south african chrome & alloys limited annual report 2004€¦ · for compliance with the...

annual report 2004SOUTH AFRICAN CHROME & ALLOYS LIMITED

SA Chrome is proudly South African, owned by South Africansand is committed to:• Producing a product in an environmentally friendly manner;• Continuing as a technology leader;• Being a reliable supply partner to the stainless steel industry;• Adding value to the country and its people;• Empowerment and employment equity; and• Creating shareholder value on a sustainable basis.

Company Profile 3

Major Shareholders 3

Group Structure 4

Directorate 4

Chairman and Chief Executive Officer’s Review 7

Xstrata – SA Chrome Venture – a Win-Win Partnership 13

The Way Forward 17

Sustainability Report 19

Corporate Governance 25

Annual Financial Statements 28

Shareholder Information 58

Shareholders’ Diary 59

Notice of Annual General Meeting 59

Form of Proxy 61

Group Information 63

C O N T E N T S

SOUTH AFRICAN CHROME & ALLOYS LIMITED

SA Chrome Annual Report 2004

3

South African Chrome and Alloys Limited(SA Chrome) is listed on the JSE Securities ExchangeSouth Africa, under ‘Resources – Mineral Extractorsand Mines’, share code ‘SCE’. It is also listed onthe FTSE/JSE SRI Index. It had 1,195, 664, 842ordinary shares in issue as at 31 March 2004. TheCompany’s market capitalisation was R1,1 billionon 31 March 2004.

SA Chrome’s assets consist of a ferrochrome facilityin Boshoek, a UG2 concentrator plant and theHorizon chrome mine, in the North West Provinceof South Africa. The Boshoek facility consists oftwo 54 MVA closed submerged arc furnaces withcharge preheating, and a 520 000 tonnes per annumpelletising and sintering plant based on Outokumputechnology. The feedstock for the Boshoek facilityis provided by the Horizon chrome mine and aUG2 concentrator plant.

The Xstrata - SA Chrome Venture which came intobeing on 1 July 2004 has created the world’s largestferrochrome producer.

COMPANY PROFILE

SA Chrome forms part of the JSE Securities Exchange FTSE/JSE SRI (SociallyResponsible Investment) Index.

SA CHROME AND ALLOYS LTD (Close), FTSE/JSE RESOURCES(CLOSE) Daily 25/3/2003 - 12/7/2004

A M J A S O N D J F M A M J JJ

12 000

11 000

10 0009 500

9 000

8 500

8 000

7 500

100959085807570

65

60

5553

SCE[CL](79) FTSE/JSE RESOURCES [Close](9448.83)

2003 2004

BREAKDOWN OF SA CHROME MAJORSHAREHOLDERS AS OF 15 JULY 2004

24.4%

32.1% 43.5%

MajorShareholders

Royal

Bafokeng

The IDC

Minorities

4

Forward Looking Statements

Certain statements in this report constitute ‘forward lookingstatements’. Such statements involve known and unknownrisks, uncertainties and other factors that may cause theactual results, performances, objectives or achievementsof SA Chrome and its subsidiary companies as well as theferrochrome industry to be materially different from futureresults, performances, objectives or achievements expressedor implied by these forward looking statements. SA Chromeis subject to the effect of changes in commodity prices,currency fluctuations and the risks involved in mining andsmelting operations.

Non-Executive Directors

Chris Molefe (54)ChairmanBCom, Post-graduate Diploma inProperty DevelopmentChris Molefe joined the SA Chromeboard as Non-Executive Chairmanin February 2002. He is the Chief

Executive Officer of Royal Bafokeng Resources Holdings.He has had extensive experience in merchant bankingand transformation strategy development.

Reinier Posthumus Meyjes (58)Pr Eng, BSc Eng, MBLReinier Meyjes has been involvedin numerous furnace projectsspanning 30 years in this field. Ofspecific importance is his closeinvolvement in turnkey smelter

projects with closed ferrochrome furnaces utilising sinteredore pellets.

Qinisani Mbatha (28)BSc Quantity Surveying, MComm,PrQSQinisani Mbatha is the head of theProject Evaluations Department atthe Industrial DevelopmentCorporation (IDC). He is also a

member of the Sectors and Project Review Committee,looking at technical and commercial viability of equity

and debt transactions.

Andre Bekker (43)BSc Hons, MDPAndre Bekker is a senior projectmanager at the IndustrialDevelopment Corporation withextensive international experience

in the ferrochrome industry, having been involved in thedevelopment of a number of ferrochrome projects in South

DIRECTORATEGROUP STRUCTURE

BoshoekSmelter

HorizonChrome Mine

UG2Concentrator

SAFERROCHROME

SA CHROME

DIVISIONS

100%

100%


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Africa. He has visited and has an in depth knowledge offerrochrome and stainless steel operations in Kazakhstan,

India, China and Europe.

Dr Todor Vlajcic (56)PhD (Engineering)Dr Vlajcic is the managing directorof ThyssenKrupp Metallurgie GmbH(TK Met). He has been involved inthe chrome industry for over 25

years and has vast experience in the construction of furnacesthroughout the world. Prior to joining TK Met he was thesales manager and later the general manager of Ferroalloyand Nonferrous Plants Mannesmann Demag, Duisburg,Germany (1975 – 1997).

Executive Directors

Steve Phiri (48)Chief Executive OfficerBJuris LLB, LLM, HDip Co LawBefore joining the SA Chromeexecutive Steve Phiri was head ofCorporate and Legal Affairs for theRoyal Bafokeng Nation (RBN) and

joint head of RBN’s Mineral and Mining Affairs Committee.He led their negotiating team, which successfully resolvedthe dispute with Impala Platinum Ltd in the 1990s andnegotiated their investment in SA Chrome and their jointventure with Anglo Platinum. Steve is a member of theGovernment’s Standing Advisory Committee on the MiningCharter.

Bruce McBride (44) Commercial DirectorBA, LLB, Dip Advanced Banking,MBA, PhD.Prior to joining SA Chrome, BruceMcBride was a senior partner at BellDewar and Hall, where he specialised

in commercial, banking and mining law, acting for listedand international companies in these sectors.

Stuart Elliot (40)Finance DirectorCA (SA), HDip Co LawStuart Elliot was an audit manager atKPMG and a senior manager atFirstCorp Merchant Bank. He later

joined Gencor in London as a project finance consultant,focusing exclusively on their acquisition of Billiton plc fromRoyal Dutch Shell, and then moved on to Deutsche MorganGrenfell (Pty) Limited as an associate director. He was alsoa director of The Corner House (Pty) Limited.

Zed van der Walt (59)Technical DirectorPrEng, BSc Engineering (MET), MBA,DPLRZed van der Walt is a metallurgicalengineer with over 35 years broadoperational and management

experience in the ferroalloy industry, including feasibilitystudies, process design, construction, commissioning andoperations. Prior to joining SA Chrome, Zed was managingdirector and CEO of Consolidated Metallurgical IndustriesLimited, at one time the second largest ferrochrome operationin the world.

Company Secretary

Amritha Mahendranath (36)BCom (Hons)Amritha Mahendranath joined SAChrome in February 2003 as afinancial manager and was appointedto the role of Company Secretary on

1 March, 2004. Prior to joining SA Chrome she worked forMondi Limited.

The address of the directors is:Suite 106, Block C, Eva Park, Cnr Beyers Naude Drive andJudges Ave, Cresta, 2194.


7

• Our Boshoek plant achieved certification and accreditation in May 2004for compliance with the requirements of SANS IS0 9001:2000 for its Quality Management System.

• The ferrochrome facility exceeded its production capacity of 20, 000 tonnes per month in both June and July 2004

Review of ResultsSA Chrome’s turnover, on an fob basis, for the 12 months ended31 March 2004, was R554 million. It was achieved from the sale of

T h e Y e a r U n d e r R e v i e wWhile the Company continued to achieve a steadyimprovement in production performance withturnover increasing from R184 million in 2003financial year to R554 million this year, ongoingtechnical start-up and design problems took longerto eradicate than expected. This resulted in lowerthan expected production volumes, which togetherwith a number of other factors, including the strongRand, adversely affected production costs andrevenue.

There were, however, a number of positivedevelopments:

• On 24 February 2004, SA Chrome concluded anagreement with Xstrata South Africa (Pty) Limited,a wholly-owned subsidiary of Xstrata plc, a major,global, diversified mining group, listed on the London and Swiss stock exchanges. This R8 billiontransaction created the world’s leading ferrochrome producer and secured SA Chrome’sparticipation in the combined earnings of the venture.

• In June 2004 SA Chrome was proud to be one of 51 companies listed on the JSE Securities Exchange selected to participate in the FTSE/JSESRI (Socially Responsible Investment) Index.

Those included in the index had to meet set criteria in respect of economic, environmental and social sustainability and corporate governance. It is rewarding to have our commitment to a long-term sustainable approachto our business recognised in this way.

C H A I R M A N A N D C H I E F E X E C U T I V E O F F I C E R ' S R E V I E W

MARKET OUTLOOK - PRICES

605856545250484644424038363432302826

2002 2002 2002 2002 2003 2003 2003 2003 2004 2004 2004 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3

28 28 31 34 34 41 47 50 57 69 73

74727068666462

Published ferrochrome base price in USc/lb chrome contained

8

193 832 tonnes of ferrochrome at an average Rand:US$ exchange rate of R7.00: US$1, 40 000 tonnesbelow production capacity.

We incurred an operating loss before interest, taxand depreciation of R23.4 million. The transactionexpenses relating to the SA Chrome – Xstrata Ventureof R3 million and the cost of R6 million for thefeasibility study conducted into the expansion ofour Boshoek ferrochrome facility, are included inthis loss. After taking into account depreciation ofR28.3 million and interest on debt of R55.4 million,the Company’s net loss after tax totalledR107.1 million.

The stronger Rand against budget caused a negativevariance in earnings of R115 million. The negativevariance in production costs against budget reducedearnings by a further R70 million. These negativevariances were partially offset by a positive varianceof R45 million resulting from favourable ferrochromeprices.

Review of OperationsProgress on the performance of our operations wasslower than expected during the second half of thereporting period compared to the performancereported at half-year. The ferrochrome production

rate improved by only 4% during the second half of the year to reach193 832 tonnes, which was 14% less than budget expectations. Plant costof production improved by 7% in the second half of the year over productionin the first half of the year, but still fell short of expectations for the year by16% in Rand per tonne terms.

The main reasons for the slower than expected performance improvementwere:

• The metal recovery plant, although partly commissioned on an experimental basis during October 2003, was only completed after the end of the financial year. An estimated 5% of production went unrecoveredto the slag dump. It will be at least a year before the plant can recover thebacklog of previously unrecovered production from the slag dump.

TON

NES

50 000

45 000

40 000

35 000

30 000

25 000

20 000

15 000

10 000

SINTERPLANT PRODUCTIONSupply versus Demand

Demand

Supply

Sep

02

Oct

02

Nov

02

Dec

02

Jan

03

Feb

03

Mar

03

Apr

03

May

03

Jun

03

Jul 0

3

Aug

03

Sep

03

Oct

03

Nov

03

Dec

03

Jan

04

Feb

04

Mar

04

PERC

ENTA

GE

ABO

VE

TARG

ET

MONTHLY COST DEVIATION

Dec

02

Jan

03Fe

b 03

Mar

03

Apr

03

May

03

Jun

03Ju

l 03

Aug

03

Sep

03O

ct 0

3N

ov 0

3D

ec 0

3Ja

n 04

Feb

04M

ar 0

4

70

60

50

40

30

20

10

0

PERC

ENTA

GE

OF

TARG

ET

120

100

80

60

40

20

0

FURNACES - PRODUCTION

Jul 0

2A

ug 0

2Se

p 02

Oct

02

Nov

02

Dec

02

Jan

03Fe

b 03

Mar

03

Apr

03

May

03

Jun

03Ju

l 03

Aug

03

Sep

03O

ct 0

3N

ov 0

3D

ec 0

3Ja

n 04

Feb

04M

ar 0

4


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In June and July 2004 production at the Boshoek plant exceeded its fullcapacity of 20, 000 tonnes a month. We are proud to enter the Xstrata –SA Chrome Venture as a successful operation. We expect this improvementin performance to continue into the Xstrata – SA Chrome Venture and tobe enhanced by our relationship with Xstrata.

The Xstrata – SA Chrome VentureThe Xstrata – SA Chrome Venture, which commenced on 1 July 2004, hasresulted in SA Chrome and Xstrata pooling and sharing their ferrochromeoperations.

The Venture will significantly reduce operational risk as SA Chrome willno longer be dependent on the output of one mine and two furnaces, butwill be participating in the output of six mines and 16 furnaces and futuregrowth. At the same time, Xstrata, the most competitive South Africanferrochrome producer, gains meaningful empowerment credentials for itsferrochrome assets.

SA Chrome’s initial participation in the combined earnings before interest,tax, depreciation and amortisation (EBITDA), will be 11%, rising to 17,5%from year three onwards of the Venture. The Company also has the optionto acquire an additional 2,5% interest in the Xstrata – SA Chrome Venturewhich, if exercised, would increase its shareholding in the Venture to 20%.Thereafter, SA Chrome will be entitled to increase its participation to 26%by contributing more than its pro rata share of the cost of any expansionor acquisition.

SA Chrome and Xstrata retain ownership of their respective assets, miningrights and land.

An executive committee appointed by the joint board will manage theVenture’s day-to-day operations. Its members will be drawn from Xstrataand SA Chrome and will be accountable to the joint board, consisting ofsix members; three representing SA Chrome and three representing Xstrata.

Both parties will benefit from the transfer of best operational practice, theoptimisation of ore feed from the reserves of both SA Chrome and Xstrata,and the introduction of the full spectrum of technology systems. SA Chrome

• Slower than expected underground mining development at Horizon Chrome Mine resultedin a shortfall in quality LG6 chromite ore feed tothe Horizon beneficiation plant. As a result, theplant could not meet the Boshoek smelter’s ore requirements. To overcome this shortfall, it wasnecessary to buy in lumpy ore at higher prices.

Underground production at Horizon Mine isincreasing as the development of the Ruighoekshaft and Chromeden decline are nearingcompletion and are brought into production.Encouraging results have been achieved from thebulk sampling of the proposed Boshoek opencastmine adjacent to the Boshoek smelter. Thedevelopment of this mine is awaiting a mininglicense application and the completion of anEnvironmental Management Programme Report(EMPR) currently being conducted. It will alleviateall the supply problems we have experienced duringthe past 18 months. The EMPR also caters forEnvironmental Impact Assessment (EIA) elementsof an extensive feasibility study into expansionsand opportunities for the Boshoek smelter. Thisstudy will be completed shortly.

The high cost of raw materials, such as ore andimported coke, were responsible for a price varianceof 5% on total production costs. Drastic measureswere taken to avert the impact of the doubling ofthe price of coke during the year by replacing itwith more affordable reductants. These madedemands on operational stability, particularly inthe last quarter of the financial year.

In spite of these production setbacks there has beena steady improvement in performance at the plant,which continued at an accelerated pace after year-end.

10

will, among other things, have access to Xstrata’sexclusive Premus technology to be employed inthe expansion project known as ‘Project Lion’.

SA Chrome will also benefit from operationalsynergies, production flexibility, greater purchasingpower with suppliers, lower freight rates and optimalutilisation of reserves.

ThyssenKrupp Metallurgie GmbH (TK Met) agreedto relinquish its marketing and associated rights toSA Chrome’s production in exchange for the rightto purchase 100 000 tonnes of ferrochrome annuallyfrom the Xstrata – SA Chrome Venture. TK Met hasalso been appointed as a sub-agent for sales offerrochrome to ThyssenKrupp Stainless GmbH. Ourthanks to TK Met for their marketing efforts andtheir support.

Glencore International AG, becomes the marketingagent for the Xstrata – SA Chrome Venture, underthe same terms and conditions as its existingmarketing agreement with Xstrata. Glencore is oneof the world’s largest suppliers of a wide range ofcommodities and raw materials to industrialconsumers.

Market ReviewGlobal ferrochrome demand in 2003 remainedexceptionally strong, exceeding 4,9 million tonnes.The continued growth in stainless steel productionsupported this growth.

The combined stainless steel output of China,Taiwan, India and Korea was up 18% to 5,9 milliontonnes and in Europe stainless steel productiongrew 3,9% to 8,4 million tonnes.

Ferrochrome prices, underpinned by this strong demand, increasedsubstantially in 2003 and into 2004 after year end. A 12 US cents/lb chromecontained increase was achieved for Q2:2004 and a further4 US cents/lb chrome contained increase followed in Q3, which broughtthe price up to 73 US cents/lb for Q3. The drivers for higher ferrochromeprices include global economic recovery and growth in stainless steelconsumption.

The outlook for ferrochrome demand remains strong, as stainless steel meltis expected to grow a further 6 - 7% to over 24 million tonnes in 2004.Improving global economic conditions and new melt capacity in Chinasupports this. As a result, the fundamentals for ferrochrome demand remainexciting and strong growth in ferrochrome consumption is anticipated.

MARKET OUTLOOK - STAINLESS STEEL MELT GROWTHESTIMATE

25

20

15

10

5

0

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

Source: H Pariser

World S/S

5% Trend Line

There will be no meaningful increase in global ferrochrome production in2004. This should ensure that the supply and demand balance will continueto be tight and prices will remain firm.

Board and ManagementWe wish to thank the board and all our staff for working towards theachievement of our objectives. A special thanks goes to the executive teamfor their commitment and dedication to the Company in difficult times, and

for their efforts in concluding the Xstrata – SA Chrome Venture, which webelieve will bring substantial benefits to the Company in the years ahead.

Last, but not least, we would also like to thank former directors Mr TerenceMcConnachie, Mr Jack Dorfan, Mr Myron Pollack and Mr Sipho Mkhize fortheir contributions to the Company. We welcome Mr Qinisani Mbatha ofthe Industrial Development Corporation to the board as a non-executivedirector.

We are addressing the composition of the boardand will be appointing further independent non-executive directors. An announcement in this regardwill be made in due course.

ProspectsThe combination of improving production levels,strong ferrochrome prices and the creation of theworld’s leading ferrochrome producer through theXstrata – SA Chrome joint Venture, all bode wellfor SA Chrome’s future.

The board and management team have alwaysseen SA Chrome as a company poised for growth.It is well positioned, with its empowermentcredentials and strong shareholder base, to takeadvantage of the opportunities currently availablein South Africa.

To this end the board will be focusing on growingthe Company in a manner that will ensure its long-term prospects and its sustainability in the newfinancial year. The Company’s growth strategy hastwo aims; to grow its ferrochrome interests bothorganically and through acquisitions and to diversifyinto other resources. We will be sharing the detailsof this strategy with our shareholders once it isfinalised.


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Chris Molefe Steve PhiriNon-Executive Chairman Chief Executive Officer

5 500

5 000

4 500

4 000

3 500

3 000

2 500

2 000

1 500

1 000

500

0

FERROCHROME CONSUMPTION RISING SHARPLY

1988

1899

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

Western world consumption of ferrochrome

Source: CRU

USA W Europe Japan Other Asia Other W World

‘I welcome the creation of theXstrata – SA Chrome Venture and thecommitment of the partners involvedto create meaningful and sustainableempowerment in what is a globalindustry leader.’

Phumzile Mlambo-Ngcuka, Ministerof Minerals and Energy


13

• The Venture provides our shareholders with an opportunity to participatein significant future growth with significantly reduced operational risk.SA Chrome relied on the output of one mine and two furnaces with a production capacity of 235 000 tonnes. The Xstrata – SA Chrome Venturehas the combined output of six mines and 16 furnaces to draw on with an annual ferrochrome capacity of approximately 1.4 million tonnes, which represents around 30% of the current global ferrochrome output.

• SA Chrome and Xstrata have pooled the risks and rewards associated withtheir ferrochrome assets in the Venture. The two companies will share inthe pooled earnings before interest, tax, depreciation and amortisation (EBITDA) in proportion to their respective participation in the Venture.

The Xstrata – SA Chrome Venture offers transfer ofbest operational practice; optimisation of oreresources; introduction of new technology andreduced operational risk.

About XstrataXstrata plc, with its headquarters in Switzerland,is a global diversified mining company, listed onthe London and Swiss stock exchanges. Besideshaving meaningful international positions in thesix major commodities of copper, coking coal,thermal coal, ferrochrome, vanadium and zinc, italso has gold, lead and silver interests. Xstrata plchas operations in Australia, South Africa, Spain,Germany, Argentina and the United Kingdom,which employ some 18 000 people.

Xstrata South Africa (Pty) Limited is a 100%indirectly held subsidiary of Xstrata plc, whichowns Xstrata plc’s coal, chrome and vanadiumassets through the Xstrata Coal and Alloys divisions.

The Xstrata chrome mining and ferrochromeproduction facilities include four undergroundmining operations on the Bushveld IgneousComplex, three near Rustenburg on the westernside of the complex and one near Lydenburg onthe eastern side of the complex.

Their smelters are situated at Lydenburg and nearRustenburg.

The Rationale• The Venture allows both companies to participate

jointly in the world’s leading ferrochrome producer and to realise significant operational efficiencies through the transfer of best operationalpractice, the optimisation of ore feed from the reserves of the two parties and the introductionof new technology.

XSTRATA - SA CHROME VENTURE – A WIN-WIN PARTNERSHIP

4%

ASA Metals

Assmang

Hernic

Samancor

SA Chrome

Xstrata

Non-SA

Production

29%

1%36%

20%

5%5%

GLOBAL FERROCHROME MARKET

• The Venture provides Xstrata with an opportunity to introducemeaningful and sustainable empowerment ownership and involvement to its ferrochrome assets, as well as the opportunityto participate in the benefits of future synergies between Xstrata and SA Chrome.

Empowerment Objectives of VentureBoth Xstrata and SA Chrome are committed to ensuring thatthe Venture takes a long-term and responsible approach to itsbusiness. A transformation manager, appointed to the executiveteam by SA Chrome, will oversee the achievement of theVenture’s empowerment objectives.

These will include:• Skills development• Preferential procurement practices• Social upliftment of the surrounding communities through

social development projects.

14

• SA Chrome’s initial participation in the combined EBITDA will be 11%, rising to 17,5% from year three onwards of theVenture. SA Chrome also has the right to increase its effectiveinterest in the Xstrata – SA Chrome Venture to 26% by contributing proportionately more than its participation interestto the cost of any expansion or acquisition.

Transact ion Structure

* Listed on the LSE and Swiss Stock Exchange** Listed on JSE***From Year 3 onwards(1) Excludes EBITDA from the two furnaces at Wonderkop Plant,

which form part of the existing Xstrata-Samancor JV.

RBR IDC Minorities

Xstrata plc* Xstrata SouthAfrica

SA Chrome**

Xstrata SA ChromeVenture

EBITDA of SAChrome assets

EBITDA ofXstrata SA

Ferrochromeassets (1)

32.1% 24.4 % 43.5%

82.5% 17.5% ***

100% 100%

Europe

Asia

Japan

USA

Local

Bracketed figures areestimated % S/Steelproduced per region

24% (29%)10%(17.3%)

44%(37.9%)

9%(3.2%)

13%(12.5%)

INDICATIVE XSTRATA FERROCHROME SALES 2004

By geographic sales dis t r ibut ion


15

Both Xstrata and SA Chrome are committed to delivering industry-leadingreturns for their shareholders through genuine partnerships with employees,customers, shareholders, local communities and other stakeholders,which are based on integrity, co-operation, transparency and mutualvalue creation.

LOCATION OF SMELTER OPERATIONS

WONDERKOPDesign Capacity: 430 Kt FeCrSlag Recovery: 30.0 Kt FeCrEmployees: 750

LYDENBURGDesign Capacity: 378 Kt FeCrSlag Recovery: 24.0 Kt FeCrEmployees: 545

RUSTENBURGDesign Capacity: 400.0 Kt FeCrSlag Recovery: 30.0 Kt FeCrEmployees: 758

BOSHOEKDesign Capacity: 235 Kt FeCrSlag Recovery: 8.0 Kt FeCrEmployees: 340

MarketingXstrata, as a major producer of ferrochrome productshas detailed market knowledge and expertise. Alarge proportion of its ferrochrome sales are throughlong-term contracts negotiated by its marketingagent, Glencore International AG, which, as oneof the world’s largest suppliers of a wide range ofcommodities and raw materials to industrialconsumers, is a major participant in the global flowof natural resources.

Management of Xstrata - SA Chrome VentureA joint board for the combined operations of bothcompanies has been formed. The board has sixmembers – three representing SA Chrome and threerepresenting Xstrata. Mr Peet Nienaber, theChairman and Chief Executive of Xstrata SouthAfrica (Pty) Limited has been appointed as the firstchairperson of the board.

Joint BoardChairperson:

Peet Nienaber

Management Structure

Xstrata SA Chrome

Senioroperationalmanagement

MinesPlants SHEQMarketing Finance Transformation

6 members –3 appointed byeach party


17

SA Chrome has established its empowermentcredentials in the ferrochrome industry andpositioned itself as a major player in theferrochrome industry through the Xstrata – SAChrome Venture.

The board’s future growth strategy is aimed atcapitalising on this position by growing theCompany’s ferrochrome interests by acquisitionand organically. An example is SA Chrome’s interestin participating in Project Lion, an ultimate onemillion tonne per annum ferrochrome complex,in the Mpumalanga Province.

The project is a brown field expansion chosenbecause of Xstrata’s significant ore reserves in thearea, the potential for UG2 from future PGMextractions, the proximity of the plant to theMaloma anthracite mine in Swaziland and Maputoharbour. The project will be constructed in threephases, each with 330 000 tonnes of annualsmelting capacity.

THE WAY FORWARD

Phase One includes two 63 MVA closed submerged arc furnaces and a pre-reduction kiln with an estimated capital cost of R1,4 billion, which will befunded by Xstrata and SA Chrome in proportion to their participation interests.The project is progressing on schedule. Design work will be completed bymid 2004 and Phase One is expected to go into production early in 2006.

Xstrata’s exclusive Premus process, a substantial modification of the highlyefficient closed furnace and pelletising technology, is expected to deliveroperating costs around 20% below alternative technologies. The processachieves these cost reductions through the significant substitution of anthracitefor coke, and reduced power costs. The Premus process power costs arebetween 25% and 45% lower than those for the processes currently in usein the industry. The process has already been successfully implemented atXstrata’s Lydenburg ferrochrome facility.

In addition we wish to use our empowerment credentials and our ability toaccess project capital to diversify into other minerals and metals and establishourselves as a major player in the resources sector. Shareholders will beadvised in due course of the Company’s strategy.


19

The key to the long-term prospects of any enterprise is its sustainability,which requires integrating economic activity with environmental integrity,social concerns and an effective governance system. SA Chrome takes along-term and responsible approach to its business. We are committed tothe vision of the new legislation governing our industry in South Africa,which is to develop a globally competitive mining industry that draws onthe human and financial resources of all South Africa’s people, offers realbenefits to all South Africans and proudly reflects the promise of a non-racial South Africa.

In addition we have taken note of the critical issues highlighted by theSouthern African Mining, Minerals and Sustainable Development projectthat need to be addressed if progress toward sustainability is to be achievedin this region. These are poverty alleviation, capacity building and skillstraining, gender equity, job creation and governance. SA Chrome is committedto addressing these issues within its own workforce, and also in the communityin which it operates.

FTSE/JSE SRI IndexIn June 2004 SA Chrome was one of 51 companies, listed on the JSE SecuritiesExchange, chosen to participate in the FTSE/JSE SRI (Socially ResponsibleInvestment) Index.

The integrated/inclusive approach to corporate governance standards in allcorporate activities advocated by King II and the rise in socially responsibleinvestment and SRI funds, together with increasing evidence suggesting aninterrelationship between socially responsible practices and long-termshareholder value, prompted the JSE to establish the SRI index.

The SRI Index criteria reflect the complexity of corporate social responsibilityin South Africa. The companies included in the Index were independentlyassessed by a JSE-appointed task team. They had to meet set criteria inrespect of economic, environmental and social sustainability and corporategovernance.

SUSTAINABILITY REPORT

SOCIAL

ECONOMIC

ENVIRONMENT

SUSTAINABLEDEVELOPMENT

• Employment equity• Transparency• Safety• Health• Skills development• Human resource

development• Community

investment

• Profitability• Accelerating economic

growth through greater equity and self reliance

• Beneficiation• Growth

Ensuring equitable andsustainable use of theenvironment and naturalresources for the benefitof present and futuregenerations

20

Progress Made Towards Target 5-Year Target Met

HUMAN RESOURCE DEVELOPMENT

Every employee to be offered the opportunity Eight out of 211 employees need literacy On the way to complyingto be functionally literate and numerate by 2005 training – ABET programmes and

computer literacy and numeracy trainingis scheduled to start in the new financialyear.

Career paths and skills development plans Career path plans have been developed Yesimplemented for all HDSA employees. for all occupations and skills

development plans are in place.

Has the company developed systems through The Company mentors and assists Yeswhich empowerment groups can be mentored? empowerment groups that have a direct

link to the organizational process. Thesegroups are then contracted to performcontracts / work for the Company.

EMPLOYMENT EQUITY

Has the company published its employment Yes Yesequity plan and reported on its annual progressin meeting that plan?

Has the company established a plan to achieve Yes – set out in Employment Equity Plan Yesa target for HDSA participation inmanagement of 40% within 5 years and is itimplementing the plan?

Has the company identified a talent pool and is it A talent pool has been identified in terms Yesfast tracking it? of our equal opportunities policy and it is

being fast tracked.

THE SA CHROME SCORECARD IN TERMS OF THE MINING SCORECARD


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Has the company established a plan to achieve Yes – already exceed 10% (13% of Yesthe target for women participating in mining of employees are women in operational10% within 5 years and is it implementing positions).the plan?

MIGRANT LABOUR

Has the company subscribed to government and Yes Yesindustry agreements to ensure non-discriminationagainst foreign migrant labour?

MINE COMMUNITY AND RURALDEVELOPMENT

Has the company co-operated in the formulation The Company has engaged with the local On the way to complying.of integrated development plans and is the mining communities and independentcompany co-operating with government in the external experts who, together withimplementation of these plans for communities management, are in the process ofwhere mining takes place and for major labour formulating an integrated socialsending areas? Has there been effort on the side development plan.of the company to engage the local minecommunity and major labour sending areacommunities? (Companies will be required tocite a pattern of consultation, indicate moneyexpenditures and show a plan).

HOUSING AND LIVING CONDITIONS

For company provided housing has the mine, in Our employees are local to our operations Not applicableconsultation with stakeholders, established and therefore do not require specialmeasures for improving the standard of housing, arrangements for housing. Opportunities including the upgrading of the hostels, conversion have been provided to all employees toof hostels to family units and promoted home determine their own living arrangementsownership options for mine employees? Company through flexible remuneration.will be required to indicate what they have doneto improve housing and show a plan to progressthe issue over time and is implementing the plan.

Has the company established measures for The Company does not provide meals for On the way to complyingimproving the nutrition of employees? Companies its employees unless they are at workwill be required to indicate what they have done longer than eight hours. It is preparing ato improve nutrition and show a plan to progress health education programme, which willthe issue over time and implementation of this include nutritional training to beplan. implemented in the near future.

PROCUREMENT

Has the mining company given historically The Company has in place a procurement On the way to complyingdisadvantaged South African’s preferred committee, which is responsible forsupplier status? awarding tenders and supply contracts.

All potential suppliers are required toprovide us with details of HDSA

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shareholding/participation in theirbusiness. The Company is committed tosupporting and making use of localbusinesses that meet the BEE criteria setout in the Broad-Based Socio-EconomicEmpowerment Charter for the MiningIndustry.

Has the mining company identified the current Yes - our current level of HDSA Yeslevel of procurement from historically procurement is identified and recorded.disadvantaged South African companies in terms On average the Company procures 48%of capital goods, consumables and services? of all commodities and services from BEE

companies and 17% from companies,which are in the process of complyingwith BEE requirements.

Has the mining company indicated a commitment SA Chrome has indicated its commitment On the way to complyingto a progression of procurement from historically to procuring capital goods, consumablesdisadvantaged South African companies over a and services from historically3-5 year time frame in terms of capital goods, disadvantaged South African companiesconsumables and services and to what extent has where and whenever possible and isthe commitment been implemented? implementing this commitment. We are

hopeful of achieving our targets within thestipulated timeframe.

OWNERSHIP AND JOINT VENTURES

Has the mining company achieved historically The Royal Bafokeng currently Yes – target of 15% exceeded bydisadvantaged South African participation in terms own a 32.1% shareholding in SA Chrome. an additional 20%of ownership for equity or attributable units ofproduction of 15 per cent in historicallydisadvantaged South African hands within fiveyears and 26 per cent in 10 years?

BENEFICIATION

Has the mining company identified its current The main business of SA Chrome is the Yeslevel of beneficiation? beneficiation of chromite at our Boshoek

smelter.

Has the mining company established its base line Yes Yeslevel of beneficiation and indicated the extent thatthis will have to be grown in order to qualify foran offset

REPORTING

Has the company reported on an annual basis its This progress is reflected in the Corporate Yesprogress towards achieving its commitments in its Review of this report.annual report?


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SUSTAINABILITY REPORT

Additional Comments on our Progress TowardsSustainable Development

Employment EquityIn terms of the Broad-Based Socio-EconomicEmpowerment Charter for the South African miningindustry the stakeholders committed themselves toaspiring to a baseline of 40% historicallydisadvantaged participation in management withinfive years; and in terms of ensuring higher levelsof inclusiveness and advancement of women theycommitted to a baseline of 10% of womenparticipation in the mining industry within fiveyears.

The percentage of participation of permanently employed HDSAs inmanagement in SA Chrome’s operations is currently 36%, while the overallpercentage of HDSA employees is 77%. Our 5-year employment equityplan was submitted in 2003 and our employment equity annual report waspublished and submitted on 1 October 2003 and will be published on1 October every subsequent year. We have set ourselves the goals of

increasing our percentage of HDSA members of management to 54% by2008 and our targeted percentage of HDSA managers, professionals,technicians and associate professionals is set at 73% by 2008. As can beseen from the statistics set out in this report SA Chrome has already morethan achieved its commitment as far as women participation is concerned,with 13% of its staff being female. Female participation at management levelis included in our equity plan.

The employment equity committee at our operations meets regularly andconsists of representatives from the various groups, as set out in the EmploymentEquity Act.

Racial Breakdown of SA Chrome’s Management

Gender Breakdown of SA Chrome’s Employees

36% 64%

HDSA

Non-HDSA

Females

Males

87% 13%

RACIAL BREAKDOWN OF SA CHROME ’S EMPLOYEES

HDSA

NON-HDSA

77% 23%

Social Responsibilities

Safety, Health, Environment and Quality (SHEQ)The ISO 9001 – 2000 international qualitymanagement system has been implemented in ouroperations. The assessment for certification wasconducted in May 2004 and certification andaccreditation was awarded in June 2004. We havea complete safety, health, environment and qualitysystem (SHEQ), together with the relevant policiesand procedures, in place. Internal audits of thesesystems have already been completed

SafetyProviding a safe and healthy working environmentfor our employees is a priority at SA Chrome. Theoperation presently has a reportable injury frequencyrate of 2.2.

HealthPrimary health care facilities are available from theon-site clinic, which manages minor ailments andon duty injuries. A tuberculosis programme, DOT(Directly Observed Treatment) is in place at theclinic. The clinic also monitors chronic illnesses,such as hypertension and undertakes the medicalscreening of employees. A doctor visits the cliniconce a week.

Every month the Occupational Health Nurseinspects all First Aid Boxes and the hygiene statusof relevant sections of the plant.

HIV/AIDSThe Company has an HIV/AIDS and life threateningdisease policy in place, which was drawn up afterclose liaison with employees and stakeholders. TheCompany does not allow discrimination towardsthose with HIV/AIDS. It has entered into anagreement with the RBN/Rasimone Clinic to providemedical services and counselling to employees ofthe Company with HIV/AIDS.

Voluntary prevalence testing was conducted inDecember 2003 using the Oraquick Rapid SalivaHIV – 2 test. Voluntary participation in theprevalence testing was high. The testing indicatedthat 11% of SA Chrome’s permanent employeesare HIV-positive and 23% of the contractors workingon site are HIV-positive.

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Our employees are encouraged to go for voluntary counselling and testing,which is conducted at the clinic on site. To date 12 staff members haveavailed themselves of this facility. In addition employees who qualify forAnti Retro-Viral (ARV) treatment have been provided with treatment.

On site HIV/AIDS awareness campaigns are ongoing. The emphasis in thesecampaigns is on prevention through the use of condoms.We are in the process of selecting and training peer educators.

The EnvironmentWe adhere to the requirements of our EMPR as a minimum standard andare constantly striving to reach exemplary standards, and to preserve thenatural environment in and surrounding the plant. We are re-introducingindigenous fauna and flora to the area, which were lost to farming.

On-site boreholes, registered with the government as monitoring points, aresampled monthly. The stream, which passes through the plant, is sampledas it enters and leaves the plant. SA Chrome’s laboratory and an independentlaboratory undertake analysis of the samples to check for potentially harmfulelements. The plant’s storm water dams, which are used to collect rainwaterand to prevent runoff, are lined to prevent seepage into the ground. Thiswater is used in the plant and recycled.

Community investmentWhile SA Chrome has had limited financial resources to expend on acommunity investment programme, during the year under review it wasinvolved in a number of projects. These included participating in schoolprojects, career exhibitions, skills programmes and donations.

We are also in the process of formulating our social plan and have employedthe services of independent external specialists to assist us with this process.The process has been started by engaging with the local communities.


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The BoardThe board is committed to the principles ofopenness, integrity and accountability and to theprovision of timeous, relevant and meaningfulreporting to all stakeholders.

The directors endorse the code of corporate practicesand conduct issued by the King Committee oncorporate governance. The board has carefullyassessed the King II Report and is taking thenecessary steps to transform the board to meet itsrecommendations.

Board CompositionThe board, which meets quarterly, consists of ninedirectors; a non-executive chairman, four executivedirectors and four non-executive directors.

As set out in the review by the Chairman and ChiefExecutive Officer, the board will be appointingfurther independent non-executive directors inaccordance with King II.

Appointment PolicyThe Board’s nomination committee, chaired byNon-Executive Chairman, Chris Molefe, isresponsible for establishing the policy for theappointment of directors and for ensuring that thecomposition of the board complies with corporategovernance principles. The committee regularlyreviews the mix of skills, experience and otherqualities, such as demographics and diversity amongits directors, in order to assess the effectiveness ofthe board. Any such appointments are formal andtransparent and a matter for the board as a whole.

The Company’s articles of association stipulate thatthe maximum term of office of a director is threeyears. One-third of all directors retire by rotationannually and, if eligible for re-election, their names

are submitted for election at the annual general meeting. All directors whowere appointed subsequent to the last annual general meeting are requiredto seek election at the following annual general meeting.

The directors’ diverse skills and expertise are set out on pages 4 and 5 ofthis report.

All board members have access to the advice of the Company Secretaryand are entitled to seek independent professional advice about the affairsof the Company at its expense.

Effective ControlThe board retains full and effective control over the Company. While theboard currently has in place policies covering its responsibility for strategy,monitoring operational performance, management and determination ofpolicy and processes.

To ensure a balance of power and authority there is a clear division ofresponsibilities between the Chairman and the Chief Executive Officer. Theboard annually appraises the performance of the Chairman, and the Chairmanappraises the Chief Executive Officer.

CommitteesThe Company has a remuneration committee, an audit committee, a riskcommittee and a transformation and employment equity committee.

Remuneration CommitteeThe remuneration committee is comprised of non-executive directors.Executive directors are invited to attend its meetings from time to time. Themembers of the remuneration committee are; Andre Bekker (Chairman),Chris Molefe and Reinier Meyjes.

The remuneration committee is responsible for remuneration policy, whichincludes the appropriate remuneration of executive directors and seniormanagement and operation of the Company’s share incentive scheme.Senior executives are incentivised through the Company’s share incentivescheme and profit-related bonuses. As the business was in a start-up phaseduring the past three years, no-one received any profit - related bonusesand the non-executive directors received no remuneration.

CORPORATE GOVERNANCE

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Risk Management CommitteeThe Company’s risk management is achieved through identification andcontrol of all significant business and operational risks that could adverselyaffect the achievement of the Company’s business objectives.

The risk department of Alexander Forbes works with management and liaisesclosely with the risk committee to identify and control significant risks.

A risk register, mitigation measures and cross-references to all proceduresin the Company SHEQ systems are in place, as well as formal site specificrisk management sub committees. Risk identification and mitigation areformally communicated quarterly.

The risk committee consists of Reinier Meyjes (Chairman), Andre Bekker,Dr Todor Vlajcic and Chris Molefe.

Employment EquityThe Company has established itself as a leader in the ferrochrome industryin this area (refer to details on page 23 of this report). SA Chrome is committedto employment equity and to the visions and aims of the Employment EquityAct, being:

• promoting equal opportunity and fair treatment in employment, throughthe elimination of unfair discrimination;

• treating all people equally, fairly and with dignity and respect;• achieving a diverse, efficient workforce that is equitably representative

of the population; and• involving employees and their representatives in employment equity

matters.

The Company has in place a diverse workforce, representative of the population and the country’s demographics. It has further identified certainwork categories, where people from disadvantaged communities did not previously have opportunities and where there is a shortage of employmentequity skills to fill these positions. It has also established procedures whereby the ratios in terms of the Act will be met, within a reasonable time frame.

At our operations an employment equity committee is in place, which meetsregularly and consists of representatives from the various groups as set outin the Employment Equity Act. In addition the board has a Transformationand Employment Equity Committee, whose members are Bruce McBride,Chris Molefe and Steve Phiri.

The remuneration committee is also responsiblefor ensuring that appropriate succession plans arein place for the Chief Executive Officer andexecutive management.

The committee used PE Consulting Services toperform an independent assessment of theremuneration packages of SA Chrome’s executivesand to ensure they are aligned to our remunerationphilosophy. The assessment showed that executiveremuneration packages are within industryremuneration levels. PE Consulting Services alsoassessed and made recommendations regardingthe remuneration of non-executive directors.

Audit CommitteeThe audit committee met both with managementand with the auditors, to review interim and annualfinancial statements and accounting policies, theeffectiveness of management information and othersystems of internal control, the effectiveness of theaudit function and to discuss the auditors’ findings.The audit committee is responsible for setting theprinciples for recommending the use of anaccounting firm of external auditors for non-auditservices. It is also responsible, annually, for makingrecommendations to the board regarding theappointment of auditors.

The external auditors, PriceWaterhouseCoopersInc, have unrestricted access to the audit committeeand its chairman. The audit committee consists ofChris Molefe (Chairman), Stuart Elliot and QinisaniMbatha.

Dealing in SecuritiesIn accordance with the Listing Requirements of theJSE, the Company has adopted a code of conductfor dealing in the Company’s securities. During theclosed period, directors and designated employeesare prohibited from dealing in the Company’ssecurities. The closed period runs from the end ofa financial reporting period until the publicationof the financial results for that period.

south african chrome & alloys limited annual report 2004€¦ · for compliance with the...

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