Alloys

18.15
Alloys | Boshoek | South Africa

Abinaar Magodielo, Production Engineer, leaves the plant after handing over to the afternoon shift

Chrome | Markets

The first half of 2005 was characterised by strong growth in stainless steel melt, which accounts for approximately 80% of global ferrochrome consumption, and consequently in ferrochrome demand. As a result, ferrochrome prices rose to 78¢ per pound in the second quarter of 2005. In the second half, stainless steel stocks began to build, particularly in China, as high nickel prices impacted demand for stainless steel, leading to a slow-down in stainless melt production. While globally, stainless steel melt production in 2005 continued at a similar level to the previous year, in Europe, stainless steel melt production declined by an estimated 4.8% to 8.3 million tonnes. Production of stainless melt also fell in the United States, down by 7%, in Taiwan, down by 4%, and in Japan, where production declined by around 2.5% year-on-year. China was the exception, experiencing significant growth of 33% to around 3.7 million tonnes.

Demand for ferrochrome has continued to grow year-on-year, albeit at a slower rate than in the first half of the year, by around 3.6%. This growth brings global demand to 5.7 million tonnes, up from 5.5 million tonnes in 2004, primarily due to increased production of ferritic grade stainless steel.

As the correction in stainless melt production translated into lower ferrochrome demand in the second half of 2005, ferrochrome prices came under pressure, with the base price reducing by 5¢ in each quarter to end the year at 68¢ per pound. The average quoted price for 2005 was 73¢ per pound, 7.3% higher than the published 2004 average of 68¢ per pound.

Relatively weak stainless steel melt production has continued into the first quarter of 2006, resulting in further downward pressure on prices; in the first quarter the base price reduced by a further 5¢ to 63¢ per pound. However, a recovery in the second half of 2006 is expected as both stainless steel melt production and ferrochrome demand gain momentum, with China again anticipated to drive this growth.

Operations

Revenue for 2005 was 2.6% lower than the previous year, predominantly due to lower volumes and the agreed reduction in Xstrata's participation interest in the Xstrata-Merafe Chrome Venture (the "Chrome Venture"). EBIT decreased by 4.9% to $141.5 million.

The Chrome Venture continues to mature and is gradually realising the anticipated synergies from management, technological diversity and sharing of operational expertise. From 1 July 2005, Merafe's participation interest in the venture increased from 11% to 14%. Following the Chrome Venture's acquisition of Samancor's 50% stake in the Wonderkop furnaces and Kroondal reserves (the "Gemini JV") in addition to the acquisition of the contiguous Marikana reserves, completed in November 2005, Merafe's share in the Chrome Venture increased further to 17%. Merafe's interest will increase again to 20.5% on 1 July 2006, in line with the Pooling and Sharing agreement with Xstrata Alloys. Accordingly, Merafe's participation in Project Lion will also increase to 20.5%.

Operating conditions benefited during the year from improved performance at the Rustenburg pelletising plant, the increased availability of Outokumpu pellets from the Boshoek plant and reduced overall raw material requirements through better efficiencies from higher pellet availabilities. In June 2005, suspensions were announced at seven of the Chrome Venture furnaces to perform planned maintenance during the winter months when energy costs are elevated. The temporary closures had no material impact on 2005 financial performance and all seven furnaces were brought back into operation during the third quarter. Following routine maintenance work, the two Gemini JV furnaces at Wonderkop have remained suspended in light of prevailing market conditions and to improve the distribution of agglomerated ores across the chrome operations. In addition, a further five furnaces are being temporarily suspended, comprising two furnaces at Wonderkop, two furnaces at Rustenburg and one furnace at Boshoek, and will be returned to production according to market conditions.

During 2005, modifications were made to the Boshoek furnaces during the winter shutdown. Using the combined expertise within Xstrata and Merafe, the modifications have produced excellent results. The two Boshoek furnaces are currently operating with great stability, production volumes have increased and operating costs have significantly reduced.

Operating costs were contained in 2005 despite lower production volumes. Excluding standing charges of $10 million incurred by idled capacity, unit costs fell by ZAR48 per tonne in real terms compared to 2004, due to lower coke prices, mechanical improvements at the Boshoek furnaces and improved furnace efficiencies resulting from higher pellet availabilities. These cost savings also reflect lower power costs than in the previous year, primarily due to the suspension of the Wonderkop JV furnaces, which had operated at escalated commodity-linked electricity prices in 2004. The continued strength of the South African rand during the year negatively impacted South African rand costs in US dollar terms by $4.6 million.

Mining operations improved during 2005. Higher underground production volumes from the Kroondal mine, especially after the acquisition of the Marikana reserves announced in July 2005, displaced production from the lower quality opencast operations at Kroondal and Boshoek.

Operations at the Horizon mine were temporarily suspended from 1 July to December 2005 to refurbish the mine, with the objective of improving yields and production costs from January 2006. The Thorncliffe mine in the East remained the best performing and lowest cost chrome ore mine in the group in 2005. The Thorncliffe mining complex is being expanded with the development of the Helena mine to supply ore to the new Lion ferrochrome smelter.

Developments

The first stage of Project Lion, to construct a 360,000 tonnes per annum smelting complex in the Mpumalanga province, is currently under construction following ground clearing which commenced during December 2004. The smelter is situated close to existing Xstrata chrome reserves at the Thorncliffe mining complex. The project utilizes Xstrata Alloys' proprietary Premus technology, which will deliver significant production cost savings compared to prevailing ferrochrome production technologies. Project Lion was awarded a substantial grant by the South African Department of Trade and Industry in 2005 in recognition of the project's contribution to the sustainable development of the surrounding area. This is a result of the project's beneficial impact on local communities in the form of direct and indirect employment, training schemes, and specific social development programmes initiated by Xstrata Alloys, as well as the associated improved infrastructure that will benefit local communities and surrounding industries. The project has encountered some external difficulties, in particular the quality of the kiln riding rings and roller support castings and difficult ground conditions. Despite these challenges, the project is on track to commission on time and within budget during the third quarter of 2006. The related Helena mine development also remains within the project timing schedule and budget, with chrome ore already being brought to surface.

Marifaan Primary School, outside Lydenburg is sponsored by Xstrata

Simulated training at Kroondal Mine

The acquisition of the African Carbon Group was completed during January 2005. The purchase has been an important step in enabling Xstrata Alloys to secure its supply of reductants and to gain greater control over key inputs into the ferrochrome manufacturing process. Other reductant supply alternatives continue to be actively pursued by the carbon division.

In November 2005, Merafe successfully raised equity and debt funding to acquire Samancor's 50% stake in the Gemini Joint Venture and associated chrome reserves, as well as facilitating Merafe's 20.5% participation in the Project Lion.

Project Bokamoso was approved towards the end of 2005 at a capital cost of ZAR800m. The project consists of the construction and commissioning of a pelletising and sintering plant with a production capacity of 1.2 million tonnes per annum. The additional agglomeration capacity will restore the ore balance between the mines and smelters in Xstrata's Western operations, reducing operating costs for the smelting operations and enhancing mining and operational efficiencies. The project will also result in improved environmental performance and operational flexibility. Construction will commence in the first quarter of 2006, with commissioning expected in the second quarter of 2007. The plant is anticipated to reach full capacity by the end of 2007.

Project Mototolo, a 50-50 joint venture with Anglo Platinum, was initiated in the latter part of 2005, heralding Xstrata's entry into platinum group metals; an attractive new commodity. The project will commence commissioning in the final quarter of 2006, reaching full production by the end of 2007. Xstrata's share of the total capital expenditure is estimated to be approximately ZAR675 million. The project is expected to produce approximately 132,000 ounces of platinum and 82,000 ounces of palladium per annum.

On 28 February 2006, Xstrata announced the formation of a partnership with Kagiso Investment Trust ("Kagiso"), through which Kagiso will acquire 26% of Xstrata's 50% interest in the joint venture, in return for funding its proportionate share of the capital expenditure required. Xstrata Alloys and Kagiso will jointly manage and vote the combined 50% share in the joint venture.

Project Lion construction of ferrochrome plant, phase 1

Vanadium | Markets

Carbon steel, which dominates the usage of vanadium, continued to show solid global growth of approximately 6% during 2005. The primary driver of demand was China, where carbon steel production increased by approximately 25%. Consequently the vanadium market remained strong, particularly in the first half of the year when rapid increases in demand from all sectors led to ferrovanadium prices rising to over $128 per kilogram.

Vanadium supply increased in response, particularly from magnetite steel producers in China, while high prices led to some substitution of vanadium by ferroniobium in certain applications, bringing supply and demand towards equilibrium. Consequently, ferrovanadium prices retreated from the peaks seen in the first half of the year to around $38 per kilogram by year end, bringing the average price for 2005 to around $70 per kilogram, compared to $27 per kilogram in 2004.

With further growth anticipated in carbon steel production, demand for vanadium units should remain firm during 2006 despite expected further increases in vanadium production in China and additional ferroniobium substitution. Prices are expected to moderate as a consequence, but are likely to remain above historical levels in 2006.

Operations

Revenue increased by almost 138% to $318 million compared with the previous period, while operating profit increased by 688% to $176 million. Increased profitability was principally driven by higher sales prices, despite the effects of US dollar weakness and slight increases in real unit costs during the period. Vanadium pentoxide volumes were lower than the previous period, due to the closure of the Vantech operation announced in November 2004. Production of vanadium pentoxide at Rhovan was maximised in 2005 at the expense of efficiency in order to capitalise on favourable market conditions and maximise contribution margins. As a result, overall production volumes at Rhovan increased by 1.2% year-on-year to record levels, comprising higher vanadium pentoxide production and slightly lower ferrovanadium production. Unit costs increased slightly, principally due to an increased overburden removal programme.

Rhovan reaped the benefits throughout the year of several projects launched during 2004. This included installing the crusher in the pit, maximising the capacity of the overland conveyor and introducing a primary stockpile split to increase the efficiency of the fully-autogenous mill.

During 2005, Xstrata Alloys took advantage of the vanadium division's strong financial performance to redesign the Rhovan mining operation to improve efficiencies and access previously uneconomic reserves. As a result, additional costs of approximately $2.4 million were incurred, but the life of mine was extended by more than six months, while enhancing operational efficiencies.

Developments

Xstrata's efficient Rhovan operation has the potential to increase vanadium pentoxide production capacity by a further 8.5 million pounds per annum through low cost brownfield expansion to take advantage of expected increased future demand. The planned increase in capacity will have a substantial positive impact on unit costs due to economies of scale. The Environmental Management Programme Report (EMPR) for the proposed expansion project is being prepared and will be completed in the first half of 2006.

Final settlement was reached with PMA on the closure of the Windimurra plant during August 2005 and, as a consequence, PMA has assumed all responsibilities and obligations related to the final rehabilitation of the Windimurra project. Rehabilitation of the Vantech site is also progressing well, with full closure expected to take approximately four-to-five years in order to allow for groundwater remediation.

Xstrata Alloys Health, Safety, Environment and Community (HSEC)

Three critical incidents in which five employees (including contractors) lost their lives overshadow a year where intensive safety programmes were implemented and substantial improvements in injury frequency rates were achieved. Xstrata Alloys is striving to become a fatality-free business and invested significant resources in a range of safety improvement programmes which began in 2005, including specific fatality prevention programmes, behavioural safety training for all employees and contractors and specific training for supervisors and mine managers. Two of the fatal incidents in 2005 involved falls of ground. Special focus being applied to this area includes:

• securing the assistance of various experts in this field, including leading academic institutions from South Africa and Australia;
• visits to other mines in South Africa and abroad to investigate alternative roof support mechanisms;
• the implementation of a new set of working instructions for the interim in order to minimise risks; and
• enhancing the use of ground-penetrating radar equipment, including software development.

Xstrata Alloys has actively drawn on HSEC resources and best practices from Xstrata's global operations to identify and manage major risks and to enhance safety at its operations during 2005.

A revised HSEC strategy has been developed under the leadership of a newly appointed Executive Director of Sustainable Development, which has helped to focus efforts on key risks and to invest resources more effectively.

The lost time injury frequency rate (LTIFR) and total recordable injury frequency rate (TRIFR) for Xstrata Alloys improved by 21% and 32% respectively compared to 2004 to 4.3 and 11.5, the lowest ever frequency rates for the business unit.

Tapping of furnace at Boshoek smelter

Every Xstrata Alloys operation was independently audited against Xstrata's HSEC policy and 17 HSEC management standards in 2005. Significant resource was dedicated to the implementation of the 17 Xstrata corporate HSEC standards and substantial improvements were achieved over the past six audits as a result.

No serious or critical environmental incidents (category 4 or 5) and one category 3 (significant) incident occurred at Xstrata Alloys operations during 2005. Overall, environmental incidents decreased by 32% from the previous year. No fines or penalties were issued. A group air pollution specialist was appointed during 2005 to ensure a holistic approach to the control and management of air emissions arising from Xstrata's operations and to work closely with the local municipalities to ensure optimal emissions monitoring. Individual specialists have been assigned to drive Xstrata Alloys' occupational health and community initiatives. In particular, Rhovan, Xstrata's vanadium operation, has implemented a number of wide-ranging initiatives to improve air quality and prevent respiratory problems in the workplace. In 2006, Xstrata Alloys is implementing a comprehensive voluntary counselling, testing and treatment programme for HIV/AIDS for all employees and contractors at every operation.

The Xstrata-Merafe Chrome Venture has been recognised by the then Minister of Minerals and Energy, Mrs Phumzile Mlambo Ngcuka (currently Deputy President) and the Director General of the Department of Minerals and Energy, as a partnership that embodies the spirit of the Minerals and Petroleum Development Act. The venture is on track to satisfy the 26% participation required by the Charter before the stipulated deadline.

Negotiations are currently being advanced to secure broad-based participation by historically disadvantaged South Africans (HDSAs) in Xstrata's vanadium operation. Procurement from HDSA suppliers increased significantly in 2005 to 40% of total discretionary procurement expenditure compared to 23% in 2004 and the proportion of management positions held by HDSAs increased to 21%, up from 17.5% in the previous year.