Lonmin PLC (LMI) - Final Results RNS Number : 7225Q Lonmin PLC 09 November 2012 REGULATORY RELEASE 9 November 2012 2012 Final Results Announcement Lonmin Plc, (Lonmin or the Company),the world's third largest primary Platinum producer, today publishes its Final Results for the year ended 30 September 2012. HIGHLIGHTS • Commendable operational performance in light of circumstances o The tragic events at Marikana significantly impacted operational and financial results § Impact of 110,000 ounces of mined Platinum o Saleable metal in concentrate down 5.5% to 679,821 Platinum ounces o Platinum sales of 701,831 ounces - down 2.6% on 2011 o Improved safety performance - LTIFR of 4.16 per million man hours worked vs. 4.71 in FY2011 o Immediately available ore reserves at 3.3 million centares, up 14% - healthy levels aligned to creating operational flexibility to respond to market conditions o Further improvements in grades and concentrator recoveries o Number Two Furnace commissioned on schedule in July 2012 and Number One Furnace successfully modified and operating well • Financial results o Underlying profit before tax $57 million o Special costs of $755 million, including $159 million for costs related to illegal work stoppage and impairment of Akanani exploration asset at $602 million o Resulting loss before tax of $698 million • Balance Sheet restructuring o Underwritten Rights Issue to raise c. $817 million announced separately today o Amended banking facilities - strengthening financial position • Focus areas FY2013 onwards o FY2013 guidance of 680,000 Platinum ounces of saleable metals in concentrate, and sales of 660,000 ounces o Targeting Platinum sales in excess of 750,000 ounces in FY2014 and FY2015 o Unit costs to increase by around 10% to ZAR9,350 per PGM ounce produced in FY2013 o Capital expenditure of $175 million for 2013 financial year o Attractive long-term fundamentals for PGM markets remain, despite short-term volatility Roger Phillimore, Chairman, said: "The publication of today's results closes a painful chapter in Lonmin's history. There are many lessons to be learnt and these will inform our actions in the future. However we are now looking ahead with renewed confidence. We have secured our financial position and we have a clear strategic plan that management and workers alike need to deliver on for the sake of all our stakeholders." FINANCIAL HIGHLIGHTS 30 September 2012 30 September 2011 Revenue $1,614m $1,992m Underlying ^i operating profit $67m $311m Operating (loss) / profit ^ii $(702)m $307m Underlying ^i profit before taxation $57m $315m (Loss) / profit before taxation $(698)m $293m Underlying ^i earnings per share 7.4c 111.6c (Loss) / earnings per share (202.3)c 134.8c Trading cash inflow per share ^iii 129.8c 311.2c Free cash (outflow) / inflow per share (78.5)c 103.7c ^iv Net debt as defined by the Group ^v $421m $234m Gearing ^vi 14% 7% Footnotes: i Underlying results and earnings per share are based on reported results and earnings per share excluding the effect of special items as disclosed in note 3 to the financial statements. ii Operating (loss) / profit is defined as revenue less operating expenses before impairment of available for sale financial assets, finance income and expenses and before share of (loss) / profit of equity accounted investments. iii Trading cash flow is defined as cash flow from operating activities. iv Free cash flow is defined as trading cash flow less capital expenditure on property, plant and equipment and intangibles, proceeds from disposal of assets held for sale and dividends paid to non-controlling interests. v Net debt as defined by the Group comprises cash and cash equivalents, bank overdrafts repayable on demand and interest bearing loans and borrowings less unamortised bank fees. vi Gearing is calculated as the net debt attributable to the Group divided by the total of the net debt attributable to the Group and equity shareholders' funds. CONTENTS The following sections are contained in this document: · Events at Marikana in August and September 2012 · Chairman's Letter · Chief Executive Officer's Review · Operational Review · Financial Review · Reserves & Resources · Operating Statistics - 5 Year Review · Financial Statements ENQUIRIES Investors / Analysts: Lonmin Tanya Chikanza (Head of Investor Relations) +27 11 218 8300 / +44 20 7201 6007 Ruli Diseko (Investor Relations Manager) +27 11 218 8373 Media: Cardew Group James Clark / Emma Crawshaw +44 20 7930 0777 Sue Vey +27 72 644 9777 Brunswick - Johannesburg Cecilia de Almeida +27 11 502 7400 / +27 83 325 9169 Notes to editors Lonmin, which is listed on both the London Stock Exchange and the Johannesburg Stock Exchange, is one of the world's largest primary producers of PGMs. These metals are essential for many industrial applications, especially catalytic converters for internal combustion engine emissions, as well as their widespread use in jewellery. Lonmin's operations are situated in the Bushveld Complex in South Africa, where nearly 80% of known global PGM resources are found. The Company creates value for shareholders through mining, refining and marketing PGMs and has a vertically integrated operational structure - from mine to market. Lonmin's mining operations extract ore from which the Process Division produces refined PGMs for delivery to customers. Underpinning the operations is the Shared Services function which provides high quality levels of support and infrastructure across the operations. For further information please visit our website: http://www.lonmin.com Events at Marikana in August and September 2012 There is no way to begin our Annual Report this year without addressing the terrible events which took place at Marikana in August and September. The scenes which unfolded there shocked and horrified all who witnessed them. They placed this Company in the global spotlight and, crucially, they left the nation of South Africa seeking answers to some of the most difficult questions it has faced in a generation. Mining is a dangerous business. We are proud of our record of being the safest primary platinum mining company in the world, but all of us who have been involved in this industry for years know the pain of losing colleagues underground. Nothing, though, could have prepared the Lonmin family for the loss of so many colleagues during the events which took place. Like the whole nation around us, it will take a long time for us to come to terms with the tragedy that unfolded and for normality to return. We have begun that journey, but it will be long and difficult. In compiling our Annual Report this year we faced a challenge in that the Events at Marikana are so relevant to so much of our business that they could be mentioned in most sections of the report. An Annual Report, however, is, by definition, a complex and technical publication, containing a huge amount of information to help inform its shareholders. For that reason we felt that we should address Marikana immediately. Much has been written by others about those weeks, some of it moving, some insightful but, sadly, much that is wholly inaccurate. In reporting this year, we felt it was important to deal with that. Of course, the issues around Marikana are the subject of an ongoing judicial inquiry in South Africa. It is for Judge Farlam and his team, whom we support fully and completely, to establish causes and examine effects, and we do not intend to do that here. It would be entirely wrong to do so. However some facts, sadly, are not in dispute in that before 16 August eight employees, including two security guards, as well as two policemen were killed whilst on 16 August 34 people were killed and many more injured. Speaking a few days later at a Memorial Service for those who died, we both tried to find the right words to express our deep sorrow, shock and regret at what had happened. We tried, also, to speak of hope, and healing. Even now, many weeks later, there are no words adequate to reflect the events of that day; but, our heartfelt sympathy for the families and friends who have lost loved ones remains undiminished. Lonmin with its Black Economic Empowerment (BEE) partner, Shanduka Group (Proprietary) Limited, established the 16/8 Memorial Fund in the wake of the shootings, committing to fund the education of the children of those who died to adulthood, and providing care to the injured. The fund is to be independently run, and open for public donations or donations from other organisations or companies (a number of which have already, both publicly and anonymously, contributed generously). Details can be found elsewhere in this report. In the wake of the shootings sporadic violence continued, combined with a focused campaign of threats and intimidation to prevent the vast majority of our workforce of 28,000 (and another 10,000 contractors) from reporting for work. We worked hard with SAPS to try to address this, not least because the vast majority of our workforce wanted to return to work, but the very geography of Marikana made this difficult. It is important to remember also that we found ourselves at the centre of nothing less than a national crisis for South Africa. Certainly we faced huge pressure to find a way to resolve the situation in order that we could start mining again and protect the safety and jobs of tens of thousands who had not been involved, but also to give the nation an opportunity to begin to address the difficult issues it faced. Both Board and Management were convinced that a resolution which could deliver a sustainable peace was essential. We worked tirelessly with government, religious and traditional leaders, unions and other workers' representatives, under the guidance of the Commission for Conciliation, Mediation and Arbitration (CCMA), to bring about a Peace Accord. We thank all these parties for their involvement and for the significant role each and every one of them played. That document, which committed all parties to peaceful negotiation, was signed on September 6. One union chose not to sign, but in the interests of peace we and the other signatory parties reached out to them to join the wage negotiations which followed. The discussions which followed the signing of the Peace Accord resulted in an agreement, again facilitated by the CCMA and signed by all the trade unions party to our existing wage agreement, to add an addendum to our existing wage agreement which gave pay rises of between 11% and 22% to most workers (not including management). Many have failed to report that this included rises of 9% to 10% already due. Subsequently we saw an immediate return to work, and the resumption of operations. We refer to this tragic series of events as "Events at Marikana" in the rest of the Annual Report. We believe we did the right thing both for this Company and for South Africa in helping bring the dispute and associated violence to an end. It was easy to blame Lonmin, as some have done, for the spread of unrest in the weeks after our agreement. We reject this accusation. Unrest in the mining sector predated the Marikana dispute, and was growing elsewhere during it. Deep-rooted issues of poverty and inequality have been highlighted by what has taken place, but those go beyond mining and to every corner of South Africa. It is certainly true that mining companies have faced criticism for their efforts to support the transformation agenda in the country and, on Lonmin's behalf, we accept that we must do more, particularly around the nationally difficult issue of housing. However we are rightly proud of the huge amount we have achieved in education, health, infrastructure and other areas, both for our employees and the wider community - work which has not had the recognition the dedicated teams who deliver it deserve. Nonetheless, no company, however large, can alone address the socio-economic issues facing the Republic. Only by working in partnership with central and local government to build a sustainable and profitable mining sector can we make the investments needed to create and sustain the jobs and careers which will help solve some of these problems. We are committed to being a good corporate citizen of South Africa, to meeting the challenges set us around BEE and Transformation and, more than this, to being a force for good in a country in which mining is a vital part of economic well-being. In doing all this, however, we must never lose sight of the most important thing, which must be to help ensure that such terrible events never happen again. South Africa is a country which has been through more than most, and come through all challenges to become a better place. It is a beautiful nation, blessed with many resources and home to a vibrant and determined people. It deserves to reap the benefits of all of this. What happened at Marikana was a tragedy for the families and friends of those who died, and for those who still bear the physical and mental injuries of those events; but it was also a warning to all of South Africa. Together, we must heed that warning. Roger Phillimore Simon Scott Chairman Acting Chief Executive Officer Chairman's Letter Dear Fellow Shareholder, This has been a year where issues of business and commerce have been overshadowed by tragic loss of life, violence, unrest and fear. Events at Marikana and elsewhere mark a watershed for post-Apartheid South Africa, and leave everyone involved in the country asking questions and seeking answers. What is clear, though, is that if South Africa is to deal with the historic issues of poverty and dissatisfaction which underpin much of the unrest we have witnessed, it will require a growing and effective private sector to provide the jobs so desperately needed. It is business which will help to deliver much of the growth which, in turn, will help to provide the economic, educational and social platforms for change. Given the country's extensive natural resources, mining will be a key part of that. The future of your Company, like our peers, is intrinsically linked with the future of South Africa. The Government of the Republic recognises the importance of this link. Whilst there are those who attack the mining industry as being to blame for many of South Africa's ills, and demand it does ever more to address them, I am confident that the government realises that loading more and more costs on to the sector during difficult times can only lead, in the long run, to serious damage to the nation's economy. Certainly miners have a role to play, and perhaps greater responsibility than others given the labour-intensive nature of our businesses. Your Company accepts that challenge, and that responsibility, but we must also be clear that the change all of us who love South Africa wish to see cannot be delivered by businesses alone. We are a crucial component, but only by working in partnership with government and other stakeholders can transformation be delivered. To play our part morally and legally, we must be financially and commercially healthy. We are a business; without being successful at what we do we can do nothing to help South Africa. What is clear from the terrible events of August and September is that, for both government and the mining industry, the reality of what happened has bred a new determination to work in partnership for the betterment of South Africa, and to do all we can to ensure such awful scenes never take place again. Financial Issues Post Year End Since the year end there have been a number of significant financial events affecting your Company, the full details of which are contained in a number of relevant documents you will, I hope, have seen by the time this Annual Report is published. Chief amongst these was our announcement on October 30 that we intended to raise US$800 million in a Rights Issue, the Prospectus for which is being published on 9 November 2012. This was designed with one thing in mind: to help our shareholders maximise returns in the long-term from this Company's excellent assets, operational turnaround and position in the market when it improves. The fact that this Rights Issue is fully underwritten is a real vote of confidence in our business, as well as in South Africa's ability to deal with its short-term problems and move forwards. The Rights Issue is vital, so as not to lose the benefits of your Company's fundamental strengths: · Operations located in the world's premier PGM deposit · Long life mineral resource base backed by long-term New Order Mining Rights · Significant inherent value in existing infrastructure and mineral reserves · Attractive long-term fundamentals for PGM markets, despite short-term volatility · Maximisation of value through vertical integration · Operational gearing · Industry leading expertise in processing UG2 ore The Rights Issue should also be viewed against the background of our clear strategic focus on future plans for our outstanding asset at Marikana. Markets, Operations and Costs Platinum miners were hit hard by a combination of lower prices and rising costs, and instability in the latter part of the year. Much of this year saw a continuation of the global economic instability with issues in Europe in particular heavily impacting sentiment across global markets. The Events at Marikana, and subsequent strike action at almost all other South African PGM producers have, given the importance of South African producers to global PGM production, in a short space of time altered the outlook for the supply side of the PGM industry. These events have increased operating costs for Lonmin and other companies in the South African PGM mining industry, while at the same time creating supply constraints which have contributed to an increase in PGM prices. Your Board believes that the disruption to the South African PGM mining industry is also likely to result in some capacity reductions in the near term as higher cost operations are forced to reduce output or close down, and/or in the longer term as reduced capital expenditure plans today defer the production of replacement or growth ounces in the future. Your Board believes that these factors should sustain improved pricing for PGMs. Over the longer term, your Board also believes that improved PGM pricing should be supported by underlying positive demand dynamics. Automotive demand is expected to be driven by a combination of increasingly stringent emissions legislation, the ongoing extension of this regime to non-road applications and a positive outlook for vehicle sales in US and Chinese markets. Although Chinese growth expectations have recently been downgraded, consumer expenditure in China is still expected to increase with positive implications for jewellery sales. Your Company's key operational challenges this year were safety, managing costs and labour relations (before the events of August and September). Lonmin can be proud of its safety record. It is the safest South African platinum mining company, having achieved the lowest Lost Time Injury Frequency Rate amongst the primary producers, and a number of our shafts have set records in South Africa for fatality-free shifts. Constant vigilance and procedures notwithstanding, regrettably two colleagues lost their lives in mining related incidents this year. Your Company is determined to continue to be the safest platinum miner in the business. Our commitment to "zero harm" remains undiminished and safety will always be our first priority. Rising wages and other price increases in areas such as power drove gross costs up this year. Unit costs were of course significantly impacted by the seven weeks we were unable to mine due to the illegal strike at Marikana. The cost of agreeing the wage settlement which ended it will add approximately 14% to our wage costs in 2013 over our normailsed costs for 2012. Included in this are the awards negotiated in 2011 for implementation in October 2012. Industry Challenges The issue of nationalisation seems to have slipped down the political agenda in South Africa during 2011/12, with many mainstream politicians publicly stating that it would neither be practicable nor desirable. However, there remains the issue of multi-faceted intervention by the state which over time could amount to nationalisation by stealth. Your Company is working hard, in partnership with its industry peers and business organisations, to address this. Responsible mining companies operate to the standards laid down by the International Council on Mining and Metals (ICMM). They have much to offer their host nations and, because of this, we and our peers continue to make clear to government that a balance must be maintained between the distribution of wealth generated by mining companies and recognition of the commercial and competitive environment in which they operate. Transformation Your Company has long taken the view that delivering on its ambitions and responsibilities in these areas is an essential element of its licence to operate in South Africa, both legally in terms of its obligations under the Mining Charter or morally in terms of being a good corporate citizen of the country. Lonmin has a good record and one it can be proud of, but it has also delivered more slowly in some areas, notably the difficult issue of housing, than it would have liked, despite strenuous efforts. Addressing these shortcomings is a priority, but I would not wish this to eclipse the good work we have done in recent years. The socio-economic realities of South Africa are such that no company, however large, can resolve the issues of housing, unemployment, poverty and dissatisfaction which exist in the country. Your Company is wholly committed to both the BEE and Transformation agendas, to being part of the future success of the Republic of South Africa, and of being a force for good in the country. In doing so, it will grow and ensure returns for its investors. Role and effectiveness of the Board Your Company is committed to the highest standards of corporate governance. The continuous improvement opportunity presented by a formal review of the Board's effectiveness is valuable. Ordinarily, we would have done such a review in August/September 2012, but given all the recent events the Board judged that it would be inappropriate to conduct such a review in 2012. The Board does not believe that this decision creates any additional risk for Shareholders, and believes that the decision can be justified given that the time otherwise needed for a review was utilised to address the multiple issues then facing the Company. It is currently intended that an independent facilitator will manage a rigorous review process in 2013. Management Your management team is to be congratulated for the strong operational performance of the business through July, with marked improvement in the performance of safety initiatives, production and costs. The terrible Events at Marikana happened days after Ian Farmer, Chief Executive Officer, was hospitalised with a serious condition. The Board appointed Simon Scott to act as Chief Executive Officer in Ian's absence, and he has done a frankly remarkable job in leading the strong executive team in returning the business to stable production and developing the renewal plans for the future. My thanks are due to them for their exceptional commitment to Lonmin. The Board recognises the Company's need for permanent leadership and will take such actions as are necessary to establish this at the appropriate time. Dividend Whilst dividends are not affordable in the short-term, Lonmin has confidence in the future demand for PGMs and its expectation is for prices to firm in response to anticipated supply deficits in the future. We are also determined to increase the effectiveness of our operations, in both production and cost terms. While there are challenges to be overcome in achieving this, our current planning anticipates positive free cash flow from the 2014 financial year onwards. The return to stronger earnings and cash flows will permit the resumption of dividends at some point. When we do resume the payment of dividends we would intend to follow the existing policy of declaring an ordinary final dividend at a rate which the Board expects can at least be maintained in subsequent years. Outlook Sales of Platinum is forecast to be around 660,000 ounces for the 2013 financial year, significantly impacted by the Events at Marikana which have resulted in lower capital spend, the suspension of mining at K4 and the time it takes to ramp up the operation back to previous levels of productivity. Metal prices have shown some recovery as recent industrial unrest across the industry has in a short space of time altered the outlook for the supply side of the PGM industry. Lonmin is extremely well positioned to benefit from a strong pricing environment when it comes thanks to the quality of our ore body, our un-utilised shaft capacity, our immediately available ore reserves, and the capacity and quality of our Processing Division. Employees We are a large Company, averaging some 28,000 employees (and another 10,000 contractors). I t has been my practice to thank them each year for their work, dedication and loyalty. Given the nature of our business and the risks associated with it this thank you, on behalf of our shareholders, is always heartfelt and genuine. This year, though, our people have been through something unprecedented. The bravery we witnessed amongst employees determined to come to work despite terrible intimidation, amongst managers who faced down angry, armed mobs of people and then, ultimately, the courage of the entire workforce in coming together in the wake of the deaths of so many colleagues and friends to help your Company return to operations. We have seen terrible things in 2012, but, as is often the way in times of crisis, we have also seen the very best of people. For everything our people have done this year, much of it beyond anything we could have expected of them, my thanks are particularly poignant. Roger Phillimore Chairman Chief Executive Officer's Review Dear Fellow Shareholder, 1. Introduction Both the Chairman and I have spoken in this report about the shocking events which took place at Marikana in 2012, their impact and effect on our Company, and South Africa more widely. As the Acting Chief Executive Officer (CEO), it is my role in this section of our Annual Report to review the year for our shareholders and to report on our performance. Our success as a business is central to our ability to be a good corporate citizen of South Africa and to play our part in its transformation. Everyone, then, has a stake in our success. I am pleased to report that we delivered a solid operational performance in the 2012 financial year, in spite of the significant disruptions that we experienced. The results reflect the healthy state of our operating assets and a team that is continuing to deliver in a challenging environment. Taking the 2012 financial year as a whole total tonnes mined were 10.4 million, a 1.3 million tonnes decrease from 2011 as a result both of the Events at Marikana and the uncharacteristically high number of safety stoppages that were seen across the South African PGM mining industry during the first half. This resulted in total refined production for 2012 of just under 690,000 Platinum ounces compared to just over 730,000 Platinum ounces in the previous year. Sales of Platinum ounces were 702,000 helped by running down stocks in the pipeline. Total revenue declined by US$378 million from 2011 to US$1,614 million for the year ended 30 September 2012. Total underlying costs (excluding the impact of the strike disruption) in US Dollar terms decreased by US$134 million mainly due to the impact of cost escalations being offset by decreased production and positive foreign exchange movements. Resulting underlying EBIT was US$67 million, although this is before special costs including those relating to the Events at Marikana and the impairment of Akanani. After special items, which are detailed in the Financial Review, the loss before interest and taxation was US$702 million. Our unit cost guidance of an 8.5% increase was exceeded as unit costs increased by 12.9% to R8,507 per PGM ounce produced as a result of the significant disruption to production we experienced. On a normalised basis, unit costs would have increased by 5.2% Cash flow generated from operations was US$300 million although this benefited from the pre-paid sale of gold undertaken in the first half of the year and the reduction in closing stocks following the Events at Marikana. Capital expenditure at US$408 million was less than guidance. Total cash outflow was US$185 million leaving net debt at US$421 million. We have been monitoring carefully our covenant position in relation to our existing debt facilities. While the covenants as at 30 September 2012 were not breached our debt levels are likely to rise significantly over the coming months in order to fund the production ramp up and enable stock levels to be rebuilt through the production pipeline. Indeed at 31 October 2012 net debt was approximately US$550 million. In light of this, we believe that the Company may breach its covenants under the terms of the existing debt facilities when they are tested for the six months ended 31 March 2013, or subsequently, in the event that the Company does not raise new equity and secure the agreed amendments to its existing bank facilities. This is addressed in Section 4 below. 2. Safety Our commitment to zero harm and safe production in our work place remains undiminished. We believe that while our fundamental approach to safety management remains sound, we continue to learn from the root cause of each incident. Regrettably we recorded two mining related fatalities during the period and we extend our sincere condolences to the family and friends of Mr Albino Moises Cuna who died in December 2011 and Mr Thobisani David Didi who died in June 2012. The full year mining safety record, absent these fatalities, has been commendable. Lonmin achieved the lowest Lost Time Injury Frequency Rate (LTIFR) in the platinum industry of 4.16 per million man hours worked, 11.7% lower than the 4.71 achieved in 2011. Rowland shaft continued to be an industry leader as it recorded the significant achievement of 12.9 million Fall of Ground Fatality Free Shifts over a ten year period. We also recorded a best ever five million Fatality Free Shifts for Lonmin as a whole. We remain completely focused on improving our safety working in partnership with the Department of Mineral Resources (DMR). 3. Operational Review There is no question that the tragic events that took place at our Marikana operations in August and September were hugely disruptive but I am pleased to say that we are working well to stabilise the Company and bring production back to normal. Following the addendum to the existing wage agreement signed at the end of September, employee attendance is back to normal levels. The production ramp up is currently going better than expected and we fully anticipate that we will be operating at previously achieved productivity run rates during the third quarter of the 2013 financial year. Mining In respect to the 2012 financial year, the total tonnes mined were 10.4 million, a 1.3 million tonnes decrease from the 2011 financial year. As noted at the time of the Company's interim results, productivity at all the mining divisions, Karee, Middelkraal, Easterns and Westerns in the first half of the year was impacted by an uncharacteristically high number of Section 54 safety stoppages, which were also seen across the whole South African PGM mining industry during this period. The momentum established at the beginning of the second half was however impacted by the Events at Marikana which affected production of the whole operation. The combined impact of these disruptions in the period was a loss of approximately 2.4 million tonnes, of which 1.8 million tonnes, equivalent to 110,000 mined Platinum ounces, was as a result of the Events at Marikana. Notwithstanding the disruptions we made good progress with our mining initiatives which aim to improve productivity. Our immediately available ore reserves increased by 14% to 3.3 million centares equal to 18 months. This level of preparedness provides flexibility for the future. Our safety initiatives have produced excellent results and this is reflected in the number of industry safety awards that were won by the various mining teams and shafts. Our Line of Sight System to track production on a daily basis and identify early technical bottlenecks is progressing well and our production incentive bonus system is now fully rolled out. In addition team effectiveness training has now been rolled out at Karee and early indications are encouraging. Processing I am pleased to report the success of a number of initiatives in the Process Division in the 2012 financial year. The Easterns Tailing Treatment Plant was commissioned, coming into production in April 2012, and has contributed to the improvements in our overall recovery rates. The smelter complex has improved its flexibility and capacity through the rebuild and modification of the Number One furnace and the construction of the new Number Two furnace. The first matte tap from the Number Two furnace took place in July 2012. In terms of performance the total tonnes milled during the 2012 financial year declined by 10% to 10.8 million tonnes when compared against 12.0 million tonnes in 2011. This translated into total refined production for 2012 of just under 690,000 Platinum ounces, compared to just over 730,000 Platinum ounces in the previous year. Despite the disruptions, we delivered underlying operational improvements with total milled head grade and overall concentrator recoveries improving during the year. The US Dollar basket price including base metal revenue at US$1,163 was 16.3% lower than the prior financial year. The corresponding Rand basket price including base metal revenue was ZAR9,304, which was 4.2% lower than the 2011 financial year. 4. Balance Sheet Structure In last year's Annual Report, we provided guidance on our planned capital expenditure of around US$450 million for the 2012 financial year, based on the then outlook for PGM markets. This guidance was reiterated at our interim results in May 2012, recognising the uncertain near-term outlook for PGM prices (the price of platinum had fallen from a 2012 peak of US$1,722 per ounce on 28 February 2012 to US$1,440 by the time of publication of the interim results on 14 May 2012), and stating our intention to defer future capital expenditure if appropriate. By the time of publication of the Third Quarter Production Report on 26 July 2012, the platinum price had remained below US$1,500 per ounce for more than eleven weeks, and we acknowledged that the weak pricing environment was likely to persist for longer than anticipated. As a result, we announced that capital expenditure would be reduced to around US$430 million in the 2012 financial year (reflecting the proximity of the year end and the lead time relating to capital expenditure programmes), and to around US$250 million in each of 2013 and 2014 financial years. This reduction would be achieved principally through the deferral of capital spend on the Hossy, K4 and Saffy shafts, as well as the optimisation of some of the processing projects. Against this backdrop, the Events at Marikana resulted in a material reduction in mine production at a time when we were not well positioned to absorb the resulting financial shock, though production and sales of finished metal continued during the period of the work stoppage by maintaining operations in the Process Division through the running down of stocks in the pipeline. Given this we completed a thorough review of Lonmin's strategy and capital structure and concluded that reducing Lonmin's cost base and capital expenditure in the near term, whilst raising additional equity, in conjunction with entering into amended bank facilities, is the best route to achieving a more appropriate and robust capital structure with greater financial flexibility. We believe that Lonmin's long-life assets should be substantially funded by long-term equity capital, supplemented by free cash flow with appropriate levels of debt funding available to provide additional financial flexibility for the Group as well as to reduce its overall cost of capital. In this context, we view debt financing as providing the flexibility required to fund Lonmin's normal working capital requirements and to accommodate short-term cash flow volatility inherent in an operationally geared business arising from either or both of movements in the price of PGMs and the Rand / US Dollar exchange rate. In addition, we believe that it would be more appropriate for the Group's debt facilities to contain covenants that are linked to capital expenditure and tangible net worth rather than covenants linked to profitability, which do not reflect the significant asset backing that underpins the longer-term credit quality of the Group. The announcement of our results therefore coincides with the launch of a Rights Issue seeking to raise approximately US$817 million before costs, the intention for which we announced on 30 October. In addition, the terms of our debt facilities will be revised subject to a successful Rights Issue to provide greater funding flexibility. More details on the agreed amendments to debt facilities are included in the Financial Review. Rights Issue The proceeds from the Rights Issue will be used to permanently reduce the Company's available US Dollar denominated borrowing facilities from US$700 million to US$400 million and partially pay down outstanding amounts on our remaining facilities. Post the repayment, the US Dollar Revolving Facility of US$400 million and the other Facilities of approximately US$225 million will remain available to the Company. This lower level of borrowing will provide the flexibility we need to fund the Company's normal working capital. The UK issue price of 140 pence per new share represents a discount of 44.4% to the theoretical ex-rights (TERP) and a discount of 69.1% to the closing price of 452.8 pence per share on Thursday 8 November. The South African issue price of ZAR 19.4872 per share represents a discount of 45.0% to the TERP and a discount of 69.7% to the closing price of ZAR 64.22 per share on Thursday 8 November. The Rights Issue is being fully underwritten save in respect of new shares which the Company's Directors have irrevocably committed to take up, which is around 0.03% of the new shares to be issued in the Rights Issue. Further details relating to the Rights Issue are outlined in a separate announcement published today. 5. Future Production, Cost Management and Capital Expenditure Future Production We continue to have a clear strategic focus on our mineral resources, mining and processing infrastructure at Marikana, and have invested significantly in these areas in recent years. This investment had two aims. First, it was necessary in order to restore the operational health of the business which had fallen to unacceptable levels prior to 2008. We believe this aim has been achieved. There have been significant improvements in metrics such as development, grade and recoveries, and following further expenditure in the Process Division the risk of smelter outages, for example, have fallen materially. The second aim was to deliver significant growth in production and sales over the medium-term in order to meet expected demand and to result in a reduction in unit costs over the corresponding period. In light of the Events at Marikana, the focus of and priority for the Company during the 2013 financial year is to return productivity levels safely back to, and then above, the run rates achieved prior to those events and to improve relationships with employees. Part of this will require implementing sustainable inclusive collective bargaining structures that facilitate wage agreements that are accepted by all the relevant stakeholders to be binding. We have announced plans to target production at Marikana of around 680,000 Platinum ounces of metal in concentrate in the year ending 30 September 2013, although Platinum sales for the year are expected to be around 660,000 ounces as in-process inventory levels are rebuilt within the Process Division. The ramp up back to these normalised levels of productivity is so far progressing better than planned and we fully expect the Marikana operations to be operating at previously achieved productivity run rates during the third quarter of the 2013 financial year. We will continue to monitor developments in PGM market conditions closely and may accelerate or delay planned investment if we deem doing so to be in the best interests of shareholders. Beyond the 2013 financial year, we will continue to target growth in production and an improvement in its relative position on the cost curve. We are targeting production in excess of 750,000 Platinum ounces in each of the years ending 30 September 2014 and 2015, and in excess of 800,000 Platinum ounces per annum by the 2016 financial year. Cost Management The Events at Marikana have created two specific cost pressures for the Company in the 2013 financial year. First, the agreement entered into with the trade unions and worker representatives increased the wages paid to Lonmin's workers employed in the Category 4-9 bargaining units by about 14% from 1 October 2012, which includes the wage increase of 9% due under the existing wage agreement signed in 2011. As a result, employment costs overall will increase by approximately 11% in the 2013 financial year against the normalised employee cost in FY2012. Secondly, there is inefficiency inherent in any production ramp up, as the business bears the full costs of operations, but does not achieve full production in the early stages of that ramp up. As a result, we anticipate unit costs of around ZAR9,350 per PGM ounce produced for the 2013 financial year. A number of measures are in place, or will be implemented during the 2013 financial year, both to address the pressures of gross cost increases and also to improve the effectiveness of the Company's expenditure. These measures include: · A review of the Company's operating model, as well as management structure, is expected to yield savings in excess of ZAR200 million per annum, on an annualised basis, with the full effect from 2014 onwards; · A procurement initiative known as "Total Cost of Ownership" is being implemented which is expected to yield savings of ZAR100 million in the second half of the 2013 financial year and in each subsequent financial year thereafter; and · The Company has already completed and embedded a productivity enhancement programme known as "Line of Sight" and "Mission Directed Work Teams", which will form the foundation for a series of further productivity and optimisation initiatives in the 2013 financial year. Team effectiveness training trials at various shafts in the Karee mining unit during the 2012 financial year have shown the potential of this initiative, which will be extended across the business during the 2013 financial year. This will be supported by improved systems and training, particularly for supervisory management. Taken together, these and other initiatives should significantly improve the productivity of the Company. Capital Expenditure In order to achieve the targeted level of production Lonmin expects to invest approximately US$175 million for the 2013 financial year and approximately US$210 million for the 2014 financial year (depending on the Rand / US Dollar exchange rate). Of the aggregate capital expenditure planned for the 2013 and 2014 financial years, approximately US$260 million relates to the Mining Division with the balance relating to the Process Division and expenditure as part of the Company's Social Labour Plan (SLP) commitments. In the 2015 and 2016 financial years, the Directors expect that capital expenditure will rise to around US$400 million per annum (depending on the Rand / US Dollar exchange rate). The step-up in capital expenditure from 2015 onwards primarily relates to further development in Hossy, Saffy and K4 in order to support the increased production levels and processing projects. However, the increase in capital expenditure in the 2015 and 2016 financial years is contingent upon performance in the earlier years and that there is sufficient market demand and sufficiently attractive pricing for PGMs to warrant the increased investment. The thresholds in the financial covenant linked to capital expenditure within the amended bank facilities described in the Financial Review have been set at approximately 10% above the budgeted levels of capital expenditure outlined above. 6. Building a Sustainable Business Social License to Operate Alongside our legal and regulatory obligations, we believe it is essential to hold an informal social license from the people and communities that host its operations. We have transformation goals which were established in line with the Mining Charter and are aligned to our SLP commitment to the South African Government. We have worked with determination to accomplish the goals we have set and made progress in many areas, notably in our education programmes for the community, in the number of Historically Disadvantaged South Africans (HDSA) employees within our management structures, which now stands at 36% (excluding white women) and in our initiatives to procure from HDSA managed and owned suppliers. Our gender-related policies and procedures, designed to increase the participation of women in the Company, have had some success, with the number of women at the Company having grown by 66% since 2007, but there are still challenges in order to meet our 2014 commitments. Nevertheless, we recognise that we have delivered more slowly in some areas. Housing is the hardest task the wider mining sector faces, in terms of what is still to be done. Lonmin is far from alone in trying to deal with what is essentially a national problem in South Africa. Our housing strategy is comprised of three elements: hostel conversion, Marikana housing ownership and the long-term housing programme. To date we have converted 79 of the 128 old-style hostels into 931 single person occupancy and 580 family units and we have detailed plans to convert the remaining blocks by 31 December 2014. We have also seen 242 employees become owners of homes, sold through the Marikana Housing Development Corporation. The challenge however is in facilitating the provision of mass affordable employee accommodation particularly for our migrant workforce. The Events at Marikana have highlighted the critical shortage of affordable housing as a major challenge for Lonmin and the South African nation more broadly, reflecting the need for a solution that involves all stakeholders including government, mining companies and employees. Management is engaging with employees and all stakeholders as necessary to understand better their requirements as part of developing a framework for a sustainable and fundable solution. We recognise there will be a cost to this and we will develop appropriate budgets in due course. The partnership Lonmin has with the Greater Lonmin Community where its operations are based is important to us. For over 18 years, we have paid royalties into a trust on behalf of the Bapo Ba-Mogale community. The amount of funds contributed to date is approximately ZAR371 million. The Events at Marikana have shown, however, that much remains to be done and we need to work more closely with our communities to improve dialogue and rebuild trust as this will be key to enhancing better relations with them. Our management team will be focusing on this in the coming months. Equity Ownership We are required to increase HDSA ownership in our operations by 31 December 2014 to the 26% required under the Mining Charter. As at 30 September 2012, HDSA investors directly and indirectly owned 18% of the share capital of our subsidiaries that own and operate Marikana and Limpopo and that participate in the Pandora joint venture, as well as 26% of the share capital of its subsidiary that owns Akanani. Our Black Economic Empowerment partner, Incwala Resource (Pty) Limited (Incwala), is owned as to 50.03% of its equity by Shanduka Group (Proprietary) Limited. Other equity investors in Incwala include a trust for the benefit of community members, the Industrial Development Corporation and Lonmin itself. In considering how best to meet its HDSA 2014 ownership requirements, we believe that one element we must consider is how to achieve further HDSA ownership through a broad-based solution as this will ultimately be in the best interests of shareholders. Judicial Commission of Inquiry The Judicial Commission of Inquiry into the Events of Marikana commenced on 1 October, led by retired Judge Farlam. We welcome this Inquiry and will be co-operating fully with its work. 7. Guidance In light of the Events at Marikana, our focus during 2013 is to return production safely back to the run rate levels achieved prior to those events. We have announced our plans to deliver Platinum production at Marikana of 680,000 ounces of saleable metal in concentrate in the year ending 30 September 2013. This is below our previous expectations for two reasons associated with the Events at Marikana: first, due to the estimated time required to return to normal productivity levels; and, secondly, due to the impact of lower capital spend and the suspension of production at K4 shaft which, as previously announced, was placed on care and maintenance in September 2012. The metal in concentrate output forecast for 2013 is expected to result in Platinum sales of around 660,000 ounces. The shortfall of around 20,000 ounces from the metal in concentrate output represents the necessary build-up of pipeline ounces in the smelters and the refineries during 2013 to replace stocks depleted during the fourth quarter of the current financial year. Taking into account the reduced production profile for 2013 and the increase in wages, we anticipate that the unit cost per PGM ounce will increase by 10 % to R9,350. Capital expenditure for 2013 is forecast to be US$175 million as mentioned above. 8. Executive Ian Farmer, CEO, is undergoing a course of treatment for a serious illness diagnosed in August. In all of this, he remains firmly in our thoughts. Our executive team has excelled, despite trying times. The team continues to demonstrate its cohesiveness, eminent expertise, and notwithstanding the recent absence of Ian, solid support for me in my role as Acting CEO. My thanks go to the Chairman and Mahomed Seedat who have joined the Executive Committee and to Alan Ferguson who has been working with me on a part-time basis. Their support has been invaluable during this challenging time. 9. Thank You to All The dedication, support and professionalism of our employees remain key to our success. The tragic events of the last two months of the financial year have affected all of us and although saddened, I am satisfied that the Company navigated these events appropriately. I am confident that we have the right strategy and plan to realise long-term value from the Company's high-quality resource base and existing infrastructure for the benefit of all our stakeholders and I look forward to delivering against these plans in 2013. Ian Farmer joins me in conveying our best wishes to everyone in the Company. Simon Scott Acting Chief Executive Officer Operational Review Our performance in 2012 was impacted in the first half of the year by uncharacteristically high Section 54 safety stoppages which were a feature across the platinum industry. In the second half of the year the tragic and violent events that occurred in August and September at our Marikana operations are forever etched in our collective memory as we witnessed the loss of so many lives. The Company, however, managed to deliver some positive operational results despite these significant challenges. "Events at Marikana" On 10 August 2012, approximately 3,000 rock drill operators employed by Lonmin commenced an unlawful work stoppage and protest march at the Company's Marikana mine operations. This was followed by significant levels of violent intimidation of non-striking workers, with eight employees, including two security guards as well as two policemen, killed in the initial days of the unlawful work stoppage. As a result, in subsequent days the vast majority of the 24,000 mine workers were absent from work and it was no longer possible to maintain production. Tragically the violence and unrest escalated materially throughout that week and in total 46 people, including 40 Lonmin employees, lost their lives. The Board was deeply saddened by the violent unrest which took place during this time and continues to express its profound sympathy to those affected, including the families, friends and colleagues of those who died. The Company, with its partner Shanduka Group (Proprietary) Limited (Shanduka), has committed to establish and contribute to a Memorial Fund for the benefit of the families of the deceased, the central purpose of which is to fund the education of their children. The Company then worked resolutely to resolve the tensions within the various factions of the workforce in order to create an environment where a return to work was possible. We refer to this tragic series of events as the "Events at Marikana". On 18 September 2012, following an all-inclusive negotiation process facilitated by the Commission for Conciliation, Mediation and Arbitration (CCMA) involving the Company, trade unions, the South African Council of Churches, the Department of Mineral Resources, the Department of Labour and delegates of striking employees, an addendum to the existing wage agreement was signed by the Company, the National Union of Mineworkers, the Association of Mineworkers and Construction Union, Solidarity, the United Association of South Africa and representatives of the delegates of striking employees, which agreed on a return to work with effect from 20 September 2012. On 20 September 2012, 81.4% of Lonmin's employees returned to work and the initial focus of the Company was to ensure a safe resumption of production. As a result it was not until 1 October 2012 that the normal mine shift pattern was re-established and blasting across the property restarted. Since then employee attendance has continued at high levels, with normal shift patterns and in the week ended 26 October 2012, attendance averaged 93.1%, which is regarded by the Board as a normal level for Lonmin's business, due to scheduled leave, sickness and other reasons for absence. All concentrators are now in production, except for the Number One UG2 plant, which is down for a planned upgrade. The Number One and Number Two smelters are fully operational, as are the Base Metals Refinery and the Precious Metals Refinery. The first Platinum ounces were turned out on 31 October. Farlam Commission of Inquiry The rapid escalation of public disorder and subsequent intervention by law enforcement, accompanied with the loss of so many lives resulted in the President of the Republic of South Africa, Mr Jacob Zuma, announcing a Judicial Commission of Inquiry to investigate the events that led up to the wide scale tragedy. The Judicial Commission is being led by retired Judge Farlam. Lonmin welcomes this Judicial Commission of Inquiry and is co-operating fully with it. The Inquiry will look into the following in relation to Lonmin: · whether Lonmin exercised its best endeavors to resolve any disputes which may have arisen between Lonmin and its labour force on the one hand and generally among its labour force on the other; · whether Lonmin responded appropriately to the threat and outbreak of violence which occurred at its premises; · whether the Company, by act or omission, created an environment which was conducive to the creation of tension, labour unrest, disunity among its employees or other harmful conduct; and · whether it employed sufficient safeguards and measures to ensure the safety of its employees and property and the prevention of the outbreak of violence between any parties. The Commission will also examine Lonmin policies generally, including the procedure, practices and conduct relating to its employees and organised labour. It will also investigate whether by act or omission, the Company directly or indirectly caused loss of life or damage to persons or property. It is not expected that the Commission will report before February 2013. Safety Performance Overview The safety of our people is an integral part of how we conduct our core business and is a priority. We are thus saddened by the loss of two lives during the course of our mining operations, and extend our deepest condolences to the families of Mr Albino Moises Cuna and Mr Thobibisani David Didi. We have however made progress on our journey to achieving zero harm. Significant effort has gone into identifying key learnings from these incidents and implementing corrective action to mitigate the reoccurrence of such events. This includes the adaptation and revision of systems, procedures and standards. During the past three years Lonmin's safety results have been impressive, having recorded, compared to its peers, the lowest industry Fatality Frequency rate. This year has also been no exception, where once again Lonmin is an industry leader, on a comparative basis, recording the lowest Lost Time Injury Frequency Rate (LTIFR) in the platinum industry of 4.16 per million man hours worked (11.7% improvement compared to the prior year). This puts us in a good position to achieve the 2013 Department of Mineral Resources (DMR) fatality rate milestones. Whilst improvements arose in mining the Process Division also reflected a significant improvement in both the LTIFR and Medical Treatment Case Frequency Rate (MTCFR) for 2012. There were a number of factors behind this overall improvement in safety. It required attention to all three key objectives in our strategy, namely fatality prevention, injury prevention and safe production culture. Also the effort and collaboration between operations and service departments helped deliver the much improved results. We also undertook a number of initiatives in the year. Initiatives Our investigation methodology (ICAM) has been reviewed and formalised to align with the Culture Transformation Framework requirements for risk management. A simplified tool has been developed and adopted by the business, which will also facilitate a more effective environment for knowledge sharing. Actions resulting from ICAM investigations on injuries as well as Section 54 or 55 stoppages are managed and monitored via the TeamMate software application, which has already proved to be very successful in the tracking control points raised by internal and external auditors. In addition, there is always a need for us to continuously improve the levels of safety knowledge and awareness amongst our leadership teams. Consequently, a team of our executive management and senior leaders attended international best practice training in this area. The greater knowledge and skills gained are evident as demonstrated by the improved communication processes which have helped increase safety awareness amongst all employees. Tactical teams headed up by Vice Presidents were established for Leadership, Simple Systems, Enabling Environment and Safe Production Culture, to facilitate and manage certain projects and initiatives to generate and maintain momentum within the safety programme. The projects and initiatives from these teams were intertwined within the 15 Lonmin sustainable development standards (LSDS) and will grow from this platform. Fatal Risk Control Protocols (FRCP) were successfully rolled out across the operations. The relevant and critical FRCP per division were identified and repackaged as easily understandable critical behaviours for each of the Lonmin Life Rules, via various communication mediums. Safe and At Risk behaviours are also monitored, and the results used to direct Visible Felt Leadership (VFL) programmes. Finally, Lonmin implemented a Contractor Safety Management Framework. This framework set the basis for industry collaboration through standardisation and reciprocity opportunities. The Lonmin Contractor Safety Management framework covers all aspects of contractor utilisation from pre-qualification to closure. Acknowledgements • During her budget speech in parliament earlier this year, the Minister of Mineral Resources, congratulated Lonmin for its exemplary safety performance. • The South African Association of Mine Manager's recognised Lonmin during its annual safety awards function held in 2012 as having won a majority of the industry safety Awards on offer. The same awards were won in 2011. • Mine Safe 2012, recognised Lonmin's safety record, as being the most improved amongst its peers. • Lonmin's 1B/4B Mine received the prestigious JT Ryan award, which is an international award for the safest mine in South Africa. • Lonmin's Rowland shaft achieved a world record 13 million Fall of Ground Fatality free shifts. • Lonmin Mining has on two occasions achieved 6 million Fatality free shifts. No other comparable mining company has achieved this. • Lonmin Mining has achieved 12 million Fall of Ground Fatality free shifts. No other comparable mining company has achieved this. Summary Whilst we are proud of our achievements so far we are well aware of the journey ahead of us to realise our vision of zero harm. We believe that the various initiatives being undertaken will help enable us to ultimately achieve our goal. What remains clear however is that collaboration with all stakeholders, internal and external, will remain a critical factor as we approach the milestone of zero harm. Mining Division Total tonnes mined during the 2012 financial year were 10.4 million, a 1.3 million tonnes decrease from 2011. The decreased performance is largely attributable to the Events at Marikana.Productivity in the first half of the year was impacted by the uncharacteristically high Section 54 safety stoppages that were seen across the South African platinum industry during this period, as well as labour and community unrest and management induced safety stoppages (MISS). The total tonnes lost during the financial year associated with MISS, Section 54's and illegal industrial actions / community unrest is estimated to be around 2.4 million tonnes with the Events at Marikana contributing around 1.8 million tonnes,equivalent to 110,000 mined Platinum ounces, and 0.5 million tonnes as a result of Section 54's and MISS. Marikana Ore Reserves FY12 FY11 Variance % ('000m^2) ('000m^2) Karee 1,808 1,437 371 25.8% Middelkraal 466 385 81 21.0% Westerns 581 576 5 0.9% Easterns 472 533 (61) (11.4)% Total 3,327 2,931 396 13.5% We delivered a good performance with respect to development as the ore reserve position increased overall by 13.5% from the level reported in 2011. The ore reserve increase for Karee of 25.8% and Middelkraal of 21.0% are aligned with Lonmin's strategy of creating greater flexibility in these shafts. The Easterns operations decreased as planned. Mining grades as delivered to the concentrators increased slightly in comparison to 2011 due to: • higher underground Merensky mining grade; • slight improvement in stoping dilution; • unchanged underground UG2 grade; • constant ratio of UG2 to Merensky ore; • constant ratio of developing to stoping tonnes; • lower proportion of Merensky opencast ore; and • significantly improved opencast grade. Business Improvement Initiatives A number of initiatives are in place to support improved delivery and increased productivity in the Mining Division. These include: • the "Line of Sight" management system to track production on a daily basis is embedded in all the operations and is starting to bear fruit in allowing early identification of technical bottlenecks, lost blast analysis and improved productivity; • the team effectiveness programme has commenced and half of the operations' employees went through the programme, the initial productivity results specifically at the Karee operations are encouraging; • technical up skilling of lower level operational employees; and • relationships with the DMR continue to improve as a result of various safety initiatives implemented across the operations resulting in the best in industry LTIFR. The inflationary cost pressures being experienced by the industry continue to be of great concern and so productivity improvement programmes, as noted above, are critical in helping mitigate these pressures. Overview of Marikana Mines Karee In 2012 the Karee operations, K3, 1B, 4B and K4, mined 4.4 million tonnes which represents a decrease of 1.2%, or 54,000 tonnes from 2011. This is largely as a result of the Events at Marikana with losses estimated to be 706,000 tonnes. The mining grade has decreased as a result of reduced in-situ grades in the UG2 reef. Unit cost per tonne increased by 12% to R640 per tonne due to the Events at Marikana. Westerns Production from our Westerns operations, Rowland, W1 and Newman, at 2.6 million tonnes declined by 23.0%, or 791,000 tonnes from 2011 with the depletion of Newman shaft as expected and the Events at Marikana which had an estimated impact of 460,000 tonnes. Additional dilution resulting from adverse ground conditions on Rowland shaft and a decrease in the in-situ grade negatively impacted shaft head resulting in a 4.6% decrease on the 2011 figures. The reduced production resulted in the unit cost per tonne increasing by 26% to R681 per tonne. Middelkraal In 2012 the Middelkraal, Saffy (conventional) and Hossy (mechanised/hybrid) operations mined 1.8 million tonnes which represents a decrease of 7.5%, or 142,000 tonnes from 2011. Production losses emanating from the Events at Marikana are estimated to be 333,000 tonnes. Grade was negatively impacted by the higher ratio of development ore versus stoping ore. Unit cost per tonne increased to R837 per tonne or 13% as the operations struggled to meet increased production targets mainly due to the Events at Marikana. Saffy's production was significantly impacted during 2012 by adverse ground conditions. The production delays experienced during the year have been addressed by means of changes in layout designs as well as a revision to the support strategy. The increase in ore reserve availability and the planned build-up of stoping crews will give the shaft the necessary flexibility to deliver planned production increases in 2013. Hossy increased tons hoisted from 793,000 tonnes to 864,000 tonnes during 2012 notwithstanding the Events at Marikana. The biggest challenges that continue to be faced by the mechanised mining team centre around machine reliability, the availability of replacement parts and the supply of trained artisans. The decision taken to introduce hybrid mining in some upper quadrants resulted in the increased production. Easterns At our Easterns operations performance for the year decreased from 1.2 million tonnes in 2011 to 1.0 million tonnes. E3 and E2 shafts were impacted by Section 54's in December 2011 and July 2012 as well as the Events at Marikana which had an estimated impact on production of 164,000 tonnes. The unit costs at R643 per tonne showed an 11% year on year increase. Opencast Production at the Merensky opencast operation at Marikana decreased from 601,000 tonnes in 2011 to 443,000 tonnes in 2012. Grade improved significantly (by 34.8%) as a result of the change in mining method and sequence of mining. Pandora Joint Venture 2012 2011 Variance Attribuable production ('000 tonnes) 185 168 10.3% Saleable metal in concentrate (oz PGMs) 58,188 48,199 20.7% The capital expansion plan relating to 9 and 10 levels progressed well with level 9 moving into production during April 2012 and a further build-up in production is scheduled for the 2013 financial year. The studies on additional expansion projects have been deferred by two years due to the current economic situation and have been agreed with our Joint Venture (JV) partner (Anglo Platinum). Capital Expenditure Capital expenditure in the Mining Division was $269 million during 2012 of which around $20 million related to the change in the accounting policy to capitalise deferred stripping associated with opencast mining. The majority of the remaining capital was spent developing ore reserves at K4, K3, Saffy and Hossy. Process Division The Process Division produced 687,372 ounces of refined Platinum compared to 731,273 ounces in 2011. This represents a decrease of 6.0% which is primarily attributable to the Events at Marikana. Unit costs 2011 2012 Variance Processing R872/oz R830/oz 11% Cost management and control received the highest focus over the period particularly due to above Consumer Price Index increases associated with labour costs, chemicals, power and water. Before and during the Events at Marikana the Process Division embarked on cash conservation measures as well as various cost improvement measures due to the reduced throughput from mining. These improvement measures will continue during 2013 together with our other continuous improvement projects. Concentrators 2012 proved to be another exceptional year in terms of recoveries achieved. This can be attributed to the Eastern's tailings treatment plant coming on line in April 2012. Additional recovery improvements are planned for 2013 as the concentrators continue on their journey of technology and operational excellence. Plant running times continued to improve during 2012 and the overall concentrator running time has increased to 92.8% in 2012 from 91.4% in 2011. The concentrators are targeting a 0.5% uplift in running time per year to ensure we equal and improve on the previously best achieved during the period from 2003 to 2005. The overall milled grade improved by 2.2% to 4.49g/t when compared to the previous year largely due to less opencast ore being treated and a 34.8% increase in the opencast grade. The underground grade is relatively flat with an improvement of 0.4% and continues to be within the acceptable ranges. Tailing Treatment and Chrome Plants The Eastern's tailings treatment plant was commissioned and the first production started in April 2012. This plant has achieved above planned recoveries and throughput. All chrome plants were operational for the period under review excluding the strike period and sales increased to 1.2 million tonnes compared to sales of 0.7 million tonnes in 2011. Smelter The smelter delivered a solid operational performance with total tonnes smelted increasing by 0.6% compared to 2011. The furnace availability increased compared to 2011 due to improved operational and maintenance practices. The Number Two furnace was successfully commissioned and was handed over to production on 21 June. After heat up the first slag was tapped on 11 July and the first matte on 16 July. The project was completed within the estimated budget. Over the past year the new design and operational discipline of the Number One furnace has proven to be more robust, with no operational disruptions during the reporting period. Refineries '000 oz 2012 2011 Variance Platinum 687 731 (6.0)% PGMs 1,350 1,447 (6.7)% The refineries delivered a solid operational performance, with increased product quality being achieved at the Base Metal Refinery (BMR). Refined production of PGMs decreased by 6.7% whilst Platinum production decreased by 6.0%. This was as a result of the Events at Marikana. The instantaneous recoveries were maintained at prior year levels (82.4%). Final metal sales for 2012 were 701,831 Platinum ounces which reflects a decrease of 2.6% compared to the prior period sales of 720,783 ounces and PGM sales were 3.6% lower than the prior year at 1,383,945 PGM ounces, despite benefiting from the depletion of stocks in the pipeline which resulted from the Events at Marikana. Capital Expenditure Capital expenditure in the Process Division during 2012 was $121 million. The majority of this expenditure was for the upgrading and capacity increase at the Number One Shaft concentrator, the Number Two furnace and the Easterns Tailing Treatment plant which was commissioned during the year. Unit Costs Notwithstanding production losses associated with the increased Section 54's during the first half of the year, the improved cost control and productivity measures implemented had a real effect and Lonmin would have beaten its previously announced guidance of an 8.5% unit cost increase. The unit cost increase was however around 13% following the Events at Marikana where Lonmin lost around 1.8 million tonnes from the mining operations. When normalised and taking cognisance of the production losses associated with the strike the unit cost would have been limited to around 5.2%. Business Development Limpopo Shanduka delivered the Limpopo Feasibility Review on 31 August 2012 which is currently being reviewed by Lonmin. If the feasibility review is successful and subject to the fulfilment of certain suspensive conditions including Shanduka raising and contributing R1.1 billion in funding towards the ramp up and development of operations, Shanduka will acquire control and operational management of the operating entity. Akanani During the second half of the financial year we completed a pre-feasibility study on the Akanani exploration and evaluation asset. This study provided an update on the results of the original concept study undertaken at the time of acquisition. Based on the results of this pre-feasibility study coupled with the current and long term PGM pricing outlook we have taken the decision to impair the asset and reduced the net carrying amount of this asset from $628 million in 2011 to $162 million at 30 September 2012. We continue to enhance our mining and processing studies on this project and will make a decision during 2013 on further development. BEE Equity Ownership The Company is required to increase Historically Disadvantaged South African (HDSA) ownership in its prospecting and mining ventures by 31 December 2014 to the 26% required under the Mining Charter. As at 30 September 2012, HDSA investors directly and indirectly owned 18% of the share capital of the Company's subsidiaries that own and operate Marikana and Limpopo and that participate in the Pandora JV, as well as 26% of the share capital of its subsidiary that owns Akanani. Shanduka owns 50.03% of the Company's Black Economic Empowerment (BEE) partner, Incwala Resources (Pty) Limited (Incwala). Other equity investors in Incwala include a trust for the benefit of community members, the Industrial Development Corporation and Lonmin itself. In considering how best to meet its HDSA ownership requirements by 31 December 2014, the Board believes that one element it must consider is how to achieve further HDSA ownership through a broad based solution as this will ultimately be in the best interest of shareholders. It is possible that the Company may wish to facilitate the creation of trusts for the benefit of current and future employees, and separately for members of the Greater Lonmin Community, to which new shares could be allotted for their sole economic benefit. In order to achieve this increase in HDSA participation, the Company is considering a range of options involving the issuance of additional shares which could dilute the interests of shareholders. The Company has not yet finalised its proposals, and any future transaction would need to be considered on its merits and may require prior shareholder approval. Exploration International Lonmin is exploring for PGM deposits around the Sudbury Basin in Canada in JVs with Wallbridge Mining and Vale S.A. On the Vale JV, Lonmin met its exploration earn-in commitment in December 2011 for the right to earn a 50% interest in low sulphide, PGM rich deposits on the properties comprising the JV. Consultants Wardrop Tetra Tech assisted in the completion of a positive pre-feasibility study for a shallow open pit on the Denison 109 Zone PGM mineralisation. The open pit design covers the top 95 metres of the deposit containing 456,275 tonnes of ore at an average grade of 3.58g/t (52,500 ounces Pt+Pd+Au). Exploration mapping, geophysical surveys and drilling continued to generate targets for follow up in the coming year on our Canadian and Northern Ireland properties. South Africa Western Platinum Limited carried out exploration activities on a PGM-Nickel prospect on Vlakfontein, and has defined shallow, drill ready targets. Lonmin has a JV with Boynton in the eastern Bushveld. Market Review Overview The market this year has been characterised by significant influences on both the supply and demand side. Though the fallout from illegal strikes affecting mines in South Africa is still to run its course, it is likely that primary metal supplies will continue a decreasing trend while operating cost increases will exceed South African inflation rates putting pressure on the availability of capital for increased levels of capital expenditure. This will ultimately impact on future supply levels. The Eurozone crisis continues to be the major dampener of demand. Notwithstanding softer demand during 2012, there are numerous areas of captive demand that should continue to support the platinum market and prices in the medium term and beyond. Catalyst fabricators are gearing up for Euro 6 emissions legislation in 2014. In addition, a growing number of engine categories that were previously not fitted with PGM containing catalysts, including non-road equipment (construction, agriculture and mining) in the USA, Japan and Europe, as well as heavy-duty on-road engines in Europe, will need to comply from 2014. The tightening of legislation for non-road engines in emerging countries will see the legislative net increasingly capture more than the current 20% of the world's non-road fleet. Longer term, there are wide-ranging drivetrain options that could be used to reduce CO output from vehicles, including full electric power. However, significant advances in combustion engine technology, including smaller and more efficient turbocharged engines, as well as hybridisation and the use of advanced lightweight materials, ensure the future of the internal combustion engine for many years to come. Consequently the fundamental outlook for PGM's remains positive and robust. PGM Prices Downgrades to forecast economic growth in Europe in the second half of 2011 pulled the platinum price down from an average of $1,748 per ounce in September 2011 to an average of $1,454 per ounce in December. Price weakness continued through 2012 with prices mostly trading in a $1,400-1,500 per ounce range, except for two major supply events that stimulated price rallies, the second of which is still underway. An illegal strike at Impala Platinum in February reduced platinum supply by 150,000 ounces and led to a price rally that lifted platinum to over $1,700 per ounce for a week. Most recently the Events at Marikana and subsequent illegal strikes at other mines saw platinum prices rise from below $1,400 per ounce to close to $1,700 per ounce by mid-September. 2012 average platinum prices at $1,535 per ounce were still $180 per ounce down on the same period in 2011. Palladium prices tend to be more volatile but moved in tandem and in reaction to the same events that affected platinum. Palladium prices for 2012 declined 12% year on year compared to platinum's drop of 10%. The lasting effects from a tight market that forced the rhodium price spike in 2008 are becoming increasingly evident, as manufacturers continue to look for breakthroughs that would require less rhodium. As a result of weak demand and a stock overhang, the fall in the rhodium price has far exceeded both platinum and palladium with a 34% drop in 2012 compared to 2011. Demand Automotive While European auto sales contracted in the period under review the large auto inventory overhang of more than two million vehicles in 2008/09 does not appear to exist today. Auto manufacturers adjusted factory output to carefully manage inventories. Global vehicle production is already higher than pre-financial crisis levels and looks set to continue to grow. Platinum demand in 2012, while likely to be down in Europe, will to some degree be offset by growth from the USA, Japan and the rest of the world, especially from higher metal loadings associated with tighter emissions already affecting new heavy duty vehicles in USA and Japan. Palladium substitution for platinum in light duty diesel catalysts continues steadily. However, there are more than six million heavy duty on-road and all types of non-road diesel engines scheduled to be affected by the roll out of tighter emissions regulations of which most will require a platinum-rich catalyst after treatment system. Jewellery In recent years jewellery demand has become increasingly significant for the platinum market and now accounts for 33% of demand. Chinese platinum jewellery consumption, which accounts for more than 65% of the global jewellery market, continues to grow. Underlying, and less price elastic, bridal jewellery purchases are increasing year on year along with wedding registrations which were up more than 10% for the first six months of 2012. Despite softening Gross Domestic Product growth forecasts for China, major jewellery retailers continue to expand. Investment The industrial action and social-political unrest at PGM mines in South Africa seemed to be the catalyst for the most recent increase in Exchange Traded Fund (ETF) holdings of 187,000 ounces of platinum. Palladium ETF holdings were barely affected with only 34,000 additional ounces added. Platinum supply is heavily concentrated in South Africa at 73% of primary supply, while palladium supplies are more globally spread with 37% derived from South African based mines. Looking at 2012 year-to-date, platinum ETFs have added 263,000 ounces to reach a new record level of 1.59 million ounces. Palladium ETFs added 233,000 ounces of palladium this year to reach 1.86 million ounces. Outlook Primary supply will be down year on year in 2012 mainly owing to industrial unrest, but also due to some closures, notably Aquarius' Everest South and Blue Ridge operations. Looking ahead, supply will remain constrained due to supply disruptions and forced cutbacks of capital expenditure since the financial crisis started in 2008. At the start of 2012, with a backdrop of weakening demand in Europe, the prospect of a platinum market surplus loomed. However, based on recent supply disruptions a market shortfall is increasingly likely. There are significant stocks that have accumulated since the financial crisis in 2008, but these should start to be drawn down and translate into higher prices, particularly as captive demand takes hold towards the latter part of 2013 and during 2014. The palladium market remains in structural deficit and reliant on accumulated stocks to meet demand. The switch from palladium to platinum in light duty diesel catalysts makes sense today at the current price differential and will continue to benefit producers and investors exposed to palladium for the medium term, but the palladium supply-demand mismatch is unsustainable beyond this time frame. Rhodium supply is most concentrated in South Africa and supply disruptions, particularly affecting marginal UG2 (rhodium rich) operations should start to accelerate the drawdown of accumulated inventories. Financial Review Overview The Events at Marikana in August and September of the 2012 financial year resulted in Lonmin being unable to mine for seven weeks and that had a significant impact on our financial results. Key in this impact has been the reduction in the volume of Platinum Group Metals (PGMs) produced and sold while fixed production costs continued to be incurred during the strike period which has had an adverse effect on the Group's profitability. Prior to the Events at Marikana industrial demand for PGMs had been subdued resulting in a depressed pricing environment which was putting pressure on revenues and margins. The supply side concerns resulting from the strike action, which spread to others in the industry, saw prices rebound during August and September but this only benefited minimal inventory and processing pipeline sales conducted during this period in the absence of new production. On the cost side we have separately accounted for fixed production overheads incurred during the Events at Marikana for which there was no associated production output as well as additional costs arising directly as a result of the strike action. These have been disclosed as special costs to assist in understanding the financial performance achieved by the Group on a comparable basis with prior years. As a result our underlying performance excludes the impact of the strike action. Other than the impact of the strike, movements in underlying costs were driven primarily by above inflation wage and electricity tariff increases, somewhat mitigated by favourable exchange movements. The C1 unit cost per ounce produced for 2012, including the impact of the strike action, was 12.9% higher than 2011. Capital expenditure for 2012 was $408 million. This coupled with the loss made as a result of events described above resulted in an increase in our net debt position which was partially mitigated by the prepaid sale of gold undertaken in the first half of the financial year and the reduction in closing stocks following the strike disruption. Our net debt position at 30 September 2012 amounted to $421 million. This figure has increased significantly subsequent to year end as we fund the production ramp up and enable stock levels to be rebuilt through the production pipeline. At 31 October 2012 net debt was approximately $550 million. Subsequent to year end we have embarked on significant steps to strengthen our financial position. The announcement of our results coincides with the launch of a Rights Issue seeking to raise $817 million before costs and foreign exchange charges. In addition, the terms of our debt facilities will be revised subject to a successful Rights Issue to provide greater funding flexibility going forward. Details of the Rights Issue and proposed amendments to debt facilities are included below and in our Rights Issue Prospectus. Income Statement The $244 million movement between the underlying operating profit of $311 million for the year ended 30 September 2011 and that of $67 million for the year ended 30 September 2012 is analysed below. $m Year to 30 September 2011 reported operating profit 307 Year to 30 September 2011 special items 4 Year to 30 September 2011 underlying operating profit 311 PGM price (325) PGM volume (68) PGM mix 42 Base metals (27) Revenue changes (378) Cost changes (including foreign exchange impact of $151 million) 134 Year to 30 September 2012 underlying operating profit 67 Year to 30 September 2012 special items (769) Costs relating to illegal work stoppage 159 Impairment of Akanani exploration and evaluation asset 602 Other 8 Year to 30 September 2012 reported operating loss (702) Revenue Total revenue declined by $378 million from 2011 to $1,614 million for the year ended 30 September 2012. The PGM pricing environment during the year deteriorated over the last year and the impact on the average prices achieved on the key metals sold is shown below: Year ended Year ended 30.09.12 30.09.11 $/oz $/oz Platinum 1,517 1,769 Palladium 630 752 Rhodium 1,274 2,145 PGM basket (excluding by-product revenue) 1,095 1,299 The fragile conditions in the auto industry, particularly in Europe, have resulted in subdued short-term demand for PGMs negatively impacting their price. PGM price deterioration contributed $325 million to the overall decrease in revenue. It should be noted that whilst the US Dollar basket price has decreased by 16% over the 2011 financial year, in Rand terms the basket price decreased by only 3% impacted by the relatively weaker Rand. PGM sales volume for the year to 30 September 2012 was 4% down on the year to 30 September 2011. The reduction in PGM volumes, mainly as a result of the Events at Marikana, contributed $68 million to the overall decrease in revenue. However, the mix of metals sold resulted in a positive impact of $42 million mainly due to a higher proportion of Platinum and Rhodium due to metal-in-process inventory timing differences. Base metal revenue was down $27 million largely due to lower nickel prices. Operating Costs Total underlying costs (excluding the impact of the strike disruption) in US Dollar terms decreased by $134 million mainly due to positive foreign exchange movements and decreased production offset by the impact of cost escalations. A track of these changes is shown in the table below. $m Year ended 30 September 2011 - underlying costs 1,681 Increase / (decrease): Marikana underground mining 33 Marikana opencast mining (18) Limpopo mining 3 Concentrating and processing 15 Overheads 48 Special operating costs excluded from underlying costs (169) Underlying operating costs (88) Pandora and W1 ore purchases 1 Metal stock movement 100 Foreign exchange (151) Depreciation and amortisation 4 Cost changes (including foreign exchange impact) (134) Year ended 30 September 2012 - underlying costs 1,547 Total Marikana mining costs (underground and opencast) increased in the year by $15 million or 2%, mainly as a result of an 8.5% wage increase incurred in the period partially offset by the reduction in production due to the strike disruption. Marikana opencast mining costs reduced by $18 million or 33% driven by a reduction in production initiated in the first half as we focused on grade improvement. Concentrator and processing costs increased over 2011 by $15 million or 4% as escalation effects, in particular from electricity costs were partially offset by reduced production. Overheads increased by $48 million largely due to some $37 million of idle production costs flowing directly to the income statement with no production inventory to allocate them to. In addition $5 million worth of debt capital raising costs and an additional $5 million was spent to settle the Keysha dispute. These costs form part of the $169 million of costs re-allocated to special items (see below). The $100 million adverse impact on operating profit, excluding exchange impacts, of metal stock movements results from the reduction of pipeline stocks towards the end of the year due to minimal production in August and September as a result of the strike disruption. The Rand weakened substantially against the US Dollar during the year under review averaging ZAR8.05 to USD1 compared to an average of ZAR6.95 to USD1 in 2011 resulting in a $151 million positive impact on operating costs. Cost per PGM Ounce The C1 cost per PGM ounce produced for the year to 30 September 2012 was R8,507. This was an increase of 12.9% compared to 2011. The cost increases were largely driven by higher than inflation increases in the wage bill (8.5%) and electricity tariffs (24%). These were exacerbated by significant production disruptions due to increased Section 54 and management induced safety stoppages as well as community unrest in the first half of the year and the Events at Marikana in August and September. It should be noted that the C1 cost per PGM ounce is based on all production costs including idle fixed production overheads which have been excluded from our underlying results as discussed below. If these strike related costs are excluded the increase in unit cost per PGM ounce produced for 2012 would have been a 5.2% increase compared to 2011. Further details of unit costs analysis can be found in the Operating Statistics. Special Operating Costs In 2012 special operating costs are made up as follows: $m Impairment of the Akanani exploration and evaluation asset 602 Strike related costs 159 - Idle fixed production costs 120 - Contract costs 29 - Payroll costs 7 - Other 3 Debt capital raising costs 5 Costs relating to disputed prospecting rights 5 Reversal of impairment of employee housing (2) 769 During the second half of the financial year we completed a pre-feasibility study on the Akanani exploration and evaluation asset. This study provided an update on the results of the original concept study undertaken at the time of acquisition and showed a significant increase in capital and operating costs, influenced by mining methodology and concentrator requirements. Based on the results of this pre-feasibility study, coupled with the current and long-term PGM pricing outlook, we have taken the decision to impair the asset by $602 million. The carrying amount of the asset has reduced from $806 million (including $73 million of goodwill) in 2011 to $208 million at 30 September 2012 after accounting for $4 million worth of additions during the year. As highlighted earlier, fixed production overheads incurred during the illegal strike period for which there was no associated production output and costs arising directly as a result of the strike action have been classified as special items. The total of these strike related costs amounted to $159 million. Idle fixed production costs incurred during the strike period amounted to $120 million. Costs relating to contractors not being able to fulfil their obligations as a result of the disruption as well as demobilisation costs on K4 amounted to $29 million. The negotiated wage settlement included an amount to be paid to employees on their return to work which totalled $7 million. Other costs related to the strike include additional security, media coordination and consumables. Debt capital raising costs of $5 million were incurred prior to the strike disruption. These costs related to exploratory work and capital raising initiatives looking at tapping various debt markets. As mentioned in the overview section above, we will now be launching a Rights Issue to strengthen our balance sheet. Costs amounting to $5 million (or R40 million) were incurred to compensate Holgoun Investment Holdings (Proprietary) Limited, Keysha's parent company, for relinquishing a disputed prospecting right and for its costs including those incurred in carrying out prospecting activities. The impairment charge to write down employee housing processed in 2011 has been reversed during the year under review following a re-assessment of the realisable value of the houses. In 2011 special operating costs of $4 million were charged. The move of the operational head office from London to South Africa was completed in the first quarter at a cost of $2 million and a further $2 million impairment charge was taken on the write down of employee housing in Marikana. Impairment of Available for Sale Financial Assets The $6 million impairment of available for sale financial assets represents the loss in value of our share in Platmin Limited following the company's delisting in December 2011. Financing Costs Year ended 30 September 2012 2011 $m $m Net bank interest and fees (27) (46) Capitalised interest payable and fees 26 46 Exchange (1) 2 Other (12) (7) Underlying net finance costs (14) (5) Special HDSA receivable income / (costs) 30 (12) Special fair value movements in cash flow hedges - (6) Net finance income / (costs) 16 (23) The total net finance income of $16 million for the year ended 30 September 2012 represents a $39 million favourable movement compared to the total net finance costs of $23 million for the year ended 30 September 2011. Net bank interest and fees decreased from $46 million to $27 million for the year ended 30 September 2012 largely as a result of the 2011 figures including the unwinding of previously capitalised unamortised bank fees relating to the old banking facilities which were replaced by new facilities during 2011 as well as a lower weighted average cost of financing under current bank debt facilities. Interest totalling $26 million was capitalised to assets (2011 - $46 million). Other finance costs largely relate to the unwinding of the discounting of site rehabilitation liabilities. The Historically Disadvantaged South Africans (HDSA) receivable, being the Sterling loan to Shanduka Resources (Proprietary) Limited (Shanduka), increased by $30 million during the year to 30 September 2012 being $14 million of foreign exchange gains and $16 million of accrued interest. The $12 million reduction in 2011 represented a $24 million reduction in the fair value of the HDSA derivative and $3 million worth of exchange losses partially offset by $15 million of accrued interest. During 2011 Lonmin entered into an interest rate swap to hedge against its exposure to a base floating interest rate linked to a six month USD libor. The swap was entered into prior to drawing down on the loan facility resulting in an interim fair value loss of $6 million before hedge accounting was applied in that financial year. Taxation Reported tax for the current year was a credit of $148 million after the tax effects of special items of $187 million. The underlying tax charge is $39 million reflecting an effective rate of 68%. The underlying charge largely comprises deferred tax charges being recognised on accelerated capital allowances with a reduced level of current tax in the year due to decreased profitability. The very high underlying effective tax rate is largely driven by exchange effects on profits arising from a predominantly Rand tax base translated to the US Dollar functional currency expressed as a percentage of a small profit before tax figure. Cash Generation and Net Debt The following table summarises the main components of the cash flow during the year. Year ended 30 September 2012 2011 $m $m Operating (loss) / (702) 307 profit Depreciation, 726 124 amortisation and impairment Changes in working 278 245 capital Other (2) 6 Cash flow generated 300 682 from operations Interest and (27) (36) finance costs Tax (10) (16) Trading cash inflow 263 630 Capital expenditure (408) (410) Dividends paid to (14) (10) minority Free cash (outflow) (159) 210 / inflow Distribution from / 7 (2) (investment in) joint venture Additions to (2) (30) financial assets Issue costs on - (8) non-current borrowings Dividends paid to (31) (30) equity shareholders Shares issued - 1 Cash (outflow) / (185) 141 inflow Opening net debt (234) (375) Foreign exchange - 2 Unamortised fees (2) (2) Closing net debt (421) (234) Trading cash inflow 129.8c 311.2c (cents per share) Free cash (outflow) (78.5c) 103.7c / inflow (cents per share) Cash flow generated from operations in the year ended 30 September 2012 at $300 million was significantly lower than the $682 million recorded in 2011. This was driven off the back of reduced operating profits due to the impact of the Events at Marikana and the subdued PGM pricing environment. Changes in working capital improved by $33 million compared to 2011. In 2012, working capital cash flows benefited from the reduction in stock levels at year end due to extracting ounces out of the stock pipeline as well as the revenue received in advance on the forward sale of gold in the first half of the financial year. Trading cash inflow for the year to 30 September 2012 amounted to $263 million (2011 - $630 million). The cash outflow on interest and finance costs decreased by $9 million. Tax payments decreased by $6 million and represent provisional corporate tax payments. The trading cash inflow per share was 129.8 cents for the year ended 30 September 2012 against 311.2 cents for 2011. Capital expenditure cash flow at $408 million was in line with the prior year. In Mining, the expenditure incurred was focused on operating developments at Hossy and Saffy shafts, equipping and development at K4 and investment in the sub-decline at K3. In the Process Division spend comprised additional furnace capacity, the Easterns tailings treatment plant as well as expenditure to increase capacity at the Number One shaft concentrator. The proposed dividend of 15 cents per share for the financial year ended 30 September 2011 was paid during the year under review resulting in a cash outflow of $31 million. Net debt at $421 million has increased by $187 million since 30 September 2011. Pressure on net debt as a result of declining profitability driven by the PGM pricing environment and significant business disruptions was partially mitigated by the deferred revenue proceeds as well as reduction in stock levels at the end of the year. As a result gearing, calculated on net borrowings attributable to the Group divided by those attributable net borrowings and the equity interests outstanding at the balance sheet date, was 14% at 30 September 2012 (30 September 2011 - 7%). The ratio of consolidated net debt to underlying EBITDA increased from 0.54 times at 30 September 2011 to 2.18 times at 30 September 2012 which remains within the covenants relating to the existing bank facilities. As mentioned later in this report, the terms of these bank facilities will be revised subject to a successful Rights Issue. Principal Risks and Uncertainties The Group faces many risks in the operation of its business. The Group's strategy takes into account known risks, but risks will exist of which we are currently unaware. This financial review focuses on financial risk management. Financial Risk Management The main financial risks faced by the Group relate to the availability of funds to meet business needs (liquidity risk), the risk of default by counterparties to financial transactions (credit risk), fluctuations in interest and foreign exchange rates and commodity prices (market risk). Factors which are outside the control of management which can have a significant impact on the business remain, specifically, volatility in the Rand / US Dollar exchange rate and PGM commodity prices. These are the critical factors to consider when addressing the issue of whether the Group is a Going Concern. Liquidity Risk The policy on liquidity is to ensure that the Group has sufficient funds to facilitate all ongoing operations. The Group funds its operations through a mixture of equity funding and borrowings. The Group's philosophy is to maintain an appropriately low level of financial gearing given the exposure of the business to fluctuations in PGM commodity prices and the Rand / US Dollar exchange rate. This is supplemented with additional risk mitigation strategies such as those described below in respect of foreign currency and commodity price risk. As part of the annual budgeting and long-term planning process, the Group's cash flow forecast is reviewed and approved by the Board. The cash flow forecast is amended for any material changes identified during the year, for example material acquisitions and disposals. Where funding requirements are identified from the cash flow forecast, appropriate measures are taken to ensure these requirements can be satisfied. Factors taken into consideration are: · the size and nature of the requirement; · preferred sources of finance applying key criteria of cost, commitment, availability, security / covenant conditions; · recommended counterparties, fees and market conditions; and · covenants, guarantees and other financial commitments. Prior to the strike disruption, the Group had embarked on a review of its growth strategy, future production profile and capital investment programme as a result of prevailing subdued short-term demand for PGMs. The strike disruption and the continued PGM market environment has necessitated the Group's further review of its strategy and capital structure. To this end, the Board has concluded that reducing capital expenditure in the near term and raising additional equity, in conjunction with a revision to bank facilities will result in the appropriate capital structure and retain the Group's flexibility regarding financial risks. Consequently the announcement of these results will coincide with the launch of a Rights Issue which is conditional on, amongst other things, shareholder approval. The Group proposes to raise approximately $817 million before expenses as well as amend the existing debt facilities. Both the amended US Dollar Facilities Agreement and amended Rand Facilities Agreements will only come into effect if the proposed Rights Issue is completed and raises at least $700 million of net proceeds no later than 31 December 2012 and such net proceeds are used to prepay the Group's indebtedness under the Existing Facilities Agreements, including (i) the prepayment in full of amounts outstanding (amounting to $300 million plus accrued interest and applicable break fees) under the US Dollar Term Loan, which facility will then be cancelled; and (ii) (to the extent of the remaining net proceeds of the Rights Issue) the prepayment of amounts outstanding (amounting to $400 million plus accrued interest and applicable break fees) under the US Dollar Revolving Credit Facility; and (iii) the partial prepayment of amounts outstanding (amounting to R1,980 million equivalent as at 31 October 2012, which is equivalent to approximately $229 million based on a Rand/US dollar exchange rate of R8.66) plus accrued interest and applicable break fees) under the Rand Facilities Agreements. The principal amendments to the Existing Facilities Agreements are to remove the net debt/EBITDA and EBITDA/net interest covenants and to substitute the following financial covenants into each of these agreements: · consolidated tangible net worth will not be less than $2,250 million; · consolidated net debt will not exceed 25 per cent of consolidated tangible net worth; and · if: o in respect of the amended US Dollar Facilities Agreement, the aggregate amount of outstanding loans exceeds $75 million at any time during the last six months of any test period; or o in respect of both the amended US Dollar Facilities Agreement and the amended Rand Facilities Agreements, consolidated net debt exceeds $300 million as of the last day of any test period, the capital expenditure of the Group must not exceed the limits set out in the table below, provided that, if 110 per cent of budgeted capital expenditure for any test period ending on or after 30 September 2013 is lower than the capital expenditure limit set out in the table below for that test period, then the capital expenditure limit for that test period shall be equal to 110 per cent of such budgeted capital expenditure. Test Period Capital expenditure limit (ZAR) 1 October 2012 to 31 March 2013 (inclusive) 800,000,000 1 October 2012 to 30 September 2013 (inclusive) 1,600,000,000 1 April 2013 to 31 March 2014 (inclusive) 1,800,000,000 1 October 2013 to 30 September 2014 (inclusive) 2,000,000,000 1 April 2014 to 31 March 2015 (inclusive) 3,000,000,000 1 October 2014 to 30 September 2015 (inclusive) 4,000,000,000 1 April 2015 to 31 March 2016 (inclusive) 4,000,000,000 1 October 2015 to 30 September 2016 (inclusive) 4,000,000,000 As at 30 September 2012, Lonmin had net debt of $421 million, comprising $739 million of drawn facilities net of $315 million of cash and equivalents and $6 million of unamortised bank fees as well as a further $3 million of external debt incurred to fund the construction of a chrome treatment plant with an outside partner. The effective cost of debt funding for the 2012 financial year was circa 4.3%. Credit Risk Banking Counterparties Banking counterparty credit risk is managed by spreading financial transactions across an approved list of counterparties of high credit quality. Banking counterparties are approved by the Board and consist of the ten banks that participate in Lonmin's bank debt facilities. These counter-parties comprise: BNP Paribas S.A., Citigroup Global Markets Limited, FirstRand Bank Limited, HSBC Bank Plc, Investec Bank Limited, J.P. Morgan Limited, Lloyds TSB Bank Plc, The Royal Bank of Scotland N.V., The Standard Bank of South Africa Limited and Standard Chartered Bank. Trade Receivables The Group is exposed to significant trade receivable credit risk through the sale of PGMs to a limited group of customers. This risk is managed as follows: · aged analysis is performed on trade receivable balances and reviewed on a monthly basis; · credit ratings are obtained on any new customers and the credit ratings of existing customers are monitored on an ongoing basis; · credit limits are set for customers; and · trigger points and escalation procedures are clearly defined. It should be noted that a significant portion of Lonmin's revenue is from two key customers. However, both of these customers have strong investment grade ratings and their payment terms are very short, thereby reducing trade receivable credit risk significantly. HDSA Receivables HDSA receivables are secured on the HDSA's shareholding in Incwala Resources (Pty) Limited. Interest Rate Risk Currently, the bulk of Lonmin's outstanding borrowings are in US Dollars. Of the US Dollar borrowings, the base rate in respect of the $300 million term facility has been fixed through an interest rate swap for the term of the facility which runs until May 2016. The remaining USD borrowings and the ZAR borrowings are at floating rates of interest linked to LIBOR and JIBAR respectively. The interest position is kept under constant review in conjunction with the liquidity policy outlined above and the future funding requirements of the business. Foreign Currency Risk The Group's operations are predominantly based in South Africa and the majority of the revenue stream is in US Dollars. However, the bulk of the Group's operating costs and taxes are paid in Rand. Most of the cash received in South Africa is in US Dollars. Most of the Group's funding sources are in US Dollars. The Group's reporting currency is the US Dollar and the share capital of the Company is based in US Dollars. Because of the depressed level of our revenue basket when expressed in Rands experienced prior to the strike disruption and the sensitivity of this price to a strengthening Rand, a decision was taken to use hedging instruments in respect of the Rand / US Dollar currency exposure for up to 75% of forecast non platinum revenues for the second half of the 2012 financial year. All of these hedging instruments matured by 30 September 2012 without creating any financial impact and no new foreign exchange hedging instruments have been entered into. The approximate effects on the Group's results of a 10% movement in the Rand to US Dollar based on the 2012 average exchange rate would be as follows: Underlying operating profit +/- $117m Underlying profit for the year +/- $69m EPS (cents) +/- 34.0c These sensitivities are based on 2012 prices, costs and volumes and assume all other variables remain constant. They are estimated calculations only. Commodity Price Risk Our policy is not to hedge commodity price exposure on PGMs, excluding gold, and therefore any change in prices will have a direct effect on the Group's trading results. For base metals and gold, hedging is undertaken where the Board determines that it is in the Group's interest to hedge a proportion of future cash flows. The policy is to hedge up to a maximum of 75% of the future cash flows from the sale of these products looking forward over the next 12 to 24 months. The Group did not undertake any hedging of base metals under this authority in the financial year and no forward contracts were in place in respect of base metals at the end of the year. In respect of gold, Lonmin entered into a prepaid sale of 75% of its current gold production for the next 54 months in March 2012. In terms of this contract Lonmin will deliver 70,700 ounces of gold over the period with delivery on a quarterly basis and in return received an upfront payment of $107 million. The upfront receipt was accounted for as deferred revenue on our balance sheet and is being released to profit and loss as deliveries take place at an average price of $1,510/oz delivered. The approximate effects on the Group's results of a 10% movement in the 2012 average metal prices achieved for Platinum (Pt) ($1,517 per ounce), Palladium (Pd) ($630 per ounce) and Rhodium (Rh) ($1,274 per ounce) would be as follows: The story has been truncated, [TRUNCATED]
Lonmin PLC LMI Final Results
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