| Tue 18 Nov 2008, 9:00 | | LON - Lonmin - Final Results |
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LON
LOLMI
LON - Lonmin - Final Results
Lonmin Plc
(Incorporated in England and Wales)
(Registered in the Republic of South Africa under registration number
1969/000015/10)
JSE code: LON
Issuer Code: LOLMI & ISIN: GB0031192486 ("Lonmin")
Final Results
18 November 2008
Highlights
* Safety performance excellent
* Operational performance:
- Sales in line with guidance at 726,918 ounces of Platinum
- Positive momentum from Mining initiatives to increase efficiency,
reliability and productivity
- Recoveries improved across the Process Division
* Financial results:
- Underlying EBIT up 21.0% to US$963 million
- Underlying earnings per share up 18.9% to 351.9 cents
- Gearing reduced to 12%
- $169 million impairment of assets at Limpopo Baobab shaft
* Action plans implemented to entrench Lonmin`s low cost position:
- Eliminating non-value adding ounces
- Maximising output from invested capital including a change of
approach for mechanisation
- Simplified organisational structure with clear accountability and
management emphasis in South Africa
- Reducing costs and managing cash
* Final dividend passed due to continuing difficult Platinum Group Metals
(PGMs) and credit markets
Financial highlights -
Continuing Operations 2008 2007 variance
Year to 30 September
Revenue US$m 2,231 1,941 14.9%
Underlying EBIT (i) US$m 963 796 21.0%
EBIT (ii) US$m 764 794 (3.8)%
Underlying profit US$m 997 811 22.9%
before taxation
Profit before taxation US$m 779 705 10.5%
Underlying earnings per cents 351.9 295.9 18.9%
share (iii)
Earnings per share cents 291.1 205.1 41.9%
Free cash flow per cents 168.9 248.2 (31.9)%
share
Net debt US$m 303 375 -
Interest cover (iv) x 53.4 27.4 -
Gearing (v) % 12 15 -
NOTES ON HIGHLIGHTS
(I) Underlying EBIT is total operating profit adjusted for special items.
(ii) EBIT is total operating profit.
(iii) Underlying earnings per share are calculated on profit for the year
excluding special items.
(iV) Interest cover is calculated as Group operating profit excluding
special items divided by net interest excluding exchange.
(v) Gearing is calculated on the net borrowings attributable to the Group
divided by the net borrowings attributable to the Group plus equity
shareholders` funds.
Commenting, Ian Farmer, Lonmin`s Chief Executive Officer said:
"Lonmin is a business with unique high quality long life assets and an
excellent market position. However, over the last few years our operational
performance has fallen below our expectations. Following my appointment as
Chief Executive six weeks ago, I have conducted a review of our operations
looking at ways to improve performance and maximise shareholder value. Today
we are exercising producer discipline by announcing that we will close those
portions of our operations which are uneconomic and cut back on capital
expenditure. We are also changing our approach to mechanised mining and
cutting costs across the business. The combination of these actions will
ensure that Lonmin maintains its sound financial position and remains well
placed to weather the current challenging PGM market conditions and to
exploit the upturn when markets recover."
Enquiries:
Analysts/investors:
Lonmin Plc +44 (0) 207 201 6000
Alex Shorland-Ball / Rob Gurner
Media:
Lonmin Plc +44 (0) 207 201 6060
Alex Shorland-Ball
Cardew Group +44 (0) 207 930 0777
Antony Cardew / Rupert Pittman
This press release is available on www.lonmin.com. A live webcast of the
final results` presentation starting at 09.00hrs (London) on 18 November 2008
can be accessed through the Lonmin website. There will also be a web question
facility available during the presentation. An archived version of the
presentation, together with the presentation slides, will be available on the
Lonmin website.
Chief Executive`s Review
Lonmin is a unique business with high quality long life assets. However, the
Company has struggled with a number of challenges and has been performing
below its potential. 2008 has been a difficult year with cost escalation
throughout the year and challenging market conditions in the latter part of
the year putting pressure on our margins and cash generation.
With this in mind, a review of our operations has been conducted, primarily
focusing on improving performance, reducing costs and maximising the value of
our assets. The first section of this Final Results announcement outlines the
following:
- The Past: the internal and external issues encountered during 2008;
- The Present: our immediate focus areas and the action plans we are
implementing to ensure Lonmin delivers consistent, low cost production;
- The Future: our long term potential includes a range of growth options,
which can supplement our core Marikana operations.
The Past - issues impacting 2008
Although we saw encouraging signs of operational improvements towards the end
of the year, overall our production and cost performance in 2008 was
disappointing. This was the result of both internal and external factors.
Our Mining business has suffered from a lack of mine ore reserve development.
This impacted our production during the year and will continue to do so in
2009, as we continue to accelerate ore reserve development to address this
issue. In addition, our operating systems were poor, resulting in weak
planning, production control and forecasting. Most importantly, productivity
has been below our expectations, primarily at our mechanised shafts.
Across the Process Division, there has been a renewed focus on optimising
recoveries which, in recent years, have been below historical levels. We have
also struggled to release stock from the system. This has been a key factor
in our missed production guidance and has adversely affected our working
capital. This will be an area of focus for us in 2009.
In addition, our organisational structure has become overly complex with too
many layers of management, and a poorly implemented shared services
structure, which resulted in overhead duplication.
Lonmin, along with the rest of the mining industry, was impacted during the
year by the electricity supply situation in South Africa, with an industry-
wide shutdown in January as well as a rationing of our energy consumption to
95% of normal levels. We have been successfully managing the business at
this level of energy consumption for around five months now.
Another key external factor during the year was the increased emphasis on
mine safety by the government, evidenced by the growing prevalence of safety
closures across the industry. We fully support this renewed focus on safety
by the government and we expect this focus to be maintained in 2009. Safe
working practices remain a key priority for Lonmin and we recorded another
excellent safety performance in 2008.
Workforce-related issues were also prevalent throughout the industry in South
Africa. There were three one day national strikes in the 2008 financial year.
The shortage of skilled workers in South Africa has also been an issue, as
international markets and significant national infrastructure projects
attract resources.
The Present - immediate priorities and actions
We intend to take steps to entrench our low cost position.
Short term market conditions will lead to structural shifts within the
Platinum industry
Cost inflation was ever present in 2008, whilst the pricing environment
worsened towards the end of the financial year. PGM prices are now some way
below the cash cost of production for a significant proportion of the
industry and the longer this situation prevails, the more companies,
including Lonmin, will need to take action to protect their financial
position. We anticipate a sharp decline in investment in the industry in the
short term, which could include shaft closures and moth-balling, resulting in
reduction or deferment in the supply of PGMs. This increases the possibility
of a rebound in pricing once sentiment and markets improve. With these
structural shifts in mind, the first priority for Lonmin management has been
to look for ways to improve our operational performance, with an emphasis on
consistent, low cost production. We have therefore restructured key parts of
the business, with a view to aggressively cutting and better managing costs,
while at the same time increasing management`s focus on delivery against
plans.
Actions taken include the following:
- Eliminating non value adding ounces: we have reviewed the contribution
from our underground business on a shaft-by-shaft basis and we intend to
initiate consultations with our workforce and the unions in relation to
the future of operations at our Limpopo property, which we believe are
uneconomic. Currently production from Limpopo is included in our 2009
guidance. We have also taken the decision to suspend production from our
opencast operations at Marikana with effect from the end of the 2008
calendar year;
- Mechanisation strategy changed: we have failed to significantly improve
productivity from our two fully mechanised shafts and, given the
resultant high cost of production, we have taken the decision to change
our approach. We are switching to hybrid mining at Saffy shaft, where we
are introducing conventional stoping methods, whilst maintaining
mechanised development. This change will be completed during the course
of 2009 and is likely to cause an initial, short term dip in output from
this shaft. We have also concluded that K4 shaft will be developed as a
hybrid mine when it comes into production in 2010. This is due to the
nature of the ore body and the experience gained from our investment in
mechanisation to date. Hossy shaft will continue to be run as a fully
mechanised shaft as we continue to work hard to achieve satisfactory
levels of productivity. We will review the performance of Hossy shaft in
September 2009 if it becomes apparent that we are not able to achieve
productivity of 1,500 square metres per month per suite of equipment;
- Reducing costs, managing cash and capital rationing: a restructuring
team, led by Mian Khalil, Executive Vice President Capital Programmes,
has been established to review our cost structure. We have implemented a
series of initiatives to restrict spending, including a freeze on all
recruitment. We have also taken the decision to halve our exploration
expenditure. This spend level protects the value of our portfolio. We
will continue to work with our joint venture partners and we will
allocate less cost to our wholly-owned projects in the short term. In
addition, we have reviewed our capital expenditure programmes throughout
the business. As a result, our capital expenditure programme will be
primarily focused on mine development at Marikana and obligatory spend
at our Process Division. We have placed all other growth projects on a
care and maintenance basis;
- Simplified organisational structure with clear accountability: we have
simplified our organisational structure to bring greater management
focus and to give the operations more ownership of the functions
required to ensure effective and efficient delivery. To achieve this,
we have re-allocated responsibility for the Shared Business Service
functions to line managers within the Mining, Process and Finance
Divisions. This will simplify our management structure and help remove
any duplication. Furthermore, to enable greater accountability in each
area of the business, I have appointed Mahomed Seedat as our new Chief
Operating Officer with overall responsibility for the operations in
South Africa, reporting to me. Chris Sheppard, Executive Vice
President, Mining and Theuns de Bruyn, Executive Vice President, Process
Division now report to Mahomed. Together with Mahomed, Alan Ferguson,
Chief Financial Officer, and Albert Jamieson, Executive Vice President,
Commercial, make up my three direct reports and divisional heads;
- Management emphasis in South Africa: we require greater management focus
in South Africa where all our operations are located. To achieve this
we are reducing the current headcount of the London office by one third
and transferring certain functions to South Africa. In addition, it is
crucial that, as Chief Executive Officer, I am close to our operations
and I will therefore spend around half of my time in South Africa.
The Future - building a sound base for growth, supported by long term
expansion options
Lonmin has excellent growth prospects at our core operations at Marikana,
supplemented by a range of projects, which provide the Company with long term
growth options, to be accessed at the appropriate time.
Growing production from a solid base
Our key priority at the current time is to focus on our Marikana asset base,
thereby re-establishing it as a strong, well controlled platform which will
leave us well positioned to exploit a rebound in the market environment.
We expect to increase our production from underground operations at Marikana
in the 2009 financial year, which will compensate for the reduction in
opencast production, following our decision to close those operations by the
end of the 2008 calendar year. Consequently, we are targeting Platinum sales
guidance for the 2009 financial year broadly in line with that achieved in
the 2008 financial year. This takes into account the restructuring of our
mechanised shafts and the development challenges faced by the Mining
operational management team. In addition, the rebuild of the Number One
furnace, initiated earlier this month, will have an impact on output during
the first half of the 2009 financial year. Further ahead, we remain confident
that we can achieve, and improve on, previous sales levels of over 900,000
Platinum ounces per annum.
Maintaining flexibility around longer term growth
To supplement Marikana, we have a number of projects which provide us with
options from which we can deliver significant medium to long term growth.
However, given our focus on cash management and the current state of the
credit markets, we believe it prudent to put these projects, including
Akanani and Limpopo, on a care and maintenance basis for the short term.
We still firmly believe that the quality and the unique average 18 metre
width of the Akanani ore body presents an outstanding opportunity for Lonmin.
This is supported by findings from a scoping study carried out at Akanani
during 2008, which indicated an acceptable rate of return.
During the year, we completed a pre-feasibility study at our Limpopo
expansion project, which indicated the combined property supports a mine
producing around 4.3 million tonnes per annum at full production. Likewise,
at Pandora, we successfully completed a pre-feasibility study on a standalone
project looking at the development of a 2.9 million tonnes per annum
operation using a hybrid mining method. The Pandora project will continue to
be progressed on a self-funded basis with our joint venture partners.
We will continue to evaluate opportunities, as they arise. This includes
reviewing our strategy on Chrome, a by-product of our mining and processing
of UG2 ore, where we believe there is unexploited value.
Dividend
Although we have reported significant profits for 2008, our profitability and
cash flows are highly geared to PGM prices and we enter 2009 with prices of
PGMs considerably below those prevailing during 2008. As a result, our
profitability and cash flows will come under pressure despite the Company
taking immediate measures to address its cost base.
Our balance sheet remains strong and our lines of credit are secure. Our
confidence in the longer term potential of Lonmin, the quality of its assets
and the excellent fundamentals of the PGM industry remains unchanged.
However, the Board has reviewed the final dividend for the 2008 financial
year and, given the continuing difficulties in both the PGM and credit
markets, it is right that a conservative stance is taken. In light of this
and, despite our sound financial position, a decision has been taken to pass
the final dividend. An interim dividend for 2008 of 59 cents per share was
paid on 8 August 2008 which, with no final dividend, will become the total
dividend for the year.
The Board will review this matter and will resume dividend payments as soon
as conditions allow. Our policy remains that dividend distributions are based
on the reported earnings for the year, but take into account the projected
cash requirements of the business.
Outlook
Recent unprecedented developments in world financial and economic markets
have had a substantial impact on PGM and other commodity prices and we expect
these volatile conditions to continue in the short term.
However, we are confident that Lonmin, with its high quality asset base, low
cost position and strong balance sheet, will be able to withstand these short
term pressures. Our liquidity position is sound, our gearing is 12% and our
banking relationships remain strong and secure. In addition, the action plans
we are implementing will ensure the Company will be in a strong position when
the PGM markets recover.
For the 2009 financial year, we are targeting Platinum sales to be broadly in
line with that achieved in the 2008 financial year. We are targeting our Rand-
based gross operating costs for the year to increase at a rate well below
South African inflation and capital spend of $250 million for the financial
year.
The long term demand fundamentals for Platinum and other PGMs remain
attractive and our key priority continues to be delivering value for all our
shareholders, through improving our operational performance and creating a
culture of delivery.
Ian Farmer
Chief Executive Officer
18 November 2008
Market Overview
Along with other commodities, the pricing environment for PGMs has changed
dramatically during the year.
In the early part of the year, Platinum pricing peaked at around US$2,200 in
March 2008, mainly as a result of supply side challenges arising from the on-
going power supply concerns and the growing number of industry safety
stoppages, alongside a strong demand environment. However, the Platinum price
declined significantly from its peak to around US$1,000 per ounce at the end
of September 2008 and has since fallen to much lower levels. This steep fall
was, we believe, mainly a result of the increasingly negative outlook for the
automotive sector and the forced liquidation of investment holdings. Whilst
we expect the pricing environment to continue to be unpredictable in the
short term, we are confident that the positive balance between supply and
demand in the PGM sector will return in due course.
Review of Operations
Safety
Our safety performance improved significantly in 2008, with a 42% improvement
in our lost time injury frequency rate (LTIFR) to 6.27 per million man hours
worked, the lowest level in the history of the Company. It should be noted
however that 3% of this improvement corresponds to an adjustment of man-hours
in the Mining business, to include man-hours from office personnel and some
contractors which were in error not previously included in calculations.
It is with regret that we report the death of three of our employees as a
result of industrial accidents during 2008.
We continue to investigate incidents rigorously through the Incident Cause
Analysis Method and now include near-miss incidents. Findings from these
incidents are critical to our efforts in eliminating fatalities and serious
injuries and are communicated across our operations.
In order to ensure safe production at our operations, a large proportion of
the safety shutdowns at our operations during the year were initiated by
management as we continue our drive to Zero Harm. We remain supportive of the
South African Department of Mineral and Energy`s (DME) renewed stance on
safety in the mining industry, which has been evidenced by an increased
number of inspections and ordered shaft closures related to these inspections
across the industry during the year.
Visible leadership is crucial and is a powerful aid in creating an
interdependent safety culture. All managers undertake safe behaviour
observations and participate with the employees in their areas in daily
safety breaks.
During the year, we continued the implementation of our Laduma safety
awareness campaign, based on learning map technology, across the business at
Marikana. This campaign uses football to communicate and promote safe
behaviours and procedures. Initial indications are that the campaign has
been well received and we will continue to raise awareness and increase its
visibility going forward.
Mining
At the beginning of the financial year we introduced a new senior operational
management team in the Mining division under the leadership of Chris
Sheppard. Chris and his team were tasked with implementing and executing
improvement programmes to increase productivity and consistency of
performance. These programmes are gaining traction and the key focus areas to
date include the strengthening of the operational management team, an
increased focus on development, the upgrading of management operating systems
at shaft level, the completion of a new mining extraction strategy, an
improvement in our labour management programmes and a new approach to
mechanisation.
Our initial, mine-wide, Mining Extraction Strategy is now complete, including
a review and analysis of various key components of the Mining business,
including depth, ore type, stoping technique and processing and commercial
requirements. Completion of the extraction strategy has played a significant
part in our long term planning and, to this end, we completed our long term
planning protocol towards the end of the financial year. We expect to
complete site-specific extraction strategies by the start of the second half
of the 2009 financial year.
We have committed to completing a half-level optimisation project by the
middle of 2010. Blue prints for all half levels have been completed and we
remain on track with this project.
We are also making progress in improving ore reserve development at our
shafts, evidenced by development rates increasing 7.6% during the last
quarter of the 2008 financial year, compared with the previous quarter.
However, improving development is not a quick fix and it will take another 18
months before we achieve acceptable levels of immediately available ore
reserves, and higher extraction rates. As at 30 September 2008, immediately
available ore reserves were 11.4 months.
A key focus area in 2008 was labour management. The Mining team introduced a
Zero Tolerance approach to absenteeism, which was extensively communicated
throughout the business, and focused on increasing awareness that persistent
absenteeism would result in dismissal. To combat the shortage of skilled
workers, we implemented recruitment programmes to attract and retain the
necessary skills and we were successful in reducing skilled labour turnover
during the year.
Marikana Mining
Our Marikana operations mined 11.5 million tonnes of ore, a 10% decrease on
the same period in 2007 with underground operations contributing 10.2 million
tonnes. As previously reported, underground production was principally
impacted by safety related stoppages, the Eskom four day power outage in
January, our focus on accelerating ore reserve development and high levels of
absenteeism particularly in the first half of the financial year.
As planned, opencast tonnages were down year on year with total tonnes mined
in 2008 of 1.3 million tonnes versus 1.6 million tonnes in 2007. Given the
relatively high cost of production from opencast operations, as well as the
low grade of opencast ore and its dilutive effect on concentrator recoveries,
we decided to suspend production from this part of the business with effect
from the end of the 2008 calendar year.
Another key factor impacting production was the slower than anticipated ramp
up of our mechanised shafts with our mechanised operations producing 1.2
million tonnes in the year, significantly behind our plans, but a substantial
increase on the 0.6 million tonnes produced by these shafts in the prior
year. The change in our approach to mechanisation will have some impact on
production in the 2009 financial year, given the logistical complexities,
including transferring crews and equipment between shafts, re-organising
scheduling and planning and re-training managers and their teams. The
transition to hybrid mining at Saffy is expected to be completed by the end
of the 2009 financial year.
Despite the year on year decline in production at Marikana, we are seeing
initial signs of improvement from the operation and our underground
operations will continue to grow in 2009.
Costs at our conventional operations at Marikana for the 2008 financial year
were R390 per tonne, compared to R430 per tonne at our opencast operations
and R615 per tonne at our mechanised sections, hence the need to address our
mechanised shafts and our opencast operations. Capital expenditure at our
Marikana Mining division was R1,459 million, the majority of which was
allocated to Hossy, Saffy and K4.
Limpopo Mining
Our Limpopo Baobab shaft produced 523,000 tonnes of ore in the year, a
decline of 31% on 2007. Production continued to be constrained by a shortage
of available ore caused by the IRUP occurrence and a lack of ore reserve
development. Limpopo produced 22,017 saleable ounces of Platinum in
concentrate for the year, a decline of 38% on 2007 due to the lower
throughput from the mine and a six week shutdown of the Limpopo concentrator
in 2008 to undertake repairs. Costs for the year at Limpopo Mining were R622
per tonne and capital expenditure was R217 million.
Our Limpopo Baobab shaft operations have always been high cost. In recent
years the mine has not delivered and this situation cannot continue. We
believe the mine is uneconomic and intend to start discussions with the
workforce and unions regarding the future of the operation.
Pandora Joint Venture
Our share of mined production from the Pandora Joint Venture ground during
the year was 400,000 tonnes mined, a decline of 3% from 2007. Our underground
operations at Pandora produced 124,000 tonnes, a 3% decline from 2007, and
our opencast Pandora operations produced 275,000 tonnes, a 4% decline from
2007. Lonmin purchases 100% of the ore from the Pandora Joint Venture and
this ore contributed 48,743 saleable ounces of Platinum in concentrate and
87,871 saleable ounces of total PGMs in concentrate to our production. The
Pandora Joint Venture contributed US$18.0 million of profit after tax for our
account in the financial year, up 50% from the 2007 financial year.
Process Division
Process Division management continued to implement a number of initiatives
which have started to improve efficiencies and recoveries across the value
chain. At the Smelter, a number of programmes were implemented at the Number
One furnace to improve process stability and recoveries. These include the
implementation of a blending strategy to ensure standardised feed to the
furnace, manage temperature fluctuations and predict slag chemistry. We also
have a number of programmes in place to improve concentrator recoveries,
including better management and scheduling of planned maintenance, as well as
the establishment of improved control systems, which will allow us to better
match particular ore types to certain concentrators. Costs for the year in
the Process Division were R1,447 per PGM ounce and capital expenditure was
R308 million.
Concentrators
The Concentrators produced a total of 732,125 saleable ounces of Platinum in
concentrate for the year down 16% on 2007 reflecting the lower levels of
throughput from the mines and lower opencast grades. The improvement
programmes we have introduced in the Concentrators during the year showed
encouraging results with overall recoveries improving to 79.2% from 77.3% in
2007 and underground recoveries up to 81.7% versus 80.7% last year.
Underground milled head grade was 4.66 grammes per tonne (5PGE+Au), 4.5%
lower than the prior year partly as a result of ore mix issues including the
increased percentage of lower grade development ore from the Marikana
mechanised shafts.
Smelter
At the Smelter, we brought forward the planned inspection and repair of the
Number One furnace to coincide with the Eskom power outage at the end of
January. We successfully completed the work on the furnace and it returned
to full operation on 2 March 2008. In June, the Number One furnace was
powered down for seven days due to a leak in one of the copper cooling
waffles on the side of the furnace, as a result of a manufacturing fault. In
July, the Merensky furnace was shut down for around two months for repair,
following a matte run out through one of the tappe holes. These were
relatively minor incidents and the Smelter performed well during the year,
with Number One furnace availability increasing to 86% in the 2008 financial
year, from 61% in 2007.
We have scheduled a rebuild of the Number One furnace in November 2008. The
furnace will be offline until early January 2009 as we complete a redesign of
the vessel. During the rebuild we will install graphite tiles for the upper
waffle coolers, a third matte tappe hole to increase tappe hole life, a
redesigned refractory below the waffle coolers and split waffle coolers for
external removal. The redesign will allow for hot repairs of the furnace
tappe holes, with quicker repairs of the copper coolers. As a result, we
expect to be able to increase the availability and reliability of the
furnace, so that it can operate on a more continuous basis, with fewer
planned maintenance shut downs. During the Number One furnace downtime we
will be running our Merensky furnace and the Pyromet furnaces to ensure the
impact is mitigated. This rebuild will however have an impact on our
production during the first half of the 2009 financial year, and particularly
in the first quarter of the year. Accordingly, as in 2008, production during
the 2009 financial year is expected to be weighted towards the second half.
Refineries
Lonmin refined production was 699,942 ounces of Platinum, up from 695,842
ounces of Platinum in 2007. We are completing an upgrade of the Base Metal
Refinery to increase throughput to 37 tonnes per day and we have completed
various de-bottlenecking projects, as well as upgrading the nickel sulphate
crystallisers at the plant. Final sales for the year were 726,918 ounces of
Platinum and 1,401,371 ounces of total PGMs, in line with our revised
guidance.
Reserves and Resources
During the year, Lonmin`s entire Mineral Resources and Reserves has been
thoroughly reviewed and certain areas have been re-estimated where
appropriate. The major changes are as follows:
- Extensive remodelling of the Marikana Resource has been completed using
methodology that allows greater sophistication in accounting for the PGE
grade variations across the property. This modelling has confirmed the
robustness of the UG2 Mineral Resource estimates and revealed no
significant changes in the UG2 PGE grade overall. The re-modelling of
the Merensky Resource has resulted in a lower overall Merensky Reef PGE
grade, particularly in the known lower grade and thicker eastern areas
of Marikana. It is worth noting that Lonmin does not currently mine
Merensky Reef from these lower grade eastern areas but the impact has
been to lower the average grade of the overall Merensky Mineral
Resource. The overall Merensky Reef Mineral Reserve grade is less
affected.
- As announced at the Interim Results on 8 May 2008, a review of the P2
and P1 reef type extents at Akanani resulted in a marked increase in the
Indicated Resource and PGE grade in the main mineralised zone (the P2).
Additional drilling allowed Lonmin to upgrade a portion of the P2
Inferred Resource to Indicated Resource whilst other areas of lower
grade or less certain continuity have been removed from the
classification. The exclusion of large volumes of low grade P1
mineralisation from the Mineral Resource resulted in a significant
increase in overall project grade and a reduction in overall metal
content.
- At Limpopo Baobab shaft, the Probable Mineral Reserve has reduced as a
result of a) a more conservative view of some areas of the Merensky Reef
downgrading these to Inferred Resources pending information from closer
spaced drilling; and b) changes made during the year to the Life of Mine
Plan taking account of a number of factors including the need for an
additional ventilation shaft and refrigeration below 750 metres. The
Mineral Reserves in the relatively shallow Limpopo Phase 2 Project are
unchanged since 2007.
Consistent with 2007 reporting, the 2008 Lonmin Mineral Resources and
Reserves include Lonmin`s attributable portion only. The percentage of each
of the areas attributable to Lonmin has not changed during the year.
Full details of Lonmin`s Mineral Resources and Mineral Reserves are included
on our website - www.lonmin.com. A summary is presented in the following
tables:
Mineral Resources (Total Measured, Indicated & Inferred)
Area 30-Sep-2008 30-Sep-2007
Mt 3PGE+Au 1 Pt Mt 3PGE+Au 1 Pt
g/t Moz Moz g/t Moz Moz
Marikana 672.0 4.68 101.1 59.3 644.4 4.94 102.3 61.2
Limpopo 2 138.1 4.23 18.8 9.6 146.7 4.24 20.0 10.0
Limpopo Baobab 28.6 4.00 3.7 1.9 32.1 3.96 4.1 2.1
shaft
Akanani 154.4 4.42 21.9 9.3 269.7 3.46 30.0 12.5
Pandora JV 3 55.5 4.30 7.7 4.7 56.7 4.33 7.9 4.9
Loskop JV 4 10.1 4.04 1.3 0.8 10.1 4.04 1.3 0.8
Total 1,058.8 4.54 154.5 85.6 1,159.7 4.44 165.6 91.6
Mineral Reserves (Total Proved & Probable)
Area 30-Sep-2008 30-Sep-2007
Mt 3PGE+Au 1 Pt Mt 3PGE+Au 1 Pt
g/t Moz Moz g/t Moz Moz
Marikana 332.6 4.03 43.1 25.9 331.4 4.18 44.5 26.6
Limpopo 2 40.1 3.23 4.2 2.1 40.1 3.23 4.2 2.1
Limpopo Baobab shaft 9.4 3.16 1.0 0.5 24.2 3.32 2.6 1.3
Pandora JV 3 0.46 4.28 0.06 0.04 0.30 4.55 0.04 0.03
Total 382.5 3.93 48.3 28.5 396.0 4.03 51.3 30.0
Notes on the Lonmin Platinum Mineral Resources and Reserves
The Lonmin Platinum Mineral Resources and Reserves information was prepared
on 1. the following basis:
3PGE + Au = Pt+Pd+Rh+Au (Loskop joint venture excludes Rh due to
insufficient assays).
2. Limpopo: includes Dwaalkop joint venture, in which Western Platinum
Limited (82% owned by Lonmin) has an interest of 50%, but excludes
Baobab shaft.
3. Pandora Joint Venture: Eastern Platinum Limited (82% owned by Lonmin)
has an attributable interest of 42.5% in the Pandora Joint Venture
together with Anglo Platinum, Mvelaphanda Resources and the Bapo Ba
Mogale Mining Company.
4. Loskop Joint Venture: Western Platinum Limited (82% owned by Lonmin) has
an attributable interest of 50% in the Loskop Joint Venture with Boynton
Investments.
5. Incwala Resources owns 18% of both Western Platinum Limited and Eastern
Platinum Limited and 26% of Akanani.
6. All quoted Resources and Reserves includes Lonmin`s attributable portion
only and the following percentages were applied to the total Mineral
Resource and Reserve for each property:
Area Marikana Limpopo - Limpopo - Akanani Pandora Loskop
Dwaalkop Baobab,
JV Doornvlei,
Zebedelia
Lonmin 82% 41% 82% 74% 34.85% 41%
Attributable
7. All figures are reported as metric tonnes (millions), grammes per tonne,
percent or troy ounces (millions).
8. Where Nickel (Ni) and Copper (Cu) grade estimates for the various
Mineral Resources are considered compliant with SAMREC (2007)
guidelines, they are included in the Mineral Resource statements for the
individual areas. These grades are reported in percent and represent
acid soluble proportions.
9. All tabulated data have been rounded to one decimal place for tonnage
and content and two decimal places for grades.
10. Mineral Resources are inclusive of Mineral Reserves.
Mineral Resources are reported as "in situ" tonnes and grade and allow
for geological losses such as faults, dykes, potholes and Iron Rich
Ultramafic Pegmatite (IRUP).
11. Proved and Probable Mineral Reserves are reported as tonnes and grade
expected to be delivered to the mill, are inclusive of diluting
materials and allow for losses that may occur when the material is
mined.
13. Mine tailings dams are excluded from the above Mineral Resource summary
14. For economic studies and the determination of pay limits, consideration
was made of both short and long term revenue drivers. The following
long term assumptions were used: Pt $1500, Pd $500, Rh $3,000, Ru $450,
Ir $410, Au $550 per ounce and Ni $15,400, Cu $2,860 per tonne, using an
average exchange rate of $1 to R8.
15. Dilutions are quoted as waste tonnes / waste + ore tonnes in percent.
16. Unless otherwise stated, the Lonmin Mineral Resources and Reserves
estimates were prepared or supervised by various persons employed by
Lonmin.
Financial Review
Introduction
The financial information presented has been prepared on the same basis and
using the same accounting policies as those used to prepare the financial
statements for the year ended 30 September 2007.
Analysis of results
Income Statement
Underlying operating profit has increased by $167 million, or 21%, to $963
million in the year to 30 September 2008. A comparison with the year to 30
September 2007 is set out below:
$m
FY07 reported operating profit 794
FY07 special items 2
FY07 underlying operating profit 796
PGM price 500
PGM volume (107)
PGM mix (35)
Base metals (68)
Cost changes (including foreign exchange (123)
impact)
FY08 underlying operating profit 963
FY08 special items (199)
FY08 reported operating profit 764
PGM markets were strong for the first three quarters of the year and saw
increasing prices supported by supply-side issues in the industry and longer
term growth concerns in light of potential power constraints in South Africa.
The last quarter saw significant declines in prices reflecting the sudden
worldwide economic downturn and, in particular, the impact on the automotive
sector. In comparison to the prior year overall the average price per PGM
ounce increased 28% to $1,529 resulting in an additional $500 million of
profit generated. However, the average price per PGM ounce in the month of
September 2008 fell to $966, some 37% down on the average for the year and
some 49% below the peak month in May when the PGM basket reached $1,907 per
ounce. Conditions in the early part of FY09 have continued to deteriorate.
However, we do not believe that current pricing levels reflect the longer
term PGM fundamentals and expect that some supply and demand corrections will
occur.
The PGM sales volume for the year at 1,401,371 ounces was 6% below the prior
year resulting in an adverse operating profit impact of $107 million. The
factors contributing to the weaker performance are discussed in the Review of
Operations in this announcement. Rhodium as a percentage of sales fell from
7.0% to 6.7% giving rise to an adverse mix variance of $35 million. The
contribution from base metals fell by $68 million with Nickel sales impacted
by a 37% fall in volume and a 15% fall in price.
Cost changes (increase) / decrease:
$m
Core productive costs (118)
Mechanised mining (62)
Opencast mining (23)
Incremental stock movement 64
Safety, health, environment and community (20)
Overheads (13)
Foreign exchange 58
Depreciation and amortisation (9)
(123)
Core productive costs have increased in the year partly due to the very
significant inflationary pressures in South Africa in the mining sector,
particularly in respect of raw materials such as steel, chemicals, utilities
and fuel. The business has also continued to experience higher levels of
labour absenteeism which necessitated increased staff numbers and the
additional use of contractors. The Process Division has also been undertaking
a major enhancement of its plant maintenance programme which, whilst
increasing costs today, will improve the reliability of our operations over
time. As a result of these issues core productive costs increased by $118
million which was 15% up on the prior year.
Since 2007 we have ramped-up our mechanised operations and moved from a
development to an operational phase resulting in the recognition of operating
costs. The cost increase from these shafts is $62 million. Given productivity
levels were low this led to an unacceptably high cost per tonne of R615. The
cost of opencast operations also increased significantly due to working at
deeper levels and this resulted in an additional spend of $23 million.
This level of cost increase is unsustainable in today`s markets and the
actions being taken to address this are set out in the Chief Executive`s
review in this announcement.
We recognise the vital role we have in caring for our employees both within
the work environment and in the wider community and have spent an incremental
$20 million in the year. Safety has remained a major area of focus and we
have invested in training programmes, improved equipment and have extended
our initiative to enhance our roof-bolting to help prevent fall of ground
incidents.
The increase in overheads arose in two main areas. Firstly, the Group
completed pre-feasibility studies on the Limpopo and Pandora expansion
projects during the year and the capital projects team was expanded to ensure
that we built the appropriate delivery capability for our portfolio of
projects. In addition costs of shared services and other functions which
support the business also increased and reflected a continuation of our
efforts to improve service delivery. We completed projects in the year to
optimise usage of our SAP system, to enhance significantly our metallurgical
tracking systems and to improve our stock control.
Foreign exchange has been a positive factor for costs with the Rand weakening
against the US dollar versus the comparative period by 4%.
The Group C1 cost before by-product credits increased by 29% to R5,408 per
PGM ounce sold reflecting not only these cost increases but also lower than
expected production. This compared to R5,003 at the Interims, which was 24%
up on the prior period. It should be noted that stock levels at September
2007 were higher than usual and the Group benefited by selling these cheaper
ounces in the year.
The main reason for the C1 cost increase has been the growth in mining cost
per unit at Marikana which is up by R1,574 per PGM ounce with costs up 41%
and production volume down 16%. Mechanised shafts and opencast, which
represent just over 21% of total Marikana 2008 volumes, were responsible for
half of this 41% cost increase. The C1 cost per ounce for mechanised was
R6,493 and for opencast was R7,523 which compare to the conventional average
of R3,421. Limpopo cost per ounce mined rose by 43% to R6,363 per ounce.
Whilst net special costs had a limited impact on reported operating profits
in 2007 there has been a charge of $199 million in 2008. The key component of
this relates to Baobab shaft at Limpopo where a reduction in mineral
reserves, and the impact of the economic downturn, significantly reduced the
value of the assets. The other major component related to the cost of bid
defence work. The reported operating profit has therefore fallen from $794
million in the prior year to $764 million this period.
Summary of net finance income / (costs):
FY08 FY07
$m $m
Net bank interest and fees (18) (29)
Capitalised interest 23 23
Movement in fair value of embedded - (104)
derivative of convertible bonds
Other 2 3
Net finance income / (costs) 7 (107)
Net interest charges at $18 million were $11 million below the prior period
from a combination of lower average net debt and lower interest rates.
Capitalised interest for the period was in line with the prior year. The
convertible bonds redeemed by the company in financial year 2007 had a
significant impact on finance costs with $104 million of fair value movements
recognised in the year. This change is the major factor in the $114 million
reported improvement in the year.
Reported profit before tax at $779 million has increased by $74 million
versus 2007. This has been driven by the $30 million decline in reported
operating profit, the $114 million improvement in net finance costs, a write-
off on mark-to-market investments of $19 million and an increase of $9
million in the Group`s share of profit from associates and joint ventures. On
an underlying basis profit before tax was up $186 million, or 23%, to $997
million.
The 2008 reported tax charge at $213 million was substantially lower than the
reported $297 million in 2007. However, this comparison is materially
distorted by the impact of foreign currency retranslation differences which
are treated as special items. On an underlying basis the tax rate remained
relatively consistent at 32% (2007 - 31%).
Profit for the year attributable to equity shareholders amounted to $455
million (2007 - $314 million) and earnings per share were 291.1 cents
compared with 205.1 cents in 2007. Underlying earnings per share, being
earnings excluding special items, amounted to 351.9 cents (2007 - 295.9
cents), an increase of 19%.
Balance sheet
A reconciliation of the movement in equity shareholders` funds over the year
to 30 September 2008 is given below.
$m
Equity shareholders` funds as at 1 October 2007 1,968
Recognised income and expense 352
Dividends (186)
Share scheme related and other 13
Equity shareholders` funds as at 30 September 2,147
2008
Equity shareholders` funds were $2,147 million at 30 September 2008 compared
with $1,968 million at 1 October 2007, an increase of $179 million. Equity
shareholder`s funds in the period increased by $352 million through the
recognition of attributable income, however, this was partially offset by the
payment of the final dividend in respect of financial year 2007 of $94
million and the interim dividend for 2008 of $92 million.
Net debt at $303 million has decreased by $72 million in the year with a cash
inflow of $70 million (as explained below).
Gearing was 12% compared with 15% at 30 September 2007 calculated on net
borrowings attributable to the Group divided by those attributable net
borrowings and the equity interests outstanding at the balance sheet date.
This demonstrates the strength of the balance sheet and leaves us well
positioned going into 2009.
Cash flow
The following table summarises the main components of the cash flow during
the year:
FY08 FY07
$m $m
Operating profit 764 794
Depreciation and amortisation 96 87
Change in working capital (84) 81
Impairment 174 0
Other (3) 21
Cash flow from operations 947 983
Interest and finance costs (12) (25)
Tax (229) (266)
Trading cash flow 706 692
Capital expenditure (378) (276)
Proceeds from disposal of 1 5
assets held for sale
Dividends paid to minority (65) (41)
Free cash flow 264 380
Disposals / (acquisitions) 3 (393)
Financial investments (17) (21)
Shares issued 6 68
Equity dividends paid (186) (171)
Cash inflow (outflow) 70 (137)
Opening net debt (375) (458)
Bond conversion - 213
Foreign exchange 2 7
Closing net debt (303) (375)
Trading cash flow (cents per 451.7c 452.0c
share)
Free cash flow (cents per 168.9c 248.2c
share)
Cash flow generated from operations at $947 million was $36 million down
compared to the prior year. This was largely due to an adverse movement of
$165 million in the working capital position. The working capital position
reversed in 2008 with inventories increasing by $82 million more than the
prior year. After interest and finance costs of $12 million and tax payments
of $229 million, trading cash flow for the 12 months amounted to $706 million
against $692 million in 2007, with trading cash flow per share of 451.7 cents
in 2008 against 452.0 cents in 2007.
Capital expenditure was up $102 million on the prior year at $378 million. In
Mining the spend was focused on the exploration and evaluation work at
Akanani, development of the mechanised operations at Hossy and Saffy,
completion of sinking and equipping at K4 and investment in sub declines at
Rowland and K3. In the Process Division we invested in both the Smelter and
the BMR during the year.
Dividends paid to minorities in the year at $65 million were $24 million
higher than the prior year reflecting a timing difference on the payment of
dividends from South African subsidiaries.
As a result of the above free cash flow generated at $264 million in 2008 was
$116 million adverse to the prior year with free cash flow per share falling
from 248.2 cents to 168.9 cents. The equity dividend of $186 million was $15
million higher than 2007. The overall cash inflow for the year was $70
million which decreased net debt accordingly.
Dividends
As dividends are accounted for on a cash basis under IFRS the amount shown in
the accounts represents the 2007 final dividend of 60.0 cents and 2008
interim dividend of 59.0 cents making a total of 119.0 cents for the year
(2007 - 110.0 cents total for the year).
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.
Liquidity risk
The policy on overall liquidity is to ensure that the Group has sufficient
funds to facilitate all on-going operations.
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 e.g.
material acquisitions and disposals. Where funding requirements are
identified from the cash flow forecast, appropriate measures are taken to
ensure these requirements can be satisfied. Factors taken into consideration
are:
- the size and nature of the requirement;
- preferred sources of finance applying key criteria of cost, commitment,
availability, security/covenant conditions;
- recommended counterparties, fees and market conditions; and,
- covenants, guarantees and other financial commitments.
A range of committed facilities are currently in place both in the UK and
South Africa. These are sourced from a diverse base of banking counterparties
and are mostly in US Dollars.
At the 2008 year end the Group had $975 million of committed facilities in
place of which $150 million matures within one year, although this facility
was undrawn at the balance sheet date. Of the $975 million committed
facilities in place, $529 million was drawn down at the balance sheet date,
of which $229 million falls due within one to two years. The remainder falls
due after more than two years. Cash held at the year end amounted to $226
million.
Credit risk
Banking Counterparties
Banking counterparty credit risk is managed by spreading financial
transactions across an approved list of counterparties of high credit
quality. Banking counterparties are approved by the Board.
Trade Receivables
The Group is exposed to significant trade receivable credit risk through the
sale of PGM metals 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.
Interest rate risk
Currently, all outstanding borrowings are in US Dollar and at floating rates
of interest. Given the relatively small net debt position of the Group, this
position is not considered to be high risk at this point in time. This
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
Most of the Group`s operations are 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 South African Rand. Most of the cash
received in South Africa is in US Dollars and is normally remitted to the UK
on a regular basis. Most of the Group`s funding sources are in US Dollars.
The Group`s reporting currency remains the US Dollar and the share capital of
the Company is based in US Dollars.
Our policy is not to hedge South African Rand/US Dollar currency exposures
and therefore fluctuations in the Rand to US Dollar exchange rate can have a
significant impact on the Group`s results. A strengthening of the Rand
against the US Dollar has an adverse effect on profits due to the majority of
operating costs being paid in Rand. The approximate effect on the Group`s
results of a 10% movement in the Rand to US Dollar 2008 year average exchange
rate would be as follows:
EBIT +- $125m
Profit for +- $74m
the year
EPS (cents) +- 47.3c
These sensitivities are based on 2008 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 PGM`s and therefore
any change in prices will have a direct effect on the Group`s trading
results.
On base metals, which are by-products of PGM production, hedging is
undertaken where the Board determines that it is in the Group`s interest to
hedge a proportion of future cash flows. Policy is to hedge up to a maximum
of 75% of the future cash flows from the sale of Nickel and Copper looking
forward over the next 12 to 24 months. The Group has undertaken a number of
hedging contracts on Nickel and Copper sales using outright forward
contracts. These are disclosed in note 21 to the financial statements.
The approximate effects on the Group`s results of a 10% movement in the 2008
financial year average market prices for Platinum (Pt) ($1,655 per ounce) and
Rhodium (Rh) ($7,614 per ounce) would be as follows:
Pt Rh
EBIT +- $120m +- $72m
Profit for +- $71m +- $42m
the year
EPS (cents) +- 45.5c +- 27.1c
The above sensitivities are based on 2008 volumes and assume all other
variables remain constant. They are estimated calculations only.
Fiscal risk
During the course of 2009, the South African Government will be introducing a
new Mining Royalty. The Royalty Bill has been approved by Parliament and is
awaiting final signature by the President of South Africa before it is
enacted. The Royalty will be introduced with effect from 1 May 2009 and will
be calculated based on a percentage of Gross Sales. The percentage is
calculated using a formula depending on whether the company sells
concentrate, ore or refined products. The Royalty formula is subject to a
minimum royalty rate of 0.5 %, which will be applicable if the formula
calculation results in a rate of less than 0.5%.
The formula for refined products is:
% of Gross Sales = Adjusted EBIT* x100
Gross Sales x 12.5
* Adjusted EBIT for the purpose of the Royalty calculation is statutory EBIT
adjusted for, amongst other things, depreciation and a capital deduction
based on Mining Tax rules.
Alan Ferguson
Chief Financial Officer
18 November 2008
Date: 18/11/2008 09:00:01 Produced by the JSE SENS Department.
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