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Chief financial Officer’s REPORT

The reported results for 2013 have been affected by a number of extraneous factors and are not directly comparable to those of the prior year, 2012. The 2012 figures themselves have been restated due to a change in accounting policy mandated by the coming into effect of a revised International Accounting Standard, IAS 19. In the circumstances, normalised earnings provides a more meaningful comparison and, on this basis, earnings increased from R57,3 million in 2012 to R201,4 million in the current year.

Impairment of Rolled Products Assets

The board concluded that compliance with International Accounting Standard (IAS) 36 required an impairment of R2 122,3 million be made against the carrying value of the tangible and intangible assets of the Rolled Products business. This impairment is a non-cash accounting adjustment analogous to accelerated depreciation and has been charged against operating profit (EBIT). A corresponding deferred tax adjustment reduces the net charge on attributable earnings to R1 528,1 million, which is equivalent to R4,79 per share. In terms of the rules of the JSE Limited, such impairments are excluded from the computation of headline earnings. The impairment is also excluded from the computation of normalised earnings. The annual depreciation expense will be approximately R86 million lower in 2014 following the impairment and will increase profits by the same amount (27 cents per share). The benefit of the lower depreciation charge will be adjusted for in future management incentive determinations.

The Hulamin share price closed at R5,15 on 31 December 2013, having averaged R4,64 over the year, whereas the underlying net asset value per share before impairment was R15,44 at year-end. The discount to underlying value of R10,29 per share is a deemed indicator of impairment and a detailed value-in-use computation was carried out before finalising the results, as was the case in the previous year. Details are provided in note 19 to the financial statements of the group.

The value-in-use calculation at December 2013 used a significantly higher discount rate than was used in the previous year due to an increase in the general risk-free rate and the introduction of a premium to cater for the increased risk brought about by the volatility in the Rand and the uncertainty surrounding slab supply from the Bayside casthouse. Volumes assumed in the forecast were also reduced to take account of the actual achievements against previous forecasts and the lower total volumes anticipated as local sales increase. A continuation of slab supply from Bayside was assumed in the forecast and, should this not be the case, a further impairment may become necessary at that time.

The impairment does not result in the breach of any banking covenants and has been discussed specifically with key lenders.

Change in accounting policy and restatement of prior year figures

As was explained when the half-year results were published earlier this year, International Accounting Statement (IAS) 19R – Employee Benefits came into effect on 1 January 2013. The revisions impacted mainly the treatment of actuarial gains and losses that arise in defined benefit funds such as pension and post-retirement medical aid funds.

IAS 19R had little impact on the current year, increasing operating profit (EBIT) by R6,9 million and earnings by R5,0 million. However, since Hulamin had converted its defined benefit pension fund to a defined contribution fund in June 2012, and recorded a large gain on conversion, it had a substantial impact on the restatement of the prior year figures where 2012 EBIT was reduced by R143,5 million and earnings by R103,2 million from R132,5 million to R29,3 million.

Normalised earnings

In order to better monitor underlying performance, management reports results excluding abnormal or non-recurring type gains and losses such as those arising from the disposal of capital assets and the conversion of the retirement benefit fund. The costs associated with the rightsizing of the Rolled Products business during the current year have similarly been excluded. Items such as derivative gains and losses and metal price lag are not excluded from normalised earnings.

The calculation of normalised earnings is shown in note 23 to the financial statements of the group.

Operating performance

Normalised earnings, increased from R57,3 million in 2012 to R201,4 million in the current year.

The Hulamin group comprises two major segments, Rolled Products which contributes around 90% of revenue by value, and Extrusions which provides the remaining 10%. A segmental analysis is provided in note 2 to the financial statements of the group.

The Hulamin Extrusions business performed particularly well in 2013 and normalised earnings increased from R4,4 million to R30,7 million. Volume growth was limited but did benefit from various solar-related contracts, whilst several unprofitable contracts were restructured or terminated. The return on equity based on normalised earnings was 12,7%.

Hulamin Rolled Products was impaired by R1 528,1 million at year-end, reducing the carrying value of its net assets (equity) to R3 161,1 million. Normalised earnings grew strongly from R52,9 million in 2012 to R170,7 million in the current year despite sales volumes of 190 200 tons being 3 800 tons below the previous year. The Rand/Dollar exchange rate has a substantial impact on profitability and the average exchange rate weakened from 8,22 in 2012 to 9,66 in 2013. The return on equity based on normalised earnings was 5,4% after the reduction in net asset value arising from the impairment. Cash flow before and after capital expenditure was strongly positive at R285,4 million and R158,9 million respectively.

An analysis of expenses is provided in note 18 to the group financial statements. The purchase of aluminium, both rolling slab and melting ingot, together with alloying elements and related products, comprises more than 70% of total expenditure. Employment costs at R762,5 million are the next largest category at 10% of total expenditure. Salaries and wages, excluding retirement benefit costs, increased by 8,6% in nominal terms or 10,7% after adjusting for the lower sales volumes. The R26 million severance costs incurred in the rightsizing exercise contributed significantly to this increase. Utilities, and LPG gas in particular, is a major cost and places Hulamin at a significant disadvantage to many of its international competitors who benefit from low-cost alternatives such as shale gas. Expense control is a key area and will receive ongoing focus in 2014.

Working capital

Inventories rose by R291 million to R1 807 million at December 2013, representing 95 days in inventory compared to 91 days in 2012. Rolled Products inventory totalled 61 000 tons, which is above last year and our target level of 55 000 tons. Manufacturing performance fell well short of targets and introduced additional variability into the forecasting process which impacted negatively on inventory levels. Inventory at Extrusions was inflated by a large replenishment order that was in transit at year-end.

Although trade receivables increased from R748 million to R827 million, they were well managed and days outstanding fell from 42 to 40 days. All export debtors and around 90% of local debtors were covered by credit insurance which has a 10% excess. Bad debts written off during the year amounted to R0,7 million (2012: R0,8 million).

Trade payables remained broadly in line with activity levels, increasing from 31 to 33 days purchases.

Hulamin’s functional currency is South African Rand. The group does not speculate in foreign currencies and has a policy of covering via forward exchange contracts (FECs) all exposures to foreign currency once a binding contract has been concluded.

The group’s metal sales and purchases are primarily based on a ruling London Metal Exchange (LME) price for aluminium plus applicable geographic premiums and a conversion margin. However, the pricing of metal sales normally lags that of metal purchases and this exposure is mitigated through a combination of commodity derivatives (futures) and foreign exchange contracts. The group has an established policy of eliminating 50% of its net metal price exposure through hedging activities. The impact of the unhedged metal price movements, referred to as metal price lag, amounted to a pretax loss of R57,8 million in the current year (2012: loss of R2,2 million) and is included in cost of goods sold.

Hedging 100% of the metal price exposure would eliminate the metal price lag effect but would expose the group to considerable liquidity stress were the price of aluminium to rise suddenly and substantially as it did in 2008 and 2011/12. Under the previous borrowing facilities, this could, in turn, have led to a breach of banking covenants. However, the new finance facilities put in place during the current year provide much more flexibility and have largely eliminated this risk and the 50% hedging strategy will be reconsidered in 2014.

Capital expenditure

Expenditure increased from R97,9 million to R147,8 million but still remains well below the depreciation charge of R210,3 million. Expenditure comprised R131,2 million on strategic spares, improvements and long-life consumables such as work rolls and dies and R16,7 million on enhancements to IT systems. The enhanced asset care programme embarked on will see an increased spend on plant and equipment in coming years.

A new aluminium recycling operation is being developed at the Camps Drift site in Pietermaritzburg at an estimated total cost of R300 million. The facility will allow Hulamin to process used beverage cans (UBCs) and other scrap very efficiently in a new state-of-the-art furnace. The faster than anticipated take-up of aluminium beverage cans in the local market augurs well for this project, as do the recently introduced restrictions on the export of scrap aluminium. Funding is currently being negotiated and will likely be a combination of medium-term loans and vendor finance. The operation is expected to be in production within two years.

A new production planning software suite will be implemented during 2014 at a cost of R20 million. The solution will allow planners to react rapidly to changes in production levels and shop floor developments, thereby reducing bottlenecks, improving on-time deliveries and allowing lower inventory levels.

Cash flow

Cash generated before working capital requirements rose strongly from R365,9 million in 2012 to R586,8 million in the current year. Working capital absorbed R211,2 million due to the increase in inventory levels referred to above and cash from operating activities amounted to R283,0 million after interest and tax payments.

Capital expenditure of R147,8 million was partly offset by a R32,4 million increase in borrowings, resulting in a positive cash inflow of R163,2 million for the year (2012: R9,7 million).

Borrowing facilities and finance costs

Borrowings closed at R804,5 million and, after deducting cash and cash equivalents of R192,8 million, net borrowings amounted to R611,7 million, some R130 million lower than in 2012. The high cash position was an anomaly caused by the transition from the old payment systems to a new one following the change in lead bankers.

Hulamin previously had facilities mainly with Standard Bank and FNB/RMB. These consisted of a term loan of R557 million repayable in full by June 2015 and a R550 million 360-day facility. Virtually all assets of the group were pledged as security for these facilities, which also required compliance with onerous covenants. Hulamin’s current borrowing requirements are driven by working capital movements and a sharp weakening in the Rand or increase in the aluminium price on the LME demands a rapid response and places heavy demands on liquidity. The previous facilities were unable to provide such flexibility and led to increased liquidity risk.

Nedbank was appointed lead banker to Hulamin in June 2013. New agreements provided a working capital facility of R1,2 billion secured only against the specific assets funded, i.e. inventory and receivables, as well as a R250 million general purpose 360-day facility. Although the facilities “revolve”, advance and repay, they are committed three-year facilities. The facilities are competitively priced and covenants are limited to a debt/equity ratio and current ratio, neither of which is likely to prove restrictive in the future. At year-end, the group was well within its covenants, notwithstanding the impact on equity of the Rolled Products asset impairment.

Given the existing security structure at that time, Nedbank provided an additional bridge loan of R650 million to allow Hulamin to repay all amounts owing to other banks and so remove the pledges on existing assets. The bridge loan was repaid in full in January 2014 from advances under the new working capital facility. Hulamin’s capital assets are now free of encumbrances and can be pledged to secure funding for capital projects such as the aluminium recycling project referred to earlier.

Net finance costs at R63,4 million were in line with the previous year’s R62,9 million.

Dividend payments

The group has not paid any dividends since 2008 when a total of 41 cents was paid for the year based on a dividend cover ratio of just over three. Dividend payments were suspended due to severe liquidity constraints brought about by weak profit performances and substantial capital expenditure.

The board has not declared any dividends in respect of 2013.


The group reported an attributable loss of R1 345,0 million for the year ended 317 December 2013. Headline earnings for the same period, which exclude the impairment charge, amounted to R183,0 million (2012: R78,9 million), equivalent to 57 cents per share (2012: 25 cents).