U.S. Markets closed

Edited Transcript of ARI.J earnings conference call or presentation 16-Mar-17 1:00pm GMT

Thomson Reuters StreetEvents

Q2 2016/2017 African Rainbow Minerals Ltd Earnings Call

Sandton Mar 16, 2017 (Thomson StreetEvents) -- Edited Transcript of African Rainbow Minerals Ltd earnings conference call or presentation Thursday, March 16, 2017 at 1:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Mike Schmidt

African Rainbow Minerals Limited - CEO

* Mike Arnold

African Rainbow Minerals Limited - Financial Director

* Stompie Shiels

African Rainbow Minerals Limited - Executive, Business Development

* Abigail Muelelwa Mukhuba

African Rainbow Minerals Limited - CFO

* Patrice Motsepe

African Rainbow Minerals Limited - Executive Chairman

================================================================================

Conference Call Participants

================================================================================

* Andrew Snowdowne

Investec - Analyst

* Brian Morgan

RMB Morgan Stanley - Analyst

* Kieran Daly

UBS - Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good afternoon, ladies and gentlemen, and welcome to African Rainbow Minerals' (ARM's) Interim Results Conference Call.

(Operator Instructions)

Please note that this conference is being recorded.

I would now like to hand the conference over to ARM's Chief Executive Officer, Mr. Mike Schmidt. Please go ahead, sir.

--------------------------------------------------------------------------------

Mike Schmidt, African Rainbow Minerals Limited - CEO [2]

--------------------------------------------------------------------------------

Thank you very much. Whilst I'm not sure -- obviously, I don't know who is on the call, so in their absence, good afternoon, ladies and gentlemen. I trust we've got a mixed audience today.

Maybe I'll just start on our headline, which at least in terms of our announcement this morning, our headline earnings increase of 234% to ZAR1.69 billion, mainly due to strong earnings from iron ore, manganese and Two Rivers, and we've seen improved results from Nkomati, Lubambe and PCB coal.

I then ask you, if you can just move across to Slide 5 or Page 5, and the point that I wanted to touch on here is that the increased earnings per share is up quite considerably, and the reason for that being obviously with the change in our equity holding of shares with the transaction we announced last year with regards to the BBEE Trust, the accounted share are slightly lower than historic. I think Mike will help me, it used to be 213 (multiple speakers).

--------------------------------------------------------------------------------

Mike Arnold, African Rainbow Minerals Limited - Financial Director [3]

--------------------------------------------------------------------------------

ZAR218 million in the comparative period. For June, it is ZAR212 million, but now for this period, we completely eliminated the shares owned (inaudible) and at the Trust. So the number is ZAR190 million.

--------------------------------------------------------------------------------

Mike Schmidt, African Rainbow Minerals Limited - CEO [4]

--------------------------------------------------------------------------------

The next bullet point is obviously those impairments at Nkomati and Modikwa, and they are quite substantial. But we do believe, as the management team, that they were appropriate to getting at this stage. And it was based on a number of criteria, primarily accounting criteria. And if I may ask Mike Arnold just to touch as to what drove these amounts and what the indicators in terms of both operations.

--------------------------------------------------------------------------------

Mike Arnold, African Rainbow Minerals Limited - Financial Director [5]

--------------------------------------------------------------------------------

Thanks, Mike. There is a detailed table in the financial statements, which I'm not going to look at now, but it's on Page 83, which gives you all the pricing parameters, prospect and discount rates that we used for the calculations. But in essence, we tested these two sets of assets for the carrying values against the expected realization of those, and we arrived at these numbers for in payments.

In the case of Nkomati, it is evident from our presentation, we've got a drop in volumes. Long term, nickel price has come down. And you also have your -- there's been a delay in the (inaudible). At Modikwa, we also have a change in the long-term outlook on our PGM process, and the delivery is up to -- has been slower than was anticipated. Those are the non-cash charges which impact the basic earnings. Thanks Mike.

--------------------------------------------------------------------------------

Mike Schmidt, African Rainbow Minerals Limited - CEO [6]

--------------------------------------------------------------------------------

If I take you to Slide 11, it's the EBITDA margins. There's obviously been quite a significant shift for the positive in these margins. The two challenging operations I'd like to touch on going forward, if I may, is: first one is nickel, and we're going to -- we will spend some more time on that in the next couple of slides. And albeit that it is a positive and it had positive earnings, it is going through a very challenging time into the future, and we'll touch that later.

Our copper at Lubambe is still loss making, albeit that it's made significant improvements in terms of the restructuring, cutting that down to 80 kilotons a month. That's been transitioned pretty successfully. Coming out of that, we've seen the unit costs improve, we've seen the grade improve, and we've seen the recoveries improve. But it's still a loss-making entity and we obviously are working very hard in terms of our optionalities and our considerations. And as you would recall, last year, we put these assets up for sale. That process has not yet concluded. And obviously, any type of indication would be premature, but as soon as we have information in this regard, we will make that announcement.

Our copper has remained quite a challenge for us, is on the wrong -- significantly on the wrong end of the cost curve. So going forward, it is something that we certainly would like to get out of as soon as we possibly can.

I should go to Page 15 and -- sorry, my humble apologies, ladies and gentlemen. My introductions have a lot to be desired. I have got Stompie Shiels, and he certainly needs no introduction; Michael Arnold, I'm sure everyone knows. The newest entry into our team is Abigail, and Abigail is our current Chief Financial Officer. Young, dynamic lady, and she is going to take us through one or two slides. Slide 15 is the first one I'll ask her to take.

--------------------------------------------------------------------------------

Abigail Muelelwa Mukhuba, African Rainbow Minerals Limited - CFO [7]

--------------------------------------------------------------------------------

Thank you, Mike. As Mike has already alluded, our headline earnings have gone up by 234%, and this slide basically gives down the breakdown of that headline earnings split. It's an excellent set of results across most of the operations. What I would like to highlight in this slide is, if you look at copper, Modikwa, Nkomati and PCB coal, and you look at the turnaround that they've had, there's a combined turnaround of about ZAR500 million from 2015 to 2016, something which we're very pleased about.

Then if we move to Slide 17, on the segmental profit variance analysis, this slide basically highlights the environment that we've operated in the past six months. We've had the benefit of the increasing prices, as can be seen in the biggest bar there, of ZAR2.2 billion in the US dollar commodity prices. I would like to also highlight on this slide that there was an exchange rate losses driver, forex losses, unrealized on the ARM US dollar loans to Lubambe, and that accounts for the negative bar of ZAR618 million and the effect is subject to market conditions. The loss this year was ZAR153 million, but last year's gains were ZAR465 million, and that's the variance of a negative ZAR618 million. However on the whole, from this slide, one can immediately see that in this period, we basically doubled the profit of last year. Thanks, Mike.

--------------------------------------------------------------------------------

Mike Schmidt, African Rainbow Minerals Limited - CEO [8]

--------------------------------------------------------------------------------

Abigail, thank you. We can then move to Slide 21. I think what's quite significant on this slide is, if we take manganese, copper and PCB, for the second consecutive time, we've got negative earnings increases here -- or decreases in terms of costs -- sorry, decreases in terms of costs. These operations are performing pretty well, albeit in a very strained environment.

The two on the bottom -- and it's probably something that needs a bit of discussion, and we will elaborate on further slides -- is the GGV coal and the nickel. The combined effect is -- these operations -- the waste stripping needs to be accelerated. In fact, it started. And we need to create additional mining flexibility, and ultimately, get the pit back into balance. So the stripping ratios will be very high and costly for a period.

The coal revision, I think in the next couple of months, we will see ourselves in a far better position as we've already moved into the new pit, and we should see the benefit of that. The nickel, I will elaborate in a few slides down the line, but it has some serious challenges that we need to overcome, and what the reasons for that -- but it will continue to be challenge in terms of its cost position for at least two years.

I'll ask you to then to move on to Page 23, and Stompie will take that.

--------------------------------------------------------------------------------

Stompie Shiels, African Rainbow Minerals Limited - Executive, Business Development [9]

--------------------------------------------------------------------------------

I think it's important to (inaudible) iron ore and manganese are big earnings driver. The iron ore, as you well know, we did -- 8.8 million tonnes sold, and we're targeting between 17 million tonnes and 17.5 million tonnes for this year. I think it's very good whilst the iron ore prices are very strong and much higher than what we anticipated and all of you. We think the more we can push up, the better.

Our ultra-fine recovery plant is progressing very well, and also a lumpy ratio. We're not getting a very good premium at the moment, but we've been working hard there. We've been telling you, we were previously at 50% to 52%. We've now gone up to 57% with segmentation. So it bodes well, should that lumpy premium come back. We're quite comfortable the premium is going to come back.

And the manganese ore, we are very proud to announce that the whole upgrade of the shaft was completed, was handed over fully to the management just in the New Year, January 2 or January 3. And they're now on [both Seams] and they can now do the development. And most of this capital -- we've spent about ZAR4.7 billion on this project. We have committed to a total of ZAR5.4 billion, and we're still confident that should we and when we do decide to ramp up to over 4 million tonnes, the ZAR6 billion project is still within budget and we can produce a very good high quality manganese ore and the lower grade Gloria, we can obviously start doing away with.

The next one is on the alloys, Sakura mine, the plant was commissioned very successfully. That actually had the opening yesterday. A number of people attended it in Malaysia. It can ramp up. The alloy prices, as you well know, has picked up now after the reporting period. And we can produce both qualities, and we've got two furnaces and a lot of flexibility there now. And I'm sure we haven't committed yet to when we are going to ramp up, but the high carbon manganese is what we're going to go for. And we are quite confident we can get the nameplate capacity of [170,000 tonnes].

On Modikwa mine, it's slow, a mine that takes a lot of attention from management. It's in the ICU. It's been in ICU for a very long time. The South shaft is -- infrastructure is behind schedule. It has a result of -- the development is lagging behind, and we're not getting (inaudible) tonnes out that we require at low cost. So we still have to mine a lot more at the South 1 shaft, which we didn't anticipate, and that's at a much higher cost. And that's the main -- one of the main reasons is the PGM output is lower than anticipated over the next few years. And as Mike said, it made for -- boded for the impairment.

Two Rivers is still progressing very, very well. And although the costs are up very high, you must understand that mine is on a very low cost base. But because of the Section 11, we are moving into the south section of the mine where we have split reef, and that split reef is at much higher cost, much slower at mining, and it has a lower grade. But that is only temporary until we get our Section 11 license, which we think we'll get that within the next few months, we will be able to correct the cost position on that mine.

If we can go to Mike, on the nickel?

--------------------------------------------------------------------------------

Mike Schmidt, African Rainbow Minerals Limited - CEO [10]

--------------------------------------------------------------------------------

Stompie, thanks. Back to Nkomati, it achieved a headline profit for the period, but is entering a very difficult three-year phase with declining output. Waste stripping needs to be accelerated. We need to open up ore reserves and create more mining flexibility. The pit require piling work on the western section to improve the slope stability. This program will probably take a year and half. We made a conscious decision in the last couple of months to stop all mining on the western side, which is the higher grade side of the pit, until the stability and the piling is guaranteed in place. We're not prepared to compromise. We've had a number of low level incidents in terms of slumping, and we've made that conscious decision.

So in this interim, whilst we're doing the accelerated stripping, whilst we are getting out lower grades, we've also decided to, in some instances, blending, and other instances to (inaudible) lower -grade stockpile ore over this period. And we're obviously forecasting a reduction in sales volume over the next three years.

We did explain the impairment, so maybe I'll then take you to Slide 27. In terms of ARM Coal position, we're very pleased with the improved performance at PCB with cash operating profits improving from ZAR195 million to ZAR539 million over the corresponding period. The Tweefontein Optimization Project (TOP), as of December 31, 2016, 99% of the project was committed and spent. This project is now in full production with a realized saving of ZAR681 million with finally estimated cost of ZAR7.5 billion.

The GGV operations have been struggling over the last couple of months, with equipment availability, going through a low-grade Seam and also impacted by high levels of rain and some community instability of late. So while it did make a profit, it's still insufficient to cover what we call our interest charges. The mine has moved (inaudible) to a new pit, and the production and cost should improve over the next couple of months.

With that, we move onto ARM Copper. Stompie, do you would want me to -- or let me talk to a while. So this mine has transitioned. With what we committed to do in terms of the restructuring and cash preservation, it's moving into what's called an 80 kiloton a month operation. This was transitioned pretty successfully.

We are seeing the cost position has improved, grades have improved and the recoveries are looking better. The evaluation and consideration for sale or other options ongoing have not yet been concluded, and an announcement will be done when this has been finalized.

Then we move on to slide 29, and that's over to Mike Arnold. Thanks, Mike.

--------------------------------------------------------------------------------

Mike Arnold, African Rainbow Minerals Limited - Financial Director [11]

--------------------------------------------------------------------------------

Thank you, Mike. I think -- yes, we put out this slide because I think it needs a fine analysis when you look at the numbers on the balance sheet. One of the main aspects of this, of course, is that on the balance sheet, the attributable cash and cash equivalents at ARM Ferrous are now shown as that's treated as a joint venture. But on the balance sheet, the net debt has come down since June from ZAR4.2 billion to ZAR3.5 billion. Primarily, during that period, we repaid the loan -- the $80 million loan offshore and we've made payments on that, and we've also made some payments on the ARM corporate facility, which was sitting at ZAR1.4 billion at the end of June, and at the end of December, it's sitting at ZAR1.025 billion. So that is positive.

If you look at the comparison to last year December, there is obviously one big change and that is, at last year December, we didn't have the ARM BBEE Trust loans consolidated into our results and those we showed separately. Those are the amounts that the trust owes to Nedbank and Harmony. We have made a salient feature of the fact that since the period end, we received ZAR1.5 billion as a dividend from Assmang. So out of that -- out of the cash at the bottom of the page, ZAR2.588 billion, we would have received ZAR1.5 billion in February. That's been used to repay the corporate facility. So at this point in time, the corporate facility balance is (inaudible). And, yes, we remain robust. We've got a robust financial position and quite pleasing to get so much cash from Assmang.

Over the page to Slide 30, our last slide, this is on the capital allocation. I think the key point there is that we haven't revised this. We have revised it annually in line with our business plan that get revised, so you'll see that the segmental capital, which increased the Ferrous spend, for the six months was about ZAR1.2 billion. Our guidance for the full year is ZAR2.6 billion. (inaudible) whether we will spend an extra ZAR1.5 billion in six months, not likely. But that trend we believe going forward will come off. Part of the reason for the capital expenditure profile reducing of course is because we -- what we've just said now. We would have spent a lot of the money at Black Rock, which is one of our major capital items.

--------------------------------------------------------------------------------

Mike Schmidt, African Rainbow Minerals Limited - CEO [12]

--------------------------------------------------------------------------------

Thanks, Mike. Thank you very much. And then we hand back it for any questions if there are.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Thank you very much.

(Operator Instructions)

Andrew Snowdowne, Investec.

--------------------------------------------------------------------------------

Andrew Snowdowne, Investec - Analyst [2]

--------------------------------------------------------------------------------

It's a very simple question. I just wanted to get a sense, because it was mentioned earlier that you've got increased rail capacity of manganese ore, you do show a ramp-up up to 4 million tonnes in 2019. Is that going to all be railed volumes? And maybe you can just give me an update on what your rail capacity is for manganese as well as iron ore at this point in time and what agreements you have in place with Transnet.

--------------------------------------------------------------------------------

Mike Schmidt, African Rainbow Minerals Limited - CEO [3]

--------------------------------------------------------------------------------

I'll ask Stompie on touch on that. And I made that comment about the rail capacity and I just wanted to put a point of clarity there. We've got a two-year interim agreement because of -- when the prices started collapsing, a lot of the suppliers weren't taking it up, and Transnet came back to us and said, guys, we need to get our trains full, do you want the allocation? And we said to them, we will sign providing we sign a two year agreement. So it's not the [Mega 3] but Stompie will put you -- give you some further detail on that. Thanks, Stompie.

--------------------------------------------------------------------------------

Stompie Shiels, African Rainbow Minerals Limited - Executive, Business Development [4]

--------------------------------------------------------------------------------

Okay. Andrew, we have got to PE port allocation, and we talk allocation, not actual, we've always had a low allocation. We've got 1.56 million tonnes per annum and (inaudible) 1.76 million tonnes per annum. And that's valid till end of February 2018, which is next year. As Mike said, we are in the advanced stages of talks and negotiations.

The way the manganese ore has gone in the last year or two, we are definitely one of the preferred -- I'm not saying preferred, we are the preferred because we have ore on stockpile and we generally can -- we have made our allocation and not stopped in the difficult times like other people. And because of that, they will come to us. At the end of this year, and I have visited our sites, our rapid load-out terminal will be commissioned in the last quarter. When I say this year, calendar year, and they are very aware of that and that will drop the cycle time considerably. And because of that, they have indicated that they will negotiate favorably to us, both on quantity and pricing going forward, but it is early times.

We're very confident as a management team that they will meet our requirements. But the problem is, the take-or-pay agreement for signing is definitely still under scrutiny. And it's not us mainly, it's the other players that are not playing along. And if they don't, we're very comfortable that we will get our required allocation and hoping that we'll get it a 90% penalty position, if we go below the [90 percentile].

On iron ore, you're very much aware, we've got no problem. The [14, 14.5], we think we will be there, and that's the range we act, that's the allocation and within our specs and we haven't held them up.

--------------------------------------------------------------------------------

Andrew Snowdowne, Investec - Analyst [5]

--------------------------------------------------------------------------------

That's very helpful. And what's maybe -- while we're talking about it, just some quick thoughts on the manganese ore market in particular, we've seen quite a big divergence between the higher grade manganese ore and the lower grade, the 37%, 38% versus the 44%. In the last week, we've actually seen that lower grade actually bottom, but it is quite a big discount versus the higher grade. Maybe you could just fill us in in terms of your mix at the moment, just what sort of qualities have you been shipping. Have you been sending from stockpiles as some of your peers have been doing on manganese, given the very high pricing we had a while ago? And just your view in terms of outlook and what you're seeing in that market at this point in time.

--------------------------------------------------------------------------------

Stompie Shiels, African Rainbow Minerals Limited - Executive, Business Development [6]

--------------------------------------------------------------------------------

Our view is, we just heard last week's numbers, that's up to 3.4 million tonnes manganese ore at the port, which is very high, and that's the reason that -- 80% to 85% of it is low grade and that's why it's carrying a major discount. So the oversupply is mainly low grade. But if you do a tracking in the past, very seldom has the higher grade on a Platts or a Metal Bulletin been trading over $1 a metric ton unit. And it's been doing that for a while. It's gone as high as $1.30, $1.40 per metric ton unit premium on the discount one. So it bodes well. It's what we've been saying a few years ago, and we still maintain it for both iron ore, manganese and chrome, that pollution and the authorities in China are putting a lot of pressure on the smaller players and intermediate players on pollution. And you know, the high-grade is much better. It's lot less (inaudible) mostly is fast, and it's better quality.

For iron ore, they also like the higher quality because of the coking coal problem. You we don't want to put too much coking coal in. So manganese, we feel, is going to be a premium differential over time, but not as high. It will be between $0.70 and $1.00. But the one mine -- [Bootu Creek] mine is coming in in Australia. That's starting to pick up now. And the other one is that the South African producers, which are mainly low-grade, are doing a lot of road transport, cannot be making money at this price. So I'm very confident that they will slow down or stop.

We don't go into long-term growth transport contracts. And if we do, we do on a quarterly basis, and we do a fixed contract and that's it. So we are very aware and not flooding the market. You asked what we distribute? We distribute what the customer would like. Most of our customers have been with us a long time, and we tend to favor then, but we will not flood the high-grade product. We've still got a lot of high-grade on stock.

--------------------------------------------------------------------------------

Operator [7]

--------------------------------------------------------------------------------

Brian Morgan, RMB Morgan Stanley.

--------------------------------------------------------------------------------

Brian Morgan, RMB Morgan Stanley - Analyst [8]

--------------------------------------------------------------------------------

Could we go back to Nkomati again, just thinking about how to model that over the next couple of years. So you've got three years of 16,000 tonnes, but you'll be treating low-grade stockpiles. I'm just trying to get a handle on how to model it from a cost perspective, and I understand that your recoveries in fact will be lower. And then beyond three years, how should I be thinking about it in terms of the ramp-up once you've got the western side back up again?

--------------------------------------------------------------------------------

Stompie Shiels, African Rainbow Minerals Limited - Executive, Business Development [9]

--------------------------------------------------------------------------------

Brian, the modeling, it's a guide and a position. Depending on how successful, which you're well aware of, we do additional or accelerated waste stripping, so I caveated immediately, because, yes, we've got to do a lot of tonnes, we've got to do in the order of 27 million tonnes per annum, to give you guidance, and it's a big number. Of that, we're going to be doing -- probably [2 million, 3 million or 4 million] is extra to open up the ore reserve because you're one-sided only. And the mine wasn't designed with the benches to take both sides, so a little bit of risk in it. So I'm guiding you -- our guidance is that we think -- and that's why we said circa three years. It's two to three years. The grade we're taking in the stockpile will be coming in a lot lower because your stockpile grade is very, very low. It's the cut-off grade. So you could model in probably between 0.25% and 0.27% is the grade on the recovery for that output.

The costing is circa in the order of about $5.80 per pound but it's highly dependent -- and I'm saying it -- if we do not get the waste stripping we do and we cannot capitalize all of it, we have less to capitalize, it could move $0.20, $0.30 higher or $0.20, $0.30 a pound lower.

The capital component, which we guided at the end of last year, we still think it's doable. What we guided was around about a total of ZAR800 million a year for three years. So that's the capital, but a lot of that capital is going to come to the income statement. Read carefully the income [RT] statement which I put there, because of we have not -- we don't -- we are not opening up more than a year ahead of our ore reserve yet because we are in catch-up mode. We've got to make up 17 million tonnes that we are behind over the last three years, and that's why we've got to bring that back - a lot of that back in. So hard to model it.

Cash flow-wise modeling, we're going to be running $6.30 a pound, $6.20 a pound, and we are aware of it. The next year, what we are -- because of chrome -- remember we've got a lot of chrome. Chrome is in a good phase at the moment, but chrome is not sustainable. And we're going to -- the shareholders probably will have to be putting in (inaudible) we're prepared to go through it. Thereafter, three years, we go back to 18,000 tonnes nickel and the associated copper and PGM output, and then we should be a lot better off.

--------------------------------------------------------------------------------

Operator [10]

--------------------------------------------------------------------------------

Kieran Daly, UBS.

--------------------------------------------------------------------------------

Kieran Daly, UBS - Analyst [11]

--------------------------------------------------------------------------------

Just a quick question on Nkomati as well, more on the chrome side of things. I'm sorry I missed some of the presentation earlier, so you may have mentioned it. I think you said you started off the chrome - posting the chrome stockpile again, I think, in Nkomati only sort of November time. How much you're forecasting -- chrome you're forecasting to produce this year from that chrome plant? Can you give us some idea?

--------------------------------------------------------------------------------

Stompie Shiels, African Rainbow Minerals Limited - Executive, Business Development [12]

--------------------------------------------------------------------------------

20,000 tonnes per month, when we think the price will come down, which will be until June-July. Until the price gets to $160, we will go. So I think you've got to predict when the price is going to get lower. I think the chrome forecast for us for the year could be in the order of 350,000 tonnes to 400,000 tonnes -- sorry, 280,000 tonnes to 300,000 tonnes for the year.

--------------------------------------------------------------------------------

Kieran Daly, UBS - Analyst [13]

--------------------------------------------------------------------------------

So its 280,000 tonnes to 300,000 tonnes of chrome products you're going to produce for the year?

--------------------------------------------------------------------------------

Stompie Shiels, African Rainbow Minerals Limited - Executive, Business Development [14]

--------------------------------------------------------------------------------

Total, yes. That's both -- that's PCMZ and the washing -- let's just put most of you back in the picture, you've got PCMZ chrome and you've got washing plant chrome. It's two different chromes. Look at the annual report and you'll see it. That's the total.

--------------------------------------------------------------------------------

Mike Arnold, African Rainbow Minerals Limited - Financial Director [15]

--------------------------------------------------------------------------------

We did 96,000 tonnes for the six months.

--------------------------------------------------------------------------------

Stompie Shiels, African Rainbow Minerals Limited - Executive, Business Development [16]

--------------------------------------------------------------------------------

In steady state, for modeling purposes, you should do 250,000 tonnes chrome from the PCMZ and you should do about 100,000 tonnes chrome from the washing plant, if the chrome prices are right.

--------------------------------------------------------------------------------

Operator [17]

--------------------------------------------------------------------------------

(Operator Instructions)

Andrew Snowdone, Investec.

--------------------------------------------------------------------------------

Andrew Snowdowne, Investec - Analyst [18]

--------------------------------------------------------------------------------

Just one more from me, just with regards to the high grading that has taken place at Nkomati and the catch-up, maybe you could just fill me in in terms of how much of this was intentional, given the weak environment that we've had. And the reason I'm asking this is, I'm trying to get a sense of -- and I appreciate your views on this in terms of how many others in the industry have been doing exactly the same as what you guys have, i.e., in a very tough environment, the CapEx needs to be spent at some facilities, so there's been an intentional high grading, and now we have to go through a period of catch-up in order to bring things back to where they should have been under normal conditions. Maybe you could just talk around that for me, please.

--------------------------------------------------------------------------------

Stompie Shiels, African Rainbow Minerals Limited - Executive, Business Development [19]

--------------------------------------------------------------------------------

Andrew, I think, everything gets done for a specific reason. The nickel price for three years was circa $5 a pound, and we had to come out below $5 a pound. And when that went low, it kept on going lower. So to answer your question, it was intentional. The pile wall and the geotechnical work over the last six months, that was not intentional. The remedial action was a managerial decision. But if we could have maintained the western and eastern walls and the configuration, we're quite confident we would have come out a lot easier.

Yes, everybody holds back. GGV held back. A lot of people -- a lot of companies hold back the capitalized stripping, but we always like to keep a one-year ore reserve, or inventory or input inventory ahead of the phase. We went way down. We came down to virtually months. Yes, it was intentional to rebuild up as well, and we've got a new mining contractor again. When we rebuilt up, they didn't do it at the rate we anticipated. So we were caught short there as well. And that's why I said, in order we should do 33 million tonnes, 34 million tonnes, we went as low as 25 million tonnes per annum, and now we've got to make that up. Now, you can't just make that up in one year. It will take -- two or three years is our latest calculation, on condition, we get that stripping right.

So it's not sunny. What did catch us off guard and what was a bad result for the last six months and low output in nickel of just under 7,000 tonnes was a 15-day strike. We had other issues and we had this pile wall where we had to make a safety decision which the management, after a lot of analysis, decided we're not going to go back there. Now, that caught us off guard, if that was the word. We had a previous pile wall a year or two before, which we did do and we constructed it and we mined it. We did concurrently. We thought we could do it here as well, but the advisors and the technical advisers and people guided us, we felt it is not interfered and it's moved to the site, and that's what's accommodated a re-evaluation of what to mine. And that's why Mike said, now we're going to go to the stockpiled ore. We wanted to do at the end of the life of the mine. We need that now, to use now, and that's what's making the grade lower.

It's not just logical problem. The ore reserve and the (inaudible) 0.32 %, it's still there. But if you are putting a stockpile of ore that's a lot lower than that, it's going to drop your weighted average, and we are putting that because we have not got MMZ. The MMZ is running out, which is the deeper, lower -- higher grade, but deeper ores.

--------------------------------------------------------------------------------

Mike Schmidt, African Rainbow Minerals Limited - CEO [20]

--------------------------------------------------------------------------------

Andrew, I Just want to add in perspective about why we made this decision in terms of this pile wall, as Stompie alluded to the initial pile wall, huge debate, it was quite a serious collapse of the pit, which forced us to gain way, we were forced to build that pile, which took a year to complete, quite a lot of money before we could get back the -- remove the waste and get into it.

We were quite confident even at that stage that the remaining extent of the western pile wall was competent enough and wasn't as amplified as initially to get away with it, but then -- but we didn't have sufficient geotechnical information. So we started a very intensive drilling program, which took more than a year and obviously we had to debate as to whether there are other options, because (inaudible) is one, part one, the pile wall is usually restrictive and prohibitive and that very expensive, very, very time consuming and not without risk. But after due consideration, lot of interaction we made a conscious decision in short of the lot of consideration, we are not risking that mine, those people, we are going to put this extended, elevated pile wall in a gain at a huge cost and it's going to cost us 1.5 years.

And hence compounded with the decision to reduce the waste and we knew the impact, but thought we could mitigate it, we now cut short about this pile wall, which we never intended to build, we thought we get away with (inaudible) so instead of moving your waste, right up the waste stockpiles, we moved all the waste below the area of instability to create a (inaudible) the one issue, which Stompie alluded to say well, providing we can do this accelerated stripping sustainably. Remember that, that areas high in rainfall, you now putting a substantial amount of more waste on to existing waste piles, these waste piles they have to be compacted, they have to be (inaudible) back because you cannot just dump on top of these piles because of these subsurface instability. So they're going to be well managed. So the rate of rise like a (inaudible) our waste dumps are managed accordingly. So it is quite a complex situation, and the situation that is evolved and going forward is compounded by our managerial decision in the interest of safety. But we are letting you know well ahead of the game that it's coming. Thank you.

--------------------------------------------------------------------------------

Andrew Snowdowne, Investec - Analyst [21]

--------------------------------------------------------------------------------

So, maybe just one quick follow-up on that. I was wondering whether you could tell me is there any change or should we expect any change in the life of mine at these operations? And then also, given these issues, and as you said some of it's unexpected, some of it is intentional, is this asset potentially similar to Lubambe Copper or is it going to be put on the potential block of better ways of value creation, is there potential another buyer, I can't help recognizing the fact that Norilsk didn't take its preemptive rights, to what extent where they aware of these potential issues?

--------------------------------------------------------------------------------

Patrice Motsepe, African Rainbow Minerals Limited - Executive Chairman [22]

--------------------------------------------------------------------------------

Andrew, I think Norilsk was kept abreast and obviously they have their management team with us of all developments, but it did come hard and fast on top of us. I think you asked well, what's the potential implications. Well it is, it has -- if you do the calc and you look on the cost curve, it puts us very high on the cost curves.

Now it takes very little movement, probably 10% on the downside, puts us in a really serious situation. So we cannot just sit back and say that's what we're doing. We're doing this because of all the options it gives us the best preferred outcome. The option of care and maintenance is at this stage, not financially viable and the risk appetite, because it is premised on price and outlook. If the better option is the one that we are tabling now, after lot of discussions, but it is not without risk, technically as I explained. And if we have price movements 10% negative, it has other serious ramifications.

In terms of the Lubambe being a little bit different because it has a long-life and extended life assets, people could make a judgment call. But in itself, only has an effect 10 years and we were going to do two to three years of low-grade stock mining at the end of the life and I explained we're going to do some of it now as a blend in a batch. So it does affect the life of mine ultimately from that point of view. So it is not without risk, and it is probably fair to say, it is also an intensive care. And watched very, very closely.

--------------------------------------------------------------------------------

Stompie Shiels, African Rainbow Minerals Limited - Executive, Business Development [23]

--------------------------------------------------------------------------------

I think Andrew, Patrice made it very clear -- and when everyone -- when the calendar -- now that the numbers are out and we reevaluate them all the time on a continuous basis and we got the nickel cost curves already with that thing. And if those assets in the steady state in four years, five years, six years' time on a forward curve looks like it's going to be at [70] at the same time, we as management must make a decision and we have evaluated.

But at this stage, the information we have now knowing that we can put in this stockpile, we think it's the best case for the moment at a nickel price of $10,000 per tonne. If and the nickel price goes to $8,000, $8,500, it is going to be -- the loss might be too big. We know we're going to carry a loss for two years, three years, maybe four years. We haven't actually marked, we haven't put in any (inaudible) put in any cash into that business. And also I think that that's quite important (multiple speakers).

--------------------------------------------------------------------------------

Mike Arnold, African Rainbow Minerals Limited - Financial Director [24]

--------------------------------------------------------------------------------

I think that's the caveat and that's what Stompie alluded to. Depending on the outlook of this chrome and our chrome year is different to the general chrome mines, so even the UG2 and that this is high in sulfide and the Chinese are rejecting material, which is low grade for impurities and this chrome in itself is also, you got it, it got to be on the radar, or be it that they've taken it up to now, there is not many smelters in the world, in fact there is only two that can touch this product and we are not getting the realized prices that the general marks are getting, we're taking quite a big discount on this chrome because of the sulfide content.

--------------------------------------------------------------------------------

Andrew Snowdowne, Investec - Analyst [25]

--------------------------------------------------------------------------------

Break here, thank you guys.

--------------------------------------------------------------------------------

Mike Arnold, African Rainbow Minerals Limited - Financial Director [26]

--------------------------------------------------------------------------------

Thanks.

--------------------------------------------------------------------------------

Operator [27]

--------------------------------------------------------------------------------

(Operator Instructions) We don't have any further questions from the lines, do you have any closing comments.

--------------------------------------------------------------------------------

Mike Schmidt, African Rainbow Minerals Limited - CEO [28]

--------------------------------------------------------------------------------

Thank you very much and great questions and thanks for asking them.

I just maybe wanted to sum up four bullet points and really just bullet points. I think as a management team, we are pretty pleased with the overall group performance. We think the operation by and large have delivered solid results. We've improved our headline earnings with good earnings out of the iron ore, manganese, platinum, Two Rivers Platinum continues to do a lot better, is that positive swing we spoke about in the non-ferrous, which is promising.

Cost in general are well controlled, kept to the inflationary figures some even negative. And in the GGV and the nickel, I think it's been well -- they're risk-free and I'm very pleased that we have the ability to be able to be really transparent with you, but that's where we have reached today, and we are just not going to sit back and do nothing about this, we burn the midnight oil on these things all the time.

So where are we sitting in conclusion. Lubambe, it is -- we have to try and get a decision there. Modikwa remains and consistently remains a serial loss maker, and there is a number of interventions that are again an initiatives taking place. If I may and I know it sounds premature, but we've never moved that mines recoveries beyond 85% over the last 10 years. We've made serious interventions, we changed people, brought in high levels of experience out about two of those operations and I'm very pleased and I don't want to say that already we've seen recoveries of up to 88%.

We are looking at the off-take agreements with the partnership. The Nkomati is well spoken for GGV, again probably shooting the gun, but we are looking at restructuring the -- at the deck, because that's the problem, we alluded to that, it's the interest charges and we hope that things span out, but premature to discuss that.

All I want to say to you guys is that we are conscious of where our focus should be and we're giving it a lot of attentions. The fact that we haven't gone public, we can't go public and so it's cost and concrete written down, it is the same with why Patrice alluded to, you cannot have a discussion about growth or M&A until its (inaudible) on the bottom line. With that, thank you very much.

--------------------------------------------------------------------------------

Operator [29]

--------------------------------------------------------------------------------

Thank you. On behalf of African Rainbow Minerals, that concludes this afternoon's conference. Thank you for joining us. You may now disconnect your lines.