INTEGRATED ANNUAL REPORT

Transcription

1 INTEGRATED ANNUAL REPORT 2012

2 CONTENTS 02 Corporate administration 03 About this report 04 Performance highlights 05 Group financial highlights 06 Geographical footprint 08 Board of directors 12 Report of the chairman and chief executive officer 14 Review of operations 26 Business segments 28 Analysis of shareholders 29 Significant shareholdings 30 Corporate governance 32 Report of the audit committee 33 Report of the risk committee 34 Report of the remuneration committee 40 Report of the social and ethics committee 41 Sustainability report 48 Approval of annual financial statements 48 Declaration by company secretary 49 Directors report 53 Summarised financial statements 64 Notice of meeting to members

3 corporate ADMINISTRATION DIRECTORS Executive Directors Marcel Jonathan Anthony Golding (Chairman) Block B, Longkloof Studios Darters Road, Gardens Cape Town, John Anthony Copelyn (Chief Executive Officer) Block B, Longkloof Studios Darters Road, Gardens, Cape Town, 8001 Theventheran Govindsamy Govender [Kevin] (Financial Director) Block B, Longkloof Studios Darters Road, Gardens Cape Town, 8001 Non-Executive Directors Virginia Mary Engel Block A, Longkloof Studios Darters Road, Gardens Cape Town, 8001 Barbara Hogan # Block B, Longkloof Studios Darters Road, Gardens Cape Town, 8001 Mimi Freddie Magugu # Block B, Longkloof Studios Darters Road, Gardens Cape Town, 8001 Dr Lynette Moretlo Molefi # Block B, Longkloof Studios Darters Road, Gardens Cape Town, 8001 Velaphi Elias Mphande Block B, Longkloof Studios Darters Road, Gardens Cape Town, 8001 Jabulani Geffrey Ngcobo # Block B, Longkloof Studios Darters Road, Gardens Cape Town, 8001 Yunis Shaik # 52 Troon Road Greenside, 2193 # Independent WEBSITE ADDRESS COMPANY REGISTRATION NUMBER 1973/007111/06 SHARE CODE HCI ISIN: ZAE COMPANY SECRETARY AND REGISTERED OFFICE HCI Managerial Services Proprietary Limited Block B, Longkloof Studios Darters Road, Gardens, Cape Town, 8001 Telephone: (021) Telefax: (021) P O Box 5251 Cape Town, 8000 AUDITORS PKF (Jhb) Inc Registration number 1994/001166/21 42 Wierda Road West, Wierda Valley, Johannesburg, 2196 Private Bag X10046, Sandton, 2146 BANKERS First National Bank of Southern Africa Limited SPONSOR Investec Bank Limited 100 Grayston Drive Sandton, Sandown, 2196 TRANSFER SECRETARIES Computershare Investor Services Proprietary Limited 70 Marshall Street Johannesburg, 2001 PO Box Marshalltown, 2107

4 ABOUT THIS REPORT In line with the requirements of the King Report on Corporate Governance ( King III ), this is the second integrated report generated by HCI in its journey to ensure improved reporting systems and measures so as to provide meaningful information to stakeholders. This report provides a consolidated review of the group s financial, economic, social and environmental performance on matters material to the group, and those of interest to the group s key stakeholders. In accordance with the stated objectives of integrated reporting, this report focuses on those issues that have a material impact on the group to create and sustain value, and outlines how these issues have been integrated within the group s business strategy. The integrated report includes all our subsidiaries, associates and joint ventures and covers the period from 1 April 2011 to 31 March Where relevant in the report, adjusted comparatives are shown on a likefor-like basis to assist in the understanding of the group s results. It has also been necessary to restate comparative data from prior years in the annual financial statements (refer note 48 for more information). The information included in the integrated annual report has been provided in accordance with International Financial Reporting Standards (IFRS), Companies Act of South Africa 2008 (as amended), the JSE Listings Requirements, King III and the guidance provided in the Integrated Reporting Committee of South Africa s Framework for Integrated Reporting and the Integrated Report Discussion Paper (Framework) The sustainability information included in this report has been guided by the Global Reporting Initiatives (GRI) G3 guidelines. The legal requirements in the South African Companies Act which became effective on 1 May 2011, coupled with the JSE s initiatives, has allowed the company to provide shareholders with summarised financial information. This has enabled the company to exclude the financial reporting requirements and corporate governance disclosures. Ultimately, the shorter, integrated report reduces the company s carbon footprint and promotes the company s sustainability efforts. The full integrated annual report and annual financial statements will be available on our website from 28 September Assurance for this report has been provided through a combination of external and internal sources. The company s external auditors, PKF (Jhb) Inc, audited the annual financial statements and reviewed the annual integrated report to assess the report against the framework and the disclosure requirements in King III. The board, assisted by the audit and risk committee, is ultimately responsible for overseeing the integrity of the integrated report. The directors confirm that they have collectively reviewed the content of the integrated report and believe it addresses the material issues and is a fair presentation of the integrated performance of the group. Combined assurance is a work in progress and the group has, as yet, not achieved optimal co-ordination of the different forms of assurance. The board approved this integrated annual report on 29 August Framework, codes, guides Framework for the following sections Assurance providers IFRS Annual financial statements PKF (Jhb) Inc (external audit) Companies Act of 2008 Annual financial statements and corporate governance PKF (Jhb) Inc (external audit) and Investec Bank Limited (sponsors) King III Corporate governance Audit committee Global reporting initiative Sustainable development information CoZero Broad-based BEE code BEE scorecard and contributor level ratings Empowerlogic Carbon disclosure project Sustainable development information CoZero JSE listing requirements and SRI framework Full suite of reports and index Investec Bank Limited (sponsors) and JSE Limited 3

5 PERFORMANCE HIGHLIGHTS Revenue R 7 611,7 million +13,2% EBITDA R 1 501,9 million +17,1% Profit before tax R 1 924,7 million +104,4% Headline earnings R 1 020,1 million +41,2% Headline earnings per share 802,34 cents +40,1% Net asset carrying value per share 9 259,35 cents +12,1% TRANSFORMATION AND EMPOWERMENT BBBEE level Level 2 BBBEE score Enterprise spend R33 million Social development spend R22 million +41,2% Employee skills development R25 million +40,1% Reduction in emissions 16.4% 4

6 GROUP FINANCIAL HIGHLIGHTS HEADLINE EARNINGS NET ASSET CARRYING VALUE PER SHARE R 000 Cents FINANCIAL HIGHLIGHTS FOR THE YEAR Dividend per share - cents Share price - high - cents low - cents at year end - cents SIX YEAR REVIEW Group Revenue (R m) Net asset carrying value per share cents Shares in issue ( 000) (net of treasury) average at year end INTEGRATED ANNUAL REPORT 2012 HOSKEN CONSOLIDATED INVESTMENTS LIMITED 5

7 GEOGRAPHICAL FOOTPRINT Nigeria Ghana Tanzania Kenya Seychelles Tsogo Sun Vukani Gaming Corporation Galaxy Bingo Sabido Golden Arrow Bus Services Montauk Energy Capital Seardel Investment Corporation KWV Holdings Formex Industries Syntell HCI Coal Limtech HCI Australia BSG Africa Three Blind Mice Communications Zambia Namibia Zimbabwe Botswana Mozambique Gauteng Ladysmith Lesotho Durban East London Cape Town Vukani - LPM machines installed in all provinces except Northern Cape 6 Tsogo Sun - Hotels in all the provinces; casinos in all provinces except North West; Limpopo and Northern Cape

8 CHINA UNITED STATES OF AMERICA UNITED KINGDOM AUSTRALIA INTEGRATED ANNUAL REPORT 2012 HOSKEN CONSOLIDATED INVESTMENTS LIMITED 7

9 BOARD OF DIRECTORS KEVIN Govender Moretlo Molefi Freddie Magugu Jabu Ngcobo Yunis Shaik Marcel Golding John Copelyn BARBARA HOGAN VIRGINIA ENGEL Elias Mphande 8

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11 BOARD OF DIRECTORS EXECUTIVE DIRECTORS John Copelyn (62) Chief Executive Officer B.A. [Hons] B.Proc Marcel Golding (52) Executive Chairman B.A. [Hons] John joined HCI as chief executive officer in Prior to this he was a member of parliament and general secretary of the Southern African Clothing and Textile Workers Union. He is chairman of e.tv, Seardel Investment Corporation, Tsogo Sun Holdings and the HCI Foundation. Marcel joined HCI as chairman in Prior to this he was a member of parliament and deputy general secretary of the National Union of Mineworkers. He is chairman of Golden Arrow Bus Services and KWV Holdings. non-executive DIRECTORS Virginia Engel (62) Non-Executive Director Freddie Magugu (52) Independent Non-Executive Director Virginia retired from the position of chief executive officer of the HCI Foundation in Previous to this she was the coordinator of the SACTWU Welfare Trust and private secretary to Nelson Mandela during the last two years of his presidency. She was appointed to the Board of HCI as nonexecutive director in January Freddie worked for the Southern African Clothing and Textile Workers Union from 1982, reaching the position of national organising secretary which he held from 1993 to He was the senior development manager at Unibank from 1999 to He was appointed to the board of HCI as a non- executive director in April Jabu Ngcobo (61) Independent Non-Executive Director BARBARA HOGAN (60) Independent Non-Executive Director BA [Hons] (Development Studies) Jabu was the regional secretary for Africa of the International Textile Garment and Leather Workers Federation from 1999 to 2006, Prior to this appointment he held the position of general secretary of the Southern African Clothing and Textile Workers Union for 6 years from 1994 to Jabu was appointed to the board of HCI as a nonexecutive director in October He also serves on the board of Tsogo Sun Holdings, Niveus Investments and HCI Coal. Barbara worked at the Development Bank of South Africa as an institutional specialist until her appointment as a member of parliament in She served as chair of numerous committees including the budget committee, finance portfolio committee the standing committee of the auditor-general. She was appointed to cabinet as minister of health in 2008 and then as minister of public enterprises in She was appointed to the board of HCI as a non-executive director in August

12 KEVIN Govender (41) Financial Director B.Comm [Hons] B.Compt [Hons] Kevin is the financial director of HCI. He joined the HCI group in 1997 where he has also held the position of company secretary and chief financial officer from He holds directorships in several HCI subsidiaries and is a trustee of the HCI Foundation. He was appointed to the HCI Board as an executive director in June Moretlo Molefi (43) Independent Non-Executive Director BSc MBChB Telemed [dip] SMP Elias Mphande (54) Non-Executive Director Elec. Eng. [dip] Moretlo is a businesswoman with interests in the health sector. Prior to this she was the director of the Telemedicine program at the Medical Research Council of SA; consultant for Aspen Pharmacare and COO of Safika Health. She currently serves as a board member of International Society for Telemedicine and ehealth and vice-president of SA Telemedicine Association. She also serves on the board of Niveus Investments and e.tv. She was appointed to the board of HCI in December Elias Mphande has served as the national organising secretary of the Southern African Clothing and Textile Workers Union, marketing director of Viamax Fleet Solutions, chief executive officer of AUTA and the Vukani Group and chairman of Golden Arrow Bus Services. He was appointed to the HCI board in 2010 as a non-executive director and serves on the board of Vukani Gaming Corporation and e.tv. Yunis Shaik (54) Independent Non-Executive Director B.Proc Yunis is an attorney of the High Court and presently in private practice. He is a former deputy general secretary of the Southern African Clothing and Textile Workers Union and a director of Workers College. He has served as a senior commissioner to the CCMA in KwaZulu Natal. He also serves on the board of Niveus Investments and Tsogo Sun Holdings. He was appointed to the HCI Board in August 2005 and as lead independent non-executive director of the HCI Board in August INTEGRATED INTEGRATED ANNUAL ANNUAL REPORT 2012 REPORT HOSKEN 2011 HOSKEN CONSOLIDATED CONSOLIDATED INVESTMENTS INVESTMENTS LIMITED LIMITED 11

13 REPORT OF THE CHAIRMAN MJA Golding Chairman For the first time this year, HCI produced annual headline profits in excess of a billion rand. This figure is in fact more than the entire market capitalisation of the company at the time when the current management team started working for the company in The company currently has only half the number of issued shares as in Debt: While the company has at various times been fairly heavily indebted, its ratio of total debt to EBITDA is currently less than a multiple of one. Cash generated by operations during the year amounted to more than half our total debt at the end of the year. In addition, debt was greatly reduced during the year through the sale of our interest in A.I.C. Holding Company to partners in that business, as well as by the disposal of the Pan African Parliament to various NAFCOC trusts in exchange for the majority of the preference shares previously issued to them by the group. The Core Assets: The major mature businesses of the group (hotels, gaming, media and transport) produced headline profits that were some 30% up on the previous year. Admittedly, significant contributing reasons for this extraordinary improvement year-to-year is due to HCI s increased stake in Tsogo Sun during the previous financial year as well as Tsogo Sun increasing its operations through its merger with Gold Reef Resorts. Nevertheless, all these businesses performed strongly, notwithstanding the fact that the general economy was not doing nearly as well. Assets that perform well in bad times are good core assets to own and we are pleased that they represent the heart of the HCI value proposition. Growth Assets: Some businesses that HCI had invested in a few years earlier, in the hope they would provide strong growth, did exactly that. In particular, HCI Coal has emerged as a valuable business. Palesa mine produced about 2 million tons of coal for the year on contract to Eskom which resulted in it earning R51,7m in headline earnings (2011: R22,2m). Subsequent to year end, HCI succeeded in obtaining a final high court order obliging the state to correct the mis-award of our mining rights at Mbali mine forthwith. We have finally succeeded in obtaining the water licence for the property and are now in the final stages of implementing the section 11 transfer of the rights to our wholly owned subsidiary. We hope to complete the development of Mbali by year end. This should increase the value of coal sold during the 2014 financial year. Likewise, Seardel has emerged as a diversified company with strong property interests, as well as several profitable businesses in distribution and manufacture. Litigation against former directors resulted in the recovery of some R250m worth of assets. The transfer of these assets to Seardel is now fairly advanced in one case and complete in the rest. Admittedly, clothing manufacture has been exceptionally difficult to bring to profitability. The weakening of the rand has helped in relation to imports but enormous hurdles remain as a result of huge disparities between the cost base of local manufacturers. Over the three years since HCI rescued the firm, its share price has grown from 50c a share to R1,45 a share. While this may, in itself, not always be a great gauge of underlying performance, it does demonstrate the markets confidence in the restoration of shareholder value there since we took the company over. New Projects: HCI has developed a set of strong relationships with various different property developers over the last year and is in the process of investing in the development of two retail shopping centres. The first of these is in Upington and the second will shortly be commenced in Seapoint, Cape Town. Both appear to be lucrative developments and will hopefully add significantly to our property portfolio which also includes Gallagher Estate in Midrand, an office block in Umhlanga Ridge and a 50% stake in another office block in Claremont, Cape Town. HCI s diversification offshore has continued though we believe it is too early to judge progress in these latest developments. We have succeeded in acquiring 67% of a listed vehicle in Australia, Oceania Capital Partners and have a good management team with whom we have a long relationship focused on developing our interests there. Likewise we have restructured our media interests so as to retain a larger stake in an offshore media vehicle, Longkloof, which we have bought out of Sabido subsequent to the year end together with our partner in that business. Longkloof is currently involved in developing various start up media opportunities in Europe, the USA and Asia. We have now built our interest in KWV to about 40% and have satisfied both the Competition 12

14 AND CHIEF EXECUTIVE OFFICER Board requirements to take control thereof, and the Companies Act requirements to make an offer to its minority shareholders. The business is not profitable currently but we believe it to be a great base to develop a distribution business in the liquor industry. Struggling Businesses: Montauk, our landfill gas business in the USA, continues to produce Hi-BTU gas and electricity under difficult circumstances given the low natural gas prices that currently prevail there. While it remains loss making, it is stable and produces sufficient cash to meet its short term commitments. Further, there are opportunities for it to grow where projects can be developed with fixed price offtake agreements. Last year we developed such a project at McKinney which has performed well and in the coming year we have committed to developing AEL on a very similar basis. The forward gas price of natural gas in the USA indicates a slow improvement over the next couple of years which should help though, until demand for the commodity grows to match the current very substantial oversupply from shale gas, this is unlikely to be that significant. Until infrastructure develops to export gas from the USA to Europe and Japan (where gas costs are several times the USA price) and more coal fired plants are converted to gas fired plants, this business will have to be carefully managed. Nevertheless, every commodity has its moment and we believe patience will be rewarded at some point. It seems unrealistic to us that gas can continue to trade at a small fraction of its heat exchange value compared to oil without the market ultimately correcting this and we are continuing to grow this business counter-cyclically. Formex remains a disappointing business with little improvement. Most of the value associated with the business has been written off, so only the upside remains. It is an open question what this might turn out to be, but it is slowly trading its way out of the hole it fell into, and prudent managing of the business over the next year or two should allow it to recover. Decentralisation: HCI has developed as a conglomerate investment company holding controlling stakes in businesses with vastly differing profiles across several unrelated industries. The blend of these businesses has allowed HCI to fund its growth from the profits of the mature assets coupled with some debt. In turn this has allowed us to grow without diluting our current shareholders, and especially our BBBEE shareholders. This has been the basis whereby HCI has maintained its majority Black owned status to date. Nevertheless, the very success of the group in relation to media and casino investments has created a situation where other extremely interesting companies are so hidden in the shade of these successes that they are being grossly undervalued by the market. As a result, we have decided to consider decentralising the company s operations to some extent. The first consequence of this has been the recent announcement of the splitting off of some 45% of the shares in Niveus Investments Limited. This company is centred in non-casino gaming and our stake in KWV. The assets are managed by a close-knit team that has grown within HCI and will allow them an opportunity to show the market what they have been doing in the shade, as well as to allow these smaller assets to be separately viewed by the market while retaining HCI as it s BBBEE shareholder. Sustainability: Finally, we are happy to report that the group has developed a substantial sustainability section to this report which is reflective of the general concerns the group has to develop as a rounded, corporate contributor in areas of integrity, Black Empowerment, corporate governance, environmental concern as well as social responsibility. In truth the corporation is an unusual one on the JSE with enviable BBBEE credentials, a corporate social investment profile larger than others several times its size, and an environmentally balanced portfolio of assets where major contributions to global warming through coal mining and a large diesel based bus company are largely offset by renewable energy assets operated by the group. Board: There have been two changes in our board since our last report. Firstly, Rakesh Garach resigned with effect from January We would like to thank him for his valuable time and services. In his place the board co-opted Barbara Hogan with effect from the August 2012 board meeting. Barbara was previously, since 1994, a member of Parliament and was a member of cabinet until late We believe she will become a great addition to our board from the outset and warmly welcome her. JA Copelyn Chief Executive Officer INTEGRATED ANNUAL REPORT 2012 HOSKEN CONSOLIDATED INVESTMENTS LIMITED 13

15 REVIEW OF OPERATIONS FOR THE YEAR ENDED 31 MARCH 2012 GAMING, HOTELS AND LEISURE TSOGO SUN HOLDINGS LIMITED ( TSOGO SUN ) The merger of Tsogo Sun and Gold Reef Resorts and the effective listing of the Tsogo Sun group was concluded on 24 February During the year under review, the group has focused on integrating the Gold Reef businesses and this process has largely been completed, culminating in the rebranding and launch of the group s new look identity in April The overall performance for the year was satisfactory, with a noticeable increase in activity levels in the second six months. Both casino win and hotel occupancy showed accelerated year on year growth and allowed the group to achieve margin expansion for the first time since Total income of R9,0 billion ended 39% above the prior year, assisted by the inclusion of R2,2 billion incremental income from Gold Reef, and satisfactory organic growth offset by the non-recurrence of 2010 FIFA World Cup related income. Like-for-like growth in income (including Gold Reef ) is 5%. EBITDAR at R3,5 billion reflected a 41% increase on the prior year, including additional EBITDAR from Gold Reef and good organic growth in the current year. Like-for-like EBITDAR (including Gold Reef) is 7% up on the prior period, again impacted by the non- recurrence of World Cup related earnings in hotels. The overall group EBITDAR margin of 38.8% is 0,6pp above the prior year. Gaming experienced revenue growth throughout the financial year with accelerated revenue growth across many of the group s casinos during the second six months. Hotels, which benefited from the World Cup in June and July 2010, reflected revenues in line with the comparative period for the full year but have shown stronger revenue growth, driven by increased occupancies, during the second half of the year. Overall revenue for gaming operations increased 5% on the prior year to R7.1 billion. Operating costs were well controlled with a 2% increase on the prior year, despite increased regulated utility costs and property rates, partially due to savings achieved through the merger. EBITDAR increased 10% to R2,9 billion at a margin of 40.6%. The hotel industry in South Africa is still experiencing the dual impact of depressed demand and oversupply, with overall industry occupancies of 57% for the year. The group s hotels are likewise affected. However, as a result of the strong sales and distribution channels and the superior product and service quality available within the group, a significant occupancy and rate premium is being achieved in the segments in which the group operates. Showing some recovery, the group s system-wide occupancies in South Africa improved to 60.9% (2011: 58.4%), as rooms sold increased by 5% despite the closure of Southern Sun Grayston in December Average room rates in the South African operations declined by 7% to R775, with virtually all the decline attributable to the higher achieved rates during the World Cup in the prior year. 14

16 The offshore division of hotels achieved total revenue of R324 million during the year, representing a 20% improvement on the prior year, assisted by the inclusion of Southern Sun Nairobi as a leased hotel (previously managed) with effect from 1 August EBITDAR (pre-foreign exchange gains) of R88 million was achieved. The Rand weakness in the second half of the year positively impacted both the translation of USD and Euro earnings streams of the offshore hotels as well as resulting in a R13 million foreign exchange gain on the translation of offshore monetary items. The underlying operations of the group remain highly geared towards the South African consumer (in gaming) and the corporate market (in hotels) with both sectors experiencing difficult economic conditions and increased administered costs. The group is poised for growth if these sectors of the South African economy continue to improve. Regulatory risks remain a threat to the group as evidenced by the announcement in the National Budget of a proposed additional tax of 1% of gaming revenue with effect from 1 April 2013, albeit a better alternative to the previously proposed withholding tax on winnings. The risk remains of additional changes to tax rates and an increased cost burden of compliance with various regulations. The group continues to engage with the various regulatory bodies and other Government departments on a constructive basis to ensure that proposed changes are warranted and capable of being implemented without having a negative impact on both current and new investment in the industry, and consequently on employment levels. The accelerated trading performance across the group s operations in the second half of the year is encouraging, although the sustainability thereof is uncertain. Nevertheless, the group remains highly cash generative and has significant opportunities to invest capital in its growth strategy. Plans are at an advanced stage for the redevelopment of the Silverstar casino, where the group expects to invest some R320 million in new facilities, including cinemas, restaurants, concert and entertainment areas and conferencing facilities, to better service the West Rand market. The group is also exploring a variety of projects, including the redevelopment of the Gold Reef City Theme Park, the expansion of the Suncoast Casino and related entertainment facilities, and the opportunity to bid for the relocation of one of the smaller casinos in the Western Cape to the Cape Metropole as well as a number of potential acquisitions under negotiation. The ability to continue to pursue such investment will depend on the final outcome of, and impact from, the variety of proposed regulatory and tax changes considered by Government and will require the successful interaction with various regulatory bodies including gaming boards, city councils, provincial authorities and national departments. Tsogo Sun is separately listed and more detailed commentary on its results can be found within its results which are published separately. INTEGRATED ANNUAL REPORT 2012 HOSKEN CONSOLIDATED INVESTMENTS LIMITED 15

17 REVIEW OF OPERATIONS FOR THE YEAR ENDED 31 MARCH 2012 VUKANI GAMING CORPORATION PROPRIETARY LIMITED ( VUKANI ) Vukani Gaming is a group of companies principally engaged in the offering of limited payout machines ( LPM ) gaming services. VSlots, which was established in 1994, is the largest operator of limited payout machines in South Africa. VSlots manages a network of sites and is the only Route operator that is licensed in all operational provinces across South Africa. The installed LPM base increased by 13% from in the prior year to at March Management is optimistic that the planned increase in the number of LPMs, as well as a focus on improving the quality of the gaming offering, will see an increasing trend of profitability for the business. The degree of this projected growth will be determined by the extent to which the rollout of LPM s is efficiently managed. The growth strategy will be focused on the continued improvement of gross gaming revenue ( GGR ) per machine and the rollout of machines in the various provinces, particularly where licenses have only recently been awarded. Furthermore, as part of a strategy to increase its footprint in Africa, it has successfully procured an interest in licensed gambling operations in Swaziland, and is awaiting the necessary regulatory approvals prior to commencing operations in this region. The GGR and EBITDA increased by 27% and 42% respectively from the prior year which was achieved through strict cost control measures and continued focus on improving the GGR per LPM. 16 GALAXY BINGO INTERNATIONAL SOUTH AFRICA PROPRIETARY LIMITED ( BINGO ) Galaxy Bingo s operational efficiency has been improved considerably over the past year and the upgrading of operating sites has been concluded, which is expected to yield positive returns for the 2013 financial year. Even though it made an insignificant loss for the 2012 financial year, the turnaround was successful and the business generated cash from its operations during the year. Existing operations of the group are expected to be profitable, for the first time since our investment, for the 2013 financial year and should realise a solid positive EBITDA performance. However, national regulatory uncertainty still exists for Galaxy Bingo relating to its wholly electronic bingo terminals ( EBTs ). The release of the long awaited Gaming Review Commission ( GRC ) report and the Portfolio Committee ( PC ) recommendations have raised concerns that the further roll-out of EBTs will be contained, mainly based on unsupported and ill-advised concerns about the detrimental social impact of electronic bingo, while other sectors within the gambling sector are allowed to utilise technology to expand their businesses. The adoption of these recommendations will lead to job losses and reduced investment. All this while the GRC and PC seem to be supporting the legalisation of online gambling which will include wholly electronic bingo and which will have a detrimental effect on all land based gambling operations which create employment opportunities.

18 MEDIA AND BROADCASTING SABIDO GROUP ( SABIDO ) The Sabido Group once again performed well ahead of expectations in the period under review. While there are some smaller investments which require closer attention to bring their performance into line with expectations, the main part of the business e.tv and e.sat tv is on a solid footing and this provides a firm base for continued growth. Despite aggressive growth in pay-tv which is impacting on audience share for free-to-air services e.tv has managed to hold its own against the increasing competition. AMPS figures for December 2011 showed a 4% growth for e.tv, taking its reach to 16.1 million viewers. However, continued delays in the launch of DTT have started to demonstrate an impact on the free-to-air broadcast market as viewers turn to the multi-channel offerings of pay-tv. Proposed legislation which would ban the advertising of alcohol on television may have a significant impact on revenues if the legislation is passed. e.sat s primary operating business - the enews Channel - benefited from growth in the DStv Compact platform and retained its position as the premier news service on DStv. enews continued to provide syndicated services to e.tv Africa, The Africa Channel and Kyknet (via its enuus brand). The 24-hour news business has entrenched itself firmly in the South African market since its launch in 2008 and is now in a position to expand its horizons. Yfm the Gauteng-based youth radio station managed to perform according to budget for the period under review and audiences remain stable at just over 1.4 million, although radio remains under pressure on the revenue front. On the rest of the continent, Sabido s investments in Botswana and Ghana have both shown improvement with Ghana showing particular promise in the context of the country s forecast for doubledigit advertising growth. e.tv Africa continues to broadcast in 49 countries across the continent via direct-to-home satellite as well as via syndicated partners in Nigeria, Kenya, Zimbabwe, Namibia, Botswana and Ghana. Sasani Studios performed ahead of expectations for the period and Media Film Services (now part of the Memar Group) also returned a good performance. The post-production business continues to struggle with the decline in business and The Refinery once again experienced losses in this regard. Cape Town Film Studios, while still in an investment phase, is gaining traction among the international film-making community and Phase 2 of its development is under consideration. On the production and distribution front, Crystalbrook Sabido s African distributor completed the period under review well ahead of targets with broadcast licensing deals driving revenue. UK distribution arm, Power, is re-establishing itself in the market having been bought out of administration by Sabido subsidiary, Longkloof. Both distribution agencies represent Sabido s factuals and wildlife product which are being produced primarily for international export and sales. Music publisher, Lalela, has shown solid growth over the past year and is starting to earn revenues from public performance royalties. Subsequent to the year-end, Longkloof Investments (Sabido s offshore subsidiary) was separated from Sabido Investments and will be held by HCI and Remgro under a separate shareholding structure. Longkloof houses all media businesses outside of Africa including The Africa Channel (UK), Power (UK), Setanta Sports Asia (Ireland and South East Asia), e.tv China and Lalela Music s offshore operation in Los Angeles, USA. Overall performance by the Group has been satisfactory and provides a solid base for further growth and expansion in the next fiscal. INTEGRATED ANNUAL REPORT 2012 HOSKEN CONSOLIDATED INVESTMENTS LIMITED 17

19 REVIEW OF OPER ATIONS FOR THE YEAR ENDED 31 MARCH TRANSPORT GOLDEN ARROW BUS SERVICES PROPRIETARY LIMITED ( GABS ) Golden Arrow Bus Services (GABS) posted a creditable 7,6% rise in turnover, which for the first time in the company s history, exceeded the billion Rand threshold. However, continual increases in fuel prices and the relative weakness of the Rand placed considerable strain on the company s operating expenses and severely eroded the revenue gains. Fuel and oil related expenses increased by 23,8%. The net effect of the extraordinary price escalations of this major input cost resulted in a decrease of 16,9% in net profit after tax. The increase in the price of petrol, triggered increased demand for commuter bus services, with approximately 1,2 million (2,5%) more passengers opting to use the bus for commuting during the reporting period. The company continued its ambitious fleet recapitalisation programme to improve the commuting experience and safety of its loyal commuter base, and during the year, 93 new replacement buses at a cost of R 141million were purchased. This has significantly improved the age of the fleet which now boasts an industry best practice benchmark average age of 10 years. In line with the company s ongoing practice of gauging passenger approval levels and identifying areas for improvement, an independently conducted customer satisfaction survey was commissioned. The survey, which incorporated the random sampling of respondents, was overseen by the Cape Peninsula University of Technology s (CPUT) Mathematics and Physics Department at five separate termini located in Khayelitsha, Mitchell s Plain, Bellville, Golden Acre and Killarney. A significant 81% of respondents gave the service a resounding endorsement and empirically confirmed that the passengers who make use of GABS services on a daily basis, are most satisfied with safety levels, driving competencies, bus availability and the overall reliability and comfort of the service. The launch of the MyCiti bus service ushered in a new era of Integrated Rapid Public Transport Networks as envisioned in the National Land Transport Act of GABS has proactively embraced this new development and expanded its operational repertoire through its operation of the trunk route in the new bus rapid transport network. Legislation allows the local authority to offer a 12-year negotiated contract to existing bus and taxi operators whose businesses will be affected by the BRT. Key to this process is the determination of existing market share which will determine the shareholding in the BRT operating companies and the subsequent alienation of assets. GABS challenge will be to ensure that its rights and interests and future sustainability are not in any way compromised as it navigates the divide between the current and new dispensation and to this end we are involved in litigation with the City of Cape Town over the market share determination. The impending establishment of the City s Transport Authority (Transport for Cape Town), which will be responsible for the planning, financial, regulatory, contracting and monitoring functions of road and rail-based public transport across Cape Town is set to define the future architecture of the sector.

20 INTEGRATED ANNUAL REPORT 2012 HOSKEN CONSOLIDATED INVESTMENTS LIMITED 19

21 REVIEW OF OPER ATIONS FOR THE YEAR ENDED 31 MARCH 2012 ENERGY AND MINING MONTAUK ENERGY CAPITAL, LLC ( MONTAUK ) As in the past, the profitability of Montauk s business continues to be highly sensitive to the market price of natural gas. During the period under review, approximately 49% total revenue was derived from prices indexed to natural gas, including the recently acquired Viridis portfolio of electric generation assets located in Texas where power pricing is closely correlated to natural gas. Despite a 10% decrease in the average price of natural gas for the 2012 fiscal year as compared to fiscal 2011, Montauk s EBITDA increased by 11% to R55 million primarily as a result of a 15% increase in MWh production over annualised 2011 MWh production in the Viridis portfolio acquired in February 2011, as well as an overall 5% increase in High-Btu production over Revenue also increased in fiscal 2012 by 20% to R257 million as a result of the increased production as well as the full year of operations from the Viridis portfolio acquisition. The operational improvements experienced are a result of management s completion of existing deferred maintenance items in the Viridis portfolio acquired as well as continued focus on the preventative maintenance plans and operational efficiencies across the entire portfolio. The continued slow growth in the US economy and on-going impact of shale gas supply has caused natural gas prices in the US to remain highly volatile and react significantly to short term market fundamentals, such as weather, that impact natural gas storage levels. According to the US Energy Information Administration (EIA) over 75% of US households utilise natural gas to heat their homes. Therefore the winter heating season (November through March) typically provides pricing support given the large usage during this time of year. From November 2011 through March 2012 the US experienced the 4th warmest heating season on record, which reduced residential usage and increased storage levels. This resulted in natural gas futures pricing dropping to 10 year lows by the end of fiscal As of a result of this market condition, management made the decision to impair goodwill and certain assets totalling R44 million and to provide for a reserve of previously recognised deferred tax benefits of R138 million in the fiscal 2012 financial statements. However, the lower pricing has accelerated the move from coal fired to natural gas fired electric generation whereas, according to the EIA, the amount of US electricity produced by natural gas fired units rose 40% in March 2012 as compared to March In addition the EIA reported that in April 2012 natural gas fired electric generation equalled that of coal fired generation for the first time in US history. Also, as a result of the low pricing, several major shale gas producers have announced significant cutbacks in expected production evidenced by recent reductions in natural gas drilling rig counts. Despite recent recoveries in natural gas pricing since March 2012, the ratio of oil to gas prices remains in excess of 20 times. The on-going recovery and stabilisation in natural gas pricing will depend on the continued increase in natural gas fired electric generation, led by price or regulatory issues associated with coal fired generation, the relative cost and possible environmental concerns related to shale gas production, as well as the continued development of alternative uses for natural gas such as transportation fuel to reduce US dependence on foreign oil. Even with the significant volatility in profits associated with a large percentage of revenues derived from current market pricing, the current depressed pricing does not warrant locking in long term pricing at this time. Management maintains a longer term view of pricing and with the on-going operational improvements and the continuation of significant value realised from the green attributes of the energy produced, management believes it has positioned Montauk to capitalise on opportunities that arise to lock in longer term pricing arrangements when market conditions dictate. 20

22 HCI COAL PROPRIETARY LIMITED ( HCI COAL ) Coal HCI Coal (Pty) Ltd The business continued its steady progress and performed ahead of expectations for the year under review. The Palesa Colliery achieved sales of tons of coal for the year, up from the tons sold in the previous year. Operational improvements and meeting its contractual obligations to Eskom continue to be the main focus for management at the Colliery. The documentation for the mining right at Rooipoort, contiguous with the Palesa reserve, was completed and lodged with the Department of Mineral Resources ( DMR ). Approval of this right will increase the Palesa resource by 32 million tons of probable resources. As mentioned in the previous year the Mbali court case was heard and a judgement was received in favour of HCI Coal. Subsequently African Exploration Mining and Finance Corporation ( AEMFC ) appealed the judgement and thereafter also lodged an application with the Supreme Court of Appeals. Both their applications were unsuccessful. The DMR was accordingly ordered to take the necessary steps which will ultimately enable the registration of these rights in Mbali Coal (Pty) Ltd. Subsequent to year end the Mbali Colliery received its integrated water use licence from the Department of Water Affairs. Management will now complete the remaining infrastructure with a view to starting mining operations in the latter part of 2012 or the first quarter of The approval of the Nokuhle mining right has not yet been received from the DMR but management is optimistic that this right will be granted in the near future. The mineral resource at Nokuhle is made up of 28 million inferred tons not included in the resource and reserve statement below. Revenue for the year increased by R150 million to R513 million and EBITDA from R30 million to R76 million for the year under review. Management continues to assess additional coal reserves which will enhance the asset. Palesa Colliery Mbali Colliery Nokuhle Colliery Total Tons Tons Tons Tons Mineral reserve: proven Mineral reserve: probable INTEGRATED ANNUAL REPORT 2012 HOSKEN CONSOLIDATED INVESTMENTS LIMITED 21

23 REVIEW OF OPER ATIONS FOR THE YEAR ENDED 31 MARCH 2012 EXHIBITIONS AND PROPERTY GALLAGHER ESTATE HOLDINGS LIMITED ( GALLAGHER ) In December 2011, Gallagher sold the Pan African Parliament chamber and office complex with a resultant profit arising from the sale of R73.5 million. When HCI took over Johnnic Holdings Limited ( Johnnic ), the owner of Gallagher, certain tax issues were inherited. The result of these tax matters led to a payment and settlement of which the net was an expense of R40 million before tax, being incurred during this financial year. As mentioned in last year s report, the conference and exhibition business was disposed of on 1 April The sale was necessitated as part of a competition commission ruling when Johnnic was acquired in December This sale resulted in Gallagher leasing the conference and exhibition buildings at a below market related rental for a period of 6 years. As a consequence of this, when the buildings were revalued during the period under review, it resulted in a fair value adjustment downwards of R41.8 million. This should reverse once Gallagher renegotiates the lease on expiry of the initial term thereof. The net effect of the adjustments and numbers described herein resulted in a PBT of R70 million for the business, a decline of 45% from the preceding year. The overall occupancy of Gallagher s buildings across its portfolio was close to 100% for the period under review. Furthermore, the opening of the Gautrain station in Midrand, finalisation of the Allandale interchange upgrade and the commencement of various high profile developments in and around Midrand bode well for Gallagher in the long term. SERVICES AND TECHNOLOGY SYNTELL PROPRIETARY LIMITED ( SYNTELL ) Syntell grew sales by 27% to R326 million. This growth mainly came from the Traffic Management business where Syntell has seen reasonable orders from Metros as well as good performance on our road counting contract with SANRAL. The core Road Safety business remains strong with the Cape Town and JMPD contracts performing well. Syntell has unfortunately not been able to resolve the Free State province non-payment issue and this resulted in a provision of R13 million being made against this year s profits. Despite this provision the company achieved profit before tax of R 47.2 million a small increase from last year s figure of R 46.2 million. Syntell has made satisfactory progress with the finalising of legal proceedings with the Free State and is hopeful for a favourable resolution in the new year. Both the Cape Town and JMPD contracts will be re-tendered during the new financial year and winning these contracts is a key priority for management. The delay of AARTO is still creating problems for the industry but Syntell is optimistic that outstanding issues will be resolved by government soon. The e-commerce business is still a key strategic focus area through Syntell continues to build brand value by attracting new users and adding additional services. A new subscription service has recently been launched that will see the business start making profits in the new year and open up many new possibilities. 22

24 CLOTHING AND TEXTILES SEARDEL INVESMENT CORPORATION LIMITED ( SEARDEL ) could not be recovered in higher prices for products supplied. The resultant losses were of such a magnitude that it left no alternative but to rationalise the business unit. Seardel reports income attributable to ordinary shareholders of R136.9 million (2011: R8.6 million) and total comprehensive income of R163 million (2011: R42.2 million loss) for the year ended 31 March However, the current year s results were overwhelmingly influenced by the settlement of the various litigation proceedings with former directors and officers of Seardel with income of R191.8 million relating to a portion of that settlement having been recognised in the period. If one excludes the effect of the settlement on the current year s results, Seardel would have reported a loss attributable to ordinary shareholders of R54.8 million against a R8.6 million profit in the prior period. The main reason for the deterioration was the poor performance of the Seardel Apparel division. The competition that this business unit faces from imports out of lower wage paying countries and manufacturers from within the South African borders that do not pay the prescribed minimum wages meant that rising input costs The textiles segment also found itself under pressure. Reduced gross margins saw operating profit before finance costs from continuing operations fall to R38.3 million in the current period down from R56.2 million in the prior period. Good progress has been made on the property developments with m 2 having been developed and made available for letting to external tenants by financial year end. Of this, m 2 (98.5%) had been let. Approximately another m 2 across three different sites is available for development. The businesses within the Toy, Stationery and Electronics segment continue to deliver excellent results with operating profit up 46.2% to R56.6 million. Seardel is separately listed and more detailed commentary on its results can be found within its results which are published separately. INTEGRATED ANNUAL REPORT 2012 HOSKEN CONSOLIDATED INVESTMENTS LIMITED 23

25 REVIEW OF OPER ATIONS FOR THE YEAR ENDED 31 MARCH 2012 VEHICLE COMPONENT MANUFACTURE FORMEX INDUSTRIES PROPRIETARY LIMITED ( FORMEX ) The automotive sector in South Africa remains challenging with high labour costs and the delay in the implementation of the export incentive scheme proving to be significant obstacles the sector faces to maintain global competitiveness. Countries such as Mexico, Eastern Europe, India and China are generally viewed as more favourable investment locations due to higher productivity and lower labour costs. In addition, a drop in demand has resulted in automotive companies consolidating work in European and US locations. While automation has assisted the pressings division to become more competitive, the tubing division is still plagued by inefficiencies and high unit costs. A decision was made to curtail the operations of the tubing division and significant customer contracts were cancelled by Formex following unsuccessful price increase negotiations. The pressings division has a good order book and customers have a positive view of its capability and quality of production. It is hoped that the implementation of the export incentive scheme will result in new production orders being allocated to South Africa, following a generally quiet period for the industry over the last two years. The pressings division is executing according to budgeted activity and costs levels while the tubing division remains below breakeven. Plans are therefore underway to further consolidate operations and to reduce small volume contracts in both tubing and pressings which are difficult to execute profitably. OTHER HCI INVESTMENTS AUSTRALIA PROPRIETARY LIMITED HCI Australian Operations has had a productive first year. Through a series of transactions it has successfully acquired a controlling stake in Oceania Capital Partners Limited ( OCP ), a company listed on the Australian Stock Exchange. It intends to grow OCP and thereby to enhance value for the HCI Group. 24

26 BEVERAGES KWV HOLDINGS LIMITED ( KWV ) Headline earnings for the full year ended June 2011 was a loss of R17, 5 million and the interim results for the period ended 31 December 2011 showed a headline loss of R6, 5 million. The brandy market in South Africa is declining. KWV is very dependent on brandy sales and has a significant investment in distillation and maturation infrastructure. A significant portion of the infrastructure is currently mothballed due to high inventory levels and declining local demand. KWV has managed to increase its market share but the diversification of the product portfolio remains a strategic imperative. Significantly a new Ready-to-Drink ( RTD ) product was launched during 2011 and KWV also launched a new range of pre-mixed cocktails. New product launches are capital and resource intensive and it is important that the investment returns and risks are monitored on an ongoing basis. While two new products are not a panacea for KWV, the focus on innovation and new products outside the traditional product portfolio is important. KWV has also decided to insource all sales activities and to expand its local sales force to provide better market coverage. The fixed cost of this investment is high but the risk of a ban on alcohol advertising makes the establishment of a dedicated sales force a necessity. The increased cost of this sales force must be leveraged through a wider product portfolio which KWV is attempting to build. Wine sales remain competitive with prices at the lower end of the market often below breakeven. The emergence of cheaper imported wine is also distorting pricing and an increase in dealer-owned brands by the large retailers is putting further pressure on the market. KWV has rebranded its flagship KWV wine portfolio and its Laborie range, and the positive effects thereof can already be seen in the market. KWV was recognized as the top wine producer at the Veritas wine awards in 2011, winning the most double gold medals ever in a single year by an entrant, and also won the award for the top wine producer at the Old Mutual wine awards. Other awards include the top entrant and the Young Wine Awards and the top Muscadel award. INTEGRATED ANNUAL REPORT 2012 HOSKEN CONSOLIDATED INVESTMENTS LIMITED 25

27 BUSINESS SEGMENTS AS AT 29 AUGUST 2012

28 GAMING, HOTELS AND LEISURE Tsogo Sun Holdings 41.5% Vukani Gaming Corporation 100% Galaxy Bingo 100% MEDIA AND BROADCASTING e.tv 64% Yired 64% e sat.tv 64% TRANSPORT Golden Arrow Bus Service 100% ENERGY AND MINING Montauk Energy Capital 87.9% Coal HCI Coal (Pty) Ltd HCI Coal 100% EXHIBITIONS AND PROPERTY Gallagher 100% HCI Properties HCI Properties 100% CLOTHING AND TEXTILES Seardel Investment Corporation 74.1% BEVERAGES KWV Holdings 39.9% VEHICLE COMPONENT MANUFACTURE Formex Engineering 90% SERVICES AND TECHNOLOGY Syntell 55% Business Systems Group (Africa) 40% Limtech Biometric Solutions 51% INTEGRATED ANNUAL REPORT 2012 HOSKEN CONSOLIDATED INVESTMENTS LIMITED 27

29 ANALYSIS OF SHAREHOLDERS Listed below is an analysis of shareholdings extracted from the register of ordinary shareholders at 31 March 2012 Number of % of total Number of % of total shareholders shares shares shares shares shares Over shares Type of shareholder Number of shareholders % of current shareholders Number of shares % of issued capital Public companies Banks Close corporations Individuals Nominees and trusts Other corporations Pension funds Private companies Shareholders Diary Financial year end 31 March Annual general meeting October Reports - Preliminary report May - Interim report at 30 September November - Annual financial statements September Stock Exchange Performance 31 March 2012 Total number of shares traded (000 s) Total value of shares traded (R 000) Market price (cents per share) - Closing High Low Market capitalisation (R 000)

30 SIGNIFICANT SHAREHOLDINGS At 31 March 2012, insofar as HCI is aware, the following members beneficially held directly or indirectly 5% or more of the issued shares: Southern African Clothing and Textile Workers Union and associated entities M.J.A Golding Shareholder Spread Percentage held Number of shareholders Public Non public Directors Associates of directors Significant shareholder Share trust Treasury shares INTEGRATED ANNUAL REPORT 2012 HOSKEN CONSOLIDATED INVESTMENTS LIMITED 29

31 CORPORATE GOVERNANCE Hosken Consolidated Investments Limited ( HCI ) and its subsidiaries subscribe to the Code of Corporate Practices and Conduct (the code) as set out in the King Report (King III) on Corporate Governance. HCI believes that in all material respects it complies with the major recommendations of the code and in particular those set out below, to ensure sound corporate governance and structures are applied within the Group. In terms of the company s Memorandum of Incorporation, there is no mandatory retirement age for non-executive directors. Non-executive directors do not hold service contracts with the company. The board met four times during the period under review. Board attendance The board of directors of HCI comprises of three executive directors and seven non-executive directors, of which five are independent. The board is structured so as to ensure clear division of responsibilities at board level to ensure a balance of power and authority, such that no-one individual has unfettered powers of decision making. Such appointments are formal and transparent, and a matter for the board as a whole. All non-executive directors are appointed so as to bring independent judgment on material decisions of the company. The directors are entitled to seek independent professional advice at the company s expense concerning the company s affairs and have access to any information they may require in discharging their duties as directors. The board retains control over HCI and its subsidiaries, meetings are held at least quarterly, to review the performance of subsidiary and associated companies, group strategy and other matters relating to the achievement of HCI s objectives. Directors are provided with substantive board papers to enable them to consider the issues on which they are requested to make decisions. All of the executive directors have entered into three year service contracts with the company. These contracts have been approved by the remuneration committee and define the terms of employment of the executive directors. Where appropriate, the chief executive officers and executive directors of subsidiary companies have entered into service contracts with that subsidiary. The roles of the chairman and chief executive officer are separated. HCI has appointed Mr Yunis Shaik as lead independent nonexecutive director in view of the fact that the chairman is an executive director. This is considered acceptable by King III. According to the Memorandum of Incorporation of the company, HCI may have a maximum of 12 directors. Mr Rakesh Garach resigned as a non-executive director as of the 20th January Ms Barbara Hogan has been appointed as a nonexecutive director as of the 29th August There were no further changes to the non-executive directorate during the year under review. In terms of the company s Memorandum of Incorporation, one-third of directors must retire at every annual general meeting and are eligible for re-election. The directors retiring by rotation at the forthcoming annual general meeting are Mr JA Copelyn; Mr TG Govender and Mr MF Magugu who offer themselves for re-election. Ms B Hogan, who was appointed by the board during the course of the year and who is required to retire in terms of the company s memorandum of incorporation, is eligible and has offered herself for re-election at the forthcoming annual general meeting. Director May August November March JA Copelyn Yes Yes Yes Yes VM Engel * No No No Yes RS Garach** Yes Yes Yes n/a MJA Golding Yes Yes Yes Yes TG Govender Yes Yes Yes Yes B Hogan *** n/a n/a n/a n/a MF Magugu Yes Yes Yes Yes LM Molefi Yes Yes Yes Yes VE Mphande Yes No No Yes JG Ngcobo Yes Yes Yes Yes Y Shaik Yes No Yes Yes * Leave of absence ** Resigned 20 January 2012 *** Appointed 29 August 2012 Details of directors of the board appear on pages 2, 10 and 11 of this integrated report. Seminars, workshops and lectures by leading experts in their fields are given on an on-going basis to directors to assist in their duties. The board s key roles and responsibilities are: Promoting the interests of all stakeholders Formulation and approval of strategy Retaining effective control Ultimate accountability and responsibility for the performance and affairs of the company and its subsidiaries. BOARD OF DIRECTORS BOARD COMMITTEES EXCO AUDIT AND RISK REMUNERATION SOCIAL AND ETHICS JA Copelyn Y Shaik MF Magugu LM Molefi MJA Golding LM Molefi JG Ngcobo JG Ngcobo TG Govender B Hogan MJA Golding JA Copelyn BOARD COMMITTEES Board committees have been established to assist the board in discharging its responsibilities. In line with King III, all board committees comprise of only members of the board. All committees are empowered to obtain such external or other independent professional advice as they consider necessary to carry out their duties. 30

32 CORPORATE GOVERNANCE Each of the company s major subsidiaries has established board and committee structures which submit regular reports to the company. This ensures the maintenance of high standards and best practice for corporate governance and internal control throughout the group. The boards of the main subsidiaries comprise of a majority of non-executive directors. The board has appointed the following committees to assist it in the performance of its duties: Executive committee Remuneration committee Audit and risk committee Social and ethics committee EXECUTIVE COMMITTEE The HCI Executive Committee ( EXCO ) comprises MJA Golding (Executive Chairman), JA Copelyn (Chief Executive Officer) and TG Govender (Chief Financial Officer). The three executives are in regular discussions and are primarily responsible for the daily management of the group, including the allocation and investing of the group s resources. The major operating subsidiaries and associated companies operate on similar principles. board, its members and the committees. These self-assessments are integral to best governance practices and have practical applications to assess areas of strength and/or development. DEALING IN THE COMPANY S SECURITIES The company has a policy in place regarding dealings in its securities. The company s directors, executives and senior employees are prohibited from dealing in HCI securities during certain prescribed restricted periods. The company secretary regularly disseminates written notices to inform them of the insider trading legislation and advise them of closed periods. All directors and senior executives are required to obtain clearance from the company secretary prior to their dealings in the company s securities. All dealings in the company s securities are disclosed in terms of the applicable JSE listings requirements. CONFLICTS OF INTEREST The directors are required to avoid situations where they have direct or indirect interests that conflict or may conflict with the company s interests. Processes are in place for disclosure by any director of any potential conflicts and for authorisation to be sought if conflict arises. AUDIT COMMITTEE Members: Y Shaik (chairman), LM Molefi and B Hogan A report by the HCI Audit Committee has been provided on page 32 of this integrated report. REMUNERATION COMMITTEE Members: MF Magugu (chairman) and JG Ngcobo. A report by the HCI Remuneration Committee has been provided on page 34 of this annual report. SOCIAL AND ETHICS COMMITTEE Members: LM Molefi (chairperson); JG Ngcobo, JA Copelyn, MJA Golding A report by the HCI Social and Ethics Committee has been provided on page 40 of this integrated report. COMPANY SECRETARIAT GOVERNANCE OF INFORMATION TECHNOLOGY Due to the inherent risks in information technology, King III has recommended that the board of directors is responsible for the assessment, implementation and monitoring of IT within the company. The board of directors of HCI acknowledges the need for an IT Governance Framework which, if effectively managed, can streamline and add value to the underlying businesses. Due to the diverse nature of HCI s business operations, IT plays different roles within the group. Processes are being implemented at major subsidiary companies to address the requirements of King III at strategic levels within the companies. At a group level, HCI does not believe it is necessary to employ a chief information officer as recommended by King lll. The audit committee is responsible for the monitoring of IT compliance within the Group. DISCLOSURES The board is assisted by a suitably qualified company secretary, in line with legislated requirements. All directors have access to the advice and services of the Company Secretariat, who is responsible for ensuring the Board complies with all applicable procedures, statutes and regulations. COMPLIANCE WITH LAWS, CODES AND STANDARDS HCI respects and complies with the laws of the countries in which it operates. This includes corporate laws, common law as well as specific laws, including regulations of all the gambling boards, mining and energy laws. HCI will strive to be a good corporate citizen of the country in which it operates. BOARD ASSESSMENTS A framework has been put in place for assessments by the board of directors, as required by King III, to evaluate the effectiveness of the To ensure shareholder parity, HCI ensures that accurate and timely disclosure of information that may have a material effect on the value of its securities or influence investment decisions is made to all shareholders. The company publishes details of its corporate actions and performance on the SENS and in the main South African daily newspapers. The company maintains a website through which access is available to the broader community on the company s latest financial, operational and historical information, including its annual report. LITIGATION There are no material legal or arbitration proceedings (including proceedings which are pending or threatened of which the directors of HCI are aware) which may have or have had, during the 12-month period preceding the last practicable date, a material effect on the financial position of HCI. INTEGRATED ANNUAL REPORT 2012 HOSKEN CONSOLIDATED INVESTMENTS LIMITED 31

33 REPORT OF THE AUDIT COMMITTEE Members: Y Shaik (chairman), LM Molefi, B Hogan Mr Shaik was appointed as chairman of the committee subsequent to the resignation of Mr Garach. Ms Hogan was appointed as a member of the audit committee on the 29th August The audit committee has pleasure in submitting this report, as required by section 94 of the Companies Act 2008, as amended ( the act ). FUNCTIONS OF THE AUDIT COMMITTEE The audit committee has adopted formal terms of reference, delegated to it by the board of directors, as its audit committee charter. During the year under review four audit committee meetings were held and attended as below: Member Profession May August November February RS Garach** Chartered Accountant Yes Yes Yes n/a B Hogan*** Analyst n/a n/a n/a n/a LM Molefi Doctor Yes Yes Yes Yes Y Shaik Attorney Yes No Yes Yes ** Resigned 20th January 2012 *** Appointed 29th August 2012 The audit committee has discharged the functions in terms of its charter and ascribed to it in terms of the act as follows: Reviewed the interim, provisional and year-end financial statements, culminating in a recommendation to the board to adopt them; Reviews legal matters that could have a significant impact on the group s financial statements; Reviewed the external audit reports on the annual financial statements; Verified the independence of the external auditor, nominated PKF (Jhb) Inc. as the auditor for 2012 and noted the appointment of Mr Theunis Schoeman as the designated auditor; Approved the audit fees and engagement terms of the external auditor; and Determined the nature and extent of allowable non-audit services and approved the contract terms for the provision of non-audit services by the external auditor. The audit committee fulfils an oversight role regarding the group s financial statements and the reporting process, including the system of internal financial control. MEMBERS OF THE AUDIT COMMITTEE AND ATTENDANCE AT MEETINGS The audit committee consists of the independent non-executive directors listed hereunder and meets at least three times per annum in accordance with the audit committee charter. All members act independently as described in section 94 of the Companies Act. CONFIDENTIAL MEETINGS Audit committee agendas provide for regular confidential meetings between the committee members and the external auditors without management present. INDEPENDENCE OF EXTERNAL AUDITOR During the year under review the audit committee reviewed a representation by the external auditor and, after conducting its own review, confirmed the independence of the auditor. Non-audit services of the external auditor, as approved by King III, are pre-approved by the audit committee up to a maximum of 10% of the annual audit fee. EXPERTISE AND EXPERIENCE OF FINANCIAL DIRECTOR As required by JSE Listings Requirement 3.84(h), the audit committee has satisfied itself that the financial director has appropriate expertise and experience. INTERNAL AUDIT The group does not consider it necessary to establish an internal audit function at parent company level. Where appropriate, subsidiaries have their own internal audit departments. Reports generated by the subsidiary companies internal audit departments are made available and discussed at the HCI group audit and risk committee. ATTENDANCE The external auditors, in their capacity as auditors to the group, attended and reported at all meetings of the audit committee. RISK MANAGEMENT AND INTERNAL CONTROL The board acknowledges that it is accountable for the process of risk management and the system of internal control of the group. Executive directors and relevant senior managers attended meetings by invitation. The group operates in a highly regulated environment. Where necessary, compliance officers have been appointed at each of the 32

34 REPORT OF THE AUDIT COMMITTEE group s key operating subsidiaries and associated company levels for ensuring adherence to the various Acts and Codes that govern the day-to-day operations. Each group company has its own board of directors responsible for the management, including risk management and internal control, of that company and its business. The group audit and risk committee assists the board in discharging its responsibilities. It also considers reports and information generated by the subsidiary companies audit or finance committees to their respective boards. Mr JR Nicolella has been appointed as Group Risk Officer for the HCI Group. The risk report is presented below. Internal control structures have been implemented to ensure that significant business and financial risk is identified and appropriately managed. Y Shaik Chairman 29 August 2012 REPORT OF THE RISK COMMITTEE During the period under review a Risk Committee was established under the auspices of the board. As HCI is an investment holding company, the risk management process takes into account the risks and opportunities within the company as well as those inherent in its portfolio of investments. The members of the Risk Committee are the Audit Committee as well as the Group Risk Officer and the CEO who are invited to attend all audit committee meetings. to ensure it is management s responsibility to design, implement and monitor the risk management policies; that risk assessments are performed on a continual basis; frameworks and methodologies are implemented to increase probability of anticipating unpredictable risks; risk responses by management are considered and implemented; risk monitoring is continuous; and the Board should receive assurance regarding effectiveness of risk management. The committee is accountable to the board for implementing and monitoring the processes of risk management and integrating this into day-to-day activities. The process of advising the board on the risk management of the group assists the board to foster a culture in the HCI Group that emphasises and demonstrates the benefits of a risk based approach to internal controls and management of the group. Effective risk management is seen as fundamental to the sustainability of the group s interests. It further enables the principle that risk management is also about analysing opportunities and not only guarding against downside possibilities. Since implementation substantial progress has been made in achieving the objectives set out above, however there are still certain components and changes that need to be further developed and embedded. The committee will conduct annual reviews of its performance and ensure it is provided with resources to perform its duties and ensure sufficient training to its members. A disciplined and timeous reporting structure enables the Risk Committee to be fully apprised of group company activities, risks and opportunities. All controlled entities are required to adhere to the relevant principles of King III. Members of the committee are individuals with risk management skills and experience, and the committees responsibilities are: JR Nicolella Group Risk Officer 29 August 2012 INTEGRATED ANNUAL REPORT 2012 HOSKEN CONSOLIDATED INVESTMENTS LIMITED 33

35 REPORT OF THE REMUNERATION COMMITTEE Members: MF Magugu (chairman) and JG Ngcobo All the members of the committee are independent non-executive directors. In line with the recommendations of King III the chief executive officer attends the meetings of the committee at the request of the committee but recuses himself from the meeting before any decisions are made in which he is affected. The committee met twice during the past year as per the memorandum of incorporation. The fair value of options granted is measured using the Black Scholes Model. Share options granted in the current year were fairly valued using a volatility indicator of 20% and an annual interest rate of 5.5%. Executive directors earn a basic salary which is determined by independent remuneration consultants and escalate in line with inflation for the duration of their contracts. Bonuses payable are purely discretionary and are determined annually after reviewing the performance of the group and its subsidiaries. The maximum bonuses that can be earned by executive management are as follows: Each major group subsidiary has its own remuneration committee. This committee is primarily responsible for overseeing the remuneration and incentives of the executive directors and executive management. It takes cognisance of local best remuneration practices in order to ensure that such total remuneration is fair and reasonable to both the employee and the company. The committee utilises the services of independent remuneration consultants to assist in providing guidance on the remuneration for executive management. The functions and mandates of the remuneration committee include: make recommendations to the board on directors fees and the remuneration and service conditions of executive directors including the chief executive officer; provide a channel of communication between the board and management on remuneration matters; review the group s remuneration policies and practices and proposals to change these and to make recommendations in this regard to the board; review and approve the terms and conditions of executive directors employment contracts taking into account information from comparable companies; determine and approve any grants to executive directors and other senior employees made pursuant to the company s executive share scheme and share appreciation rights scheme; and review and approve any disclosures in the annual report or elsewhere on remuneration policies or directors remuneration. During the year under review HCI shareholders approved the HCI Employee Share Scheme which is a net-equity settled incentive scheme. In terms of this scheme share options are granted to executive directors and senior and middle management. Share options are allocated to participants at a ten percent discount to the 20 day volume weighted average market price as at date of grant. The number of share options granted is determined by use of a multiple of the participant s basic salary divided by the discounted market price. The multiples relating to each level of management are as follows: Position Multiple Chief executive officer 6 Executive chairman 6 Chief financial officer 5 Senior management 4-5 Other management 2-3 % of annual Position salary Chief executive officer 75 Executive chairman 75 Chief financial officer 65 Other senior management Non-executive directors earn a basic fee which is in line with companies of a similar size. These fees escalate annually in line with inflation and are reviewed every 3 years by an independent remuneration consultant. Directors can earn up to a maximum of 50% of their board fees by serving on the committees responsible to the board of directors. Position Actual fee 2012 R 000 Proposed fee R 000 Non-executive director Member of audit committee Member of remuneration committee Member of social and ethics committee n/a 64 KEY MANAGEMENT PERSONNEL EMOLUMENTS FOR THE YEAR ENDED 31 MARCH 2012 Detail of personnel remuneration of three highest paid members of management is reflected below: Salary per annum R 000 Bonus R 000 Gains on share options R 000 Total R 000 Employee A Employee B Employee C Directors emoluments and other relevant remuneration information are disclosed under note 41 and on pages 35 to 39. MF Magugu Chairman 29 August

36 REPORT OF THE REMUNERATION COMMITTEE HCI EMPLOYEE SHARE OPTION SCHEME During the current year the Group adopted an updated option scheme. In terms of the new scheme, shares are offered on a share option basis to participants, provided they remain in the Group s employ until the options vest. Any gain realised on the exercise of these options will be settled on a net equity basis, whereby the participant will receive that number of shares that equates in value to the gain made on exercise date. Options must be exercised within three months of the vesting date, where after the options lapse. Options vest over periods of three to five years. These vesting periods may be varied by the board of directors. In terms of the previous option scheme, shares were offered either on a share option or on a combined share option and deferred sale basis. Participants were able to exercise options to purchase shares in tranches within periods of three to seven years from the grant at the exercise price, provided that they remained in the Group s employ until the options vested. The terms of the previous option scheme remain applicable to all options issued in terms of that scheme and that have not yet been paid for or become unconditional. Options issued in terms of the previous scheme must be exercised within three years of being granted, where after the options lapse. Options vest over periods of three to seven years. These vesting periods may be varied by the trustees of the scheme. Participants are required to pay for the shares between five and ten years from the date of grant. Share options granted to eligible participants that have not yet become unconditional: Number of share options Weighted average exercise price Number of share options Weighted average exercise price R R Balance at beginning of the year Options granted Options vested and paid for ( ) ( ) Options forfeited (16 466) Balance at the end of the year The volume weighted average closing share price during the current year was R80.72 (2011: R79.19). INTEGRATED ANNUAL REPORT 2012 HOSKEN CONSOLIDATED INVESTMENTS LIMITED 35

37 REPORT OF THE REMUNERATION COMMITTEE HCI EMPLOYEE SHARE OPTION SCHEME (continued) The options outstanding at 31 March 2012 become unconditional between the following dates: Number of share options Exercise price R 25 July 2011 and 24 July ,50 8 September 2011 and 7 September ,50 29 June 2010 and 28 June ,00 29 June 2012 and 28 June ,00 4 June 2011 and 3 June ,80 4 June 2012 and 3 June ,80 4 June 2014 and 3 June ,80 15 October 2009 and 14 October ,58 17 June 2010 and 16 June ,52 17 June 2013 and 16 June ,52 17 June 2014 and 16 June ,52 16 May 2011 and 15 May ,00 15 March 2012 and 14 March , Options vested but not yet paid for ,50 Options vested but not yet paid for ,00 Options vested but not yet paid for ,

38 REPORT OF THE REMUNERATION COMMITTEE Number of Weighted Number of Weighted share options average exercise price share options average exercise price HCI EMPLOYEE SHARE OPTION SCHEME (continued) Options granted to executive directors JA Copelyn Balance at the beginning of the year Options granted Balance at the end of the year Unconditional between the following dates: 29 June 2008 and 28 June June 2009 and 3 June June 2010 and 16 June March 2012 and 14 March MJA Golding Balance at the beginning of the year Options granted Balance at the end of the year Unconditional between the following dates: 29 June 2008 and 28 June June 2009 and 3 June June 2010 and 16 June March 2012 and 14 March TG Govender Balance at the beginning of the year Options granted Balance at the end of the year Unconditional between the following dates: 29 June 2008 and 28 June June 2009 and 3 June June 2010 and 16 June March 2012 and 14 March INTEGRATED ANNUAL REPORT 2012 HOSKEN CONSOLIDATED INVESTMENTS LIMITED 37

39 REPORT OF THE REMUNERATION COMMITTEE Direct beneficial Indirect beneficial Percentage Percentage Number holding Number holding DIRECTORS' SHAREHOLDINGS 31 March 2012 Executive directors JA Copelyn MJA Golding TG Govender Non-executive directors VM Engel Y Shaik VE Mphande March 2011 Executive directors JA Copelyn MJA Golding TG Govender Non-executive directors VM Engel Y Shaik VE Mphande Mr VE Mphande has sold shares between the reporting date and the date of issue of this report. There were no other changes in directors shareholdings during this period. 38

40 REPORT OF THE REMUNERATION COMMITTEE Board Other Gains from fees Salary benefits share options Bonus Total R'000 R'000 R'000 R'000 R'000 R'000 DIRECTORS' EMOLUMENTS Year ended 31 March 2012 Executive directors JA Copelyn MJA Golding TG Govender Non-executive directors VM Engel MF Magugu 234 * ML Molefi 268 ** JG Ngcobo 234 * RS Garach # 221 *** Y Shaik 268 ** VE Mphande # resigned 20 January 2012 * includes R remuneration committee fees ** includes R audit committee fees *** includes R audit committee fees Year ended 31 March 2011 Executive directors JA Copelyn MJA Golding TG Govender Non-executive directors VM Engel MF Magugu 224 * ML Molefi 256 ** JG Ngcobo 224 * RS Garach 256 ** Y Shaik 256 ** VE Mphande ## ## appointed 01 September 2010 * includes R remuneration committee fees ** includes R audit committee fees INTEGRATED ANNUAL REPORT 2012 HOSKEN CONSOLIDATED INVESTMENTS LIMITED 39

41 REPORT OF THE SOCIAL AND ETHICS COMMITTEE Members: Dr LM Molefi (Chairperson); JG Ngcobo, JA Copelyn, MJA Golding The social and ethics committee has pleasure in submitting this report, as required by section 72(4) to section 72 (10) of the Companies Act 2008, as amended ( the Act ) and regulation 43 to the Act. FUNCTIONS OF THE SOCIAL AND ETHICS COMMITTEE To ensure that the committee fulfils its responsibilities in line with the Companies Act, 2008 (as amended) and King III, the composition of the committee has been expanded. A number of personnel within the company, who are the drivers of the underlying functions of the committee, has been invited to join the meetings. In line with the Act, the invitees do not have voting powers. The committee also considers reports and information generated by the subsidiary companies to their respective boards. The committee reports back to the board of HCI and all decisions taken are decided by the board of directors. The social and ethics committee has discharged the monitoring functions in terms of regulation 43.5 of the act as follows: Social and ethic development, including the standing of the company with regard to: the 10 principles set out in the United Nations Global Compact Principles; and the Employment Equity Act; and the Broad-Based Black Economic Empowerment Act; Good corporate citizenship Environment, health and public safety Labour and employment The sustainability report on pages 41 to 47 incorporates the various aspects overseen by the committee. Dr LM Molefi Chairperson 29 August

42 SUSTAINABILITY REPORT This report outlines HCI s sustainability initiatives from an environmental, social and economic perspective. It focuses on issues that can be aggregated to Group level and which can be sensibly governed by the Group with a common set of policies and reporting protocols. The Group is reporting according to Global Reporting Initiative Reporting Index ( GRI ) Reporting Framework in order to promote a standardised approach to sustainability reporting. A range of key economic, social and environmental indicators have been selected to report on sustainability practices within the Group to benchmark progress year on year. These indicators fall in line with the GRI but are not exhaustive. Implementing sustainable business practices is a journey for every organisation. To succeed along this path of continuous improvement, the principles of sustainable development need to be embedded in our organisation s strategy and culture. HIGHLIGHTS HCI reduced overall scope 1 and 2 emissions by 16.4% HCI established a social and ethics committee tasked with monitoring the social, economic and environmental impacts of HCI. HCI retained it s level two status as a contributor to Broad-Based Black Economic Empowerment based on the new (post February 2012) standards. Over R22 million spent on social responsibility projects and over R33 million spent on enterprise development Golden Arrow buses continued with its investment in new more efficient buses. By the end of 2012, Golden Arrow will have approximately 700 new, Euro3 specification buses in service, accounting for more than two thirds of its total fleet. Continued investment in employee training and development, with over R25 million being spent on employee skills development in the past financial year. RECOGNITION The Textiles Group within Seardel, specifically Frame New Germany and Frame Mobeni, is committed to a process of continual environmental improvement, which is achieved by compliance with all requirements of the SANS ISO14001 Standard for Environmental Management System. Syntell, as well as multiple divisions within Seardel, are ISO9001 compliant. HCI Coal maintains a Health, Safety, Environmental, Community and Quality Management system (HSEC and QMS) in accordance with the international standard BS8800/OHSAS18001, and is currently drafting a programme to implement ISO9001, and Based on independent research by the CRF Institute, which is an organisation which identifies best employers, the Tsogo Sun Group has been certified as a Best Employer South Africa 2011/12. ENVIRONMENTAL HCI and its subsidiaries are committed to the protection of the environment through the implementation of effective environmental management programs. At a minimum, the Group endeavours to comply with environmental legislation and makes every reasonable effort to exceed its formal obligations for protecting the environment. As an example of an initiative implemented by a subsidiary, Golden Arrow Bus Services collects and returns used motor oil to the manufacturer for recycling. Approximately litres of used motor oil was collected and returned for recycling during the previous financial year. A single litre of used oil, if improperly disposed of, can find its way into the groundwater and render 1,000,000 litres of water almost undrinkable. This is enough water to cover the needs of 13 people for a year. The Group is taking reasonable steps to inform its employees of their duties and obligations to prevent, contain and clean up the release of pollutants generated at locations under the Group s control or as the result of Group s activities and with the applicable regulations and procedures for protecting the environment. Where appropriate, the Group has established, and shall continue to establish, special procedures and programs to assist in preventing the release of pollutants, the containment of pollutants, cleaning up spills and recycling materials. Climate and Energy All our subsidiaries are now collecting energy and emissions data on an annual basis, and HCI responds yearly, as a Group, to the Carbon Disclosure Project (CDP). HCI is actively engaging with project developers, in terms of the SA governments Renewable Energy IPP Procurement Programme with the aim to invest in renewable energy projects. Currently HCI has a host of products and services that directly enables third parties to reduce their emissions. For example: Syntell is actively involved in road traffic management, with Cape Town, Johannesburg, Durban and Pretoria municipalities employing their traffic management systems to reduce congestion and hence total vehicle emissions in these cities. Reductions in emissions are difficult to estimate, and these types of emissions reductions would not be eligible under any carbon offset initiatives. Golden Arrow Bus Services (GABS) is a public transport provider which operates a fleet of over 1000 buses in the Cape INTEGRATED ANNUAL REPORT 2012 HOSKEN CONSOLIDATED INVESTMENTS LIMITED 41

43 SUSTAINABILITY REPORT Town metropolitan area. GABS carried approximately 56 million passengers during the past year. Any modal shift from private to public transport will result in a decrease in GHG emissions. Reductions in emissions are difficult to estimate, and these types of emissions reductions would not be eligible under any carbon offset initiatives. It is estimated that every passenger that shifts from using their private motor vehicles to GABS transport to get to work and back would result in an average of 0.5 tons CO 2 e saved per annum. Formex is involved in the production of the boxes for catalytic converters which directly reduces vehicle exhaust emissions. Montauk is involved in the conversion and sale of landfill gas. Any shift from the use of fossil fuel such as coal to the use of High Btu gas as generated by Montauk would result in a decrease in emissions. Three landfill gas projects are currently producing offset credits under the California Climate Action Reserve. During 2011 approximately metric tons CO 2 equivalent were avoided as a result of these projects. This figure is based on the amount of credits that were sold during Further, through the sale of landfill gas and electricity generated at landfill gas sites, and the flaring of land fill methane, Montauk directly enabled the avoidance of tons CO 2 e. Seardel has a division which manufactures a product known as Isotherm. This product is used in factories and homes for roof and wall insulation, effectively reducing energy requirements and hence reduces carbon emissions. Energy Eff iciency During the past financial year HCI has, in aggregate, reduced total scope 1 and 2 emissions by 16.4%. This was mainly due to increased energy efficiency of the Tsogo Sun and Seardel operations. Scope 1 emissions increased mainly due to the improvement in the data collection process and also in part to HCI Coal significantly increasing mining production. The Group s emissions for the financial year ending 31 March 2012 are as follows: Scope 1 Scope 2 Subsidiary 2012 tons CO 2 e 2011 tons CO 2 e 2012 tons CO 2 e 2011 tons CO 2 e BSG Sabido Formex ,846 Golden Arrow Bus Services Galaxy Bingo Gallagher HCI Coal Montauk Seardel Syntell Tsogo Vukani Total The GHG Protocol Corporate Standard is designed to prevent double counting of emissions between different companies by separating scope 3 emissions from those of scope 1 and 2. Nevertheless we disclose scope 3 in view of the relatively large numbers involved through mining coal. HCI believes that reporting only on Scope 1 and Scope 2 is too narrow a view and has therefore included Scope 3 emissions where possible. Scope 3 Description 2012 Tons CO 2 e 2011 Tons CO 2 e Emissions from purchase of fossil fuels Emissions from business travel in commercial airlines Emissions from business travel in rental cars 81 0 Emissions from consumption of office paper Use of sold goods and/or services * TOTAL

44 SUSTAINABILITY REPORT * According to the Scope 3 Accounting and Reporting by the Greenhouse Gas Protocol Initiative, the product sold by HCI Coal can be classified as product type 3: Fuels including fossil fuels. Product type = tons sold * fe fe = emission factor associated with the use of that product. Calculations were performed using the Defra conversion factor of kgs CO 2 e / tons of coal sold. Offset of emissions: If we include our offset emissions from Montauk, which include tons CO 2 e, along with tons CO 2 e, our Scope 3 emissions can be seen as a vastly reduced number of tons CO 2 e. Water HCI and the majority of the subsidiaries are not vast waters users. The largest user of water in the Group is undoubtedly the coal mining operations of HCI Coal using approximately 3 million cubic meters of reclaimed water per year. All the water required for the operations is reclaimed from the mining pit, and no additional sources of water are used. The water use of the mine is strictly controlled by the Department of Water Affairs and Forestry, and the mine operates within the boundaries as dictated to it by the Department. However, HCI and its subsidiaries go beyond compliance needs and aims to reduce water usage wherever it can. The subsidiaries have various initiatives in place, including recycling of water, the use of boreholes where possible, and the Water Wise campaigns, where applicable. In total, the group, excluding HCI Coal, consumed 4.1 million cubic meters of water in the period under review. Waste Most subsidiaries employ the services of external recycling contractors to sort and recycle their waste. All waste disposed of in this way is sorted, weighed, recorded and then recycled. through an energy recovery process. Total waste in tons for the year is detailed below. Waste Category Unit Total General waste to landfill tons Used oil kilolitres Industrial effluent kilolitres Fabric and general textile waste tons 119 Filter dust tons 720 Other general tons 98 Waste paper tons 247 Glass tons 0 Steel tons Plastic tons 625 Non-condensate hazardous waste tons Hydrocarbon condensate tons The increase in the numbers compared to 2011 is as a result of the improvement in data collection and quality in the last financial year. This is only the second year in which HCI has collected sustainability related data across the group and the third year of collecting carbon emissions data. Biodiversity Two of our subsidiaries operate in known, protected areas, namely the Cape Town Film Studios, which is part of the Sabido Group, and Montauk Energy. The Cape Town Film Studios are situated on a site composed of a mosaic of wetlands and patches of irreplaceable and critically endangered Swartland Shale Renosterveld. In order to protect this endangered area, berms have been constructed as boundaries between operational areas and wetland areas. Hazardous waste containers are to be built to further prevent any spillage into storm water drains and prevent resultant spills into the wetlands. The Hydrocarbon condensate is produced by Montauk as a by-product in the process of extracting landfill gas. However, this is recycled Montauk Energy operates in areas that include the unique coastal sage scrub. A number of rare and endangered species occur in INTEGRATED ANNUAL REPORT 2012 HOSKEN CONSOLIDATED INVESTMENTS LIMITED 43

45 SUSTAINABILITY REPORT Southern coastal scrub habitats. Montauk has fully developed action plans to protect these endangered species, as is required under California building law. PRODUCT RESPONSIBILITY Customer Health and Safety HCI, through its subsidiaries, works systematically on product safety and compliance to guarantee that its products meet the requirements imposed by applicable legislation, customers and voluntary agreements in trade associations. Since HCI s product and services range is highly diversified, a variety of routines and processes relating to product safety are in place across the different subsidiaries. As a rule, however, these include safety and quality assessments of raw material, quality assurance, hygiene standards, information to customers, and processes for dealing with complaints and product recalls. Procedures related to product safety are well established and involve marketing, sourcing, research and development and quality. Compliance HCI respects and complies with the laws of the countries in which it operates. This includes corporate laws, common law as well as specific laws, including regulations of all the gambling boards, mining and energy laws. The Group operates in a highly regulated environment and where necessary, compliance officers have been appointed at each of the Group s key operating subsidiaries and associated company levels for ensuring adherence to the various Acts and Codes that govern the day-to-day operations. Each group company has its own board of directors responsible for the management, including risk management and internal control, of that company and its business. Customer satisfaction Customer satisfaction is the responsibility of the subsidiary, which sells the product and or service. Each subsidiary considers customer satisfaction as critical to their success and there are established procedures within relevant subsidiaries to measure and ensure customer satisfaction is achieved. The procedures include customer surveys and questionnaires, dialogue and complaints logging systems. All of this is to procure customer retention. Gaming Marketing Gaming companies in the Group adhere to the standards set by the National Responsible Gaming Association (NRGA). The NRGA requires a disclosure on all marketing material stating The Company supports responsible gambling. Gambling only for persons 18 years and older. Winners know when to stop. National Responsible Gambling Program Toll-Free Counselling Line: ECONOMIC Regulatory Risks A number of the HCI subsidiaries operate in heavily regulated environments. Infringement of regulations could result in penalties, fines, or even the loss of a license to operate. The gaming entities (Vukani Gaming Corporation, Galaxy Bingo and Tsogo Sun) are regulated by various gambling boards who attach specific conditions to gambling licenses. In the case of non-compliance the license can be revoked. Sabido is required to abide by local content regulations. Sabido is required to pay radio spectrum fees which impose additional costs on the business. Training and Education There is continuous training and development of employees across all subsidiaries. The Group invests significant resources in competence development to strengthen employees abilities to build a career within the Group. During the past financial year, the Group spent R22.5 million on skills development, which equates to 1.6% of the total payroll. Employees within specific income categories can apply for assistance to educate their children through a HCI bursary scheme. Health and Safety All subsidiaries operate in accordance with the Health and Safety Act. HCI subsidiaries continuously pursue health and safety activities that aim to reduce the risk of accidents and reinforce safety awareness, thereby also increasing productivity. Health and Safety Committees are established in those subsidiaries where it is deemed necessary as per legislation. HCI Coal is also in the process of establishing the framework for implementing the OHSAS18001 standard to ensure it maintains world-class health and safety standards. Labour and management relations HCI recognises the right of employees to freely associate, and thus all HCI employees are free to join trade unions. However, the level of trade union activity and the existence of formal collective bargaining arrangements vary from subsidiary to subsidiary, with between 10% and 90% of employees in the different subsidiaries being covered by collective bargaining agreements during the period under review. 44

46 SUSTAINABILITY REPORT TRANSFORMATION HCI is committed to the transformation of South Africa s society and economy. The performance of the Group over the past years and its BBBEE status demonstrates the company s determination to drive change. Voting rights by previously disadvantaged individuals (PDIs) totals 91.9% of the board with 8 out of 10 directors being previously disadvantaged, including two black females. Further, two out of three senior top management positions are filled by PDIs. Being a black-owned and controlled company with 31.14% black women ownership, any company that HCI acquires or invests in gets the full recognition of black ownership. The Group s transformation efforts have to date been aligned with DTI codes of good practice. HCI Group maintained a level 2 BBBEE status with an overall score of 85.26%. This places HCI firmly amongst the top Empowerment Companies listed on the JSE. HCI s Broad based Black Economic Empowerment Profile is summarised below: BEE Category * Ownership Management control Employment equity Skills development Preferential procurement Enterprise development Socio economic development Total % Level Level 2 Level 2 Level 2 Level 3 * restated HCI has a score of out of a maximum of 20 points for Preferential Procurement and has spent R on black companies for procurement. This is an increase in spend from just below 50% in 2011 to % in Further, HCI is classified as a Value Adding Vendor with a BEE recognition level of 156%. This implies that any company procuring goods or services from HCI, or one of its subsidiaries, can claim 156% of their spend as BEE spend. Enterprise development and socio-economic development scored maximum points due to the high levels of investment in minorities and CSI programs. HUMAN RIGHTS HCI has established a social and ethics Committee, which, including Enviromental, Social and to ensure that HCI continues to support and respect the protection of internationally proclaimed human rights. HCI upholds the freedom of association and the effective recognition of the right to collective bargaining within all subsidiaries. Any form of discrimination, be it with respect to race, gender, employment and occupation is not tolerated and is dealt with within the normal disciplinary procedures. HCI promotes the elimination of all forms of forced and compulsory labour, as well as the effective abolition of child labour. HCI supports the fight against corruption in all its forms, including extortion and bribery. INTEGRATED ANNUAL REPORT 2012 HOSKEN CONSOLIDATED INVESTMENTS LIMITED 45

47 SUSTAINABILITY REPORT CORPORATE SOCIAL RESPONSIBILITY The HCI Group places major importance on its corporate social investment activities, which are implemented and overseen by the HCI Foundation ( the foundation ). Further social investment is also funded by its group companies and its stakeholders, such as SACTWU (the single largest shareholder in HCI) the latter who fund these by dividends received from their investment in HCI. In order to assist in maximising the impact of the funding committed by HCI to its foundation, various people from across the HCI Group (including HCI board members) are part of the permanent make up of the foundation. This varied skill base and experience compliment the full time employees of the foundation in providing guidance and in the application of the funds received for social investment projects. Furthermore, the foundation is part of, and reports to, the HCI Social and Ethics committee. This well established foundation is, in essence, the co-ordinator and driver of the HCI Groups socio-investments which, during the period under review, totalled R28 million, the major portion being allocated to the groups primary initiative, education (approximately 58% of the spend). The balance of the allocated funds was spread across health, environment and welfare projects (see table below). Total spend was approximately 2.8% of HCI s headline earnings. The above table excludes the monies spent by SACTWU on its CSI programmes, which are funded by its dividends from HCI, which totalled R45 million. Furthermore, the monies spent by HCI group companies on initiatives and programmes being implemented by them also has to be taken into account. Tertiary education As is evident from the allocation of the foundation spend on its corporate and social initiatives, the work of the foundation is primarily focussed on education projects. The overall objective of the foundation undergraduate bursary programme is to provide tertiary bursaries to financially and academically deserving students. Over 900 bursaries were granted this year and of those 85% of the students in the bursary programme either graduated or continued with their studies. Mentorship The on-going Seardel initiative of a mentorship programme where 76 of the 83 students completed the academic year, is encouraging, and the programme went into its second year with 60 students continuing as mentees. The success of this initiative has encouraged other HCI group companies to implement mentorship initiatives. Senior employees across the group have committed themselves this year in engaging and making themselves available to mentor students who are part of the foundations bursary programme. HCI Social Investment spend for period under review Spend R 000 % of spend Tertiary education Secondary education Primary education Early childhood development Health Environment Welfare and social development Administrative costs Total as per audited financials The results of the Seardel programme point out the obvious fact that it s not only about funding, but also connecting with the students. During the course of the programmes, it is important to give these students life skills and coaching, as much as in giving them the funding for their studies. With this objective in mind, the foundation has encouraged other group companies and NGO s to participate actively. Primary and Secondary education The foundation has specifically identified these areas of education to become involved in. The social accord that South African corporates assist failing institutions is somewhat different to that of what the foundation seeks to implement which identifies those institutions that are in part succeeding

48 SUSTAINABILITY REPORT The foundation s efforts are focussed on mobilising NGO s, educational institutions amongst others, so as to promote broad based participation which allows outreach work of all participants to focus on these education initiatives. The foundation is working with, and funding, LEAP school initiatives. LEAP was further encouraged to get involved in outreach work with Litha Primary School in Gugulethu. Applying the foundation s philosophy of focussing on instructions where partial success is evident, LEAP was identified as a platform open to students who make the effort to apply themselves. The programme was further enhanced with the linking of LEAP 2, whose pupils are drawn from Gugulethu, with the private school, Herzlia. Both schools benefit from this relationship in terms of bridging gaps and engaging with cultural differences. They also work together to contribute to the disadvantaged members of the communities from which their learners are drawn. Intervention at primary school has focused on two aspects: a continued commitment to enhanced learning support for teachers and pupils in terms of mathematics and literacy and secondly, the uplifting of underperforming schools. The foundation has partnered with Litha to essentially improve the numeracy and literacy levels of the learners as well as replicating and rolling out a workable model in other primary and secondary schools. Other group initiatives There are various other corporate social investment projects carried out by the foundation and other HCI group companies. These cover the support of clinics in Kwa Zulu Natal, upkeep of libraries, road safety programmes, HIV and AIDS education and prevention programmes and many more. A number of these projects are detailed in the published integrated reports of the listed subsidiaries. INTEGRATED ANNUAL REPORT 2012 HOSKEN CONSOLIDATED INVESTMENTS LIMITED 47