Financial statements > Group financial statements > Notes to the Group Financial Statements

notes to the group financial statements
for the year ended 31 December 2015

11.

BUSINESS COMBINATIONS 

Isizinda Aluminium (Pty) Ltd (60% interest Bingelela Capital (Pty) Ltd and 40% interest Hulamin Operations (Pty) Ltd) acquired, on 1 July 2015, the Bayside casthouse business from Hillside Aluminium (Pty) Ltd, part of the South32 Limited group of companies. This strategic transaction secures Hulamin's local supply of rolling slab for the next five years and beyond, and the Bayside casthouse in Richards Bay will be developed into a broad range aluminium hub in order to stimulate and support industrialisation in Richards Bay, the growth of the domestic aluminium industry and economic growth throughout Southern Africa. 

The following table summarises the consideration paid for the Bayside casthouse business, the fair value of the assets acquired and liabilities assumed at the acquisition date.

Details of the purchase consideration, and the net assets acquired are as follows: 

   2015 
R'000 
2014 
R'000 
Purchase consideration: 
Cash payment  100 170  – 
The assets and liabilities recognised as a result of the acquisition are as follows: 
Sundry receivable  10 000  –  
Plant and equipment  48 800  –  
Land and buildings  68 364  –  
Inventory  41 198  –  
Deferred tax liability  (16 324) –  
Net identifiable assets acquired  152 038  –  
Bargain purchase gain  51 868  –  

The bargain purchase gain of R51 868 000 arising from the acquisition is attributable to the land and buildings. The redevelopment of the casthouse business through the partnership of Isizinda Aluminium (Pty) Ltd (Isizinda) and Hulamin is of strategic importance to the local aluminium industry, including the interest of South32 Limited, and was an integral element in the transaction and the related gain. 

Acquisition related costs of R2 480 000 have been charged to administrative expenses in the group income statement for the year ended 31 December 2015.

The gross amount due in respect of the sundry receivable is equal to its fair value and is considered collectable. The fair value of inventory is based on its market value. 

Independent valuations of the plant and machinery and land and buildings were performed by external and qualified valuators in order to arrive at their respective fair values. These valuations represent level 3 fair value measurements as described in note 1.20.

Plant and machinery was valued using a market approach. The valuation technique employed provides a market value, which is determined by comparing the subject asset with identical or similar assets for which price information is available in the market. Key unobservable inputs related to quotations from suppliers and adjustments for economic obsolescence. 

Land and buildings were valued using the net income capitalisation method, taking into account comparable market transactions, reduced by remedial works required to the property for best use. Key unobservable inputs related to market rentals, comparable transactions and the capitalisation rate applied.

Revenue and profit recognition 
As Hulamin is the sole customer of the acquired business, the acquisition resulted in no increase in group revenues. Since 1 July 2015, the acquired business generated R1 158 million in revenues from Hulamin and contributed R1 203 000 to the net profit of the Group. The business acquired began trading on acquisition date.

Equity option 
The purchase consideration of R100 170 000 for the acquisition of the Bayside casthouse was funded by a loan from Hulamin to Isizinda. The terms of the loan arrangement result in the interest held by the outside shareholder in Isizinda being treated as a grant of an equity option for a nominal consideration. An IFRS 2 charge, which represents the fair value of the option granted, of R27 224 000 was recognised in the group income statement. The fair value of the option granted was determined based on its intrinsic value. This was determined on an indirect basis with reference to the bargain purchase gain and the contributed capital of R4 000 000 from the outside shareholder. The time value component was deemed to be nominal as the option is expected to be exercised upon settlement of the loan funding which is planned to take place within eighteen months. 

 2015 
R'000 
2014 
R'000 

12.

SHARE CAPITAL AND SHARE PREMIUM

12.1

Authorised

800 000 000 ordinary shares of no par value 
(2014: 800 000 000 ordinary shares of 10 cents each) –  80 000 
31 477 333 A ordinary shares of no par value 
(2014: 45 000 000 A ordinary shares of 10 cents each) –  4 500 
36 072 000 B ordinary shares of no par value 
(2014: 28 000 000 B ordinary shares of 10 cents each) –  2 800 
Total authorised stated/share capital  –  87 300 

The A ordinary shares consist of 4 721 600 A1 shares and 26 755 733 A2 shares. 

The B ordinary shares consist of 9 018 000 B1 shares, 9 018 000 B2 shares
and 18 036 000 B3 shares.

 

12.2

Issued

Ordinary shares 
Opening balance: 319 596 836 ordinary shares of 10 cents each 
(2014: 319 268 492 ordinary shares of 10 cents each) 31 960  31 926 
Issued during year: nil 
(2014: 328 344 ordinary shares of 10 cents each) –  34 
Transfer from share premium  1 785 620  – 
Closing balance: 319 596 836 ordinary shares of no par value 
(2014: 319 596 836 ordinary shares of 10 cents each) 1 817 580  31 960 
A ordinary shares 
Issued during the year: A1 and A2 ordinary shares 
(4 721 600 A1 ordinary shares of no par value, 26 755 733 A2 ordinary shares of no par value) 59 656  – 
B ordinary shares 
Issued during the year: B1, B2 and B3 ordinary shares 
(9 018 000 B1 ordinary shares of no par value, 9 018 000 B2 ordinary shares of no par value, 18 036 000 B3 ordinary shares of no par value)   361  – 
Total issued stated/share capital  1 877 597  31 960 
Share premium 
Opening balance  1 785 620  1 785 620 
Transfer to share capital  (1 785 620) – 
Consolidated A and B ordinary shares  (60 017) – 
Stated capital/share capital and share premium  1 817 580  1 817 580 
    

12.3

A and B ordinary shares

All A ordinary shares and B ordinary shares have voting rights which rank pari passu with ordinary shares. 

A1 ordinary shares are entitled to dividends whilst all B ordinary shares have no entitlement to dividends. 

12.4

Unissued

Under option to employees:
Details of the employee share incentive schemes, including the share options outstanding at the end of the year, the range of exercise prices and the weighted average contractual lives related thereto, are set out in note 33

Under the control of the directors: 
At 31 December 2015, 6 801 529 unissued ordinary shares (2014: 6 801 529) were under the control of the directors, for the purpose, inter alia, of existing employee share incentive schemes.

 Effective
interest 
rate (%)
2015 
R'000 
2014 
R'000 

13.

NON-CURRENT BORROWINGS

Nedbank  9,53  270 000  – 
Less: Current portion included in current borrowings  (54 000) – 
216 000  – 

The Nedbank long-term loan is secured against a mortgage bond of R405 000 000 over land and buildings disclosed in note 3

The fair values of the non-current borrowings approximate their carrying value. 

The loan is repayable in quarterly instalments over five years commencing in March 2016.
As R54 000 000 is due within twelve months from reporting date, it has been reclassified to current borrowings. Refer to note 17

14

DEFERRED TAX LIABILITY 

At beginning of year  477 702  405 311 
Tax (credited)/charged directly to equity  (28 050) 4 684 
Deferred tax on business combination  16 324  – 
Income statement 
Current year charge  21 574  66 797 
Prior year (credit)/charge  (785) 910 
At end of year  486 765  477 702 
The deferred tax liability is analysed as follows: 
Accelerated tax depreciation  564 783  518 026 
Provisions and leave pay accruals  (61 662) (63 166)
Defined benefit fund  38 222  38 879 
Share schemes  (11 154) (14 070)
Hedging reserve  (35 825) 2 572 
Trade receivable prepayments  (6 426) (6 778)
Other  (288) 2 239 
Assessed loss  (885) – 
486 765  477 702 
Deferred tax liability to be settled after more than 12 months  544 204  479 463 
Deferred tax liability to be settled within 12 months  (57 439) (1 761)
486 765  477 702 
 

15.

RETIREMENT BENEFIT OBLIGATIONS 

Post-retirement medical aid provision  195 606  203 445 
Retirement gratuity provision  32 391  32 924 
227 997  236 369 
The movements in these provisions are detailed in note 27
 

16.

TRADE AND OTHER PAYABLES 

Trade payables  564 097  779 627 
Leave pay and bonus accruals  85 101  76 796 
Sundry accruals and other payables  157 012  108 404 
806 210  964 827 
       

17. 

CURRENT BORROWINGS

Nedbank revolving facilities  703 382  614 838 
Current portion of term loan  54 000  – 
Pension fund loan (note 27,31) 72 019  71 306 
829 401  686 144 
Effective interest rates are as follows: 
Nedbank term loan (%) 8,32  7,68 
Pension fund loan (%) 7,89  6,68 

The Nedbank revolving facilities comprise gross borrowings of R926 647 000 (2014: R652 884 000) which has been offset by bank balances of R223 265 000 (2014: R38 046 000) in terms of the loan agreements with Nedbank. 

The Nedbank revolving facilities are secured against total inventories, total trade receivables, total bank balances, moveable items of property, plant and equipment and also against all credit insurance on trade receivables and against insurance on fixed assets.

Refer to note 13 for details on the term loan. 

The pension fund loan is unsecured and has no fixed terms of repayment. 

The fair values of the current borrowings approximate their carrying value. 

18.

OTHER GAINS AND LOSSES

Loss on disposal of property, plant and equipment  (10 538) (6 498)
Valuation adjustments on non-derivative items (note 18.1) 203 072  46 349 
Valuation adjustments on derivative items (note 18.2) 4 371  74 810 
Bargain purchase gain (note 11) 51 868  – 
248 773  114 661 
 

18.1

Valuation adjustments on non-derivative items 

Foreign exchange gains on debtors and creditors balances  207 640  50 156 
Foreign currency denominated cash balances  7 156  (6 583)
Valuation (losses)/gains on firm commitments  (11 724) 2 776 
203 072  46 349 
 

18.2 

Valuation adjustments on derivative items 

Foreign exchange contracts: debtors and creditors balances  (141 895) (16 322)
Foreign exchange contracts: firm commitments  8 675  (738)
Commodity futures: fair value hedges  26 150  (6 180)
Losses on fair value hedges  (107 070) (23 240)
Forward point gains: forward exchange contracts in respect of cash flow hedge designated contracts  111 441  98 050 
4 371  74 810 
 

18.3

Ineffective portion of all hedges recognised in profit or loss 

Fair value hedges  3 436  1 110 
Cash flow hedges  (858) – 
2 578  1 110 
 

18.4

The following amounts are included in revenue 

Cash flow hedge losses transferred from equity  (166 597) (170 582)
      
 2015 
R'000 
2014 
R'000 

19.

EXPENSES BY NATURE

Aluminium and other material costs  5 667 073  5 381 439 
Utilities and other direct manufacturing costs  657 418  636 620 
Employment costs (note 19.1) 929 937  776 483 
Depreciation (note 3) 140 321  109 952 
Amortisation of intangible assets (note 4) 8 340  8 308 
Repairs and maintenance  255 100  203 869 
Freight and commissions  308 630  325 519 
Other operating income and expenditure (note 19.2) 381 460  169 661 
8 348 279  7 611 851 
Classified as: 
Cost of sales  7 855 025  7 119 966 
Selling, marketing and distribution expenses  382 204  403 104 
Administrative and other expenses  111 050  88 781 
8 348 279  7 611 851 
 

19.1 

Employment costs 

Salaries and wages  839 123  720 050 
Retirement benefits costs: 
Defined contribution schemes (note 27) 50 306  42 502 
Defined benefit scheme (note 27) (8 227) (9 565)
Post-retirement medical aid costs (note 27) 27 209  4 030 
Retirement gratuities (note 27) 4 749  4 310 
Share incentive costs  16 777  15 156 
929 937  776 483 
        

19.2 

Other operating income and expenditure 

Other operating income and expenditure includes: 
Write-down of inventories  13 669  9 266 
Operating leases  22 245  12 899 
Decrease in provision for impairment of debtors  (1 470) (1 613)
Auditors' remuneration (note 19.3) 4 633  4 391 
Equity-settled share-based payment: Isizinda  27 224  – 
Share-based payment costs on 2015 BEE transaction  20 000  – 
 

19.3 

Auditors' remuneration 

Audit fees  4 282  3 844 
Fees for other services  155  362 
Expenses  196  185 
4 633  4 391 
       

20.

IMPAIRMENT OF NON-CURRENT ASSETS

The impairment reversal recognised in the income statement is as follows: 
Rolled Products specific asset impairment reversal (note 20.3) –   (43 405)
Taxation thereon  –   12 153 
Net impairment reversal  –   (31 252)

The company's shares continued to trade on the Johannesburg Stock Exchange at a discount to underlying net asset value during the period under review. In the circumstances, and as required by IAS 36, management have assessed the recoverable amounts of the assets (or cash-generating units to which they belong) disclosed in notes 3, 4, 7 and 8 (net of liabilities disclosed in note 13 and 17) at the period end. The recoverable amount was determined to be the value in use. The assessment compared the estimated value in use based on forecast future cash flows to the carrying amount. 

20.1

Hulamin Rolled Products Cash-Generating Unit 

The recoverable amount of these assets at 31 December 2015 was above the carrying amount and no impairment charge is thus required. A reversal of the 2013 impairment charge is also not required. 

The key assumptions used in the value-in-use calculation are consistent with those used in the five-year business plan approved by the board of directors. Adjustments were made to the plan forecasts to ensure compliance with the value-in-use methodology required by IAS 36. Key assumptions include: 

Sales volumes – excludes benefits of future capital expenditure and restructuring and adjusted to take account of actual performance against previous forecasts. Annual future volume capped at 220 000 tons.

Rolling margins – takes into account current and anticipated changes in market conditions and product mix.

Currency exchange rates – based on the median of forecasts by major financial and other institutions to 2018 and on inflation differentials thereafter, with the ZAR/USD rate rising from an average of R12,76 in 2015 to R15,59 in 2020.

A pre-tax discount rate of 14,9% (post-tax 11,6%) was used in the calculation and this rate is similar to the 14,1% (post-tax 11,3%) used in 2014. The increase in the rate was caused by an increase in the interest rates. The discount rate includes a company-specific risk premium of 1% which in particular arises from the company's exposure to volatile exchange rates, and is unchanged from the prior year.

Sensitivity analysis 

The determination of the value in use for Hulamin Rolled Products, and any resulting impairment, is particularly sensitive to: 

Discount rate – increasing the rate from 11,6% to 12,6% would result in an impairment charge of R166 million. 

Rolling margins – lowering average margins by 5,0% would result in an impairment charge of R1 352 million.

Rate of exchange – a R1,00 strengthening in the ZAR/USD rate for each year in the forecast period would result in an impairment charge of R1 861 million. 

20.2 

Hulamin Extrusions Cash-Generating Unit 

It was determined, as at 31 December 2015, that no impairment of the carrying values of the assets of this cash-generating unit is required. 

20.3 

Specific asset impairment reversal 

In 2014, management committed to a plan to sell this rolling mill and, accordingly, the recoverable amount was reassessed based on the rolling mill's fair value less costs to sell. This resulted in an impairment reversal of R43 405 000 which had been recognised in 2012. The rolling mill was classified as an asset held for sale in the 2014 financial statements. The sale was completed during 2015 and accordingly the rolling mill has been derecognised in the 2015 financial statements. Refer to note 5 for further disclosure.