Mittal Steel South Africa Limited
Annual Financial Results for the 12 months ended December 2005
market & operations
Davinder Chugh
Overview
Record full year earnings of R5 079m
• Earnings per share of 1 139c up 12%
• Operating margin of 29% unchanged on 2004
• Return on equity of 29% down from 32%
• Higher average international steel prices
• Cost increases contained
• Liquid steel production up 3%
Safety remains priority
• 13% reduction in injury rate
Delivering on R9bn capital investment programme
Earnings up 12%
3
Key Result Drivers
2005 vs 2004
Increase in HRC US$ export price
4%
Increase in HRC Rand domestic price
4%
Total sales volume
unchanged
Export sales volume up
Slowdown in domestic sales volume
17%
(10%)
Increase in HRC Rand cash cost per tonne
11%
Labour productivity up
11%
Strengthening of ZAR
1%
Strong export effort countered slowdown in domestic market
4
Mittal Steel South Africa invoice prices (c&f) US$/t
Export Prices
700
600
500
400
300
200
100
1994
1995
1996
1997
1998
1999
2000
2001
2002
HRC
2003
2004
2005
Low carbon wire rod
Prices remained above historical trends, though off peak
5
Global Market Trends
• Global steel supply outstripped demand in 2005
• Slackening demand in 2005 caused steel prices to fall
• World economic growth is expected to remain positive at 4.3% according to
the IMF
• Global consolidation amongst steel companies continues
• Steelmakers’ input costs remain high & will still increase in 2006, albeit at a
lower rate
• Chinese economy still growing at high rate, notwithstanding measures to
cool down the economy (2005 = ±10%)
• In 2005 China accounted for
- 30.9% of world steel production
- 30.1% of world steel consumption
China continues to influence world markets
6
Chinese Market Trends
• China a 3 million tonne net exporter of finished steel products in 2005
• This trend is likely to continue in 2006
• A small imbalance in the Chinese market can impact world markets
Chinese import/export tonnes 1998 - 2005
Million tonnes
40
30
20
10
0
1998
1999
2000
2001
2002
2003
2004
2005
Import
China became net exporter in 2005
Export
7
Chinese Market Trends
Chinese market saw substantial price reduction in Q2 and Q3 of 2005
Strong recovery late in 2005 recouped a third of the loss
Price recovery expected
• Prices dipped to below marginal cost
• Inventory levels are low
• Seasonal factors turn positive in the USA & EU
• Chinese government to moderate the industry
• Steel prices remained firm in the EU
Chinese cost structure support higher steel prices
8
Chinese Cost Trends
China’s advantage of low labour cost is mitigated by:
• Dependence on imported raw material
• Inadequate iron ore reserves
• Require imported good quality coking coal
• Future capacity growth moderated by government policy & water shortage
• Logistics constraints of port & rail capacity
Overall high operating cost
9
Global Benchmark Price
350
Based to 100
300
250
200
150
100
50
Dec 01
Jun 02
Dec 02
Jun 03
Dec 03
Jun 04
Dec 04
Coking coal - Contract
Jun 05
Dec 05
Iron ore fines - Contract
Margins under pressure due to increased input costs
10
Global Input Cost Trends
• BF iron ore fines price for 2005 increased by 72%
(higher increases for lump & pellets)
• Metallurgical coking coal contracts for 2005/2006 settled at +120%
• Scrap prices & freight rates stabilised during 2005, but still above historical
trend
• Diverging price trends for base metals & alloys
• Zinc price increased by 58% in 2005
Raw materials continue to exert upward pressure on cost
11
Input Cost Positioning
Tonnes ‘000
Backward
integrated
Domestic
supply
agreements
Imported
Iron ore
7 981
94%
-
6%
- DRI
1 155
100%
-
-
Scrap (Purchase & Internal)
1 858
60%
40%
-
Coke (Metallurgical)
2 157
99%
-
1%
Coking coal (Metallurgical)
2 866
12%
22%
66%
709
-
100%
-
2 122
-
100%
-
Coking coal (Market)
Other coal & anthracite
Coal remains the biggest exposure
12
Input Cost Developments
2004
2005
7%
5%
12%
17%
6%
8%
66%
8%
56%
3%
9%
3%
Iron ore
Coal
Scrap/DRI
Alloys/Coating
Refractories
Raw materials now constitute 44% of cash cost
Other
13
Key Performance Indicators
2004
2005
CI savings (Rm)
1 053
105
Employees per mt produced
1 698
1 487
Revenue per head (R000)
2 019
2 302
1 756
1 949
273
307
HRC cash cost
- R/t
- US$/t
Percentage value-add exports - flat
- long
83%
94%
87%
79%
Continued efficiency & productivity improvement
14
Liquid Steel Production
8000
7033
7261
7000
‘000 tonnes
6000
5000
4000
3628 3823
3000
2178 2194
2000
1227 1244
1000
0
Vanderbijlpark
Saldanha
Long Products
Total
2004
Several production records at all plants
2005
15
Sales Volumes
7000
6230
6223
6000
2344
‘000 tonnes
5000
2745
4000
3000
3166
3123
942
1106
2000
1000
2224
2017
0
2004
2005
Vanderbijlpark
1894
1947
1163
659
504
1160
743
864
775
385
1151
1083
2004
2005
2004
2005
Saldanha
3879
3485
2004
Long Products
2005
Total
Domestic
Inventory adjustment impacted on domestic sales
Export
16
Mittal Steel South Africa - Geographic Sales
South Africa
Rest of Africa
Total Africa
Americas
Asia
Europe
Oceania
0%
10%
20%
30%
40%
50%
60%
2004
Focus will remain on Africa
70%
80%
2005
17
Revenue Drivers in Relation to the Economy
Manufacturing
Construction
Wholesale & Retail
Transport/Storage & Communication
Electricity/Gas & Water
Government
Mining
Agricultural
Financial Services
0%
Steel sector demand
5%
10%
15%
20%
25%
30%
Sector contribution to RSA Economic Growth (GDP)
Three sectors make up 70% of steel consumption
18
Safety Remains our Priority
Disabling injury frequency rate (DIFR)
Disabling injuries per million man hours worked
(employees & contractors)
6.0
• Du Pont safety evaluation
completed & safety
improvement in progress
5.5
• Four major units certified under
OHSAS 18001 health & safety
management system
5.0
4.5
4.0
3.5
3.0
2002
2003
IISI
2004
2005
Mittal Steel South Africa
Our safety record compares with global standards
19
Vanderbijlpark now a Zero Effluent Discharge Facility
Water treatment plant commissioned in December 2005
R222m
20
Investment Programme
Rm
Relines
1 600
Maintain capability
930
Galvanising line #5
100
Automotive galv. line & other downstream projects
1 200
Coke strategy related
620
Other value adding
937
Completed in 2005
1 100
Expansion plans on track
21
finance
Headline Earnings
Rm
Revenue
Comparable operating profit
Gains & losses on foreign exchange rate & financial instruments
Financing cost - net interest income
- imputed interest on non-current provisions
Income from investments
Tax
Equity earnings*
Minority interest
Comparable headline earnings
- in US$m
BAA remuneration*
Headline earnings
2004
2005
23 053
7 458
(52)
31
(170)
5
(2 465)
258
(6)
5 059
794
(511)
4 548
24 032
6 855
246
169
(140)
5
(2 329)
275
(2)
5 079
807
5 079
* After tax
Earnings up 12%
23
Comparable Headline Earnings Trend
1800
1575
1600
1393
1400
1578
1643
1422
Rm
1200
987
1000
800
871
657
596
655
669
4Q
1Q
600
352
400
200
0
1Q
2Q
3Q
2003
2Q
3Q
2004
4Q
1Q
2Q
3Q
2005
Earnings remain healthy, though off previous highs
4Q
24
Operating Profit
Rm
2004
2005
Vanderbijlpark
4 137
3 688
Saldanha Steel
1 173
785
Long products
1 783
2 100
462
301
43
56
Coke & Chemicals
Other
Corporate
(140)
Comparable operating profit
BAA remuneration
Total
7 458
(75)
6 855
(731)
6 727
Long products increased it’s contribution
6 855
25
Cash Flow
Rm
2004
2005
Cash profits from operations
8 572
8 402
Working capital
BAA remuneration
Capex
(1 410)
20
(731)
(1 254)
(1 568)
Net interest income
31
168
Investment income
11
43
Tax
(886)
(2 977)
Dividends
(339)
(2 853)
Net cash flow
3 994
1 235
Net cash
3 973
5 160
Strong cash flow before tax & dividends
26
Financial Ratios
2004
2005
29
29
32
29
33
33
37
33
Revenue/invested capital (times)
1.5
1.5
Return on equity (%)
32
29
35
29
25.0
26.4
Operating margin
- on comparative basis (%)*
EBITDA margin (%)
- on comparative basis (%)*
- on comparative basis (%)*
Net cash/equity (%)
* Adjusted for once-off items
Ratios support good investment case
27
Share Performance
300
Based to 100
250
200
150
100
50
Source: McGregor BFA
2002
2003
2004
Top 40
All Share
Excellent medium term share performance
2005
Mittal Steel South Africa
28
Dividend
• Dividend policy
- Distributing one third of headline earnings
• Dividend declared
- Interim dividend of 240 cents per share - 12 September 2005
- Final dividend of 140 cents per share - 20 March 2006
- Total dividend of 380 cents covered 3 times by EPS of 1 139 cents
Dividend yield of 5.8%
29
outlook
Outlook for Q1’06
Business environment
• Local demand expected to improve
• Stable international steel prices
• Off-take to improve as inventory cycle completed
• Higher input prices will influence production costs
• Exchange rate will have an important influence
Earnings
• Earnings to remain robust and in line with Q4’05,
but exchange rate may have influence
Continuous focus on cost control
31
Mittal Steel Company NV
Mittal Steel Company NV
Continue to reshape the global steel industry through consolidation
• Revenues of almost US$30bn
- Net profit US$3.4bn
• #1 steel producer - Output at 69mtpa
• Strong & strategic vertical integration
• Potentially the first 100mtpa steel producer if Mittal & Arcelor combine:
- Revenue US$70bn*
- Net profit US$7.4bn*
- Steel output at 115mtpa*
*IBES estimates
“Creating the most admired steel institution”
33
Mittal Steel South Africa Limited
Annual Financial Results for the 12 months ended December 2005