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Overview

2011 was an important year for Grindrod. The group continued to advance in ports, terminals and rail infrastructure projects in Africa, in order to realise its strategy of becoming an integrated freight and logistics service provider, whilst retaining its position in shipping.

During the year shareholders approved the raising of R2 billion in equity, which is required to develop infrastructural opportunities and projects, in particular the expansion of coal terminal capacity.

The format of the specific share issue underwritten by the Remgro Group enabled Grindrod to raise funds at a premium to the market.

In order to reduce the group’s exposure to a single project and increase its ability to execute its strategy, the Vitol Group, the world’s largest independent energy trader, has been introduced as a strategic partner to Maputo Coal Terminal. Vitol has also entered into a coal trading venture with Grindrod. The transactions, which are subject to regulatory approvals, were concluded and announced in January 2012.

The group generated earnings of R530,9 million for the year ended 31 December 2011 (2010: R780,3 million), a 32% decline. Headline earnings per share decreased by 41% to 99,6 cents per share (2010: 167,7 cents per share). Earnings growth on the prior year was achieved in the Freight Services, Trading and Financial Services divisions, whilst the Shipping division was impacted by weak shipping markets.

Total ordinary dividends of 29,5 cents per share (2010: 54,0 cents per share) was declared, at a dividend cover of 3,8 times.

Whilst the R2 billion raised strengthened the group’s statement of financial position, this has resulted in a dilution of earnings and the final dividend.

Capital expenditure and commitments

Capital expenditure was directed towards the group’s ship newbuilding programme, the expansion of terminal capacity and the replacement of a portion of the Logistics road fleet.

Future capital commitments relate to the expansion of terminal capacity and the procurement of locomotives and ships. The commitments exclude the planned expansion of terminal capacity by 20 million tonnes at Maputo and by about 8 million tonnes at Richards Bay, railway infrastructure and the development of a bulk liquid storage facility at Coega currently being developed.

Capital expenditure Capital expenditure approved Split as follows:
          Total Approved Approved
          commit- not and
(R million) 2011 2012 2013 2014 ments contracted contracted
Freight Services 287 384 129 513 468 45
  Logistics 159 12 12 12
  Ports and Terminals 128 372 129 501 468 33
Trading 11 1 1 1 3 3
Shipping 866 251 42 293 4 289
Financial Services 1 23 2 3 28 28
Group 1
  1 166 659 174 4 837 472 365

The table above includes capital commitments of R365 million relating to Grindrod’s share of joint ventures’ capital commitments.

Cash flow and borrowings

Operating profit before working capital adjustments was R1 069 million (2010: R1 316 million).

Cash out flows included investment in working capital of R1 264 million, capital expenditure of R1 166 million and dividends of R260 million. Increased working capital was required in December as a result of high oil prices and increased sales in the Trading division. Cash in flows included net R1 984 million received on the issue of shares. This resulted in the net debt position at 31 December 2010 of R1 835 million decreasing to R890 million at 31 December 2011 and the net debt: equity ratio decreasing from 31% to 10%.

The group incurred a net interest expense of R49 million for the year compared to a net interest expense of R51 million in the prior year.

The group is con dent that it has adequate funding for all capital commitments through its cash resources and bank facilities.

Shareholders’ equity

The R2 billion, together with a translation gain of R905 million and retained profits, increased shareholders’ equity by 56% from R5 971 million at 31 December 2010 to R9 311 million at 31 December 2011.

On 31 October 2011, 133 333 334 ordinary shares were issued by way of a specific issue. The total number of ordinary shares in issue accordingly increased to 598 715 314.

A total of 9 179 348 ordinary shares continue to be held in treasury.

Divisional operating reviews

Freight Services

The Freight Services division contributed 60% of the group’s attributable income for the 2011 year, with earnings of R318 million (21% growth on the prior year).

Revenue generated was R2,9 billion, a growth of 22% despite operational disruptions during the commissioning phase of the Maputo Coal Terminal.

Ports and Terminals

Improved rail delivery coupled with strong market demand for commodities resulted in increased volumes handled through all terminals during the second half of the year.

The Maputo port concession extension until 2043 provided a timeline for implementing the port master plan and for sub-concessionaires to undertake additional investment. The immediate expansion plan included dredging the port access channel to 11 metres in depth to accommodate panamax vessels. This was completed in the first quarter of 2011, increasing the port’s competitiveness, particularly with respect to bulk and container traffic.

The expansion of Maputo Coal Terminal to 6 million tonnes was completed at the end of the first half of 2011, with record tonnages subsequently achieved. To date US$70 million has been invested in the refurbishment and expansion of the terminal. A further coal stockpile was added to the Richards Bay terminal bringing capacity up to 3,2 million tonnes.

Phase 4 of the Maputo Coal Terminal expansion project to create capacity for 20 million tonnes of coal and 10 million tonnes of magnetite is progressing as planned, with the pre-feasibility stage completed in the second half of 2011. The project involves land reclamation resulting in a footprint of 120 hectares, the construction of two additional berths, a stockyard and railway infrastructure. To support the successful completion of the project, Grindrod entered into a strategic agreement with the Vitol Group subsequent to year-end. In the interim the board has approved the expenditure to increase coal capacity at the terminal during 2012 by a further 1,3 million tonnes.

The Rail business conducted by RRL Grindrod performed in line with expectation. Rail operations successfully concluded significant manufacturing, lease and maintenance contracts in Sierra Leone and Mozambique. Concession and other growth opportunities are being explored, which would positively impact on performance over the next few years.

Logistics

Logistics achieved earnings growth on the prior year, benefiting from improved market conditions. The earnings of R106 million included a profit of R23 million from the disposal of the perishable cargo business.

The operations were impacted by both industrial action across most road transport businesses in the first quarter of 2011 and a reduction in car carrying volumes due to plant shutdowns following the tsunami in Japan. The businesses, however, experienced improved market demand particularly during the second half of 2011.

Volume increases in the mining and automotive sectors and rationalisation of the businesses, partially mitigated the poor performance during the first half of 2011. Further improvements are expected in 2012.

The intermodal operations performance improved on the prior year following an increase in mining volumes although margins remain tight. Intermodal continues to invest in the consolidation and expansion of its existing operations, with a new development in Maputo scheduled for 2012.

Ships Agencies results were impacted by low container freight rates and the strong Rand/US Dollar exchange rate for most of 2011, whilst the clearing and forwarding businesses benefited from increased airfreight and seafreight volumes.

Outlook

Port and terminal operations are well positioned to benefit from the demand for commodities, particularly through demand for coal from China and India.

Performance of the Logistics business segment is expected to improve during 2012 as benefits are extracted from the turnaround strategy combined with further expected improvement in volumes.

Trading

The Trading division contributed 27% of the group’s attributable income and generated revenue of R29 billion, a growth of 28% for 2011. Volumes increased from 7,4 million tonnes to 7,5 million tonnes in 2011 whilst on average, Rand commodity prices increased by 26%.

Earnings were R144 million, a growth of 20% on the previous year and an operating margin of R20 per tonne was achieved.

Marine fuels performed well with growth in volumes, margins and profitability. This was achieved through its ability to source and finance product in a tight supply market further restricted by the availability of funding due to the high oil price and the banking sectors’ willingness to lend.

Industrial raw materials produced pleasing results for 2011, mainly due to the strong performance of the chrome ore and coal trading operations. Generally, demand for commodity in this sector was strong resulting in volume growth of 95% on the previous year.

The agricultural commodities business maintained volumes in a highly competitive market. profitability was, however, below expectations.

Management are currently negotiating the potential sale of a 50% interest in the marine fuels trading business. Consequently in terms of IFRS 5 Non-current Assets Held for Sale and Discontinued Operations, the investment in this business has been included in held for sale assets and liabilities.

Outlook

Demand for commodities driven by global economic growth, is expected to remain strong. Price volatility and regional supply/demand imbalances are anticipated.

The division will build on its current position through further developing its presence in sub-Saharan Africa. This will be combined with an increased focus on utilising group skills, services and assets to be in a position to offer integrated value adding solutions to customers. In addition, investment opportunities or joint ventures that support the trading capability of the division will be pursued.

The division anticipates achieving earnings growth for 2012.

Shipping

The Shipping division’s earnings of R7 million remain positive despite a challenging year.

Revenue generated for the year was R3 597 million, a 10% decline on the prior year.

The division’s drybulk business had a steady year with the handysize ships generating profits due to a high level of contract cover and low vessel costs. The panamax ships continued to generate profits under their fixed income charters whilst the capesize ships benefited from a high level of contract cover. Margins continued to be adversely affected by the ongoing piracy risks resulting in deviation costs to fulfil contractual commitments.

Volumes were steady in the Parcel Service business, however, margins were adversely affected by ongoing piracy issues particularly in the first half of the year. The Handymax and Indian Ocean Islands operating businesses developed further with an increase in both the number of cargoes carried and ships contracted.

The tanker business had a dif cult year, with European sovereign debt worries and a sluggish American economy weighing heavily on oil demand allied to continuing fleet oversupply. The small products tanker earnings were also affected by ongoing high maintenance issues.

The South African coastal tanker and bunker tanker ship operating businesses performed well.

As in previous years, average daily earnings achieved were above average spot rates for the year through forward contract cover, operational efficiencies and good pool performances.

Over the year, deliveries into fleet consisted of two 32 500 dwt handysize bulk carriers, a 28 000 dwt handysize bulk carrier in a joint venture, a 61 000 dwt handymax bulk carrier (chartered), two 16 500 dwt products tankers and a 52 600 dwt products tanker in a joint venture (chartered). In addition, a purchase option on a 32 400 dwt handysize bulk carrier was exercised and the division took ownership of a 46 700 dwt products tanker previously held under a long-term finance arrangement.

The shipping fleet has grown from 35,0 in 2010 to 38,5 ships. Forward contracts on 45% (weighted by revenue) of vessels in 2012 will lock in US$20 million of operating profit with 13% (weighted by revenue) of vessels already under contract for 2013.

Contract cover information and a fleet overview, are included in the 2011 results presentation annexures on www.grindrod.co.za.

Outlook

Commodity demand is expected to remain strong, however, the outlook for the dry cargo market is weak due to the large amount of newbuilding tonnage delivering into a market already oversupplied with ships.

Scrapping of older drybulk tonnage continues at a historical record level and will, in time, alleviate a large part of the imbalance.

The owned and long-term chartered drybulk fleet has a good level of cover for 2012 and management is working on increasing this through a combination of forward cargo bookings and forward freight agreements.

Recovery in the product and chemical markets continues to be slow. Tanker earnings will continue to be impacted by a lack of profitable forward cover and poor spot market earnings. However, the outlook on the supply/demand imbalance is looking more positive.

The weak shipping markets and European banking sector constraints should present interesting value-led investment opportunities in both wet and drybulk sectors.

Financial Services

The Financial Services division accounted for 11% of the group’s attributable income in 2011 with earnings growing by 30% to R58 million. The diversity of the Bank’s earnings streams continues to improve with a good balance of fees generated by the Corporate Banking, Property Solutions, Asset Management and Corporate Finance divisions.

Credit advances and liquidity are conservatively managed resulting in no specific impairments for bad debts, a strong liquidity position and a well controlled capital adequacy ratio.

Outlook

The global financial crisis continues to cast a cloud over the banking and asset management sectors and this is unlikely to be resolved in the near future. Financial Services will continue to focus on its chosen areas of expertise and to take advantage of appropriate growth opportunities that present themselves during this period of economic volatility. Asset management portfolios and lending will be conservatively managed, however, there will be growth in business activity across all divisions.

Basis of preparation

The condensed consolidated financial statements have been prepared in accordance with the recognition and measurement criteria of International Financial Reporting Standards (IFRS) and its interpretations adopted by the International Accounting Standards Board (IASB) in issue and effective for the group at 31 December 2011 and the AC 500 standards issued by the Accounting Practices Board or its successor. The results are presented in terms of IAS 34 Interim Financial Reporting and comply with the Listings Requirements of the JSE Limited and the Companies Act 71 of 2008.

These condensed consolidated annual financial statements were approved by the board of directors on 28 February 2012.

Accounting policies

The accounting policies adopted and methods of computation used in the preparation of the condensed consolidated financial statements are in terms of IFRS and are consistent with those of the annual financial statements for the year ended 31 December 2010 except for the adoption of new or revised accounting standards, interpretations and circulars which are described below.

New accounting standards

During the year the group elected to early adopt IFRS 10 Consolidated Financial Statements, IFRS 11 Joint Arrangements, IAS 27 (as revised in 2011) Separate Financial Statements, IAS 28 (as revised in 2011) Investments in Associates and Joint Ventures and IFRS 12 Disclosure of Interests in Other Entities. The group believes that adoption of these standards will improve the disclosure of the nature and risks associated with interests in other entities. The major change as a result of the early adoption is that joint venture entities which were previously proportionately consolidated are now accounted for and disclosed on the same basis as investments in associates, which are equity accounted. These standards have been applied retrospectively.

The group adopted IAS 24 (revised) Related Party Transactions in the current year which modifies the definition of a related party. The adoption of this standard has had no material effect on the group’s disclosures.

Audit opinion

The auditors, Deloitte & Touche, have issued their opinion on the group’s financial statements for the year ended 31 December 2011.

The audit was conducted in accordance with International Standards of Auditing. They have issued an unmodified audit opinion. These condensed consolidated annual financial statements have been derived from the group financial statements and are consistent in all material respects with the group financial statements. A copy of their audit report is available for inspection at the company’s registered office.

Any reference to future financial performance included in this announcement has not been reviewed or reported on by the group’s external auditors.

Directorate/executive

J G Jones and L R Stuart-Hill retired from the board on 30 June 2011. B J McIlmurray, a member of the executive committee, also retired on 30 June 2011.

The board of directors wish to express appreciation for their respective contributions to the group.

H J Gray was appointed to the executive committee on 1 June 2011 and is responsible for the Logistics operations.

M H Visser and J J Durand (alternate) were appointed to the board with effect from 31 October 2011 and M R Wade on 16 November 2011.

Post balance sheet events

Grindrod and the Vitol group entered into an agreement with effect from 1 January 2012 whereby Vitol is to acquire from Grindrod a 35% interest in Maputo Coal Terminal for a consideration of US$67,7 million. In addition, Vitol and Grindrod will enter into a partnership to combine their respective sub-Saharan coal trading businesses (65% Vitol/35% Grindrod). This transaction was announced in the press on 18 January 2012.

Prospects

The group anticipates an increase in earnings in 2012 despite uncertainty in the shipping markets. The investment in strategic infrastructure, from a strong financial base, supports the goal of sustainable longer-term growth for shareholders.

For and on behalf of the board

I A J Clark A K Olivier
Chairman Chief Executive Officer