Notes to the condensed consolidated financial statements

1. Corporate information

ArcelorMittal South Africa Limited is a public company domiciled in the Republic of South Africa and listed on the JSE Limited. These condensed consolidated financial statements for the six months ended 30 June 2017 comprise the company and its subsidiaries (together referred to as the group). The group is one of the largest steel producers on the African continent.

2. Basis of preparation

The condensed consolidated financial statements were prepared in accordance with the requirements of the JSE Limited Listings Requirements for interim reports as well as the requirements of the Companies Act of South Africa. The condensed consolidated financial statements have been prepared in accordance with the SAICA Financial Reporting Guides as issued by the Accounting Practices Committee and Financial Pronouncements as issued by Financial Reporting Standards Council. It also contains, at a minimum, the information required by IAS 34 Interim Financial Reporting. The accounting policies applied in the preparation of the condensed consolidated financial statements are in terms of IFRS and are consistent with those applied in the previous consolidated annual financial statements.

The condensed consolidated financial statements were prepared under the supervision of Mr D Subramanian CA(SA), the chief financial officer.

3. Accounting policies

There were no new or revised accounting standards adopted that could have a material impact on the condensed consolidated financial statements.

4. Segment report

Flat Steel Products Six months ended  
  30 June 2017
Reviewed
  30 June 2016
Reviewed
 
Revenue (R million) 13 422     11 127    
– External  13 321     10 797    
– Internal  101     330    
EBITDA (R million) (unreviewed) (69)    (118)   
EBITDA margin (%) (unreviewed) (0.5)    (1.1)   
Average net realised price (R/t) (unreviewed) 8 413     6 889    
Depreciation and amortisation (R million) (253)    (339)   
Loss from operations (R million) (322)    (406)   
Unreviewed information             
Liquid steel production (000 tonnes) 1 649     1 732    
Steel sales (000 tonnes) 1 506     1 489    
– Local  1 167     1 146    
– Export  339     343    
Capacity utilisation (%) 79     83   
Long Steel Products Six months ended  
  30 June 2017
Reviewed
  30 June 2016
Reviewed
 
Revenue (R million) 5 420     5 593    
– External  5 130     5 425    
– Internal  290     168    
EBITDA (R million) (unreviewed) (706)    152    
EBITDA margin (%) (unreviewed) (13.0)    2.7    
Average net realised price (R/t) (unreviewed) 7 492     6 758    
Depreciation and amortisation (R million) (191)    (188)   
Loss from operations (R million) (897)    (12)   
Unreviewed information             
Liquid steel production (000 tonnes) 725     788    
Steel sales (000 tonnes) 641     753    
– Local  462     649    
– Export  179     104    
Capacity utilisation (%) 77     83   
Coke and Chemicals Six months ended  
  30 June 2017
Reviewed
  30 June 2016
Reviewed
 
Revenue (R million) 735     811    
– External  700     784    
– Internal  35     27    
EBITDA (R million) (unreviewed) 191     97    
EBITDA margin (%) (unreviewed) 26.0     12.0    
Depreciation and amortisation (R million) (18)    (16)   
Profit from operations (R million) 173     81    
Unreviewed information             
Commercial coke produced (000 tonnes) 100     157    
Commercial coke sales (000 tonnes) 92     238    
Tar sales (000 tonnes) 39     37   
Corporate and other Six months ended  
  30 June 2017
Reviewed
  30 June 2016
Reviewed
 
EBITDA (R million) (unreviewed) 50   151  
Depreciation and amortisation credit (R million) 13   13  
Profit from operations (R million) 63   68  

5. Related party transactions

The group is controlled by ArcelorMittal Holdings AG, which effectively owns 69% (June 2016: 69%) of the group's shares. At 30 June 2017, the outstanding ArcelorMittal Holdings AG subordinated loan amounted to R2 700 million (2016: Rnil). Interest is payable at the prime lending rate (2016: three months Jibar plus 2.125%) and an amount of R139 million (2016: R37 million) was incurred for the six months ended 30 June 2017.

During the year, the company and its subsidiaries entered into sale and purchase transactions with joint ventures in the ordinary course of business at an arm’s length.

6. Fair value measurements

Certain of the group’s financial assets and financial liabilities are measured at fair value at the end of each reporting period. The following table gives information about how the fair values of these financial assets and financial liabilities are determined, particularly the valuation techniques and inputs used.


Financial assets Fair values as at period ended          
In millions of rand 30 June 2017
Reviewed
  30 June 2016
Reviewed
  Fair value hierarchy   Valuation techniques and key inputs  
Available-for-sale 61   120   Level 1   Quoted prices in an active market  
Held-for-trading assets   24   Level 1   Quoted prices in an active market  
Held-for-trading liabilities 105   81   Level 1   Quoted prices is an active market  

Level 1: Fair value measurements are those derived from unadjusted quoted prices in active markets for identical assets or liabilities.

7. Taxation

The effective tax rate of 0% (compared to the statutory tax rate of 28%) for the six months ended 30 June 2017 is primarily as a result of not recognising the deferred tax asset on the available income tax losses. Management believes that the turnaround initiatives will result in the group returning to profitability at some point in the future. However, based on considerations presented, management believes it is premature to conclude at this stage that it is more likely than not for sufficient future taxable profits to be available against which the full proposed deferred tax asset can be utilised.

8. Restricted cash and securities

At 30 June 2017, ArcelorMittal South Africa has restricted cash of R1 583 million (30 June 2016: Rnil). This consists of R998 million regarding the True Sales Receivables (TSR) facility and R585 million for the environmental rehabilitation obligations.

Eligible inventories and receivables are provided as securities for the borrowing base facility to the extent of the draw down. At 30 June 2017, R3 350 million was drawn down on the borrowing base facility and R1 150 million was still available.

Bank accounts of R1 021 million were ceded in favour of the borrowing base and TSR facilities.

9. Property, plant and equipment

An impairment indicator assessment was performed on all cash-generating units of the group. Following this assessment, an impairment test was performed on the long steel unit.

In accordance with IAS 36 Impairment of Assets, an asset is impaired if the carrying amount of the asset is greater than the recoverable amount of the asset.

The result of the impairment test was that the long steel unit was impaired by R600 million (30 June 2016: Rnil) and was recognised against property, plant and equipment. This was primarily as a result of the strengthening of the rand against the US dollar and loss of volumes due to higher coal prices compared to competitors who do not use coal in their production process.

Basis of the impairment model

The recoverable amount of the unit was determined using a discounted cash flow model and an explicit forecast period for five years. These cash flows are US dollar based. Cash flows has not taken the proposed carbon tax into account when determining the recoverable amount. To determine the terminal value, the Gordon growth model was used, year five was taken into perpetuity. The outcome of the impairment test was that the long products cash-generating unit was impaired by 9%.

The other major assumptions in arriving at present value of future cash flows are as follows:

Long products
Major assumptions 30 June 2017
Reviewed
 
WACC (%) (US$ denominated) 12.86  
Growth rate (%)(US$ denominated) 2.0  
Exchange rate (R/US$) 13.06 – 14.74  
Iron ore prices (US$/ton) 41 – 47  
Steel sales prices (US$/ton) 533 – 593  
Sales volumes (tonnes) 1 322 – 1 649  
Capex (US$) (over five years) 186  

10. Going concern

The group would like to re-emphasise that, despite the positive progress on safeguards on flat products, import duties and the designation of local steel for government infrastructure projects, the local steel industry continue to be threatened by imports entering the market, primarily from China. Higher steel prices did not fully compensate for higher raw material costs, namely coal and iron ore, resulting in lower margins. Poor market conditions, operational incidents, impairments and the strengthening of the rand against the US dollar also negatively impacted the group's results.

ArcelorMittal South Africa has implemented various initiatives to return the group to profitability and to generate positive cash flows. In order to address the current challenges, the group is in the process of exploring several additional initiatives, including additional cost-saving interventions, assessing the profitability of various product lines and the implementation of structural changes (restructuring) in the next six months. Further information will be provided as soon as the necessary investigations and decisions have been finalised.

Through the realisation of these initiatives, the board believes that the group will have sufficient funds to pay its debts as they become due over the next 12 months, and will therefore remain a going concern. The reasonableness of the initiatives and the likelihood of the initiatives being achieved have and will continue to be assessed as final decisions are made in this regard. However, should these initiatives not materialise, it could result in material uncertainty regarding the ability of the group to continue as a going concern. Processes will be established to ensure the effective and frequent monitoring of the implementation of the necessary initiatives so that appropriate and timeous action can be taken should the implementation not materialise.

11. Headline losses


  Six months ended  
In millions of rand 30 June 2017
Reviewed
  30 June 2016
Reviewed
 
Loss for the period (2 223)   (450)  
Adjusted for:        
– Impairment charge 604     
– (Profit) on disposal or scrapping of assets –    (17)  
– Tax effect –     
Headline loss for the period ( 1 619)   (458)  
Headline loss per share (cents)        
– basic (148)   (45)  
– diluted (148)   (45)  

12. Commitments


  Six months ended  
In millions of rand 30 June 2017
Reviewed
  30 June 2016
Reviewed
 
Commitments 4 076   1 162  

13. Subsequent events

The directors are not aware of any matter or circumstances arising since the end of June 2017 to the date of this report that would significantly affect the operations, the results or financial position of the group.