Lonmin PLC (LMI) - Final Results
RNS Number : 7225Q
09 November 2012
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
• Commendable operational performance in light of circumstances
o The tragic events at Marikana significantly impacted operational and
§ 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
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
o Resulting loss before tax of $698 million
• Balance Sheet restructuring
o Underwritten Rights Issue to raise c. $817 million announced separately
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
o Capital expenditure of $175 million for 2013 financial year
o Attractive long-term fundamentals for PGM markets remain, despite
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."
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
Net debt as defined by the Group ^v $421m $234m
Gearing ^vi 14% 7%
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
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
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
Investors / Analysts:
Tanya Chikanza (Head of Investor Relations) +27 11 218 8300 /
+44 20 7201 6007
Ruli Diseko (Investor Relations Manager) +27 11 218 8373
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
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
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
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
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
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
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
· Operations located in the world's premier PGM deposit
· Long life mineral resource base backed by long-term New Order Mining
· Significant inherent value in existing infrastructure and mineral
· Attractive long-term fundamentals for PGM markets, despite short-term
· 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
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.
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
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.
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
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
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.
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.
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.
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.
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.
Chief Executive Officer's Review
Dear Fellow Shareholder,
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.
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.
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.
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
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
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.
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
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
5. Future Production, Cost Management and Capital Expenditure
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.
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
· 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
· 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
Taken together, these and other initiatives should significantly improve the
productivity of the Company.
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
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
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
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.
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.
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
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 %
Capital expenditure for 2013 is forecast to be US$175 million as mentioned
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.
Acting Chief Executive Officer
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
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
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.
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
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
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.
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)
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
• During her budget speech in parliament earlier this year, the Minister
of Mineral Resources, congratulated Lonmin for its exemplary safety
• 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.
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.
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
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 %
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
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
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.
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.
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.
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.
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 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
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.
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
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.
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.
'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 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.
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%.
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.
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
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
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
Exploration mapping, geophysical surveys and drilling continued to generate
targets for follow up in the coming year on our Canadian and Northern Ireland
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.
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.
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.
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.
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.
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
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.
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.
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.
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.
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
Year to 30 September 2012 reported operating loss (702)
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
Year ended Year ended
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.
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.
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
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
Special Operating Costs
In 2012 special operating costs are made up as follows:
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)
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.
Year ended 30 September
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 -
Other finance costs largely relate to the unwinding of the discounting of site
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.
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 ended 30 September
Operating (loss) / (702) 307
Depreciation, 726 124
Changes in working 278 245
Other (2) 6
Cash flow generated 300 682
Interest and (27) (36)
Tax (10) (16)
Trading cash inflow 263 630
Capital expenditure (408) (410)
Dividends paid to (14) (10)
Free cash (outflow) (159) 210
Distribution from / 7 (2)
Additions to (2) (30)
Issue costs on - (8)
Dividends paid to (31) (30)
Shares issued - 1
Cash (outflow) / (185) 141
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
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
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.
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
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
· 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
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.
Capital expenditure limit (ZAR)
1 October 2012 to 31 March 2013
1 October 2012 to 30 September 2013
1 April 2013 to 31 March 2014
1 October 2013 to 30 September 2014
1 April 2014 to 31 March 2015
1 October 2014 to 30 September 2015
1 April 2015 to 31 March 2016
1 October 2015 to 30 September 2016
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
The effective cost of debt funding for the 2012 financial year was circa 4.3%.
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.
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 are secured on the HDSA's shareholding in Incwala Resources
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
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
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
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:
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