Transcript Document
investor pack
Market Information
JSE Top 40 index position: #22
Free float 41%
Market cap $3.1bn
Daily value traded $6.1m for past 12 months
Annualised turnover 77% of total issued shares
Major shareholders
-
LNM Group
IDC
Institutional
-
50.01% (#2 global steel producer)
8.8%
41%
South Africa 28%
International 13%
Good liquidity and high turnover
2
Company Profile
1928 – Iscor established as parastatal
1989 – Iscor privatised and listed on JSE
1994 – Start of major re-engineering program
2001 – Unbundling of mining division as Kumba Resources
2001 – LNM Holdings N.V. buys initial stake in Iscor
2002 – Iscor enters into BAA with LNM
2004 – LNM/Iscor merger approved; LNM holding goes over 50%
2004 – Name changed to Ispat Iscor
Steel industry ranking
-
Africa #1
Global #29
Largest regional steel producer
3
Successful Restructuring History
Major re-engineering
-
1994-2001
significant headcount reduction (30 000 people)
steel grades down from 302 to 50
inefficient capacity closed (1mtpa)
moved to lowest quartile on global cost curve
Value added products:
-
Flat 61%
Long 72%
Mining division (Kumba) unbundled November 2001
-
iron ore mining rights retained to ensure supply at cost
Market value increase* since unbundling (Nov ‘01):
500%
* Including effect of rights issue in April 2002
Major value release
4
Production
Operations
-
3 integrated steel mills
1 steel mini-mill
surplus coke batteries producing market coke
captive iron ore (toll-mined by Kumba Resources)
Output
-
Steel: 6.4 mtpa
Long
31%
Flat
69%
-
Market Coke: 400 ktpa for ferro-chrome industry
Largest regional steel producer
5
Geographic Location
Flat Products
Overview of operations
Thabazimbi
Vanderbijlpark
3.1 Mtpa final product
Saldanha
1.3 Mtpa final product
Long Products
Vanderbijlpark
Johannesburg
Vereeniging
Newcastle
Sishen
Durban
Newcastle
1.7 Mtpa final product
Vereeniging
0.3 Mtpa final product
6.4 Mtpa final product
South Africa
Market Coke
Vanderbijlpark and Newcastle
400 ktpa
Saldanha
Cape Town
Iron ore supply at cost + 3%
Steel plants
Captive iron ore source
Southern African location
6.25 Mtpa iron ore from Sishen
2 Mtpa iron ore from Thabazimbi
6
Geographic Sales
South Africa
Rest of Africa
Total Africa
Far East
European Union
North America
1H’03
2H’03
1H’04
Middle East
Other
%
0
10
20
30
40
50
Switch to better paying markets
60
70
80
7
Domestic Market
Sound South African economic fundamentals
Good prospects for long-term sustainable growth
Underlying demand recovery throughout 2004
Other Africa market share growing strongly
Domestic margins $100/t > non-African exports
Imports %
’000t
1 500
Quarterly consumption
Steel imports
Consumption trend
14%
12%
10%
1 300
8%
1 100
6%
900
Imports
1 700
Consumption
4%
700
2%
0%
500
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004
Switch to sustainable growth
8
Domestic Pricing Policy
Domestic prices based on International Parity Principle
Competition Commission (Feb 2004) ruling that Iscor pricing policy is fair
and reasonable: complainants have lodged appeal
Government has asked for review of downstream support programme
Downstream industry support programme ($70m pa) through:
- export rebates
- strategic concessions
- long-term contracts (auto industry, packaging)
Current import duty – 5%
- risk of removal considered low
- SA’s duty amongst lowest in world
International parity pricing model
9
Invoiced Export Prices
US$/t (c&f)
630
580
Hot rolled coil
Low carbon wire rod
530
480
Based on
order book &
expectations
430
380
330
280
230
180
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
Source: Ispat Iscor
Record high prices
10
Global Steel Demand
‘mt
1 200
WSD forecast
China
Rest of world
+7%
1 000
+3%
+3%
+6%
+8%
0%
+6%
800
+2%
+22%
+21%
+22%
+10%
+4%
+6%
+4%
+1%
+6%
+3%
600
400
+9%
2000
+2%
+6%
+3%
+2%
+4%
+0%
-4%
+3%
2001
2002
2003
2004
2005
2006
2007
2008
200
0
Source: World Steel Dynamics
China driving growth in steel demand
11
China – Supply and Demand
‘mt
350
WSD forecast
Consumption
Production
China forecast to become
net exporter by 2008
300
250
200
150
100
50
0
2000
2001
2002
2003
2004
2005
2006
2007
2008
Source: World Steel Dynamics
China expected to become net exporter
12
World Steel Consumption Trends
World Steel Consumption and GDP Per Capita, 1950-2010
2010
7 000
China takes
off!
6 500
6 000
$US/capita ($1995)
5 500
5 000
4 500
Asian crisis
1999
1997
1994
1989
Phase 2
1983
Post war expansion to
1970 led to predictions
of seemingless
endless growth
3 500
2004
2002
Collapse of USSR led
to steel consumption
collapse in Eastern
Europe
4 000
Phase 3
1979
1975
1971
1973
1970
3 000
1961
2 500
1954
Phase 1
2 000
First and second oil prices and
subsequent recessions led to
massive light-weighting of steelcontaining products
1 500
50
55
60
65
70
75
80
85
90
95 100 105 110 115 120 125 130 135 140 145 150 155 160
kg steel/capita
Source: Macquarie Research
Per capita steel demand entering growth phase
13
Global Input Price Trends
Based to 100
170
Based to 100
Coking coal - contract (LHS)
Iron ore fines - contract (LHS)
800
Freight rates (RHS)
Coke (RHS)
Scrap (RHS)
160
700
150
600
140
500
130
400
120
300
110
200
100
100
90
Jul-01
0
Jan-02
Jul-02
Jan-03
Jul-03
Jan-04
Jul-04
Source: Ispat Iscor
Global input prices still under pressure
14
Raw Material Integration
Internally
sourced
(at cost)
Iron ore
92%
Domestic
supply
agreement
s
3%
Imported
5%
Coke
100%
-
-
Coal
8%
55%
37%
Scrap
81%
19%
-
DRI
98%
2%
-
Actual 1H’04 data
Cost benefit for raw material integration
15
Key Performance Indicators
1H’03
2H’03
1H’04
13
303
464
0.2
4.3
6.1
13 045
12 539
12 072
1 756
1 637
1 686
221
231
254
1 535
1 529
1 543
193
217
231
- flat
37
44
61
- long
60
72
72
CI savings (Rm)
- percentage
Number of employees (’000)
HRC cash cost - R/t
- US$/t
Billet cash cost - R/t
- US$/t
Percentage value-add exports
Exchange rate impacting good productivity performance
16
Headline Earnings
Rm
1H’03
2H’03
1H’04
Revenue
Comparable operating profit
Financing cost - net interest expense
- long-term provision top-up
Tax
Equity earnings*
Minority interest
Comparable earnings
- in US$m
BAA remuneration*
Restructuring costs*
Power contract settlement*
Headline earnings
9 312
1 871
(31)
(28)
(608)
48
1
1 253
156
9 175
1 504
(16)
(53)
(492)
67
(3)
1 007
145
(429)
(116)
10 544
2 948
(14)
(133) #
(914)
179
(4)
2 062
311
(511)
462
1 551
* After tax
(110)
1 143
# Lower discount rate accounts for R100m
Record earnings
17
Comparable Headline Earnings Trend
Rand million
1 500
US$ million
240
1 393
212
1 350
210
1 200
180
1 050
150
900
750
657
655
120
669
97
596
600
79
450
352
99
90
77
60
48
300
30
150
0
1Q’03 2Q’03 3Q’03 4Q’03 1Q’04 2Q’04
* Average R/US$ spot rate
0
1Q’03 2Q’03 3Q’03 4Q’03 1Q’04 2Q’04
* R8.32/$ R7.73/$ R7.40/$ R6.72/$ R6.75/$ R6.57/$
Steel cycle overshadows Rand strength
18
Key Result Drivers
Positive
1H’04 vs 1H’03
HRC cash cost per tonne (Rands)
Negative
-4%
Domestic sales volume
+22%
HRC US$ price
+40%
Exchange rate
+21%
Operating margin*
20%
28%
* Excluding BAA remuneration (1H’04) & power contract settlement (1H’03)
Strong Rand only negative factor
19
Sensitivity Analysis
Operating
Income*
Headline
Earnings*
EPS
(SAc)*
Variable
Change
International steel price
±$10/tonne
197
134
30
Exchange rate
±10c
116
79
18
Domestic sales
±10%
187
127
29
* Based on impact for full six months forecast July-December 2004
Significant gearing to major variables
20
Financial Ratios
1H’03
2H’03
1H’04
Operating margin (%)
- on comparative basis (%)
18
20
8
16
21
28
EBITDA margin (%)
- on comparative basis (%)
23
25
13
22
26
33
Revenue/invested capital (times)
1.3
1.3
1.4
Return on equity (%)
- on comparative basis (%)
18
20
7
16
23
30
Net cash/equity (%)
5.8
0.2
9.7
Margins approaching cyclical peak levels
21
Distribution to Shareholders
In view of our strong cash flow:
Current distribution policy being reviewed
Capital reduction proposal to be put to shareholders
before end-2004
Programme of capital reduction to be instituted
Current stated capital R14/share
No interim dividend declaration
Surplus capital to be returned to shareholders
22
3-Year Focus
Further quantum reduction in costs
Increase production from current assets by 1mtpa
Focus on value-add projects
Lowest quartile producer (delivered EU cost basis)
Defer South African steel industry consolidation
Join select group of steel companies earning in excess of WACC
23
Outlook for 2004
Positive steel business environment
-
ongoing global consumption growth
prices increasing from current levels
continued strength in domestic demand
Operations
-
ongoing cost reduction
increased throughput
Earnings
-
Q3 up on Q2
Positive outlook
24
Investment Case
Competitive producer
-
vertically integrated
lowest cost quartile focus
part of major global steel group
naturally protected domestic market
Growth potential
-
growing, more profitable regional market
sweat current assets for extra 1mtpa
expansion of market coke operations
domestic steel industry consolidation
Gearing to Chinese growth
-
steel market fortunes dependent on continued Chinese growth
Ispat Iscor revenue directly linked to international steel prices
Competitive low-cost producer
25
Market Data
Steel Equity Performance
Base to 100, all prices in US$
600
500
400
300
200
Ispat Iscor
Gerdau
CSN
POSCO
China Steel
Severstal
Bluescope
Arcelor
Nucor
US Steel
100
0
Source: Bloomberg
Ispat Iscor amongst best performers
27
Steel Equity P/E’s (Forward)
14
12
10
8
6
4
2
0
Source: Bloomberg, 24 August 2004
Ispat Iscor still attractively valued
28
Steel Equity Price/Book
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0
Source: Bloomberg, 24 August 2004
Ispat Iscor still attractively valued
29
Steel Equity Market Capitalisation
US$m
14 000
12 000
10 000
8 000
6 000
4 000
2 000
0
Source: Bloomberg, 24 August 2004
Mid-sized market cap
30
extra slides
Relationship with LNM
Iscor’s long-term desire to link-up with a major steel group
Business assistance agreement signed with LNM (Jan ‘02)
-
remuneration linked to performance
target cost savings (excl. labour + first 1%) R350m to R700m pa
LNM reward: 5-10% Iscor issued shares or cash equivalent
Sustainable savings to June 2004 – R1 326m per annum
-
cost savings target exceeded by 132%
R613m (value of 25.7m shares) paid to LNM Dec ‘03
R731 (value of 18.9m shares) paid to LNM Aug ’04
BAA expires at end-2004
-
allowance for renegotiation
approval of minority shareholders required
Value from international tie-up
32
Business Assistance Agreement
Savings achieved
% of
max target
Rm pa*
Dec ‘02
644
82%
Jun ‘03
388
58%
Dec ‘03
687
115%
Jun ‘04
1 326
232%
Dec ‘04
Further savings expected
Remuneration due
Cum %
of shares
Number of
shares (m)
5.8%
25.7
613
Dec ‘03
(cash)
10.0%
18.9
731
Aug ‘04
(cash)
44.6
1 344
Rm Settled
* Measured from Jul-Dec ’01 base, indexed
BAA payback approximately 1 year
33
BAA Savings Analysis
By Savings
Annualised Savings (Rm)
Efficiencies
858
65%
Procurement
468
35%
1 326
100%
Total BAA Savings
By Plant
%
Annualised Savings (Rm)
%
Vanderbijlpark
506
38%
Saldanha
251
19%
Newcastle
378
29%
Vereeniging
190
14%
1 326
100%
Total BAA Savings
BAA savings spread over group operations
34
Currency Strength
Rand has strengthened 37% against US$ over past 24 months
Rand relatively stronger than currencies of competitor countries
Costs 65% Rand-based
Focus to maintain position on cost curve
3-yr programme
-
restructuring
improvement projects
efficiency programmes
Pro-active initiatives to counter strong Rand
35
Capital Projects
Planned
Completion
Newcastle
-
pulverised coal injection
Vanderbijlpark
-
Blast Furnace C – throat armour repair
Blast Furnace D – interim repair
Roofer galvanising line*
Coke & chemicals
-
market coke expansion*
1H’05
Completed
2H’04
1H’06
2H’06
Thabazimbi
-
iron ore mine: life expansion project*
* Still to be approved
Significant spend for value-add
36
Environmental
Environmental master plans approved
All steel operations ISO 14001 certified
Major environmental projects in progress
-
Vanderbijlpark
-
-
main water treatment plant
coke oven gas & water cleaning
Newcastle
-
reverse osmosis water treatment plant
Focus on environmental compliance
37
Cash Flow
Rm
1H’03
2H’03
1H’04
Cash generated by operations
2 302
2 022
3 452
(48)
(292)
(1 069)
41
46
13
Working capital
Asset sales
BAA remuneration
(613)
Capex
(780)
(499)
(405)
Finance cost
(96)
(9)
(22)
Tax
(55)
(1 032)
(273)
(446)
(446)
(334)
918
(823)
1 362
Dividends
Net cash flow
Strong cash flow
38
Capital Expenditure
Fcast
Rm
1H’03
2H’03
1H’04
2H’04
Value adding
219
124
82
378
Replacement
452
300
267
352
Environmental
109
75
56
130
Total
780
499
405
860
Depreciation
451
469
478
519
Increased value-add and environmental spend
39
Sales Volumes
’000t
3 500
3 000
Export
Domestic DSP*
Domestic other
3 225
3 034
2 500
1 483
1 603
3 101
1 210
2 000
1 664
1 500
1 509
232
588
1 000
290
1 569
722
470
176
134
150
565
500
787
792
548
395
438
350
98
114
114
72
70
84
1H’03
2H’03
1H’04
923
0
1H’03
622
2H’03 1H’04
Vanderbijlpark
Saldanha
960
939
984
500
443
390
460
496
594
1H’03
2H’03
1H’04
Long products
264
1 319
1 358
1 601
1H’03
2H’03
1H’04
Total
* Duferco Steel Processing – re-roller mainly for export
Strong domestic sales growth
40
Liquid Steel Production
’000t
4 000
3 490
3 500
3 595
3 477
3 000
2 500
2 000
1 811 1 870 1 829
1 500
1 073 1 080 1 085
1 000
606
645
563
1H’03
2H’03
1H’04
500
0
1H’03
2H’03
1H’04
Vanderbijlpark
Saldanha
1H’03
2H’03
1H’04
Long products
Production affected by Saldanha breakout
1H’03
2H’03
1H’04
Total
41
Flat Product Prices – Hot Rolled Coil
US$/t c&f
850
750
US Midwest
Germany
Far East
650
550
450
350
250
150
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
Source: CRU
Geographical divergence
42
Long Product Prices - Wire Rod
US$/t c&f
750
650
US Midwest
Germany
Far East
550
450
350
250
150
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
Source: CRU
Geographical divergence
43
Ispat Iscor Cash Cost Base
General
6%
Iron ore
7%
Labour
15%
Coal : Local
7%
Coal : Import
7%
Services
3%
Scrap/DRI/Pellets
6%
Consumables
4%
Other raw material
4%
Electricity, gas & petroleum
10%
Spares & repairs
8%
Transport
10%
Alloys & coating
9%
Refractories
4%
Total production cost base H1 2004: R6.5 billion
Cash cost breakdown
44
Raw Material and Energy Impact
US Integrated plant – without coke
US Integrated plant – with coke
350
350
+$81/ton
250
250
200
200
150
150
100
100
50
50
0
0
Q1 02
400
Q2 04
Q1 02
US Minimill –flat products
Ispat Iscor
300
+$199/ton
250
250
$/ton
$/ton
Q2 04
350
350
300
+$135/ton
300
$/ton
$/ton
300
200
+$40/ton
200
150
150
100
100
50
50
0
Q1 02
Q2 04
Coking coal
Coke
Iron ore/sinter/pellets
0
Q3 02
Pig iron
Q2 04
Scrap
DRI
Energy
Source: World Steel Dynamics
Iscor’s cost push relatively muted
45