text: A N N U A L R E P O R T 2 0 0 8 THE DETERMINED DELIVERY OF VALUE VISION "Desire is the key STATEMENT to motivation, but Foskor is internationally respected for it's determination competing with determination in the profitable and commitment and responsible beneficiation of phosphates to to an unrelenting the sustained benefit of all our stakeholders. pursuit of your goal - a commitment to excellence - that MISSION will enable you to STATEMENT attain the success Foskor will continue to earn the respect of you seek." all its stakeholders by being internationally competitive in the beneficiation of phosphates. We will do this through continuing our heritage of - Mario Andretti creating value and profit, by meeting challenge with determination. VALUES STATEMENT Foskor will set a benchmark in our industry by living our values with integrity: • Resolve: We believe that to remain competitive requires us to continually improve in everything we do. • Responsibility: We believe in being held responsible to ourselves, our shareholders, our communities and the environment. • Respect: We believe that we will excel as a team by respecting and nurturing our individual abilities. This respect extends to a commitment to both the spirit and the law of transformation. • Rewards: We believe that sustainable reward is only possible if it is shared. SLOGAN Determined delivery of value (of sustained value creation through competitiveness and profitability) Contents A N N U A L R E P O R T 2 0 0 8 Directors and Management 2 Chairman's Review 4 Chief Executive Officer's Review 7 Review of Mineral Resources and Ore Reserves 16 Corporate Governance 21 Annual Financial Statements 28 Directors' Declaration 29 Independent Auditors' Report 30 Directors' Report 31 Balance Sheets 34 Income Statements 35 Statements of Changes in Equity 36 Cash Flow Statements 37 Notes to the Financial Statements 38 Five-Year Review: Foskor Group 70 Notice to Members/Administrators 72 Consent to Waive Period of Notice of Annual General Meeting 73 1 Foskor (Pty) Limited | Annual Report 2008 BOARD OF DIRECTORS List of Directors, Committees and Management as at the end of the 12 month financial period ended on 31 March 2008. Mr MG Qhena Mr MA Pitse Mr A Vellayan Mr G van Wyk Chairperson CEO (Non-executive) (Non-executive) (Non-executive) (Executive) Dr DS Phaho Mr F Madavo Mr XGS Sithole (Non-executive) (Non-executive) (Non-executive) BOARD AUDIT & RISK COMMITTEE Mr G van Wyk Chairperson Mr MA Pitse CEO Ms SS Ngoma Member BOARD TECHNICAL COMMITTEE Dr DS Phaho Chairperson Mr MA Pitse CEO Mr F Madavo Member Mr XGS Sithole Member Ms JM Modise Ms SS Ngoma (Non-executive) (Non-executive) BOARD HUMAN RESOURCES COMMITTEE Ms JM Modise Chairperson Mr MA Pitse CEO Mr MG Qhena Member Mr G van Wyk Member Mr A Vellayan Member 2 | Foskor (Pty) Limited | Annual Report 2008 EXECUTIVE MANAGEMENT Mr MA Pitse Mr JW Horn Mr TJ Koekemoer President & CEO Chief Operating Officer Chief Financial Officer BCompt (Hons), MBL, CA (SA) BEng, PrEng, MSAIIE, BCom (Hons), CA (SA), AEP (Hons) BB & A, MBA Mr G Skhosana Mr J Vaidhyanathan Mr K Cele Vice President: Sales & Vice President: Technical Vice President: Marketing & Advisor to CEO Procurement & Logistics BCom, MDPD, ASMPD BE (Mech) BCom (Hons), Dip Bus Tax, EDP Ms XS Luthuli Mr H Malhotra Mr JWT Potgieter Vice President: Human Vice President: Vice President: Acid Resources Commercial NHD Chem Eng (Hons), MBA BSocSci, PDPM BSc, MTech (Mech Eng) Ms AUS Khanyile Company Secretary BProc 3 Foskor (Pty) Limited | Annual Report 2008 | CHAIRMAN'S REVIEW "Build for your team a feeling of oneness, of dependence on one another and of strength to be derived in unity." - Vince Lombardi The year under review has seen Foskor operate in a very interesting and challenging period. I say this because we have seen the continued rally of the commodities (what others refer to as a super Mr MG Qhena cycle), whilst we also saw a Chairman (Non-executive) rapid and consistent rise in the oil prices. The American economy has slowed down, the impact of 2.074 million tons per annum. Although the total physical the subprime is still being felt, particularly in the US and tons sold in South Africa has remained static at around Europe, and now the food shortage is upon us. On the 2 million tons per year for the last ten years, the total plant local front the fuel price is on a rise. We also experienced nutrient contained in the fertiliser has increased over time challenges in the electricity supply, resulting in some to 31.6% by 2007. sectors of the economy being encouraged to reduce the usage of their normal consumption. The interest rate has The Fertiliser Society of South Africa's net fertiliser price, also been on a consistent rise, as we have seen the which is a reflection of price changes in the RSA, shows inflation getting out of the set targeted band. that there is a steady rise in the average net price, mostly due to all the external influences as mentioned previously. Coming to the industry in which Foskor operates we have seen, in recent years, the international fertiliser industry The above mentioned factors have brought challenges and having vast increases in demand coupled with a opportunities in Foskor's operations. Some of the corresponding reduction in availability of phosphates. The challenges are in the form of increased raw material prices increased demand is partially driven by the boom in the (especially sulphur which is linked to oil prices). The limited biofuels industry as well as the global increase in affluency supply of electricity will ensure that we improve our levels. The global trend of countries' fight for food securities process to still produce to our capacity (especially in has led to some governments restricting and in some Phalaborwa where there is no alternative source of energy). instances stopping all exports of phosphates and They have also ensured that we explore different ways in derivatives by means of export tariffs. The overall which we can power the operations in Richards Bay and availability and quality of phosphate reserves are being continue to ensure that the plant is reliable. Some of the eroded, also exercising strain on supply as efficiencies opportunities are the strong prices, especially of phosphoric drop. No additional capacity has come on line in recent acid and DAP, which will enhance the sustainability of the years, leading to capacity utilisation being at record levels. company. Significant new capacity is only expected in Saudi Arabia by 2012. All of this has resulted in an overall imbalance in It is against this background that the Board went on a supply and demand in the favour of suppliers, resulting in strategic planning session, to further review and reconfirm prices being at record highs. the direction in which the company is moving. After an intense session the Board did reconfirm its support to the The South African fertiliser industry of today is fully path that the company has chosen. exposed to world market forces and operates in a totally deregulated environment with no import tariffs or The year under review is epitomised by the continuation of government sponsored support measures. During 2006 its turnaround in profitability by more than tripling its and 2007 fertiliser sales gained momentum after the operating profit from R351m in the previous year to 39 year low of 2005, ending the year with a total of R1,186m. Since 2005, the turnaround has amounted to 2.014 million tons sold. This compares very well with R1,606m – from an operating loss of R420m (after the 10-year average in South Africa (before 2005) of impairment of R300m) in 2005, to an operating profit of 5 Foskor (Pty) Limited | Annual Report 2008 | R1,186m for the year under review. Group revenue o The development of the new South Pyroxenite mine to increased by 52%, from R2,950m in 2007 to R4,488m in replace depleting above ground reserves. In the light of 2008. The majority of this is attributable to our Richards current and expected continuation of the strong demand Bay operations which have performed at record production we have to expedite the expansion of our mining and levels. The investment of circa R1,1bn in 2002 is now beneficiation capacity. starting to benefit the Group as intended. Contrary to o Diversification of the markets and products. This previous years, the exchange rate had a minor effect on includes the diversification into added value down- the results due to the slight weakening of the exchange stream product as well as the conversion of our waste rate from R7.02/$ during the previous year to R7.09/$ for streams into wealth. the year under review. The impacts of the global and national shortage of relevant Safety, health and environmental performance improved and specifically technical skills are also still hard felt by significantly at our Richards Bay operations while the the Group. We are confident and hopeful that our Phalaborwa operations continued with their world class continued efforts towards alleviating these problems for track record by also receiving an award (the only such ourselves but also for the country will soon transpire into award given to a mine in South Africa) from the Minister of positive results. The mining operation has completed the Water Affairs and Forestry, for the Water Management last step in the application for the conversion of "old order" Project implemented during 2007. Over and above the fact mineral rights into "new order" mining rights and the Group that both operations are now ISO 9001 (Quality), ISO is optimistic about obtaining a favourable result. Our 14001 (Environmental) and OSHAS 18001 (Safety) commitment towards Local Economic Development accredited, the Phalaborwa operations also received captured in the Social and Labor Plan has progressed SANS 16001 accreditation for their AIDS management significantly with this application. The Environmental systems and programmes. Management Programme including the Integrated Water Use licence and Closure Cost estimate is being reviewed The Business Assistance Agreement (BAA), which Foskor and would ensure future sustainability of the operation. entered into with Coromandel Fertilisers Limited (CFL) in The conversion of our resources into reserves in accordance February 2005, concluded its third and final year on with the internationally accepted South African Minerals 31 March 2008. This agreement proved to be successful Resource Committee (SAMREC) Code will also be done in that Foskor achieved record production of phosphoric during this year. acid in Richards Bay of 691,887 tons – more than 10% over the previous best production of 625,534 in 2005/6 as The overall future prospects are looking very bright in light of the opportunities experienced and those on the well as improved its Safety and Environmental systems. In horizon in spite of the challenges highlighted above. It is terms of the agreement, the financial remuneration payable against this background that I express my appreciation to to CFL is limited to a maximum of R300m. The Group my fellow Board members for their support during the past recognises the value that the assistance of CFL brought year. Without their guidance the turnaround achieved and could still bring to the organisation and has therefore would not have been as smooth as it has been. I am also elected to engage CFL in a Technical Assistance Agreement grateful for the leadership of the Chief Executive Officer whereby Foskor could still access their skills, technical and his Executive team and the whole of the Foskor staff, knowledge and know-how. without whom our responsibility of ensuring a future for Foskor would not have been as successful, and lastly the The financial year end also saw the dawn of a new era for support from the two shareholders (i.e. the IDC and our Zirconia Division (which accounted for 2,6 % in terms Coromandel) who have been patient and helpful in enabling of turnover and asset base 1,5 %) as the Division will no the company to achieve such good results. longer be an integrated operating division of Foskor (Pty) Limited, but a separate stand-alone company and legal entity called Foskor Zirconia (Pty) Limited. The new company will initially be wholly owned by Foskor (Pty) Limited. An exciting future lies ahead for the Foskor Group as it prepares itself for a listing on the Johannesburg Stock Exchange. In addition to the excellent financial performance of the Group, significant progress has been made in addressing a number of projects and significant activities, which Foskor has embarked upon, those being: o The logistics inability to transport the phosphate rock concentrate from the mine in Phalaborwa to either the plant in Richards Bay or the port of export; 6 | Foskor (Pty) Limited | Annual Report 2008 CHIEF EXECUTIVE OFFICER'S REVIEW "The only way to discover the limits of the possible is to go beyond them into the impossible." - Anonymous It is with absolute excitement and pride that I accept this honour to report back on the excellent and outstanding performance of the Foskor Group for the 2007/8 financial year. Mr MA Pitse CEO (Executive) OVERVIEW From the outset, I wish to express my appreciation to the report that excellent progress has been made in all spheres Board of Directors, and the shareholders, for their in achieving the strategic goals and objectives that were meaningful engagement, guidance and encouragement agreed upon in 2007 and reconfirmed in February 2008 by during the period, specifically during the strategic planning the Board and shareholders. conference. Also, to the Executive Team, the Management Team and all the employees of the Foskor Group is due a These imperatives represent the minimum that needs to be special word of gratitude for their endurance and achieved for Foskor to have a reasonable expectation to perseverance in making things happen – contributing to succeed as an organisation going into the future. the success of Foskor. These imperatives include: In terms of safety, health and environmental management, • Secure Foskor's long-term future through optimal a significant improvement was achieved. No environmental development of a new mining resource, incident was recorded during 2007/8 subsequent to the • Secure necessary logistics through continued two environmental incidents in Richards Bay in the 2006/7 discussions with Transnet Freight Rail for Richards Bay financial year. During the year under review, Richards Bay and Mozambique authorities for Maputo port, achieved ISO 14001 certification and also maintained ISO • Maximise opportunities from market positions, 9001 and OSHAS 18001 accreditation. • Achieve a sustainable cost position in Foskor operations, The Phalaborwa operation once again maintained its world • Drive human capital excellence, class Safety, Health, Environment and Quality (SHEQ) • Secure optimal finance structure, performance, by retaining all ISO and OSHAS • Develop strategic management information systems accreditations. In addition, for the first time the operation and received SANS 16001 accreditation – the workplace • Achieve world-class SHEQ and operational excellence quality management system developed for benchmarking in Foskor operations purposes by the South African Bureau of Standards – for its HIV/AIDS management system; the first mine in South The international supply–demand balance for phosphate Africa to do so. Furthermore, the Phalaborwa operation rock and phosphoric acid experienced an unprecedented received a special award (the only such award given to a swing in the favour of suppliers. The international decline mine in South Africa) from the Minister of Water Affairs and in availability of good quality phosphate sources, linked Forestry, for the Water Management Project implemented with the tremendous growth in demand as a result of the during 2007. This project has benefited the people in the drive for food security and bio-fuels, led to a huge shortage community and especially the Kruger National Park by in fertiliser-based commodities and unheard of price hikes, ensuring that Foskor becomes a zero effluent discharge in which Foskor, for the first time, took a leading role in the facility and enabling Foskor to reduce its industrial water price determination by being the first to settle in negotiations intake by 50% – or 20 million litres of water per day. with customers in India. The Foskor team has worked hard to implement the The Group generated a net profit after tax of R978,3m established strategic goals, and it is with great pride that I during the period under review compared to R443,8m for 8 | Foskor (Pty) Limited | Annual Report 2008 the previous accounting period. The increase in profit compliance compared to the permit requirements of 96% compared to the previous year is as a result of, amongst for plants A and B and 98% for plant C. The Richards Bay other things, the increased and record production of division had two disabling injuries for own employees and phosphoric acid in Richards Bay of 691,887 tons – more five disabling injuries for contractors, resulting in a DIFR of than 10% over the previous best production of 625,534 in 0.7%. 2005/6. While safety and environmental compliance/responsibility Several operational challenges were accepted and handled received increased attention during the year, it remains a with success. On the production front, phosphate rock key focus area for all our operations. production decreased by 10.8% to 2.38m tons, mainly as a result of the variation in feed grades due to diminishing above ground ore reserves. Despite efforts to reduce plant FINANCIAL PERFORMANCE downtime and improve reliability, challenges that adversely impacted production included the suspension of the ore Group revenue increased by R1,538m or 52%, from processing agreement with Palabora Mining Company R2,950m in 2007 to R4,488m in 2008, of which R1,368m (PMC), and the Eskom power outages. Foskor, like many is attributable to our Richards Bay operations and R200m other producers in South Africa, has been hard hit by the to an increase in revenue from our Sasol tolling operation unprecedented increase in the costs of raw material that increased to R798m. The increase at Richards Bay is (mainly sulphur) and other consumables (spares, steel and due to an increase in prices as well as an increase in imported reagents). The Rand/Dollar exchange rate volumes. Phosphoric acid sales increased by 11% from averaged around R7.09 for the year under review. The 498k tons to 555k tons, and granular sales increased by Group continued the strategy of hedging circa one-third of 59% from 164k tons to 261k tons. While the sales prices its revenue between a floor of R7.00 and a cap of R7.90 of phosphoric acid increased by 31% or $145/t, from to the US$ for the year. $462/t to an average of $607/t, the sales prices of granular fertiliser increased from an average of $307/t in 2007, to The Foskor strategic direction and identified strategic key an average of $544/t in 2008. With the increase in initiatives necessary for the short- and medium-term phosphoric acid production we were able to utilise our success of the Group have again been reviewed by the excess phosphate rock stock in the current year by Foskor Board and Executive Management. reducing the stock levels by 480k tons, from 653k tons to the current balance of 174k tons. Contrary to previous years, the exchange rate had a minor effect on the results SAFETY, HEALTH, ENVIRONMENT AND due to the slight weakening of the exchange rate from QUALITY (SHEQ) R7.02/$ during the previous year to R7.09/$ for the year under review. The Rock and Copper division maintained a best in class Disabling Incident Frequency Rate (DIFR) of a mere The Group has continued with its turnaround in profitability 0.045% as a result of only one disabling incident during by more than tripling its operating profit from R351m in the the year under review. The Zirconia division also experienced previous year to R1,186m. Since 2005, the turnaround has only one disabling injury for the period. The Rock and amounted to R1,606m – from an operating loss of R420m Copper division recorded 2.5 million fatality-free shifts and (after impairment of R300m) in 2005, to an operating profit 3.2 million man hours without a disabling injury at the end of R1,186m for the year under review. The breakeven for of March 2008. the Group, expressed in terms of the Rand/Dollar exchange rate, reduced from more than R8/$ three years ago, to All plants in Richards Bay outperformed the environmental below R5/$ for the year under review. permit emission requirements for the period under review, with the sulphuric acid plants achieving in excess of 99% A number of contributing factors help to explain the year on year change. The delivered cost of sulphur, a major ingredient in the manufacture of phosphoric acid, more than doubled from $83/t in the previous year to $175/t in the year under review. The cost of sulphur – R789m – represents the single largest cost item, amounting to 18% of revenue. Other major cost items include distribution costs that increased by 31% – or R170m – from R547m to R717m, staff expenses that increased by 23% to R446m, and maintenance that remained more or less unchanged at circa R300m. Excluding raw material costs and copper recoveries, the operating cost of production of phosphate rock increased by 17% and after taking into account the reduction in production of 287k from 2,669k ton to 2,382k tons, the cost per ton increased by 31%. The operating cost of 9 Foskor (Pty) Limited | Annual Report 2008 | The inventory (excluding the assets held for sale) increased from R615m to R920m (50%) mainly due to an increase in stock values of sulphur and rock. This impacted on the cost per ton valuation, which increased from R2,858.60 to R3,428.09 (20%) for phosphoric acid. The result was an increase of R37m on phosphoric acid valuation at year end – mainly from price and quantity variance (phosphoric acid tons increased from 36,038 tons to 40,947 tons). The value of sulphur stock increased by R130.4m, due to higher closing stock of sulphur (an increase of 19,073 tons: from 41,095 tons to 60,168 tons) and the sulphur price increase from R701.98/t to R2,646.04/t. Furthermore, our stock at year end also included a value of R207m sulphur stock in transit, expected from Canada on a shipment totalling 71,787 tons. Trade Receivables The trade receivables increased by R257m due to higher realisation of selling prices on phosphoric acid; export sales at March 2008 amounted to R449m (70,891 tons), compared to March 2007 export sales of R229m (66,942 tons). In addition, certain customers had increased the credit period from 30 days to 60 days, resulting in higher debtors at year end. Trade and Other Payables The trade and other payables increased by R349m mainly production of phosphoric acid remained unchanged year due to sulphur shipments due; the sulphur was received at on year, and after taking into account the 31% increase in higher prices at $370 as against the March 2007 purchase production from 529k tons to 692k tons, the operating price of $82 and at a higher exchange rate at the end of cost of production reduced by 24% per ton. the year under review. For many years losses were incurred at the Richards Bay plant. The decision to invest R1.1bn in 2002 has proved a BUSINESS ASSISTANCE AGREEMENT sound one, with the return on investment now becoming evident. The Richards Bay plant has achieved a turnaround The Business Assistance Agreement (BAA), which Foskor in terms of both production and profitability. Since the unit entered into with Coromandel Fertilisers Limited (CFL) in has made a profit of R615m, and it is expected that this February 2005, concluded its third and final year on profit will increase into the future, the impairment loss of 31 March 2008. The essence of the agreement was for R300m provided in 2005 has been reversed, which CFL to provide technical, operational, maintenance, amounted to a net income value of R255m, after adjusting purchasing and business assistance to Foskor. CFL would for amortisation. be compensated for its efforts to improve Foskor's Earnings Before Interest and Tax (EBIT) over and above the ongoing With more than 95% of revenue being Dollar-based, the initiatives of Foskor. In terms of the agreement, the financial Group follows a hedging strategy that incorporates a remuneration payable to CFL is limited to a maximum of natural hedge of one-third representing Dollar-based R300m. import costs, one-third covered by way of Forward Exchange Contracts (FECs) within a period after sale, and The financial benefits will be finalised and audited within the remaining one-third covered by entering into zero cost three months of year end. Unaudited indications are that collar options. These options need to be fair valued at year the amount due will be R300m and after adjusting for end, with the loss or profit being recorded in the income advance payments of US$1.5m, an amount of R289m is statement. Normally, these options would not extend over due. Further discussion of this matter is included in the year end, but due to the volatility of the markets the Group Directors' Report. decided to utilise these instruments on a limited basis. At year end these options had an average floor price of R7.30/$, a maximum of over R8/$, and were less than CAPITAL PROJECTS 10% of the 2008/9 Dollar-based revenue. The fair value loss on these options at year end amounted to R52m. Capital expenditure incurred by the Group during the period under review amounted to R360m. The positive free cash flow for the Group (defined as the net of cash flow from operating activities and net cash Projects already approved and carried over to the 2008/9 used in investing activities) amounted to R640m for the financial year amounting to R273m include the new South year under review (compared to R219m in 2007). Pyroxenite Mine (PEP project) of R90m, and various 10 | Foskor (Pty) Limited | Annual Report 2008 projects in Richards Bay, including projects to enhance international non-availability of tyres. The Loesche mill safety and environmental issues: a new effluent pipeline remains a bottleneck in the production stream as the (R76m), startup scrubbers (R6m) and groundwater capacity is lower than the flotation capacity installed. The remediation (R10m). The effluent pipeline and startup capital cost estimate for the de-bottlenecking of the plant scrubbers are expected to be completed by August/ has been completed and the feasibility study will be September 2008. presented to the Board shortly. The production cost per ton of rock increased in the year under review, mainly as a result of lower production and increased raw material MINING RIGHTS costs (reagents, diesel and steel). The process of converting 'old order' mineral rights into Production of phosphoric acid at Richards Bay amounted 'new order' rights as per the Minerals and Petroleum to a record 692k tons, against the previous year's Resources Development Act of 2003 (Act 28 of 2004), is production of 529k tons and a design capacity of 750k still ongoing, with the applications having been lodged tons. Sulphuric acid production was 1,920k tons, which with the Department of Minerals and Energy (DME) in was 6% above target. The year under review showed Polokwane. The Social and Labour Plan is a critical record production of both phosphoric and sulphuric acid, section of the application and sets objectives in the despite four power dips during the year that impacted by areas of human resources development, employment decreasing production by 13,099 tons. Granular fertiliser equity, local economic development for the mine production amounted to 261k tons compared to a target communities, procurement of commodities, ownership of 230k tons. and joint ventures, and the beneficiation of products. Compliance with the requirements of the Social and Labour Plan will benefit all and lead to new investments – a critical factor in job creation and sustainable development. The final acceptance of the Social and Labour Plan portion of our applications is still under discussion with the relevant authorities. In maintaining our social licence to operate, our sustainable development strategy is as important as our mining disciplines. Sustainable development is primarily concerned with ensuring long-term balance between Foskor's commercial interests and those of the communities and environments where it operates. Simply stated, it entails living up to the rules of good corporate citizenship. A fundamental requirement is ensuring and maintaining stakeholder engagement and communicating to governments and communities that there are short- and long-term benefits for them flowing from our operations. Although the production cost per ton of P2O5 showed an improvement from the previous reporting period, in terms During the year under review, we became signatories to a of both usage efficiencies and reduced conversion costs, number of initiatives that we believe will make a major these savings were offset by increased raw material prices contribution to building a more sustainable future. These (an increase of 15%). Cost control at the Richards Bay include the establishment of the Ba-Phalaborwa Local plant improved between the previous reporting period and Economic Development Forum, chaired by the DME, that under review. The cost per ton of granular fertiliser reaffirmation of our support to the local business chambers was also impacted by higher raw material costs; however, and formalising and strengthening the relationships with after correcting for increased raw material prices, the cost the local town councils. per ton showed a reduction of 11% due to increased production and reduced conversion costs. PRODUCTION AND OPERATIONS The Group continues to engage with Eskom in South Africa to manage the efficient use of energy, and the risks Phosphate rock concentrate production decreased by from unplanned power outages from both a safety and an 10.8% to 2.38m tons, which is well below the target of economic perspective. Foskor is responding to Eskom's 2.53m tons. This was mainly as a result of a decrease and power supply constraints during peak periods by partnering fluctuations in feed grades from the diminishing above with the national utility to implement Demand Side ground ore reserves, substantial downtime due to Eskom Management (DSM) projects with the potential of power outages, and the poor performance – i.e. throughput permanently saving 10% of electricity demand. It is and grade of tailings received – from PMC in terms of the expected that if these DSM projects are accepted by suspension period of the processing agreement. Ore Eskom and if the other electricity saving initiatives are mined was on budget despite the fact that a large portion implemented, production output would only be affected in of the haul truck fleet is intermittently standing due to the a minor way. 11 Foskor (Pty) Limited | Annual Report 2008 | THE TOLLING ARRANGEMENT WITH SASOL tons and were also less than the target of circa 255k tons NITRO per annum. The decrease in phosphate rock export was compensated for by an increase in inter-company sales of 170k tons above target, as a result of stable performance The interim short-term tolling agreement between Foskor by our phosphoric acid plant in Richards Bay. Total and Sasol Nitro came into effect on 1 September 2005. phosphate rock sales increased by 16% from 2,520k tons In terms of this agreement, Foskor supplies the raw to 2,911k tons. The overall increase in phosphate rock materials to Sasol Nitro and sells the finished goods to the sales was as a result of stable phosphoric acid production local market. For this service, Foskor pays Sasol Nitro a at our Richards Bay plant and improvement in railing monthly fixed fee, as well as variable charges per ton of phosphate rock from Phalaborwa to Richards Bay. The product produced. average Free On Rail (FOR) price of phosphate rock increased significantly to $73/t, compared to the $58/t of The production outputs from Sasol Tolling increased by the previous financial year. The price of phosphate rock 11k tons or 6%, from 181k tons of phosphoric and was based on South African market conditions. defluorinated acid in 2006/7, to 192k tons for the year under review. Sales volumes of phosphoric acid and The overall sales of phosphoric acid and granular fertilisers defluorinated acid increased slightly, by 1k tons or 0.5%, were significantly higher than those of the previous financial from 187k tons in 2006/7 to 188k tons in 2007/8. More year, as a result of stable production experienced at the than 90% of sales were made to the local market. Richards Bay plant. Phosphoric acid sales volumes increased by 57k tons, or 11%. The increase in phosphoric During the year under review, the Group received acid production and sales was as a result of stable correspondence from the Competition authorities stating phosphoric acid production as well as improvements to that the tolling agreement in its current form may be a the logistics of railing phosphate rock from Phalaborwa to 'notifiable' transaction/arrangement (in other words, a Richards Bay. Sales volumes of granular fertiliser increased potential merger). Through a 'declaratory order', by 59% to 261k tons in the year under review. The management sought greater clarity from the Tribunal, and granulation plant had a 43 day shutdown to perform specific reasons as to why the Competition authorities had routine maintenance. The local market experienced a good taken this view. season, as a result of good rainfall during the year under review. After negotiation between Foskor and Sasol the parties agreed to terminate the toll manufacturing arrangement, as at the end of March 2008. The future impact of this will As part of the market diversification strategy, Foskor not negatively impact operations. reduced the reliance on India as a region from 91,5% in 2006/7 to 86,9% in 2007/8 of total phosphoric acid exports, by adding new customers in Japan, Indonesia and Bangladesh. The reliance on the fertiliser market, expressed as P2O5 sales, decreased from an actual of 91,5% in 2006/7 to 87,8% in 2007/8. A number of product diversification projects has been introduced and pre-feasibility studies are currently far advanced for purified and de-fluorinated phosphoric acid as well as technical grade granular fertiliser. Pre-feasibility studies have also been started to convert our waste product into value added products such as gypsum board for housing panels, cement clinker and aluminium tri- fluoride for the aluminium industry. Subsequent to the closure of the financial year, the phosphoric acid price for the first 3 months of the 2008/9 financial year was concluded at $1,985/t Cost and Freight (CFR) on 30 days interest free and payment covered by letter of credit, compared to the price for the year under review of $566.25 – an increase of 251%. This is, however, MARKETING AND SALES offset by a sulphur price increase from $175/t during the year under review to possibly as high as $740/t during the Total sales of phosphate rock to the local market, excluding coming year. The imported Togolese rock price has also inter-company sales, were slightly less than targets as a increased significantly from $204/t in March 2008 to result of a decrease in demand in the local market. This $352/t in April 2008. was also attributable to less than target off-take on the toll manufacturing arrangement between Foskor and Sasol The Group expects that sales tonnages of phosphoric Nitro. In the year under review, phosphate rock exports acid, granular fertiliser and phosphate rock could increase decreased from the previous period's 179k tons to 111k in the future. 12 | Foskor (Pty) Limited | Annual Report 2008 MINE CLOSURE COST PROVISION The Group is aware of the increasing emphasis on environmental accounting and accountability. Management is continuously assessing and monitoring the various environmental issues facing the Group. A new environmental assessment was performed by Golder Associates Africa, an internationally recognised and respected company. Foskor provides for environmental rehabilitation based on a two-tier strategy: scheduled end-of-mine closure is provided for by deposits into and growth of the special purpose Section 37A Environmental Rehabilitation Trust; while unscheduled or premature mine closure is provided for by means of bank guarantees for the difference. Based on a Mine Rehabilitation and Closure Cost Assessment FOSKOR REHABILITATION TRUST performed in March 2008 by Golder Associates Africa, the (PHALABORWA MINE) contingent liability has been recognised for the issuing of guarantees to the Department of Minerals and Energy Details of contributions to the Trust are as follows (refer to (DME) in terms of Regulation 54(2) of the Regulations Note 7 to the Annual Financial Statements): promulgated in terms of the Minerals and Petroleum R '000 Resources Department Act, 2003 (Act 28 of 2004). Before June 2000 13,767 June 2004 3,000 The estimated total scheduled rehabilitation liability March 2006 8,000 increased from R152,4m in the previous year to R195.2m March 2007 10,000 after taking into account the following assumptions (refer 34,767 to Note 19 to the Annual Financial Statements): The current market value of the assets in the Trust is – The closure cost of the mine circa R60m, which is regarded as adequate at this point (R223.4m previous year) R 316.4m when considering the remaining life of the Phalaborwa – Estimated escalation per annum 6.4% mine. – Discount period 20 yrs – Risk-free rate government bonds R186 PROCUREMENT AND LOGISTICS (closure costs discounted to present value) 9.0% The international sulphur market price rose sharply during The environmental rehabilitation liability of R195.2m, the period under review. Free On Board (FOB) prices out of considered together with the value of the rehabilitation the region of Canada for January to June 2007 contracts Trust amounting to R60m, results in an unfunded portion were agreed at circa $40/t. Negotiations for July to of the liability of R135.2m (refer to Notes 7 and 19 to the December 2007 were held towards the end of June 2007 Annual Financial Statements). and were concluded at circa $100/t FOB. For January to June 2008, the Canadian prices were concluded at circa The estimated unscheduled rehabilitation liability increased $338/t. Spot procurement at end of March 2008 was from R223m to R420m. being quoted circa $600/t FOB. Securing volumes has been key in this buoyant market. Foskor has enjoyed long- Net shortfall at this stage Rm term contractual arrangements with the Canadian suppliers. – Recommended mine closure cost 420 The Middle East sources have been and continue to be less positive than Canada in terms of price and quality. We – Assets held in Environmental Trust 60 expect a tight market for the balance of 2008 and the – Net shortfall after realising assets held in expectation is that thereafter a number of production Environmental Trust 360 projects will come on stream in early 2009, which will assist with increasing supply. A contingent liability has been recognised for the issuing of guarantees to the DME as follows (refer to Note 31 to the The ammonia market also spiked upwards in the last six Annual Financial Statements): months of the period under review, during which time Rm Foskor extended the annual contract with SABIC for an – Guarantee issued July 2007 100 additional year (July 2007 to June 2008). The contract is still competitive in the market. Volume off-take in the year A commitment has been made to the DME with respect to under review was much higher than in the previous review the phased in delivery of guarantees for premature mine period, due to high production of granulation on the back closure provision. of good fertiliser prices in the international market. 13 Foskor (Pty) Limited | Annual Report 2008 | Foskor has yet again performed exceptionally in terms of promoting and supporting BBBEE. In the period under review, direct purchases from BBBEE suppliers reached 49% of discretionary procurement for the whole Group (excluding reagents and strategic raw materials). Total spend was R847m, with BBBEE spend coming to R414m. FOSKOR ZIRCONIA (PTY) LIMITED The Foskor (Pty) Limited Board has approved the corporatisation of the Zirconia Division. This means that the Division will no longer be an integrated operating division of Foskor (Pty) Limited, but a separate stand-alone company and legal entity called Foskor Zirconia (Pty) Limited. The new company will initially be wholly owned by Foskor (Pty) Limited. The new company will have its own Togo Rock supply continued to be a challenge in the first Board of Directors and will be accountable for its own six months of the financial period under review. Getax operational profitability. Australia, the exclusive Togo rock distributor, shipped only 40k tons against the volume contract of 125k tons. The Division currently produces only two products, namely Further, two shipments were supplied at much higher zirconia and fumed silica, and the Division's competitive prices, in line with the market movements. During the advantages in the marketplace are being eroded by the course of the year under review, we were informed that all entry of new competitors into these markets. Foskor contracts had been cancelled, due to the dissolution of the recognises its responsibility towards ensuring a continued Togo-based company IFG-TG. A new company – the sustainable future for this business unit, its customers and Société Nouvelle des Phosphates du Togo (SNPT) – was the employees of the unit. New partners with the right subsequently formed; and new contracts negotiated. The technical and marketing expertise will be sought to ensure global market prices looked to be 50% higher than the the sustainability and growth of the business. previous contracted prices. Operating profit for the 2007/8 financial year at R18.3m By the end of the period under review, the Contract Of was R2.97m higher than the previous year. The net income Affreightment (COA) with Southern Chartering (backed by for the year shows a positive variance of R4.03m (or Swiss Marine) on sulphur had just completed one successful 22.5%) against the previous year. This is mainly attributable year. The savings that Foskor has made since entering into to the increase in sales and the weakening of the Rand. this three year deal are substantial. For the past 12 months, Foskor has enjoyed extremely competitive freight Sales of fused zirconia for the year increased from 3,709 rates as compared to average spot prices. On the liquid tons to 4,090 tons on a year on year basis. These side, the Odfjell Makana COA came to an end in March represent the highest sales figures ever attained by the 2008. Foskor has finalised and signed a new contract from Division. April 2008 for the next five years, with prices only fixed for two years. We believe, under the current shipping market Production achieved a record 4,412 tons of fused zirconia conditions, that the deal is highly beneficial to Foskor. It for the year under review. This beat the previous year's also supports empowerment initiatives, as the party has a record of 4,106 tons by 306 tons. The achievement was strong Broad Based Black Economic Empowerment made possible by the effort of the zirconia team to increase (BBBEE) representation. At the contract signing ceremony, the productivity of the smelter plant and to reduce the both the local chairman and the Odfjell CEO thanked losses and rework of material in the powder plant. Foskor for truly believing in sustainable BEE initiatives and expressed their appreciation for the continued business relationship. OUR HUMAN CAPITAL Foskor rock movement from Phalaborwa to Richards Bay Employment Equity for the 12 month period under review was above budget. Consultative processes dealing with employment equity The train performance has continuously improved; once continue at the Phalaborwa and Richards Bay operations, again, thanks are due to all involved for their efforts in via relevant steering committees. Even though these revamping and maintaining good business relationships forums are in place, employment equity remains one of the with the service provider. notable challenges in Foskor. This is because attracting and retaining Historically Disadvantaged South Africans Procurement support for the plant continued to be excellent (HDSAs) to the operations is proving a major challenge, in the 12 months under review. No major incidents were due both to the remoteness of the locations and demand reported relating to procurement activities. throughout the country. The shortage of qualified artisans 14 | Foskor (Pty) Limited | Annual Report 2008 and professionally qualified engineers in the country is signing of the three-year agreement on substantive having a negative impact on the Group's ability to attract conditions of employment, which towards the end of the and retain skilled artisans and engineers, and these are period under review was extended for its final lap, expiring areas where the achievement of set targets is proving on 31 March 2009. There was no industrial action of any extremely challenging. Foskor Management has integrated kind for the period under review. There was also a marked all systems that impact on employment equity, for example, decline in the number of cases referred to the CCMA at the bursary scheme (both prestige bursary scheme and Group level – from 16 in 2006/7 to 8 in 2007/8. employee study assistance scheme); artisan learnership programme; government certificate of competence Employee Well-being assistance programme; and recruitment and selection Foskor offers employee assistance programmes at both system. operations. A full-time employee assistance practitioner is employed at each operation (both being registered social In addition to initiatives already discussed, in the period workers). The following interventions are catered for: under review Foskor focused its recruitment and promotion stress management, individual counselling for HIV/AIDS, practices on addressing demographic imbalances and trauma, family-related matters, and/or addiction problems, under-representation of designated employee groups. and bereavement counselling. Skills Development With regard to HIV/AIDS, Foskor's main focus is on: Foskor's human resource development strategy takes – Training and awareness campaigns; cognisance of the growing shortage of critical skills in – Voluntary counselling and testing campaigns; South Africa. The Phalaborwa operation is characterised – Provision of treatment for HIV positive employees; and by low skill levels and therefore Adult Basic Education and – Support for community structures in the fight against Training (ABET) is available at this operation, with a learner- this pandemic. intake group of 103 for the period under review. An in- house ABET centre under the watchful eye of a full-time During the period under review, the Foskor Phalaborwa ABET facilitator offers full-time classes to employees. For operation's HIV/AIDS management system for the first time the period under review this centre also included computer received SANS 16001 accreditation, the workplace quality training for all staff members, with 107 employees management system developed for benchmarking successfully completing such training. purposes by the South African Bureau of Standards. This is considered a major achievement for the Group. Career development plans have been developed for critical positions in Foskor. A talent pool has been established at Employee Benefits both operations, and Foskor's succession planning assists It remains the objective of the Group to provide affordable, with ensuring that the business has the necessary talent to effective and sustainable health care to all employees and fill key positions timeously; however this initiative has been their dependants in an equitable manner. adversely affected by 'poaching' of skilled and trained technical staff. Mentorship programmes are in place at Further to the formation of a Group Benefits steering both operations. Mentors have been identified, trained and committee, whose members review all benefits on a assigned to protégés, and individual development plans regular basis, Workplace Health Care Forums were have been established in respect of all protégés. established during the period under review; these comprise management representatives and organised labour In line with Foskor's skills development theme, a supervisory representatives, whose duties include, among other things, development programme was launched in 2007 where discussion of workplace health-related matters. employees in junior management were nominated for this programme. Supervisors and potential supervisors Corporate Social Investment completed the programme, which was offered through the Foskor has over the years contributed immensely to the Durban University of Technology. This programme was surrounding communities in the Phalaborwa and Richards embarked upon to ensure that skills at first line management Bay areas. A summary of the various projects is discussed level keep pace with the increasing complexity of our in the corporate governance section. Nationally educational business environment. institutions are finding it a major challenge in addressing the growing demand of employers for high quality skilled Learnership agreements were entered into with existing labour and Foskor recognises that education is one of employees for boilermaking, electrical and fitter trades at South Africa's crucial developmental areas and by the Phalaborwa operation. Learnership agreements are in contributing to this field, Foskor attempts to close the gap place at the Richards Bay operation for jobs ranging from of unemployment by increasing the living standards of all plant operators to supervisors. The learnership programme South Africans. In view of this Foskor has partnered with has proved to be a useful springboard for placement the Department of Education in a huge project called the opportunities. Dinaledi Schools Project. Our new corporate identity is a milestone achievement and represents the growth and Industrial Relations transformation of the company. It also marks a new The employment relations climate has been relatively beginning for Foskor and the exciting journey ahead of satisfactory for the second consecutive year following the us. 15 Foskor (Pty) Limited | Annual Report 2008 | REVIEW OF MINERAL RESOURCES AND ORE RESERVES "You will either step forward into growth or you will step back into safety." - Abraham Maslow There are three mines currently operating in the PIC. Palabora Mining Company (PMC) operates a copper mine in the central portion of the complex, as well as a vermiculite mine in the southern portion of the complex. Foskor's current opencast mine is situated in the North Pyroxenite and Foskor's future mining venture is in the South Pyroxenite (refer to Figure 1). Geological Exploration There have been numerous phases of drill testing of the in situ phosphate deposits in the PIC. The first substantial drilling programmes were in the late 1950s, and the most recent substantial drilling programme was completed in 2006. A total of 100,544 metres have been drilled to delineate the North and South Pyroxenite Mineral Resources. Drilling programmes of the PMC active tailings dam were also embarked upon to determine the Mineral Resources and Reserves. Samples acquired from the delineation drillholes were assayed at Foskor's chemical laboratory. The laboratory is INTRODUCTION not internationally accredited but participates in the 'Association of Fertiliser and Phosphate Chemists' (AFPC) The impetus for modern mining activity in Phalaborwa was monthly round robin assay programme. triggered by the discovery in 1906 of appreciable quantities of the phosphate mineral apatite in the rocks of the Foskor is not currently exploring for new phosphate Phalaborwa complex. Although phosphate mining took resources. place during the early 1930s it proved unsuccessful, and it was not until some 20 years later that phosphate once RESOURCE ESTIMATION again attracted attention. In 1951 the state acquired the necessary claims from The information obtained from the drilling was analysed Dr Hans Merensky, and the Industrial Development geostatistically and used to compile geological block Corporation (IDC) established Foskor. Production started models. Ordinary kriging was used to estimate the in 1954 under difficult conditions but continued for strategic phosphate mineral distribution in the 3-dimensional block reasons, and in 1961 the first profits were reported. model. The block models were validated and the estimated values correlated with the original drillhole assays. This General Geology was done for North and South Pyroxenite as well as the The Phalaborwa Igneous Complex (PIC), situated south of PMC active tailings dam. the town of Phalaborwa (Limpopo Province), comprises a group of 14 distinct rock types, each with its own The classification of the Mineral Resource into Measured, characteristic mineral assemblage. Figure 1 on page 19 Indicated and Inferred categories is based on the drillhole illustrates the geology of the PIC. It is a vertical volcanic density, kriging parameters (in particular, kriging efficiency) pipe, roughly kidney-shaped and measuring 1.5 to 3.5 km and the combined 50 years' knowledge and experience of in width, and 6.5 km in length. It is made up of three Foskor's geologists on the PIC. coalescing and concentrically zoned lobes designated the North Pyroxenite, Loolekop and South Pyroxenite. Mineral Resources and Reserves The South African Minerals Resource Committee (SAMREC) Apatite is the only phosphate-bearing mineral in the PIC, Code (the code for reporting of exploration results, mineral and although sometimes present in very small quantities in resources and mineral reserves – 2007) was used as a the pyroxenite, it is never completely absent and often guideline to classify the Mineral Resources and Reserves. figures as an abundant mineral constituent. Carbonatite and foskorite are the two copper-bearing host rocks, According to the SAMREC Code: a 'Mineral Resource' is a which also contain magnetite and apatite. concentration or occurrence of material of economic interest in or on the earth's crust in such form, quality and As a result of exploration drilling, higher concentrations of quantity that there are reasonable and realistic prospects apatite mineralisation were highlighted in three areas, for eventual economic extraction. The location, quantity, namely the north-western portion of the PIC (North grade, continuity and other geological characteristics of a Pyroxenite), in the centre (Loolekop), and in the southern Mineral Resource are known, or estimated from specific portion (South Pyroxenite). The presence of apatite is geological evidence, sampling and knowledge interpreted expressed in % P2O5. from an appropriately constrained and portrayed geological 17 Foskor (Pty) Limited | Annual Report 2008 | which the optimised pit was designed. By applying modifying factors, the Mineral Reserves were estimated. The North Pyroxenite Reserves totalled 442.5 million metric tons at 31 March 2008. The North Pyroxenite Mineral Reserve was also internally estimated. South Pyroxenite Deposit The first substantial drilling programmes in the South Pyroxenite area (refer to Figures 1 and 2) were carried out during the late 1950s and late 1960s. The infill drilling programme, which commenced during the 1990s, was terminated prematurely due to financial considerations, but was completed during 2005/6 and incorporated additional definition drillholes. The total number of metres drilled was 49,584 from a total of 143 drillholes. Bulk and trench sampling has also been done in the South Pyroxenite area. The geological and resource models for the South Pyroxenite area were based on the information obtained model. Mineral Resources are subdivided, and must be so from all the drilling campaigns. reported, in order of increasing confidence in respect of geoscientific evidence, into "Inferred, Indicated or Measured The geological contacts were interpreted from the diamond categories" (refer to Table 1 on page 20). drilling data. Ordinary kriging was used to estimate the P2O5 block model values and it was validated by comparing According to the SAMREC Code "a 'Mineral Reserve' is it to the original drillhole data. the economically mineable material derived from a Measured and/or Indicated Mineral Resource. It includes The South Pyroxenite Mineral Resource was audited by diluting and contaminating material and allows for losses Steffen, Robertson and Kirsten Consulting (SRK) in 2007. that are expected to occur when the material is mined. The South Pyroxenite Mineral Reserve of 981.8 million Appropriate assessments to a minimum of a Pre-feasibility metric tons was internally estimated. Study for a project, or a Life of Mine Plan for an operation, must have been carried out, including consideration of, PMC Active Tailings Dam and modification by, realistically assumed mining, Phosphate-rich tailings have been deposited on the PMC metallurgical, economic, marketing, legal, environmental, active tailings dam (refer to Figure 2) since the late 1970s. social and governmental factors (the Modifying Factors)" Foskor has rights to the apatite in this tailings dam and it (refer to Table 2 on page 20). is located on the premises of PMC. A resource of approximately 297 million metric tons with an in situ grade The cut-off grade for % P2O5 was calculated using the of 6.75% P2O5 was delineated through drilling and sampling methods from Kenneth F. Lane's book The Economic during the 1990s. Definition of Ore. The cut-off grade for the North and South Mineral Reserves is 5.5 % P2O5 and for marginal ore The data collected from the exploration was valuated for between 4.4 and 5.5 % P2O5. geostatistical application. An oriented block model was created and ordinary kriging was applied to estimate the North Pyroxenite Deposit grade distribution through the dam. The drill spacing was The North Pyroxenite Deposit (refer to Figure 1 and Figure 2 on page 19) is located in the north-western part of the used to categorise the resource in terms of Measured, PIC. Foskor commenced mining phosphate-bearing ore Indicated and Inferred Resources. from this deposit in 1966. During the period 1961–1977 a drill programme consisting of 149 drillholes totalling 24,377 The feasibility study of reclaiming the tailings, which was metres was carried out. A second phase of drilling in and completed in 2003, revealed that capital and operating around the existing pit was started in 1980 and completed costs would be more than forecast. For that reason, in 1984, totalling 23,200 metres (55 drillholes). Foskor decided to exploit other sources of phosphate ore prior to exploiting PMC's active tailings dam. The lithological information from these holes was geologically interpreted, and a resource model of Snowden Mining Industry Consultants and Rio Tinto mineralisation was created. The Mineral Resources were Technical Services provided input to the feasibility study, internally estimated and categorised as Measured, although the report itself was compiled by Foskor staff. Indicated and Inferred Resources according to the SAMREC PMC continued to add tailings to the dam after Foskor had Code. A Whittle pit optimisation was undertaken, from completed estimating the Mineral Resources. 18 | Foskor (Pty) Limited | Annual Report 2008 referred to as foskorite stockpiles. Foskor reclaimed material from these stockpiles but most of these stockpiles have been completely reclaimed. In the Mineral Reserve statement (see Table 2 on page 20) the remainder of the stockpiles have been listed as Area 2, Area 6 and Area 9. Foskor is currently reclaiming the Area 9 stockpile (refer to Figure 2). PP&V Tailings Currently, PMC operates a vermiculite opencast mine in the South Pyroxenite Area, which produces a vermiculite concentrate from the plant using dry winnowing methods. PMC trucks the high P2O5 tails from this plant to a stockpile located close to Foskor's East Crusher. Foskor has been reclaiming the high phosphate tails from this stockpile for the past two years. Responsible Persons The estimated Mineral Resources and Reserves reported here have been reviewed and endorsed by the following persons: – Marianne van den Heever, BSc (Hons) (Geology), three years' experience, Superintendent: Mining Services; – Hennie Coetzee, BSc (Geology), 21 years' experience, Mine Geologist; – Qeda Mhlongo, NHD (Mining), 10 years' experience, Senior Mine Engineer; assisted by – Neil Richardson, NHD (Mine Survey), Government Mine Surveyor Cert of Comp, Chief Surveyor. Figure 1: The Geology of the Phalaborwa An international, reputable company is being appointed Igneous Complex during the course of 2008 to act as competent person in the validation of the report. Stockpiles The carbonatite intrusion in the centre of the PIC (refer to Figure 1) is surrounded by foskorite and phlogopite- pyroxene-apatite pegmatoid. PMC used to mine and stockpile the foskorite and pegmatoid as a by-product of Phalaborwa Town mining the copper-bearing carbonatite by opencast North Pyroxenite Area 2 methods. PMC selectively mined and stockpiled the foskorite and pegmatoid according to the Extension 100F Agreement between Foskor and PMC, which gave PMC the right to process rocks with less than an agreed P2O5 Foskor Plant grade, and retain all the valuable constituents within those rocks, except phosphate. The rights to the rocks mined Palabora Mining by PMC were determined by conventional grade Area 6 Company control practices that were implemented by PMC and monitored by Foskor. PMC commenced mining in 1965, PMC Tailings Dam and in 2002 the opencast mine reached its maximum Area 9 South planned depth of 750 metres, after which PMC mined Pyroxenite from the underground mine developed in the same ore body below the opencast mine. Figure 2: Areas of interest regarding Mineral Resources and Reserves. The foskorite and apatite-rich pegmatoid mined by PMC Figure 2: Areas of interest regarding Mineral that contained more than 6% P2O5 was stockpiled and Resources and Reserves 19 Foskor (Pty) Limited | Annual Report 2008 | Table 1: Mineral Resources as at 31 March 2008 Mineral Resources1 Resource Dolerite5 Pyroxenite6 %P2O5 Category (Mt) (Mt) North Measured 78.3 1,792.8 6.58 Pyroxenite2 Indicated 1.6 201.7 5.94 Inferred 8.5 508.9 5.42 Sub-total 88.4 2,503.4 6.29 South Measured 207.8 2,501.5 6.15 Pyroxenite3 Indicated 191.8 769.1 5.72 Inferred 475.2 3,211.3 6.00 Sub-total 874.8 6,481.9 6.03 PMC Tailings Dam4,14 Measured 238.3 6.70 Indicated 48.8 6.60 Inferred 9.9 6.40 Sub-total 297.0 6.67 Grand Total 963.2 9,282.3 6.12 1 Mineral Resources are reported inclusive of Mineral Reserves 2 Internally estimated, current opencast mine 3 Externally audited by SRK in 2007, PEP project 4 Externally audited by Snowden in 2002 5 Excluded from P2O5 estimation, selectively mined in Mineral Reserve 6 Includes internal waste 14 Feasibility done in 2002/3 showed resource not economical to exploit, therefore not included at this stage as a reserve Table 2: Mineral Reserves as at 31 March 2008 Mineral Reserves7 Reserve Ore11 %P2O5 Marginal12 %P2O5 %Cu Waste13 category (Mt) (Mt) (Mt) North Proved 442.5 7.34 18.3 5.04 Pyroxenite8 Probable - - 0.1 4.53 Sub-total 442.5 7.34 18.4 5.04 44.5 South Proved 854.9 7.04 76.0 5.10 Pyroxenite9 Probable 126.9 6.51 8.6 5.24 Sub-total 981.8 6.97 84.6 5.11 196.9 Stockpiles 10 Proved: Area 9 24.7 6.96 - - 0.07 Area 6 - - 11.1 4.35 0.19 Area 2 0.5 6.90 - - Sub-total 25.2 6.96 11.1 4.35 Grand Total 1,449.5 7.08 114.1 5.03 241.4 7 Calculated at a selling price of $75/ton at exchange rate of R7.20 8 Internally estimated, current opencast mine 9 Internally estimated, future opencast mine 10 Annual end of year stockpile audit by Premier Mapping 11 Ore > 5.5% P2O5 (includes internal waste) 12 Marginal 4.4 - 5.5% P2O5 13 Waste (selectively mined) 20 | Foskor (Pty) Limited | Annual Report 2008 CORPORATE GOVERNANCE " Opportunity is a haughty goddess who wastes no time with those who are unprepared." - George Clason Table 3: Foskor Board and Sub-Committees Attendance Record Board Board Technical, Human Board Safety, Resources Directors Board Audit and Health and Risk and Remunera- Environ- tion ment Number of 4 4 6 4 Meetings Mr MG Qhena 4/4 4/4 1/1* Mr MA Pitse 4/4 4/4 6/6 4/4 Mr A Vellayan 4/4 4/4 Mr G van Wyk 4/4 4/4 6/6 Ms SS Ngoma 1 3/3 4/4 Mr F Madavo2 1/1 1/1 Dr DS Phaho 4/4 4/4 Mr XGS Sithole3 1/1 Ms JM Modise4 1/1 1/1 Ms Z 1/1 1/1 Monnakgotla5 Ms RK Morathi6 3/3 3/3 1/5 Ms LBR Mthembu 7 2/4 4/6 Ms M Nhlanhla8 1/2 Appointments 1=07/07/16, 2=08/01/01, 3=08/03/26, 4=08/03/26 Resignations 5=07/07/16, 6=08/02/10, 7=08/03/26, 8=07/09/10 * Invitee BOARD AND BOARD SUB-COMMITTEES The company has a unitary Board in order to achieve the Human Resources Committee desired level of objectivity and independence in Board The Human Resources Committee comprises four non- deliberations and decision-making. executive directors of which 1 is independent, and the President/CEO. All directors have unlimited access to the advice and services of the Group Secretary, who is responsible to the The responsibilities of the Committee are to consider the Board for ensuring that Board procedures are adequately following before submission to the Board: followed. The general remuneration policy of Foskor and proposed The Board has established the following sub-committees adjustments to the policy, the approval of the Executive to assist in the discharge of its duties: remuneration packages and incentives as delegated to the – Audit and Risk; Committee by the Board of Directors and to determine the – Technical, Safety, Health and Environment; and CEO's remuneration package and incentives, the – Human Resources. composition of the staff complement (identifying skills, gender, age, seniority and ethnicity) and staff transformation. The Board has adopted a comprehensive delegation They consider succession planning, monitor compliance matrix aimed at clarifying the various limits of authority in with the Foskor Code of Ethics and any other matters place within Foskor. The matrix has allowed the Board to related to human capital management referred to the ensure effective control of Foskor. Committee by the Board of Directors. The Committee will monitor Foskor's compliance with employment equity and The Board retains full and effective control over the the legislation relative thereto and they will review the company by monitoring the Executives in implementing Human Resources Policy of the company. Board policies and strategies, as well as by setting targets and by measuring the company's performance on an Board Technical, Safety, Health and Environment annual basis. Committee The Technical Committee comprises three independent The attendance record of the individual Board members is non-executive directors and the President/CEO. The disclosed in the annual report in line with the objective of this committee is to consider complex technical recommendations of King II (Code of Corporate Practices aspects of submissions and make recommendations to and Conduct). the Board. 22 | Foskor (Pty) Limited | Annual Report 2008 Board Audit and Risk Committee the impact and likelihood of an adverse event, including The Board Audit and Risk Committee comprises four non- control activities, in responding to a risk. executive directors (of which two positions for independent directors are vacant) and the President/CEO. The Chief Foskor (Pty) Limited recognises that risk in business is a Financial Officer, Group Internal Audit Manager and complex and diverse concept, and that there are many representatives from the external auditors, Executives and parts of the organisation working at managing risk Management attend the meetings of the Committee, by exposures. It is the intention that these parts work together invitation. in a consistent and integrated manner, with the overall objective of reducing risk as far as reasonably The Committee is authorised by the Board to access any practicable. internal audit report and financial information and can instruct the management of Foskor, the internal auditors or Foskor (Pty) Limited is committed to operating in the external auditors to conduct any investigation or study accordance with the risk management requirements of it deems necessary. Both the internal and external auditors King II. Commitment to Foskor (Pty) Limited's philosophy have unrestricted access to the Committee, which meets of risk management will ultimately result in the achievement at least once every quarter. The Board Audit and Risk of the company's objectives, and will enhance shareholder Committee operates in accordance with a formalised value in the long term. Board Audit and Risk Committee Charter. Foskor's risks have been identified, assessed and uploaded Management has reviewed the financial statements with onto the CURA risk database. The process of assessing the Board Audit and Risk Committee and the external risks and ensuring that there are controls and action plans auditors. The quality and appropriateness of the accounting in place to mitigate the risks is an ongoing one. policies were fully discussed with the external auditors. The Board Audit and Risk Committee considers the Annual The system of risk management and internal control is Financial Statements of Foskor (Pty) Limited and its intertwined with the company's operating activities to subsidiaries to be a fair representation of its financial provide assurance that enterprise-wide policies and position, results of operations and cash flow information procedures are in place to address all forms of risk identified as inherent to the company's activities. A for the year ended 31 March 2008. combined assurance concept is employed, to manage enterprise-wide risk. RISK MANAGEMENT Some of the significant risks facing the group are: – Increased competitor supply of P2O5 at lower prices. In line with sectoral best practice, Foskor has instituted a The group has mitigated this risk by entering into robust Enterprise-wide Risk Management (ERM) process. long-term supply agreements and product ERM is a structured, consistent and continuous process diversification programmes. across the whole organisation for identifying, assessing, – Not being able to attract and retain qualified skills. deciding on responses to and reporting on opportunities HR has developed a retention strategy, which and threats that may affect the achievement of its includes succession planning, the reassessment of objectives. the Group incentive schemes and implementing a technical skills shortage allowance. Objectives of ERM: – Alignment of strategy; – Alignment of risk appetite; – Defining clear goals and objectives for the organisation; – Identification and assessment of risks; – Evaluation and continuous monitoring; – An ERM process that is tailor-made for the organisation's environment; and – Buy-in from management and staff. At Foskor, we categorise risk into two categories, namely: – Inherent risk, which is measured in terms of impact and likelihood. Inherent risk is the potential risk effect that may materialise: o in the absence of any controls; o if all controls mitigating the risk fail; and o if all controls mitigating the risk are overridden by management or via collusion by employees. – Residual risk, which is measured after management's assessment of the control's effectiveness has been taken into consideration. Residual risk is the risk remaining after management has taken action to reduce 23 Foskor (Pty) Limited | Annual Report 2008 | INTERNAL CONTROL AND INTERNAL AUDIT To meet its responsibility with regard to providing reliable and accurate financial information, the Group maintains financial and operating systems of internal control. These controls are designed to provide reasonable assurance regarding the achievement of organisational objectives with respect to: – The effectiveness and efficiency of operations; – The safeguarding of the company's assets; – Compliance with applicable laws, regulations and supervisory requirements; – Support for business sustainability under both normal and adverse operating conditions; – The reliability of reporting; and – Behaving responsibly towards all stakeholders. In accordance with recommended corporate governance practice, it is the policy of Foskor (Pty) Limited to maintain a centralised independent internal audit function, titled Foskor Group Audit Services (FGAS). The role of this function is to assist the Board Audit and Risk Committee of the Board of Directors, as well as management personnel at all levels, in the effective exercise of their responsibilities through the provision of analyses, appraisals, recommendations, counsel, and information concerning the activities reviewed, and by promoting effective control at reasonable cost. The internal audit function is thus responsible for providing independent assurance to the Board Audit and Risk Committee regarding the effective management of all risks that may impact the achievement of the business objectives. The scope of the work of FGAS is to determine whether – Poor reputation/image. The new Group Foskor's network of risk management, control and Communications and PR manager has implemented a governance processes as designed and represented, is communication strategy to mitigate this risk, which adequate and functioning in a manner to ensure: includes a new Foskor logo and brand awareness and – Risks are appropriately identified and managed; improved stakeholder communication and employee – Interaction with the various governance groups within participation. the company occurs as appropriate; – Inadequate and ineffective logistics supply chain. The – Significant financial, managerial and operating group continues to engage with Transnet Freight Rail information is accurate, reliable and timely; (TFR) to increase wagon availability and to address the – Employees' actions are in compliance with policies, majority of service issues. Alternate transport routes standards, procedures and applicable laws and (e.g. the Maputo corridor) is also being considered. regulations; – Financial Risk Management. The Group's overall risk – Resources are acquired economically, used effectively, management focuses on the unpredictability of the and protected adequately; financial markets and seeks to minimise potential – Programmes, plans and objectives are achieved; adverse effects on the Group's financial performance. – Quality and continuous improvement are fostered in The Group uses derivative financial instruments (mainly the organisational control process; and forward exchange contracts and swap contracts) to – Significant legislative or regulatory issues impacting on hedge certain risk exposures. The Group operates the company are recognised and addressed internationally and is exposed to foreign exchange risk appropriately. arising from various currency exposures, primarily with respect to the US$. Certain of these transactions are Based on its assessment, as well as internal and external covered by forward exchange contracts and option audit, the Group believes that, as at 31 March 2008, its contracts. system of internal control met the criteria for effective internal control. 24 | Foskor (Pty) Limited | Annual Report 2008 CODE OF ETHICS Employment Equity – All staff Foskor (Pty) Limited is committed to organisational integrity and sound business ethics as set out in the codes of 5.41% corporate governance best practices. Foskor (Pty) Limited has adopted a code of ethics, which incorporates the Group's operating, financial and behavioural policies in a set of integrated values and standards required of employees in their interaction with one another and with all 16.55% stakeholders. The code of ethics is distributed to all 4.03% employees of the Group. 2.43% An ethics hotline facility exists to enable staff to report unethical behaviour anonymously. This hotline is the 0.72% responsibility of FGAS, which ensures that all unethical 0.28% behaviour is adequately investigated and feedback is timeously given to the business. A comprehensive fraud 0.11% report is also provided to the Board Audit and Risk Committee for review and approval. In the year under review, Foskor successfully consolidated the existing code 70.49% of ethics and related material. EMPLOYMENT EQUITY The Group supports employment equity and the development and promotion of previously disadvantaged Black Female Coloured Female Asian Female White Female employees. The Group believes in developing and Black Male Coloured Male Asian Male White Male promoting people from within the company as far as possible. Training and development programmes are in place to ensure that every employee will have the opportunity to enhance his/her potential. The Group also adheres to the requirements of the Skills Development Act and sees this as yet another opportunity to develop employees. Employment Equity – Management The current Employment Equity categories are displayed 5.63% and shown below for ease of reference: 38.73% 30.28% 0.70% 10.56% 8.45% 3.52% 2.11% Black Female Coloured Female Asian Female White Female Black Male Coloured Male Asian Male White Male 25 Foskor (Pty) Limited | Annual Report 2008 | success of our business. Employees at Foskor are continually engaged through monthly feedback sessions with the purpose of sharing information, promoting employee suggestions and providing feedback on company performance and future strategies. The Focus, our monthly newsletter, communicates more informal news and reporting on social events. The intranet is rich with news and practical documentation and events including employee functions and participation. External stakeholder groups are addressed through a combination of various media including media relations, tactical advertising and tightly segmented direct communication to our niche international audiences. Moving forward Foskor will focus on leveraging the excellent existing stakeholder relationships and through collaboration aim to achieve even greater successes. CORPORATE SOCIAL RESPONSIBILITY (CSI) At Foskor, we not only recognise our responsibility towards the communities within which we operate as a good governance issue, we embrace the fact that our involvement in these communities places us in the privileged position of being able to make a positive, sustainable contribution towards the upliftment of these communities. As our corporate responsibility initiatives are focused to benefit the communities within which we operate, each STAKEHOLDER COMMUNICATION AND division is responsible for implementation of projects. EMPLOYEE PARTICIPATION Foskor was instrumental in pioneering the development of the town of Phalaborwa and we acknowledge our At Foskor we understand the importance of reputation, responsibility to invest back into this community and therefore we strive to be internationally respected for surrounds. competing with determination in the profitable and responsible beneficiation of phosphates to the sustained In 1989 we developed and built an expansive community benefit of all our stakeholders. centre, known as the Phosphate Club, which was aimed at offering recreational and social facilities to employees and In 2007 we redesigned our corporate identity to express the people of Namakgale and surrounds. The extensive this vision and signal our transformation to a forward infrastructure, already in place at the centre, allows Foskor looking, performance driven enterprise with a social to effectively and creatively harness the potential held by conscience. We also understand the vital role of each of the many buildings, facilities and sports fields by working our internal and external stakeholder groups, and constantly engage them in strategic communication that builds and manages our reputation and brand equity. Building and managing this reputation is largely dependent on our communication efforts which we believe are more efficient and effective when focused by brand. At Foskor we define our brand as Resolve and Shared Reward and our slogan The Determined Delivery of Value reminds us of this definition and promotes it externally. Our primary communications objective for the 2008 fiscal is, starting with employees, to implement a communication campaign that positively and measurably transforms the opinion of all stakeholders to that of pride in a successful and sustainable business that is a responsible corporate citizen. This objective recognises our employees as our number one stakeholder priority. Our employees are our best advocates and they are ultimately responsible for the 26 | Foskor (Pty) Limited | Annual Report 2008 in collaboration with government, local leadership, private the Unizal Science Centre Project. We are committed to business and entrepreneurs in the area to revitalise the contributing R50,000 annually to the project. The inaugural centre - ultimately to the benefit of the people of Namakgale. Charity Golf Day was a huge success and funds raised The objective of the Foskor Community Centre is not only were donated to various charities. to provide much needed services to the surrounding communities, but more importantly to create employment Although we focus on CSI projects that directly benefit the opportunities, starting with the people of Namakgale. communities within which we trade, one very exciting project is being initiated from our head office in Midrand. Foskor Phalaborwa Charity Golf Day is an annual event This is the implementation of the Foskor Dinaledi Schools which, on average, raises around R150,000 for various Project. charity organisations within a 50km radius of Ba- Phalaborwa. Foskor is one of the major co-sponsors of the The Dinaledi Schools project is an initiative started by the Protec project. We have committed R180,000 per annum Department of Education which recognises schools that to this project which aims to better Maths and Science excel in Maths and Science and promote their abilities to education. The HIV/AIDS project is also a collaborative potential funding from the private sector. project between Foskor, PMC and Sasol Agri which is being managed by the Phalaborwa Foundation. Here we Foskor's objective for the project is to develop a sustainable have committed to spending R150,000 per annum. CSI project which assists the Department of Education in addressing the current skills shortage in Maths and Huis Maroela is a Foskor owned property, which is leased Science by adopting four Dinaledi schools. Working in to the Woman Federation at R1.00 per annum to provide collaboration with the Department of Education and shelter for abused women and children. Our contribution Dinaledi representatives we short-listed a number of per annum is in the region of R90,000. The Prestige schools which we visited to establish what they need and Bursary Programme is aimed at providing financial how Foskor could assist. At the time of writing this report assistance to deserving students studying in various we have presented our suggested solution and rollout plan disciplines of engineering and each student is awarded a to the department of education with great success. This is full bursary to the value of R75,000. Annual donations in an exciting project and we look forward with keen the region of R120,000 is made to tribal leaders in anticipation to its future success. recognition of their important role in our communities. As part of the Local Economic Development (LED) Projects, Foskor, in collaboration with the Ba-Phalaborwa Municipality, has identified four focal projects namely planting of Marula seedlings, brick making, buffalo breeding project and landscaping to promote wildlife tourism. These LED projects are aimed at reducing the level of poverty through creating employment opportunities in the Phalaborwa area. The Richards Bay Division situated in KwaZulu-Natal supports various charitable activities which play an active role in the upliftment of the community in and around the operation. Business Against Crime (BAC) has been successfully working towards achieving a more effective criminal justice system through reliance on investment from business. Our contribution this year was just short of R50,000. Education and skills development is important to us and the Foskor Media Resources Centre provides learning infrastructure such as a library, duplication service and conference facilities to 58 schools in the Zululand area. Our contribution to the project on an annual basis is around R120,000. Phakamisani Crèche is situated in The Esikhawini area, an area in which most of the Richards Bay employees reside and Foskor has donated amongst other things swings, puzzles, carpets, toys, a television set and other learning material to enrich the daily activities at the crèche. In promoting a clean and healthy environment, Foskor, under the auspices of the Department of Agricultural Affairs, participates in the annual coastal cleanup project and our contribution this year was R13,000. In collaboration with several local businesses Foskor is a proud sponsor of 27 Foskor (Pty) Limited | Annual Report 2008 | ANNUAL FINANCIAL STATEMENTS Directors' Declaration 29 Independent Auditors' Report 30 Directors' Report 31 Balance Sheets 34 Income Statements 35 Statements of Changes in Equity 36 Cash Flow Statements 37 Notes to the Financial Statements 38 Five Year Review: Foskor Group 70 Notice to Members/Administrators 72 Consent to Waive Period of Notice of Annual General Meeting 73 DIRECTORS' DECLARATION DIRECTORS' RESPONSIBILITY FOR THE FINANCIAL STATEMENTS To the members of Foskor (Pty) Limited The directors are responsible for monitoring the preparation and integrity of the financial statements and related information included in this report. In order for the Board to discharge its responsibilities, management has developed and continues to maintain a system of internal control. The Board has ultimate responsibility for the system of internal control and reviews its operation primarily through the Board Audit and Risk Committee and indirectly through other risk-monitoring committees. Adequate accounting records and an effective system of internal controls are maintained to provide reasonable assurance that assets are safeguarded and that transactions are executed in accordance with policies and procedures. As part of the system of internal control, the internal audit function conducts operational, financial and specific audits and co-ordinates audit coverage with the external auditors. The external auditors are responsible for reporting on the financial statements. The financial statements are prepared in accordance with International Financial Reporting Standards (IFRS), and incorporate responsible disclosure in line with the accounting philosophy of the Group. The financial statements are based on appropriate accounting policies consistently applied and supported by reasonable and prudent judgments and estimates. Foskor endorses the Code of Corporate Practices and Conduct as contained in the King II Report on Corporate Governance, and adheres to the Code in all material respects. The directors believe that the Group will be a going concern in the year ahead. For this reason they continue to adopt the going concern basis in preparing the Group financial statements. The financial statements for the year ended 31 March 2008 set out on pages 31 to 69 were approved by the Board of Directors on 21 July 2008 and are signed on its behalf by: MA Pitse MG Qhena President and Chief Chairman Executive Officer CERTIFICATE BY COMPANY SECRETARY I hereby certify that the company has lodged with the registrar all such returns as are required in terms of the Companies Act of 1973 as amended. AUS Khanyile Secretary 29 Foskor (Pty) Limited | Annual Report 2008 | INDEPENDENT AUDITORS' REPORT We have audited the Annual Financial Statements and Group Annual Financial Statements of Foskor (Pty) Limited, which comprise the directors' report, the balance sheets and the consolidated balance sheet as at 31 March 2008, the income statements and the consolidated income statement, the statements of changes in equity and the consolidated statement of changes in equity, the cash flow statements and the consolidated cash flow statements for the year then ended, and a summary of significant accounting policies and other explanatory notes, as set out on pages 31 to 69. DIRECTORS' RESPONSIBILITY FOR THE FINANCIAL STATEMENTS The company's directors are responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards (IFRS) and in the manner required by the Companies Act of South Africa. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. AUDITORS' RESPONSIBILITY Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance that the financial statements are free from material misstatement. An audit involves performing procedures to obtain evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence that we have obtained is sufficient and appropriate to provide a basis for our audit opinion. OPINION In our opinion, the financial statements present fairly, in all material respects, the financial position of the company and of the Group as of 31 March 2008, and their financial performance and their cash flows for the year then ended in accordance with International Financial Reporting Standards and in the manner required by the Companies Act of South Africa. PricewaterhouseCoopers Inc Ngubane & Co. Inc Director: HP Odendaal Director: DS Msomi Registered Auditor Registered Auditor Sunninghill Durban 21 July 2008 21 July 2008 30 | Foskor (Pty) Limited | Annual Report 2008 DIRECTORS' REPORT For the 12 month period ended 31 March 2008 With the Group's return to profitability, good prospects and a healthy balance sheet, it is well placed to fund the The directors have pleasure in submitting their report and expansion projects addressed elsewhere in this report. the Annual Financial Statements of the company and the Group for the 12 month period ended 31 March 2008. REVERSAL OF IMPAIRMENT OF ASSETS – INCOME The term 'Group', in the context of the financial statements, refers to the company and its subsidiaries. The balance sheet values of Foskor's fixed assets have been assessed in accordance with International Accounting Standards (IAS) 36, Impairment of Assets, which requires NATURE OF BUSINESS that each group of assets that forms a cash generating unit, as well as the company as a whole, be assessed. This The core business of the Group is the manufacture and assessment resulted in the reversal of the impairment loss supply of international standard merchant grade phosphoric of R300m provided in 2005, amounting to a net income acid and related granular fertiliser products at the Richards value of R255m, after adjusting for amortisation. Bay plant. In all, 95% of the phosphoric acid is exported and the granular sales are divided between exports and local markets. BUSINESS ASSISTANCE AGREEMENT Approximately 72% of the phosphate rock concentrate Foskor entered into a Business Assistance Agreement produced at the Phalaborwa mine is transported to the (BAA) with Coromandel Fertilisers Limited (CFL) in February 2005 to provide technical, operational, maintenance, Richards Bay plant for the production of phosphoric acid, purchasing and business assistance to Foskor. The while 24% is sold in local markets and 4% is exported. underlying principle of the BAA was to remunerate CFL for its efforts to improve Foskor's Earnings Before Interest and Tax (EBIT) over and above the ongoing initiatives of ENVIRONMENTAL ACCOUNTING Foskor. Management is continuously assessing and monitoring the Remuneration in terms of the BAA would be based on the various environmental issues facing the Group. The improvement of the EBIT as calculated during the environmental provision strategy is to provide for scheduled measurement period of 1 April 2007 through to 31 March mine closure by means of a special purpose Section 37A 2008 against that of the base period of 1 January through Environmental Trust and for unscheduled, premature mine to 31 March 2005, annualised. The EBIT would be adjusted closure as per Department of Minerals and Energy (DME) for any improvement outside of CFL's contribution. These regulations by means of bank guarantees. adjustments include: exchange rate movements, selling price movements, raw material price movements, abnormal items such as insurance claims, and Foskor's own continuous improvement benefits equivalent to 7.5% of FINANCIAL RESULTS the cost of production. The Group achieved a net turnover of R4,5bn, representing In terms of the agreement, the remuneration payable to a growth of 52% over the R2.9bn of the previous year. Net CFL would be limited to a maximum of R300m. profit after tax increased by 120.4% or R534,5m, from R443,8m to R978,3m. The remuneration payable is based on year end audited EBIT. Unaudited indications are that the amount due will The Group had a positive bank balance of R1,281m equal the maximum of R300m less an advance payment of (2007: R644m) at year end and no interest-bearing debt. R11m (US$1.5m). 31 Foskor (Pty) Limited | Annual Report 2008 | DIRECTORS' REPORT (CONTINUED) INVESTMENT IN GODAVARI/CFL expertise amongst other value added contributions into the business to ensure a sustainable future for all CFL, the Business Assistance partner, is also a customer stakeholders. The first step of this process is the of Foskor and the majority shareholder of Godavari corporatisation of the business unit, followed by the Fertilisers and Chemicals Ltd (GFCL) of India, in which dilution of shareholding during the next financial year. Foskor had a 5% shareholding. During the course of the year under review, GFCL was merged with CFL, and the SUBSIDIARIES Foskor holding was changed to 1.72% of CFL share capital. The value of the investment as at 31 March 2008 Details of the subsidiaries of the company are set out in was R57m as compared to a value of R32m as at Note 5 to the Annual Financial Statements. 31 March 2007. DIVIDENDS RECEIVED GFCL was amalgamated into CFL via a Scheme of Amalgamation (Scheme), which was approved by the High Court of Andhra Pradesh, India, effective as of 1 February A dividend of R526m was received by the company from 2008. Pursuant to the Scheme, the shareholders of GFCL its subsidiary IMSA (Pty) Limited in anticipation of the would receive three equity shares of Rs 2/- each of CFL for rationalisation of the subsidiary company. The dividend three equity shares of Rs 10/- each held in GFCL. As per represents all post-acquisition reserves of IMSA (Pty) the provisions of the Scheme, Foskor has been allotted Limited. 2,400,000 equity shares of Rs 2/- each fully paid up in CFL, which represents 1.72% of the total paid up equity TAX APPEAL capital of CFL. The company has appealed to the Income Tax Court for hearing tax appeals for resolution of the revised 1999 FOSKOR ZIRCONIA (Pty) Limited income tax assessment. The Foskor (Pty) Limited Board has approved the The assessment raised includes the F100 mining ore corporatisation of the Zirconia Division as from 1 April stockpiles as trading stock, and has given rise to a 2008. This means that the Division will no longer be an potential additional tax charge of R60.6m and interest of integrated operating division of Foskor (Pty) Limited, but a separate stand-alone company and legal entity called R51.2m. The hearing will be held during August 2008. Foskor Zirconia (Pty) Limited. The new company will initially be wholly owned by Foskor (Pty) Limited. The new INSURANCE AND RISK MANAGEMENT company will have its own Board of Directors and will be accountable for its own operational profitability. The The Group's philosophy is to manage its risks in order to intention is to dilute the shareholding after year end by protect its assets and earnings against unacceptable inviting investors and strategic partners that can contribute financial loss and to avoid legal liabilities. In this regard, in securing the sustainability and growth of this business. possible catastrophic type risks are insured at a relatively advantageous cost with satisfactory cover while non- Foskor's Zirconia as an operating division of the Foskor catastrophic type risks are self-insured. The management Group, contributed 2,6% of the Group's revenue and 1,8% of risk is further supported by the Group's health and of the Group operating profit. The division produces only safety programmes, and maintenance of the ISO 9001 two saleable products. The competitive advantages that it (quality) and ISO 14001 (environmental) standards. Fixed has in the market place are being eroded continuously by assets are insured at current replacement value, which has the entrance of new competitors into these markets. been estimated by an external valuator. Foskor recognises its responsibility towards ensuring a continued sustainable future for this business unit, its The policy loss limit is restricted to R2bn per site, with customers and the employees employed by this unit and sub-limits for each cover and a R30m aggregate deductible has therefore embarked on a process to attract suitable on the policy for fire, explosion, machinery breakdown and strategic partners to invest capital, technical and marketing machinery breakdown loss of profits. Risk surveys and 32 | Foskor (Pty) Limited | Annual Report 2008 assessments are an integral part of the Group's risk Act (Act 1 of 1999, as amended by Act 2 of 1999) until management policy and are performed as part of the 31 October 2008. It is expected that the exemption will be integrated Group risk management system. Risks identified renewed. during these surveys are eliminated, reduced or transferred to the insurers. EVENTS AFTER BALANCE SHEET DATE REPAYMENT OF SHAREHOLDERS' LOANS The following events took place after the balance sheet AND BUY-BACK OF "B" SHARES date that could influence the interpretation of the annual report: The IDC shareholder loan of R1,45bn will be repaid during the year to March 2009. This shareholder loan from the • Partial repayment of the shareholders loan amounting IDC is linked to the "B" shares issued to CFL and to R500m on 30 April 2008 and R500m on 30 June repayment of these loans will result in the pro-rata share 2008 buy-back of the "B" shares issued to CFL amounting to • The BAA payment of R289m was approved and paid R37m. on 30 June 2008 • At the conclusion of the BAA agreement, CFL aquired an additional 12.5% shareholding in Foskor, which SHARE CAPITAL together with their previously held 2.5%, increased their total shareholding to 15% The authorised capital remained unchanged during this • The corporatisation of Foskor Zirconia (Pty) Ltd was period at: implemented. • 8,100,000 ordinary shares of R1 each; and DIRECTORATE • 23,500,000 new class 'B' ordinary shares of R1 each. During the period under review, the following changes in The issued ordinary share capital remained unchanged at the directorate occurred: 7,983,590 ordinary shares of R1 each. The shareholding in Foskor is as follows: Appointments: Ms SS Ngoma – Appointed, 16 July 2007 • 97.5% of the shares are held by the Industrial Mr F Madavo – Appointed, 1 January 2008 Development Corporation (IDC) of South Africa Mr XGS Sithole – Appointed, 26 March 2008 Limited; Ms JM Modise – Appointed, 26 March 2008 • 2.5% of the shares are held by Coromandel Fertilisers Limited (CFL), an Indian based company. Resignations: Ms Z Monnakgotla – Resigned, 16 July 2007 The directors are authorised, until the next Annual General Ms M Nhlanhla – Resigned, 10 September 2007 Meeting, to issue unissued ordinary shares. Ms RK Morathi – Resigned, 10 February 2008 Ms LBR Mthembu - Resigned, 26 March 2008 As mentioned elsewhere in this report, the repayment of the shareholder loan subsequent to the end of the financial Other than the employment contract of the President/Chief year will result in the pro-rata share buy-back of the "B" Executive Officer, there were no contracts during or at the shares issued to CFL. end of the financial period in which any directors of the company were materially interested. No service contracts PUBLIC FINANCE MANAGEMENT ACT exist between the company and any of its non-executive directors having a notice period exceeding one month, or Foskor has been granted full exemption by the Minister of providing for compensation and benefits in excess of one Finance to comply with the Public Finance Management month's salary. 33 Foskor (Pty) Limited | Annual Report 2008 | BALANCE SHEETS as at 31 March 2008 COMPANY GROUP Notes 2008 2007 2008 2007 R'000 R'000 R'000 R'000 Restated Restated ASSETS Property, plant and equipment 3 2,247,621 1,740,194 2,248,417 1,744,061 Ore stockpiling 30,401 42,199 30,401 42,199 Intangible assets 4 672 41 672 41 Investments in subsidiaries 5 187,007 83,078 - - Loans to subsidiaries 5 3,475 5,331 - - Investment in joint venture 6 25 25 25 25 Available for sale investments 7 117,025 88,730 117,025 88,730 Non-current assets 2,586,226 1,959,598 2,396,540 1,875,056 Inventory 8 919,746 615,123 919,746 615,123 Ore stockpile short-term 12,428 12,266 12,428 12,266 Prepaid taxation 2,399 3,100 2,399 3,440 Trade and other receivables 9 940,593 668,281 944,160 669,519 Derivative financial instruments 10 13,019 1,117 13,019 1,117 Deferred tax 11 323,125 482,053 323,125 482,053 Cash and cash equivalents 1,277,815 636,487 1,280,863 643,551 3,489,125 2,418,427 3,495,740 2,427,069 Non-current assets held for sale 12 91,176 - 91,176 - Total current assets 3,580,301 2,418,427 3,586,916 2,427,069 Total assets 6,166,527 4,378,025 5,983,456 4,302,125 EQUITY AND LIABILITIES Share capital 13 31,484 31,484 31,484 31,484 Share premium 13 13,800 13,800 13,800 13,800 Retained earnings 2,215,480 716,656 2,384,854 1,406,495 Share-based payment reserve 14 188,024 125,349 188,024 125,349 Fair value reserve 26,289 138,789 26,289 138,789 Shareholders' equity 2,475,077 1,026,078 2,644,451 1,715,917 Shareholder loan 16 - 1,312,217 - 1,312,217 Total shareholders' interest 2,475,077 2,338,295 2,644,451 3,028,134 Non-interest-bearing borrowings 17 11,378 11,584 11,378 11,584 Finance lease liability 18 27,962 31,035 27,962 31,035 Environmental rehabilitation liability 19 195,217 152,442 195,217 152,442 Loans from subsidiaries 5 354,753 767,001 - - Post-employment obligations 20 67,000 68,234 67,000 68,234 Deferred tax 11 586,804 458,073 586,804 458,073 Non-current liabilities 1,243,114 1,488,369 888,361 721,368 Trade and other payables 21 843,434 495,486 845,328 496,536 Short-term portion of the shareholder loan 16 1,450,000 - 1,450,000 - Current tax liability - - 414 212 Finance lease liability 18 3,073 3,131 3,073 3,131 Derivative financial instruments 10 63,203 - 63,203 - Provisions 22 77,059 52,744 77,059 52,744 2,436,769 551,361 2,439,077 552,623 Liabilities directly associated with non-current assets held for sale 12 11,567 - 11,567 - Current liabilities 2,448,336 551,361 2,450,644 552,623 Total equity and liabilities 6,166,527 4,378,025 5,983,456 4,302,125 34 | Foskor (Pty) Limited | Annual Report 2008 INCOME STATEMENTS for the year ended 31 March 2008 COMPANY GROUP Notes 2008 2007 2008 2007 R'000 R'000 R'000 R'000 Restated Restated Revenue 4,487,467 2,947,617 4,487,922 2,949,985 Cost of sales (2,670,240) (1,964,986) (2,668,406) (1,964,986) Gross profit 1,817,227 982,631 1,819,516 984,999 Other operating income 340,400 106,109 339,144 107,228 Other operating costs (250,964) (231,854) (252,995) (229,226) Distribution costs (724,792) (550,871) (717,366) (547,099) Post-employment obligation (loss)/income (1,834) 35,235 (1,834) 35,235 Operating profit 23 1,180,037 341,250 1,186,465 351,137 Finance income 24 262,429 56,947 262,482 57,297 Finance costs 24 (142,958) (7,260) (142,958) (7,299) Net foreign exchange (loss)/gains 25 (43,523) 19,218 (43,559) 19,277 Investment income 526,222 - - - Impairment of loan investment in join venture (1,724) - - - Share of results of joint venture - - (1,724) - Profit before taxation 1,780,483 410,155 1,260,706 420,412 Taxation 26 (281,659) 23,980 (282,347) 23,357 Net profit for the year 1,498,824 434,135 978,359 443,769 35 Foskor (Pty) Limited | Annual Report 2008 | STATEMENTS OF CHANGES IN EQUITY for the year ended 31 March 2008 Share-based Fair Share Share Retained payment value Notes capital premium earnings reserve reserve Total R'000 R'000 R'000 R'000 R'000 R'000 GROUP Previously stated balance at 01 April 2006 31,484 13,800 994,063 - (13,766) 1,025,581 Restatement: Share-based payment expense 14 - - (31,337) 31,337 - - Restated balance at 01 April 2006 31,484 13,800 962,726 31,337 (13,766) 1,025,581 Restated net profit for the year - - 443,769 - - 443,769 Share-based payment expense 14 - - - 94,012 - 94,012 Fair value gain: - Available for sale investments 7 - - - - 13,556 13,556 - Shareholder loan 16 - - - - 137,783 137,783 - Non-interest bearing borrowings 17 - - - - 1,216 1,216 Restated balance at 31 March 2007 31,484 13,800 1,406,495 125,349 138,789 1,715,917 Net profit for the year - - 978,359 - - 978,359 Fair value gain transferred to profit and loss 24 - - - - (137,783) (137,783) Share-based payment expense 15 - - - 62,675 - 62,675 Fair value gain: - Available for sale investments 7 - - - - 25,077 25,077 - Non-interest bearing borrowings 17 - - - - 206 206 Balance at 31 March 2008 31,484 13,800 2,384,854 188,024 26,289 2,644,451 COMPANY Previously stated balance at 01 April 2006 31,484 13,800 313,858 - (13,766) 345,376 Restatement: Share-based payment expense 14 - - (31,337) 31,337 - - Restated balance at 01 April 2006 31,484 13,800 282,521 31,337 (13,766) 345,376 Restated net profit for the year - - 434,135 - - 434,135 Share-based payment expense 14 - - - 94,012 - 94,012 Fair value gain: - Available for sale investments 7 - - - - 13,556 13,556 - Shareholder loan 16 - - - - 137,783 137,783 - Non-interest bearing borrowings 17 - - - - 1,216 1,216 Restated balance at 31 March 2007 31,484 13,800 716,656 125,349 138,789 1,026,078 Net profit for the year - - 1,498,824 - - 1,498,824 Fair value gain transferred to profit and loss 24 - - - - (137,783) (137,783) Share-based payment expense 15 - - - 62,675 - 62,675 Fair value gain: - Available for sale investments 7 - - - - 25,077 25,077 - Non-interest bearing borrowings 17 - - - - 206 206 Balance at 31 March 2008 31,484 13,800 2,215,480 188,024 26,289 2,475,077 36 | Foskor (Pty) Limited | Annual Report 2008 CASH FLOW STATEMENTS for the year ended 31 March 2008 COMPANY GROUP Notes 2008 2007 2008 2007 R'000 R'000 R'000 R'000 CASH FLOWS FROM OPERATING ACTIVITIES Cash generated from operations 27 863,301 387,470 864,921 389,149 Finance income 24 121,428 51,334 121,481 51,684 Finance costs 24 (5,175) (7,260) (5,175) (7,299) Net foreign exchange gains 6,661 19,218 6,625 19,277 Dividend received 526,222 - - - Taxation 6,701 - 6,555 (1,369) Net cash from operating activities 1,519,138 450,762 994,407 451,442 CASH FLOW FROM INVESTING ACTIVITIES Additions to property, plant and equipment 3 (359,677) (150,182) (359,837) (150,182) Acquisition of software (697) - (697) - Proceeds on disposal of property, plant and equipment 16 13,389 6,570 23,016 Repayment of inter-company loan (514,321) 7,032 - - Repayment of post-employment medical obligation - (95,260) - (95,260) Contribution to Environmental Rehabilitation Trust - (10,000) - (10,000) Net cash used in investing activities (874,679) (235,021) (353,964) (232,426) CASH FLOW FROM FINANCING ACTIVITIES Decrease in finance lease liability (3,073) (3,132) (3,073) (3,132) (Decrease)/increase in current portion of finance lease liability (58) 308 (58) 308 Net used in financing activities (3,131) (2,824) (3,131) (2,824) NET INCREASE IN CASH AND 641,328 212,917 637,312 216,192 CASH EQUIVALENTS CASH AND CASH EQUIVALENTS AT 636,487 423,570 643,551 427,359 BEGINNING OF YEAR CASH AND CASH EQUIVALENTS AT 1,277,815 636,487 1,280,863 643,551 END OF YEAR 37 Foskor (Pty) Limited | Annual Report 2008 | NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 March 2008 PRINCIPAL ACCOUNTING POLICIES IFRS 2 to share-based payment arrangements involving an entity's own The principal accounting policies applied in the preparation of equity instruments or equity instruments these consolidated financial statements are set out below. of another entity in the same group (e.g. These policies have been consistently applied to all the years equity instruments of its parent). presented, unless otherwise stated. 1.1.2 Standards, amendments and interpretations effective in 2008 but not relevant to the 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICY Group. 1.1 BASIS OF PREPARATION • Revised guidance on implementing The consolidated financial statements of the Foskor IFRS 4, Insurance contracts; Group have been prepared in accordance with the • IFRIC 9, Re-assessment of embedded International Financial Reporting Standards (IFRS or derivatives. IFRSs) historical cost convention, as modified by 1.1.3 Standards, amendments and interpretations the revaluation of available-for-sale investment issued but not yet effective in 2008, and also securities, and financial assets and liabilities at fair not early adopted by the Group. value through profit or loss. The following standards, amendments and The preparation of financial statements in conformity interpretations to existing standards have with IFRS requires the use of certain accounting been published and are mandatory for the estimates and assumptions that affect the reported Group's accounting periods beginning on or amounts of assets and liabilities and disclosure of after 1 April 2008 or later periods, but the contingent assets and liabilities at the date of the Group has not early adopted them: financial statements, and the reported amounts of revenue and expenses during the reporting period • IAS 1 (Revised), Presentation of based on management's best knowledge of current financial statements (effective from 1 events and actions. Actual results may ultimately January 2009). The changes made to differ from these estimates. IAS 1 are to require information in financial statements to be aggregated on the basis 1.1.1 New accounting standards and International of shared characteristics and to introduce Financial Reporting Interpretations Committee a statement of comprehensive income. ("IFRIC") interpretations adopted in the This will enable readers to analyse changes current year. in a company's equity resulting from • IFRS 7, Financial Instruments: transactions with owners in their capacity Disclosures, and the complementary as owners separately from 'non-owner' amendment to IAS 1, Presentation of changes. The revisions include changes financial statements – Capital in the titles of some of the financial disclosures, introduces new disclosures statements to reflect their function more relating to financial instruments. clearly. The new titles are not mandatory • IFRIC 8, Scope of IFRS 2, requires for use in financial statements. consideration of transactions involving the • IAS 1 (Amendment), Presentation of issuance of equity instruments, where the financial statements - Puttable Financial identifiable consideration received is less Instruments and Obligations Arising on than the fair value of the equity instruments Liquidation (effective from 1 January issued in order to establish whether or not 2009). The amendments require entities they fall within the scope of IFRS 2. This to classify the following types of financial standard does not have any impact on the instruments as equity, provided they Group's financial statements. have particular features and meet specific • IFRIC 10, Interim financial reporting conditions: a) puttable financial and impairment, prohibits the impairment instruments (for example, some shares losses recognised in an interim period on issued by co-operative entities); goodwill and investments in equity b) instruments, or components of instruments and in financial assets carried instruments, that impose on the entity an at cost to be reversed at a subsequent obligation to deliver to another party a pro balance sheet date. This standard does rata share of the net assets of the entity not have any impact on the Group's only on liquidation (for example, some financial statements. partnership interests and some shares • IFRIC 11, Group and Treasury share issued by limited life entities). Additional transactions, addresses how to apply disclosures are required about the 38 | Foskor (Pty) Limited | Annual Report 2008 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) for the year ended 31 March 2008 instruments affected by the amendments. maker. As goodwill is allocated to groups • IFRS 2 (Amendment): Share-based of cash-generating units based on Payments – Vesting Conditions and segment level, the change will also require Cancellations (effective from 1 January management to reallocate goodwill to the 2009). The amendment deals with two newly identified operating segments. matters. It clarifies that vesting conditions Management does not anticipate that this are service conditions and performance will result in any material impairment to conditions only. Other features of a share- the goodwill balance. based payment are not vesting conditions. • IFRIC 14, IAS 19 – The limit on a It also specifies that all cancellations, defined benefit asset, minimum funding whether by the entity or by other parties, requirements and their interaction should receive the same accounting (effective from 1 January 2008). IFRIC treatment. 14 provides guidance on assessing the • IFRS 3 (Revised): Business limit in IAS 19 on the amount of the Combinations (effective from 1 July surplus that can be recognised as an 2009). The new standard continues to asset. It also explains how the pension apply the acquisition method to business asset or liability may be affected by a combinations, with some significant statutory or contractual minimum funding changes. For example, all payments to requirement. The Group will apply IFRIC purchase a business are to be recorded at 14 from 1 April 2008, but it is not expected fair value at the acquisition date, with to have any impact on the Group's some contingent payments subsequently accounts. re-measured at fair value through income. • Improvements to IFRSs (effective from Goodwill may be calculated based on the 1 January 2008), dealing with annual parent's share of net assets or it may improvements to International Financial include goodwill related to the minority Reporting Standards interest. All transaction costs will be expensed. 1.1.4 Standards, amendments and interpretations • IAS 23 (Amendment), Borrowing costs issued but not yet effective during the year (effective from 1 January 2009). It under review, and also not early adopted by requires an entity to capitalise borrowing the Group. costs directly attributable to the The following interpretations to existing acquisition, construction or production of standards have been published and are a qualifying asset (one that takes a mandatory for the Group's accounting substantial period of time to get ready for periods beginning on or after 1 January 2008 use or sale) as part of the cost of that or later periods but are not relevant for the asset. The option of immediately expensing Group's operations: those borrowing costs will be removed. The Group will apply IAS 23 (Amended) • IFRIC 12, 'Service concession from 1 April 2009. arrangements' (effective from 1 January • IFRS 8, Operating segments (effective 2008). IFRIC 12 applies to contractual from 1 January 2009). IFRS 8 replaces arrangements whereby a private sector IAS 14 and aligns segment reporting with operator participates in the development, the requirements of the US standard financing, operation and maintenance of SFAS 131, 'Disclosures about segments infrastructure for public sector services. of an enterprise and related information'. IFRIC 12 is not relevant to the Group's The new standard requires a 'management operations because none of the Group's approach', under which segment companies provide for public sector information is presented on the same services. basis as that used for internal reporting • IFRIC 13, 'Customer loyalty purposes. The Group will apply IFRS 8 programmes' (effective from 1 July from 1 January 2009. The expected 2008). IFRIC 13 clarifies that where impact is still being assessed in detail by goods or services are sold together with a management, but it appears likely that the customer loyalty incentive (for example, number of reportable segments, as well loyalty points or free products), the as the manner in which the segments are arrangement is a multiple-element reported, will change in a manner that is arrangement and the consideration consistent with the internal reporting receivable from the customer is allocated provided to the chief operating decision- between the components of the 39 Foskor (Pty) Limited | Annual Report 2008 | NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) for the year ended 31 March 2008 arrangement using fair values. IFRIC 13 is entities is accounted for by the equity method not relevant to the Group's operations of accounting. Under this method, the because none of the Group's companies investment in the jointly controlled entity is operate any loyalty programmes. initially recognised at cost. For subsequent 1.2 CONSOLIDATION measurement, the company's share of the post-acquisition profits or losses of joint 1.2.1 Investment in subsidiaries ventures is recognised in the income Subsidiaries, which are those entities statement, and its share of post-acquisition (including Special Purpose Entities) in which movements in reserves is recognised in the Group has an interest of more than one equity. The cumulative post-acquisition half of the voting rights or otherwise has movements are adjusted against the carrying power to govern the financial and operating amount of the investment. In the company's policies, are consolidated. The Group Annual stand-alone accounts, joint ventures are Financial Statements incorporate the assets, recorded at cost. liabilities and results of the operations of the company and all of its subsidiaries. At each balance sheet date the Group Subsidiaries are fully consolidated from the assesses whether there is any indication of date on which control is transferred to the impairment. Group. They are de-consolidated from the Unrealised gains on transactions between date that control ceases. the Group and its associates are eliminated The purchase method of accounting is used to the extent of the Group's interest in the to account for the acquisition of subsidiaries associates. Unrealised losses are also by the Group. The cost of an acquisition is eliminated unless the transaction provides measured as the fair value of the assets evidence of an impairment of the asset given, equity instruments issued and liabilities transferred. Accounting policies of associates incurred or assumed at the date of exchange, have been changed where necessary to plus costs directly attributable to the ensure consistency with the policies adopted acquisition. The assets, liabilities and by the Group. contingent liabilities acquired are assessed 1.3 SEGMENT REPORTING and included in the balance sheet at their A business segment is a group of assets and estimated fair value to the Group. If the cost operations engaged in providing products or of acquisition is higher than the net assets services that are subject to risks and returns that acquired, any difference between net asset are different from those of other business segments. value and the cost of acquisition of a A geographical segment is engaged in providing subsidiary is treated in accordance with the products or services within a particular economic Group's accounting policy for goodwill. If the environment that are subject to risks and return that cost of acquisition is less than the fair value are different from those of segments operating in of the net assets of the subsidiary acquired, other economic environments. the difference is recognised directly in the income statement. 1.4 PROPERTY, PLANT AND EQUIPMENT Inter-company transactions, balances and Property, plant and equipment includes land, mine unrealised gains on transactions between properties, capital work-in-progress, office and Group companies are eliminated; unrealised plant buildings, heavy plant and machinery, losses are also eliminated but considered an equipment, vehicles, as well as certain essential impairment indicator of the asset transferred. plant spares which are held to minimise delays Where necessary, accounting policies of arising from plant breakdowns. All property, plant subsidiaries have been changed to ensure and equipment are stated at historical cost less consistency with the policies adopted by the accumulated depreciation and accumulated Group. impairment. Historical cost includes expenditure that is directly attributable to the acquisition of the In the company's stand-alone accounts, items. Land and capital work in progress is stated subsidiaries are recorded at cost less at cost less accumulated impairment. accumulated impairment. Direct costs incurred on major projects during the 1.2.2 Joint ventures period of development or construction are The Group's interest in jointly controlled capitalised. Subsequent costs are included in the 40 | Foskor (Pty) Limited | Annual Report 2008 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) for the year ended 31 March 2008 asset's carrying amount or recognised as a separate acquired in a business combination, is initially asset, as appropriate, only when it is probable that measured at cost, being the excess of the cost of future economic benefits associated with the item the business combination over the interest in the will flow to the Group and the cost of the item can net fair value of the identifiable assets, liabilities and be measured reliably. The carrying amount of the contingent liabilities. replaced part is de-recognised. All other repairs and Separately recognised goodwill is tested annually maintenance are charged to the income statement for impairment and is carried at cost less during the financial period in which they are accumulated impairment losses. Impairment losses incurred. on goodwill are not reversed. Goodwill is allocated 1.4.1 Depreciation to cash-generating units for the purpose of Land and capital work in progress impairment testing. The allocation is made to those cash-generating units or groups of cash-generating Land and capital work in progress is stated units that are expected to benefit from the business at cost and is not depreciated. combination in which the goodwill arose. Property, plant and equipment (PPE) Gains and losses on the disposal of an entity Property, plant and equipment are depreciated include the carrying amount of goodwill relating to on the straight-line method to estimated the entity sold. residual values as follows: Computer software Building and structures 30 – 50 years Acquired computer software is capitalised on the Vehicles 4–5 years basis of costs incurred to acquire and bring to use Heavy plant and machinery 10 – 20 years the specific software. These costs are amortised Equipment 8 – 10 years over their estimated useful lives of three years. Computer equipment 3–5 years Mining asset 10 – 20 years 1.6 IMPAIRMENT OF ASSETS Factory equipment 4–5 years The carrying amounts of the Group's assets and Capital insurance spares 10 – 20 years cash generating units are reviewed at each balance 1.4.2 Useful lives and residual values sheet date, to determine whether there is any indication of impairment, other than that of a The assets' residual values and useful lives temporary nature. If any such indication exists, the are reviewed, and adjusted if appropriate, at asset's recoverable amount is determined. The each balance sheet date. Gains and losses recoverable amount is the higher of an asset's fair on disposals are determined by comparing value less costs to sell and value in use. For the proceeds with carrying amount. These are purposes of assessing impairment, assets are included in the income statement. grouped at the lowest levels for which there are 1.4.3 Useful lives and residual values separately identifiable cash flows (cash-generating An asset's carrying amount is written down units). Non-financial assets other than goodwill that immediately to its recoverable amount if the suffered impairment are reviewed for possible asset's carrying amount is greater than its reversal of the impairment at each reporting date. estimated recoverable amount (Note 1.6). An impairment loss is recognised whenever the 1.4.4 Capitalisation on borrowing costs carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. Assets that Interest costs on borrowings to finance the construction of property, plant and equipment are subject to amortisation are reviewed for that are considered to be "qualifying assets", impairment whenever events or changes in are capitalised during the period of time that circumstances indicate that the carrying amount is required to complete and prepare the may not be recoverable. asset for its intended use. Other borrowing Cash-generating units costs are expensed. A cash-generating unit is the smallest identifiable group of assets that generates cash inflows that are 1.5 INTANGIBLE ASSETS largely independent of the cash inflows from other Goodwill assets or groups of assets. For an asset whose Goodwill represents the excess of the cost of an cash flow is largely dependent on that of other acquisition over the fair value of the Group's share assets, the recoverable amount is determined for of the net identifiable assets of the acquired the cash-generating unit to which the asset subsidiary at the date of acquisition. Goodwill, belongs. 41 Foskor (Pty) Limited | Annual Report 2008 | NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) for the year ended 31 March 2008 Impairment losses recognised in respect of cash- Ore stockpiles are valued at the lower of cost and generating units are allocated first to reduce the net net realisable value. The cost includes the book value of any goodwill allocated to cash- expenditure incurred in the mining and stockpiling generating units and then to reduce the net book of the ore for use in future production. value of the other assets in the unit on a pro rata 1.9 INVENTORIES basis. Impairment losses are recognised in the income statement. Spares and consumables Spares and consumable are valued at the lower of Goodwill cost and net realisable value. Cost is determined Goodwill is allocated to cash-generating units for using the weighted average method. the purpose of impairment testing. The allocation is The cost of inventories comprises all costs of made to those cash-generating units or groups of purchase and other costs incurred in bringing the cash-generating units that are expected to benefit inventories to the present location and condition. It from the business combination in which the goodwill excludes borrowing costs. arose. The recoverable amount for goodwill is assessed at each balance sheet date. An impairment Obsolete, redundant and slow moving items of loss is reversed when significant changes with a spares and consumable stores are identified on a favourable effect on the cash generating unit have regular basis and written down to their net realisable taken place in the technological, market or economic value. environment in which the cash generating unit Net realisable value is the estimated selling price in operates. the ordinary course of business, less the costs of Impairment losses relating to goodwill are not completion and selling expenses. reversed. Raw materials, work-in-progress and finished Impairment reversals goods An impairment loss is reversed only to the extent Raw materials and finished goods consisting of that the asset's carrying amount does not exceed phosphate rock, phosphoric acid and other minerals the carrying amount that would have been are valued at the lower of cost of production and determined, net of depreciation or amortisation, if net realisable value. no impairment loss had been recognised. Cost in respect of raw materials is determined on a weighted average basis. Cost of production in 1.7 LEASES respect of work-in-progress and finished goods, is The Group is the lessee calculated on a standard cost basis, which Leases of property, plant and equipment where the approximates the actual cost and includes Group has substantially all the risks and rewards of production overheads. Production overheads are ownership, are classified as finance leases. allocated on the basis of normal capacity. Assets held under finance lease agreements are Net realisable value is the estimated selling price in capitalised. Such assets are depreciated in terms of the ordinary course of business, less the costs of the lease term relating to the relevant lease completion and selling expenses. agreement, provided that such term of lease is 1.10 TRADE AND OTHER RECEIVABLES shorter than the assets' useful lives. Finance leases are capitalised at the inception of the lease at the Trade receivables are recognised initially at fair value lower of the fair value of the leased property or the and subsequently measured at amortised cost present value of the minimum future lease payments. using the effective interest method, less provision Lease finance charges are allocated to accounting for impairment. A provision for impairment of trade periods over the duration of the leases by the receivables is established when there is objective effective rate method, which reflects the extent and evidence that the Group will not be able to collect cost of the lease finance utilised in each accounting all amounts due according to the original terms of receivables. Significant financial difficulties of the period. debtor, probability that the debtor will enter All other leases are treated as operating leases and bankruptcy or financial reorganisation, and default the relevant rental incomes are recognised in income or delinquency in payments are considered on a straight-line basis over the lease term. indicators that the trade receivable is impaired. The amount of the provision is the difference between 1.8 ORE STOCKPILING the asset's carrying amount and the present value Ore stockpiles consist of ore delivered from the of estimated future cash flows, discounted at the neighbouring Palabora Mining Company (PMC) and effective interest rate. The amount of the provision stockpiled on Foskor's property. is recognised in the income statement. 42 | Foskor (Pty) Limited | Annual Report 2008 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) for the year ended 31 March 2008 The carrying amount of the asset is reduced through liability. Actuarial gains and losses arising from the use of an allowance account, and the amount of experience adjustments and the effects of changes the loss is recognised in the income statement. in actuarial assumptions to the defined benefit plans When a trade receivable is uncollectible, it is written are recognised fully in the income statement in the off against the allowance account for trade current year. receivables. Subsequent recoveries of amounts Past-service costs are recognised immediately in previously written off are credited in the income income, unless the changes to pension plan are statement. conditional on the employees remaining in service 1.11 PROVISIONS for a specified period of time (the vesting period). In A provision is recognised when it is probable that this case, the past-service costs are amortised on a the Group has a present legal or constructive straight-line basis over the vesting period. obligation as a result of past events resulting in an For defined contribution plans, the company pays outflow of resources embodying economic benefits; contributions to publicly or privately administered and a reliable estimate of the obligation can be pension insurance plans on a mandatory, contractual made. Provisions are not recognised for future or voluntary basis. Once the contributions have operating losses. Where the effects of discounting been paid, the company has no further payment are material, provisions are measured at their obligations. The regular contributions constitute net present values. periodic costs for the year in which they are due Provisions are measured at the present value of the and as such are included in staff costs. expenditures expected to be required to settle the 1.13 OTHER POST-EMPLOYMENT LIABILITY obligation using a pre-tax rate that reflects current The Group provides post-employment healthcare market assessments of the time value of money and benefits to its retirees who were employed by the the risks specific to the obligation. The increase in company on or before 1 July 1995. The same the provision due to the passage of time is benefits are provided to a specific group of recognised as interest expense. employees employed before 1 July 1996. The 1.12 PENSION OBLIGATION entitlement to post-employment healthcare benefits The Group operates a defined benefit and a defined is based on the employee remaining in service up to contribution plan, the assets of which are held in retirement age. The expected costs of these benefits separate trustee-administered funds. The schemes are accrued over the period of employment, using are generally funded through payments to insurance the projected unit of credit method. Valuations of companies or trustee-administered funds as these obligations are carried out annually by determined by periodic actuarial valuations. A independent, qualified actuaries. defined benefit plan is a pension plan that defines Actuarial gains and losses arising from previous an amount of pension benefit to be provided, adjustments and the effects of changes in actuarial usually as a function of one or more factors such as assumptions to the defined benefit plans are age, years of service and compensation. A defined recognised fully in the income statement as earned contribution plan is a pension plan under which the in the current year. Actuarial gains and losses Group pays fixed contributions into a separate arising from previous adjustments, changes in entity (a fund) and under which the Group will have actuarial assumptions and amendments to pension no legal or constructive obligations to pay further plans are charged or credited to income over the contributions if the fund does not hold sufficient average remaining service lives of the related assets to pay all employees benefits relating to employees. employee service in the current and previous periods. 1.14 CURRENT AND DEFERRED TAXATION The current income tax charge is calculated on the The liability in respect of defined benefit pension basis of the tax laws enacted or substantially plans is the present value of the defined benefit enacted at the balance sheet date and in instances obligation at the balance sheet date minus the fair where companies in the Group generate taxable value of plan assets, together with adjustments for income. unrecognised actuarial gains/losses and past- service cost. The defined benefit obligation is Deferred income tax and deferred capital gains tax calculated annually by independent actuaries using are accounted for on the comprehensive basis, the projected unit credit method. The present value using the liability method for all temporary differences of the defined benefit obligation is determined by arising between the net book value of assets and the estimated future cash outflows using interest liabilities in the financial statements and the rates of government securities that have terms to corresponding tax bases. Deferred tax liabilities are maturity approximating the terms of the related recognised for all taxable temporary differences, 43 Foskor (Pty) Limited | Annual Report 2008 | NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) for the year ended 31 March 2008 and deferred tax assets are recognised to the revenue is not considered to be reliably measurable extent that it is probable that future taxable profit until all contingencies relating to the sale have been will be available against which deductible temporary resolved. The Group bases its estimates on historical differences can be utilised. results, taking into consideration the type of customer, the type of transaction and the specifics Deferred tax assets and liabilities are not recognised of each arrangement. if the temporary differences arise from goodwill or from the initial recognition (other than in a business (a) Sale of goods combination) of other assets and liabilities in a Sales of goods are recognised when a Group entity transaction that affects neither taxable income nor has delivered products to the customer (depending accounting income. on the INCO Terms agreed to with the customer, i.e. FOR or CFR), the customer has full discretion over Deferred income tax is provided on temporary the channel and price to sell the products, and differences arising on investments in subsidiaries, there is no unfulfilled obligation that could affect the except where the timing of the reversal of the customer's acceptance of the products. Delivery temporary difference is controlled by the Group and does not occur until the products have been it is probable that the temporary difference will not shipped to the specified location, the risks of reverse in the foreseeable future. obsolescence and loss have been transferred to the Deferred tax is charged or credited in the income customer, and the customer has accepted the statement, except when it relates to items credited products in accordance with the sales contract, or or charged directly to equity, in which case the the acceptance provisions have lapsed, or the deferred tax is also recognised in equity. Group has objective evidence that all criteria for acceptance have been satisfied. 1.15 FOREIGN CURRENCIES Foreign currency translation (b) Interest income The Group's presentation currency is the same as Interest income is recognised on a time-proportion its functional currency. The Group's presentation basis using the effective interest method. When a currency is South African Rands (ZAR). The receivable is impaired, the Group reduces the functional currency of the Group's operation is the carrying amount to its recoverable amount, being currency of the primary economic environment in the estimated future cash flow discounted at the which each operation has its main activities. original effective interest rate of the instrument, and continues unwinding the discount as interest Foreign currency transactions income. Interest income on impaired loans is Transactions in foreign currencies are translated recognised using the original effective interest rate. into South African Rands at the foreign exchange rate ruling at the date of the transaction. (c) Royalty income Royalty income is recognised on an accruals basis Monetary assets and liabilities denominated in in accordance with the substance of the relevant foreign currencies at the balance sheet date have agreements. been translated into South African Rands at the rates ruling at that date. (c) Dividend income Dividend income is recognised when the right to Foreign exchange differences are recognised in the receive payments is established. income statements. 1.17 FINANCIAL INSTRUMENTS 1.16 REVENUE Financial instruments consist mainly of loans and Revenue represents the gross income from sales of advances, listed and unlisted investments, cash phosphate rock, phosphoric acid, granular fertiliser, and cash equivalents, derivative instruments, trade zircon sand and other minerals. Revenue is shown and other receivables, and trade and other payables. net of Value Added Tax (VAT), returns, rebates and Derivative instruments consist of forward exchange discounts and after eliminating sales within the contracts and option contracts. At inception the Group. Group classifies its financial assets into the following Sales between Group companies are eliminated on categories: consolidation. Revenue from the sales of goods is • Financial asset or financial liability through recognised when significant risks and rewards of profit or loss – instruments that meet any of the goods are transferred to the buyer. The Group the following conditions: recognises revenue when the amount of revenue can be reliably measured, it is probable that future – Held for trading or designated to be held for economic benefits will flow to the entity and specific trading; or criteria have been met for each of the Group's – Have a quoted market price in an active activities, as described below. The amount of market; or 44 | Foskor (Pty) Limited | Annual Report 2008 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) for the year ended 31 March 2008 – Whose fair value can be reliably measured profit and loss on right to receive dividends otherwise; or and earlier of accrual or receipt of interest. – Are used to match investment contract liabilities • Loans and receivables: or assets held at fair value or designated as such; or – Initial measurement is at fair value net of – Performance of instruments is evaluated on a transaction costs directly attributable to fair value basis in accordance with a acquisition of funds; documented risk management strategy. – Subsequent measurement is at amortised cost, using the effective interest method; None of the financial assets or liabilities are – Provision on impairment of loans and designated to be held for trading. receivables is raised on long outstanding • Loans and receivables –non-derivative assets amounts and write off of irrecoverable amount with fixed or determinable payments that are not is approved by the Board of Directors. quoted in an active market other than those that Recognition and de-recognition the Group intends to sell in the near future. • Available-for-sale financial assets – assets Financial instruments are recognised when the that are not: company becomes party to the contractual – Loans and receivables; provisions of the instruments. – Held-to-maturity investments; or Financial assets are de-recognised when the – Financial assets at fair value through profit or contractual rights of the asset or of receiving cash loss. flows have been transferred and substantially all Financial instruments classified at inception are not risks and rewards of ownership have also been subsequently reclassified into a different category. transferred. The contractual rights to the cash flows from the financial asset expire; or it transfers the The basis for any impairment loss for an available- financial asset and the transfer qualifies for for-sale asset is its fair value. Any previous net derecognition. upward revaluation in equity in respect of the asset is reversed first. Additional write-down below the Financial liabilities are de-recognised when, and initial amount recognised for the asset is recorded only when, they are extinguished, that is, when the as an impairment loss in profit or loss. obligation specified in the contract is either discharged, cancelled, or expired. Impairment losses on available-for-sale instruments are not reversed through profit or loss. Any increase 1.18 ENVIRONMENTAL OBLIGATIONS in the fair value, after an impairment loss has been Long-term environmental obligations are based on recognised, is treated as a revaluation and is the Group's environmental management plans, in recognised directly in equity. compliance with current environmental and Initial and subsequent measurement regulatory requirements. • Financial asset or financial liability through Full provision is made based on the net present profit or loss: value of the estimated cost of restoring the environmental disturbance that has occurred up to – Initial measurement is at fair value at trade date the balance sheet date, using a discount rate based (excluding transaction costs); on a risk free rate. Increases due to additional – Subsequent measurement is at fair value with environmental disturbances are capitalised and gains or losses from fair value adjustments amortised over the remaining life of the mine. recognised in the income statement. Annual increases in the provision relating to change • Available-for-sale financial assets: in the net present value of the provision and – Initial measurement is at fair value at trade date inflationary increases are shown as part of finance (including transaction costs); costs in the income statement. – Subsequent measurement is at fair value with The estimated costs of rehabilitation are reviewed gains or losses from fair value adjustments on a three yearly basis, and adjusted as appropriate recognised in equity, except for impairment for changes in legislation or technology. Cost losses and foreign exchange gains and losses estimates are not reduced by the potential proceeds that are recognised in the income statement. from the sale of assets, or from planned clean-up at The fair value adjustments previously recognised closure, in view of the uncertainty of estimating the in equity are transferred to profit and loss upon potential future proceeds. de-recognition; – Interest and dividends accruing on available- Contributions are made to a dedicated Rehabilitation for-sale financial instruments are recognised in Trust Fund to fund the estimated cost of rehabilitation 45 Foskor (Pty) Limited | Annual Report 2008 | NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) for the year ended 31 March 2008 during and at the end of the life of the mine. The transactions and recognised assets Rehabilitation Trust is consolidated into the Group and liabilities. financial statements at each reporting date. (ii) Price risk 1.19 DIVIDENDS The Group is exposed to equity Dividends payable are recorded in the Group's securities price risk because of financial statements in the period in which they are investments held by the Group and approved by the Group's shareholders. classified on the consolidated balance sheet as available-for-sale. Dividends received are recorded when the right to The Group is exposed to commodity receive them has been established. price risk. 1.20 CASH AND CASH EQUIVALENTS (iii) Cash flow and fair value interest rate Cash and cash equivalents are defined as cash on risk hand, deposits held on call with banks, short-term As the Group has significant interest- liquid investments and original maturities of three bearing assets, the Group's income months or less. Cash and cash equivalents are and operating cash flows are measured at fair value based on the relevant substantially influenced by changes exchange rate at balance sheet date. in market interest rates. 1.21 BORROWINGS The Group's interest rate risk arises Borrowings are recognised initially at fair value, net from long-term borrowings. of transaction costs incurred. Borrowings are (b) Credit risk subsequently stated at amortised cost; any Credit risk is managed on a group basis. difference between the proceeds (net of transaction Credit risk arises from cash and cash costs) and the redemption value is recognised in equivalents, derivative financial the income statement over the period of the instruments and deposits with banks borrowings using the effective interest method. and financial institutions, as well as Borrowings are classified as current liabilities unless credit exposures to customers, including the Group has an unconditional right to defer outstanding receivables and committed settlement of the liability for at least 12 months after transactions. For banks and financial the balance sheet date. institutions, only independently rated parties with a minimum rating of 'A' are 1.22 FINANCIAL RISK MANAGEMENT accepted. If customers are independently 1.22.1 Financial risk factors rated, these ratings are used. Otherwise, The Group's activities expose it to a variety if there is no independent rating, risk of financial risks: market risk (including control assesses the credit quality of the currency risk, fair value interest rate risk, customer taking into account its financial cash flow interest rate risk and price risk), position, past experience and other credit risk and liquidity risk. The Group's factors. Individual risk limits are set overall risk management programme focuses based on internal or external ratings in on the unpredictability of financial markets accordance with limits set by the Board. and seeks to minimise potential adverse The utilisation of credit limits is regularly effects on the Group's financial monitored. performance. No credit limits were exceeded during Risk management is carried out by a central the reporting period, and management treasury department (Group Treasury) under does not expect any losses from non- policies approved by the Board of Directors. performance by these counterparties. Group Treasury identifies, evaluates and (c) Liquidity risk hedges financial risks in close co-operation Prudent liquidity risk management with the Group's operating units. includes maintaining sufficient cash, the (a) Market risk availability of funding from an adequate (i) Foreign exchange risk amount of committed credit facilities and The Group operates internationally the ability to close out market positions. and is exposed to foreign exchange Due to the dynamic nature of the risk arising from various currency underlying businesses, Group Treasury exposures, primarily with respect to maintains flexibility in funding by the US Dollar. Foreign exchange risk maintaining availability under committed arises from future commercial credit lines. 46 | Foskor (Pty) Limited | Annual Report 2008 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) for the year ended 31 March 2008 Management monitors rolling forecasts (a) Income taxes of the Group's liquidity reserve on the Significant judgment is required in determining the basis of expected cash flows. worldwide provision for income taxes. There are many transactions and calculations for which the 1.22.2 Fair value estimation ultimate tax determination is uncertain during the The fair value of financial instruments traded ordinary course of business. The Group recognises in active markets (such as trading and liabilities for anticipated tax audit issues based on available-for-sale listed securities) is based estimates of whether additional taxes will be due. on quoted market prices at the balance Where the final tax outcome of these matters is sheet date. The quoted market price used different from the amounts that were initially for financial assets held by the Group is the recorded, such differences will impact the income current bid price. tax and deferred tax provisions in the period in The carrying value less impairment provision which such determination is made. of trade receivables and payables are (b) Fair value of financial instruments assumed to approximate their fair values. The fair value of financial instruments that are not The fair value of financial liabilities for traded in an active market is determined by using disclosure purposes is estimated by valuation techniques. The Group uses its judgment discounting the future contractual cash flows to make assumptions that are mainly based on at the current market interest rate that is market conditions existing at each balance sheet available to similar financial instruments date. Significant judgment was used in computing trading in the market. the fair value of the Shareholder Loan, and the non- interest bearing borrowings. More details on these Derivative instruments such as forward assumptions are given in Notes 14 and 15 exchange contracts and option contracts respectively. are carried at fair value at the balance sheet date. The fair value is based on spot rates (c) Post-employment obligations traded in the financial markets at balance Significant judgment and actuarial assumptions are sheet date. required to determine the fair value of the post- employment obligations. More detail on these 1.23 SHARE-BASED PAYMENT TRANSACTIONS actuarial assumptions is given in Note 18 to the The Group has entered into a Business financial statements. Assistance Agreement which is considered to be an equity-settled, share-based payment (d) Environmental rehabilitation liability transaction. The fair value of the technical In determining the environmental rehabilitation and business services received in exchange liability an inflation rate of 6.4% (F2007: 4.8%) was for the grant of equity instruments is assumed to increase the rehabilitation liability for recognised as an expense. The total amount the next 20 years, and a rate of 9% (F2007: 7.4%) to be expensed over the vesting period is to discount that amount to present value. The determined by reference to the fair value of discount rate assumed of 9% is a risk free rate, the equity instruments granted, excluding specifically the rate at which the R186 South African the impact of any non-market vesting government bond was quoted at year end. conditions. Non-market vesting conditions (e) Fair value of share-based payments are included in assumptions about the The fair value of equity instruments on grant date is number of equity instruments that are determined based on a simulated company value, expected to vest. using the Geometric Brownian Motion model. The 2. CRITICAL ACCOUNTING ESTIMATES AND valuation technique applied to determine the JUDGMENTS simulated company value is the Monte Carlo simulation model. The key assumptions used in the Estimates and judgments are continually evaluated and calculation include: are based on historical experience and other factors, including expectations of future events that are believed Valuation date 31 March 2005 to be reasonable under the circumstances. Maturity date 31 March 2008 The Group makes estimates and assumptions concerning Initial company value R1,500,000,000 the future. The resulting accounting estimates will, by definition, rarely equal the related actual results. The Risk-free rate 8.01% estimates and assumptions that have a significant risk of Volatility 30% causing a material adjustment to the carrying amounts of EBIT Forecast (2008) R679,000,000 assets and liabilities within the next financial year are outlined below. Company Value R2,143,000,000 47 Foskor (Pty) Limited | Annual Report 2008 | NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) for the year ended 31 March 2008 COMPANY GROUP Notes 2008 2007 2008 2007 R'000 R'000 R'000 R'000 3 PROPERTY, PLANT AND EQUIPMENT At cost Mining asset, land and buildings 596,053 533,216 596,757 535,331 Plant, equipment and vehicles 3,062,008 2,663,000 3,062,768 2,663,849 Capital work in progress 330,205 163,946 330,205 163,946 3,988,266 3,360,162 3,989,730 3,363,126 Accumulated depreciation Mining asset and buildings 214,345 196,105 214,476 194,474 Plant, equipment and vehicles 1,526,300 1,423,863 1,526,837 1,424,591 1,740,645 1,619,968 1,741,313 1,619,065 Net carrying amount Mining asset, land and buildings 381,708 337,111 382,281 340,857 Plant, equipment and vehicles 1,535,708 1,239,137 1,535,931 1,239,258 Capital work in progress 330,205 163,946 330,205 163,946 Net carrying amount 2,247,621 1,740,194 2,248,417 1,744,061 Plant, equipment and vehicles include the following lease where Foskor (Pty) Ltd is the lessee under a finance lease. Cost - capitalised finance lease 41,567 41,567 41,567 41,567 Accumulated depreciation (7,793) (5,715) (7,793) (5,715) Net book value 33,774 35,852 33,774 35,852 Details of land and buildings are available for inspection at the registered office of the company. Mining Plant, Capital asset, land equipment work in and buildings and vehicles progress Total R'000 R'000 R'000 R'000 PROPERTY, PLANT AND EQUIPMENT (continued) 12 Months ended 31 March 2008 Movement in carrying value for the year Company Opening balance 337,111 1,239,137 163,946 1,740,194 Additions 25,666 167,293 166,718 359,677 Adjustment to mining asset (refer to Note 17) 42,775 - - 42,775 Depreciation (18,579) (104,485) - (123,064) Impairment reversal - 255,000 - 255,000 Disposals - (540) - (540) Transfers to non-current assets held for sale (6,526) (20,697) (459) (27,682) Transfers of assets from IOF 1,261 - - 1,261 Closing balance 381,708 1,535,708 330,205 2,247,621 Group Opening balance 340,857 1,239,258 163,946 1,744,061 Additions 25,666 167,453 166,718 359,837 Adjustment to mining asset (refer to Note 17) 42,775 - - 42,775 Depreciation (18,591) (104,543) - (123,134) Impairment reversal - 255,000 - 255,000 Transfers to non-current assets held for sale (6,526) (20,697) (459) (27,682) Disposals (1,900) (540) - (2,440) Closing balance 382,281 1,535,931 330,205 2,248,417 48 | Foskor (Pty) Limited | Annual Report 2008 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) for the year ended 31 March 2008 Notes Mining Plant, Capital asset, land equipment work in and buildings and vehicles progress Total R'000 R'000 R'000 R'000 12 Months ended 31 March 2007 Movement in carrying value for the year Company Opening balance 269,051 1,357,297 79,634 1,705,982 Additions 6,068 59,945 84,169 150,182 Depreciation (15,632) (93,167) - (108,799) Disposals (7,045) (126) - (7,171) Transfers 84,669 (84,812) 143 - Closing balance 337,111 1,239,137 163,946 1,740,194 Group Opening balance 270,464 1,357,487 79,634 1,707,585 Additions 6,068 59,945 84,169 150,182 Depreciation (15,644) (93,236) - (108,880) Disposals (4,700) (126) - (4,826) Transfers 84,669 (84,812) 143 - Closing balance 340,857 1,239,258 163,946 1,744,061 Computer software Total R'000 R'000 4 INTANGIBLE ASSETS for the year ended 31 March 2008 Movement in carrying amount Company Opening carrying amount 41 41 Additions 697 697 Amortisation (66) (66) Closing carrying amount 672 672 Group Opening carrying amount 41 41 Additions 697 697 Amortisation (66) (66) Closing carrying amount 672 672 12 Months ended 31 March 2007 Movement in carrying amount Company Opening carrying amount 454 454 Less amortisation (413) (413) Closing carrying amount 41 41 Group Opening carrying amount 454 454 Less amortisation (413) (413) Closing carrying amount 41 41 49 Foskor (Pty) Limited | Annual Report 2008 | NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) for the year ended 31 March 2008 COMPANY GROUP Notes 2008 2007 2008 2007 R'000 R'000 R'000 R'000 At cost Computer software 2,689 1,992 2,689 1,992 2,689 1,992 2,689 1,992 Accumulated amortisation and impairment Computer software 2,017 1,951 2,017 1,951 2,017 1,951 2,017 1,951 Net carrying amount Computer software 672 41 672 41 Closing carrying amount 672 41 672 41 Issued ordinary and preference shares Shares at cost Indebtedness and proportion R'000 R'000 Number % 2008 2007 2008 2007 5 INVESTMENTS IN SUBSIDIARIES Inter Minerals SA (Pty) Ltd (South Africa) 1 - - - 22 - (77,395) Indian Ocean Fertilizer (Pty) Ltd (South Africa)2 93,265 100% 103,956 - (218,501) (556,290) Inter Minerals Holdings AG (Switzerland) - - 10 10 (10) (10) Phosphate Shipping (Pty) Ltd 1,000 100% 1 1 (3,283) - Verstan Holdings Company Ltd (BV.I) - - - 5 - (55) Richards Bay Sulphuric Acid (Pty) Ltd 83,000,000 100% 83,000 83,000 (132,959) (132,959) IOF Property Trust (South Africa) - - - (292) Loans from and shares in subsidiaries 186,967 83,038 (354,753) (767,001) Phosfert Marine (Pty) Ltd (South Africa) 40,000 100% 40 40 2,695 3,198 Phosphate Shipping (Pty) Ltd 1,000 100% - - - 2,133 IOF Property Trust (South Africa) 780 - Loans to subsidiaries 40 40 3,475 5,331 Total shares at cost/Net loans owing 187,007 83,078 (351,278) (761,670) The company's percentage shareholdings in the above subsidiaries at year-end is consistent with that of the prior year. The majority of subsidiaries have financial years ending on 31 March and are consolidated to that date. Loans to and from subsidiaries are interest-free with no repayment terms. 1 Intermineral South Africa (Pty) Ltd declared a dividend of R526.2 million to Foskor (Pty) Ltd during the year under review. 2 IOF declared a dividend of R344.9 million to Intermineral South Africa (Pty) Ltd during the year under review. The shares in IOF (Pty) Limited previously held by IMSA (Pty) Limited are now held directly by Foskor (Pty) Limited 50 | Foskor (Pty) Limited | Annual Report 2008 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) for the year ended 31 March 2008 COMPANY GROUP Notes 2008 2007 2008 2007 R'000 R'000 R'000 R'000 6 INVESTMENT IN JOINT VENTURE Foskor (Pty) Limited has a 50% interest in a joint venture, Palfos Aviation (Pty) Ltd. The company's major asset, an aircraft, was sold in June 2004. Palfos Aviation (Pty) Ltd (South Africa) Carrying amount at the beginning of the year 25 25 25 25 Loan investment in joint venture 1,724 - 1,724 - Impairment of loan investment in joint venture (1,724) - - - Share of result of joint venture - - (1,724) - Carrying amount at the end of the year 25 25 25 25 The investment consists of 12 500 shares of R2 each, being 50% of the authorised and issued share capital. As at year-end the venture's assets comprise cash and cash equivalents of R25,000. 7 AVAILABLE FOR SALE INVESTMENTS Listed shares Investment in Coromandel Fertilizers & Chemicals Ltd (India) (Previously Godavari) 56,961 31,884 56,961 31,884 Opening balance 31,884 18,328 31,884 18,328 Fair value movements 25,077 13,556 25,077 13,556 Unlisted shares Other investments available for sale Held for environmental rehabilitation (refer to Note 19) 60,064 56,846 60,064 56,846 117,025 88,730 117,025 88,730 8 INVENTORY Spares and consumables stores 219,298 180,261 219,298 180,261 Phosphate rock 14,721 124,415 14,721 124,415 Raw material 514,314 169,303 514,314 169,303 Finished goods 171,355 134,448 171,355 134,448 Work in progress - 6,501 - 6,501 Other minerals 58 195 58 195 919,746 615,123 919,746 615,123 9 TRADE AND OTHER RECEIVABLES Gross trade receivables 794,118 538,350 796,902 539,791 Impairment provision for doubtful debts - - - - Net trade receivables 794,118 538,350 796,902 539,791 Employee loans 27 398 27 398 VAT receivable 83,971 29,937 84,754 30,813 Prepaid insurance 6,977 12,638 6,977 12,638 Insurance receivable - 44,730 - 44,730 Other receivables 55,500 42,228 55,500 41,149 940,593 668,281 944,160 669,519 51 Foskor (Pty) Limited | Annual Report 2008 | NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) for the year ended 31 March 2008 COMPANY GROUP Notes 2008 2007 2008 2007 R'000 R'000 R'000 R'000 10 DERIVATIVE FINANCIAL INSTRUMENTS Assets 13,019 1,117 13,019 1,117 Forward foreign exchange contracts - 931 - 931 Derivative option contracts 13,019 186 13,019 186 Liabilities (63,203) - (63,203) - Forward foreign exchange contracts (896) - (896) - Derivative option contracts (62,307) - (62,307) - (50,184) 1,117 (50,184) 1,117 Trading derivatives are classified as current assets or liabilities. Gains and losses on these instruments are recognised in the income statement. 11 DEFERRED TAXATION The gross movement on the deferred tax account is as follows: Beginning of the year 23,980 - 23,980 - Current year timing differences (96,142) (97,821) (96,142) (97,821) Under-provision prior year (98) - (98) - Cumulative prior years timing differences - 175,300 - 175,300 Tax loss utilised (190,595) (53,499) (190,595) (53,499) Rate adjustment (824) - (824) - End of the year (263,679) 23,980 (263,679) 23,980 The gross movement on the deferred tax account is as follows: Deferred income tax asset Finance lease liability 8,690 9,908 8,690 9,908 Mark-to-market adjustment of FEC 17,697 - 17,697 - Provisions 46,149 50,720 46,149 50,720 Mining rehabilitation liability 76,026 44,208 76,026 44,208 Tax loss 174,563 377,217 174,563 377,217 323,125 482,053 323,125 482,053 Deferred income tax liability Property, plant and equipment - Mining (245,663) (228,177) (245,663) (228,177) Property, plant and equipment - Other (262,967) (179,583) (262,967) (179,583) Property, plant and equipment - Leased (9,457) (10,397) (9,457) (10,397) Mark-to-market adjustment of FEC - (324) - (324) Mining footprint (39,907) (7,312) (39,907) (7,312) Mining rehabilitation investment (16,818) (16,485) (16,818) (16,485) Ore stockpiling (11,992) (15,795) (11,992) (15,795) (586,804) (458,073) (586,804) (458,073) Net deferred income tax liability (263,679) 23,980 (263,679) 23,980 The total estimated tax loss of the company and Group amounted to R623 million (2007: R 1.3 billion) as at 31 March 2008. 52 | Foskor (Pty) Limited | Annual Report 2008 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) for the year ended 31 March 2008 COMPANY GROUP Notes 2008 2007 2008 2007 R'000 R'000 R'000 R'000 12 NON-CURRENT ASSETS HELD FOR SALE The assets and liabilities relating to Zirconia Division of Foskor (Pty) Limited (Operations based in Phalaborwa - Limpopo Province) have been presented as held for sale following the final approval of dilution and shareholding by the Board of Directors on 06 May 2008. 12.1 Operating cash flows 24,730 - 24,730 - Investing cash flows (2,173) - (2,173) - Financing cash flows - - - - Total cash flows 22,557 - 22,557 - 12.2 Non-current assets held for sale Property, plant and equipment 27,682 - 27,682 - Inventory 43,980 - 43,980 - Trade and other receivables 19,514 - 19,514 - 91,176 - 91,176 - 12.3 Liabilities directly associated with non-current assets held for sale Post-employment medical liability 3,068 - 3,068 - Trade and other payables 8,499 - 8,499 - 11,567 - 11,567 - 13 SHARE CAPITAL Authorised 8,100,000 ordinary shares of R1 each 8,100 8,100 8,100 8,100 23,500,000 class "B" shares of R1 each 23,500 23,500 23,500 23,500 Total authorised share capital 31,600 31,600 31,600 31,600 Issued 7,983,590 ordinary shares of R1 each 7,984 7,984 7,984 7,984 23,500,000 class "B" ordinary shares of R1. 23,500 23,500 23,500 23,500 Total share capital 31,484 31,484 31,484 31,484 Share premium 13,800 13,800 13,800 13,800 14 SHARE-BASED PAYMENTS Foskor entered into a Business Assistance Agreement ("the Agreement") with Coromandel Fertilizers Limited ("CFL") in February 2005, whereby CFL would render technical and business services to Foskor for a three year period commencing on 01 April 2005 to 31 March 2008. In terms of the Agreement Foskor would remunerate CFL for any improvement in Foskor's EBIT relating to the year ended 31 March 2008, in comparison with the EBIT of the base period 01 January 2005 to 31 March 2005 annualised. This remuneration is capped at a cash payment of R300 million. The Agreement further obligates CFL to apply the remuneration received by it for any such improvement in Foskor's EBIT, to subscribe for up to 14% of the ordinary share capital of Foskor. The company previously did not apply IFRS 2, on Share-based Payments, to account for this transaction. COMPANY GROUP The effect of accounting for this transaction on prior year Effect on 31 Effect on 31 Effect on 31 Effect on 31 results is as follows: March 2007 March 2006 March 2007 March 2006 financial financial financial financial statements statements statements statements Increase in other operating costs 94,012 31,337 94,012 31,337 Decrease in profit before tax (94,012) (31,337) (94,012) (31,337) Increase in share-based payments reserve 94,012 31,337 94,012 31,337 53 Foskor (Pty) Limited | Annual Report 2008 | NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) for the year ended 31 March 2008 COMPANY GROUP Notes 2008 2007 2008 2007 R'000 R'000 R'000 R'000 15 SHARE-BASED PAYMENT RESERVE - At beginning of the year 125,349 31,337 125,349 31,337 - Share-based payment expense 62,675 94,012 62,675 94,012 - At end of the year 188,024 125,349 188,024 125,349 16 SHAREHOLDER LOAN Industrial Development Corporation Ltd Non-current Cost 1,450,000 1,450,000 1,450,000 1,450,000 Less short-term portion 1,450,000 - 1,450,000 - - 1,450,000 - 1,450,000 Fair value adjustment - (137,783) - (137,783) Carrying amount - 1,312,217 - 1,312,217 Current Short-term portion 1,450,000 - 1,450,000 - The loan is unsecured, interest-free and repayable in the next twelve months. The loan has been measured at amortised cost as at year-end. In the prior year, the loan was measured at fair value using a discount rate of prime less 2%. 17 NON-INTEREST-BEARING BORROWINGS BHP Billiton South Africa Ltd Cost 12,800 12,800 12,800 12,800 Fair value adjustment (1,422) (1,216) (1,422) (1,216) Carrying amount 11,378 11,584 11,378 11,584 The loan is unsecured and interest-free with no repayment terms. The loan has been measured at fair value at year-end using a discount rate of prime less 2%. 18 FINANCE LEASE LIABILITY Finance lease liability - minimum lease payments Not later than one year 7,542 8,051 7,542 8,051 Later than one year and not later than five years 23,599 26,291 23,599 26,291 Later than five years 32,550 37,400 32,550 37,400 63,691 71,742 63,691 71,742 Future finance charges on finance lease (32,656) (37,576) (32,656) (37,576) Present value of finance lease liability 31,035 34,166 31,035 34,166 Less current portion (3,073) (3,131) (3,073) (3,131) Long-term portion of finance lease liability 27,962 31,035 27,962 31,035 Present value of finance lease liability is as follows: Not later than one year 3,073 3,131 3,073 3,131 Later than one year and not later than five years 9,924 11,028 9,924 11,028 Later than five years 18,038 20,007 18,038 20,007 31,035 34,166 31,035 34,166 The finance lease is between Foskor (Pty) Limited and Mhlathuze Water Board for an effluent pipeline. The lease liability is effectively secured as the rights to the leased asset revert back to the lessor in the event of default. 54 | Foskor (Pty) Limited | Annual Report 2008 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) for the year ended 31 March 2008 COMPANY GROUP Notes 2008 2007 2008 2007 R'000 R'000 R'000 R'000 19 ENVIRONMENTAL REHABILITATION LIABILITY Foskor (Pty) Limited continuously contributes to the Rehabilitation Trust to ensure that adequate funds are available to pay for mine closure and reclamation costs. The Trust is regarded as a Special Purpose Entity and is therefore consolidated as part of Foskor (Pty) Limited's figures. This note compares the net present value of the rehabilitation liability to the assets held by the Trust. Environmental rehabilitation liability Balance at beginning of year 152,442 152,442 152,442 152,442 Rehabilitation liability growth (refer to Note 3) 42,775 - 42,775 - Balance at end of year 195,217 152,442 195,217 152,442 Rehabilitation Trust Balance at beginning of year 56,846 41,233 56,846 41,233 Fair valuation of investments 3,199 5,602 3,199 5,602 Dividend received 19 11 19 11 Investments held by the Trust (refer to Note 7) 60,064 46,846 60,064 46,846 Cash contribution made to the Trust - 10,000 - 10,000 Total assets held by the Trust 60,064 56,846 60,064 56,846 Unfunded portion of rehabilitation liability 135,153 95,596 135,153 95,596 The directors are aware of the estimated cost of rehabilitation and are satisfied that adequate provision is being made to meet this obligation. A contingent liability has been recognised for the issuing of guarantees to the Department of Mineral and Energy. (Refer to 31.1) COMPANY AND GROUP 2008 2007 R'000 R'000 20 POST -EMPLOYMENT OBLIGATIONS Amounts recognised in the balance sheet Pension schemes - - Post-employment medical obligation 67,000 68,234 67,000 68,234 20.1 Pension obligation The Group has established a post-retirement pension scheme covering certain employees who were employed by the company prior to 1995. The pension fund is fully funded. The assets of the fund are held in an independent trustee-administered fund. The liability is valued every year using the projected unit credit method. The latest actuarial valuation was performed on 31 December 2007. The amounts recognised in the balance sheet are as follows: Present value of funded obligations 319,181 278,090 Fair value of plan assets (324,340) (313,654) (5,159) (35,564) Unrecognised pension fund surplus 5,159 35,564 Unrecognised past service cost - - Liability in the balance sheet - - 55 Foskor (Pty) Limited | Annual Report 2008 | NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) for the year ended 31 March 2008 COMPANY AND GROUP 2008 2007 R'000 R'000 The movement in the unrecognised actuarial gains can be analysed as follows: Current service cost 500 400 Interest cost 18,162 18,016 Expected return on assets (22,745) (19,691) Net actuarial loss/(gains) recognised during the year 37,950 11,490 Additional contributions by employer (3,104) (12,300) Contributions (358) (354) Movement in the unrecognised pension fund surplus 30,405 (2,439) The principal actuarial assumptions used for accounting purposes were: - Discount rate 8.75% 8.00% - Expected return on plan assets 9.50% 9.50% - Future salary increases 6.00% 5.50% - Future pension increases 4.13% 3.75% - Normal retirement age 60 60 20.2 Post-employment medical obligation The Group provides post-employment healthcare benefits to its retirees who were employed by the company on or before 1 July 1995. The same benefits are provided to a specific group of employees employed before 1 July 1996. The Group operates a post-employment medical obligation scheme, which is held in an independent trustee-administered fund. The liability is valued every year using the projected unit credit method. The latest actuarial valuation was performed on 31 December 2007. The amounts recognised in the balance sheet are as follows: Present value of unfunded obligation Discovery Health members 67,000 68,234 67,000 68,234 Movement in the liability recognised in the balance sheet: At beginning of year 68,234 201,739 Contributions paid (3,510) (4,319) Current service costs 1,323 5,571 Interest cost 6,147 11,719 Curtailment payment - (95,260) Reduction in obligation due to curtailment payment - (88,950) Obligation relating to non-current asset held for sale 1 (3,068) - Unrecognised acturial (gains)losses (2,126) 37,734 Balance at the end of the year 67,000 68,234 The principal actuarial assumptions used for accounting purposes were: - Discount rate 8.75% 8.00% - General inflation rate 6.00% 5.00% - Medical inflation rate 7.50% 7.00% - Normal retirement age 60/65 60/65 1 Refer to note 12 on non-current assets held for sale. 56 | Foskor (Pty) Limited | Annual Report 2008 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) for the year ended 31 March 2008 COMPANY GROUP Notes 2008 2007 2008 2007 R'000 R'000 R'000 R'000 21. TRADE AND OTHER PAYABLES Trade payables 451,823 302,372 453,707 303,032 Accruals 313,450 106,124 313,460 106,514 Leave 17,523 21,291 17,523 21,291 13th Cheque 3,185 3,711 3,185 3,711 PAYE payable - 29,120 - 29,120 Sundry payables 57,453 32,868 57,453 32,868 843,434 495,486 845,328 496,536 22. PROVISIONS Bonus 71,512 48,980 71,512 48,980 Demurrage1 5,547 3,764 5,547 3,764 Total provisions 77,059 52,744 77,059 52,744 Movement in provisions Balance at beginning of year 52,744 36,900 52,744 36,900 Additional provisions 71,315 52,744 71,315 52,744 Unused amounts reversed - - - - Utilised during period (47,000) (36,900) (47,000) (36,900) Balance at end of year 77,059 52,744 77,059 52,744 1 Demurrage is a penalty payable to a ship owner if the agreed loading time is not honoured. 23. OPERATING PROFIT Operating profit is arrived at before finance income, finance costs, and net foreign exchange gains after taking into account: Income Profit on disposal of property, plant and equipment - 6,218 4,654 18,190 Reversal of impairment 255,000 - 255,000 - Insurance reimbursement - 81,531 - 81,531 Expenditure Loss on disposal of property, plant and equipment 524 - 524 - Amortisation of intangible assets - Software 66 413 66 413 Auditors' remuneration 3,144 2,741 3,144 2,741 - Audit fee 1,813 1,628 1,813 1,628 - Other services 1,014 890 1,014 890 - Expenses 317 223 317 223 Depreciation 123,064 108,799 123,134 108,880 - Buildings 16,810 13,863 16,822 13,875 - Plant, equipment and vehicles 104,485 93,167 104,543 93,236 - Mining footprint 1,769 1,769 1,769 1,769 Operating lease charges 4,975 5,844 4,975 5,844 - Property rentals 683 686 683 686 - Equipment 4,292 5,158 4,292 5,158 Repairs and maintenance 293,643 296,756 293,643 296,756 Share-based payment expense 62,675 94,012 62,675 94,012 57 Foskor (Pty) Limited | Annual Report 2008 | NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) for the year ended 31 March 2008 COMPANY GROUP Notes 2008 2007 2008 2007 R'000 R'000 R'000 R'000 Staff costs 445,115 360,633 446,056 361,574 - Salaries and wages 409,989 368,318 410,930 369,259 - Pension costs: Defined contribution plans 29,830 27,196 29,830 27,196 - Pension costs: Defined benefit plans (Note 20) 358 354 358 354 - Increase/(decrease) in post-employment medical liability 1,834 (38,235) 1,834 (38,235) - Additional contribution to pension fund 3,104 3,000 3,104 3,000 24. NET FINANCE INCOME Interest expenses (142,958) (7,260) (142,958) (7,299) - Interest paid to banks (250) (1,934) (250) (1,973) - Interest paid on finance lease (4,925) (5,326) (4,925) (5,326) - Unwinding of interest related to fair valuing of shareholder loan (137,783) - (137,783) - Interest income 259,211 51,334 259,264 51,684 - Interest received from banks 100,376 38,726 100,429 39,076 - Interest received from customers 21,052 12,608 21,052 12,608 - Realised fair value gain on shareholder loan 137,783 - 137,783 - Rehabilitation Trust Investment - Growth in Investment 3,218 5,613 3,218 5,613 Total interest income 262,429 56,947 262,482 57,297 Net finance income 119,471 49,687 119,524 49,998 25. NET FOREIGN EXCHANGE (LOSSES)/GAINS Foreign transaction loss (120,348) (35,813) (120,384) (35,814) - Foreign exchange transaction loss (57,145) (35,813) (57,181) (35,814) - Derivative instruments (63,203) - (63,203) - Foreign transaction gains 76,825 55,031 76,825 55,091 - Foreign exchange transaction gains 63,806 53,914 63,806 53,974 - Derivative instruments 13,019 1,117 13,019 1,117 Net foreign exchange (losses)/gains (43,523) 19,218 (43,559) 19,277 26. TAXATION Composition South African normal income tax Normal tax 6,000 - 5,474 (207) - Current year - - (534) (210) - Adjustment previous year 6,000 - 6,008 3 Capital gains tax - - (162) (416) Deferred tax (287,659) 23,980 (287,659) 23,980 - Current (286,737) 23,980 (286,737) 23,980 - Adjustment previous year (98) - (98) - - Rate change (824) - (824) - Total taxation as per income statement (281,659) 23,980 (282,347) 23,357 58 | Foskor (Pty) Limited | Annual Report 2008 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) for the year ended 31 March 2008 COMPANY GROUP Notes 2008 2007 2008 2007 R'000 R'000 R'000 R'000 Reconciliation of tax rate Standard tax rate 29.00% 29.00% 29.00% 29.00% Permanent differences (12.32%) 6.42% (5.40%) 5.75% Capital gains tax 0.00% 0.00% 0.01% 0.08% Prior year overprovision - income tax (0.34%) - (0.48%) - Prior year underprovision - deferred tax 0.01% - 0.01% - Rate adjustment in respect of deferred tax - prior years 0.05% - 0.07% - Rate difference in respect of deferred tax - current year (0.58%) - (0.81%) - Deferred tax on cumulative prior year differences - (41.27%) - (40.39%) Effective rate 15.82% (5.85%) 22.39% (5.56%) 27. CASH GENERATED FROM OPERATIONS Reconciliation of profit for the year: Operating profit for the year 1,180,037 341,250 1,186,465 351,137 Adjustments for: Depreciation 123,064 108,799 123,134 108,880 Amortisation of intangible assets 66 413 66 413 Transfer of assets from IOF (1,261) - - - Loss on disposal of property, plant and equipment 524 - 524 - Profit on disposal of property, plant and equipment - (6,218) (4,654) (18,190) Provisions 71,315 52,744 71,315 52,744 Post-employment medical aid obligation growth/(reversal) 1,834 (38,245) 1,834 (38,245) Decrease in ore stockpiling 11,636 9,030 11,636 9,030 Impairment reversal (255,000) - (255,000) - Share-based payment expense 62,675 94,012 62,675 94,012 Operating profit before working capital changes 1,194,890 561,785 1,197,995 559,781 Increase in inventory * (348,603) (86,206) (348,603) (86,119) Increase in trade and other receivables * (291,826) (89,139) (294,155) (85,722) Movements in other financial assets at fair value 1,117 - 1,117 - Increase in trade and other payables * 354,723 37,930 355,567 38,109 Movement in provisions (47,000) (36,900) (47,000) (36,900) Changes in working capital (331,589) (174,315) (333,074) (170,632) Cash generated from operations 863,301 387,470 864,921 389,149 * When analysing the changes in working capital for 2008, the balance sheet should be read in conjunction with Note 12 on non-current assets held for sale 28. BORROWING FACILITIES Borrowing facilities and guarantees Rand-denominated facilities Non-interest bearing Total facility 1,450,000 1,450,000 1,450,000 1,450,000 Utilised (1,450,000) (1,450,000) (1,450,000) (1,450,000) Available - - - - The above facility from the IDC (shareholder) and R500 million was paid subsequent to year-end. Interest-bearing facilities Total facilities from banks - 400,000 - 400,000 Utilised - - - - Available - 400,000 - 400,000 Available on request 400,000 - 400,000 - 400,000 400,000 400,000 400,000 59 Foskor (Pty) Limited | Annual Report 2008 | NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) for the year ended 31 March 2008 COMPANY GROUP Notes 2008 2007 2008 2007 R'000 R'000 R'000 R'000 Guarantees Total facility from banks 126,005 100,000 126,005 100,000 Utilised 126,005 76,143 126,005 76,143 Available - 23,857 - 23,857 29. COMMITMENTS Capital commitments The capital expenditure contracted for at balance sheet date but not recognised in the financial statements is as follows: Property, plant and equipment 273,021 332,453 273,021 332,453 Total capital commitments 273,021 332,453 273,021 332,453 Operating lease commitments The Group company is lessee The future minimum lease payments payable under non-cancellable leases are as follows: Payable no later than one year 3,595 3,708 3,595 3,708 Payable later than one year 2,727 2,250 2,727 2,250 6,322 5,958 6,322 5,958 The company leases photocopiers under various agreements which terminate between 2008 and 2010. The lease for the Midrand office expires in 2008. The agreements include an extension option. 30. FINANCIAL INSTRUMENTS Designated as Loans and fair value through Available Financial instruments by category receivables profit and loss for sale Total Group - 2008 Assets Investment in joint venture 25 - - 25 Available for sale investments - - 117,025 117,025 Trade and other receivables 944,160 - - 944,160 Derivative financial instruments - 13,019 - 13,019 Cash and cash equivalents 1,280,863 - - 1,280,863 2,225,048 13,019 117,025 2,355,092 Liabilities Non-interest-bearing borrowings 11,378 - - 11,378 Finance lease liability 31,035 - - 31,035 Trade and other payables 1,134,205 - - 1,134,205 Shareholder loan 1,450,000 - - 1,450,000 Derivative financial instruments - 63,203 - 63,203 2,626,618 63,203 - 2,689,821 Group - 2007 Assets Investment in joint venture 25 - - 25 Available for sale investments - - 88,730 88,730 Trade and other receivables 669,519 - - 669,519 Derivative financial instruments - 1,117 - 1,117 Cash and cash equivalents 643,551 - - 643,551 1,313,095 1,117 88,730 1,402,942 Liabilities Non-interest-bearing borrowings 11,584 - - 11,584 Finance lease liability 34,166 - - 34,166 Trade and other payables 496,536 - - 496,536 542,286 - - 542,286 60 | Foskor (Pty) Limited | Annual Report 2008 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) for the year ended 31 March 2008 Designated as Loans and fair value through Available Company - 2008 receivables profit and loss for sale Total Assets Investments in subsidiaries 187,007 - - 187,007 Loans to subsidiaries 3,475 - - 3,475 Investment in joint venture 25 - - 25 Available for sale investments - - 117,025 117,025 Trade and other receivables 940,593 - - 940,593 Derivative financial instruments - 13,019 - 13,019 Cash and cash equivalents 1,277,815 - - 1,277,815 2,408,915 13,019 117,025 2,538,959 Liabilities Non-interest-bearing borrowings 11,378 - - 11,378 Finance lease liability 31,035 - - 31,035 Loans from subsidiaries 354,753 - - 354,753 Trade and other payables 843,434 - - 843,434 Shareholders loan 1,450,000 - - 1,450,000 Derivative financial instruments - 63,203 - 63,203 2,690,600 63,203 - 2,753,803 Company - 2007 Assets Investments in subsidiaries 83,078 - - 83,078 Loans to subsidiaries 5,331 - - 5,331 Investment in joint venture 25 - - 25 Available for sale investments - - 88,730 88,730 Trade and other receivables 668,281 - - 668,281 Derivative financial instruments - 1,117 - 1,117 Cash and cash equivalents 636,487 - - 636,487 1,393,202 1,117 88,730 1,483,049 Liabilities Non-interest-bearing borrowings 11,584 - - 11,584 Finance lease liability 34,166 - - 34,166 Loans from subsidiaries 767,001 - - 767,001 Trade and other payables 495,486 - - 495,486 1,308,237 - - 1,308,237 The carrying amounts of the financial instruments listed above, approximate their fair values. FINANCIAL RISK MANAGEMENT The principal financial risks arising from the Group activities are those related to market risk (price risk, currency risk and interest rate risk). The Group's overall risk management programme focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the Group's financial performance. The Group uses derivative financial instruments to hedge certain risk exposures. The Group's principal financial instruments comprise forward exchange contracts and option contracts. The Group has various other instruments such as trade debtors, trade creditors and cash, which arise directly from its operations. 30.1 Market risk Foreign currency risk management The Group operates internationally and is exposed to foreign exchange risk arising from various currency exposures, primarily with respect to the US Dollar. Foreign exchange risk arises when future commercial transactions or recognised assets or liabilities are denominated in a currency that is not the entity's functional currency. Circa 33% of these foreign-denominated transactions are covered by forward exchange contracts and option contracts. These contracts were entered into to cover firm foreign commitments not yet due and export earnings of which the proceeds are not yet receivable. Import of raw material of circa 33% of foreign denominated revenue transactions is regarded as a natural hedge which is considered sufficient to mitigate the remaining risk. 61 Foskor (Pty) Limited | Annual Report 2008 | NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) for the year ended 31 March 2008 Details of the contracts are as follows: COMPANY GROUP 2008 2007 2008 2007 R'000 R'000 R'000 R'000 Forward exchange contracts Denominated in United States Dollars 27,500 6,500 27,500 6,500 Average exchange rate as per contract R 8.13 R 7.41 R 8.13 R 7.41 Derivative option contracts Denominated in United States Dollars 99,000 17,500 99,000 17,500 Average put contract exchange rate R/$ R 7.35 R 7.00 R 7.35 R 7.00 Average call contract exchange rate R/$ R 8.06 R 7.95 R 8.06 R 7.95 Spot rate at year end R/$ R 8.02 R 7.30 R 8.02 R 7.30 The following are balances of existing import and export commitments at year end. The balances are exposed to exchange rate movements. Receivables (less than 1 year) US$ denominated balances at year-end - $'000 58,441 35,935 58,441 35,935 Rand equivalent balances at year-end - R'000 468,697 262,475 468,697 262,475 Payables (less than 1 year) US$ denominated balances at year-end - $'000 (70,288) (20,794) (70,288) (20,794) Rand equivalent balances at year-end - R'000 (563,710) (151,884) (563,710) (151,884) Net profit before tax effect (9,501) 11,053 (9,501) 11,053 At 31 March 2008, if the Rand had weakened by 10% against the US Dollar with all other variables held constant, the profit before interest and taxation for the Group and the company for the year would have been R9,501,000 less (2007: R11,053,000 higher), conversely if the Rand had strengthened by 10% against the US Dollar with all other variables held constant the pre-tax profit for the Group and the company would have been R9,501,000 higher (2007: R11,053,000 less). Interest rate risk management As part of an ongoing restructuring of the borrowing mix and interest rate characteristics of borrowings, the Group restructures funding of operating capital as it sees fit. As the Group has no significant interest-bearing assets, the Group's income and operating cash flows are substantially independent of changes in market interest rates. Borrowings issued at variable interest rates expose the Group to cash flow interest rate risk. Borrowings issued at fixed rates expose the Group to fair value interest rate risk. The Group has no existing interest bearing debt commitments. The Group invests cash funds on call and fixed short term interest bearing deposits. Interest on these deposits is linked to prime interest rate. The Group is exposed to cash flow interest rate risk when the returns on these investments decline. At 31 March 2008, if interest rates on financial assets had been 1% lower with all other variables remaining constant, the pre-tax profit for the year would have been R13 million lower, conversely if interest rates had been 1% higher with all other variables remaining constant, the pre-tax profit for the year would have been R13 million higher. Price risk management Commodity and share price risk Copper, phosphoric acid and sulphur price risk arises from the risk of an adverse effect on current or future earnings resulting from fluctuations in the prices. Copper, phosphoric acid, and sulphur markets are predominantly priced in US Dollar which exposes the Group to the risk that fluctuations in the SA Rand/US Dollar may also have on future or current earnings. The risk of changes in the price of these commodities is hedged by entering into fixed contracts with customers and suppliers and derivative option contracts. The risk associated with listed or unlisted equity investments is the change in equity prices resulting in the decrease in value of the investments. Unlisted investments are actively managed by reputable fund managers. They are held in conservative portfolios which guarantee return of capital amount invested. 62 | Foskor (Pty) Limited | Annual Report 2008 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) for the year ended 31 March 2008 COMPANY GROUP 2008 2007 2008 2007 R'000 R'000 R'000 R'000 Listed investments Fair value at 31 March 2008 56,961 31,884 56,961 31,884 The equity investments are listed on the Mombay Stock Exchange in India. A 5% decrease in the share index at the reporting date, with all other variables held constant, would have decreased equity by R2.8 million (2007: R1.6 million), conversely a 5% increase in the share index at reporting date, with all variables held constant, would have increased equity by R2.8 million (2007: R1.6 million). 30.2 Credit risk management Credit risk arises from cash and cash equivalents, derivative financial instruments, as well as outstanding receivables and committed transactions. To manage this risk, the Group limits its counterparty exposure by dealing only with well-established financial institutions. The granting of credit is controlled by well-established criteria, which are reviewed and updated on an ongoing basis. The Group limits its investments and deposits to a maximum of R500m per financial institution with AA+ rating by Fitch, and R200m per financial institution with rating of AA-. Increase in such limits is subject to approval by the Board of Directors. Surplus funds available on transactional bank accounts are deposited in short-term high interest yielding investments. The Group manages credit risk on accounts receivable by fixing payment terms on open accounts and selling on letters of credit to foreign customers. Stringent credit assessments are employed before allowing credit sales with customers. At year end customers are assessed individually for impairment. Recoverability for the outstanding amount can be analysed as follows COMPANY GROUP 2008 2007 2008 2007 R'000 R'000 R'000 R'000 Trade receivables Fully performing - outstanding for less than 60 days 786,886 448,830 789,670 450,271 - outstanding for more than 60 days but less than 120 days 763 67,542 763 67,542 Past due but not impaired - outstanding for more than 120 days 6,469 21,978 6,469 21,978 794,118 538,350 796,902 539,791 Major debtors - foreign Account balance Agora International Trading 47,967 - 47,967 - CFL Kakinada 211,226 - 211,226 - Coromandel Fertilizers Ltd 46,640 22,987 46,640 22,987 Gujarat State Fertilizers 60,429 81,002 60,429 81,002 IFFCO 39,823 71,332 39,823 71,332 Thermphos International B.V 26,172 20,297 26,172 20,297 Godavari Fertilizers - 68,813 - 68,813 No collaterals, guarantees or any other renegotiated contracts are held against cash funds. Maximum exposure to credit risk is in the carrying trade receivable amounts. Cash and cash equivalents on hand 1,277,815 636,487 1,280,863 643,551 30.3 Liquidity risk management Prudent liquidity risk management implies maintaining sufficient cash and marketable securities, the availability of funding through an adequate amount of committed credit facilities and the ability to close out market positions. Liquidity risk arises from existing commitments associated with the industry and the requirements to raise funds in order to meet these commitments. The Group manages liquidity by monitoring forecasted cash flows and ensuring that adequate un-utilised borrowing facilities are available if necessary. The Group currently has a debt owing to the holding company. The loan is interest free and repayable in the next 12 months. The Group has no long term interest bearing debts. 63 Foskor (Pty) Limited | Annual Report 2008 | NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) for the year ended 31 March 2008 Short term commitments relate to amounts payable to the trade creditors and derivative liability instruments. The derivative instruments commitments are managed by underlying transactions. Current year's trade payables can be analysed as follows: COMPANY GROUP 2008 2007 2008 2007 R'000 R'000 R'000 R'000 Trade payables - due in less than 60 days 183,597 212,496 185,481 213,156 - due in more than 60 days but less than 120 days 210,360 8,467 210,360 8,467 - due in more than 120 days 57,866 81,409 57,866 81,409 451,823 302,372 453,707 303,032 Accrual - Raw material in transit due in more than 120 days 233,953 18,656 233,953 18,656 Financial asset/(liability) - Forward exchange contracts (896) 931 (896) 931 - Derivative option contract (62,307) 186 (62,307) 186 (63,203) 1,117 (63,203) 1,117 Maturity dates are spread evenly throughout the year ending March 2009 Shareholder loan 1,450,000 1,312,217 1,450,000 1,312,217 The financial liability is a result of fair valuation of hedging contracts concluded for the 12 months subsequent to 31 March 2008. 30.4 Capital risk The Group's objectives when managing capital are to safeguard the Group's ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital. The Group's capital includes share capital and share premium. In order to maintain the capital structure, the Group may issue new shares, adjust dividend amounts payable to shareholders, return capital to shareholders or sell assets to reduce debt. The Group monitors capital on a gearing basis. The gearing ratio is calculated as net debt divided by total capital. Net debt is calculated as total borrowings (including current and non-current borrowings as shown in the balance sheet) less cash and cash equivalents. Total capital is calculated as 'equity' shown in the balance sheet plus net debt. COMPANY GROUP 2008 2007 2008 2007 R'000 R'000 R'000 R'000 Share capital 31,484 31,484 31,484 31,484 Share premium 13,800 13,800 13,800 13,800 Interest free shareholders loan - 1,312,311 - 1,312,311 Capital 45,284 1,357,595 45,284 1,357,595 There were no changes to the Group's approach to capital management during the year. The company is not subject to externally imposed capital requirements. 31. GUARANTEES AND CONTINGENT LIABILITIES 31.1 Guarantees Guarantees issued by Foskor (Pty) Ltd and Foskor Group to various beneficiaries amount to R126 million. COMPANY GROUP 2008 2007 2008 2007 R'000 R'000 R'000 R'000 Details Beneficiary Mine Rehabilitation - Department of Mineral and Energy 100,000 50,000 100,000 50,000 Water and electricity supply - Richards Bay T.L.C. 12,433 12,433 12,433 12,433 Rail transport of phosphate rock and granular - Transnet 7,359 7,359 7,359 7,359 Electricity - Eskom 5,188 5,188 5,188 5,188 Various ZAR-denominated guarantees - Various 1,025 1,163 1,025 1,163 Total 126,005 76,143 126,005 76,143 Refer to Directors' Report on guarantee in respect of the mine rehabilitation. 64 | Foskor (Pty) Limited | Annual Report 2008 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) for the year ended 31 March 2008 31.2 Contingent liabilities Guarantees The Group had mine rehabilitation guarantees amounting to R100 million as at year-end (refer above). In line with the requirements set by the Department of Minerals and Energy ("DME"), this amount needs to be increased to R200 million by 31 July 2009. However, these guarantees and the agreement reached with the DME, were based on the environmental rehabilitation and closure costs assessment that was performed during the 2005 financial year. Based on the latest assessment of the closure costs and rehabilitation liabilities, it is probable that the guarantees that the company is required to put in place by DME may increase in future. Listed below are all the claims against the Foskor Group. Management is, however, of the opinion that these claims will be successfully defended. COMPANY GROUP 2008 2007 2008 2007 R'000 R'000 R'000 R'000 G Marais - 26,000 - 26,000 Insimbi Engineering - 1,070 - 1,070 PCL USD'000 - 414 - 414 Environmental liability - Groundwater Contamination Foskor, in consultation with Department of Water Affairs and Forestry (DWAF), continues to monitor the groundwater situation whilst solutions are being developed for approval by DWAF for implementation. An amount of R4.75m was spent on investigating the contamination plan to determine remedial solutions in the current financial year ended 31 March 2008. At this point in time, it is not possible to quantify the exact costs arising from the final solution which is to be agreed with DWAF to resolve the groundwater conditions at Richards Bay. However, R10 million capital budget has been provided for spending on possible solutions for the year 2008/2009. 65 Foskor (Pty) Limited | Annual Report 2008 | NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) for the year ended 31 March 2008 Phosphate Copper Zirconia Phosphoric Phosphoric Unallocated Total rock acid acid (Other) 2008 2008 2008 2008 2008 2008 2008 R'm R'm R'm R'm R'm R'm R'm 32. SEGMENTAL REPORTING Business segmentation Total segment revenue 1,886 59 117 3,364 798 - 6,224 Inter-segment revenue (1,736) - - - - - (1,736) Revenue from external customers 150 59 117 3,364 798 - 4,488 Operating profit/(loss) 568 59 18 615 63 (137) 1,186 Assets 1,564 - 91 3,720 260 348 5,983 Liabilities 1,891 - 12 713 62 661 3,339 Capital expenditure 140 - 2 217 - 1 360 Depreciation and amortisation 52 - 1 66 - 4 123 Impairment reversal - - - 255 - - 255 Share-based payment expense - - - 63 - - 63 Sales between segments are carried out at arm's length. Geographical segmentation Revenue - South Africa 64 - 1 922 798 - 1,785 - India - - 9 2,003 - - 2,012 - USA - 59 - - - - 59 - Netherlands - - - 141 - - 141 - Singapore - - - 126 - - 126 - Switzerland - - - 85 - - 85 - Japan 86 - - - - - 86 - Dubai - - - 46 - - 46 - United Kingdom - - 41 - - - 41 - Europe - - - 28 - - 28 - Germany - - 22 - - - 22 - China - - 19 - - - 19 - Zambia - - - 13 - - 13 - Italy - - 13 - - 13 - Other countries - - 12 - - - 12 External revenue 150 59 117 3,364 798 - 4,488 Revenue is allocated based on the country in which the customer is located. Segment Information The primary reporting format of the company is by business segment. Given the concentration of assets and liabilities within the Republic of South Africa, it is not meaningful to allocate such elements on a geographical basis. Segment assets consist primarily of property, plant and equipment, intangible assets, inventories, prepaid tax, trade and other receivables and cash and cash equivalents. Segment liabilities comprise non-current and current liabilities. Capital expenditure comprises additions to property, plant and equipment (Note 3) and intangible assets (Note 4). Segment operating profit/(loss) equals segment revenue less segment expenses, which include cost of sales and other operating costs. Segment expenses exclude interest and investment income. 66 | Foskor (Pty) Limited | Annual Report 2008 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) for the year ended 31 March 2008 Phosphate Copper Zirconia Phosphoric Phosphoric Unallocated Total rock acid acid (Other) 2007 2007 2007 2007 2007 2007 2007 R'm R'm R'm R'm R'm R'm R'm Business segmentation Total segment revenue 1,305 90 104 1,995 599 2 4,095 Inter-segment revenue (1,145) - - - - - (1,145) Revenue from external customers 160 90 104 1,995 599 2 2,950 Operating profit/(loss) 468 94 15 (183) 43 (96) 341 Assets 1,366 - 97 2,168 169 44 3,844 Liabilities 446 - 1 316 30 481 1,274 Capital expenditure 63 - 5 82 - - 150 Depreciation and amortisation 49 - 1 59 - - 109 Post-employment medical aid reversal 38 - - - - - 38 Share-based payment expense - - - 94 - - 94 Sales between segments are carried out at arm's length. Geographical segmentation Revenue - South Africa 56 - 5 358 599 - 1,018 - India - - 10 1,463 - - 1,473 - USA - 90 - - - - 90 - Netherlands - - - 94 - - 94 - Japan 84 - - - - - 84 - Dubai - - - 32 - - 32 - Zambia - - - 48 - - 48 - China - - 16 - - - 16 - United Kingdom - - 38 - - - 38 - Germany - - 25 - - - 25 - Other countries 20 - 10 - - 2 32 External revenue 160 90 104 1,995 599 2 2,950 33. RELATED PARTY TRANSACTIONS Directors' emoluments The following table records the emoluments payable to the directors during the period: 67 Foskor (Pty) Limited | Annual Report 2008 | NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) for the year ended 31 March 2008 Fees for Fees for services as services as directors directors 2008 2007 Rands Rands 33.1 NON-EXECUTIVE DIRECTORS' REMUNERATION MG Qhena * 240,980 100,660 LL van Niekerk - 118,120 RK Morathi 1 * 107,060 137,120 A Vellayan 137,040 180,360 G van Wyk * 174,240 157,360 DS Phaho 175,260 128,120 Z Monnakgotla 2 * 30,060 120,240 SS Ngoma 3 * 117,640 - M Nhlanhla 4 50,000 195,240 LBR Mthembu 5 95,240 115,180 P Ledger - 80,060 PJD Viljoen - 30,060 F Madavo 6 46,860 - JM Modise 7 30,060 - XGS Sithole 7 25,000 1,229,440 1,362,520 1 - Resigned on 10/02/2008 2 - Resigned on 16/07/2007 3 - Appointed on 16/07/2007 4 - Resigned on 10/09/2007 5 - Resigned on 26/03/2008 6 - Appointed on 01/01/2008 7 - Appointed on 26/03/2008 * - All directors' fees accrue directly to the IDC and not to the director in his/her personal capacity. 33.2 EXECUTIVE DIRECTORS' AND EXECUTIVE MEMBERS' REMUNERATION - FOSKOR Payments for Contributions conversion to medical aid, Basic Termination to fixed term Performance pension, life Expenses salary benefit contracts * bonuses ** insurance & UIF allowances Total Rands Rands Rands Rands Rands Rands Rands 12 Months ended 31 March 2008 MA Pitse *** 1,782,235 - - 1,466,256 292,506 - 3,540,997 JW Horn 1,424,690 - - 953,921 18,788 32,739 2,430,138 TJ Koekemoer 979,463 - - 770,464 173,510 22,702 1,946,139 G Skhosana 952,354 - - 715,000 127,343 34,361 1,829,058 ND Naidoo 1 69,667 2,149,176 - - 15,797 - 2,234,640 K Cele 2 844,934 - - 591,000 108,477 28,907 1,573,318 H Malhotra 841,012 - - 617,500 91,300 - 1,549,812 JWT Potgieter 3 812,105 - - - 175,174 98,619 1,085,898 J Vaidhyanathan 836,729 - - 618,969 100,504 - 1,556,202 XS Luthuli 826,336 - - 255,459 100,736 14,314 1,196,845 9,369,526 2,149,176 - 5,988,569 1,204,135 231,642 18,943,047 1 - Resigned on 30/04/2007 2 - Appointed on 01/05/2007 3 - Appointed on 01/06/2007 68 | Foskor (Pty) Limited | Annual Report 2008 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) for the year ended 31 March 2008 Payments for Contributions conversion to medical aid, Basic Termination to fixed term Performance pension, life Expenses salary benefit contracts * bonuses ** insurance & UIF allowances Total Rands Rands Rands Rands Rands Rands Rands 12 Months ended 31 March 2007 MA Pitse *** 1,649,761 - 1,307,170 949,314 271,606 47,864 4,225,715 JW Horn 1,340,380 - - 678,821 18,120 31,207 2,068,528 TJ Koekemoer 901,889 - - 518,781 155,732 22,702 1,599,104 J Vaidhyanathan 781,229 - - - 93,771 - 875,000 H Malhotra 751,586 - - 253,979 85,614 - 1,091,179 G Skhosana 855,940 - - 477,854 113,333 69,020 1,516,147 ND Naidoo 833,941 - - 512,808 184,359 1,941 1,533,049 XS Luthuli 4 335,014 - - - 39,986 1,873 376,873 7,449,740 1,307,170 3,391,557 962,521 174,607 13,285,595 4 - Appointed on 01/11/2006 * Represents amounts paid to executive member for migrating from permanent employment contracts to fixed term contracts. ** Represents amounts payable to executive members for achieving certain objectives that are aligned to the corporate objectives (targets). These objectives are approved by the Board at the beginning of each period. The amount paid is based on the corporate, team and individual performance. *** Executive director. 33.3 RELATED PARTY TRANSACTIONS The Group is controlled by Industrial Development Corporation, which owns 97.5% of the company's shares. The remaining 2.5% of the shares are owned by Coromandel Fertilizers Limited (incorporated in India). The following transactions were carried out with related parties. Terms of Receiving of Outstanding outstanding Nature of relationship services balances balances Total 2008 R'000 R'000 R'000 12 Months ended 31 March 2008 Industrial Development Corporation 1 - 1,450,000 - 1,450,000 Eskom Limited 92,378 - 30 days 92,378 Transnet Limited 423,877 - 30 days 423,877 Telkom Limited 3,975 - 30 days 3,975 520,230 1,450,000 - 1,970,230 1 R500m was paid subsequent to year-end. Terms of Receiving of Outstanding outstanding Nature of relationship services balances balances Total 2007 R'000 R'000 R'000 12 Months ended 31 March 2007 Industrial Development Corporation - 1,450,000 - 1,450,000 Eskom Limited 91,344 7,523 30 days 7,523 Transnet Limited 315,848 22,844 30 days 338,692 Telkom Limited 3,087 149 30 days 3,236 410,279 1,480,516 - 1,799,451 69 Foskor (Pty) Limited | Annual Report 2008 | FIVE-YEAR REVIEW: FOSKOR GROUP for the year ended 31 March 2008 Annualised 9 Months 2008 2007 2006 2005 2005 2004 KEY DRIVERS Average exchange rate R/$ 7.09 7.02 6.37 6.17 6.83 P205 CFR price ($/ton) 607 462 440 399 356 P205 CFR price (R/ton) 4,337 3,275 2,806 2,461 2,315 Sulphur FOB price ($/ton) 104 58 65 63 59 Sulphur CFR price ($/ton) 175 83 85 86 81 Sulphur CFR price (R/ton) 1,263 606 573 574 592 Ammonia CFR price ($/ton) 324 341 320 298 241 Rock FOB sales price ($/ton) 72 58 59 54 43 Rock sales price (R/ton) 513 404 376 324 372 P205 - Production volume ('000 ton) 692 529 626 542 406 575 P205 - Sales volume ('000 ton) 557 498 581 437 328 435 Granular - Production volume ('000 ton) 261 137 190 161 121 297 Granular - Sales volume ('000 ton) 261 164 177 174 130 296 Rock production volume ('000 ton) 2,382 2,670 2,528 2,791 2,093 2,642 Rock sales volume ('000 ton) 2,911 2,520 2,606 2,575 1,931 3,017 INCOME STATEMENT (R million) Revenue 4,488 2,950 2,574 1,806 1,354 2,051 Operating profit 1,186 351 5 (420) (228) Net finance income and foreign gains/(losses) 219 77 49 (8) (99) Profit/(loss) before tax 1,261 420 45 (427) (328) Taxation (282) 23 (1) (51) 129 Net profit/(loss) 978 444 44 (478) (198) Major cost items (R million) Number of employees (at year end) 1,805 1,799 1,783 1,760 1,707 Staff costs 446 362 401 329 247 331 Repairs and maintenance 294 297 258 247 185 265 Depreciation 123 109 96 93 70 147 Capex 360 150 104 164 133 290 - Normal capital expenditure 123 92 - Finance lease 41 41 PROFITABILITY RATIOS Operating income to revenue (%) 26% 12% 1% (31%) (11%) Pre-tax margin (%) 28% 14% 2% (32%) (16%) Revenue per employee (R'000) - p.a. 2,486 1,640 1,444 1,026 770 1,201 BALANCE SHEET Property, plant and equipment 2,248 1,744 1,708 1,698 1,967 Non-current assets 148 131 111 138 111 Current assets 3,587 2,427 1,558 1,266 948 Total assets 5,983 4,302 3,377 3,102 3,026 Non current liabilities 888 721 401 338 677 Current liabilities 2,451 553 500 405 468 Total liabilities 3,339 1,274 901 743 1,145 Net assets 2,644 3,028 2,476 2,359 1,882 70 | Foskor (Pty) Limited | Annual Report 2008 FIVE-YEAR REVIEW: FOSKOR GROUP (CONTINUED) Annualised 9 Months 2008 2007 2006 2005 2005 2004 Shareholders' equity 2,644 1,716 1,026 909 1,338 Shareholders' loan - Non-interest bearing - 1,312 1,450 1,450 544 Total shareholders' interest 2,644 3,028 2,476 2,359 1,882 Interest-bearing debt (net of cash) - - - - 483 Ratios Debt/equity ratio (%) (debt net of cash) 0% 0% 0% 0% 26% Current assets to current liabilities (ratio) 6.3 4.4 3.1 4.4 2.0 CASH FLOW STATEMENT Operating profit/(loss) before working capital changes 1,198 560 204 12 (109) Working capital changes (333) (171) (86) 24 119 Cash generated from operations 865 389 118 36 11 Net cash inflow/(outflow) from operating activities 994 451 132 (9) (62) Net cash outflow from investing activities (354) (232) (74) (118) (283) Free cash inflow/(outflow) 640 219 58 (127) (345) 71 Foskor (Pty) Limited | Annual Report 2008 | NOTICE TO MEMBERS/ADMINISTRATORS FOSKOR (PTY) LIMITED REG. NO. 1951/002918/07 NOTICE IS HEREBY GIVEN that the fifty-seventh Annual General Meeting of the members of the above company will be held at Foskor, 21 John Ross Parkview Drive, Richards Bay on Friday 20 June 2008 at 10:00 for the following purposes: 1. To receive and consider the Annual Financial Statements for the year ended 31 March 2008, including the Directors' Report and the report of the Auditors thereon. 2. To authorise the Directors to fix the Auditors' remuneration for the past year. 3. To re-appoint Directors. 4. To re-appoint Auditors. 5. To transact any other business as may be transacted at the Annual General Meeting. A member entitled to attend and vote at the meeting is entitled to appoint one or more proxies to attend and vote in his/her stead. A proxy need not be a member of the company. Proxy forms should be forwarded to reach the registered office of the company not less than 48 hours before the start of the meeting. By order of the Board AUS Khanyile Company Secretary Registered Office Foskor (Pty) Limited 18 Thornhill Office Park 94 Bekker Road MIDRAND 1682 22 May 2008 ADMINISTRATION SECRETARY AND REGISTERED OFFICE AUS Khanyile 18 Thornhill Office Park 94 Bekker Road MIDRAND 1682 Telephone: 011 347 0600 Telefax: 011 347 0640 e-mail: email@example.com REGISTRATION NUMBER 1951 / 002918 / 07 WEBSITE ADDRESS www.foskor.co.za 72 | Foskor (Pty) Limited | Annual Report 2008 FOSKOR (PTY) LIMITED (Reg No. 1951/002918/07) CONSENT TO WAIVE PERIOD OF NOTICE OF ANNUAL GENERAL MEETING We, the shareholders of Foskor (Pty) Limited, consent and agree that the Annual General Meeting of Foskor (Pty) Limited to be held on 21 July 2008, and of which less than 21 days' notice was given, be convened. Date : ___________________________________ Signature : IDC Date : ___________________________________ Signature : CFL ___________________________________________________________________________________________________________ I certify that the members of the company whose signatures are affixed above are the shareholders of Foskor (Pty) Limited having the right to attend and vote at the meeting concerned. Signature : GROUP COMPANY SECRETARY 73 Foskor (Pty) Limited | Annual Report 2008 | FOSKOR (PTY) LIMITED (Reg No. 1951/002918/07) CONSENT TO WAIVE PERIOD OF NOTICE OF ANNUAL GENERAL MEETING We, the shareholders of Foskor (Pty) Limited, consent and agree that the Annual General Meeting of Foskor (Pty) Limited to be held on 21 July 2008, and of which less than 21 days' notice was given, be convened. Date : ___________________________________ Signature : IDC Date : ___________________________________ Signature : CFL ___________________________________________________________________________________________________________ I certify that the members of the company whose signatures are affixed above are the shareholders of Foskor (Pty) Limited having the right to attend and vote at the meeting concerned. Signature : GROUP COMPANY SECRETARY 73 Foskor (Pty) Limited | Annual Report 2008 | FOSKOR (Pty) Limited Registered Office 18 Thornhill Office Park, 94 Bekker Road, MIDRAND, 1682 Tel: +27 11 347 0600, Fax: +27 11 347 0640 Registration Number: 1951/002918/07 Website: www.foskor.co.za