Think Future. Think Aluminium. Think Hulamin.

Chief Executive officer’s reVIEW

Richard Jacob, Chief Executive Officer

I am pleased to report significantly improved financial results in a testing year. Attributable earnings increased by 66% to R133 million, while operating profit increased from R170 million in 2011 to R245 million in 2012, an increase of 44%. Headline earnings per share increased by 128% to 57 cents, with the effect of the successful conversion of the pension fund contributing to this increase.

At the outset, I would like to thank our loyal and dedicated employees who have proved their resilience in a year of external uncertainty and operational challenges. In 2012 international markets softened, the Euro crisis continued, labour unrest grew following the Marikana shootings, and here at Hulamin operations were disrupted by the Camps Drift hot rolling mill motor repair and re-commissioning. I am particularly pleased that against the backdrop of a difficult year in 2012, there is much excitement back in the business with the arrival of the all-aluminium can in South Africa and our success in participating in this programme, as well as the first major orders for extrusion sections arising from the Renewable Energy Independent Power Producers’ (REIPP) solar projects that have been placed with Hulamin Extrusions.

Hulamin remains well placed to capitalise on the underlying growth in demand, particularly in South Africa, for products and applications made from aluminium, the metal of the future. The competitive local supply of primary aluminium provides further support for Hulamin’s growth vision.

2012 was an eventful and difficult year for Hulamin, in both its local operations and in its international markets. Demand grew slowly in the first quarter, with international markets continuing to recover steadily from the 2008/2009 recession. However, the sovereign debt crisis in Europe, the debt and political uncertainty in the USA, as well as the rapid softening of the Chinese economy (by their standards), caused Hulamin’s export markets to soften throughout the remainder of the year. Demand for Hulamin’s automotive products slowed measurably, as Hulamin’s customers and their customers are largely European. US elections, debt ceilings and fiscal cliffs together have negatively impacted on the historically healthy demand for Hulamin’s products in the USA. China continued to invest in additional aluminium semi-fabricating capacity despite weakening local demand, and experienced increased trade barriers to its exports, which resulted in China targeting unprotected countries such as South Africa, with increasing imports of Chinese products into the local market, and increased competition in some international markets.

In the local market, which is Hulamin’s most important, the manufacturing economy has continued to struggle, and we have again not exceeded the record local sales achieved in 2006. It is, however, pleasing that the Government continues to consult constructively with manufacturers in an effort to reverse the deindustrialisation of South Africa. In contrast, the industrial relations climate has worsened with the conflicts that arose in the mining and agricultural sectors, spilling over into employer-employee tension throughout the economy. This underlying discord was reflected in Hulamin with a new set of union and employee representatives, and we are all thankful that no days were lost in 2012 to strike action.

Operational Performance in 2012

One of Hulamin’s key strategies it to achieve benchmark levels in key performance areas that are under its control. These areas include safety, consumption and costs, yields, throughput, cycle times and inventory. In line with this imperative, we launched a manufacturing excellence programme in 2009, known as the Integrated Manufacturing Approach, or IMA as it is now branded. This programme includes the core competences of managing product quality through process control, maintaining equipment in optimum condition, using world class lean/six sigma problem solving techniques and team-based, bottom up performance management, known in Hulamin as IMA Visual Management.

We continue to focus on safety as one of our five values and I am pleased to report that we achieved our best ever Total Recordable Injury Frequency rate in 2012, at 1,00, and this is an achievement of which I am most proud. We still have a long way to go in preventing all injuries, and I am confident that by entrenching the more proactive programmes that we started in 2012, we will make further improvements in the year ahead.

In late April, the Camps Drift hot finishing mill main drive motor developed a fault, as a result of the failure of a braided cable that carries current to the rotor. The resulting outage caused the loss of some 25 000 tons of sales and negatively affected the performance of the business by most measures. The trend of annually increasing sales volumes, which we started in 2009, was interrupted. Sales in 2012 totalled 215 000 tons, which was 6% lower than in 2011. Hulamin Rolled Products sales totalled 194 000 tons (2011: 208 000 tons).

We are pleased with the good progress that has been shown in improving the hot rolling uptime rate and consequently throughput, and with improved slab casting throughput, light gauge foil yields and cold rolling speeds and consequent throughput. In addition to these improvements, we are striving for greater consistency throughout our operations, to convert the many interim performance records into sustained success.

In 2012 we continued the rationalisations that were started in 2011 with the closure of the Cape Town extrusion plant. We closed Hulamin Roofing Solutions as well as our circle manufacturing operations, selling off the assets in both cases to ensure the ongoing demand for our upstream products in the local market.

Hulamin Containers continued to perform well, as it has in recent years. Hulamin Extrusions improved its performance significantly in the final quarter, when we received the first orders from the newly emerging solar market for delivery in 2013. As a consequence of the recently improved outlook, we look forward to an improved contribution from Extrusions throughout 2013.

Financial performance in 2012

Turnover declined by 5% to R6,54 billion in 2012. This was impacted by the 14 000 tons lower sales volumes, the 13% weaker Rand
and the US Dollar LME aluminium price, which was some $400 lower in 2012 compared to 2011.

Operating profit before the metal price lag effect increased to R247 million, boosted by the impact of an allocation from the Hulamin Pension Fund of R164 million (R118 million after tax) pursuant to the conversion and outsourcing process, which was partly offset by
the R84 million impairment of mothballed and underperforming assets. The net effect of decreasing Rand aluminium prices on metal inventories improved from a loss of R34 million in 2011 to a loss of R2 million in 2012, resulting in earnings before interest and tax improving by 44% to R245 million.

Interest paid and the effective tax rate were similar to 2011, resulting in 2012 headline earnings of R182 million (127% increase)
and headline earnings per share of 57 cents.

Headline earnings excluding the employer allocation from the pension fund of R118 million, amounted to R64 million. This was
an increase of 19% over the 2011 headline earnings, excluding the R26 million prior year insurance receipt, of R54 million

Funds generated by the operations decreased by R196 million to R366 million, while working capital requirements decreased by
R7 million. Capital expenditure declined by R54 million resulting in a positive cash flow before financing activities of R72 million compared to R152 million in 2011.

The decrease in the price of the company’s shares in 2012 has prompted a thorough evaluation of the values at which we carry our assets. Our business plan for the next five years indicates that the assets will generate returns that result in values well above their carrying values, improved by the conversion of the local beverage can market to all-aluminium cans. However, uncertain supply from the Bayside smelter and subdued financial performance in recent years introduces a higher than normal level of uncertainty into the business plan, and therefore an alternative valuation of the business has been compiled, based on adjusted cash flows to compensate for these uncertainties. These adjustments for uncertainty are material and the adjusted valuation indicates that the value of the company’s assets is in line with their carrying value.

The output achieved from the Camps Drift hot mill has exceeded previous forecasts, resulting in the Edendale hot mill being mothballed and consequently this asset has been impaired by R45 million. In addition, the uncertainties related to local market conditions in the longer term have led to an impairment of the extrusion assets of R26 million. The board has decided not to declare a final dividend.

Strategic Progress

As one of South Africa’s largest exporters of manufactured products and a significant beneficiator of locally produced primary metal, Hulamin has established its international brand as one of the leading independent aluminium rolled products producers and has strong market positions in its preferred products around the globe. At the same time, we have embarked on a comprehensive manufacturing excellence programme to ensure that operational performance matches our market positioning. While this may have been sufficient in a previous era, this is no longer sufficient to ensure success.

The historic advantage of competitive manufacturing costs in South Africa has been eroded by sharp increases, led by energy costs in particular, which have moved significantly compared to our international competitors. Electricity costs have risen by more than 100% in the past four years, while our gas costs have risen and those of many of our competitors have declined. We have thus embarked on both a new overall cost management project as well as seeking alternatives to our current gas strategy.

The proportion of export sales in Hulamin’s mix of products is higher than all of our known competitors. This has resulted from our small and declining local market which has been eroded by the flood of imports of low cost products. While many countries like the USA, Australia and Europe are increasing trade barriers to prevent the loss of the local aluminium industry, South Africa is becoming increasingly vulnerable, as more and more countries become closed to Chinese products and South Africa remains “open” and without import duty. Hulamin continues to motivate for the Government to reconsider its current stance.

When Hulamin embarked on its first major capital expansion programme in 1996, part of the justification was based on growing the local demand for aluminium beverage can stock. At that time, Rheem Can had started to produce aluminium cans in South Africa, but ceased operations prior to Hulamin establishing its capability to produce can body stock. We are therefore particularly pleased that Nampak has decided to convert its operations from steel to aluminium and to install new all-aluminium can lines. In November, we concluded a three-year agreement with Nampak for the supply of approximately 15 000 tons per year after qualification. While this is a significant first step, the volume only reflects a small portion of the forecast local demand in the coming years. As such, this represents a significant step in positioning Hulamin to benefit from opportunities in the local and regional market.

From the mid 2000s, the government has been planning to capitalise on South Africa’s abundant, high quality sunlight to generate renewable, low carbon footprint energy. Aluminium is used in many solar applications, particularly in extruded sections used in framing and supporting both photovoltaic panels and various supporting systems. Solar farms require large numbers of panels and infrastructure and there is consequently a significant potential for aluminium extrusion sales. Hulamin Extrusions has secured its first sales orders and has positioned itself well as the numerous phases of contracts are awarded in the coming five years or more.

The procurement of local supply of rolling slab and extrusion billet remains at the centre of Hulamin’s strategic repositioning. There is an obvious anomaly in the greater Southern African aluminium industry. Southern Africa produces in excess of 1,3 million tons of primary aluminium each year in the three regional aluminium smelters at Hillside, Bayside and Mozal, which is approximately three times the local primary aluminium demand. This locally produced primary aluminium is mostly exported in an un-beneficiated form, with only limited production of rolling slab for Hulamin. While the upstream aluminium producers export their metal, the downstream aluminium semi-fabrication industry has to import extrusion billet, foundry alloys, rod (for the wire and overhead conductor industry), aluminium monobloc for aerosol cans as well as the balance of Hulamin’s slab requirements – and this despite the assets being available at Bayside to produce these products. This anomaly, which is in excess of 100 000 tons, represents a major opportunity for the South African aluminium industry to improve its competitive position.

The possible closure of BHP Billiton’s Bayside smelter remains a threat and it would result in the curtailment of Hulamin’s growth potential, as the majority of Hulamin’s export sales would no longer be viable using imported rolling slab. Available alternatives could include expanding Hulamin’s slab casting capacity in Pietermaritzburg or establishing a new slab facility in Richards Bay, neither of which are attractive. A more likely outcome would require Hulamin to downscale its business to supply the local market and a limited range of high value exports. Hulamin has noted the public debate around aluminium and electricity in South Africa, and has developed a range of alternatives for the future of slab supply, and which may capitalise on the anomaly described above.

Prospects for 2013 and beyond

Hulamin has frequently stated that it plans to reach full production capacity by the end of 2014. Were it not for the 25 000 tons disruption to operations as a result of the Camps Drift hot mill outage in the second quarter, this momentum would have been maintained in 2012. With the operation having settled down after this interruption, the team is focusing on achieving this objective.

In order to make it happen, Hulamin will further reinforce its manufacturing excellence programme, the Integrated Manufacturing Approach (IMA), in 2013. This programme has started to deliver improved manufacturing performance, which includes increasing volumes, improving yield, efficiency and cost competitiveness. In 2012, this improvement momentum was disturbed by the Hot Mill outage and we expect to deliver improved performance in 2013.

Cost pressures continue to mount in South Africa. For a number of years, manufacturers have faced labour and energy cost increases well in excess of inflation. Current projections see this trend continuing through 2013, which underlines the need for improved operational performance. The short-term prospects for international rolling margins appear to be weaker than they were at the outset of 2012 and thus provides downside risk to performance in 2013, in spite of increased volumes.

The value of the Rand against the US Dollar and the Euro continues to have a major impact on financial performance. The volatility and periods of weakness of the Rand during 2012 assisted in improving the business’ profit performance, and this sensitivity will continue through 2013.

The conversion of the South African beverage industry to aluminium cans will commence in 2013, as Nampak commissions its new and converted can lines to aluminium sheet. This is an important project for Hulamin, which will see local sales of aluminium can body coil grow to become Hulamin’s largest volume local product by 2015.

We continue to progress the initiatives to improve Hulamin’s financial performance and strategic positioning and hope to resolve the rolling slab supply security during the year ahead.

Richard Jacob

Chief Executive Officer