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Chief Executive Officer's review
Pre-unbundling activities The primary task of our management team in the period leading up to and immediately after the unbundling, was the physical separation of the Kumba Iron Ore assets and businesses from the Kumba Resources group, and I am happy to say that the process went remarkably smoothly. I am confident that, as a result of our combined efforts, Kumba Iron Ore will be able to continue delivering the same exceptional results to stakeholders that it contributed when it was part of Kumba Resources. In fact, we have plans in place to enhance our performance wherever possible. Broadly, we will build on the achievements of Kumba Resources in the iron ore industry and harness the powerful momentum gained over the past five years. We are deploying the same management systems and largely the same staffing as before the unbundling. Where there were gaps in our skills levels that we were unable to fill from within, we succeeded in attracting the required talent from outside, despite the general tightness of the market, particularly in technical skills. In this we were greatly helped by the fact that Kumba Resources was named as “the best South African mining company to work for” by a comprehensive independent survey for three successive years. This reflects a company culture that strives to give its people greater work satisfaction and applies the values of integrity, respect, accountability, fairness, caring, openness and transparency. It is also a culture in which we create opportunities for our people through our training and skills development programmes, which cover current job requirements, future and potential work orientation and personal skills development. We will continue to spend significantly more than the industry average on training and development. We have been able to draw on the expertise of both Exxaro and the Anglo American plc group. To the extent necessary normal governance principles have been applied when sourcing such services. Such agreements have been effected at an arm’s length and on a normal commercial basis. Service agreements have been negotiated in areas such as payroll, information management, mine planning and certain laboratory activities. During the Iead-up to the unbundling, I visited Kumba Iron Ore’s customers world-wide. I was able to give them full assurance that we are committed to continue to be a reliable, longterm partner in our supplier relationship with them, and I am happy to report that they expressed unanimous approval for our products and service offerings. They undertook to continue supporting us in return. Because the unbundling transaction satisfied the empowerment ownership requirements of the Mining Charter, we were able to begin the process of converting the mining rights of Kumba Iron Ore to neworder mining rights before the effective date of the transaction and we expect conversions during 2007. Operational and financial performance Despite the preoccupations and activities of the unbundling process, the group, because of its strong value system and inherent strengths, achieved record production figures and kept its expansion projects in line with development schedules. Revenue for 2006 increased by 32 percent to R8,7 billion, year on year, and earnings before interest and tax rose by 38 percent to R5,4 billion. Markets New benchmark prices for 2007/2008 have been settled by most of the major iron ore producers and steel manufacturers at 9,5 percent for both lump and fine ore. The group's core purpose and prospects On the understanding that the core purpose of our group is to deliver outstanding sustainable value to our stakeholders, we will challenge ourselves continuously to reach new frontiers in people and operational performance. Several factors will help us realise our dream. We start life as a new company in a booming global industry. We have world-class iron ore assets with many positive attributes making us a preferred supplier to many customers. The impact of effective logistics and sound infrastructure on our operations and on the industry as a whole cannot be overstated. In this regard, we appreciate the efforts of Transnet to meet growing demands. We understand that Transnet’s upgrading and expansion of the Sishen-Saldanha export channel is on schedule despite initial problems such as the failure of the shiploader in September, and we look forward to its successful completion. Human capital The most important strength of Kumba Iron Ore is its committed, experienced and motivated people who have for the most part been nurtured in a flourishing iron ore business. We have taken over, and will continue to build on, the sound business ethic and management systems that have been in place in Kumba Resources. We can build on this strong base with regard to most of our policies and we are also now able to draw on the best of the Anglo American plc group. This includes a well-entrenched talent management programme. Performance management and incentives In order to provide a stimulating environment for our employees, the group sets stringent performance targets across all levels of the workforce and ensures that exceptional performance is well rewarded. To this end short-term incentives are paid to all employees to a maximum potential of 25 percent of annual basic salary on meeting set performance conditions. In addition, all employees up to junior management level are eligible for participation in the employee share participation scheme, known as Envision. The company will pay the first dividend to participating employees in the second quarter of 2007. Employees will share pro rata individually in the appreciation of the company shares through the Envision trust at the end of five years. Middle and senior management will participate in a management share incentive scheme as from 2007. This scheme aligns management objectives to ensure the realisation of company objectives over a threeyear period. It also serves as a retention mechanism. Project pipeline and future growth The company has a balanced pipeline with the potential to more than double production by 2015. In this programme, however, the cost per ton of ore transported, currently formulated in Transnet’s feasibility study, is critical for expansion in the Northern Cape. The current expansions of the Sishen-Saldanha export channel are providing Kumba Iron Ore with the opportunity to expand production from Sishen Mine to 42 Mtpa by 2009. Construction of the SEP plant is set to grow iron ore production by 13 Mtpa. This project, with a capital cost of R5,1 billion, is on track. In addition, projects that could increase production by a further 35 Mtpa are in the pre-feasibility and potential study phases. A pre feasibility study to expand the current Sishen Mine by a further 10 – 20 Mtpa is due to be completed in 2007. Studies on the production of iron ore pellets and iron ore fines from existing waste streams and low-grade ROM material are currently in potential and pre-feasibility phases and will proceed subject to financial viability and Spoornet rail expansion. The studies are expected to be completed in 2008. Another possible hindrance to the speedy completion of our expansion programme is the stance of Mittal in relation to certain projects. We are currently in arbitration with this company about its participation in new capacity expansions at the Sishen complex. A challenge facing us in the successful implementation and completion of our expansion project pipeline is the general shortage of technical skills facing the country, which we expect will continue for at least five years. Business strategies to increase volumes and improve efficiencies In our continuing drive to produce optimum results for our stakeholders, we will drive a number of strategic initiatives as set out in the Strategic objectives section. Outlook The outlook for Kumba Iron Ore for 2007 is expected to remain positive. The upward trend in global iron ore demand is expected to continue during the coming year. Prospects for continued real growth in global steel demand remain positive in 2007, with the strongest growth again expected to come from China with an anticipated increase of 8 to 10 percent in steel consumption. Kumba Iron Ore will focus on growth through its current operations whilst broadening its production base further as it pursues actively its pipeline of projects. Thanks We are particularly grateful to Dr Con Fauconnier and his team at Kumba Resources for working closely with us to mobilise the skills and resources required to perform the physical and practical steps involved in the unbundling and the subsequent listing of Kumba Iron Ore. We express our thanks to our board under the able leadership of our Chairman, Lazarus Zim, who guided us with their experience and support through the transition. I wish to thank our executive team for the exceptionally long hours they have had to put in over the past eventful year and I am confident in the ability of our employees to make the year ahead a great success. I am proud to lead the exceptional group of people that we employ across the board in our operations and at our central services and head office. I know that together, we will be able to move forward into a new era of profitability and achievement to benefit our shareholders, customers, the wider community and ourselves.
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