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The financial results of the Assore group are largely dependent on the level of global economic growth, as the majority of commodities produced are used in the production of crude and stainless steels, the consumption of which is intimately related to global capital spend.
Group results are significantly affected by US dollar commodity prices, exchange rates and world economic growth, all of which are risks that cannot be directly controlled. Refer "Risks and opportunities".
The group's markets are mostly located in the Far East, India, Europe, North America and South Africa. Although the group's markets for iron and manganese products are reasonably diversified, the Chinese market remains the dominant destination for the group's products, especially for chrome ore. Diversification has been achieved, mostly through the establishment of long-term supply relationships, both independently and through agents. The group continues to develop other markets, the achievement of which is based on existing industry knowledge and anticipated market developments.
World economic growth improved in the second half of the 2016 calendar year, with a strong rebound occurring in developed economies. Improvement in world economic growth is expected to continue for the remainder of the 2017 calendar year, with an estimated improvement of 3,4% over the previous year. This has led to increased world crude and stainless steel production, which is expected to grow to 1 700 and 47 million tonnes respectively (by 2,0% and 3,5% respectively), over the 2016 calendar year. The increase on the latter commodity comes on the back of an increase of 8% in the 2016 calendar year over 2015. It is likely that crude steel production in China, which produces over 50% of the world's annual requirement, will continue to increase, supporting demand for chrome ore. South Africa produces approximately 55% of chrome ore worldwide.
These circumstances enabled the group to achieve selling prices that were significantly higher than those in 2016 and contributions to headline earnings/(loss) by commodity compare very favourably to those of the previous year, and were as follows:
The group, through its wholly owned subsidiary Ore & Metal, is the sole marketing and distribution agent for all the group's products, including those of Assmang.
The sales volumes for Assmang and Dwarsrivier for the current and previous years were as follows:
Assmang recorded record sales volumes of iron ore for a third consecutive year, amounting to 17,3 million tonnes, marginally higher than the volumes sold in 2016 (17,0 million tonnes). The level of export volumes remained flat in comparison to 2016, while local sales volumes increased by 11%.
The steel sector in China was robust for most of 2017, driving prices for iron ores to levels which, on average, gave rise to the benchmark price for iron ore (62% fines grade, delivered in China) being 37% higher than the level of 2016, at approximately US$70 per tonne, peaking at US$95 per tonne in February of this year. Just over half of Assmang's iron ore volume is sold as "lumpy" grade material and the premium this grade attracts varied across year, declining to approximately US$1 per tonne in April, before recovering to US$13 per tonne by the end of the year. The decline was brought about by additional "lumpy" volumes entering the market, existing high levels of inventory and high prices for coking coal. However, tighter environmental controls and increased focus on productivity at steel mills in China resulted in a recovery of this premium. Countering these price gains somewhat, higher commodity prices supported increased ocean freight rates, which, coming off historical lows in 2016, impacted gross margins negatively.
The sales strategy for iron ore in Assmang is to supply those markets that show a higher degree of stability, with China remaining as its largest market. On a per-region basis, the sales volumes for the year and the previous financial year are illustrated on the following graphs:
Capital expenditure during the year in Assmang's Iron Ore division amounted to R1,2 billion (2016: R901 million), of which approximately R670 million was spent on replacement and compliance requirements, with R261 million on waste-stripping at both mines.
As was the case in 2016, the market for manganese ore for 2017 was marked by extreme volatility, with ore prices reaching an eight-year high in December 2016, with prices for high-grade material (44% manganese content) delivered in China (CIF) and prices for medium-grade material (37% manganese content), free on board South Africa (FOB) peaking at US$9,22 per dry metric tonne unit (dmtu) and US$7,45 per dmtu respectively. The rally was caused by reduced supply, arising from a series of production cuts in the industry, occurring late in the 2015 calendar year and into early 2016, which were implemented after a sustained period of low prices. With prices recovering during most of the 2016 calendar year, and most significantly in the latter half (the first half of the 2017 financial year), some of these production cut-backs were reversed and volumes brought back to the market. This coincided with the increase in Chinese crude steel production, increasing demand for manganese alloys. Temporary logistical bottlenecks in South Africa gave rise to further price rallies in high and medium grade ores during the first half of 2017.
The second half of 2017 saw a correction in the prices from the peaks in the first half, brought about by weakening demand going into Chinese New Year and the increase in available material driven mostly by suppliers responding to the higher prices, by liquidating existing inventories and increasing production. The average index prices for 2017 for high-grade (44% manganese content) material delivered in China (CIF) and medium-grade material (37% manganese content), free on board South Africa (FOB), were US$5,77 (2016: US$2,89) per dmtu and US$4,56 (2016: US$2,31) per dmtu respectively. The distribution of manganese ore sales on a per-region basis for the current and previous financial year is illustrated as follows:
Alloy market conditions at the start of 2017 were similar to those of previous years, characterised by weak demand due to oversupplied positions. However, towards the end of the first half of 2017, ferroalloy prices rallied, firstly in Asia and then in the United States and Europe as a result of higher input costs and reduced production volumes. The market tightness experienced in the USA and Europe persisted throughout the second half of 2017, with supply insufficient to meet the increased demand. These conditions led to more resilient alloy prices compared to recent years with alloy prices for all grades stabilising at higher levels into the second half of 2017. The last time that prices were recorded at these levels was early in 2010.
Sakura Ferroalloys, Assmang's joint venture ferromanganese smelting project in Malaysia, in which it has a 54,36% stake, is now running at full capacity, with the second furnace having been commissioned in the first half of 2017, the first furnace having been commissioned a few months earlier. The project was completed below its budget of US$328 million and production in the last quarter exceeded the combined capacity of 216 000 tonnes per annum by 9%. This additional production gave rise to additional sales volumes of ferromanganese, which has brought about a change in the geographic distribution of the sales of ferromanganese, as follows:
Capital expenditure during the year in Assmang's Manganese division amounted to R1,6 billion (2016: R1,9 billion), of which R1,1 billion (2016: R652 million) was spent on the expansion and continued sustainability of the Black Rock mines to reach a sustainable output capacity of at least four million tonnes of manganese product per annum by 2020.
A strong demand for stainless steel in China, combined with consolidation in the South African chrome market, resulted in demand for chrome ore increasing substantially, with world production for the 2016 calendar year increasing by 8% over the previous year, to 45,6 million tonnes. Production of stainless steel in China increased by 12% over the same period, to 24,2 million tonnes. The increased level of demand was particularly evident in the first half of 2017, where prices for 44% chrome content material delivered in China increased from levels of approximately US$165 per tonne at the end of 2016 to over US$400 per tonne by December 2016. Inventory levels of stainless steel in China increased towards the end of the 2016 calendar year, signalling an oversupply, and resulting in a weaker price environment. Subsequently, the market experienced a prolonged period of reduced trading activity, which resulted in a sharp decline in chrome prices, to levels of US$150 per tonne in May 2017. By the end of 2017, prices recovered to levels of approximately US$200 per tonne.
With effect from 1 July 2016, the group has owned 100% of Dwarsrivier (refer to note 35.1 to the consolidated annual financial statements). For a third consecutive year, Dwarsrivier recorded record sales volumes of chrome ore, which increased by 12% to 1 279 thousand tonnes for 2017. The increased sales volumes for 2017 were largely made possible by improved mining efficiencies and improvements in the beneficiation plant. Sales of ores on a per region basis for the current and previous financial years are illustrated as follows:
The production cost per tonne increased by 1% from the cost recorded in 2016, with the mine achieving 4 million fatality-free shifts in August 2017, the last fatality having occurred in 2009. R141 million was spent on capital, mostly on replacement items.
Since 1937 the group has mined pyrophyllite, which it trades as Wonderstone. The deposit is located outside Ottosdal, approximately 300 kilometres south-west of Johannesburg. It is volcanic in origin and displays unique heat holding, insulation and pressure-resistant properties. The bulk of the material mined is beneficiated and reworked into components for export to the USA, the United Kingdom and the Far East. These components are utilised in various high-tech industrial applications, including the manufacture of synthetic diamonds and consumable products for the welding and electronics industries and are sold as specialist ceramic products. The most significant market for Wonderstone products for use in the manufacture of polycrystalline diamond (PCD) cutters for drilling in the oil and gas well industries. Other uses for Wonderstone occur in insecticides, while investigations into heat and energy storage are being undertaken in collaboration with various universities and associated institutions, the aim of which is to find alternative uses for the product.
Both export and local markets for Wonderstone were strong during 2017, with the local market in particular performing well. The sale of Wonderstone run-of-mine (ROM) material to China showed steady improvement. With effect from 1 July 2016, Group Line Projects Proprietary Limited (Groupline) separated its business from Wonderstone and as from 2018, will absorb the necessary assets of Ceramox for the continued procurement of wear-resistant tiles. Groupline specifies, selects and installs a range of lining products, including Ceramox alumina tiles, to assist in solving a wide range of industrial wear and flow problems associated with mined commodities. The remaining assets of Ceramox were sold as part of a transaction into a joint venture, Dakot Wear Ceramics Proprietary Limited (Dakot), in which Wonderstone owns a 40% interest (refer to note 35.2 to the consolidated annual financial statements). Previously, Ceramox was a division of Wonderstone.
Excluding impairment charges imposed in 2016, the attributable profit recorded by all of the entities managed by Wonderstone amounted to R1,4 million (2016: R2,3 million). Capital expenditure by Wonderstone for the year amounted to R5,2 million (2016: R2,0 million), most of which was spent on mining and machining equipment.
Wholly owned subsidiary Ore & Metal Company Limited is responsible for the marketing and shipping of all the group's products, including those produced by Assmang. Strong relationships have been established with customers in the Far East, Europe, North America, South America, Africa and India, and products with a market value of approximately R29,7 billion (2016: R20,6 billion) were marketed and distributed in these regions during the year. The company is an established supplier to steel and allied industries worldwide and has operated effectively in these markets for over 80 years. Commission income is based on the value of sales negotiated and is due once payment is received from the customers. Attributable profit after taxation for the year improved to R383,8 million (2016: R271,3 million), due mainly to higher sales volumes and commodity prices of ores and manganese alloys and increased interest income.
The group holds a 51% share in Minerais U.S. LLC (Minerais) which is a limited liability company registered in the state of New Jersey in the United States and Canada. Minerais is responsible for marketing and sales administration of the group's products in these countries, in particular manganese alloys, and it trades in other commodities related to the steelmaking industry. Significantly increased levels of sales of alloy products in the United States resulted in Minerais' contribution to the group's attributable profit for the year increasing to R97,3 million (2016: R11,4 million).
As technical adviser to Assmang and other group companies, African Mining and Trust Company Limited provides operational management services to the group's mines and plants. For these services it receives fee income, which is related to turnover in Assmang and to services provided to Dwarsrivier. The impact of significantly increased commissions received, arising from higher sales volumes and commodity prices of ores in Assmang in the amount of R127,5 million, was negated to some extent by increased operating costs (R40,2 million), resulting in its attributable net profit after taxation for the year increasing to R181,3 million (2016: R101,5 million).
IronRidge holds a 29,6% interest in IronRidge Resources Limited (IronRidge), which is accounted for using the equity method (refer to note 5 to the consolidated annual financial statements for more detail). Exploration activities by IronRidge continue, with the first stage of reconnaissance prospecting for iron ore in Gabon complete. Other prospects, which are at various stages of assessment, include bauxite in Queensland, Australia, gold in Chad, gold and lithium in Ghana and lithium in the Ivory Coast. The market value of the group's investment in IronRidge has increased from GBP3,0 million (R58,8 million) at 30 June 2016 to GBP24,8 million (R423,0 million) at 30 June 2017. Subsequent to the financial year-end, IronRidge raised GBP8,2 million by way of issuing subscription shares in order to fund further exploration work. Assore followed its rights regarding these shares, as did the other major shareholders.
The group holds a limited portfolio of listed shares which are selected and held in accordance with long-term investment criteria. In accordance with IFRS, the portfolio is valued in the financial statements at market value. During the year, the market value of this portfolio increased and the group recorded a profit of R38,3 million (2016: R41,8 million loss) on its revaluation (after allowing for capital gains taxation relief). At 30 June 2017, the market value of the portfolio was R229,4 million (2016: R180,1 million), based on a cost of R293,4 million (2016: R293,4 million). Other income for the group includes interest received of R349,3 million (2016: R210,4 million) generated on cash in excess of current requirements which was invested on a short-term basis in the money market, both on variable and fixed rates. The increased amount of interest received is mostly due to elevated average available cash balances and higher rates of interest, which prevailed in part due to fixed rates being higher than the variable rates.
