet date. All resulting exchange differences are reflected as part of shareholders’ equity. On disposal, such translation differences are recognised in the income statement as part of the cumulative gain or loss on disposal. Foreign currency hedges Foreign currency hedges are dealt with in the financial instruments accounting policy. Revenue recognition Revenue, which excludes value added tax and sales between group companies, represents the gross value of goods invoiced. Export revenues are recorded according to the relevant sales terms, when the risks and rewards of ownership are transferred. Revenue from the sale of goods is recognised when significant risks and rewards of ownership of the goods are transferred to the buyer. Revenue arising from services and royalties is recognised on the accrual basis in accordance with the substance of the relevant agreements. Revenue from the operation of bulk ships is recognised on a proportionate basis where voyages have not terminated at year end. Interest and dividend income Interest is recognised on the time proportion basis, taking account of the principal outstanding and the effective rate over the period to maturity, when it is determined that such income will accrue to the group. Dividends are recognised when the right to receive payment is established. Provisions Provisions are recognised when the group has a present legal or constructive obligation as a result of past events, for which it is probable that an outflow of economic benefits will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. Where the effect of discounting to present value is material, provisions are adjusted to reflect the time value of money, and where appropriate, the risk specific to the liability. Decommissioning and environmental rehabilitation Provision is made for environmental rehabilitation costs where either a legal or constructive obligation arises as a result of past events. Estimates are based upon costs that are regularly reviewed and adjusted as appropriate for new circumstances. • Income, expenditure and cash flow items at weighted average rates Where a provision is made for dismantling and site restoration costs, an asset of similar initial value is 1 4 0 K U M B A A N N U A L R E P O RT 2 0 0 5 raised and amortised in accordance with the group’s accounting policy for property, plant and equipment. Annual contributions are made to the group’s Environmental Rehabilitation Trust Fund, created in accordance with statutory requirements, to provide for the funding of the estimated cost of pollution control and rehabilitation during, and at the end of, the life of mines. The Environmental Rehabilitation Trust Fund has been consolidated. Expenditure on plant and equipment for pollution control is capitalised and depreciated over the useful lives of the assets whilst the cost of ongoing current programmes to prevent and control pollution and to rehabilitate the environment is charged against income as incurred. Deferred taxation Deferred taxation is provided using the balance sheet liability method on all temporary differences between the carrying amounts for financial reporting purposes and the amounts used for taxation purposes. A deferred tax asset is recognised to the extent that it is probable that future taxable profits will be available against which the associated unused tax losses and deductible temporary differences can be utilised. Deferred taxation is calculated using taxation rates that have been enacted at balance sheet date. The effect on deferred taxation of any changes in taxation rates is charged to the income statement, except to the extent that it relates to items previously charged or credited directly to equity. Employee benefits Post-employment benefits Retirement The group provides defined contribution funds for the benefit of employees, the assets of which are held in separate funds. These funds are funded by payments from employees and the group, taking account of the recommendations of independent actuaries. The group’s contribution to the defined contribution fund is charged to the income statement in the year to which it relates. Kumba is also a participating employer in two closed defined benefit funds for its pensioner members who retired before the unbundling from Mittal SA in 2001. Kumba does not however provide employee benefits in defined benefit funds for its employees. Statutory actuarial valuations on the defined benefit plans are performed every three years. Interim valuations are also performed on an annual basis. Valuations are performed on a date which coincide with the balance sheet date. Consideration is given to any event that could impact the funds up to balance sheet date. The net surplus or deficit in the benefit obligation is the difference between the present value of the funded obligation and the fair value of plan assets. No actuarial surplus is recognised as the group’s ability to assess the future economic benefit is uncertain. Actuarial losses, if any, are recognised in income as and when they arise. The group does not provide guarantees in respect of returns in the defined contribution funds. Medical No contributions are made to the medical aid of retired employees. Short- and long-term benefits The cost of all short-term employee benefits, such as salaries, bonuses, housing allowances, medical and other contributions, is recognised during the period in which the employee renders the related service. The vesting portion of long-term benefits is recognised and provided for at balance sheet date, based on the current total cost to the company. Termination benefits Termination benefits are payable whenever an employee’s employment is terminated before the normal retirement date or whenever an employee accepts voluntary redundancy in exchange for these benefits. The group recognises termination benefits when it has demonstrated its commitment to either terminate the employment of current employees according to a detailed formal plan without possibility of withdrawal or to provide termination benefits as a result of an offer made to encourage voluntary redundancy. If the benefits fall due more than 12 months after balance sheet date, they are discounted to present value. Equity compensation benefits Senior management, including executive directors, has been granted share options. Grants are based on existing ordinary shares and can be purchased or the purchase can be deferred. The option or purchase price equals market price on the date preceding the date of the grant. When the options are exercised they can either be: • purchased and if vesting according to the rules of the scheme, recorded in share capital and share premium at the amount of the option price, or • payment can be deferred resulting in no increase in share capital or share premium until paid for and vesting according to the rules of the scheme. The fair value of the options granted to senior management including executive directors, has been determined at grant date using a suitable option pricing model and expensed over the vesting period of the options with a corresponding increase in equity. 1 4 1 K U M B A A N N U A L R E P O RT 2 0 0 5 N O T E S T O T H E A N N U A L F I N A N C I A L S T A T E M E N T S c o n t i n u e d f o r t h e 1 2 - m o n t h s e n d e d 3 1 D e c e m b e r 2 0 0 5 Dividend Dividends paid are recognised by the company when the dividend is declared. These dividends are recorded and disclosed as dividends paid in the statement of changes in equity. Dividends proposed or declared subsequent to the year end are not recognised at the balance sheet date, but are disclosed in the notes to the financial statements. Secondary tax on companies Taxation costs incurred on dividends are included in the taxation line in the income statement in the year in which they are declared. Discontinuing operations and non-current assets held for sale Discontinuing operations are significant, distinguish- able components of an enterprise that have been sold, abandoned or are the subject of formal plans for disposal or discontinuance. The profit or loss on the sale or abandonment of a discontinuing operation is determined from the formalised discontinuance date. If the carrying amount of a non-current asset or disposal group will be recovered principally through a sale transaction rather than through continuing use, such an asset is classified as non-current assets held for sale and measured at the lower of carrying amount and fair value less cost to sell. Segment reporting The primary business segments are iron ore, coal, heavy minerals, base metals, and industrial minerals. On a secondary segment basis, significant geographic marketing regions have been identified. The basis of segment reporting is representative of the internal structure used for management reporting. Cash and cash equivalents For the purpose of the cash flow statement, cash and cash equivalents comprise cash on hand, deposits held on call, and investments in money market instruments, net of bank overdrafts, all of which are available for use by the group unless otherwise stated. Judgements made by management The following judgements, apart from those involving estimates (as mentioned below), have been made by management in the process of applying the group’s accounting policies that have the most significant effect on the amounts recognised in the financial statements: • The identification of special purpose entities the group which must be controlled by consolidated • In applying IFRS 5, Non-current Assets Held for Sale and Discontinued Operations, management had to make judgements as to which non-current assets fall within the scope of the standard and had to be reclassified and measured in terms of IFRS 5 • In applying IFRS 2, Share-Based Payment, management had to make certain judgements in respect of the fair value models to be used in determining the various share-based arrangements in respect of employees, as well as the variable elements used in these models. Key assumptions made by management in applying accounting policies The following key assumptions concerning the future, and other key sources of estimation uncertainty at the balance sheet date, have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year: • Estimates made in determining the present obligation of environmental and decommissioning provisions, which includes the discount rate used in determining the present value of environmental and decommissioning provisions • Estimates made in determining the recoverable amount of assets where there is an indication that an asset may be impaired, this includes the estimation of cash flows and the discount rates used • Estimates made in determining the probability of future taxable income thereby justifying the recognition of a deferred tax asset. 1 4 2 K U M B A A N N U A L R E P O RT 2 0 0 5 2. PRIOR YEAR ADJUSTMENTS/CHANGES IN ACCOUNTING POLICIES Share-based payments As part of the IFRS improvements project Kumba adopted IFRS 2 Share-Based Payments. The adoption of IFRS 2 is made in accordance with the transitional provision of IFRS 2. Prior years’ figures have been restated. The amount of the adjustment for the current and comparable periods is as follows: Income statement impact – Reduction of profit for the period Balance sheet impact – Retained income decrease – Equity-settled reserve increase – Increase in loans from subsidiaries The adjustment has no taxation implications. There were no amounts attributable to the minorities. The amount of the adjustment relating to the 30 June 2003 financial statements is a decrease of R4 million in retained income and an increase of R4 million in equity-settled reserves. Business combination In line with IFRS 3 Business Combinations the carrying value of previously recognised negative goodwill at the beginning of the period was derecognised and adjusted against the opening balance of retained earnings. The effect of the adjustment is as follows: No income statement impact Balance sheet impact – Decrease in negative goodwill – Increase in retained income Environmental rehabilitation provision A legal and constructive obligation exists to provide for rehabilitation at the Zincor refinery. The provision has been accounted for as a prior year adjustment to reflect the existence of the obligation originating from previous periods. The effect of the adjustment is as follows: Income statement impact – Increase in finance charges – Decrease in deferred taxation Balance sheet impact – Decrease in retained income – Increase in provisions – Increase in deferred tax asset – Decrease in deferred tax liability GROUP COMPANY 12-months ended 31 Dec 2005 Rm Restated 18-months ended 31 Dec 2004 Rm 12-months ended 31 Dec 2005 Rm Restated 18-months ended 31 Dec 2004 Rm 38 72 72 30 34 34 22 41 72 31 16 19 34 15 53 53 17 2 172 191 2 23 2 157 174 15 2 1 4 3 K U M B A A N N U A L R E P O RT 2 0 0 5 N O T E S T O T H E A N N U A L F I N A N C I A L S T A T E M E N T S c o n t i n u e d f o r t h e 1 2 - m o n t h s e n d e d 3 1 D e c e m b e r 2 0 0 5 GROUP COMPANY 12-months ended 31 Dec 2005 Rm Restated 18-months ended 31 Dec 2004 Rm 12-months ended 31 Dec 2005 Rm Restated 18-months ended 31 Dec 2004 Rm 2. PRIOR YEAR ADJUSTMENTS/CHANGES IN ACCOUNTING POLICIES (continued) Deferred taxation A deferred tax asset was raised as a prior year adjustment in respect of Ticor (Pty) Limited’s eligibility to claim a bad debt deduction of A$130,7 million at 31 December 2002. The effect of the adjustment is as follows: No income statement impact Balance sheet impact – Increase in retained income – Increase in minority interest – Increase in deferred tax asset Interest in joint ventures Kumba’s majority shareholder and parent, Anglo American plc (Anglo) changed its accounting policies to be in line with IFRS with effect 1 January 2005. Anglo elected to account for interests in joint ventures per IAS 31, by applying the proportionate consolidation method. To be consistent with the parent entity’s policies Kumba changed its accounting policy to the proportionate consolidation method. Prior years’ figures have been restated. This policy change does not impact on earnings per share. The effect of the change in accounting policy is as follows: Income statement impact – Increase in net operating profit – Increase in interest income – Decrease in income from equity accounted investments Balance sheet impact – Decrease in investments in joint ventures – Increase in property, plant and equipment – Increase in financial assets – Decrease in trade and other receivables – Increase in cash and cash equivalents – Increase in trade and other payables – Decrease in net debt Cash flow impact – Increase in net cash flows from operating activities – Increase in taxation paid – Increase in financial assets – Increase in borrowings raised – Increase in foreign currency translation – Increase in opening balance of cash and cash equivalents 93 87 180 93 87 180 26 1 27 38 3 2 63 48 63 22 1 1 3 39 20 20 11 3 1 32 39 39 29 2 12 1 4 4 K U M B A A N N U A L R E P O RT 2 0 0 5 2. PRIOR YEAR ADJUSTMENTS/CHANGES IN ACCOUNTING POLICIES (continued) Reclassification and presentation The group has changed the following accounting policies to be in line with the accounting policies of its majority shareholder and parent, Anglo American plc: – The equity accounted investments’ recognised profits were previously transferred to a non-distributable reserve (NDR) “Attributable reserves of equity accounted investments”. The opening balance of R20 million (2003: R11 million) of this reserve was reclassified as distributable reserves and transfers to this reserve have ceased. – Income from equity accounted investments was previously presented as pre-tax income, and the tax shown as part of the taxation charge. Only the post-tax share of equity accounted profits are now disclosed. The net effect on earnings is zero, however, the line-by-line effect on the income statement is as follows: – Decrease in income from equity accounted investments – Decrease in taxation 3. CLOSURE OF TICOR CHEMICALS PLANT On 21 April 2004 Ticor Limited announced its intention to discontinue its chemicals business, included in the heavy minerals segment. The revenue, operating results, assets, liabilities and cash flow of the chemicals business for the current and previous periods are: Revenue Expenses Provision for closure Provision for impairment Pre-tax loss Income tax expense Total assets Total external liabilities Cash inflows from operating activities 4. REVENUE Sale of goods Services GROUP COMPANY 12-months ended 31 Dec 2005 Rm Restated 18-months ended 31 Dec 2004 Rm 12-months ended 31 Dec 2005 Rm Restated 18-months ended 31 Dec 2004 Rm 2 2 1 2 (3) 9 1 26 9 9 217 192 35 89 (102) 28 76 6 50 11 962 12 600 11 962 12 600 7 579 586 12 709 721 1 4 5 K U M B A A N N U A L R E P O RT 2 0 0 5 N O T E S T O T H E A N N U A L F I N A N C I A L S T A T E M E N T S c o n t i n u e d f o r t h e 1 2 - m o n t h s e n d e d 3 1 D e c e m b e r 2 0 0 5 GROUP COMPANY 12-months ended 31 Dec 2005 Rm Restated 18-months ended 31 Dec 2004 Rm 12-months ended 31 Dec 2005 Rm Restated 18-months ended 31 Dec 2004 Rm Notes 1 893 2 475 1 898 38 7 167 (1 179) 1 126 1 470 845 28 (95) 361 894 4 (348) (6) (28) 2 408 30 35 243 (72) 1 883 1 783 1 081 35 (6) 508 969 8 (304) (296) (25) 7 075 10 755 6 857 1 492 (28) 28 (95) (1 179) 9 025 1 798 (25) 35 (6) (72) 25 287 22 1 22 324 1 8 7 5 7 (16) 693 702 (16) 7 7 075 10 755 693 37 7 104 620 2 124 4 28 (95) 6 26 126 1 54 8 117 673 4 112 8 35 (6) 35 11 33 228 7 7 9 70 8 16 13 15 8 16 13 13 13 13 13 13 13 15 8 16 37 297 16 5 27 (84) 339 2 9 51 6 8 (6) 707 746 (6) 51 (84) 707 1 7 51 12 92 5. OPERATING EXPENSES Cost by type – Raw materials and consumables – Staff costs – salaries and wages – share-based payments – termination benefits – pension and medical costs – Income from sale of investments – General charges – Railage and transport – Repairs and maintenance – Impairment charges – Negative goodwill amortisation – Excess of minority interest over cost of acquisition – Energy – Depreciation on property, plant and equipment – Amortisation of intangible assets – Movement in inventories – Own work capitalised – Sublease received Cost by function – Costs of goods sold/services rendered – Selling and distribution costs – Sublease rent received – Impairment charges – Negative goodwill amortisation – Excess of minority interest over cost of acquisition – Income from sale of investments The above costs are stated after including: Depreciation and amortisation – land and buildings – mineral properties – residential buildings – buildings and infrastructure – machinery, plant and equipment – leased assets under finance leases – site preparation, mining development, exploration and rehabilitation – amortisation of intangible assets Impairment charges Negative goodwill amortisation Excess of minority interest over cost of acquisition Closure cost Reconditionable spares usage Research and development costs Consultancy fees 1 4 6 K U M B A A N N U A L R E P O RT 2 0 0 5 5. OPERATING EXPENSES (continued) Operating lease rentals expenses – property – equipment Operating sublease rentals received – property – other Net deficit on disposal or scrapping of property, plant and equipment Net profit on disposal of investments Auditors’ remuneration – audit fees – other services Fair value adjustment on financial assets – (gain)/loss Fair value adjustment on financial liabilities – (gain)/loss Net realised (gains)/losses on currency exchange differences Net unrealised losses/(gains) on currency exchange differences Net realised losses/(gains) on the revaluation of derivative instruments Net unrealised (gains)/losses on the revaluation of derivative instruments Directors’ emoluments – executive directors – remuneration received as directors of the company – bonuses and cash incentives – compensation on retirement from executive office – non-executive directors – remuneration received as directors of the company Note Pensions Retirement amounts paid or receivable by executive directors are paid or received under defined contribution retirement funds. 6. NET FINANCING COSTS Interest expense and loan costs Finance leases Interest income Interest received from joint ventures Net interest expense Interest adjustment on non-current provisions (note 26) GROUP COMPANY 12-months ended 31 Dec 2005 Rm Restated 18-months ended 31 Dec 2004 Rm 12-months ended 31 Dec 2005 Rm Restated 18-months ended 31 Dec 2004 Rm 56 69 (28) (1) 2 (1 179) 9 1 (43) (5) (225) 76 64 (83) 79 93 (25) (1) 48 (72) 12 1 (28) 5 210 (121) (173) 124 338 1 (147) (3) 189 42 231 396 6 (41) (6) 355 69 424 19 19 (16) 2 3 22 (5) 17 63 8 (72) 14 1 1 2 144 (24) (3) 117 1 118 28 31 (6) 2 (84) 4 13 5 20 (118) (22) 129 18 1 3 283 (12) (6) 265 7 272 Financing costs of Rnil were capitalised during the year (2004: R176 million). Financing costs capitalised relates to funds specifically borrowed for the purposes of obtaining a qualifying asset. 1 4 7 K U M B A A N N U A L R E P O RT 2 0 0 5 N O T E S T O T H E A N N U A L F I N A N C I A L S T A T E M E N T S c o n t i n u e d f o r t h e 1 2 - m o n t h s e n d e d 3 1 D e c e m b e r 2 0 0 5 GROUP COMPANY 12-months ended 31 Dec 2005 Rm Restated 18-months ended 31 Dec 2004 Rm 12-months ended 31 Dec 2005 Rm Restated 18-months ended 31 Dec 2004 Rm 7. 8. INCOME FROM INVESTMENTS Subsidiaries Unlisted shares – Dividends – Net interest received IMPAIRMENT CHARGES Included in operating expenses are the following impairment losses: Impairment of cyanide chemicals plant Impairment of property, plant and equipment Impairment of intangible assets Impairment of investments Impairment of joint ventures Impairment of associates (3) (20) (7) (89) (15) (11) (10) (1) Total impairment charges (30) (126) Reversal of impairment of shipping assets Reversal of impairment of property, plant and equipment Total impairment reversals Net impairments Taxation effect Net effect on attributable earnings 2 2 (28) (28) 90 1 91 (35) (35) 1 394 158 1 552 381 269 650 (7) (7) (7) (7) (51) (51) (51) (51) The intangible asset impaired during the current year is a database of heavy mineral reserves which is now common knowledge and not proprietary to Kumba’s heavy minerals business. As such no future economic benefits are expected to arise from the intangible asset thereby warranting derecognition. The carrying amounts of certain other investments were greater than the market value and were impaired. 1 4 8 K U M B A A N N U A L R E P O RT 2 0 0 5 9. TAXATION Charge to income South African normal taxation – Current – current year – prior year – Deferred – current year – prior year – rate adjustment Foreign normal taxation – Current – current year – prior year – Deferred – current year – prior year Share of joint ventures taxation Capital gains taxation Secondary taxation on companies Non-residents withholding taxation Total Reconciliation of taxation rates Taxation as a percentage of profit before taxation Taxation effect of – Assessed losses (not provided) – Capital profits/(losses) – Disallowable expenditure – Exempt income – Learnership allowances – Associates’ and joint ventures’ differences – Tax rate differentials – Temporary differences not provided – Rate change on deferred taxation balances – Secondary taxation on companies – Withholding taxation – Controlled foreign company profits – Prior year adjustment Standard tax rate GROUP COMPANY 12-months ended 31 Dec 2005 Rm Restated 18-months ended 31 Dec 2004 Rm 12-months ended 31 Dec 2005 Rm Restated 18-months ended 31 Dec 2004 Rm (794) (9) (803) 8 (1) 29 36 (184) 22 (162) 102 (28) 74 1 (349) (179) (30) (1 412) % 30,3 (1,5) 0,8 (4,2) 8,6 (0,4) (0,6) 0,6 (3,8) (0,6) (0,5) 0,3 29,0 (323) (323) 11 14 25 (48) 11 (37) (43) (2) (45) 2 (43) (2) (423) % 30,7 (0,9) (1,8) (5,1) 9,3 0,2 (1,1) 0,4 (3,1) (0,2) (0,1) 1,7 30,0 (7) (7) (1) (1) (15) (15) 1 1 (179) (37) (187) % 14,1 (0,5) (0,9) 30,5 (0,1) (13,5) (0,6) 29,0 (51) % 13,0 1 (3,6) 29,1 (9,5) 30,0 Effective tax rate excluding (loss)/income from equity accounted investments, impairment charges and share of taxation thereon 30,2 29,2 1 4 9 K U M B A A N N U A L R E P O RT 2 0 0 5 N O T E S T O T H E A N N U A L F I N A N C I A L S T A T E M E N T S c o n t i n u e d f o r t h e 1 2 - m o n t h s e n d e d 3 1 D e c e m b e r 2 0 0 5 10. EARNINGS PER SHARE Basic headline earnings per share is calculated by dividing the headline earnings by the weighted average number of ordinary shares in issue during the year. Headline earnings (R million) Weighted average number of ordinary shares in issue (million) Adjusted for the shares held by the Kumba Management Share Trust (million) Adjusted weighted average number of ordinary shares in issue (million) Headline earnings per share (cents) (restated for 2004) For the diluted headline earnings per share the weighted average number of ordinary shares is adjusted to assume conversion of not yet released purchased shares and options under the Management Share Scheme, net of shares held by the scheme for releasing purposes. Diluted headline earnings per share is calculated by dividing headline earnings by the adjusted weighted average number of shares in issue. Weighted average number of ordinary shares in issue (million) as calculated above Adjusted for options and net purchased shares in terms of the Management Share Scheme (million) Weighted average number of ordinary shares for diluted headline earnings per share (million) Diluted headline earnings per share (cents) (restated for 2004) Basic attributable earnings per share is calculated by dividing the net profit attributable to shareholders by the weighted average number of ordinary shares in issue during the year. Net profit attributable to ordinary shareholders (R million) Weighted average number of ordinary shares in issue (million) Basic earnings per share (cents) (restated for 2004) For the diluted attributable earnings per share the weighted average number of ordinary shares is adjusted as above. GROUP 12-months ended 31 Dec 2005 Restated 18-months ended 31 Dec 2004 2 373 304 304 781 304 7 311 763 3 190 304 1 049 966 301 (1) 300 322 300 2 302 320 891 300 297 Diluted earnings per share (cents) (restated for 2004) 1 026 295 For the current year, certain shares under option had an effect on the adjusted weighted average number of shares in issue as the average option price attached to the option shares was lower than the average market price. 11. DIVIDEND The company declared a final dividend for the year of R1,60 per share (2004: R0,90 per share) which totalled R490 million (2004: R273 million) on 15 February 2006 for payment in March 2006, which will attract STC of R61 million (2004: R34 million). During September 2005 the company paid an interim dividend and a special dividend of R1,60 and R2,20 per share respectively, totalling R1 157 million, which attracted STC of R145 million. 1 5 0 K U M B A A N N U A L R E P O RT 2 0 0 5 GROUP COMPANY 12-months ended 31 Dec 2005 Rm Restated 18-months ended 31 Dec 2004 Rm 12-months ended 31 Dec 2005 Rm Restated 18-months ended 31 Dec 2004 Rm Notes 3 190 891 8 17 16 17 5 5 5 10 28 (95) 2 (1 179) (1) 428 2 373 781 763 35 27 (6) 20 48 (72) 35 (12) 966 339 322 337 320 12. RECONCILIATION OF HEADLINE EARNINGS Net profit attributable to ordinary shareholders Adjusted for: – Impairment charges – Share of associates goodwill amortisation – Negative goodwill amortisation – Excess of minority interest over cost of acquisition – Share of associates exceptional items – Net deficit on disposal or scrapping of property, plant and equipment – Net surplus on disposal of investments – Closure cost Minority interest on adjustments Taxation effect of adjustments Headline earnings Headline earnings per share (cents) – basic (2004 as previously reported) – basic restated for December 2004 – diluted (2004 as previously reported) – diluted restated for December 2004 1 5 1 K U M B A A N N U A L R E P O RT 2 0 0 5 N O T E S T O T H E A N N U A L F I N A N C I A L S T A T E M E N T S c o n t i n u e d f o r t h e 1 2 - m o n t h s e n d e d 3 1 D e c e m b e r 2 0 0 5 Land and buildings Rm Mineral properties Rm Residential land and buildings Rm Buildings Machinery, and infra- plant and equipment structure Rm Rm Site pre- paration, mining develop- ment, Extensions exploration and reha- under bilitation construction Rm Rm 13. PROPERTY, PLANT AND EQUIPMENT Group 2005 Gross carrying amount At beginning of year Decommissioning assets Adjusted opening balance Additions Non-cash flow additions1 Changes in decommis- sioning assets Disposal of subsidiary Disposals of items of property, plant and equipment Reclassification to non-current assets classified as held for sale Exchange differences on translation Other movements 144 144 4 1 023 1 023 (4) (5) 1 17 At end of year 140 1 040 Accumulated depreciation At beginning of year Decommissioning of assets Adjusted opening balance Depreciation charges Disposal of subsidiary Accumulated depreciation on disposals of items of property, plant and equipment Reclassification to non-current assets classified as held for sale Exchange differences on translation Other movements At end of year Impairment of assets At beginning of year Impairment reversals Impairment charges Disposals of items of property, plant and equipment Disposals of subsidiaries Exchange differences on translation Net carrying amount at end of year 170 170 37 4 211 1 1 121 1 122 2 1 3 (4) (8) 1 117 70 70 7 (2) (5) 70 Total Rm 12 873 72 12 945 1 044 107 14 (16) 1 820 15 1 835 30 1 7 890 50 7 940 251 27 2 (16) 1 285 6 1 291 1 72 9 590 590 756 6 (23) (162) (1) (194) 10 (202) 71 534 15 120 1 651 8 647 1 508 (1) (453) 897 529 3 532 104 2 985 15 3 000 622 (2) 545 4 549 124 (9) (69) 3 (156) 474 29 165 3 745 5 (9) 669 8 2 (8) 2 89 (2) (78) (12) 5 2 1 (1) (13) 113 14 000 4 299 22 4 321 894 (2) (80) (5) 41 5 169 98 (2) 3 (87) (12) 5 5 140 828 47 1 175 4 900 839 897 8 826 1 5 2 K U M B A A N N U A L R E P O RT 2 0 0 5 Land and buildings Rm Mineral properties Rm Residential land and buildings Rm Buildings Machinery, plant and and infra- equipment structure Rm Rm Site pre- paration, mining develop- ment, Extensions exploration and reha- under bilitation construction Rm Rm Total Rm At end of period 144 1 023 1 820 7 890 1 285 590 12 873 13. PROPERTY, PLANT AND EQUIPMENT (continued) 2004 Restated Gross carrying amount At beginning of period Joint ventures now consolidated Adjusted opening balance Additions Non-cash flow additions Changes in decommis- sioning assets Disposals of items of property, plant and equipment Exchange differences on translation Other movements 141 3 144 8 (4) (2) (2) Accumulated depreciation At beginning of period Depreciation charges Accumulated depreciation on disposals of items of property, plant and equipment Exchange differences on translation Other movements At end of period Impairment of assets At beginning of period Impairment reversals Impairment charges Exchange differences on translation Net carrying amount at end of period 1 056 120 1 609 7 143 1 071 858 11 998 1 056 3 4 120 9 1 1 609 184 6 7 143 829 31 1 071 16 25 (2) (35) 210 3 12 001 1 396 258 858 347 191 (2) (409) (371) (32) (7) (767) (11) (23) 55 (349) (264) 500 422 117 2 646 677 438 112 (13) 4 121 71 8 (9) (40) 1 125 54 (1) (9) (2) (9) 1 (213) (119) (6) 170 70 529 2 985 90 (90) 94 (5) 89 9 (1) 8 (10) 5 545 1 (1) 3 702 969 (224) (148) 4 299 91 (91) 104 (6) 98 1 1 144 853 51 1 283 4 816 740 589 8 476 1. Non-cash flow additions relates to capital expenditure of captive mines which are financed by Mittal Steel South Africa. The net carrying amount of machinery, plant and equipment includes: Assets held under finance leases (note 24) – cost – accumulated depreciation 2005 Rm 2004 Rm 2 1 1 55 6 49 For detail of property, plant and equipment pledged as security refer to annexure 1. The replacement value of assets for insurance purposes amounts to R18,8 billion (2004: R19,7 billion). A register of land and buildings is available for inspection at the registered office of the company. 1 5 3 K U M B A A N N U A L R E P O RT 2 0 0 5 N O T E S T O T H E A N N U A L F I N A N C I A L S T A T E M E N T S c o n t i n u e d f o r t h e 1 2 - m o n t h s e n d e d 3 1 D e c e m b e r 2 0 0 5 Land and buildings Rm Mineral properties Rm Residential land and buildings Rm Buildings Machinery, and infra- plant and equipment structure Rm Rm Site pre- paration, mining develop- ment, Extensions exploration and reha- under bilitation construction Rm Rm 29 20 (25) 24 Total Rm 81 25 (18) 88 36 7 (14) 29 24 59 15 14 29 29 69 16 (4) 81 31 8 (3) 36 45 13. PROPERTY, PLANT AND EQUIPMENT (continued) Company 2005 Gross carrying amount At beginning of year Additions Disposals of items of property, plant and equipment Other movements At end of year Accumulated depreciation At beginning of year Depreciation charges Accumulated depreciation on disposals of items of property, plant and equipment At end of year Net carrying amount at end of year 2004 Restated Gross carrying amount At beginning of period Additions Disposals At end of period Accumulated depreciation At beginning of period Depreciation charges Accumulated depreciation on disposals At end of period Net carrying amount at end of period 13 (3) 10 7 (1) 6 4 13 13 6 1 7 6 39 5 (15) 25 54 29 7 (13) 23 31 41 2 (4) 39 25 7 (3) 29 10 1 5 4 K U M B A A N N U A L R E P O RT 2 0 0 5 14. BIOLOGICAL ASSETS Group 2005 Carrying amount At beginning of period Gains arising from changes attributable to physical changes and price changes Disposals Reclassification to inventory At end of period Fair value of biological assets can be split as follows: Mature Immature The plantation was valued by Mr JM Potgieter, an independent appraiser, on 8 December 2005. 2004 Restated At beginning of year Acquisitions Gains arising from changes attributable to physical changes and price changes Disposals Reclassification to inventory At end of year Fair value of biological assets can be split as follows: Mature Immature Plantations consist of wattle and blue gum trees. Livestock consists of cattle, sheep and goats. Plantation Rm Livestock Rm Game Rm Total Rm 6 1 (1) 6 4 3 7 6 1 (1) 6 1 5 6 10 2 (5) 7 7 7 7 5 (2) 10 10 10 15 2 (2) 15 14 14 16 1 (2) 15 15 15 31 5 (5) (3) 28 25 3 28 29 1 6 (2) (3) 31 26 5 31 Game consists of rhino, buffalo, warthog, giraffe, ostrich and a large variety of antelope. 1 5 5 K U M B A A N N U A L R E P O RT 2 0 0 5 N O T E S T O T H E A N N U A L F I N A N C I A L S T A T E M E N T S c o n t i n u e d f o r t h e 1 2 - m o n t h s e n d e d 3 1 D e c e m b e r 2 0 0 5 GROUP COMPANY At 31 Dec 2005 Rm Restated At 31 Dec 2004 Rm At 31 Dec 2005 Rm Restated At 31 Dec 2004 Rm 15. INTANGIBLE ASSETS Patents, licences and franchise Gross carrying amount At beginning of period Additions Disposal of subsidiary Intangible assets written off Exchange differences At end of period Accumulated amortisation At beginning of period Disposal of subsidiary Intangible assets written off Amortisation charge Exchange differences At end of period Impairment charge At beginning of period Exchange differences Charge for the period Disposal of subsidiary Intangible assets written off At end of period Net carrying amount at end of year 16. GOODWILL Positive goodwill At beginning of period At end of period Comprising: Cost Accumulated amortisation Negative goodwill At beginning of period Derecognised, adjusted to opening balance of retained earnings Exchange differences Amortisation At end of period Derecognised negative goodwill comprises: Cost Accumulated amortisation 105 11 (12) (29) 6 81 23 (1) (7) 4 1 20 11 1 20 (11) (21) 61 243 243 (53) 53 (61) 8 (53) 117 (12) 105 19 8 (4) 23 11 11 71 243 243 (80) 21 6 (53) (61) 8 (53) The negative goodwill, which arose during 2003, resulted from the acquisition of Ticor Limited and was previously being amortised over 12,7 years, was adjusted against opening retained income in accordance with IFRS 3 (note 2). 1 5 6 K U M B A A N N U A L R E P O RT 2 0 0 5 17. INVESTMENTS IN ASSOCIATES AND JOINT VENTURES Associated companies – Listed – Unlisted Joint ventures (Unlisted) – Incorporated – Unincorporated Total GROUP COMPANY At 31 Dec 2005 Rm Restated At 31 Dec 2004 Rm At 31 Dec 2005 Rm Restated At 31 Dec 2004 Rm 93 93 2 2 95 6 72 78 7 7 85 24 24 7 7 31 Refer to annexure 2 for market and directors’ valuations of investments. ASSOCIATE COMPANIES JOINT VENTURES Investments at 31 Dec 2005 Rm Loans at 31 Dec 2005 Rm Total at 31 Dec 2005 Rm Investments at 31 Dec 2005 Rm Loans at 31 Dec 2005 Rm Total at 31 Dec 2005 Rm Group At beginning of year Reclassification as associate Reclassification as non-current asset classified as held for sale Movement in indebtedness from joint ventures Net share of results* – Share of results after taxation Exchange difference adjustments Impairment charges At end of year (annexure 2) 78 2 (2) 7 7 8 93 78 2 (2) 7 7 8 93 7 (7) 2 2 7 2 (7) 2 ASSOCIATE COMPANIES JOINT VENTURES Investments at 31 Dec 2004 Rm Loans at 31 Dec 2004 Rm Total at 31 Dec 2004 Rm Investments at 31 Dec 2004 Rm Loans at 31 Dec 2004 Rm Total at 31 Dec 2004 Rm Restated At beginning of period as previously disclosed Reclassification as associate Joint ventures now consolidated Restated opening balance Reclassification as financial asset Additional interests acquired Movement in indebtedness to/from associated companies/repayments Disposals Net share of results* – Share of results after taxation – Share of exceptional items – Share of goodwill Exchange difference adjustments At end of period (annexure 2) 62 14 76 85 (21) (42) 5 (20) (27) (20) 78 39 (1) 38 (35) (2) (1) 101 13 114 (35) 85 (2) (21) (42) 5 (20) (27) (21) 78 18 (10) 8 (1) 7 18 (10) 8 (1) 7 * Income from equity accounted investments, as disclosed in the income statement, amounted to R7 million (2004: loss R42 million). 1 5 7 K U M B A A N N U A L R E P O RT 2 0 0 5 N O T E S T O T H E A N N U A L F I N A N C I A L S T A T E M E N T S c o n t i n u e d f o r t h e 1 2 - m o n t h s e n d e d 3 1 D e c e m b e r 2 0 0 5 17. INVESTMENTS IN ASSOCIATES AND JOINT VENTURES (continued) Aggregate post-acquisition reserves: – Associate companies – Joint ventures Total At 31 Dec 2005 Rm Restated At 31 Dec 2004 Rm (62) 1 863 1 801 (80) 1 710 1 630 ASSOCIATE COMPANIES JOINT VENTURES Investments at 31 Dec 2005 Rm Loans at 31 Dec 2005 Rm Total at 31 Dec 2005 Rm Investments at 31 Dec 2005 Rm Loans at 31 Dec 2005 Rm Total at 31 Dec 2005 Rm Company At beginning of year Associate reclassified as financial asset Impairment loss At end of year (annexure 2) 24 (24) 24 (24) 7 (7) 7 (7) ASSOCIATE COMPANIES JOINT VENTURES Investments at 31 Dec 2004 Rm Loans at 31 Dec 2004 Rm Total at 31 Dec 2004 Rm Investments at 31 Dec 2004 Rm Loans at 31 Dec 2004 Rm Total at 31 Dec 2004 Rm Restated At beginning of period Additional interests acquired Reclassification as financial asset Impairment loss At end of period (annexure 2) 51 24 (51) 24 35 (35) 86 24 (35) (51) 24 7 7 7 7 1 5 8 K U M B A A N N U A L R E P O RT 2 0 0 5 18. INVESTMENTS IN SUBSIDIARIES Shares at cost less impairment losses Indebtedness – by subsidiaries – to subsidiaries Total (annexure 3) 19. 20. Aggregate attributable after tax profits and losses of subsidiaries: – Profits – Losses FINANCIAL ASSETS Environmental Rehabilitation Trust Asset Long-term receivables Investments (annexure 2) INVENTORIES Finished products Work-in-progress Raw materials Plant spares and stores Merchandise Included above are inventories relating to the Ticor SA project which might be sold or utilised in production over more than twelve months. Included in merchandise are biological assets classified as inventories. Inventory sold in which delivery is delayed at the buyer’s request, but the buyer takes title amounted to Rnil (2004: R25 million). 21. TRADE AND OTHER RECEIVABLES Trade receivables Other receivables Derivative instruments 22. NON-CURRENT ASSETS CLASSIFIED AS HELD FOR SALE Property, plant and equipment Investments in associates and joint ventures At end of period GROUP COMPANY At 31 Dec 2005 Rm Restated At 31 Dec 2004 Rm At 31 Dec 2005 Rm Restated At 31 Dec 2004 Rm 1 513 1 609 2 641 (305) 2 336 3 849 3 041 (174) 2 867 4 476 7 15 28 50 1 36 9 46 5 23 26 54 2 46 20 68 12 805 (6 992) 8 052 (5 042) 257 40 95 392 398 625 165 285 8 183 50 53 286 365 603 131 240 9 1 481 1 348 1 118 156 91 1 365 1 948 95 23 2 066 9 2 11 1 5 9 K U M B A A N N U A L R E P O RT 2 0 0 5 N O T E S T O T H E A N N U A L F I N A N C I A L S T A T E M E N T S c o n t i n u e d f o r t h e 1 2 - m o n t h s e n d e d 3 1 D e c e m b e r 2 0 0 5 23. SHARE CAPITAL Share capital at par value Authorised 500 000 000 ordinary shares of R0,01 each Issued 306 162 251 (301 854 211) ordinary shares of R0,01 each Share premium Shares held by Kumba Management Share Trust Total The Kumba Management Share Trust has been consolidated. Reconciliation of authorised shares not issued (million) Number of authorised unissued ordinary shares at beginning of period Number of shares issued during the period Number of unissued authorised shares at end of period GROUP COMPANY At 31 Dec 2005 Rm Restated At 31 Dec 2004 Rm At 31 Dec 2005 Rm Restated At 31 Dec 2004 Rm 5 5 5 5 3 2 941 (4) 2 940 3 2 809 3 2 941 3 2 809 2 812 2 944 2 812 198 (4) 194 203 (5) 198 198 (4) 194 203 (5) 198 The following resolutions pertain to the unissued ordinary shares under the control of the directors until the forthcoming annual general meeting: 1. Subject to the provisions of the Companies Act 61 of 1973, as amended (“the Act”), and the requirements of the JSE Limited (“JSE”), the directors be and are hereby authorised to allot and issue at their discretion such number of the remaining authorised but unissued ordinary shares of one cent each in the capital of the company as may be required to be allotted and issued pursuant to the Share Incentive Scheme (“the Scheme”). 2. Directors are authorised to issue the unissued ordinary shares of one cent each in the capital of the company (after setting aside so many shares as may be required to be allotted and issued by the company pursuant to the Scheme) for cash, without restrictions to any public shareholder, as defined by the JSE Listings Requirements, as and when suitable opportunities arise, subject to the following conditions: – this authority shall not extend beyond the next annual general meeting or 15 months from the date of this annual general meeting, whichever date is earlier; – a press announcement giving full details, including the impact on net asset value and earnings per share, be published at the time of any issue representing, on a cumulative basis within one year, 5% or more of the number of shares in issue prior to the issue/s; – the shares be issued to public shareholders as defined by the JSE and not to related parties; – any issue in the aggregate in any one year shall not exceed 15% of the number of shares of the company’s issued ordinary share capital; and – in determining the price at which an issue of shares be made in terms of this authority, the maximum discount permitted will be 10% of the weighted average traded price of the shares over the 30 days prior to the date that the price of the issue is determined or agreed to by the directors. In the event that shares have not traded in the said 30 day period a ruling will be obtained from the committee of the JSE. 3. Directors are authorised to acquire from time to time shares issued by the company, provided: – that the repurchase is effected through the order book operated by the JSE trading system and is done without any prior understanding or arrangement between the company and the counterparty; – that this authority shall not extend beyond 15 months from the date of this resolution or the date of the next annual general meeting, whichever is the earlier date; – that an announcement containing full details of such repurchases is published as soon as the company has repurchased shares constituting, on a cumulative basis, 3% of the number of shares in issue prior to the repurchases and for each 3%, on a cumulative basis, thereafter; – that the repurchase of shares shall not, in the aggregate, in any one financial year, exceed 20% of the company’s issued share capital at the time this authority is given; – that at any one time, the company may only appoint one agent to effect any repurchase; – that the repurchase of shares will not take place during a prohibited period and will not affect compliance with the shareholders’ spread requirements as laid down by the JSE; and – that shares issued by the company may not be acquired at a price greater than 10% above the weighted average traded price of the company’s shares for the five business days immediately preceding the date of repurchase. The above authorities are valid until the next annual general meeting. 1 6 0 K U M B A A N N U A L R E P O RT 2 0 0 5 24. INTEREST-BEARING BORROWINGS Non-current borrowings Summary of loans by financial year of redemption 2005 2006 2007 2008 2009 2010 onwards Total non-current borrowings (annexure 1) Current portion included in current liabilities Total Details of interest rates payable on borrowings are shown in annexure 1. Interest-bearing borrowings Non-current borrowings Short-term borrowings Current portion of non-current borrowings Total short-term borrowings Total Included in the above interest-bearing borrowings are obligations relating to finance leases (note 13). Details are: Minimum lease payments: – Less than 1 year – More than 1 year and less than 5 years – More than 5 years – Total – Less: Future finance charges Present value of lease liabilities Representing lease liabilities: – Current – Non-current (more than 1 year and less than 5 years) – Non-current (more than 5 years) Total 25. OTHER LONG-TERM PAYABLES Other long-term payables: Mittal Steel (South Africa) captive mines Other long-term payables GROUP COMPANY At 31 Dec 2005 Rm Restated At 31 Dec 2004 Rm At 31 Dec 2005 Rm Restated At 31 Dec 2004 Rm 686 932 485 218 328 2 649 (686) 1 963 784 556 865 234 676 136 737 307 368 385 670 57 3 115 (784) 2 331 1 180 (136) 1 044 1 480 (368) 1 112 1 963 2 331 1 044 1 112 225 686 911 52 784 836 168 136 304 368 368 2 874 3 167 1 348 1 480 1 1 2 2 1 1 2 604 604 15 1 16 1 15 14 1 15 607 2 609 Mittal Steel (South Africa) has funded the capital expenditure at the Thabazimbi and Tshikondeni captive mines in terms of supply agreements. The funds are repayable over the life of the mine as specified in the supply agreements. 1 6 1 K U M B A A N N U A L R E P O RT 2 0 0 5 N O T E S T O T H E A N N U A L F I N A N C I A L S T A T E M E N T S c o n t i n u e d f o r t h e 1 2 - m o n t h s e n d e d 3 1 D e c e m b e r 2 0 0 5 Environmental Decommissioning rehabilitation Rm Rm Restructuring Rm Total Rm 26. PROVISIONS Group For the year ended 31 December 2005 At beginning of year Reclassification of opening balance Charge to income statement Interest adjustment Provisions capitalised to property, plant and equipment Utilised during year At end of year Current portion included in current liabilities Total non-current provisions For the year ended 31 December 2004 – Restated At beginning of period as previously stated Prior year adjustment (note 2) Charge to income statement Interest adjustment Provisions capitalised to property, plant and equipment Utilised during year Exchange differences At end of year Current portion included in current liabilities Total non-current provisions 123 11 9 13 156 156 611 (81) 19 33 (10) 572 (18) 554 362 151 55 69 (2) (21) (3) 611 (12) 599 8 17 (2) 23 (6) 17 21 (13) 8 (8) 619 42 47 42 13 (12) 751 (24) 727 383 151 55 69 (2) (34) (3) 619 (20) 599 1 6 2 K U M B A A N N U A L R E P O RT 2 0 0 5 Environmental Decommissioning rehabilitation Rm Rm Restructuring Rm 26. PROVISIONS (continued) Company For the year ended 31 December 2005 At beginning of year Interest adjustment Total non-current provisions For the year ended 31 December 2004 – Restated At beginning of year Charge to income statement Interest adjustment Total non-current provisions 15 1 16 5 3 7 15 Total Rm 15 1 16 5 3 7 15 Environmental rehabilitation Provision is made for environmental rehabilitation costs where either a legal or constructive obligation is recognised as a result of past events. Estimates are based upon costs that are regularly reviewed and adjusted as appropriate for new circumstances. Decommissioning During 2005 the environmental rehabilitation provision was reclassified into two separate provisions, namely the environmental rehabilitation provision and the decommissioning provision, the opening balance was adjusted to reflect the split. The decommissioning provision relates to decommissioning of property, plant and equipment where either a legal or constructive obligation is recognised as a result of past events. Estimates are based upon costs that are regularly reviewed and adjusted as appropriate for new circumstances. Funding of environmental and decommissioning rehabilitation Contributions towards the cost of the mine closure are also made to the Kumba Rehabilitation Trust Fund and the balance of the fund amounted to R265 million (2004: R190 million) at period end. This amount is included in the financial assets of the group. Cash flows will take place when the mines are rehabilitated. Restructuring The liability includes accruals for plant and facility closures, including the dismantling costs thereof, and employee termination costs, in terms of announced restructuring plans for the Durnacol mine. Provision is made on a piecemeal basis, only for those restructuring obligations supported by a formally approved plan. The restructuring will be completed within the next ten years. 1 6 3 K U M B A A N N U A L R E P O RT 2 0 0 5 N O T E S T O T H E A N N U A L F I N A N C I A L S T A T E M E N T S c o n t i n u e d f o r t h e 1 2 - m o n t h s e n d e d 3 1 D e c e m b e r 2 0 0 5 GROUP COMPANY At 31 Dec 2005 Rm Restated At 31 Dec 2004 Rm At 31 Dec 2005 Rm Restated At 31 Dec 2004 Rm 27. DEFERRED TAXATION The movement on the deferred taxation account is as follows: At beginning of period as previously stated Effect of prior year adjustments Restated balance Non-distributable reserve charge – current Income statement charge – current (note 9) – prior – rate change At end of period Comprising: Deferred taxation liabilities – Property, plant and equipment – Foreign taxation to be set-off for group tax entity – Foreign taxation losses carried forward – Inventories – Leave pay accrual – Provisions – Adjustment on foreign loan – Environmental rehabilitation asset – Decommissioning provision – Environmental rehabilitation provision – Prepayments – Unrealised profits – Assessed losses Deferred taxation assets – Provisions – Property, plant and equipment – Environmental rehabilitation asset – Decommissioning provision – Environmental rehabilitation provision – Bad debt reassessment – Leave pay accrual – Prepayments – Taxation losses carried forward – Foreign taxation losses carried forward – Foreign taxation losses to be set-off for group tax entity Calculated taxation losses: – Tax losses utilised to reduce deferred taxation against South African taxable income included above – Tax losses utilised to reduce deferred taxation against foreign taxable income included above 782 782 (4) (110) 28 (29) 667 1 011 (5) 13 (36) (2) 40 67 (20) (60) 3 (5) 1 006 (37) 281 3 (2) (24) (1) (19) 1 (365) (176) (339) 667 1 276 599 901 (195) 706 56 32 (12) (21) (21) (20) (20) (1) 782 (21) (21) 1 158 (102) (26) 20 (41) (3) 41 34 (13) (42) 2 24 (12) 1 040 (31) 186 5 (7) (19) (1) (14) 2 (221) (260) 102 (258) 782 777 899 (7) 2 (4) (1) (11) (21) (21) (5) 3 (4) (1) (14) 1 (1) (21) (21) 3 The total deferred taxation assets raised with regard to assessed losses amounts to R551 million (2004: R519 million), and is mainly attributable to the ramp-up phase of the heavy minerals project. 1 6 4 K U M B A A N N U A L R E P O RT 2 0 0 5 28. TRADE AND OTHER PAYABLES Trade payables Other payables Leave pay accrual Derivative instruments 29. 29.1 NOTES TO THE CASH FLOW STATEMENT Cash retained from operations Net operating income/(loss) Adjusted for non-cash movements – Prior year adjustment – Depreciation – Impairment charges – Negative goodwill amortisation – Excess over cost of acquisition of minority interest – Provisions – Foreign exchange revaluations and fair value adjustments – Reconditionable spares usage – Net deficit on disposal or scrapping of property, plant and equipment – Net surplus on disposal of investments – Share-based payment expenses Cash generated by operations Working capital movements – (Increase) in inventories – (Increase)/decrease in trade and other receivables – (Increase)/decrease in non-current financial assets – Increase/(decrease) in trade and other payables – Utilisation of provisions (note 26) GROUP COMPANY At 31 Dec 2005 Rm 605 494 224 65 Restated At 31 Dec 2004 Rm 453 378 212 18 1 388 1 061 At 31 Dec 2005 Rm 16 90 48 50 204 Restated At 31 Dec 2004 Rm 15 149 37 15 216 GROUP COMPANY 12-months ended 31 Dec 2005 Rm Restated 18-months ended 31 Dec 2004 Rm 12-months ended 31 Dec 2005 Rm Restated 18-months ended 31 Dec 2004 Rm 4 887 1 845 (107) 817 28 (95) 47 (56) 6 (4) (1 179) 38 4 933 35 (6) 55 (19) 11 37 (72) 30 4 489 2 853 (143) (532) (157) 219 (12) (42) (242) (23) 149 (34) 3 864 2 661 7 7 8 2 22 (61) 85 19 (7) 36 14 8 51 3 6 2 (84) 16 16 (120) 21 70 (13) 1 6 5 K U M B A A N N U A L R E P O RT 2 0 0 5 N O T E S T O T H E A N N U A L F I N A N C I A L S T A T E M E N T S c o n t i n u e d f o r t h e 1 2 - m o n t h s e n d e d 3 1 D e c e m b e r 2 0 0 5 29. 29.2 NOTES TO THE CASH FLOW STATEMENT (continued) Income from equity accounted investments Income from equity accounted investments as per income statement Less: Non-cash flow income from equity accounted investments 29.3 Net financing costs Net financing costs as per income statement Financing costs not involving cash flows (note 26) 29.4 Normal taxation paid Amounts unpaid at beginning of year Prior year adjustment Adjusted opening balance Amounts charged to the income statements Arising on translation of foreign entities Amounts unpaid at end of year 29.5 Dividends paid Amounts unpaid at beginning of year Dividends declared and paid Dividends declared and paid by subsidiaries to minorities Amounts unpaid at end of year 29.6 Investments to maintain operations Replacement of property, plant and equipment Reconditional spares 29.7 Investments to expand operations Expansion and new technology 29.8 Investment in other non-current assets Increase in associates, joint ventures and other investments (Increase)/decrease in investments in subsidiaries GROUP COMPANY 12-months ended 31 Dec 2005 Rm Restated 18-months ended 31 Dec 2004 Rm 12-months ended 31 Dec 2005 Rm Restated 18-months ended 31 Dec 2004 Rm 7 (7) (42) 42 (231) 42 (189) (182) (182) (1 522) 110 773 (821) (424) 69 (355) (94) (8) (102) (403) 10 182 (313) (118) 1 (117) (1) (1) (186) (29) (216) (272) 7 (265) (3) (3) (52) 1 (54) (1 430) (17) (344) (17) (1 430) (344) (1 447) (361) (1 430) (344) (353) (36) (389) (655) (655) (3) (1 174) (1 177) (526) (45) (571) (825) (825) (93) (3) (96) (25) (25) 96 96 (16) (16) (20) (139) (159) 1 6 6 K U M B A A N N U A L R E P O RT 2 0 0 5 29. 29.9 NOTES TO THE CASH FLOW STATEMENT (continued) Foreign currency translation reserve At beginning of year Closing balance Movement Transfers from/(to) NDR Unrealised (losses)/profits in relation to foreign transactions Revaluation of long-term loans Less arising on translation of foreign entities: – inventories – accounts receivable – financial assets – derivatives – accounts payable – utilisation of provisions – taxation paid – dividends paid – fixed assets acquired – intangible assets – proceeds from investments sold – investments acquired – long-term loans – short-term loans – minority loans – share capital GROUP COMPANY 12-months ended 31 Dec 2005 Rm Restated 18-months ended 31 Dec 2004 Rm 12-months ended 31 Dec 2005 Rm Restated 18-months ended 31 Dec 2004 Rm (121) (30) 91 30 (30) (82) (71) 16 71 (5) (77) (21) 7 67 4 (115) (4) (9) (56) 51 80 169 (121) (290) (4) 14 (217) (434) (41) (117) (15) 101 6 10 (1) (215) (9) (120) (35) 2 118 1 (117) 117 (1) 120 118 (2) (2) 1 1 1 (63) (1) (4) 30. FINANCIAL INSTRUMENTS The centralised corporate treasury function (other than Ticor Pty Limited which operates on a decentralised basis, but within the approved group policies) provides services to all the businesses in the group, co-ordinates access to domestic and international financial markets, and manages the financial risks relating to the group’s operations. The group’s objective in using financial instruments is to reduce the uncertainty over future cash flows arising from movements in currency, interest rates and base metal prices. Currency and interest rate exposure is managed within board- approved policies and guidelines, which restrict the use of derivatives to the hedging of specific underlying currency, interest rate and base metal price exposures. Compliance with group policies and exposure limits is reviewed by the internal auditors on a continuous basis and they report the results to the board audit committee. 30.1 Foreign currency risk management The group undertakes transactions denominated in foreign currencies, hence exposures to exchange rate fluctuations arise. Exchange rate exposures are managed within approved policy parameters utilising forward exchange contracts (FECs), currency options and currency swap agreements. The group maintains a fully covered exchange rate position in respect of foreign currency borrowings and imported capital equipment resulting in these exposures being fully converted to rand. Trade-related import exposures are managed through the use of natural hedges arising from export revenue as well as through FECs. Trade-related export exposures are hedged using FECs and currency options with specific focus on short-term receivables. In respect of a US$60 million (2004: US$105 million) loan liability of Ticor (Pty) Limited, a natural hedge exists between US$ revenue and US$ borrowings. Accordingly, future sales proceeds to be applied to the repayment of US$ borrowings are recorded at the historical exchange rate effective at the date of loan draw down. 1 6 7 K U M B A A N N U A L R E P O RT 2 0 0 5 N O T E S T O T H E A N N U A L F I N A N C I A L S T A T E M E N T S c o n t i n u e d f o r t h e 1 2 - m o n t h s e n d e d 3 1 D e c e m b e r 2 0 0 5 30. 30.1 FINANCIAL INSTRUMENTS (continued) Foreign currency risk management (continued) Material FECs and currency options, which relate to specific balance sheet items, that do not form part of a hedging relationship or for which hedge accounting was not applied at 31 December 2005 and 31 December 2004, are summarised as follows: Foreign currency 2005 Exports United States dollar – FECs United States dollar – Put options United States dollar – Call options Loans United States dollar1 Foreign currency 2004 Exports United States dollar – FECs Attributable to minorities Loans United States dollar1 Imports United States dollar – FECs Euro – FECs Australian dollars – FECs Foreign amount million 40 1 1 100 Market related value Rm Recognised fair value gains/ (losses) Rm Contract value Rm 256 6 7 633 267 7 7 681 10 (49) 46 (18) 37 209 255 100 566 681 (115) 1 1 1 3 9 6 3 9 7 (1) 1. Kumba entered into a syndicated loan of US$150 million, of which US$100 million was drawn down at 31 December 2005 (2004: US$100 million). The fair value profit of R49 million (2004: R115 million) of the liability has been accounted for in foreign exchange profits. The amount drawn down has been hedged by entering into a cross currency swap. The fair value of the cross currency swap is included in the table above. The group has entered into certain forward exchange contracts, which relate to specific foreign commitments not yet due and export earnings for which the proceeds are not yet receivable. Details of the contracts at 31 December 2005 and 31 December 2004, are as follows: Foreign currency 2005 Exports1 Imports United States dollar – FECs Euro – FECs Japanese yen – FECs Attributable to minorities Market related value Rm Recognised fair value in equity Rm Contract value Rm Foreign amount million 2 10 514 13 79 27 14 84 30 (1) (5) (3) (7) Note: Unrealised exchange gains or losses amounting to R11,5 million (31 December 2004: R41 million) arising from the revaluation of Ticor Pty Limited’s foreign currency loans which are a natural hedge against specific future export sales revenue, are recognised in equity as hedge accounting has been applied. 1 6 8 K U M B A A N N U A L R E P O RT 2 0 0 5 30. 30.1 FINANCIAL INSTRUMENTS (continued) Foreign currency risk management (continued) Foreign currency 2004 Exports1 United States dollar – FECs United States dollar – Put options United States dollar – Call options Attributable to minorities Taxation on items charged directly to equity Imports United States dollar – FECs Euro – FECs Market related value Rm Recognised fair value in equity Rm Contract value Rm Foreign amount million 8 7 7 3 43 40 40 18 3 48 50 50 20 3 5 10 10 (12) (7) (2) 1. Recognised fair value in equity to be released to income statement within six months. Uncovered debtors at 31 December 2005 amount to US$171 million (2004: US$62 million). All capital imports were fully hedged. Imports (other than capital imports) not fully hedged amount to US$2 million (2004: US$1,5 million) and A$3 million (2004: A$nil). Monetary items have been translated at the closing rate at the last day of the reporting period US$1:R6,325 (2004: US$1:R5,6525). 30.2 Price hedging Prices for future purchases and sales of goods and services are generally established on normal commercial terms through agents or direct with suppliers and customers. Price hedging is undertaken on a limited scale for future zinc sales at Rosh Pinah Zinc Corporation (Pty) Limited and Kumba Base Metals Limited to secure operating margins and reduce cash flow volatility. The forward hedged position at balance sheet date is shown below: Contract Recognised losses Rm value Rm 49 (6) value Contract Recognised gains/ (losses) Rm Rm 9 2005 Recognised transactions 2004 Recognised transactions Market related value Rm 55 Market related value Rm 9 Tonnes 4 600 Tonnes 1 335 1 6 9 K U M B A A N N U A L R E P O RT 2 0 0 5 N O T E S T O T H E A N N U A L F I N A N C I A L S T A T E M E N T S c o n t i n u e d f o r t h e 1 2 - m o n t h s e n d e d 3 1 D e c e m b e r 2 0 0 5 30. 30.3 FINANCIAL INSTRUMENTS (continued) Interest rate risk management The group is exposed to interest rate risk as it borrows and deposits funds at both fixed and floating interest rates. The risk is managed by maintaining an appropriate mix between fixed and floating rate borrowings taking into account future interest rate expectations. A proportion of term borrowings was entered into at floating interest rates in anticipation of a decrease in the interest rate cycle. The interest rate repricing profile is summarised below: At 31 Dec 2005 Term borrowings Call borrowings % of total borrowings At 31 Dec 2004 Term borrowings Call borrowings % of total borrowings 1 – 6 months Rm 7 – 12 months Rm Beyond 1 year Rm Total borrowings Rm 1 349 225 55 815 52 27 1 300 45 2 300 73 2 649 225 100 3 115 52 100 The group makes use of interest rate derivatives to hedge specific exposures in the interest rate repricing profile of existing borrowings. The value of borrowings hedged by interest rate derivatives, the instruments used and the respective rates applicable to these contracts were as follows: Borrowings hedged Rm Floating interest payable % Floating interest receivable % Fixed interest payable % Fixed interest receivable % Recognised fair value gain/(loss) Rm At 31 Dec 2005 Local Interest rate derivatives up to 1 year: – Interest rate swaps Interest rate derivatives beyond 1 year: – Interest rate swaps Foreign Interest rate derivatives beyond 1 year: – Cross currency swaps 41 85 $30m $20m $15m $15m $10m $10m 3m Jibar + 1,625% margin 10,43 (0,40) 3m Jibar + 3,06% margin 12,41 2,60 3m Jibar + 0,95% margin 3m Jibar + 0,91% margin 3m Jibar + 0,90% margin 3m Jibar + 0,90% margin 3m Jibar + 0,88% margin 3m Jibar + 0,89% margin 3m Libor + 0,7% margin 3m Libor + 0,7% margin 3m Libor + 0,7% margin 3m Libor + 0,7% margin 3m Libor + 0,7% margin 3m Libor + 0,7% margin 1 7 0 K U M B A A N N U A L R E P O RT 2 0 0 5 (12,60) (8,30) (8,20) (8,20) (5,40) (5,40) 30. 30.3 FINANCIAL INSTRUMENTS (continued) Interest rate risk management (continued) Borrowings hedged Rm Floating interest payable % Floating interest receivable % Fixed interest payable % Fixed interest receivable % Recognised fair value gain/(loss) Rm At 31 Dec 2004 Local Interest rate derivatives up to 1 year: – Interest rate swaps Interest rate derivatives beyond 1 year: – Interest rate swaps Foreign Interest rate derivatives beyond 1 year: – Cross currency swaps 3m Jibar + 1% margin 200 100 100 113 3m Jibar + 1% margin 3m Jibar + 1% margin 3m Jibar + 3,06% margin 113 125 3m Jibar + 3,06% margin 3m Jibar + 1,625% margin $30m $20m $15m $15m $10m $10m 3m Jibar + 0,95% margin 3m Jibar + 0,91% margin 3m Jibar + 0,90% margin 3m Jibar + 0,90% margin 3m Jibar + 0,88% margin 3m Jibar + 0,89% margin 3m Libor + 0,7% margin 3m Libor + 0,7% margin 3m Libor + 0,7% margin 3m Libor + 0,7% margin 3m Libor + 0,7% margin 3m Libor + 0,7% margin 13,00 12,41 10,00 10,00 12,10 10,43 9,20 (1,80) (1,90) (1,80) 4,20 (2,00) (32,80) (21,80) (18,30) (18,30) (12,10) (12,10) 1 7 1 K U M B A A N N U A L R E P O RT 2 0 0 5 N O T E S T O T H E A N N U A L F I N A N C I A L S T A T E M E N T S c o n t i n u e d f o r t h e 1 2 - m o n t h s e n d e d 3 1 D e c e m b e r 2 0 0 5 FINANCIAL INSTRUMENTS (continued) 30. 30.4 Maturity profile of financial instruments The maturity profiles of financial assets and liabilities at 31 December 2005 and 31 December 2004 are summarised as follows: (The derivative instruments reflect the contract amounts) 0 – 12 months Rm 1 – 2 years Rm 3 – 5 years Rm > 5 years Rm Total Rm 392 1 483 2 066 2 874 1 388 (321) 100 286 1 297 1 365 3 167 1 061 32 65 295 932 975 56 (900) 280 (910) 283 239 (74) 39 61 186 556 1 099 676 (517) (1 038) (490) (1 280) 40 81 38 100 681 681 681 329 129 700 255 23 147 At 31 December 2005 Assets Financial assets Cash and cash equivalents Trade and other receivables Liabilities Interest-bearing borrowings Trade and other payables Percentage profile (%) At 31 December 2004 Assets Financial assets Cash and cash equivalents Trade and other receivables Liabilities Interest-bearing borrowings Trade and other payables Percentage profile (%) Derivative instruments at 31 December 2005 (included in the above) Recognised transactions – Buy – Sell Forecast transactions – Buy Derivative instruments at 31 December 2004 (included in the above) Recognised transactions – Buy – Sell Forecast transactions – Buy – Sell 1 483 2 066 911 1 388 1 250 (389) 1 297 1 365 836 1 061 765 (59) 329 129 19 255 23 147 1 7 2 K U M B A A N N U A L R E P O RT 2 0 0 5 30. 30.5 FINANCIAL INSTRUMENTS (continued) Fair value of financial instruments At 31 December 2005 the carrying amounts of cash and cash equivalents, trade and other receivables and trade and other payables approximate their fair values due to the short-term maturities of these assets and liabilities. Assets Financial assets Cash and cash equivalents Trade and other receivables Liabilities Non-current interest-bearing borrowings Current interest-bearing borrowings Trade and other payables Carrying value Fair value 2005 Rm 392 1 483 2 066 1 963 911 1 388 2004 Rm 286 1 297 1 365 2 331 836 1 061 2005 Rm 392 1 483 2 066 1 880 1 027 1 388 2004 Rm 286 1 297 1 365 2 158 987 1 061 Liabilities The fair value of long and medium-term borrowings is calculated using quoted prices, or where such prices are not available, discounted cash flow analyses using the applicable yield curve for the duration of the borrowing. Derivative instruments Comprise forward exchange contracts, currency options, interest rate collars and swaps as well as zinc forward contracts. The fair value of derivative instruments, included in hedging assets and liabilities are calculated using quoted prices. Where such prices are not available, use is made of discounted cash flow analyses using the applicable yield curve for the duration of the instruments. At 31 December 2005, the negative R52 million (2004: R41 million) fair value of instruments is made up of: – Favourable contracts – Unfavourable contracts 31 Dec 2005 Rm 31 Dec 2004 Rm 11 63 84 125 When an anticipated future transaction has been hedged and the underlying position has not been recognised in the financial statements, any change in fair value of the hedging instrument is recognised directly in equity. 1 7 3 K U M B A A N N U A L R E P O RT 2 0 0 5 N O T E S T O T H E A N N U A L F I N A N C I A L S T A T E M E N T S c o n t i n u e d f o r t h e 1 2 - m o n t h s e n d e d 3 1 D e c e m b e r 2 0 0 5 30. 30.6 FINANCIAL INSTRUMENTS (continued) Credit risk management Credit risk relates to potential exposure on cash and cash equivalents, investments, trade receivables and hedged positions. The group limits its counterparty exposure arising from money market and derivative instruments by only dealing with well-established financial institutions of high credit standing. The group exposure and the credit ratings of its counterparties are continuously monitored and the aggregate value of transactions concluded are spread amongst approved counterparties. Credit exposure is controlled by counterparty limits that are reviewed and approved by the board annually. Trade debtors consist of a number of customers, with whom Kumba has long-standing relationships. A high portion of term supply arrangements exist with such clients resulting in limited credit exposure which exposure, where dictated by customer credit worthiness or country risk assessment, is further mitigated through a combination of confirmed letters of credit and credit risk insurance. Detail of the credit risk exposure above 5% By industry Manufacturing (including structural metal) Public utilities Other By geographical area South Africa Asia Europe Australia USA Other 2005 % 2004 % 95 5 100 28 32 21 17 2 91 7 2 100 30 22 20 1 23 4 100 100 30.7 Liquidity risk management The group manages liquidity risk by monitoring forecast cash flows and ensuring that adequate unutilised borrowing facilities are maintained. Borrowing capacity is determined by the directors in terms of the articles of association, from time to time: Amount approved Total borrowings Unutilised borrowing capacity 2005 Rm 2004 Rm 7 377 2 874 4 503 5 289 3 167 2 122 In line with the reduction in debt and the strengthening of the group’s capital base, the borrowing powers of the company and the group were set at 100% of shareholders’ funds for the 2005 financial period (2004: 100%). 1 7 4 K U M B A A N N U A L R E P O RT 2 0 0 5 31. RELATED PARTY TRANSACTIONS 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 than those arranged with third parties. Associates and joint ventures Details of investments in associates and joint ventures are disclosed in note 17 and annexure 2 whilst income is disclosed in note 17. Interest income from joint ventures of R3 million (2004: R6 million) is included in net financing costs (note 6). The group purchased goods and services to the value of R9 million (2004: R133 million) from, and sold goods to the value of Rnil (2004: Rnil) to associates and joint ventures. The outstanding balances at year end are as follows: – Included in trade and other receivables (note 21) R4 million (2004: R20 million) – Included in trade and other payables (note 28) Rnil (2004: R6 million) – Included in cash and cash equivalents R64 million (2004: R39 million) – Included in the carrying value of associates and joint ventures (note 17) are long-term loans of R2 million (2004: R1 million) – Included in long-term debtors Rnil (2004: Rnil) (note 19) – Included in financial assets Rnil (2004: R21 million) (note 19) Subsidiaries Details of income from, and investments in subsidiaries are disclosed in notes 7 and 18 respectively, and annexure 3. Corporate service fee from subsidiaries The following corporate service fees were received by Kumba Resources Limited for essential services rendered: Sishen Iron Ore Company (Pty) Limited Kumba Coal (Pty) Limited Kumba Base Metals Limited 12-months ended 31 Dec 2005 Rm Restated 18-months ended 30 June 2004 Rm 170 55 19 244 236 115 351 Completion guarantees Kumba Resources Limited provides completion guarantees on behalf of Ticor South Africa (Pty) Limited and Ticor South Africa KZN (Pty) Limited to an amount of R869 million. On consolidation the guarantees are eliminated as the liabilities of Ticor South Africa (Pty) Limited and Ticor South Africa KZN (Pty) Limited are consolidated onto the group balance sheet. Special purpose entities The group has an interest in the following special purpose entities which are consolidated unless otherwise indicated: Entity Ferrosure (Isle of Man) Insurance Company Limited1 Ferrosure (South Africa) Insurance Company Limited Kumba Environmental Rehabilitation Fund Merrill Lynch Isle of Man PCC Limited Minco Leasing Limited Oreco Leasing Limited Vulcan Leasing Limited Kumba Resources Management Share Trust 1. Novated to Merrill Lynch Isle of Man PCC Limited on 1 July 2005. Nature of business Offshore insurance captive Insurance captive Trust fund for mine closure Offshore insurance captive Financing company Financing company Financing company Management share incentive trust 1 7 5 K U M B A A N N U A L R E P O RT 2 0 0 5 N O T E S T O T H E A N N U A L F I N A N C I A L S T A T E M E N T S c o n t i n u e d f o r t h e 1 2 - m o n t h s e n d e d 3 1 D e c e m b e r 2 0 0 5 31. RELATED PARTY TRANSACTIONS (continued) Directors Details relating to directors’ emoluments and shareholdings (including options) in the company are disclosed in the report of the directors. Senior employees Details relating to option and share transactions are disclosed in note 33. Key management personnel For Kumba Resources Limited other than the executive and non-executive directors, no other key management personnel were identified. Refer to p125 for details on directors’ remuneration. For the group, the directors of the major subsidiaries have been identified as being key management personnel. The major subsidiaries are considered to be the following: Sishen Iron Ore Company (Pty) Limited Kumba Coal (Pty) Limited Ticor South Africa (Pty) Limited Ticor South Africa KZN (Pty) Limited Ticor Pty Limited Kumba Base Metals Limited Kumba International BV Short-term employee benefits Post-employment pension/provident and medical benefits Termination benefits Share-based payments – related expense Total compensation paid to key management personnel 12-months ended 31 Dec 2005 Rm 18-months ended 30 June 2004 Rm 36 1 5 42 50 5 4 59 Anglo group Kumba’s majority shareholder and parent is Anglo American Capital Limited, with the ultimate controlling party being Anglo American plc. The Kumba Resources group purchased goods and services to the value of R190 million (2004: R170 million) from, and sold goods to the value of R152 million (2004: R157 million) to fellow subsidiaries of the Anglo group. The outstanding balances at year-end are as follows: – Included in trade and other receivables (note 21) R14 million (2004: R39 million). – Included in trade and other payables (note 28) R29 million (2004: Rnil). – Doubtful debts of R4 million (2004: R2 million) have been provided for. – Expense recognised for bad or doubtful debts of R1 million (2004: Rnil). Shareholders The principal shareholders of the company are detailed in the “Shareholders’ Analysis” schedule on p70 of the annual report. Contingent liabilities Details are disclosed in note 34. 1 7 6 K U M B A A N N U A L R E P O RT 2 0 0 5 32. SEGMENT REPORTING Iron ore Coal Heavy minerals Base metals Industrial minerals Other Total Re- stated 2004 Rm 2005 Rm Re- stated 2004 Rm 2005 Rm Re- stated 2004 Rm 2005 Rm Re- stated 2004 Rm 2005 Rm Re- stated 2004 Rm 2005 Rm Re- stated 2004 Rm 2005 Rm Re- stated 2004 Rm 2005 Rm Business segmentation Segment revenue – Total turnover – Inter-group 6 638 6 065 2 203 2 733 1 927 2 438 1 070 1 212 137 (30) 177 (39) External 6 638 6 065 2 203 2 733 1 927 2 438 1 070 1 212 107 138 30 (13) 17 32 12 005 12 657 (18) (43) (57) 14 11 962 12 600 Segment net operating profit/(loss) 2 767 1 134 554 544 227 203 69 (153) 26 27 1 244 90 4 887 1 845 Depreciation and amortisation of intangible assets Cash flow related depreciation Impairment charge and reversals Negative goodwill amortisation Excess over cost of acquisition of minority interest Net surplus on disposal of investments Other non-cash flow items 364 386 166 224 304 279 50 68 6 9 8 11 898 977 (65) (28) (16) (16) (81) (44) 1 (1) 22 89 (2) 35 7 (88) 28 35 (6) 1 (6) (95) (95) (1 179) (73) (1 179) (72) not disclosed above 33 9 14 (4) (36) (1) 7 39 2 2 11 73 31 118 Cash generated by operations 3 099 1 501 Cash inflow from operations 2 594 1 545 719 752 747 682 517 375 565 397 124 (11) (11) 23 34 34 38 38 (4) 13 4 489 2 853 120 (24) 3 864 2 661 Income/(loss) from equity accounted investments Capital expenditure – cash flow – non-cash flow Segment assets and liabilities – Assets per balance sheet – Investments in associates and joint ventures – Liabilities per balance sheet Number of employees 12 9 (5) (51) 7 (42) 404 77 481 270 198 468 347 30 377 216 56 272 190 801 71 190 801 71 83 4 87 7 7 7 7 25 19 1 044 1 396 107 258 25 19 1 151 1 654 5 835 4 536 1 602 1 684 2 562 4 303 195 87 93 97 4 400 2 372 14 687 13 079 1 1 93 72 13 95 85 2 287 1 603 1 088 850 1 975 2 042 370 308 29 31 1 647 1 844 7 396 6 678 (number) 4 308 4 199 2 589 2 716 968 794 1 300 1 092 147 169 785 721 10 097 9 691 1 7 7 K U M B A A N N U A L R E P O RT 2 0 0 5 N O T E S T O T H E A N N U A L F I N A N C I A L S T A T E M E N T S c o n t i n u e d f o r t h e 1 2 - m o n t h s e n d e d 3 1 D e c e m b e r 2 0 0 5 Carrying Carrying amount of amount of segment assets segment assets Additions Additions to property, to property, plant and equipment equipment (non-cash (non-cash flow) flow) Additions Additions plant and to property, to property, plant and plant and equipment equipment (cash flow) (cash flow) 2005 Rm Restated 2004 Rm 2005 Rm Restated 2004 Rm 2005 Rm Restated 2004 Rm Segment revenue 2005 Rm Segment revenue Restated 2004 Rm 32. SEGMENT REPORTING (continued) Geographical segmentation – South Africa – Africa – Europe – Asia – Australia – Other Total segment 4 074 4 2 269 4 207 14 1 394 5 055 35 6 072 3 774 1 158 (3 494) (2 199) 10 777 4 370 387 1 455 (8) 9 925 107 1 253 959 1 306 (386) 30 77 254 4 672 305 67 1 260 38 93 5 11 962 12 600 14 782 13 164 107 258 1 044 1 396 Total segment revenue, which excludes value-added tax and sales between group companies, represents the gross value of goods invoiced. Export revenue are recorded according to the relevant sales terms, when the risks and rewards of ownership are transferred. Total segment revenue further includes operating revenues directly and reasonably allocable to the segments. Segment revenue includes sales made between segments. These sales are made on a commercial basis. Segment net operating profit equals segment revenue less segment expenses and includes impairment charges and goodwill amortisation. Segment expenses represent direct or reasonably allocable operating expenses on a segment basis. Segment expenses exclude interest, losses on investments and income tax expenses, but include corporate costs. Segment assets and liabilities include directly and reasonably allocable operating assets, investments in associates and joint ventures and liabilities. 1 7 8 K U M B A A N N U A L R E P O RT 2 0 0 5 33. EMPLOYEE BENEFITS Retirement funds Independent funds provide retirement and other benefits for all permanent employees, retired employees, and their dependants. At the end of the financial year, the main funds to which Kumba was a participating employer, are as follows: – Kumba Selector Pension Fund and Kumba Selector Provident Fund, both operating as defined contribution funds. – Iscor Employees’ Provident Fund, operating as a defined contribution fund. – Iscor Pension Fund, operating as a defined benefit fund. This fund is closed to new entrants. – Iscor Retirement Fund, operating as a defined benefit fund. This fund is closed to new entrants. In compliance with the Pension Fund Act after the unbundling from Ispat Iscor Limited in 2001, Kumba employees were transferred from the Iscor Selector Pension Fund and Iscor Selector Provident Fund to the Kumba Selector Pension Fund and Kumba Selector Provident Fund during the period under review. Members pay a contribution of 7%, with the employer’s contribution of 10% to the above funds, being expensed as incurred. All funds are governed by the South African Pension Funds Act of 1956. Defined contribution funds Membership of each fund at 31 December 2005 and 31 December 2004 and employer contributions to each fund were as follows: Kumba Selector Funds Iscor Employees’ Provident Fund Other funds * 18-month period. Working members 2005 Number Working members 2004 Number Employer contri- butions 2005 Rm Employer contri- butions 2004* Rm 3 230 5 574 878 9 682 3 407 5 097 821 9 325 58 35 23 116 87 42 28 157 Due to the nature of these funds the accrued liabilities by definition equates to the total assets under control of these funds. Defined benefit funds Statutory actuarial valuations are performed at intervals of not more than three years. The valuations are performed at the financial year end of the funds in question which is 31 December. At the last statutory valuation of the funds (Iscor Pension Fund at 31 December 2004 and the Iscor Retirement Fund at 31 December 2002) the actuaries were of the opinion that the funds were adequately funded. The statutory valuation of the Iscor Retirement Fund at 31 December 2003 remains subject to the finalisation of the legislation relating to the surplus apportionment. 1 7 9 K U M B A A N N U A L R E P O RT 2 0 0 5 N O T E S T O T H E A N N U A L F I N A N C I A L S T A T E M E N T S c o n t i n u e d f o r t h e 1 2 - m o n t h s e n d e d 3 1 D e c e m b e r 2 0 0 5 33. EMPLOYEE BENEFITS (continued) Funded status The funded status of the two defined retirement benefit funds (Iscor Pension Fund at 31 December 2004 and Iscor Retirement Fund at 31 December 2002) for members and pensioners of Mittal Steel SA, and pensioners of Kumba, was as follows: Iscor Iscor Pension Retirement Fund 2002 Rm Fund 2004 Rm Fair value of plan assets Present value of funded obligation Net asset Surplus not recognised Unrecognised actuarial losses Net liability as per balance sheet 6 213 (6 213) 321 (281) 40 (40) The pension plan assets consist primarily of equity (local and offshore), interest-bearing stock and property. The actual return on the assets in the Iscor Pension Fund at 31 December 2004 amounted to R1 339 million (2003: R523 million) and in the Iscor Retirement Fund to R47 million (2003: R32 million). Principal actuarial assumptions (expressed as weighted averages) at 31 December 2004 were as follows: Pre-retirement discount rate Post-retirement discount rate Expected real after tax return on fund’s assets Future general and merit salary increases Iscor Pension Fund Statutory valuation 2004 % Interim valuation 2003 % Iscor Retirement Fund Statutory valuation 2002 % Interim valuation 2001 % 10,0 5,0 3,5 8,51 10,0 5,0 2,5 7,51 10,0 4,5 N/A2 N/A2 10,0 4,5 N/A2 N/A2 Future pension increases were allowed to the extent that the investment return exceeds the post-retirement discount rate. 1. Excluding merit increases according to age. 2. Not applicable Medical funds The group and company contribute to defined benefit medical aid schemes for the benefit of permanent employees and their dependants. The contributions charged against income amounted to R62 million (2004: R84 million for the 18-month period to 31 December 2004). Kumba has no post-retirement medical aid obligation for current or retired employees. 1 8 0 K U M B A A N N U A L R E P O RT 2 0 0 5 33. EMPLOYEE BENEFITS (continued) Equity compensation benefits Kumba operates the Kumba Management Deferred Purchase Share Scheme and the Kumba Management Share Option Scheme for senior employees and executive directors of Kumba. The Kumba Management Deferred Purchase Share Scheme consists of a combination of an option scheme, a purchase scheme and a deferred purchase scheme and governs to maturity the share scheme rights and obligations of employees which were in existence at the time of transfer of the employees from Iscor to Kumba on unbundling of Kumba effective July 2001. The Kumba Management Share Option Scheme consists of the granting of options in respect of ordinary Kumba shares, at market value, to eligible participants. The aggregate number of shares in the issued share capital of Kumba which may at any time be purchased by or allocated and issued to the trustees of both the Kumba Management Deferred Purchase Share Scheme, the Kumba Management Share Option Scheme, Long-term Incentive Plan and Deferred Bonus Plan may not exceed 10% in total of the ordinary shares then in issue in the share capital of Kumba. The maximum number of Kumba shares to which any one eligible participant is entitled in total in respect of all schemes albeit by way of an allotment and issue of Kumba shares and/or the grant of options shall not exceed 1% of the shares then in issue in the share capital of Kumba. Shares and/or options held in terms of Kumba Management Deferred Purchase Share Scheme are released in five equal tranches commencing on the second anniversary of an offer date and expire on the ninth anniversary of an offer date. Options granted in terms of the Kumba Management Share Option Scheme can be exercised over five years commencing on the first anniversary of the offer date. If the options are accepted by participants, the vesting periods, unless decided otherwise by the directors, are as follows: 10% after 1st anniversary of offer date – Additional 20% after 2nd anniversary of offer date – Additional 20% after 3rd anniversary of offer date – Additional 25% after 4th anniversary of offer date – Additional 25% after 5th anniversary of offer date The options not exercised lapse by the seventh anniversary of the offer date. According to the rules of the Long-term Incentive Plan (“LTIP”), executive directors and employees of Kumba Resources and its subsidiaries are awarded rights to a number of ordinary Kumba shares. The vesting of LTIP awards are conditional upon the achievement of group performance levels (established by the remuneration committee) over a performance period of three years. The extent to which the performance conditions is met governs the number of shares that vest. The performance conditions set for the initial grant were as follows: – The total shareholder return (“TSR”) condition: the Kumba TSR will be compared to the TSR of a peer group over the three year performance period, averaged over a six month period. The peer group comprises of at least 16 members. – The return on capital employed (“ROCE”) condition: the ROCE measure is a return on capital employed measure with a number of adjustments. Targets are set by the remuneration committee based on existing ROCE performance in the base year of an LTIP and planned ROCE performance in the final year of the LTIP performance period. Kumba, at its selection, settles the conditional awards by issuing new shares or by instructing any third party to acquire and deliver the shares to the participants. According to the Deferred Bonus Plan (“DBP”) rules, executive directors and employees of Kumba and its subsidiaries have the opportunity to acquire shares (“pledged shares”) on the open market with 50% of the after tax component of their annual bonus. After the pledged shares have been acquired, the shares are held by an Escrow agent for the absolute benefit of the participant for a pledge period of three years. A participant may at its election dispose of and withdraw the pledged shares from Escrow at any stage. However, if the pledged shares are withdrawn from Escrow, before the expiry of the pledge period, the participant forfeits the matching award. The participant will qualify for a matching award at the end of the pledge period on condition that the participant is still employed and the pledged shares are still in Escrow. The matching award entitles a participant to a number of shares equal in value to the pledged shares. Upon vesting, the pledged shares and the matching award are transferred and released to the participant and rank pari passu in all respects with the existing issued shares of Kumba. The company may settle the matching award by issuing new shares or alternatively, instruct any third party to acquire and deliver the shares to the participant. 1 8 1 K U M B A A N N U A L R E P O RT 2 0 0 5 N O T E S T O T H E A N N U A L F I N A N C I A L S T A T E M E N T S c o n t i n u e d f o r t h e 1 2 - m o n t h s e n d e d 3 1 D e c e m b e r 2 0 0 5 33. EMPLOYEE BENEFITS (continued) Equity compensation benefits (continued) A total of 30,6 million shares of the company, representing 10% of the issued shares, has been approved and allocated by shareholders for purposes of the schemes. Of the total of 30,6 million shares, 16,4 million shares are available in the share scheme for future offers to participants, while 14,2 million shares (5% of the issued shares) are allocated as options, long-term incentive plan, deferred bonus payment or deferred purchase shares to participants. Details are as follows: Number of shares available for utilisation in terms of the Kumba Management Share Schemes at 1 January 2005 Add: Net effect of scheme shares released, forfeitures and adjustments to scheme allocation Less: Share offers accepted Number of shares available for future utilisation, at 31 December 2005 Million 13,6 5,7 (2,9) 16,4 At 31 December 2005 the company’s loan to the Kumba Management Share Trust amounted to R50 130 578 (2004: R16 939 844). The loan is interest free and has no fixed repayment terms. This amount is reflected as an inter- company loan in the company’s accounts and eliminated at group level. The market value of the shares available for utilisation at the end of the year amounted to R1 670 565 282 (2004: R596 784 276). Details of the option/purchase schemes are: Outstanding at beginning of year Issued Exercised Lapsed/cancelled Outstanding at end of period Outstanding at beginning of period Issued Conversion to deferred purchase scheme Exercised Lapsed/cancelled Outstanding at end of period Options Dec 2005 Million 16,3 2,6 (4,7) (0,3) 13,9 Dec 2004 Million 18,6 3,9 (5,3) (0,9) 16,3 Long-term incentive plan1 Dec 2005 Million Dec 2004 Million 0,2 0,2 Deferred bonus plan Deferred purchase Dec 2005 Million Dec 2004 Million Dec 2005 Million 0,3 Dec 2004 Million 1,9 (0,2) (1,6) 0,1 0,3 1. There is no amount payable by participants on vesting. They will be awarded rights to ordinary shares in the company. 1 8 2 K U M B A A N N U A L R E P O RT 2 0 0 5 33. EMPLOYEE BENEFITS (continued) Equity compensation benefits (continued) Details of issues during the period are as follows: Expiry date Exercise price (Share price range) (R) Total proceeds if options are immediately exercised/deferred purchase shares immediately paid (R million) Options Long-term incentive plan Dec 2005 Dec 2004 Dec 2005 Dec 2004 2010/2012 39,25 – 98,50 2009/2011 24,50 – 42,40 2010/2012 62,74 179 158 14 Deferred bonus plan Deferred purchase Dec 2005 Dec 2004 Dec 2005 Dec 2004 Expiry date Exercise price (Share price range) (R) Total proceeds if options are immediately exercised/deferred purchase shares immediately paid (R million) 2010/2012 82,00 – 97,40 0,04 Details of options/deferred purchase shares exercised during the period are as follows: Options Long-term incentive plan Dec 2005 Dec 2004 Dec 2005 Dec 2004 Exercise price per share (Share price range) (R) Total proceeds if shares are issued (R million) 67,00 – 110,00 31,88 – 44,75 363 204 Exercise price per share (Share price range) (R) Total proceeds if shares are issued (R million) Deferred bonus plan Deferred purchase Dec 2005 Dec 2004 Dec 2005 Dec 2004 67,00 – 110,00 31,88 – 44,75 10 61 1 8 3 K U M B A A N N U A L R E P O RT 2 0 0 5 N O T E S T O T H E A N N U A L F I N A N C I A L S T A T E M E N T S c o n t i n u e d f o r t h e 1 2 - m o n t h s e n d e d 3 1 D e c e m b e r 2 0 0 5 33. EMPLOYEE BENEFITS (continued) Equity compensation benefits (continued) Terms of the options and deferred purchase shares outstanding at 31 December 2005 are as follows: Expiry date 2006 2007 2008 2009 2010 2011 2012 Total Expiry date 2006 2007 2008 2009 2010 2011 2012 Total Options Long-term incentive plan Exercise price R Outstanding ’000 Exercise price R Outstanding ’000 11,75 – 13,10 17,07 – 28,05 11,71 – 51,50 13,66 – 37,51 36,75 – 47,25 44,00 – 98,50 38 5 339 2 282 725 3 036 2 503 13 923 216 Deferred bonus plan Deferred purchase Exercise price R Outstanding ’000 Exercise price R Outstanding ’000 8,89 – 13,10 8,42 – 18,90 8,06 – 20,80 19,93 – 23,26 0,469 27 11 39 20 97 Terms of the options and deferred purchase shares outstanding at 31 December 2004 are as follows: Expiry date 2006 2007 2008 2009 2010 2011 Total Options Deferred purchase Exercise price R Outstanding ’000 Exercise price R Outstanding ’000 11,75 – 13,10 17,07 – 28,05 11,71 – 51,50 13,66 – 37,51 36,75 – 43,00 8,89 – 13,10 8,42 – 18,90 8,06 – 20,80 19,93 – 23,26 71 8 479 3 491 1 010 3 317 16 368 97 25 78 54 254 Options Deferred purchase Dec 2005 Dec 2004 Dec 2005 Dec 2004 Details of options vested but not sold during the year are as follows: Number of shares Exercise price (Share price range) (R) 4 049 950 11,75 – 62,00 30 810 9,17 – 23,26 1 8 4 K U M B A A N N U A L R E P O RT 2 0 0 5 33. EMPLOYEE BENEFITS (continued) Equity compensation benefits (continued) Number of shares vesting at beginning of the period Net change during the period Number of shares vesting at end of the period Directors’ interests in shares For details refer to the report of the directors Long-term incentive plan ’000 Deferred bonus plan ’000 216 216 0,469 0,469 Options ’000 16 368 (2 445) 13 923 Deferred purchase ’000 Total ’000 254 (157) 16 622 (2 386) 97 14 236 Fair value of equity-settled share-based payment transactions with employees The group applies IFRS 2 to grants of shares, share options or other equity instruments that were granted. In determining the fair value of services received as consideration for equity instruments, measurement is reference to the fair value of the equity instruments granted. The group applied the transitional provisions of IFRS 2 and applied the principles to grants that were granted after 7 November 2002. Kumba listed on 26 November 2001 and the volatility of its share price since then has been used to determine the calculations. The Black-Scholes methodology is used to calculate the fair value of options granted to employees. The inputs to the model are as follows: Weighted average share price Exercise price range (R) Annualised expected volatility (%) Option life (years) Dividend yield (%) Risk-free interest rate (%) Expected employee attrition The Monte Carlo valuation methodology is used to calculate the fair value of Long-term Incentive Plan and Deferred Bonus Plan grants to employees. The inputs to the Long-term Incentive Plan model are as follows: Date of grant Grant price Risk free rate (%) Dividend yield (%) Expected volatility (%) Time to vesting Expected employee attrition The inputs to the Deferred Bonus Plan model are as follows: Date of grant Grant price range Risk free rate (%) Dividend yield (%) Expected volatility (%) Time to vesting Expected employee attrition 1 8 5 K U M B A A N N U A L R E P O RT 2 0 0 5 12-months ended 31 Dec 2005 18-months ended 31 Dec 2004 63,12 39,25 – 98,50 37,40 – 37,50 7 – 13 2,8 – 4,6 7,73 – 9,61 4,60 – 5,50 39,73 24,50 – 42,40 37,50 7 2,8 8,65 – 10,36 4,60 24 June 2005 55,00 7,13 2,76 37,32 3 years from date of grant 4,60 per annum 1 September 2005 – 3 October 2005 82,67 – 97,50 7,13 2,76 37,32 3 years from date of grant 4,60 per annum N O T E S T O T H E A N N U A L F I N A N C I A L S T A T E M E N T S c o n t i n u e d f o r t h e 1 2 - m o n t h s e n d e d 3 1 D e c e m b e r 2 0 0 5 34. CONTINGENT LIABILITIES Contingent liabilities at balance sheet date, not otherwise provided for in these annual financial statements, arising from: – Guarantees in the normal course of business from which it is anticipated that no material liabilities will arise: – related parties – other – Other1 1. Includes the group’s share of contingent liabilities of associates and joint ventures of Rnil (2004: Rnil). Included in the company’s guarantees are guarantees relating to the Ticor SA project loans as provided by the company. On consolidation the project loans are included in net debt, and the contingent liability of the company eliminated. These contingent liabilities have no tax impact. The timing and occurrence of any possible outflows are uncertain. 35. COMMITMENTS Capital commitments Capital expenditure contracted for plant and equipment Capital expenditure authorised for plant and equipment but not contracted GROUP COMPANY At 31 Dec 2005 Rm At 31 Dec 2004 Rm At 31 Dec 2005 Rm At 31 Dec 2004 Rm 33 49 2 34 869 2 610 2 1 635 2 182 219 668 34 27 40 14 The above includes the group’s share of capital commitments of associates and joint ventures. Capital expenditure will be financed from available cash resources, funds generated from operations and available borrowing capacity. Capital expenditure contracted relating to captive mines (Thabazimbi and Tshikondeni), which will be financed by Mittal Steel (South Africa). A trust known as The New Africa Mining Fund was established during 2003 to make portfolio investments in junior mining projects within the Republic of South Africa and elsewhere on the continent of Africa. Kumba Resources, as an investor participant to the fund, has committed to contribute R20 million towards the fund. The Fund Manager can draw down this balance or any portion as and when required, by serving a 10-day notice to Kumba. The commitment period commenced on 1 March 2003 and expires on 28 February 2009. Kumba has contributed R9,9 million towards the fund since March 2003. Operating lease commitments The future minimum lease payments under non-cancellable operating leases are as follows: – Less than 1 year – More than 1 year and less than 5 years – More than 5 years Total Included in above operating lease commitments is an operating lease commitment relating to a building which terminates in 2008. Various options are available to both the lessor and lessee on mutual agreement on termination of the operating lease. Operating sublease Non-cancellable operating lease rentals are receivable as follows: – Less than 1 year – More than 1 year and less than 5 years – More than 5 years Total 2 6 46 105 12 163 1 1 1 8 6 K U M B A A N N U A L R E P O RT 2 0 0 5 27 39 120 8 167 7 21 28 31 69 100 32 93 125 7 21 28 A N N E X U R E 1 : N O N - C U R R E N T I N T E R E S T- B E A R I N G B O R R O W I N G S Final repayment date Rate of interest per year (payable half-yearly) Rate of interest per year (payable half-yearly) GROUP COMPANY 2005 2004 Fixed % Floating % Fixed % Floating % 2005 Rm Restated 2004 Rm Restated 2004 Rm 2005 Rm 2005 2006 2008 2008 2005 2008 2010 2013 13,210 8,850 7,060 9,180 7,600 12,410 12,410 13,830 14,200 7,850 14,939 13,830 14,200 7,850 1 2 3 4 2007 2008 2011 7,850 6,640 5,240 7,320 6,920 3,2405 6 7 42 250 256 548 185 685 9 879 632 1 589 200 125 250 340 915 13 244 774 9 1 040 565 595 42 250 256 548 200 125 250 340 915 632 565 1 222 1 160 632 565 2 649 3 115 1 180 1 480 LOCAL Unsecured loans Secured loans FOREIGN Unsecured loans (US$) Total non-current interest-bearing borrowings (note 24) 1. Capitalised lease agreement secured by machinery, plant and equipment with a book value of R1 million (2004: R49 million). 2. Dedicated project finance facility, for Ticor South Africa KZN (Pty) Limited secured by notarial bond over property, plant and equipment with a book value of R955 million (2004: R945 million). 3. Dedicated project finance facility for Ticor South Africa (Pty) Limited secured by notarial bond over property, plant and equipment with a book value of R1 949 million (2004: R2 019 million). 4. Dedicated Mineral Development Fund finance facility for Rosh Pinah Zinc Corporation (Pty) Limited secured by notarial bond over property, plant and equipment with a book value of R20 million (2004: R24 million). 5. US$150 million revolving credit facility of which US$100 million has been drawn at 31 December 2005. 6. Finance lease agreement in respect of computer equipment with a book value of A$0,298 million. 7. US$60 million senior notes issued by Ticor Finance (A.C.T.) Pty Limited, an entity controlled by Ticor Limited, and a syndicated loan facility of US$60 million, of which US$33 million was drawn on 31 December 2005. 1 8 7 K U M B A A N N U A L R E P O RT 2 0 0 5 A N N E X U R E 2 : I N V E S T M E N T S I N A S S O C I A T E S , J O I N T V E N T U R E S A N D O T H E R I N V E S T M E N T S f o r t h e 1 2 - m o n t h s e n d e d 3 1 D e c e m b e r 2 0 0 5 Nature of business1 Country of incor- poration2 Number of shares held Percentage holding Group carrying amount Company carrying amount Year end other than 31 December 2005 % 2004 % 2005 Rm Restated 2004 Rm Restated 2004 Rm 2005 Rm ASSOCIATED COMPANIES Listed AST Group Limited Unlisted Manganore Iron Mining Limited Chifeng Kumba Hongye Zinc Corporation Limited C A A & M Total associated companies (note 17) JOINT VENTURES Incorporated Unlisted Pietersburg Iron Company (Pty) Limited Safore (Pty) Limited Sishen Shipping (Pty) Limited Trans Orient Ore Supplies (Pty) Limited RoshSkor Township (Pty) Limited Inyanda Coal (Pty) Limited South Dunes Coal Terminal Co. (Pty) Limited Sibelo Resources Development (Pty) Limited Unincorporated Bridgetown dolomite mine Tiwest Total joint ventures (note 17) INVESTMENT COMPANIES Mineral Deposits Limited Other Total other investments (note 19) Total investment RSA 44 400 000 22,34 RSA CH RSA RSA RSA HK NAM RSA RSA RSA 25 000 50,00 50,00 30,62 28,30 4 000 400 400 50,00 40,00 40,00 50,00 40,00 40,00 2 000 50,00 50,00 50 500 50,00 50,00 50,00 50,00 1 333 33,00 28,30 1 50,00 50,00 50,00 50,00 50,00 50,00 A B B D C A A E A A A AUS 11 299 435 5,85 10,30 The investments are valued at balance sheet date. Listed shares are valued at market value and unlisted shares at directors’ value. Listed investments in associates – market value Unlisted investments in associates – directors’ valuation Listed other investments – market value Unlisted other investments – directors’ valuation 6 72 78 7 7 20 33 53 138 93 93 1 1 2 2 60 35 95 190 24 30 June 30 June 24 7 7 26 26 57 24 28 28 28 130 125 60 35 20 33 28 February Where the above entities’ financial year-ends are not co-terminous with that of the company, financial information has been obtained from published information or management accounts as appropriate. 1. A – Mining, B – Shipping charter, C – Service, D – Iron ore merchant, E – Exploration, M – Manufacturing 2. RSA – Republic of South Africa, CH – China, HK – Hong Kong, NAM – Namibia, AUS – Australia 1 8 8 K U M B A A N N U A L R E P O RT 2 0 0 5 The group’s effective share of balance sheet, income statement and cash flow items in respect of associated companies and joint ventures are as follows: Associated companies1 Joint ventures INCOME STATEMENTS Revenue Operating expenses Net operating profit/(loss) Net financing costs Profit/(loss) before taxation Taxation Profit/(loss) after taxation Outside shareholders’ interest Net profit/(loss) attributable to ordinary shareholders BALANCE SHEETS Non-current assets Current assets Total assets EQUITY AND LIABILITIES Ordinary shareholders equity Minority interest Non-current liabilities Interest-bearing borrowings Non-current provisions Deferred taxation and other Current liabilities Interest-bearing borrowings Other Total equity and liabilities CASH FLOW STATEMENTS Net cash flows from operating activities Net cash flows from investing activities Net cash flows from financing activities Foreign currency translations Net (decrease)/increase in cash and cash equivalents 2005 Rm 400 (389) 11 (1) 10 (2) 8 (1) 7 90 133 223 100 2 12 2 20 87 Restated 2004 Rm 2005 Rm Restated 2004 Rm 673 (688) 1 089 (768) 1 531 (1 171) (15) (14) (29) (10) (39) (3) (42) 126 124 250 87 3 34 13 17 96 321 1 322 (1) 321 321 360 360 2 362 362 1 191 943 2 134 1 176 760 1 936 1 827 1 697 1 105 2 1 198 2 102 135 223 250 2 134 1 936 (5) (2) 1 (6) (10) (79) 83 (1) (7) 306 (61) (138) 3 110 360 (45) (265) 50 1. GijimaAST was equity accounted until 3 May 2005. For 2005 only the four months from January 2005 to 3 May 2005 were included. The information was restated for 2004 after the reclassification of investments as associates or joint ventures (note 2). 1 8 9 K U M B A A N N U A L R E P O RT 2 0 0 5 A N N E X U R E 3 : I N V E S T M E N T S I N S U B S I D I A R I E S 1 f o r t h e 1 2 - m o n t h s e n d e d 3 1 D e c e m b e r 2 0 0 5 Country of Nature of incorporation2 business3 Interest of company Investment in shares Indebtedness DIRECT INVESTMENTS AlloyStream (Pty) Limited4 Clipeus Investment Holdings (Pty) Limited Colonna Properties (Pty) Limited Cullinan Refractories Limited Ferroland Grondtrust (Pty) Limited Ferrosure (South Africa) Insurance Company Limited Glen Douglas Dolomite (Pty) Limited Kumba Base Metals Limited Kumba Base Metals Namibia (Pty) Limited Kumba Coal (Pty) Limited Kumba FerroAlloys (Pty) Limited5 Kumba Holdings (BVI) SA6 Kumba Properties (Groenkloof) (Pty) Limited Kumba Properties (Kloofzicht) (Pty) Limited Kumba Properties (Princess Grant) (Pty) Limited Kumba Resources Management Share Trust Merrill Lynch Insurance PCC Limited Mineral Exploration Company of Southern Africa (Pty) Limited Rocsi Holdings (BVI) Limited Sishen Iron Ore Company (Pty) Limited Ticor (Bermuda) Holdings Limited6 Ticor South Africa (Pty) Limited Ticor South Africa KZN (Pty) Limited Vicva 177 (Pty) Limited RSA RSA RSA NAM RSA RSA BVI & RSA RSA RSA RSA RSA RSA RSA RSA RSA RSA ILE RSA BVI & RSA RSA BER RSA RSA RSA INDIRECT INVESTMENTS Coastal Coal (Pty) Limited Downs Holding BV Groler Investments Limited Handlon BV Ipcor N.V. Kumba Base Metals International BV Kumba Australia Pty Limited Kumba Coke (Pty) Limited7 Kumba Base Metals China Limited Kumba Finance Ireland Kumba Heavy Minerals BV Kumba Holdings (Australia) Pty Limited Kumba Hong Kong Limited Kumba International BV Kumba International Trading BV Kumba Investments (Australia) Pty Limited Kumba Reductants (Pty) Limited8 Mtunzini Sands (Pty) Limited RSA NE SWL NE NV NE AUS RSA HK IRL NE AUS HK NE NE AUS RSA RSA Issued capital – unlisted ordinary shares R 1 1 200 1 000 2 10 000 5 500 000 1 1 1 566 827 1 1 1 M H B A D I A M C A M H B B B T I B 200 H 647 044 943 A 100 74 836 H 510 M 200 A 1 H 5 000 A 119 209 A 258 958 H 151 511 H 37 950 C 119 209 A 11 C 1 M C 1 354 C 828 372 465 134 973 A 5 H C 832 10 806 551 C 142 487 C 5 H 1 M 200 A 1 9 0 K U M B A A N N U A L R E P O RT 2 0 0 5 2005 R 1 1 2 518 966 1 000 2 10 10 000 247 712 500 1 1 000 1 12 161 942 1 1 1 2 1 000 143 502 000 510 6 003 355 1 Restated 2004 R Restated 2004 Rm 2005 Rm 2 518 966 1 000 2 14 27 10 000 247 712 500 1 1 000 (22) 27 403 (1) (13) (48) 280 1 1 1 1 5 5 (50) (17) 184 141 8 1 082 661 1 158 807 648 (83) (95) 1 1 23 28 200 200 1 101 078 300 1 352 808 130 1 000 510 6 003 355 Country of Nature of incorporation2 business3 Issued capital – unlisted ordinary shares Interest of company Investment in shares Indebtedness R 2005 R Restated 2004 R Restated 2004 Rm 2005 Rm INDIRECT INVESTMENTS (continued) Rosh Pinah Zinc Corporation (Pty) Limited (89,47%) Sishen South Mining (Pty) Limited Ticor Pty Limited Ticor Chemical Company Pty Limited Crisa Pty Limited Bertini Pty Limited Ticor Chemicals Ghana Pty Limited Omacor Sac Ticor Resources Pty Limited Magnetic Minerals Pty Limited TiO2 Corporation NL Tific Pty Limited Yalgoo Minerals Pty Limited Pigment Holdings Pty Limited Synthetic Rutile Holdings Pty Limited Senbar Holdings Pty Limited Ticor (Overseas) Holdings Pty Limited Ticor SA Holdings (Pty) Limited Ticor Titanium Australia Pty Limited Rocit Investments (Pty) Limited Ticor (Bermuda) Minerals Limited Ticor Finance (A.C.T.) Pty Limited Ticor Energy Pty Limited The Durban Navigation Collieries (Pty) Limited The Vryheid (Natal) Railway Coal and Iron Company Limited NAM RSA AUS AUS AUS AUS GHANA PERU AUS AUS AUS AUS AUS AUS AUS AUS AUS RSA AUS RSA BER AUS AUS RSA RSA 2 280 A A 1 A 2 038 299 354 10 M 10 C 10 C 10 C 10 C 8 111 062 H 31 740 964 A 85 101 240 A 10 H 48 216 010 H 10 C 10 C 10 C 10 H 40 000 H 10 H 1 000 H 74 836 H 10 F 10 F A A 516 000 3 675 90 83 (147) (1) (1) 5 Total investments in subsidiaries (note 18) 1 512 990 795 1 609 056 668 2 336 2 867 1. At 100% holding except where otherwise indicated. 2. RSA – Republic of South Africa, AUS – Australia, NAM – Namibia, HK – Hong Kong, NV – Netherlands Antilles, BVI – British Virgin Islands, ILE – Isle of Man, IRL – Ireland, SWL – Switzerland, NE – Netherlands, SWL – Switzerland, BER – Bermuda 3. A – Mining, B – Property, C – Service, D – Land management, F – Finance, H – Holdings, I – Insurance, M – Manufacturing, S – Shipping, T – Trust 4. Previously Vicva 172 (Pty) Limited. 5. Previously Vicva Investments One Four One (Pty) Limited. 6. Previously held indirectly, now held directly by Kumba Resources Limited. 7. Previously Vicva Investments One Four Two (Pty) Limited. 8. Previously Vicva Investments One Six One (Pty) Limited. 1 9 1 K U M B A A N N U A L R E P O RT 2 0 0 5 N O T I C E O F A N N U A L G E N E R A L M E E T I N G Notice is hereby given that the fifth annual general meeting of members of Kumba Resources Limited will be held at the corporate office, Roger Dyason Road, Pretoria West, South Africa, at 14:00 on Wednesday, 12 April 2006, to consider, and if deemed fit, to pass the following resolutions with or without modifications: 6. 1. 2. 3. 4. ORDINARY RESOLUTION NUMBER 1 Approval of financial statements To receive and adopt the annual financial statements of the group for the period ended 31 December 2005, including the directors’ report and the report of the auditors thereon. ORDINARY RESOLUTION NUMBER 2 Reappointment of independent auditors To ratify the reappointment of Deloitte & Touche as auditors of the company for the ensuing year. 7. ORDINARY RESOLUTION NUMBER 3 Auditors’ fees To authorise the directors to determine the auditors’ remuneration for the period ended 31 December 2005. ORDINARY RESOLUTION NUMBER 4 Re-election of directors To re-elect the following directors who retire by rotation in terms of clause 16.1 of the articles of association of the company, and who are eligible for re-election: 4.1 BE Davison 4.2 SA Nkosi 4.3 CML Savage 4.4 F Titi Such re-elections are to be voted on individually unless a resolution is agreed to by the meeting (without any vote against it) that a single resolution be used. An abbreviated curriculum vitae in respect of each director offering themselves for re-election is set out on p196 of the annual report. As the retirement age for a non-executive director is 70 years of age, becoming effective at the annual general meeting after the date on which he/she turns 70, it is recorded that Mr TL de Beer will retire at the forthcoming annual general meeting. 5. ORDINARY RESOLUTION NUMBER 5 Remuneration of non-executive directors To approve the proposed remuneration for the period 1 January 2006 to 31 December 2006: Chairman: Director: Audit committee chairman: Audit committee member: Board committee chairman: Board committee member: R286 225 R143 113 R91 592 R45 796 R68 694 R34 347 ORDINARY RESOLUTION NUMBER 6 Renewal of the authority that the unissued shares be placed under the control of the directors “Resolved that subject to the provisions of the Companies Act, 61 of 1973, as amended, (the Act), and the Listings Requirements of JSE Limited (JSE), the directors are hereby authorised to allot and issue at their discretion until the next annual general meeting of the company, authorised but unissued shares for such purposes as they may determine, after setting aside so many shares as may be required to be allotted and issued by the company pursuant to the company’s approved employee share incentive schemes (the schemes).” ORDINARY RESOLUTION NUMBER 7 General authority to issue shares for cash “Resolved that pursuant to the articles of association of the company and subject to the Act, and the Listings Requirements of the JSE, the directors are hereby authorised, by way of a general authority, to allot and issue ordinary shares for cash on the following basis, after setting aside so many shares as may be required to be allotted and issued by the company pursuant to the company’s approved schemes, without restrictions to any the Listings public shareholder, as defined by Requirements of the JSE, as and when suitable opportunities arise, subject to the following conditions: 7.1 this authority shall not extend beyond fifteen months from the date of this resolution or the date of the next annual general meeting, whichever date is earlier; 7.2 a press announcement giving full details, including the impact on net asset value and earnings per share, be published at the time of any issue representing, on a cumulative basis within one year, 5% or more of the number of shares in issue prior to the issue/s; 7.3 the shares be issued to public shareholders as defined by the JSE and not to related parties; 7.4 any issue in the aggregate in any one year shall not exceed 15% of the number of shares of the company’s issued ordinary share capital; and 7.5 in determining the price at which an issue of shares be made in terms of this authority, the maximum discount permitted will be 10% of the weighted average traded price of the shares over the 30 days prior to the date that the price of the issue is determined or agreed to by the directors. In the event that shares have not traded in the said 30-day period a ruling will be obtained from the committee of the JSE.” The approval of a 75% majority of the votes cast by shareholders present or represented by proxy at the meeting is required for ordinary resolution number 7 to become effective. 1 9 2 K U M B A A N N U A L R E P O RT 2 0 0 5 8. ORDINARY RESOLUTION NUMBER 8 Amendment of the Kumba Resources Management Share Trust Deed (“the Deed”) 14. Options “14.3 8.1 Resolved that the Deed be and is hereby amended with effect from 3 August 2005 by the addition to clause 17.1 thereof of a new sub-clause, as follows: “17.1.6 makes a distribution to its shareholders, including a special dividend, a distribution in specie or a payment in terms of section 90 of the Act, (to the extent that any distribution is not paid out of reserves of the company, it shall not be regarded as a dividend, but will be treated as a section 90 distribution)” 8.2 Resolved that the Deed be and is hereby amended as indicated: (proposed amendments have been underlined): 1. Definitions – addition of a new clause 1.1.5: “1.1.5 ‘cash settlement’: the cash settlement contemplated in 1.1.22”; – as a result of the above, existing clauses 1.1.5 up to and including 1.1.37 be re-numbered as clauses 1.1.6 to 1.1.38; – clause 1.1.22 (previously clause 1.1.21) be amended as indicated: “1.1.22 ‘option’: an option as contemplated in clause 14 and where applicable, in terms of clause 12, granted under the scheme of an offeree, which when exercised in respect of any shares to which the option relates, will result in- 1.1.22.1 1.1.22.2 1.1.22.3 an allotment and issue of those shares to which such exercise relates from the company to the participant; and/or a sale of those shares to which such exercise relates from the trust to the participant; and or a cash settlement by the company to the participant of an amount equal to the difference between the purchase price and the closing price of an ordinary share (as shown by the official price list published by the JSE) on the trading day on the JSE on which the option is exercised.” Notwithstanding anything to the contrary herein contained and in particular therefore also the date on which an option is exercised, the obligation of the trustees to make a cash settlement in respect of any shares and/or deliver any shares to a participant arising from the exercise by such participant of an option, and likewise the obligation of a participant to pay the purchase consideration of such shares to the trustees in respect of the exercise of an option shall, unless otherwise determined by the directors and upon such terms and conditions as they may impose, only arise in respect of such shares on the dates referred to below (it being agreed that the obligation to discharge the purchase price of the relevant shares shall only arise against delivery by the trustees of such shares) . . .” “14.3.5.3.1 the obligation of the trustees to make a cash settlement in respect of such shares and/or deliver such shares shall only arise in respect of the periods referred to in 14.3.” “14.7 in terms A participant may at any time, with the prior written consent of the trustees, exercise all of his options on the basis that the acquisition of such shares shall be deemed to have been made pursuant to the acceptance of an offer in terms of 12, and all the other the acquisition of shares in terms of the acceptance of an offer to acquire shares shall mutatis mutandis be applicable. of determining the dates on which a participant shall be entitled to a cash settlement and/or have shares released to him, the option date shall be deemed to be the offer date.” respect of purposes For 15. Rights issues “15.2.2 for purposes of determining the date on which such participant is entitled to request a cash settlement and/or delivery to him of the option shares, such option shall have been deemed to have been granted on the same day on which the original options were granted.” 1 9 3 K U M B A A N N U A L R E P O RT 2 0 0 5 N O T I C E O F A N N U A L G E N E R A L M E E T I N G c o n t i n u e d 9. SPECIAL RESOLUTION NUMBER 1 Authority to repurchase shares “Resolved that by way of a general authority, the company or any subsidiary of the company may, subject to the Act, the articles of association of the company or subsidiary respectively and the Listings Requirements of the JSE, from time to time purchase shares issued by itself or shares in its holding company, as and when deemed appropriate.” Pursuant to the above, the following additional the Listings in required information, Requirements of the JSE, is submitted. terms of 10. SPECIAL RESOLUTION NUMBER 2 Amendment of articles of association “Resolved that the current articles of association of the company be and are hereby replaced with a new set of articles of association, a copy of which has been tabled at this general meeting and initialled by the chairman for the purpose of identification.” The reason for and effect of this special resolution number 2 is to replace Kumba’s current articles of association with a new set of articles of association, which are updated in accordance with amendments to the Act and the Listings Requirements of the JSE. It is recorded that a company may only make a general repurchase on the provisos: 11. To transact such other business as may be transacted at an annual general meeting. 9.1 that the repurchase is effected through the order book operated by the JSE trading system and is done without any prior understanding or arrangement between the company and the counterparty; 9.2 that this authority shall not extend beyond fifteen months from the date of this resolution or the date of the next annual general meeting, whichever date is earlier; 9.3 that an announcement containing full details of such repurchases is published as soon as the company has repurchased shares constituting, on a cumulative basis, 3% of the number of shares in issue prior to the repurchases and for each 3%, on a cumulative basis, thereafter; 9.4 that the repurchase of shares shall not, in the aggregate, in any one financial year, exceed 20% of the company’s issued share capital at the time this authority is given; 9.5 that at any one time, the company may only appoint one agent to effect any repurchase; 9.6 that the repurchase of shares will not take place during a prohibited period and will not affect compliance with spread requirements as laid down by the JSE; shareholders’ the 9.7 shares issued by the company may not be acquired at a price greater than 10% above the weighted average traded price of the company’s shares for the five business days immediately preceding the date of repurchase.” The reason for this special resolution number 1 is, and the effect thereof will be to grant, in terms of the provisions of the Act and the Listings Requirements of the JSE, and subject to the terms and conditions embodied in the said special resolution, a general authority to the directors to approve the repurchase by the company of its own shares. At the present time the directors have no specific intention with regard to the utilisation of this authority, which will only be used if the circumstances are appropriate. DISCLOSURES REQUIRED IN TERMS OF THE LISTINGS REQUIREMENTS OF THE JSE In terms of the Listings Requirements of the JSE, the requiring following disclosures are shareholders’ approval to: required when • • authorise the company, or any of its subsidiaries, to repurchase any of its shares as set out in the special resolution above; and the general authority to issue shares for cash as set out in ordinary resolution number 7. Working capital statement The directors of the company agree that they will not undertake any repurchase unless: • • • • the company and the group will be able, in the ordinary course of business, to pay its debts; the assets of the company and the group will be in excess of the liabilities of the company and the group, recognised and measured in accordance with the accounting policies used in the latest annual financial statements; the share capital and reserves of the company and the group will be adequate for ordinary business purposes; and the working capital resources of the company and the group will be adequate for ordinary business purposes. Litigation statement Other than disclosed or accounted for in these annual financial statements, the directors of the company, whose names are given on p58 of these annual financial statements, are not aware of any legal or arbitration proceedings, pending or threatened against the group, which may have or have had a material effect on the group’s financial position in the 12 months preceding the date of this notice of annual general meeting. 1 9 4 K U M B A A N N U A L R E P O RT 2 0 0 5 Resolution 5: Remuneration of non-executive directors The company in general meeting as per the articles of the time association shall remuneration of directors, subject to shareholders’ approval. time determine from to Resolutions 6 and 7: Directors’ control of unissued ordinary shares The existing authorities relating to resolutions 6 and 7 are due to expire at the forthcoming annual general meeting. The directors consider it advantageous to renew these authorities to enable the company to take advantage of business opportunities, which might arise in the future. Resolution 8: Amendment of the Deed The Deed is amended in order to allow for an adjustment in the price of shares purchased and options granted in terms thereof as a result of a special dividend, a distribution in specie or a payment in terms of Section 90 of the Act, and also especially to allow for a retrospective adjustment as a result of the special dividend of R2,20 per share, which was declared on 3 August 2005. This special dividend was declared as a result of the amount received in respect of the settlement of the Hope Downs BV matter. The Deed is further amended to, in addition to the existing allotment and issue or sale of shares to participants, also make provision for a cash settlement on exercise of an option to participants under the schemes. Special business Special Resolution 1: General authority to permit the repurchase of shares The reason for the special resolution is to grant the directors of the company a general authority for the acquisition of the company’s shares by the company, or a subsidiary of the company. The effect of the special resolution, once registered, will be to permit the company or any of its subsidiaries to repurchase such securities subject to the limitations applicable. This authority will only be used if circumstances are appropriate. Special Resolution 2: Amendment of articles of association New articles of association are adopted in order to bring same in line with the latest requirements of the Act, and the Listings Requirements of the JSE. Material changes Other than the facts and developments reported on in these annual financial statements, there have been no material changes in the affairs, financial or trading position of the group since the signature date of this annual report and the posting date thereof. The following further disclosures required in terms of the Listings Requirements of the JSE are set out in accordance with the reference pages in these annual financial statements of which this notice forms part: • • • • Directors and management – refer p57-58; Major shareholders of the company – refer p70; Directors’ interest in the company’s shares – refer p129; Share capital of the company – refer p138. By order of the board MS Viljoen Company secretary Pretoria 17 March 2006 EXPLANATORY NOTES CONSIDERATION AT THE ANNUAL GENERAL MEETING TO RESOLUTIONS FOR Ordinary business Resolution 1: Approval of financial statements The directors must present to shareholders at the annual general meeting the annual financial statements incorporating the directors’ report and the report of the auditors, for the period ended 31 December 2005. These are contained within the annual report. Resolution 2: Reappointment of independent auditors The reason for proposing ordinary resolution number 2 is to confirm the reappointment of Deloitte & Touche as external auditors of the company. Resolution 3: Auditors’ fees It is usual for this matter to be left to the directors, as they will be conversant with the amount of work that was involved in the audit. The chairman will therefore move a resolution to this effect authorising the directors to attend to this matter. Resolution 4: Re-election of directors Under the articles of association, one third of the directors are required to retire at each annual general meeting and may offer themselves for re-election. Biographical details of the directors, who are offering themselves for re-election, appear on p196. 1 9 5 K U M B A A N N U A L R E P O RT 2 0 0 5 S H O R T B I O G R A P H I E S O F D I R E C T O R S S E E K I N G R E - E L E C T I O N Name: BE Davison – Barry (60) Current position: Non-executive chairman, Anglo Platinum Limited Academic qualifications: BA (Wits), Graduates Commerce Diploma (Birmingham University), Advanced CIS Diploma, Advanced Executives Programme (Unisa) Designation: Non-executive director Experience: Barry was Anglo Platinum’s chief executive from 1997 until June 2003. In 1986 he joined the board of Anglo American Corporation of South Africa Limited. Appointed to Anglo American plc board on 15 May 2001. He has extensive mining industry experience, with a career starting at Johannesburg Consolidated Investment Company Limited, Consolidated Metallurgical Industries Limited, Consolidated Murchison Limited and Rustenburg Platinum Mines Limited. Name: SA Nkosi – Sipho (51) Current position: Chief executive, Eyesizwe Coal (Pty) Limited Academic qualifications: BCom, BCom (Hons) (Econ), MBA, Diploma in Marketing Management Designation: Non-executive director Experience: Sipho commenced his career as a market analyst with Ford Motor Company South Africa in 1980. In 1986 he moved to Anglo American Coal Corporation where he worked as a marketing coordinator. In 1992 he joined Southern Life Association as senior manager, strategic planning. In 1993 he accepted the position of marketing manager, new business development at Trans- Natal Coal Corporation, which later became Ingwe Coal Corporation. In 1997 he joined Asea Brown Boveri (South Africa) Limited as vice-president marketing. He joined ABB Power Generation in 1998 as managing director. Name: CML Savage – Cedric (66) Current position: Non-executive chairman, The Tongaat-Hulett Group Academic qualifications: BSc(Eng), Pr Eng, MBA, ISMP (Harvard) Designation: Non-executive director Experience: Cedric started his career as an engineer at Fairey Aviation in the United Kingdom. In 1963 he returned to South Africa to work as an engineer in the oil (Mobil) and textiles (Felt & Textiles) industries and subsequently as joint managing director of Rainbow Chickens. He joined the Tongaat Group in 1977 as managing director of Tongaat Foods and thereafter progressed to executive chairman of the building materials division and chief executive officer of The Tongaat-Hulett Group Limited in 1991. In 2002 he retired from executive duties and is now a director of JSE-listed companies, including Tongaat-Hulett, Datatec, Nedbank and Harmony Gold. Name: F Titi – Fani (43) Academic qualifications: BSc (Hons), MA & MBA Current position: Chairman, TisoGroup Designation: Non-executive director Experience: Fani has worked as a private equity investment professional with Kagiso Trust Investment Company (Proprietary) Limited, Corpgro Limited and now TisoGroup (Proprietary) Limited. He was previously an executive director of African Bank Investments Limited and a mathematics lecturer at the University of the North. He serves on the boards of Investec Limited and Investec plc. 1 9 6 K U M B A A N N U A L R E P O RT 2 0 0 5 F O R M O F P R O X Y KUMBA RESOURCES LIMITED (Incorporated in the Republic of South Africa) (Registration No 2000/011076/06) (“Kumba” or “the company”) JSE Share code: KMB ISIN code: ZAE 000034310 TO BE COMPLETED BY CERTIFICATED SHAREHOLDERS AND DEMATERIALISED SHAREHOLDERS WITH “OWN NAME” REGISTRATION ONLY For completion by registered members of Kumba unable to attend the annual general meeting of the company to be held at 14:00 on Wednesday, 12 April 2006, at the Kumba Corporate Centre, Roger Dyason Road, Pretoria or at any adjournment thereof. I/We of being the holder/s of 1 2 shares in the company, do hereby appoint: (address) or, failing him/her or, failing him/her the chairman of the annual general meeting, as my/our proxy to attend, speak and, on a poll, vote on my/our behalf at the annual general meeting of members to be held at 14:00 on Wednesday, 12 April 2006 at the Kumba Corporate Centre, Roger Dyason Road, Pretoria or at any adjournment thereof, and to vote or abstain from voting as follows on the ordinary and special resolutions to be proposed at such meeting: For Against Abstain Ordinary business 1. Resolution to adopt the 2005 audited group financial statements 2. 3. 4. Resolution to reappoint Deloitte & Touche as auditors Resolution to authorise the directors to determine auditors’ remuneration Resolution to re-elect the directors required to retire in terms of Article 52 of the articles of association 4.1 Mr BE Davison 4.2 Mr SA Nkosi 4.3 Mr CML Savage 4.4 Mr F Titi 5. 6. 7. 8. Resolution to approve the non-executive directors’ remuneration for the period 1 January 2006 to 31 December 2006 Resolution to authorise directors to allot and issue unissued ordinary shares Resolution to authorise directors to allot and issue ordinary shares for cash Resolution to authorise the amendment of the Kumba Resources Trust Deed Special business 1. Special resolution to authorise directors to repurchase company shares 2. Special resolution to authorise the amendment of the articles of association of Kumba Please indicate with an “X” in the appropriate spaces provided above how you wish your vote to be cast. If no indication is given, the proxy may vote or abstain as he/she sees fit. Signed at Signature Assisted by me, where applicable (name and signature) this day of 2006 Please read the notes on the reverse side hereof. 1 9 7 K U M B A A N N U A L R E P O RT 2 0 0 5 F O R M O F P R O X Y c o n t i n u e d 3. 4. 5. 6. 7. 8. A form of proxy is only to be completed by those ordinary shareholders who are: NOTES 1. 1.1 holding ordinary shares in certificated form; or 1.2 recorded on sub-register electronic form in ”own name”. 2. If you have already dematerialised your ordinary shares through a Central Securities Depository Participant (CSDP) or broker and wish to attend the annual general meeting, you must request your CSDP or broker to provide you with a Letter of Representation or you must instruct your CSDP or broker to vote by proxy on your behalf in terms of the agreement entered into between yourself and your CSDP or broker. A member may insert the name of a proxy or the names of two alternative proxies of the member’s choice in the space. The person whose name stands first on the form of proxy and who is present at the annual general meeting of shareholders will be entitled to act to the exclusion of those whose names follow. On a show of hands a member of the company present in person or by proxy shall have one (1) vote irrespective of the number of shares he/she holds or represents, provided that a proxy shall, irrespective of the number of members he/she represents, have only one (1) vote. On a poll a member who is present in person or represented by proxy shall be entitled to that proportion of the total votes in the company, which the aggregate amount of the nominal value of the shares held by him/her bears to the aggregate amount of the nominal value of all the shares issued by the company. A member’s instructions to the proxy must be indicated by the insertion of the relevant numbers of votes exercisable by the member in the appropriate box provided. Failure to comply with the above will be deemed to authorise the proxy to vote or to abstain from voting at the annual general meeting as he/she deems fit in respect of all the member’s votes exercisable thereat. A member or the proxy is not obliged to use all the votes exercisable by the member or by the proxy, but the total of the votes cast and in respect of which abstention is recorded may not exceed the total of the votes exercisable by the member or by the proxy. Forms of proxy must be lodged at, or posted to Computershare Investor Services 2004 (Pty) Limited, to be received not later than 48 hours before the time fixed for the meeting (excluding Saturdays, Sundays and public holidays). For shareholders on the South African register: Computershare Investor Services 2004 (Pty) Limited Ground Floor, 70 Marshall Street Johannesburg, 2001 PO Box 61051 Marshalltown 2107 www.computershare.com Tel: +27 11 370 5000 Over-the-Counter American Depositary Receipt (ADR) holders: Kumba has an ADR facility with The Bank of New York (BoNY) under a deposit agreement. ADR holders may instruct BoNY as to how the shares represented by their ADRs should be voted. American Depositary Receipt Facility Bank of New York 101 Barclay Street, New York, NY 10286 www.adrbny.com shareowners@bankofny.com (09-1) 888 815 5133 The completion and lodging of this form of proxy will not preclude the relevant member from attending the annual general meeting and speaking and voting in person thereat to the exclusion of any proxy appointed in terms hereof. Documentary evidence establishing the authority of a person signing this form of proxy in a representative capacity or other legal capacity must be attached to this form of proxy, unless previously recorded by the transfer secretaries or waived by the chairman of the annual general meeting. Any alteration or correction made to this form of proxy must be initialled by the signatory/ies. 9. 10. Notwithstanding the aforegoing, the chairman of the annual general meeting may waive any formalities that would otherwise 11. be a prerequisite for a valid proxy. If any shares are jointly held, all joint members must sign this form of proxy. If more than one of those members is present at the annual general meeting either in person or by proxy, the person whose name appears first in the register shall be entitled to vote. 1 9 8 K U M B A A N N U A L R E P O RT 2 0 0 5 K U M B A A D M I N I S T R A T I O N Secretary and registered office MS Viljoen Kumba Resources Limited Roger Dyason Road Pretoria West Pretoria 0183 PO Box 9229, Pretoria 0001 South Africa Telephone +27 12 307 5000 Company registration number: 2000/011076/06 JSE share code: KMB ISIN code: ZAE000034310 Auditors Deloitte & Touche Private Bag X6 Gallo Manor 2052 Commercial bankers Absa Bank Limited S H A R E H O L D E R S ’ D I A R Y FINANCIAL YEAR-END ANNUAL GENERAL MEETING REPORTS AND ACCOUNTS Interim report for the half-year ending 30 June Announcement of annual results Annual Report DISTRIBUTION Final dividend declaration Payment Interim dividend declaration Payment Corporate law advisers CLS Consulting Services (Pty) Limited United States ADR Depositary The Bank of New York ADR Department 101 Barclay Street New York, NY 10286 United States of America Sponsor JP Morgan Equities Limited 1 Fricker Road Illovo Johannesburg 2196 Registrars Computershare Investor Services 2004 (Pty) Limited Ground Floor, 70 Marshall Street Johannesburg, 2001 PO Box 61051 Marshalltown 2107 31 December April/May Published August February March February March August September This report is printed on Cyclus, a paper made entirely from post-consumer waste in a fully environmentally-friendly production process where even the by-products are recycled. This makes Cyclus 100% recycled. By printing on Cyclus, Kumba is playing a part in eliminating a 120kt waste mountain instead of felling trees. G R A P H I C O R 3 3 4 8 8 v i s i t u s a t w w w. k u m b a r e s o u r c e s . c o m