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Markets for the group's products for the past financial year were much stronger than initially anticipated due to improved levels of world economic growth. This led to increased demand for crude and stainless steel, which had a positive effect on demand and prices for steel-making commodities. Average prices for iron ore were 37% higher than during the previous financial year, while prices for manganese and chrome ores were approximately double those of 2016.
Improved production levels, in conjunction with increased export capacity utilisation, enabled the group to sell record volumes of iron and chrome ores, up by 2% and 12%, respectively on the previous year. This is the third consecutive year in which record sales volumes for iron and chrome ores have been achieved.
In comparison to the previous year, the volatility in the rand/US dollar exchange rate was reduced, with the rand trading at stronger levels. The rand traded at an average of R/US$13,71 in the reporting period, which was 5% stronger than the average in 2016. This had the effect of partly countering the increased prices for the group's products. The group achieved record levels of headline and attributable earnings for 2017, with the make-up of these profits over the two halves of the financial year being more balanced than the same components in 2016. Attributable earnings amounted to R5,0 billion, compared to R1,5 billion in 2016, with R2,2 billion and R2,8 billion being earned in the first and second halves, respectively. The contributions to attributable earnings by the group's commodities over the past five years are illustrated as set out alongside:
The markets into which the group sells its products recovered during the year and were generally stronger in comparison to 2016. The growth in the production of crude steel in China, which manufactures more than half of all crude steel produced globally, drove commodity prices higher during the year. Prices for iron ore (62% iron content, "fines" grade, delivered in China) were 37% higher than last year, at an average index price of US$70 per tonne, while the premium for "lumpy" grade material was US$7,38 per tonne, marginally lower than the level for 2016. Increased environmental controls in China and efficiency objectives at Chinese steel mills, however, resulted in a notable increase in this premium towards the end of 2017. Higher levels of crude steel production also resulted in a marked improvement in manganese ore prices, with the average index price for 44% grade manganese content material, delivered in China, doubling to US$5,77 per dry metric tonne unit ("dmtu"), from US$2,89 in 2016. Ferromanganese prices also rallied on the back of the increase in ore prices and robust demand in North America and Europe.
Stainless steel showed remarkable growth in the 2016 calendar year, with production growing by 8% when compared to the 2015 calendar year. The resulting demand for chrome ore in China, in conjunction with consolidation of supply in South Africa, led to a supply deficit for chrome ore. Accordingly, average prices for 44% chrome content material, delivered in China, were much higher than those for 2016, at US$300 per tonne (2016: US$150 per tonne).
The acquisition of Dwarsrivier Chrome Mine (Dwarsrivier), the final phase of which was completed in July 2016, has proven to be extremely successful for the group. The strong demand for chrome ore and improved mining and plant efficiencies resulted in attributable profit from Dwarsrivier amounting to R843 million, while at the same time generating cash of more than R1 billion.
Project work to expand Assmang's manganese capacity continues, with R1,1 billion (2016: R652 million) spent on the Black Rock expansion project, which was 82% complete by June 2017. Operations at Sakura Ferroalloys in Malaysia have yielded encouraging results, with both furnaces producing ferromanganese at 9% above their combined design capacity of 216 000 tonnes per annum, in the last quarter of 2017. The remainder of Assmang's operations are in a steady state, with R1,7 billion (2016: R2,3 billion) spent on a combination of waste-stripping at the iron ore mines, replacement and compliance requirements. Capital expenditure per commodity for the last 5 years is illustrated alongside.
Several initiatives are currently underway in IronRidge Resources Limited (IronRidge), an AIM (London) – listed exploration company in which the group holds a 29,6% equity interest. Progress continues to be made in prospecting for iron ore in Gabon, whilst developments elsewhere include assessing various bauxite, lithium and gold prospects in Australia, Ghana, Ivory Coast and Chad.
The record level of profitability and strong cash generation by the group placed it in a position to declare a final dividend of R8,00 (2016: R5,00) per share. Taking into account the interim dividend of R6,00 (2016: R2,00), the dividend for the year amounted to R14,00 (2016: R7,00) per share, which also represents a record level of dividends paid. The group continues to adopt a conservative approach to the application of available cash.
The world economy is expected to continue to grow for the remainder of the calendar year. It has been reported that infrastructural expenditure in China is set to continue in the short to medium term. Stainless steel production is expected to grow in the medium and long term, which should support Dwarsrivier well into the future. These positive indicators should ensure good demand for the group's commodities in the year ahead. The quality of the group's ore bodies and the mix of grades produced, allows it to respond to changes in market demands. This has been evident recently in the call for higher grades of iron, manganese and chrome ores. These factors place the group in a favourable position to remain profitable and competitive in the coming year.
The impact of policy uncertainty in South Africa is concerning, rendering it difficult to plan for expansion. Furthermore it raises questions about the sustainability of long-term assets. In addition to the uncertain regulatory environment, continued increases in the price of electricity in South Africa are potentially placing all smelting operations under pressure and, combined with wage demands that continually exceed inflation, South African assets are becoming less competitive in global markets for their commodities. Although the rand showed less volatility in the past year, recent indications are that this may not continue, increasing the uncertainty in making forecasts for earnings and cash flow.
2017 has been an extremely successful year for the group, with this report alone making mention of four record achievements. I am proud of our achievements and thankful to all of those people who made these achievements possible. I would also like to extend my appreciation to the management team at Dwarsrivier, who have welcomed their inclusion in the group, for the contribution they have made to the very successful year experienced by the mine. Added to the above is the fact that no work-related fatalities occurred at any of the group’s operations this year.
After 28 years of service to the group, which saw the market capitalisation of the group increase from R2,9 million, to over R27 billion, Chris Cory retired as chief executive officer (CEO). I welcome Charles Walters to the board as CEO, who joined the group on 1 April 2017, and Ross Davies, appointed as chief financial officer, as a member of the executive. I also welcome Delight Aitken to the group, who joined the board as an independent non-executive director on 1 March 2017. Finally, I extend my gratitude to our staff, customers, agents, suppliers and bankers for their respective roles in assisting the group in its success this year.
Desmond Sacco Chairman 18 October 2017
