Operational Overview

The benefits of OneSteel's transformation since being spun out from BHP 11 years ago, including its focus on growing its Iron Ore and Mining Consumables businesses, is clearly evident in the company's overall profit performance for the 2011 financial year. Underlying Net Profit After Tax for the year of $235 million largely reflects the strong performances of the Iron Ore and the newly established Mining Consumables segment.

The Mining Consumables segment was established following the acquisition of the Moly-Cop Group from Anglo American plc on 31 December 2010 for an enterprise value of US$932 million. This was another significant step in the execution of OneSteel's long-term growth strategy for creating shareholder value. The acquisition provides the company with increased exposure to the high growth mining consumables sector through Moly-Cop's grinding media businesses in the Americas, and further diversifies OneSteel's exposure away from domestic construction and infrastructure cycles. The company now participates in some of the world's largest and most attractive mining consumables markets with significant leverage to continued growth in copper and gold mining in particular.

The acquisition of these businesses is an ideal strategic fit for the company as OneSteel already has significant industry knowledge and experience gained through its own grinding media and other mining consumables operations such as the wire ropes and rail wheels businesses in Australia. These existing mining consumables businesses are now included in the new Mining Consumables segment.

Following this acquisition, OneSteel's overseas sourced revenue has increased from an insignificant amount at the time of being spun out from BHP 11 years ago, to now more that 40% due to the expansion of its business portfolio over this time.

Operational Performance

The overall profit performance for the year reflects the level of strength in the markets of our different businesses, with the international and resources focused businesses again the best performers.

The highlight was the performance of the Iron Ore segment, which recorded another impressive result underpinned by high prices compared to historical levels due to continued strong demand from China.

This business also continued to make good progress with Project Magnet Phase 2 during the year, aimed at increasing iron ore reserves and resources and maintaining iron ore sales at 6 million tonnes per year. Approximately $60 million in capital expenditure was invested during the year on this project and a further $140 million has been committed. Investments include an ore beneficiation plant at Iron Baron, additional mine cutbacks, exploration, infrastructure and roads, expansion of the mining fleet, additional rail wagons and investments in new mines. The business continues to do work to increase reserves and resources and while only 2.5 million tonnes was added to reserves during the year, a number of promising opportunities were identified that are expected to further increase reserves. Based on current reserves and the beneficiation of low grade ore, we expect to have sufficient ore to maintain sales at the rate of 6 million tonnes per annum for at least 10 years.

The new Mining Consumables segment showed the benefits of strong levels of mining activity in Australasia and the Americas. Performance of the Moly-Cop grinding media business was in line with expectations for the six months since acquisition.

There was a significant improvement in the performance of the Recycling segment for the year, particularly in the second half, largely due to the strong contribution from the US Recycling business. The Australian business, although EBITDA positive for the year, continues to be adversely affected by low sales volumes and the short supply of scrap arisings in Australia due to weak levels of construction and industrial activity.

In our Australian steel segments, continued weak domestic demand, higher raw material prices, under-utilisation in international steel markets, unseasonal wet weather and the impact on prices of a 28% run up in the Australian dollar over the year, all led to a very disappointing and unacceptable result.

The Australian steel businesses have commenced a further program of labour and other cost reductions to the businesses' cost base in response to the continuing difficult market conditions. This initial review will involve labour reductions of approximately 400 employees and contractors substantially by the end of the September quarter, and is expected to result in annual labour savings of approximately $40 million. Reviews of the businesses' product portfolio, facilities and cost base are continuing and further initiatives will be required given current economic conditions and the businesses' unacceptable performance.

With steelmaking utilisation levels still well below pre-GFC levels, the Australian steel Manufacturing business remains strongly leveraged to volume as well as price improvements, as does the Australian Distribution business.

Despite the impact of the very challenging external environment on the Australian steel businesses, the company delivered a very strong cash outcome with statutory operating cash flow of $463 million for the year. The balance sheet also remains solid with statutory gearing at 27.7%, which includes the impact of the Moly- op Group acquisition.

The information included in the following charts illustrates trends in some of the major drivers of OneSteel's businesses, including iron ore demand, world copper and gold production, key sectors of the Australian economy, domestic steel prices, prices of international steel and key inputs into steelmaking. The strength in the markets of our international and resources focused businesses and the weakness in the markets of our domestic steel businesses are evident in the following charts.

Iron ore imports into China Figure 1 represents the volume of iron ore that was imported by China. China imported 644 million tonnes of iron ore in FY11, which is 0.6% more than the volume imported in FY10. China's share of the seaborne iron ore trade has risen from ~40% in 2005 to ~60% in 2010. There has been strong demand for imported iron ore from China to support infrastructure developments in their five-year plan.	Iron ore prices OneSteel has iron ore reserves in South Australia. In FY11, OneSteel exported 6.04 million tonnes of high grade and lower grade iron ore. Figure 2 shows international movement in iron ore fines prices in both US and Australian dollars. Contract pricing has been in monthly or quarterly periods based on the spot prices in previous periods. Average spot prices for FY11 increased by 37% compared to FY10. Spot prices in FY11 ranged from a low of US$116/t cfr to a high of US$193/t cfr. Iron ore prices have been affected by tight supply due to the export ban imposed by the Indian Government on iron ore exports from the Karnataka region.	Scrap prices Figure 3 shows prices for scrap steel in US and Australian dollars. In FY11, OneSteel Recycling sold 1.99 million tonnes of ferrous scrap both to internal as well as to external customers. Non-ferrous sales were 0.25 million tonnes. Korean benchmark average price for HM1 scrap in US dollar terms increased by 20% in FY11 compared to FY10. The prices ranged from a low of US$359/t to a high of US$510/t. The benchmark scrap prices continued to be volatile due to effects caused by global economic uncertainties, geopolitical issues and natural disasters.
		Long products international prices Figure 6 presents the international benchmark prices for structural beams, merchant bar, reinforcing bar and wire rod. Average prices for structurals and reinforcing bar increased by 4%, merchant bar by 3% and wire rod by 5% in FY11 compared to the previous year. Prices peaked in March 2011 before they started to soften due to the effects of the tsunami that hit Japan and partly affected by the geopolitical unrest in the Middle East.
World copper and gold production Figure 4 shows the world copper production and LME prices in US dollars. World copper production increased by 1% in CY10 compared to previous year. The LME copper average price for FY11 saw an annual growth of 31%. Copper prices ranged from US$6,354/t to US$10,148/t. Figure 5 shows the world gold production and the London PM fixed prices in US dollars. World gold production increased by 5% in CY10 compared to previous year. The average gold price for FY11 increased by 26% compared to FY10. Gold prices ranged from US$1,157/ oz to US$1,552.50/oz.
Australian Performance of Construction Index Figure 7 shows that the Australian Performance of Construction Index has been in the “contraction” zone for the FY11 period. PCI ranged from 35.8 to 44.6 in FY11 as compared to the PCI in FY10 which was above 50 (“expansion”) for six months.	Import volumes of steel into Australia Figure 8 shows the import volumes of steel into Australia had increased 10% in FY11 compared to import volumes in FY10. Import volumes in the OneSteel range increased by 14% whereas in the flat products range, volumes increased by 10%. The strong Australian dollar has driven the increase in steel import volumes.	Prices for steel residential construction materials Figure 9 represents the movement in prices of residential construction materials indexed to 1989/90 prices. The index for reinforcing steel had decreased by 7% in the June 2011 quarter compared to the June 2010 quarter. However, the same index increased by 1% compared to the Index as at December 2010 quarter. The index is now lower than the weighted average of eight capital cities CPI due to the price increases in food items during the year.

Strategic Framework Scorecard

Delivering OneSteel's strategy

OneSteel aims to deliver superior and sustainable returns through the cycle as well as generate strong cash outcomes. Our strategy for achieving this includes improving returns from existing businesses through building organisational capability, a disciplined approach to performing the fundamentals well, such as managing costs, cash, other assets and markets, and through growing and diversifying earnings with a particular focus on leveraging areas of advantage.

Below is a summary of how the company performed against our objectives in a year of mixed performances between our segments due to the different strengths of their markets.

The four key elements to OneSteel's overall business strategy are:

• Improving returns from existing businesses
• Achieving strong cash generation
• Growing and diversifying earnings, and
• Building organisational capability.

Despite OneSteel's overall profit performance for the year being adversely affected by the impact of a very challenging external environment on the Australian steel businesses, the good performances of the Iron Ore and Mining Consumables segments and the improved performance of the Recycling segment helped the company deliver a very solid cash outcome for the year.

Shareholders are continuing to benefit from the company's investment in Project Magnet with the Iron Ore segment delivering a very strong EBIT result of $524 million for the year, and a return on funds employed of 70%.

OneSteel is continuing to invest to grow its Iron Ore business and made good progress with Project Magnet Phase 2 during the year, aimed at increasing reserves and resources and maintaining sales at the rate of 6 million tonnes per annum for at least 10 years. Approximately $60 million in capital cash expenditure was spent during the financial year on this project with investments including an ore beneficiation plant at Iron Baron, additional mine cutbacks, exploration, infrastructure and roads, expansion of the mining fleet and investments in new mines aimed at increasing capacity. We continue to do work to increase our reserves and resources and whilst we only added a further 2.5 million tonnes to reserves during the year, we have also identified a number of promising opportunities during our exploration work that we expect will further increase our reserves.

In line with OneSteel's long-term growth strategy of growing its mining and mining consumables businesses, the company acquired the Moly-Cop Group during the year from Anglo American plc. The new business complements OneSteel's existing expertise and customer relationships in grinding media and makes OneSteel the largest manufacturer of grinding media globally. The acquisition provides OneSteel with leading positions in some of the world's most attractive markets for mining consumables and increases the company's diversification away from Australian construction and infrastructure cycles.

While OneSteel's growth focus is on mining and mining consumables, the company remains focused on returning its Australian steel businesses to acceptable returns and continues to invest for this purpose. During the fourth quarter, the company invested in repair and redesign work to the Whyalla blast furnace at a cost of $65 million. As a result of this work the design life of the blast furnace is expected to now extend beyond 2020. The impact of this work on the profit performance of the Manufacturing segment, including associated operational inefficiencies leading into the shut, were significant. OneSteel expects improved operational efficiency from the Whyalla blast furnace in the 2012 financial year.

In response to the disappointing and unacceptable performance of the Australian steel businesses during the year, OneSteel has commenced further labour and other cost reductions, as well as a review of its steel product portfolio and facilities.

Below is a summary of how the company performed against our objectives during the financial year ended 30 June 2011.

Improving returns from existing businesses

• Underlying EBIT increased 3% to $428 million
• Iron Ore EBIT increased 57% to $524 million
• Recycling EBIT increased 171% to $21 million
• Australian Distribution underlying EBIT decreased to $10 million
• Manufacturing underlying EBIT decreased to loss of $185 million
• Sales margin decreased to 6.0% from 6.7%
• Return on funds employed decreased slightly to 7.3% from 7.5%
• Return on equity decreased slightly to 5.4% from 5.5%
• Underlying earnings per share decreased to 17.7 cents from 18.2 cents.

The Board declared a final dividend per share of 4 cents (unfranked). Total dividends per share decreased 10% to 10 cents (unfranked). Dividends for the 2011 financial year are unfranked as a result of significant tax benefits received which reduced the balance of franking credits available. OneSteel's ability to frank future dividends will depend on the level of franking credits generated from tax paid in Australia in future financial years but is hopeful of returning to franking in the 2012 financial year.

Cash generation

• Strong underlying operating cash flow $477 million
• Underlying free cash flow $226 million
• Statutory gearing (net debt/net debt plus equity) increased to 27.7% from 17.7%, following the acquisition of the Moly-Cop Group
• Improvements in working capital during the year despite the acquisition of the Moly-Cop Group.

Growing and diversifying earnings

Revenue increased 15% to $7,133 million
• Now over 40% of OneSteel's revenue is sourced from outside Australia
• Acquisition of the Moly-Cop Group during the year, OneSteel is now the largest manufacturer of grinding media globally
• Continued to make good progress in the Iron Ore business with Project Magnet Phase 2
• Based on our current reserves and the beneficiation of low grade ore, the company expects to have sufficient iron ore for at least a further 10 years at the rate of 6 million tonnes per annum
• Iron ore sales expected to increase to approximately 9-10 million tonnes per annum following announced port expansion at Whyalla and agreement to acquire WPG Resources' iron ore assets
• The company continues to focus on growth options in our resource focused businesses.

Organisational efficiency and capability

• The company commenced further cost and labour reduction programs during the year in response to the difficult market conditions. This includes a review of our steel product portfolio and facilities
• Staff have shown a high level of commitment and flexibility in responding to the impact of the adverse external environment on the company's businesses, as well as in relation to the Whyalla blast furnace interruption and repair work by working flexibly, taking leave and working reduced hours
• Continued emphasis was placed on the targeted development of staff and business leaders, as well as the accelerated development of potential future business leaders to meet succession planning needs
• OneSteel continues to invest in talent pipelines and technical training, employing approximately 250 apprentices, cadets and graduates.

The financial information presented for the years 2001-2004 has been presented under previous AGAAP and has not been restated under Australian Equivalents to International Financial Reporting Standards (AIFRS). The nature of the main adjustments to make the information comply with AIFRS include:

• Recognition of additional provisions relating to rehabilitation and make good
• Restatement of deferred tax balances using the balance sheet method
• Recognition of the deficit in the defined benefits superannuation fund
• Consolidation of the employee share plan trust, and
• Recognition of derivative financial instruments on balance sheet at fair value and application of hedge accounting.

Note that the financial information presented for the years 2001–2004 has been adjusted to exclude goodwill amortisation from earnings.

1. FY11 underlying results are before the impact of restructuring costs, tax benefits relating to prior years and direct costs relating to the acquisition of the Moly-Cop Group of $5.1 million after tax. These statistics include the results of the Moly-Cop Group from the date of acquisition on 31 December 2010.
2. FY10 underlying results are before the impact of legal claims, accelerated depreciation, restructuring activities, tax consolidation and tax benefits relating to prior years of $17.8 million after tax.
3. FY09 underlying results are before the impact of restructuring activities, tax consolidation and tax benefits relating to prior years of $14.2 million after tax.
4. FY08 underlying results are before the impact of restructuring costs and impairment of plant and equipment associated with the integration of the Smorgon Steel Group and Australian Tube Mills businesses of $70.1 million net of tax. These statistics include the results of the Smorgon Steel Group Limited from 20 August 2007 only.
5. FY07 underlying results exclude the impact of the derecognition of deferred tax liabilities of $9.5 million.
6. FY06 underlying results exclude the tax benefit of $15.9 million arising from adjustments to tax consolidation values.
7. FY05 underlying results exclude the benefit relating to the reversal of impairment loss on transition to AIFRS of $49.7 million after tax.
8. FY04 underlying results exclude the tax benefit of $19.8 million arising from OneSteel's entry into the tax consolidation regime.
9. Net debt under previous AGAAP has been adjusted to include securitisation, which was previously classified as off-balance sheet.