Commentary to the summarised results for the year ended 31 December 2010
General
The year to 31 December 2010 was significant for the company and shareholders should be pleased with the outcome. For many years the company’s major priority was to settle all claims with JCI Limited (JCI) and this was achieved on 23 June 2010. The JCI settlement had the effect of yielding a recovery R783.5 million to the group. This was declared as a dividend to shareholders. Subsequently a dividend valued at R338.4 million was declared, bringing the total dividends declared to shareholders to R1 110.1 million or R15.46 per R&E share for the financial year. The difference between the settlement amount and the dividend declared is mainly due to changes in the fair value of the assets distributed.
The settlement paved the way for the company’s suspension to be lifted on the JSE and this was achieved on 4 June 2010.
Your company is now a cleansed entity trading freely on the JSE. Not only was substantial value returned to shareholders, but R&E is optimally positioned to maximise the value of its remaining suite of assets.
In addition, various lawsuits against third parties were settled and this yielded further recoveries of R25.2 million. There remain material lawsuits against third parties and these were progressed during the year. The company has an adequate balance sheet to sustain these legal claims.
Priority has been given to ensure that the company’s prospecting rights are retained and exploited to ensure a commercially viable outcome.
The income statement
The group results for the 2010 year were positive, showing total profit of R741 million.
This was mainly as a result of recoveries made and dividends earned on investments. Continued expenditure on consulting, forensic, legal, audit fees and tax advisors was necessary to achieve the desired outcomes. In this regard, it is worth noting that R&E made recoveries of R25.2 million in addition to the JCI settlement in the year under review. The group also incurred substantial expenses in pursuit of the settlement with JCI.
The balance sheet
The major assets, excluding the assets held for distribution, of the R&E group as at 31 December 2010 consist of cash and prospecting rights. The board has adopted a minimum risk approach to protect the group’s cash investments, which are monitored daily in conjunction with a specialist treasury firm to maintain optimal returns with minimal associated risks. More than 90% of these investments yield a tax-free dividend return.
The group’s prospecting rights are stated at cost less impairments as we do not have sufficient geological information to allow us to declare the reserves as stated in the previously published competent persons reports. The group intends to retain most of its prospecting rights but will negotiate possible sale transactions with third parties where it is commercially sound to do so. Planned prospecting expenditure on all rights currently held is R21.7 million over the course of the next four years. R&E will progressively review the exploration programme to ensure efficient application of the company’s resources.
The post-retirement medical benefit obligation is unfunded. The group continues to fulfill its obligations. However, in managing the liability, we have successfully offered members of the medical aid scheme a cash amount in exchange for the renunciation of their benefits under the scheme, an alternative that is proving to be beneficial for both parties.
Income tax for the group currently consists mainly of tax payable in the form of STC as a result of the distributions to shareholders.
The R&E group has calculated tax losses as at 31 December 2010, but no deferred tax assets were raised as it is not probable that there would be future taxable profits against which to offset the tax losses. As in the past, certain tax matters dating back to 1998 that were part of the Kebble legacy are still being finalised with the South African Revenue Service.
Cash flow
The group’s primary cash inflows were as a result of investing activities, various loans owing to the group being repaid, dividends earned on cash and cash equivalents and the disposal of assets received in settlements. The group utilised this cash to fund its operations during the year.
Outlook
Setting aside the settlement with JCI, the outlook for 2011 is similar to that for the previous year. Expenditure on legal and operational expenses is expected to be at a similar level, which is likely to prevail until all claims have been finalised.
R&E is assessing various opportunities to utilise its assets. The positive net cash position further enhances the company’s ability to attract potentially lucrative opportunities, although the board will endeavour to always protect its asset base and ensure that there will be adequate funds to finalise all third party litigation.
The remaining claims against various parties are strategically evaluated on an ongoing basis and shareholders are once again assured that the board will adopt a commercial and pragmatic approach towards further recoveries.
David Kovarsky Marais Steyn Van Zyl Botha
Chairman Chief Executive Officer Financial Director
Johannesburg
7 March 2011
The financial statements are presented on a summarised consolidated basis.Statement of comprehensive income
| For the year ended 31 December | |||||||
| 2010 | 2009 | ||||||
| Notes | R’000 | R’000 | |||||
| Revenue | 20 408 | 17 433 | |||||
| Recoveries – JCI | 6 | 783 549 | – | ||||
| – Other | 25 204 | 60 240 | |||||
| Other income | 9 805 | 220 | |||||
| Other operating expenses | (80 826) | (47 519) | |||||
| Results from operating activities | 758 140 | 30 374 | |||||
| Finance income | 1 519 | 33 662 | |||||
| Profit before taxation | 759 659 | 64 036 | |||||
| Taxation | (18 200) | (11 678) | |||||
| Profit for the year | 741 459 | 52 358 | |||||
| Other comprehensive income | |||||||
| Net change in fair value of available-for-sale investments | 10 | 49 874 | 12 137 | ||||
| Foreign currency translation differences | – | 19 | |||||
| Total comprehensive income | 791 333 | 64 514 | |||||
| Profit or loss attributable to: | |||||||
| Non-controlling interest | 54 | 17 615 | |||||
| Owners of the company | 741 405 | 34 743 | |||||
| Profit for the year | 741 459 | 52 358 | |||||
| Total comprehensive income attributable to: | |||||||
| Non-controlling interest | 54 | 17 615 | |||||
| Owners of the company | 791 279 | 46 899 | |||||
| Total comprehensive income for the year | 791 333 | 64 514 | |||||
| Basic and diluted earnings per share (cents) | 11 | 1 032 | 48 | ||||
Statement of financial position
| As at 31 December | ||||
| 2010 | 2009 | |||
| Notes | R’000 | R’000 | ||
| Assets | ||||
| Non-current assets | 782 | 247 032 | ||
| Plant and equipment | 308 | 108 | ||
| Intangible assets | 474 | 474 | ||
| Investments in equity securities | – | 246 450 | ||
| Current assets | 568 291 | 549 096 | ||
| Loans receivable | – | 207 543 | ||
| Trade and other receivables | 2 649 | 46 747 | ||
| Investments held for distribution | 10 | 273 845 | – | |
| Cash and cash equivalents | 291 797 | 294 806 | ||
| Total assets | 569 073 | 796 128 | ||
| Equity and liabilities | ||||
| Shareholders’ equity | 174 455 | 484 152 | ||
| Issued capital | 748 | 748 | ||
| Share premium | – | 986 054 | ||
| Reserves | 62 011 | 12 137 | ||
| Retained earnings/(Accumulated loss) | 111 696 | (514 787) | ||
| Non-controlling interest | 7, 8 | – | 250 378 | |
| Total equity | 174 455 | 734 530 | ||
| Liabilities | ||||
| Non-current liabilities | ||||
| Post-retirement medical benefit obligation | 36 429 | 34 575 | ||
| Current liabilities | 358 189 | 27 023 | ||
| Tax payable | 11 220 | 15 579 | ||
| Shareholders for dividend | 11 | 338 477 | – | |
| Trade and other payables | 8 492 | 11 444 | ||
| Total equity and liabilities | 569 073 | 796 128 | ||
Statement of changes in equity
| For the year ended 31 December | |||
| 2010 | 2009 | ||
| Notes | R’000 | R’000 | |
| Share capital | |||
| Balance at the beginning and end of the period | 748 | 748 | |
| Share premium | – | 986 054 | |
| Balance at the beginning of the period | 986 054 | 986 054 | |
| Settlement distribution | 11 | (803 804) | – |
| GFI and cash distribution | 11 | (182 250) | – |
| Foreign currency translation reserve | – | – | |
| Balance at the beginning of the period | – | (19) | |
| Movement for the period | – | 19 | |
| Investment fair value reserve | 62 011 | 12 137 | |
| Balance at the beginning of the period | 12 137 | – | |
| Net change in fair value of available-for-sale investments | 49 874 | 12 137 | |
| Accumulated profit / (loss) | 111 696 | (514 787) | |
| Balance at the beginning of the period | (514 787) | (549 530) | |
| Transaction with non-controlling shareholders | 8 | 9 074 | – |
| Profit for the period | 741 405 | 34 743 | |
| Settlement distribution | 11 | 32 231 | – |
| GFI and cash distribution | 11 | (156 227) | – |
| Non-controlling interest | – | 250 378 | |
| Balance at the beginning of the period | 250 378 | 232 763 | |
| Transaction with non-controlling shareholders | 7,8 | (171 051) | – |
| Dividends paid to non-controlling shareholders | (79 381) | – | |
| Profit for the period | 54 | 17 615 | |
Statement of cash flows
| For the year ended 31 December | ||
| 2010 | 2009 | |
| R’000 | R’000 | |
| Profit before taxation | 759 659 | 64 036 |
| Adjusted for: | ||
| Recoveries not settled in cash | (808 754) | – |
| Other non-cash items | 26 420 | (378) |
| Finance income | (1 519) | (33 662) |
| Dividends received | (20 408) | (17 433) |
| Working capital changes | 41 146 | (46 627) |
| Cash utilised in operations | (3 456) | (34 064) |
| Finance income | 635 | 1 040 |
| Taxation paid | (22 559) | (10 088) |
| Cash flows from operating activities | (25 380) | (43 112) |
| Cash flows from investing activities | 101 752 | 62 174 |
| Dividends received | 20 408 | 17 433 |
| Proceeds from disposal of recovered assets | 27 344 | – |
| Proceeds on disposal of investment in equity securities | 8 061 | – |
| Acquisition of investment in equity securities | – | (5 129) |
| Acquisition of investment in subsidiary | (202) | – |
| Acquisition of plant and equipment | (285) | (14) |
| Loan payments received | 46 426 | 135 350 |
| Loans advanced | – | (85 466) |
| Cash flow from financing activities | ||
| Dividends paid to non-controlling shareholders | (79 381) | – |
| Translation effect on foreign cash and cash equivalents | – | 19 |
| Net increase/(decrease) in cash and cash equivalents | (3 009) | 19 081 |
| Cash and cash equivalents at the beginning of the period | 294 806 | 275 725 |
| Cash and cash equivalents at the end of the period | 291 797 | 294 806 |
Notes to the financial statements for the year ended 31 December 2010
1. Reporting entity
R&E is a company domiciled and incorporated in the Republic of South Africa. The financial statements of the company for the year ended 31 December 2010 include the company and its subsidiaries (together referred to as the “group”).
2. Statement of compliance
The summarised consolidated financial statements for the year ended 31 December 2010 have been prepared in compliance with International Accounting Standard (IAS) 34 Interim Financial Reporting, the AC 500 standards as issued by the Accounting Practices Board and the Companies Act of South Africa.
These financial statements were approved by the board of directors of R&E on 7 March 2011.
3. Significant accounting policies
The accounting policies applied by the group in these financial statements are in accordance with International Financial Reporting Standards (IFRS) and are consistent with those applied by the group in its consolidated financial statements for the year ended 31 December 2009. The following standards and interpretations were adopted on 1 January 2010:
– IAS 27: Amendment Consolidated and Separate Financial Statements;
– Various: Improvements to International Financial Reporting Standards 2009;
– IFRS 3: Business Combinations; and
– IFRIC 17: Distribution of Non-cash Assets to Owners (IFRIC 17).
There was no significant impact on these financial statements as a result of adopting these standards and interpretations, except for IFRIC 17.
IFRIC 17 addresses the accounting treatment for non-cash distributions made to owners. In terms of IFRIC 17 a liability is recognised at the fair value of the asset to be distributed when the distribution is authorised. The asset to be distributed is reclassified as held for distribution and measured in accordance with IFRS 5. Re-measurement of the liability at fair value of the asset to be distributed will be recognised in equity. When the distribution is made, the liability and the asset will be derecognised. IFRIC 17 has been applied prospectively.
All dividends declared during 2010 (refer note 11) have been accounted for in terms of IFRIC 17.
4. Independent audit by the auditors
The summarised consolidated statement of financial position at 31 December 2010 and the related summarised consolidated statements of comprehensive income, changes in equity and cash flows for the year then ended and related notes was audited by KPMG Inc. The individual auditor assigned to perform the audit is Mr CH Basson. KPMG’s unqualified audit report is available for inspection at the registered office of the company.
5. Segment reporting
The group operates in a single operating segment as an investment holding company with assets in the South African mining industry.
6. Settlement with JCI Limited and distribution of shares
On 28 May 2010, the shareholders of R&E approved the settlement agreement with JCI Limited (JCI) as well as the distribution of the shares received as part of the settlement to R&E shareholders. The JCI shareholders also approved the settlement with R&E on 4 June 2010.
The settlement circular, containing full details of the settlement, was distributed to shareholders on 12 May 2010. As a result of the settlement, the JCI group transferred the following assets to the R&E group on 2 July 2010:
– 6 051 632 GFI shares; and
– 1 555 710 220 JCI shares (a fresh issue).
A recovery of R783,5 million was recognised in profit or loss on 23 June 2010 (the date on which the last suspensive condition contained in the settlement agreement was met) at the fair value of the shares receivable.
No tax liability arose from the settlement transaction as all the affected entities within the group have sufficient income tax and capital gains tax losses to absorb the recovery. There were also no tax consequences as a result of the distribution of the abovementioned GFI and JCI shares, as it was made partially out of share premium and partially as an unbundling in terms of section 46 of the Income Tax Act.
On 5 July 2010, R&E distributed the above shares as well as the 305 186 049 JCI shares already held by it (JCI unbundling shares) to its shareholders.
The JCI shares received as part of the settlement as well as the JCI unbundling shares were valued at R0.105 per share. The revaluation of the JCI unbundling shares resulted in a R15.6 million impairment being recognised in profit or loss.
7. Excussion of FSD shares from JCI
At 31 December 2009, R&E had a loan receivable from the JCI group of R207.5 million. This loan was secured by a pledge of shares held by JCI in Free State Development and Investment Corporation Limited (FSD). On 14 January 2010 (the agreed settlement date), JCI was unable to make a full repayment of the loan. As a result, R&E exercised its security and became the beneficial owner of a further 6 690 610 FSD shares at an agreed value of R161.9 million, increasing its shareholding in FSD by 30.10% to 85.21%.
8. Purchase of remaining stake in FSD
On 19 November 2010, the company purchased the remaining 14.79% stake in FSD from JCI for a consideration of R0.2 million. The decrease in value was a result of cash distributions made by FSD prior to the acquisition.
9. Distribution of 2 270 687 GFI shares and special cash dividend of 90 cents per R&E share
On 30 November 2010, R&E shareholders approved the distribution of R&E’s remaining listed investment in GFI (amounting to 3.16193 GFI shares per 100 R&E shares held), as well as a cash dividend of 90 cents per share.
These distributions were effected on 17 January 2011. STC is payable on the portion of the distribution not made out of share premium.
10. Investments held for distribution
At the reporting date, the GFI shares referred in note 9 (which represent the group’s entire remaining portfolio of listed securities) were revalued to fair value, with the gain recognised in other comprehensive income. The shares were then re-classified as “Investments held for distribution” in accordance with IFRIC 17.
11. Earnings per share and dividend per share
| For the year ended 31 December | ||
| 2010 | 2009 | |
| Basic earnings and diluted earnings per ordinary share | ||
| Basic and diluted earnings for the period (R’000) | 741 405 | 34 743 |
| Weighted average number of ordinary shares in issue | 71 813 182 | 73 063 128 |
| Earnings per share (cents) | 1 032 | 48 |
| Headline and diluted headline earnings per ordinary share | ||
| Headline and diluted headline earnings for the period (R’000) | 754 893 | 34 743 |
| Weighted average number of ordinary shares in issue | 71 813 182 | 73 063 128 |
| Headline earnings per share (cents) | 1 051 | 48 |
| R’000 | R’000 | |
| Reconciliation between basic and headline earnings for the period | ||
| Profit for the period attributable to the equity holders of the company | 741 405 | 34 743 |
| Adjusted for: | ||
| Profit on disposal of available-for-sale investments | (2 165) | – |
| Impairment of investment held for distribution | 15 653 | – |
| 754 893 | 34 743 | |
| Tax effect of adjustments | – | – |
| Portion attributable to non-controlling interest | – | – |
| Headline earnings for the period attributable to equity holders of the company | 754 893 | 34 743 |
| Dividend per share | ||
| Total dividends declared | 1 110 050 | – |
| – 23 June 2010 | 771 573 | – |
| – 30 November 2010 | 338 477 | – |
| Eligible shares in issue | 71 813 235 | – |
| Dividend per share (cents) | 1 546 | – |
The dividend distribution to ordinary shareholders of the company, as declared on 23 June 2010 of R771.6 million, consists of the JCI settlement assets amounting to R771.8 million and the JCI unbundling shares of R32.0 million adjusted for the portion returned to the group by virtue of its 3 million treasury shares.
| R’000 | R’000 | |
| Total dividend payable from R&E’s share premium | 803 804 | – |
| Dividend payable to group entities recognised in retained earnings | (32 231) | – |
| Dividend distributed | 771 573 | – |
The dividend payable to ordinary shareholders of the company, excluding the treasury shares, amounting to R338,4 million, as declared on 30 November 2010, consists of 2 270 687 GFI shares and a special cash dividend of R64,6 million which was recognised in the statement of financial position as a liability.
12. Net asset and tangible net asset value and per share
| 31 December 2010 | 31 December 2009 | |
| Net asset value per share (cents) | 243 | 674 |
| Net tangible asset value per share (cents) | 242 | 674 |
13. Material changes
To the knowledge of the board, there have been no material changes to the information contained in the independent mineral asset valuation reports that were disclosed to shareholders in the settlement circular.
14. Related-party transactions
As a result of the settlement during the year, the JCI group is no longer considered a related party. For major transactions with JCI refer to notes 6, 7 and 8.
15. Events after reporting date
Refer to note 9 for the significant event occurring after 31 December 2010.
16. Annual general meeting
Details concerning the date, time and venue of R&E’s annual general meeting will be announced on SENS in due course.
Directors:
DC Kovarsky (Chairman)**, M Steyn (CEO)*, V Botha*, MB Madumise**,
JH Scholes**
(* Executive, ** Independent non-executive)
Secretary and Registered office:
RP Pearcey FCIS, 7th Floor Fredman Towers, 13 Fredman Drive, Sandown, 2196
Transfer secretaries:
Computershare Investor Services (Pty) Limited
(Registration number 2004/003647/07) 70 Marshall Street, Johannesburg 2001
Johannesburg
10 March 2011
Sponsor: PSG Capital (Pty) Limited