Notes to the condensed consolidated financial statements

The condensed consolidated financial report of Kumba and its subsidiaries for the year ended 31 December 2009 was authorised for issue in accordance with a resolution of the directors on 17 February 2010.

The condensed consolidated financial report has been prepared in accordance with the historical cost convention except for certain financial instruments, share-based payments and biological assets which are stated at fair value, and is presented in Rand, which is Kumba’s functional and presentation currency.

Except as disclosed below, the accounting policies and methods of computation applied in the preparation of the condensed consolidated financial report are consistent with those applied for the year ended 31 December 2008.

Kumba has elected to change its accounting policy in respect of the treatment of mineral waste stripping expenses in order to provide more reliable and relevant information about the effects of these costs on the entity’s financial position and financial performance for the reporting periods, for the annual period commencing 1 January 2009.

Waste stripping expenses

The removal of overburden or waste ore is required to obtain access to the ore body. To the extent that the actual stripping ratio is higher than the average stripping ratio in the early years of a mine’s production phase, the costs associated with this process are deferred and charged to operating costs using the expected average stripping ratio over the average life of the area being mined. This reflects the fact that waste removal is necessary to gain access to the ore body and therefore realise future economic benefit. The average life of mine stripping ratio is calculated as the number of tonnes of waste material expected to be removed during the life of mine, per tonne of ore mined. The average life of mine cost per tonne is calculated as the total expected costs to be incurred to mine the ore body divided by the number of tonnes expected to be mined.

The cost of stripping in any period will therefore be reflective of the average stripping rates for the ore body as a whole. However, where the pit profile is such that the actual stripping ratio is below the average life of mine stripping ratio in the early years no deferral takes place as this would result in recognition of a liability for which there is no obligation. Instead this position is monitored and when the cumulative calculation reflects a debit balance deferral commences.

During the development of a mine, before production commences, stripping expenses are capitalised as part of the investment in construction of the mine.

The change in accounting policy had no effect on the financial position or performance of the group due to the fact that Sishen Mine’s pit profile is such that the actual stripping ratio is currently below the average life of mine stripping ratio and therefore no deferral is required.

The group adopted the following amendments to existing standards and a new standard with effect from 1 January 2009.

IAS 1 (revised), Presentation of Financial Statements
The revised standard requires that changes in equity resulting from transactions with owners (holders of instruments classified as equity) be presented separately from non-owner changes in equity (also known as other comprehensive income). In addition, specific disclosures for components of other comprehensive income have been introduced. The adoption had no effect on the financial position or performance of the group.

IFRS 8, Operating segments
IFRS 8 replaces IAS 14, ‘Segment reporting’, and requires a ‘management approach’ under which segment information is presented on the same basis as that used for internal reporting purposes. This has resulted in an increase in the number of reportable segments presented, as the previously reported business segment, mining (being mining, extraction and production of iron ore) has been split further into the different mines that the group operates as well as its shipping operations.

Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker. The chief operating decision-maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the Kumba executive committee.

IFRS 7, Financial Instruments: Disclosures (amendment)
The amendment requires enhanced disclosures about the relative reliability of fair value measurements and the nature and extent of liquidity risk arising from financial instruments to which an entity is exposed. For Kumba the amendment results only in additional disclosures.

IFRS 2, Share-based Payment (amendment)
The amendment clarifies that vesting conditions are service conditions and performance conditions only. Kumba has adopted this amendment from 1 January 2009. The amendment does not have a material impact on the group’s financial position or performance.

The South African Institute of Chartered Accountants Circular 3/2009 on Headline Earnings
This circular replaces circular 8/2007 and provides a link to IFRS and accounting policy choices through guidance on the calculation of headline earnings including rules for every IFRS. The adoption of this circular has had no impact on the group.

Annual Improvements Project 2008
As part of its annual improvements project, the International Accounting Standards Board (IASB) issued 35 amendments to various issued accounting standards. These amendments were primarily made to resolve conflicts and remove inconsistencies between standards, clarify the status of application guidance in standards, clarify existing IFRS requirements as well as conform the terminology used in standards with that used in other standards and to that more widely used. Kumba adopted these amendments in 2009, the application of which has not had an effect on the results, nor has it required any restatement of prior period results.

The accounting standards, amendments to issued accounting standards and interpretations, which are relevant to the group, but not yet effective at 31 December 2009, have not been adopted. The group is currently evaluating the impact of these pronouncements.

A total of R1.3 billion was transferred from assets under construction to machinery, plant and equipment during the year.

On 21 August 2009 Kumba issued 953 660 shares to the management share option scheme. Options exercised under the management share option scheme during the year to 31 December 2009 resulted in 2 610 960 shares being issued (2008: 2 207 840 shares) with exercise proceeds of R132 million (2008: R75 million).

The effective date of this transaction was 15 July 2009, as this is the date on which SIOC effectively obtained control by acquiring all the issued share capital.

The purchase consideration of US$14 million was allocated to the individual identifiable assets and liabilities on the basis of their relative fair values at the effective date. No goodwill was recognised as part of the acquisition.

The executive committee considers the business principally according to the nature of the products and services provided, with the segment representing a strategic business unit. The reportable operating segments derive their revenue primarily from mining, extraction, production and selling of iron ore and shipping operations charged to external clients.

Corporate, administration and other expenditure not allocated to the different segments therefore form part of the reconciliation to profit before taxation under the heading ’Other segments’.

The Kumba executive committee assesses the performance of the operating segments based on a measure of earnings before interest and tax (‘EBIT’). This measurement basis is consistent with ’operating profit’ in the financial statements. Interest income and expenditure are not allocated to segments, as this type of activity is managed on a central group basis.

The total segment revenue comprises revenue from external customers as the group does not have any inter-segment revenue. The revenue from external parties reported to the executive committee is measured in a manner consistent with that disclosed in the income statement.

During the year Kumba withdrew the short-term deposit facility that was placed with Anglo American SA Finance
Limited (2008: R2.9 billion).

During January 2010 Sishen Iron Ore Company (Pty) Limited issued financial guarantees to the Department of Mineral Resources (DMR) to the value of R567 million in respect of the environmental rehabilitation and decommissioning obligations of the group.

The directors are not aware of any other matter or circumstance arising since the end of the year and up to the date of this report, not otherwise dealt with in this report.