Directors’ Report
The Directors present their report together with the Financial Report of Newcrest Mining Limited (‘the Company’) and of the Consolidated Entity, being the Company and its controlled entities, for the year ended 30 June 2004 and the auditor’s report thereon.
Directors
The Directors of the Company at any time during or since the end of the financial year are:
Ian R. Johnson Non-Executive Chairman
Anthony J. Palmer Managing Director and
Chief Executive Officer
R. Bryan Davis Non-Executive Director
Ronald C. Milne Non-Executive Director
Ian A. Renard Non-Executive Director
Nora L. Scheinkestel Non-Executive Director
Michael A. O’Leary Non-Executive Director
(appointed 19 September 2003)
Appointment and Qualifications of Directors
All Directors held their position as a Director throughout the entire year and up to the date of this Report unless otherwise stated. Details of the Directors’ qualifications, experience and special responsibilities appear in the Corporate Governance section.
Principal Activities
The principal activities of the Consolidated Entity during the year were exploration, development, mining and the sale of gold and gold/copper concentrate. There were no significant changes in those activities during the year.
Consolidated Result
The profit of the Consolidated Entity for the year ended 30 June 2004 after income tax and outside equity interest amounted to $122,870,000 (2003: $92,147,000).
Dividends
The following dividends of the Consolidated Entity have been paid, declared or recommended since the end of the preceding year:
- Final fully franked dividend for 30 June 2003 of 5 cents per share, amounting to $16,375,000 was paid on 17 October 2003.
- Final fully franked dividend for 30 June 2004 of 5 cents per share, amounting to approximately $16,428,000 has been declared and will be paid on 15 October 2004 to shareholders registered by close of business on 24 September 2004 (refer Note 7).
Review of Operations
Information on the operations of the Group during the year and the results of those operations are set out in this Concise Annual Report.
Environmental Regulation
The operations of the Consolidated Entity in Australia are subject to environmental regulation under the laws of the Commonwealth and the States in which those operations are conducted. The operation in Indonesia is subject to environmental regulation under the laws of the Republic of Indonesia and the Province in which it operates. It is the policy of the Consolidated Entity to comply with all relevant environmental regulations in all countries in which it operates.
Each mining operation is subject to particular environmental regulation specific to the activities undertaken at that site as part of the licence or approval for that operation. There is also a broad range of industry specific environmental laws which apply to all mining operations and other operations of the Consolidated Entity. The environmental laws and regulations generally address the potential impact of the Consolidated Entity’s activities in relation to water and air quality, noise, surface disturbance and the impact upon flora and fauna.
The Consolidated Entity has a uniform internal reporting system across all sites. All environmental events, including breaches of any regulation or law, are ranked according to their actual or potential environmental consequence. Five levels of incident are recognised (based on Australian Standard AS4360): I (insignificant), II (minor), III (moderate), IV (major) and V (catastrophic). Data on Category I incidents are only collected at a site level and are not reported in aggregate for the Consolidated Entity.
The number of events reported in each category during the year are shown in the accompanying table. In all cases environmental authorities were notified of those events where required and remedial action undertaken.
| Category | II | III | IV | V |
|---|---|---|---|---|
| 2004 – No. of incidents | 20 | 1 | 1 | – |
| 2003 – No. of incidents | 10 | 4 | 1 | – |
The Managing Director reports to the Board at all meetings on all environmental, health and safety incidents. The Board also has a Safety, Health and Environment Committee which reviews the environmental and safety performance of the Consolidated Entity. The Directors are not aware of any environmental matter which would have a materially adverse impact on the overall business of the Consolidated Entity.
Significant Changes in the State of Affairs
Significant changes in the state of affairs of the Consolidated Entity that occurred during the financial year were as follows:
- Total revenue increased 17 percent principally due to the increased contribution from copper by-product revenue.
- The mark to market of derivative financial instruments at 30 June 2004 was negative $451.6 million (2003: positive $84.8 million). Including gold loan swap contracts the mark to market position was negative $478.4 million (2003: positive $38.7 million).
- Expenditure on the Telfer project incurred and accrued in the financial year was $631.3 million.
- $639.9 million of proceeds from borrowings were drawn down under debt facilities to fund the Telfer project.
Subsequent Events
Subsequent to 30 June 2004, Newcrest Mining Limited announced that it had completed a comprehensive simplification of its gold and foreign currency hedging positions.
The restructure of the hedge book included elimination of the entire foreign currency book and all contingent products in the gold book. The overall purpose of the restructure is to provide greater revenue certainty and to facilitate greater understanding of the Company’s total business.
The assessed mark to market value inherent in the existing hedge book has been embedded into the price of the new forwards and gold lease rate transactions resulting in the restructure being completed without any cash outflow, except for a minor credit fee. Refer to the Subsequent Event Note 11 for details of the revised hedging tables and impact of this restructure.
There are no other matters or circumstances which have arisen since 30 June 2004 that have significantly affected or may significantly affect the operations of the Consolidated Entity, the results of those operations or the state of affairs of the Consolidated Entity in subsequent financial years.
Likely Developments and Expected Results
Further information about likely developments in the operations of the Consolidated Entity and the expected results of those operations in future financial years has not been included in this report because disclosure of the information would be likely to result in unreasonable prejudice to the Consolidated Entity.
Directors’ Meetings
The number of Directors’ meetings (including meetings of committees of Directors) and number of meetings attended by each of the Directors of the Company during the financial year are:
| Director | Directors’ Meetings | Audit Committee Meetings | Remuneration Committee Meetings | Finance Committee Meetings | Nomination, Governance & Ethics Committee Meetings | Safety, Health & Environment Committee Meetings | ||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| A | B | A | C | A | C | A | C | A | C | A | C | |
| I. R. Johnson | 14 | 14 | – | – | 3 | 3 | – | – | 4 | 4 | – | – |
| A. J. Palmer | 14 | 14 | – | – | 3 | 3 | – | – | – | – | – | – |
| N. L. Scheinkestel | 14 | 14 | – | – | 3 | 3 | 4 | 4 | 4 | 4 | – | – |
| R. B. Davis | 14 | 14 | 4 | 4 | 6 | 6 | – | – | – | – | 3 | 3 |
| R. C. Milne | 14 | 14 | 4 | 4 | 6 | 6 | 4 | 4 | – | – | 3 | 3 |
| I. A. Renard | 14 | 14 | 4 | 4 | 3 | 3 | 1 | 1 | 3 | 3 | – | – |
| M. A. O’Leary | 10 | 11 | – | – | 1 | 1 | 3 | 3 | – | – | 2 | 2 |
Column A - Indicates the number of meetings attended.
Column B - Indicates the number of meetings held whilst a Director.
Column C - Indicates the number of meetings held whilst a member.
The details of the functions and memberships of the Committees of the Board are presented in the Statement of Corporate Governance.
Directors’ and Senior Executives’ Emoluments
The Remuneration Committee, consisting of all Directors, is responsible for making recommendations to the Board on remuneration policies and practices generally, and specifically on remuneration packages and other terms of employment applicable to Executive Directors, Senior Executives and Non-Executive Directors of the Company. The broad remuneration policy objective is to ensure remuneration packages properly reflect employees’ duties and responsibilities and that remuneration is competitive in attracting, retaining and motivating people of the highest quality.
Executive remuneration and other terms of employment are reviewed annually by the Remuneration Committee having regard to performance against goals set at the start of the year, relevant comparative information and independent expert advice. Executive remuneration is made up of fixed and variable remuneration. Fixed remuneration includes monthly salary, superannuation, fringe benefits and resignation and retirement entitlements (where applicable). Executives may also receive variable remuneration payments based on the achievement of specific financial and non-financial performance hurdles. These variable remuneration payments, which represent remuneration at risk, include annual incentive payments made under the Company’s short-term incentive plan and participation in the Company’s Executive Share Option Plan. The ability to exercise options is conditional on the Consolidated Entity achieving certain performance hurdles.
Remuneration and other terms of employment for the Managing Director and certain Senior Executives are formalised in service agreements.
Remuneration of Non-Executive Directors is fixed, rather than variable and is determined with regard to the need to maintain Board membership of an appropriate calibre and remuneration trends in the market place. The total amount paid to all Non-Executive Directors may not exceed the maximum amount authorised by the shareholders in a general meeting (currently $1,000,000). Non-Executive Directors do not receive any performance related remuneration and are not entitled to participate in the Company’s Executive Share Option Plan but are required to hold a minimum amount of 3,000 shares. Each Director is required to participate in the compulsory Non-Executive Director Share Plan pursuant to which a minimum 10 percent of each Director’s annual remuneration must be used to buy shares in the Company on market at the prevailing market price (with no discount). Non-Executive Directors are also entitled to retirement benefits in accordance with a shareholder approved deed. During 2003, the Board made a decision to discontinue the practice of paying Directors a retirement allowance. This means the provision of retirement benefits will not be continued in the case of any new Directors (including Mr O’Leary). Each of the existing Directors, whose retirement benefits are contractually established in their formal terms of engagement with the Company, has agreed to have those benefits frozen with effect from 31 December 2003 in respect of the service they have provided up to that date.
| Directors | Directors’ Base Fee/ Salary $ |
Superannuation Contributions $ |
Other Services $ |
Retirement Benefit Provisionii $ |
Short-Term Incentive Payments $ |
Long-Term Incentive Payments (Options Valuation)iv $ |
Other Benefitsiii $ |
Total $ |
|---|---|---|---|---|---|---|---|---|
| I. R. Johnson Non-Executive Chairman |
252,500 | 20,455 | – | 38,430 | – | – | 195 | 311,580 |
| A. J. Palmer Managing Director |
842,500 | – | – | – | 330,000 | 445,144 | 33,862 | 1,615,506 |
| R. B. Davis Non-Executive Director |
112,500 | 9,116 | – | 31,537 | – | – | 195 | 153,348 |
| R. C. Milne Non-Executive Director |
112,500 | 9,566 | 5,000 (i) | 16,749 | – | – | 195 | 144,010 |
| I. A. Renard Non-Executive Director |
112,500 | 9,116 | – | 16,749 | – | – | 195 | 138,560 |
| N. L. Scheinkestel Non-Executive Director |
112,500 | 9,116 | – | 31,537 | – | – | 195 | 153,348 |
| M. A. O’Leary Non-Executive Director |
90,833 | 7,360 | – | – | – | – | 152 | 98,345 |
Executive Officers are those directly accountable and responsible for the operational management and strategic direction of the Company. The five most senior positions with the most authority are disclosed below. Also disclosed is John Blake (General Manager Gosowong Mine) as he falls within the top five remuneration category due to the site and housing allowances associated with this position.
| Executive Officers | Fixed Remuneration (including Superannuation) $ |
Site, Housing & Rental Allowances $ |
Short-Term Incentive Payments $ |
Long-Term Incentive Payments (Options Valuation)iv $ |
Other Benefitsiii $ |
Total $ |
|---|---|---|---|---|---|---|
| J. Smith Executive General Manager Finance and Chief Financial Officer |
532,617 | 15,175 | 240,000 | 37,835 | 18,767 | 844,394 |
| B. Price Executive General Manager Project Development |
473,100 | 28,679 | 150,000 | 104,485 | 27,203 | 783,467 |
| D. Wood Executive General Manager Exploration |
430,850 | – | 208,000 | 104,485 | 3,076 | 746,411 |
| T. O’Neill Executive General Manager Operations and Marketing |
426,900 | – | 130,000 | 97,835 | 4,621 | 659,356 |
| B. Lavery Executive General Manager Corporate Services |
404,675 | – | 112,500 | 104,485 | 4,621 | 626,281 |
| J. Blake General Manager Gosowong Mine |
242,600 | 278,455 | 68,778 | 80,484 | 15,453 | 685,770 |
- Comprises a payment of $5,000 for duties performed as Chairman of the Superannuation Policy Committee.
- The amounts disclosed in Director’s remuneration represent the provision recorded in the current year to maintain the Director’s full entitlement on the above terms.
- Other benefits mainly comprise travel, parking, insurance and applicable fringe benefits tax payable on benefits.
- The Company has adopted the fair value measurement provisions of AASB 1046 ‘Director and Executive Disclosures’ prospectively for all options granted to Directors and relevant executives which have not vested as at 1 July 2003. The fair value of such grants is being amortised and disclosed as part of Director and executive emoluments on a straight-line basis over the vesting period. No adjustments have been or will be made to reverse amounts previously disclosed in relation to options that never vest (i.e., forfeitures).The fair value of the options is calculated at the date of grant using a Black-Scholes model and binomial methodologies, and allocated to each reporting period evenly over the period from grant date to vesting date. The value disclosed above is the portion of the fair value of the options allocated to this reporting period. The fair value methodology adopted and details of performance hurdles are discussed in further detail below.
Share Options – Valuation Methodology
The Directors’ assessment of the fair value of options granted, for the purpose of reporting emoluments of Directors and Executive Officers is based upon independent advice.
The methodology used in valuing the options was as follows:
- The options were valued on the date of grant based on the relevant market parameters applying at that time.
- The options were first valued as if they were unrestricted, freely tradable options using an option pricing model which combines both Black-Scholes and binomial methodologies. It is on this basis that the Board determines this element of remuneration levels.
- The following factors and assumptions were used in determining the fair value of options granted during the year:
| Grant date | 2 December 2003 |
| Share price on grant date | $12.75 |
| Exercise price | $12.29 |
| Expected volatility | 37 percent |
| Historical volatility | 37 percent |
| Risk-free interest rate | 6.33 percent |
| Dividend yield | 0.39 percent |
| Expected life of the option | 5 years |
These factors resulted in a fair value per option of $5.48.
- To take into account the performance hurdles and forfeiture
conditions attached to the options, a discount factor based on the probability
estimate that the options will vest, was then applied to arrive at an
estimate of the number of options expected to vest. This is the best
estimate available of the cost to the Company of awarding the options.
The above valuation has been applied as follows in respect to the 2 separate
option series granted:
– For options granted to the Managing Director, it has been assumed that the service period requirements and performance hurdles will be fully met and therefore no discount has been applied. – For the options granted to all Executives, it has been assumed that the service period requirements have an 80 percent probability of being met and that performance hurdles have a 75 percent probability of being met.
Executive Share Option Plan
‘Share Options’ in the case of the Company refers to those options granted to senior management, including the Executive Director, pursuant to the Newcrest Executive Option Plan. No person entitled to exercise any of the options had or has any right, by virtue of the options, to participate in any share issue of any other body corporate.
The Newcrest Executive Option Plan provides for the allocation of five year options with performance hurdles and exercise conditions. Under the Plan, options issued to senior management may not be exercised until after the second anniversary of the grant date and can only be exercised to a maximum of 25 percent of the options granted in each subsequent year to the exercise date, subject always to the performance hurdles being satisfied. Where the previous year’s maximum entitlement was not exercised, accumulated entitlements to that anniversary date may be exercised. The exercise price at which these options are issued is based on the weighted average of the prices at which the Company’s shares were traded on the Australian Stock Exchange during the one week period prior to issue date.
Options issued to the Executive Director have specific performance hurdles relating to the development of Telfer. Refer below for the specific performance hurdle relating to options granted in the current year.
Detailed information on the movements in options on issue under the Newcrest Executive Option Plan during the financial year and the balance exercisable under the Newcrest Executive Option Plan at balance date are detailed in Note 21 to the full Financial Report of Newcrest Mining Limited.
Total Share Options Granted During the Financial Year
| Number of Options Granted |
Exercise Price $ |
Grant Date |
Expiry Date |
|
|---|---|---|---|---|
| Executive Directors | ||||
| A. Palmer Managing Director and Chief Executive Officer |
250,000 | 12.29 | 2 December 2003 | 2 December 2008 |
| All other Executives | 2,415,000 | 12.29 | 2 December 2003 | 2 December 2008 |
| Total Options Granted | 2,665,000 | 12.29 | 2 December 2003 | 2 December 2008 |
Share Options Granted to Executive Directors and Most Highly Remunerated Executives During the Financial Year
During or since the end of the financial year, the Company granted options over unissued ordinary shares to the following Executive Directors and Executive Officers as part of their remuneration. All options granted to Executive Officers during the financial year were granted under the Newcrest Executive Option Plan. No options have been granted since the end of the financial year.
| Number of Options Granted |
Exercise Price $ |
Expiry Date |
Fair Value $ |
Number of Equity Instruments Expected to Vesti $ |
|
|---|---|---|---|---|---|
| Executive Directors | |||||
| A. Palmer Managing Director and Chief Executive Officer |
250,000 | 12.29 | 2 December 2008 | 5.48 | 250,000 |
| Other Executive Officers | |||||
| J. Smith Executive General Manager Finance |
100,000 | 12.29 | 2 December 2008 | 5.48 | 60,000 |
| B. Price Executive General Manager Project Development |
100,000 | 12.29 | 2 December 2008 | 5.48 | 60,000 |
| D. Wood Executive General Manager Exploration |
100,000 | 12.29 | 2 December 2008 | 5.48 | 60,000 |
| T. O’Neill Executive General Manager Operations and Marketing |
100,000 | 12.29 | 2 December 2008 | 5.48 | 60,000 |
| B. Lavery Executive General Manager Corporate Services |
100,000 | 12.29 | 2 December 2008 | 5.48 | 60,000 |
| J. Blake General Manager Gosowong Mine |
70,000 | 12.29 | 2 December 2008 | 5.48 | 42,000 |
- Vesting conditions are not taken into account in determining the fair value. Instead the vesting conditions are taken into account by adjusting the number of equity instruments expected to vest and this amount is included in measurement of the transaction value. Refer above section ‘Share Options – Valuation Methodology’ for the assessment of vesting conditions.
Share Options – Performance Hurdles
250,000 share options were granted to the Managing Director and Chief Executive Officer during the financial year subject to the following performance hurdle:
‘The successful development and construction, under Mr Palmer’s supervision, of the Telfer Underground Mine operation and the commissioning of that operation at an annual rate of 4 million tonnes per annum in the timeframe and within the budget approved by the Board for that development.’
Share options granted in the financial year to Executive Officers and senior management are subject to the following performance hurdle:
‘50 percent of options granted vesting upon the Total Shareholder Return (‘TSR’) growth of Newcrest Mining Limited (‘Newcrest’) meeting the TSR growth of the median of companies in the ASX 100 and increasing proportionately to 100 percent of options granted vesting upon the TSR growth of Newcrest meeting or exceeding the TSR growth of the 75th percentile of companies in the ASX 100.’
Shares Issued on the Exercise of Options
During the year an aggregate of 1,351,500 options were exercised, resulting in the issue of 1,351,500 ordinary shares of the Company at an aggregate consideration of $4,234,000.
Directors’ Interests
The relevant interest of each Director in the share capital of the Company, as notified by the Directors to the Australian Stock Exchange in accordance with Section 235 (1) of the Corporations Act 2001, at the date of this Report, is as follows:
| Chief Entity or Related Body Corporate |
Number of Ordinary Shares |
Nature of Interest |
Number of Options Over Ordinary Shares |
|
|---|---|---|---|---|
| I. R. Johnson | Newcrest Mining Limited | 38,127 | Direct and Indirect | – |
| A. J. Palmer | Newcrest Mining Limited | 11,060 | Direct | 1,000,000 |
| R. B. Davis | Newcrest Mining Limited | 14,658 | Direct and Indirect | – |
| R. C. Milne | Newcrest Mining Limited | 8,501 | Direct | – |
| I. A. Renard | Newcrest Mining Limited | 15,871 | Direct | – |
| N. L. Scheinkestel | Newcrest Mining Limited | 70,635 | Direct and Indirect | – |
| M. A. O’Leary | Newcrest Mining Limited | 5,775 | Direct | – |
The Newcrest Non Executive Directors’ Share Plan was approved by Shareholders on 28 October 1999. The Board adopted a policy which requires Non-Executive Directors to receive at least 10 percent of their annual remuneration by way of on market acquired shares in the Company with no discount. Shares acquired by a Non-Executive Director under the Plan may not be sold for a period of three years after they are acquired, except if the Director retires from the Board or if the Board permits earlier sale.
Indemnification and Insurance of Directors and Officers
Pursuant to Article 103 of its Constitution, the Company insures and indemnifies its Directors and Officers, against liabilities to another person (other than the Company or a related body corporate) that may arise from their position as Directors and Officers of the Company and its controlled entities, except where the liability arises out of conduct involving a lack of good faith.
Each Director named here and the Secretary, has entered into a Deed of Indemnity with the Company on these terms.
Insurance Premiums
During or since the financial year the Company has paid an insurance premium in respect of a contract insuring against liability of Directors and Officers in accordance with the Company’s Constitution and the Corporations Act 2001.
The contract of insurance prohibits disclosure of the amount of the premium and the nature of the liability insured against. Each Director of Newcrest Mining Limited has paid the insurance premium in respect of cover which may apply in relation to liabilities of the type referred to in Section 199B of the Corporations Act 2001.
Rounding of Amounts
The Company is of a kind referred to in Class Order 98/0100 issued by the Australian Securities and Investments Commission dated 10 July 1998 and in accordance with that Class Order, amounts in the financial report have been rounded to the nearest thousand dollars, unless otherwise stated.
Signed in accordance with a resolution of the Directors.
 |
 |
Ian R. Johnson |
Anthony J. Palmer |
31 August 2004, Melbourne |
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