Notes to the audited summarised consolidated financial statements
for the year ended 31 December 2016
1. CORPORATE INFORMATION
Kumba is a limited liability Company incorporated and domiciled in South Africa. The main business of Kumba, its subsidiaries, joint ventures and associates is the exploration, extraction, beneficiation, marketing, sale and shipping of iron ore. The group is listed on the JSE Limited (JSE).
The audited summarised consolidated financial statements of Kumba and its subsidiaries for the year ended 31 December 2016 were authorised for issue in accordance with a resolution of the directors on 10 February 2017.
2. BASIS OF PREPARATION
The audited summarised consolidated financial statements have been prepared, under the supervision of FT Kotzee CA(SA), Chief financial officer, in accordance with the requirements of the JSE Limited Listings Requirements for provisional reports, and the requirements of the South African Companies Act No 71 of 2008 applicable to summary financial statements. The Listings Requirements require provisional reports to be prepared in accordance with the framework concepts and the measurement and recognition requirements of International Financial Reporting Standards (IFRS) and the SAICA Financial Reporting Guides as issued by the Accounting Practices Committee and Financial Pronouncements as issued by Financial Reporting Standards Council and to also, as a minimum, contain the information required by IAS 34 Interim Financial Reporting.
The audited summarised consolidated financial statements have 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.
3. ACCOUNTING POLICIES
The accounting policies applied in the preparation of the consolidated financial statements from which the summarised consolidated financial statements were derived are in terms of International Financial Reporting Standards and are consistent with those accounting policies applied in the preparation of the previous consolidated annual financial statements, except as disclosed below.
|3.1||New standards, amendments to published standards and interpretations
None of the standards, amendments to published standards and interpretations which became effective for the year commencing on 1 January 2016 had an impact on the group.
|3.2||New standards, amendments to existing standards and interpretations that are
not yet effective and have not been early adopted
In 2016 the group did not early adopt any new, revised or amended accounting standards or interpretations. The accounting standards, amendments to issued accounting standards and interpretations, which are relevant to the group but not yet effective at 31 December 2016, are being evaluated for the impact of these pronouncements.
4. CHANGE IN ESTIMATES
The measurement of the environmental rehabilitation and decommissioning provisions is a key area where management’s judgement is required. The closure provisions are measured at the present value of the expected future cash flows required to perform the rehabilitation and decommissioning. This calculation requires the use of certain estimates and assumptions when determining the amount and timing of the future cash flows and the discount rate. The closure provisions are updated at each balance sheet date for changes in these estimates. The life of mine (LoM) plan on which accounting estimates are based only includes proved and probable ore reserves as disclosed in Kumba’s annual ore reserves and mineral resources statement. The most significant change in the provision for 2016 arises from changes in the LoM, inflationary changes and limited scope changes. The effect of the change in estimate of the rehabilitation and decommissioning obligation quantum, which was applied prospectively from 1 January 2016, is detailed below:
|Decrease in environmental rehabilitation provision||(3)|
|Increase in decommissioning provision||9|
|Increase in profit attributable to the owners of Kumba||1|
|Rand per share|
|Effect on earnings per share attributable to the owners of Kumba||–|
The change in estimate in the decommissioning provision has been capitalised to the related property, plant and equipment and as a result had no effect on profit or earnings per share.
5. PROPERTY, PLANT AND EQUIPMENT
|Transfers from assets under construction to property, plant and equipment||2,392||3,419|
* Included in the SIB expenditure above is a non-cash addition of R167 million relating to the unguaranteed residual value under a finance lease.
Expansion capital expenditure comprises mainly the expenditure on the Dingleton relocation project. SIB capital expenditure to maintain operations was principally for the acquisition of heavy mining equipment and infrastructure.
Kumba produces iron ore at Sishen and Kolomela mines in the Northern Cape province. The two mines are treated as separate cash-generating units (CGUs). Each CGU consists of its respective mining assets located in the Northern Cape. In the 2015 financial year, Sishen was impaired by R6 billion, including an associated deferred tax credit of R1.7 billion. Kolomela was not impaired.
The increases in iron ore prices and Kumba’s market capitalisation in the current year were considered indicators for potential impairment reversal for Sishen. The group’s non-financial assets, other than inventories and deferred tax assets, were assessed for impairment or reversal of impairment. Recoverable amounts were estimated for individual assets or, where an individual asset cannot generate cash inflows independently, the recoverable amount was determined for the CGU to which the asset belongs.
Consistent with the prior year, the carrying value of Kolomela at 31 December 2016 was recoverable and therefore, no impairment charge was recorded. The recoverable amount of Sishen at 31 December 2016, determined on a discounted cash flow (DCF) basis, was R19.9 billion, which was reasonably comparable to the carrying value of R19.5 billion. Despite the short-term volatility in iron ore prices, continued supply growth is expected to put pressure on iron ore prices. As a result, the group’s assumption on the long-term iron ore price outlook remains conservative. In this context, the resulting headroom for the Sishen CGU of R0.4 billion was considered not significant and therefore no portion of the impairment charge previously recognised was reversed.
The DCF model is sensitive to forecast iron ore prices, the ZAR/US$ exchange rate and the discount rate applied. The valuation is most sensitive to fluctuations in iron ore prices. It was considered whether a reasonably possible change in any of the key assumptions, would result in additional impairment or reversal of previous impairment, as shown in the table below:
|Assumption||Movement in assumption||Result of sensitivity
(Reversal of impairment)
|Iron ore price||-/+ 5%||1.8 / (2.6)|
|ZAR/US$ exchange rates||-/+ 5%||1.6 / (2.5)|
|Discount rate||+/- 100 basis points||1.1 / (2.2)|
6. SHARE CAPITAL AND SHARE PREMIUM
Reconciliation of share capital and share premium (net of treasury shares):
|Balance at beginning of year||(131)||(311)|
|Net movement in treasury shares under employee share incentive schemes||17||180|
|Purchase of treasury shares||(180)||–|
|Shares issued to employees||197||180|
|Balance at end of year||(114)||(131)|
Reconciliation of number of shares in issue:
|Number of shares||Audited
|Balance at beginning and end of year||322,085,974||322,085,974|
|Reconciliation of treasury shares held:|
|Balance at beginning of year||1,109,732||1,553,346|
|Shares issued to employees under the Long-Term Incentive Plan and Kumba Bonus Share Plan||(452,996)||(423,614)|
|Balance at end of year||2,797,627||1,109,732|
All treasury shares are held as conditional awards under the Kumba Bonus Share Plan.
7. INTEREST-BEARING BORROWINGS
Kumba’s net (cash)/debt position at the balance sheet dates was as follows:
|Cash and cash equivalents||(10,665)||(3,601)|
|Interest cover (times)||36||4|
Movements in interest-bearing borrowings are analysed as follows:
|Balance at the beginning of the year||8,205||9,593|
|Interest-bearing borrowings raised||30||10,400|
|Interest-bearing borrowings repaid||(3,735)||(11,556)|
|Finance lease repaid||–||(232)|
|Balance at the end of the year||4,500||8,205|
The group’s committed debt facilities of R16.5 billion (R4.5 billion term facility and R12 billion revolving facility) mature in 2020. At 31 December 2016, R4.5 billion of the committed facility had been drawn down. The directors approved the early settlement of the term facility and notice was given to the lenders on 3 February 2017. As a result of the settlement, the loan cannot be drawn again, effectively reducing the group’s committed debt facilities to R12 billion. The group also had undrawn uncommitted facilities of R8.3 billion at 31 December 2016. The group was not in breach of any of its financial covenants during the year.
8. SIGNIFICANT ITEMS INCLUDED IN OPERATING PROFIT
Operating expenses are made up as follows
|Movement in inventories||(368)||1,072|
|Cost of goods sold||15,451||17,282|
|Selling and distribution costs||5,379||5,507|
|Cost of services rendered - shipping||3,115||3,657|
|Sublease rent received||(27)||(32)|
|Operating proﬁt was derived after taking into account the following items:||–||–|
|Net restructuring costs||384||34|
|Share-based payment expenses||647||593|
|Depreciation of property, plant and equipment||3,089||3,223|
|Deferred waste stripping costs capitalised||(321)||(2,852)|
|Net loss on disposal and scrapping of property, plant and equipment||191||9|
|Gains on lease receivable||(164)||–|
|Net (gains)/losses on derivative ﬁnancial instruments||–||–|
|Net foreign currency (gains)/losses||–||–|
|Fair value gains on investments held by the environmental trust||(22)||(18)|
1 The impairment charge in 2015 relates to Sishen mine.
9. SEGMENTAL REPORTING
|Audited year ended 31 December 2016|
|Revenue from external customers||26,644||10,764||612||–||2,747||–||40,767|
|Total segment assets||606||163||–||651||–||58||1,478|
|Cash ﬂow statement|
|Additions to property, plant and equipment3|
|Audited year ended 31 December 2015|
|Revenue from external customers||23,869||7,980||878||–||3,411||–||36,138|
|Total segment assets||651||198||224||510||–||269||1,852|
|Cash ﬂow statement|
|Additions to property, plant and equipment|
|1||After impairment charge.|
|2||The segment information above includes the results of Thabazimbi and therefore differs from the information presented in the income statement.|
|3||As a result of the Thabazimbi mine lease termination, Thabazimbi mine recognised assets of R167 million and a gain in profit or loss of R164 million. These are non-cash additions and therefore not included above.|
The performance of the operating segments are assessed based on a measure of earnings before interest and taxation (EBIT), which is measured in a manner consistent with ’Operating profit’ in the financial statements. Finance income and finance costs are not allocated to segments, as treasury activity is managed on a central group basis.
Total segment assets comprise finished goods inventory only, which is allocated based on the operations of the segment and the physical location of the assets.
‘Other segments’ comprise corporate, administration and other expenditure not allocated to the reported segments.
Geographical analysis of revenue and non-current assets:
|Total revenue from external customers1||40,767||36,138|
|Rest of Asia||7,730||9,879|
|Middle East and Africa||275||–|
1Including South African external sales for Thabazimbi mine of R612 million (2015: R878 million).
10. DISCONTINUED OPERATIONS AND DISPOSAL GROUP HELD FOR SALE
All remaining plant operations at the Thabazimbi mine ceased in 2016 following the decision to close the mine in 2015. The Thabazimbi operation is classified as a discontinued operation for the year ended 31 December 2016, and as a result, the comparative figures have been restated to show the discontinued operation separately from continuing operations. Analysis of the result of the Thabazimbi mine is as follows:
|Net ﬁnance income||4||94|
|Proﬁt before tax||45||42|
|Income tax expense||(42)||(132)|
|Proﬁt/(loss) after income tax of discontinued operation||3||(90)|
|Attributable to owners of the parent||2||(69)|
|Attributable to the NCI||1||(21)|
|Proﬁt/(loss) from discontinued operation||3||(90)|
|Cash ﬂow from discontinued operations|
|Net cash ﬂows from operating activities||279||639|
SIOC and AMSA have entered into an agreement to transfer Thabazimbi mine to AMSA. The agreement is expected to become effective in 2017, subject to certain conditions. Mining operations at Thabazimbi ceased in 2015 and processing operations ceased on 31 March 2016. The identified assets and liabilities of Thabazimbi mine (as indicated in the disclosure below) will be transferred at a nominal purchase consideration plus the assumed liabilities. If the conditions have not been satisfied by 28 April 2017 (or a later date agreed to by the companies), the agreement will lapse and SIOC will proceed with closure of the mine.
The requirements of IFRS 5 have been considered and as a result, the Thabazimbi mine assets and related liabilities that will transfer to AMSA to be presented as part of non-current assets and liabilities held for sale as at 31 December 2016. In addition, the results of Thabazimbi mine are presented as a discontinued operation for the year ended 31 December 2016. Comparative figures have been restated where required. An impairment loss of R4 million has been recognised related to the Thabazimbi mine assets that were not part of the lease with AMSA.
Non-current assets held for sale and the associated liabilities
|Property, plant and equipment||8|
|Investments held by environmental trust||296|
|Long-term payments and other receivables||515|
|Trade and other receivables||96|
|Net carrying amount sold||2|
11. FAIR VALUE ESTIMATION
The carrying value of financial instruments not carried at fair value approximates fair value because of the short period to maturity or as a result of market related variable interest rates.
The table below presents the group’s assets and liabilities that are measured at fair value:
|Rand million||Level 11||Level 22|
|Audited 31 December 2016|
|Investments held by the environmental trust4||855||–|
|Cash and cash equivalents|
|– Derivative ﬁnancial assets5||–||615|
|Cash and cash equivalents|
|– Derivative ﬁnancial liabilities5||–||(28)|
|Audited 31 December 2015|
|Investments held by the environmental trust||818||–|
|Trade and other receivables|
|– Derivative ﬁnancial assets5||–||38|
|Trade and other payables|
|– Derivative ﬁnancial liabilities5||–||(1)|
|1||Level 1 fair value measurements are derived from unadjusted quoted prices in active markets for identical assets or liabilities.|
|2||Level 2 fair value measurements are derived from inputs other than quoted prices included within level 1 that are observable either directly or indirectly (i.e. derived from market-related prices).|
|3||Level 3 fair value measurements are derived from valuation techniques that include inputs that are not based on observable market data. There were no level 3 measurement in 2016 or 2015.|
|4||Including Thabazimbi’s investments disclosed as held for sale in note 10.|
|5||The iron ore derivatives are measured at fair value using market related inputs. The measurement is therefore classified within level 2 of the fair value hierarchy. The inputs used in the model are the forward iron ore price on the inception date as well as the iron ore price on the date the fair value calculation is performed. In 2016 these derivatives are presented as part of cash and cash equivalents.|
12. RELATED PARTY TRANSACTIONS
During the period, Kumba, in the ordinary course of business, entered into various sale, purchase and service transactions with associates, joint ventures, fellow subsidiaries, its holding Company and Exxaro Resources Limited. These transactions were subject to terms that are no less favourable than those offered by third parties.
|Short-term deposit held with Anglo American SA Finance Limited1 (AASAF)||7,430||839|
|– Deposit 12||–||205|
|– Weighted average interest rate||–||6.48%|
|– Deposit 2||7,430||634|
|– Weighted average interest rate||7.02%||5.96%|
|Interest earned on short-term deposits AASAF during the year||262||120|
|Short-term deposit held with Anglo American Capital plc1||1,991||2,059|
|Interest earned on facility during the year||*||*|
|Interest-bearing borrowing from AASAF||–||205|
|Interest paid on borrowings during the year||7||67|
|Weighted average interest rate||8.16%||7.05%|
|Trade payable owing to Anglo American Marketing Limited2 (AAML)||195||433|
|Shipping services provided by AAML||3,107||3,642|
|Dividends paid to Exxaro Resources Limited||–||673|
|1||Subsidiaries of the ultimate holding Company.|
|2||This deposit was settled during the year.|
|*||Interest earned on the deposit is insignificant and is earned at prevailing market rates.|
13. CONTINGENT LIABILITIES
Settlement agreement with SARS
In February 2016, the group announced the receipt of a tax assessment from the South African Revenue Service (SARS), relating to Sishen Iron Ore Company (Pty) Ltd’s (SIOC) overseas sales and marketing businesses, covering the period 2006 to 2010, for the amount of R5.5 billion. This included interest and penalties of R3.7 billion. During March 2016 the group submitted an application for the suspension of payment in relation to the assessment, followed in July 2016 by its objection to the assessment.
In September 2016, SIOC received a letter of findings from SARS in relation to the 2011 tax year, indicating potential adjustments to the Company’s taxable income which would result in an additional tax liability of approximately R1.0 billion, excluding any potential interest and penalties, should Kumba ultimately be assessed on this basis.
On 3 February 2017, the group concluded an agreement with the SARS to settle a dispute relating to the assessments received for the years 2006 to 2010, and the tax treatment of the relevant issues in the years 2011 to 2015, inclusive, for a full and final total settlement amount of R2.5 billion.
Kumba had previously provided for an amount of R1.5 billion in its annual financial statements for the financial years up to 2015, and an additional R1.0 billion has been accounted for in 2016 in respect of this settlement agreement. The settlement will be paid in full in the first quarter of 2017, with appropriate adjustments made for current advance payments held on account.
As a responsible corporate citizen, the group’s policy is to be tax compliant in all jurisdictions in which it operates.
Municipal rates and taxes
As previously reported, rates and taxes levied by the municipality at Sishen since 1 June 2014 were significantly higher than previously levied. Subsequent to year end, the group settled the rates and taxes matter with the municipality at Sishen. The settlement is effective immediately and property values and the quantum of the rates and taxes will be adjusted retrospectively to the date of the publication of the 2014 municipal valuation roll.
The group has issued financial guarantees in favour of the DMR in respect of its environmental rehabilitation and decommissioning obligations to the value of R2.8 billion (2015: R2.3 billion). Included in this amount are financial guarantees for the environmental rehabilitation and decommissioning obligations of the group in respect of Thabazimbi mine of R438 million (2015: R438 million). AMSA has guaranteed R429 million of this amount by means of bank guarantees issued in favour of SIOC.
As a result of the annual revision of closure costs a further shortfall of R311 million arose. Guarantees for the shortfall will be issued in due course. AMSA has guaranteed R300 million of this amount by means of bank guarantees issued in favour of SIOC.
15. REGULATORY UPDATE
21.4% undivided share of the Sishen mine mineral rights
In October 2016, the DMR granted the residual 21.4% undivided share of the mining right for the Sishen mine to Kumba’s subsidiary, SIOC following the completion of an internal appeal process, as prescribed by section 96 of the MPRDA.
As a result of the grant of the residual 21.4% undivided share, SIOC is now the sole and exclusive holder of the right to mine iron ore and quartzite at the Sishen mine. This residual mining right will be incorporated into the 78.6% Sishen mining right that SIOC successfully converted in 2009.
The consent to amend SIOC’s mining right, by the inclusion of the residual 21.4% undivided share, is subject to various conditions. The conditions, where applicable, will ultimately form part of the conditions to the Sishen mining right. These include the requirement for the continuation of the existing Export Parity Price (EPP) based supply agreement between SIOC and AMSA in its role as a strategic South African steel producer, as well as SIOC’s continued support of skills development, research and development and initiatives to enable preferential procurement.
Significant uncertainty remains around the draft Mining Charter III process which may impact future empowerment of mining companies and granting of new mining rights. The Chamber of Mines is actively engaging in order to obtain greater clarity as to the future requirements and Kumba continues to closely monitor these developments.
16. CORPORATE GOVERNANCE
The group subscribes to the Code of Good Corporate Practices and Conduct and complies with the recommendations of the King III Report. Full disclosure of the group’s compliance will be contained in the 2016 Integrated Report.
17. EVENTS AFTER THE REPORTING PERIOD
Besides the decision to early settle the loan of R4.5 billion as discussed in note 7 and the settlement agreements with SARS and the municipality at Sishen as discussed in note 13, no further material events have occurred between the end of the reporting period and the date of the release of these audited summarised consolidated financial statements.
18. INDEPENDENT AUDITORS’ REPORT
These summarised consolidated financial statements for the year ended 31 December 2016 have been audited by Deloitte & Touche, who expressed an unmodified opinion thereon. The auditor also expressed an unmodified opinion on the consolidated financial statements from which these summarised consolidated financial statements were derived.
A copy of the auditor's reports on the consolidated financial statements and the summarised consolidated financial statements are available for inspection at the Company's registered office, together with the financial statements identified in the respective auditor's reports.
All Resource and Reserve related information listed is derived from the 2016 Kumba Iron Ore Reserve and Resource statement (to be published on 10 April 2017) as reported under the ‘The South African Code for the Reporting of Exploration Results, Mineral Resources and Mineral Reserves’ (the SAMREC Code – 2007 Edition, July 2009 amended version) by Competent Persons who are employed by SIOC and have the required qualifications and experience to qualify as Competent Persons for Mineral Resources or Mineral Reserves under the SAMREC Code.
On behalf of the board
| 10 February 2017