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LON - Lonmin Plc - Interim Results Announcement Part 1
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")
NOT FOR DISTRIBUTION OR RELEASE, DIRECTLY OR INDIRECTLY, IN OR INTO THE UNITED
STATES, AUSTRALIA, CANADA, JAPAN.
11 May 2009
Lonmin Plc
Interim Results Announcement
Lonmin Plc, ("Lonmin" or "the Company"), the world`s third largest Platinum
producer, today announces its Interim Results for the half year period ending
31 March 2009.
HIGHLIGHTS
- Solid operational performance:
- Sales of 311,853 ounces of Platinum, ahead of expectations
- Mining performance improving with higher development rates
- Process Division delivered excellent performance, supported by more
stable operations
- Continued focus on improving safety performance:
- LTIFR improved 6% from the end of 2008 to 5.92 per million man hours
worked
- Restructuring exercise implemented:
- 6,400 full time employees and contractors left the business at
Marikana and Limpopo during the period, with a further 600 employees
to leave early in the second half of the year
- One-off costs of $44 million
- Expected annualised cost benefits of $90 million
- Outlook for 2009:
- Maintaining 2009 full year sales guidance of around 700,000 Platinum
ounces
- Expecting Rand-based gross operating costs for 2009 to be lower than
incurred in 2008
- Challenges remain in Mining, despite improvements made
- Actions taken to strengthen financial position:
- Completed $575 million debt refinancing package, significantly
extending tenure of credit facilities
- Interim dividend passed, due to lack of profitability and continuing
market uncertainty
- Underwritten 2 for 9 Rights Issue to raise approximately $457 million
launched today:
- Significantly improves Lonmin`s ability to withstand potential
adverse movements in external factors, including PGM prices and Rand
/ US dollar exchange rates
- Significantly reduces Lonmin`s borrowings and annual interest charge
- Builds stronger platform to take advantage of market upturn when it
comes
Ian Farmer, Chief Executive, commented:
"With the PGM demand outlook remaining uncertain, we have acted decisively to
achieve improvements in productivity, reduce our cost profile and to adopt a
more conservative capital structure.
"We have successfully completed a major restructuring programme at our
operations which will improve our cost profile. We have also strengthened our
financial position by extending our banking facilities, thereby reducing our
financing risk. Additional financial headroom and enhanced balanced sheet
flexibility will be delivered through the Rights Issue launched today.
"Long term PGM market fundamentals remain attractive and it is crucial that we
continue to improve the health of the business whilst maintaining our range of
growth options so that we can react quickly to the market rebound when it
comes."
FINANCIAL HIGHLIGHTS
Continuing Operations
Six Months to 31 March 2009 2008
Revenue $m 436 907
Underlying operating (loss) $m (98) 371
/ profit (i)
Operating (loss) / profit $m (142) 368
(ii)
Underlying (loss) / profit $m (113) 399
before taxation (iii)
(Loss) / profit before $m (196) 396
taxation
Underlying (loss) / earnings cents (50.2) 132.5
per share (iii)
(Loss) / earnings per share cents (71.2) 181.1
Declared dividend per share cents 0.0 59.0
Net debt (iv) $m (449) (506)
Gearing (v) % 17% 17%
NOTES ON FINANCIAL HIGHLIGHTS
i) Underlying operating (loss) / profit is defined as operating profit
excluding special items (see note (iii))
ii) Operating (loss) / profit is defined as revenue less operating expenses
before impairment of available for sale financial assets, net finance
costs and share of profit of associate and joint venture.
iii) Underlying (loss) / profit is calculated on profit for the period
excluding one-off restructuring and reorganisation costs, impairment of
available for sale financial assets and foreign exchange on tax balances.
For prior periods, special items also includes profits on disposal of
subsidiaries, effects of changes in corporate tax rates, revaluations and
impairment of assets, takeover bid defence costs and pension scheme
payments relating to scheme settlements.
iv) Net debt as defined by the Group comprises cash and cash equivalents,
bank overdrafts repayable on demand, interest-bearing loans and
borrowings.
v) Gearing is calculated on the net debt attributable to the equity
shareholders of the Group divided by the total of the net debt
attributable to the Group and equity shareholders` funds.
ENQUIRIES:
Investors / Analysts:
Rob Gurner +44 (0) 207 201 6050
Head of Investor Relations
Media:
Cardew Group +44 (0) 207 930 0777
Anthony Cardew / Rupert Pittman
Financial Dynamics +27 (0) 21 487 9000
Dani Cohen / Ravin Maharaj
This press release is available on www.lonmin.com. A live webcast of the
Interim Results presentation starting at 09.30hrs (London) on 11 May 2009 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.
Disclaimer
This document does not constitute an offer to sell, or the solicitation of an
offer to buy or subscribe for, securities of Lonmin Plc (the "Company") in the
United States or in any other jurisdiction.
The Securities have not been and will not be registered under the US
Securities Act of 1933, as amended (the "Securities Act"), and may not be
offered or sold in the United States unless registered under the Securities
Act or an exemption from such registration is available. No public offering
of Securities of the Company is being made in the United States.
No communication or information relating to the offer of securities of the
Company (the "Securities") (the "Offering") may be disseminated to the public
in jurisdictions other than the United Kingdom, South Africa or the Republic
of Ireland where prior registration or approval is required for that purpose.
No action has been taken that would permit an offer of the Securities in any
jurisdiction where action for that purpose is required, other than in the
United Kingdom, the Republic of South Africa or the Republic of Ireland.
This document has not been approved by the Financial Services Authority or by
any other regulatory authority. This document is an advertisement and not a
prospectus and investors should not subscribe for or purchase any securities
referred to in this document except on the basis of information provided in
the prospectus to be published by the Company in due course. Copies of the
prospectus will, following publication, be available from the Company`s
registered office at Grosvenor Place, London, SW1X 7YL United Kingdom.
Certain statements made in this announcement constitute forward-looking
statements. Forward-looking statements can be identified by the use of words
such as "may", "will", "expect", "intend", "estimate", "anticipate",
"believe", "plan", "seek", "continue" or similar expressions. All statements
other than statements of historical facts included in this document,
including, without limitation, those regarding the Group`s financial position,
business strategy, dividend policy, estimated cost savings, production and
sales targets, timing of ramp up of shafts, plans and objectives of management
for future operations (including development plans and objectives relating to
the Group`s products, production forecasts and reserve and resource
positions), are forward-looking statements. By their nature, such forward-
looking statements involve known and unknown risks, uncertainties and other
factors, many of which are outside the control of the Group and its Directors,
which may cause the actual results, performance, achievements, cash flows,
dividends of the Group or industry results to be materially different from any
future results, performance or achievements expressed or implied by such
forward-looking statements. As such, forward-looking statements are no
guarantee of future performance.
Chief Executive`s Review
Introduction
The end markets for PGMs remained very challenging during the first half of
the 2009 financial year, and our financial results during the period reflected
these challenges. However, as a result of the actions we have taken, we are
well positioned for the second half of 2009. As a result, and despite
significant ongoing restructuring activity across our operations, we are
maintaining our sales guidance for the 2009 financial year of around 700,000
Platinum ounces.
1. Short term demand outlook remains uncertain
Whilst the long term fundamentals of PGMs remain strong, we anticipate no near
term relief to the current challenging market conditions. For Platinum in
particular, despite the moderate rise in price during the latter part of the
period, an anticipated short term improvement in jewellery demand coupled with
investment interest is not enough to compensate for the ongoing weakness in
automotive demand. This continuing market downturn had a major impact on
pricing during the period, with our average PGM basket price during the first
half of 2009 declining significantly to $699 per ounce, from $1,558 per ounce
in the prior year period, a 55% reduction. As a result, our cash flows and
profitability remain under pressure.
2. Focusing on production delivery
We are gradually stabilising and improving the key elements of the business
including development, grade and output. However, improving the performance of
our Mining business will take time to accomplish and the full benefits from
our improvement programmes are not expected to be fully realised until after
2010. At the Process Division, the emphasis has been on operational stability
and, in this regard, we successfully completed a re-build of the Number One
furnace during the period to improve the vessel`s consistency of delivery.
3. Maintaining our focus on safety
The safety of our employees remains of paramount importance and our emphasis
on safe working practices and procedures therefore remains at the top of our
agenda.
4. Further improving our position on the industry cost curve
A total of around 6,400 full time employees and contractors at Marikana and
Limpopo have left the business during the first half, with a further 600 to
follow in the second half of the 2009 financial year. Less than 300 of the
full time employees who have left the business already were forced
retrenchments. At Marikana, we have reduced our headcount by around 4,400 full
time employees and contractors, ended our opencast operations and we are
currently in the process of shutting down a small shaft and a further five
half levels across the property. At Limpopo, we have placed the
underperforming Baobab shaft on care and maintenance, resulting in around
2,000 full time personnel and contractors leaving the company. These
reductions in headcount, taken together with the elimination of non-value
adding ounces and initiatives implemented to reduce our non-labour cost base,
will enable us to re-align our cost base and to improve our position on the
cost curve. As a result of the restructuring programme, we expect to achieve
annualised cost savings of $90 million per annum.
5. Adopting a more conservative capital structure and strengthening our
financial position
Lonmin`s profitability and cash flows remain highly geared to the PGM pricing
environment and movements in the Rand / US Dollar exchange rates. We therefore
believe it prudent to strengthen our financial position and adopt a more
conservative capital structure. We have refinanced $575 million of our short
term borrowing commitments and today`s launch of an underwritten GBP457
million Rights Issue will give us greater financial headroom, with enhanced
balance sheet flexibility.
6. Positioning Lonmin for the future
In the short term, despite significant ongoing restructuring activity across
our operations, we still expect to achieve our previous Marikana sales
guidance for the 2009 financial year of around 700,000 Platinum ounces. In the
medium to longer term, we have a portfolio of growth options in place which
can be accessed when the market recovers.
1. Short term demand outlook remains uncertain
PGM pricing and markets during the first half of the 2009 financial year
PGM prices declined significantly during the first three months of our 2009
financial year. Platinum fell to a low of $756 per ounce on 27 October 2008
and Rhodium declined to a low of $1,000 per ounce on 25 November 2008. Prices
recovered somewhat in the second quarter, with the Platinum price closing the
period at $1,129 per ounce driven primarily by increasing investment and
jewellery demand. The Rhodium price closed the period at $1,175 per ounce.
The steep fall in prices at the start of the period was mainly a result of the
deteriorating conditions in the automotive sector, driven by a dramatic
reduction in global motor vehicle sales and exacerbated by de-stocking and
selling of inventories. This had a particularly significant impact on the
Rhodium price as some 85% of this metal is used in the automotive sector.
Short term demand outlook
Automotive demand makes up around 55% of total Platinum demand. We anticipate
ongoing short term weakness in the sector and we are not planning for any
significant recovery in PGM prices in the next twelve months.
We are expecting some continued recovery in jewellery demand, which currently
contributes around 20% of Platinum demand, in the second half of 2009,
supported by the growing Chinese market. Investment interest in Platinum has
resulted in stocks held by ETFs being at record high levels.
Medium to long term demand outlook
We believe that Platinum and PGM market fundamentals remain positive in the
medium to long term.
Demand for motor vehicles is expected to recover, supported by anticipated
significant medium to long term demand growth in emerging markets. In
addition, further tightening of emissions standards is expected to continue to
increase PGM loadings in autocatalysts.
The recent dramatic reductions in pricing are expected to have a positive
effect on demand from jewellery manufacturers. The Chinese jewellery market
is expected to double in size by 2011, which will help to underpin demand for
Platinum and Palladium in the jewellery sector.
These factors, combined with the significant curtailing of investment in new
projects which are focused on both replacing mines that are coming to the end
of their lives and on growing production, give us confidence in the medium and
longer term outlook for PGM pricing.
2. Focusing on production delivery
Throughout the business we are placing an increased emphasis on operational
stability and implementing a number of programmes to improve our performance.
Whilst the benefits of these plans will take some time to be fully realised,
particularly in our Mining business, we started to see initial signs of
performance improvement during the first half of 2009.
Mining
There are several ongoing initiatives designed to stabilise operations and to
improve productivity at our Mining business. Our operational management team
remains focused on underground development and grade improvements and we have
completed site-specific mining extraction strategies at various major shafts
at Marikana. We are improving our labour management, with a particular focus
on tackling absenteeism and we saw an improvement in this area during the
first half of 2009. We have also initiated hybrid mining at Saffy during the
period with a view to achieving better productivity from this important new
shaft, as well as continuing with a fully mechanised proof-of-concept project
at Hossy shaft. We are currently in the process of shutting down a small
decline shaft and a further five half levels, all of which are uneconomic in
today`s markets, across the property, after an evaluation of the implication
of such decisions on the long term mine plan.
All of these actions are being delivered against the backdrop of a major
restructuring programme at our Marikana operation and the placing of the
Limpopo operation on a care and maintenance basis. Further details on this are
noted below.
Total production during the first half of the 2009 financial year was impacted
by a number of factors relating to our planned elimination of non-value adding
ounces. These included the ending of production at our Marikana opencast
operations at the end of the 2008 calendar year and the winding-down towards
care and maintenance of our Baobab shaft at Limpopo which also suffered a 21
day wage-related strike in the first quarter of the 2009 financial year. As a
result, total tonnes mined during the half year period were 5.8 million
tonnes, a 3% decline from 2008.
Marikana underground operations - conventional production
At our conventional underground Marikana operations we mined a total of 4.5
million tonnes of ore during the first half of the 2009 financial year, a 3%
year-on-year increase. Production at our conventional sections increased in
both the first and second quarters of the 2009 financial year from the same
periods in 2008, despite a number of safety shutdowns during the period. We
received fourteen Section 54 notices at Marikana during the first half of the
2009 financial year, compared to six Section 54 notices in the first half of
2008. Operational management also initiated a number of safety-related
stoppages in the first half of 2009.
Marikana underground operations - development
We continue to invest in improving ore reserve development at our Marikana
operations. Our efforts are starting to deliver improvements in this area,
with immediately available ore reserves at Marikana at the end of the first
half of the 2009 financial year improving to 12.8 months, from 11.4 months at
the end of September 2008. Looking ahead, we expect to attain an appropriate
level of ore reserve development for our operations during 2010.
The total working cost spent on development rose by 31% to around $46 million
in the period.
Marikana underground operations - head grade
Overall milled head grade during the first half of the 2009 financial year
improved 2% year-on-year to 4.58 grammes per tonne (5PGE+Au), mainly due to
the planned reduction in the higher levels of low grade opencast stockpiles
processed during the first half of the 2008 financial year which had an
adverse impact on grade at that time.
Underground milled head grade during the first half of the 2009 financial year
was 3% lower year-on-year at 4.57 grammes per tonne (5PGE+Au) as a result of
an increased percentage of development ore coming from Hossy and Saffy and
unplanned dilution on the UG2 reef horizon, as well as a lack of flexibility
in face availability on the Merensky reef horizon, where some localised lower
grade areas were encountered, particularly during the first quarter.
In addition, our continued emphasis on improving our safety standards also had
an adverse impact on grade, as a result of our decision, in some areas of the
property, to extract an extra layer of waste rock when stabilising the hanging
wall. Whilst this enables safer production, it does impact underground grade
as a result of the increased amount of dilution.
Management actions initiated during the period started to have an impact on
underground grade, as evidenced by a 4% sequential improvement in underground
head grade delivered in the second quarter of the 2009 financial year.
Marikana underground operations - update on Saffy & Hossy
At our 2008 Final Results, published on 18 November 2008, we announced that we
were changing our approach to mechanisation. This involved re-configuring the
Saffy shaft from a fully mechanised to a hybrid mining methodology, with
mechanised development and conventional stoping. This includes transferring
suites of mechanised equipment to Hossy shaft, which is being run as a fully
mechanised proof-of-concept project. Production from Saffy and Hossy shafts
continued to ramp up in the first half of the year, with tonnages at these
shafts and our other smaller mechanised section increasing to 771,000 tonnes
of ore, up 40% from the first half, and up 28% from the second half, of 2008.
In the second half of 2009 there will be some significant challenges at Saffy
relating to recruiting, transferring, training and stabilising new crews at
the shaft. Management has put in place a number of actions to ensure a smooth
transition process. Despite the challenges in achieving our expectations for
production at Saffy we fully expect that the hybrid mining method at Saffy
shaft will bring productivity and cost benefits as the shaft ramps up towards
capacity of 200,000 reef tonnes per month, from monthly production of around
58,000 tonnes at the end of the first half of the 2009 financial year. We
expect Saffy to reach 80,000 tonnes per month by September 2009 and to achieve
full shaft capacity in 2012.
The mechanisation project at Hossy shaft continues to make progress. We
continue to learn a great deal about the equipment, the mining cycle and the
processes relating to fully mechanised production. The shaft produced around
53,000 tonnes per month at the end of the first half of the 2009 financial
year, with average productivity per month per suite of equipment increasing by
19% from the average during the second half of 2008. The shaft`s performance
improved during the first half of 2009, and by March, productivity reached
1,100 square metres per month per suite of equipment, ahead of the average for
the first six months of 2009. As previously announced, we will review the
performance of Hossy at the end of the 2009 financial year, and make a
decision on the future mining strategy at that time.
Marikana opencast operations - production
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 contract-based part of
the business as at the end of the 2008 calendar year. As a result, opencast
production at our Marikana operations during the first half of the 2009
financial year declined to 229,000 tonnes compared to 624,000 in the prior
year period. We expect to process the remainder of our opencast stockpiles
during the second half of the 2009 financial year.
Pandora - production
Our share of mined production from the Pandora joint venture during the first
half of 2009 increased 7% from 2008 to 181,000 tonnes mined, with underground
operations producing 71,000 tonnes, a 4% increase from 2008. The Pandora
opencast operations produced 110,000 tonnes, a 9% increase from 2008, but we
expect opencast production to decline in the second half of the year, as the
remaining pit is mined out.
Lonmin purchases 100% of the ore from the Pandora joint venture and this ore
contributed 25,754 saleable ounces of Platinum in concentrate and 47,310
saleable ounces of total PGMs in concentrate to our production, increases of
44% from 2008. The Pandora joint venture contributed $5.7 million of profit
after tax for our account in the first half of the 2009 financial year.
Limpopo
We announced at our 2008 Final Results that we intended to discuss the future
of Baobab shaft at Limpopo with our workforce and Unions, given that in recent
years the mine has not delivered and that we believed the operation to be
uneconomic. Following a consultation process with the recognised unions and
our workforce, the shaft was placed on care and maintenance and is no longer
in production. Prior to this, during the first quarter of the 2009 financial
year, we experienced a wage-related strike at the operation which impacted
production at that time. As a result of these factors, production at Limpopo
fell to 87,000 tonnes during the first half of the 2009 financial year from
264,000 tonnes during the prior year period. Metal in concentrate produced
from Limpopo in the period was 3,770 platinum ounces and a total of 8,679 PGM
ounces.
Process Division
Our focus at the Process Division remains on improving the stability and
productivity of each operating unit. During the first half of the 2009
financial year, our Process Division delivered an excellent performance and,
ahead of our original expectations, processed the majority of the inventory
built up during the planned re-build of the Number One furnace in the first
quarter.
Concentrators
The concentrators produced a total of 338,142 saleable ounces of Platinum in
concentrate in the first half of the 2009 financial year, a 3% year-on-year
decline, mainly as a result of the planned ending of production at our
Marikana opencast and Limpopo operations.
Overall concentrator recoveries improved during the first half of the 2009
financial year to 80.0% from 78.8% in the first half of 2008, partly due to
lower levels of low grade opencast stockpiles being processed during the first
half of the 2009 financial year compared to the prior year period.
Underground recoveries fell to 80.8%, from 81.5% in the first half of the 2008
financial year, as a result of undertaking extensive maintenance on some of
our Marikana concentrators in the first quarter of the 2009 financial year, as
well as ore distribution being skewed towards the eastern side of the Marikana
property, which has lower recovery potential than ore sourced from the western
side.
Smelter
We successfully completed a rebuild of the Number One furnace in January 2009,
during which time we installed split waffle coolers with graphite tiles on the
upper coolers, a third matte tappe hole to increase tappe hole life and a
redesigned refractory below the waffle coolers. The redesign allows for hot
repairs of the copper coolers. As a result, we should be able to increase the
availability and reliability of the furnace, so that it will operate on a more
continuous basis, with fewer planned maintenance shut downs.
As a result of the ending of production at Limpopo and some timing issues on
increasing our output of Merensky ore, the base metal content required to
maintain consistent feed delivery into the Number One furnace is lower than we
would like. Therefore to maintain the optimal balance of base metals in the
feed we have taken the decision to acquire a small amount of concentrate, with
high base metal content, from a third party. This will help to ensure
stability of the feed stock through the Smelter in the second half of the 2009
financial year.
Refineries
Our refineries performed well during the half year period. Total refined
production for the first half of the 2009 financial year was 318,219 ounces of
Platinum and 606,145 of total PGMs, both up 13% from the same period in 2008,
partly reflecting the continued improvement in performance from our core
Marikana underground operations during the first half of the 2009 financial
year. In addition, refined production during the first half of the 2008
financial year was adversely impacted by a build up of metal in process,
partly due to the planned inspection and repair of the Number One furnace,
following the Eskom power outage in January 2008. Final metal sales for the
first half of the 2009 financial year were 311,853 ounces of Platinum and
583,873 ounces of total PGMs, up 8% and 5% respectively on the same period in
2008.
3. Maintaining our focus on safe production
The safety of our employees remains of paramount importance. Hence, whilst
taking action to improve our productivity performance and cost profile across
the business, we have made great efforts to continue our strong focus on safe
working practices and procedures.
Safety
Our safety performance continued to improve in the first half of 2009, with
lost time injury frequency rate improving by 6% from the end of the 2008
financial year to 5.92 per million man hours worked, as we intensified our
focus on safe behaviour and visible leadership. As further evidence of
improving safety performance, fall of ground incidents, historically the most
common cause of serious injuries in the industry, reduced to 35 incidents
during the first half 2009, from 38 during the same period in 2008.
The economic impact of safety continues to grow in significance. We
experienced 14 safety shutdowns during the first half of the 2009 financial
year, as a result of government-instituted Section 54 notices, whilst a number
of stoppages were initiated by our operational management. We successfully
cleared all Section 54 notices received during this period.
Increasing safety standards also have an impact on underground grade, as
discussed above, as well as on costs, given the increased investment in ground
support needed to maintain safe production.
We regrettably suffered two industrial fatalities as a result of accidents at
our Marikana operations during the six months. We extend our sincere
condolences to the families and friends of our colleagues Mr Mantelena Mvela
and Mr Lorenzo Myburgh.
The Laduma "Score a Goal for Safety" campaign has been revitalised and rolled
out across all operations, with the aim of consistently reinforcing safety
messages while rewarding workers for achieving certain safety objectives and
attending regular safety information and education sessions.
Sustainability
We have also maintained our focus on sustainable development and, during the
first half of the 2009 financial year, we continued to make progress towards
our targets in this area. All business units have continued to retain their
ISO 14 001 environmental management system certification and we have furthered
our efforts to enhance and integrate management plans to achieve our targets.
Importantly, we have maintained our expenditure on projects relating to our
Social and Labour plan commitments.
As at March 2009, the participation in Lonmin`s anti-retroviral treatment
programme has increased by 15% since the end of 2008, to 1,020 patients. To
date, as a component of the Lonmin-IFC Technical Assistance Programme, we have
trained 56 active home based care givers and 57 community based peer educators
and support in excess of 1,200 home based care clients. Tuberculosis, in
addition to the multi-drug resistant strain within the AIDS epidemic, however
remains a concern with an increasing prevalence rate during the last six
months. We have embarked on additional tuberculosis awareness campaigns at
the workplace. With an effective hearing diagnosis and conservation
programme in place, we have continued to experience a significant decrease in
noise induced hearing loss cases.
We support the delivery of quality education in our communities by
supplementing the school nutrition programme of the Department of Education at
a total of 28 schools, benefiting more than 15,000 primary school learners
with at least one balanced meal per day. The Lonmin-IFC Technical Assistance
Programme to develop and promote suppliers and service providers within the
communities around our operations has progressed well, with various components
from the Lonmin Business Development Centre initiative being implemented,
including business training, daily monitoring and mentoring of local
companies.
4. Further improving our position on the industry cost curve
At our 2008 Final Results, we outlined the action plans for reducing our cost
base and focusing our efforts on the elimination of non-value adding ounces.
Major restructuring programme implemented
To ensure these dual objectives were met, management took the decision to
implement a number of initiatives to reduce both our labour and non-labour
cost base. The most significant of these initiatives was a major restructuring
programme at both our operating facilities, Marikana and Limpopo, during the
first half of the 2009 financial year. This programme was initiated with a
view to reducing our workforce to a more appropriate and cost efficient level
and at the same time we aimed to eliminate areas of high cost production. Our
goal was to complete these programmes as quickly as possible to minimise the
inevitable uncertainty relating to the restructuring for our employees.
In February 2009, we reached a framework agreement with the recognised Unions,
the National Union of Mineworkers, Solidarity and the United Association of
South Africa, regarding the down-sizing of a portion of our workforce. By the
end of March 2009, despite challenging circumstances for our workforce and
their families, the Union representatives involved with the negotiations and
the Lonmin team implementing the programme, we effectively completed the
programme. As a result a total of around 6,400 employees, including 2,250
contractors have left the Company since 1 October 2008, with a further 600
expected to leave during the second half of the 2009 financial year. In
addition we have reduced management headcount from the Vice President level
downwards.
At Marikana, around 4,400 full time employees and contractors have left the
business. We ended opencast operations by 31 December 2008 and we are in the
process of closing down a small underground decline shaft and a further five
uneconomic half levels at the property.
At Limpopo we are now running our historically high cost Baobab shaft on a
care and maintenance basis. Around 2,000 full time employees and contractors
have left, or are in the process of leaving, the business. We are retaining
around 55 staff in order to ensure the shaft and associated equipment is kept
in good condition during the care and maintenance programme. So far, the
restructuring programme at both Marikana and Limpopo has resulted in less than
300 forced retrenchments, which is a credit to both our teams leading this
exercise and the Unions with whom we have constructively worked throughout the
process. Whilst the Unions have understandably executed their mandate to
protect the interests of their members, they have displayed an appreciation of
our efforts to ensure the long term sustainability of the Company.
As a result of the restructuring programme, we expect to achieve annualised
cost savings of $90 million per annum, including the savings from those
employees who left through natural attrition. The initial cost benefits are
expected to come through as early as the second half of 2009. However, there
is a one-off cost of $44 million relating to the whole restructuring
programme, accounted for as a special item in the first half results for 2009,
and of this amount approximately $35million related to the cost of employees
leaving the Company.
Cost performance during first half of 2009 and outlook for the second half
As expected, costs during the first six months of 2009 were substantially up
on the same period in 2008. Our C1 cost per ounce produced during the first
half of 2009 was impacted by higher costs, lower production volumes as well as
disruption relating to the restructuring programme and increased 27% over the
same period last year to R6,956 per PGM ounce. It should be noted however that
costs rose significantly in the second half of 2008 as Mining cost inflation
accelerated rapidly. As a result, on a sequential half-yearly basis, the C1
cost per ounce fell by 1%. Further information on our cost performance in the
first half of the 2009 financial year, including details on C1 costs and gross
cost movements is discussed in the Financial Review of this report.
Encouragingly, our monthly cost trend towards the end of the first half of
2009 showed a clear improvement, with costs trending down, as a result of the
many initiatives put in place to better manage our cost base. This is prior to
seeing the real impact of the restructuring process described above.
We therefore expect this positive trend to accelerate into the second half of
the 2009 financial year as cost benefits from the restructuring programme
start to come through. We also expect to see benefits from the declining
prices of key consumables, including steel and explosives. Whilst there has
been some benefit in the first half more significant savings are forecast for
the second half.
Given the actions taken to improve our cost performance, supported by the
positive cost trends already coming through in the latter part of the first
half of the year, we are today updating our cost guidance for the 2009
financial year. Previously, we had targeted our Rand-based gross operating
costs for the year to increase at a rate well below South African inflation.
We are now expecting a better cost performance for the 2009 financial year
than previously envisaged, with Rand-based gross operating costs for 2009 now
expected to be lower than incurred in 2008. This means that costs in the
second half are expected to be significantly lower than costs in the prior
year period.
5. Adopting a more conservative capital structure and strengthening our
financial position
Our profitability and cash flows remain uncertain, as they are highly geared
to two significant external factors - namely, the PGM pricing environment and
movements in the Rand / US dollar exchange rate.
Given the potentially significant impact of these factors on our financial
performance, combined with ongoing economic uncertainty and difficulties in
credit markets, a key priority has been strengthening our financial position
and seeking to adopt a more robust capital structure.
Debt refinancing
With this in mind, an important objective during the first half of the 2009
financial year was to lengthen the tenure of our short term committed credit
facilities. We have successfully achieved this objective, having completed a
$575 million debt refinancing package during the period. This package
comprises a $250 million revolving credit facility and $150 million amortising
term loan both maturing in November 2012 in the UK and a $175 million
revolving credit facility in South Africa, maturing in November 2010.
This refinancing significantly reduces our short term financing risk and, with
total committed facilities of $975 million we continue to have adequate debt
facilities for this business. Further details, including covenant
information, maturity profiles and interest rates for the refinanced
facilities are outlined in the Financial Review of this report.
Rights Issue
We believe we have a high quality asset base, with growth and low cost
potential and we remain confident of the long term fundamentals of the PGM
industry. However, in light of the potentially significant impact of PGM
pricing and Rand / US dollar exchange rates on the Group`s financial
performance, combined with continuing economic uncertainty and difficulties in
credit markets, we believe it is currently appropriate to adopt a more
conservative capital structure.
Against this background, we have therefore concluded that it is prudent and
appropriate to raise equity now, by way of a Rights Issue. We believe this
will improve our ability to withstand potential adverse movements in the PGM
pricing environment and/or Rand / US dollar exchange rate and provide us with
incremental headroom in respect of our financial covenants.
In addition, our lower level of borrowings and annual interest costs, together
with our existing committed debt facilities, will provide enhanced financial
flexibility allowing us to take advantage of investment and growth
opportunities at the appropriate time, which should enable Lonmin to generate
attractive returns in the future.
Total expected net proceeds from the Rights Issue of approximately $457
million will be used to reduce drawn borrowings under our existing credit
facilities. The UK issue price of GBP9.00 per new share represents a discount
of 39.6% to the theoretical ex-rights price (TERP) and a discount of 44.5% to
the closing price of GBP16.22 per share on Friday 8 May. The South African
issue price of ZAR 113.04 per new share represents a discount of 39.5% to the
TERP and a discount of 44.4% to the closing price of ZAR 203.30 per share on
Friday 8 May.
The Rights Issue is being fully underwritten by Citi and J.P. Morgan
Securities, save in respect of new shares which Xstrata, M&G Investment
Management Limited and the Company`s Directors have irrevocably committed to
take up, which is around 36% of the new shares to be issued in the Rights
Issue. Further details relating to the Rights Issue are outlined in a separate
announcement published today.
Dividend
In line with our focus on stringent cash conservation and balance sheet
management, the Board continues to take a conservative but appropriate stance
towards the distribution of dividends. With this in mind, the Board has
decided to pass an interim dividend for the first half of the 2009 financial
year. This follows the Board`s decision in November 2008 to pass the final
dividend for 2008 financial year. Our dividend policy remains that the payment
of dividends is based on reported earnings for the period, whilst taking into
account the projected cash requirements of the business. Given our ongoing
confidence in the longer term potential of Lonmin, the quality of its asset
base and the excellent fundamentals of the PGM industry, the Board will review
the matter of dividend distributions and resume payments as soon as conditions
allow.
6. Positioning Lonmin for the future
The objective of all the actions we have implemented during the last six
months is to ensure Lonmin is well positioned to react to a market
improvement.
Outlook for the 2009 financial year
We maintain our sales guidance for the 2009 financial year of around 700,000
Platinum ounces.
Platinum sales in the first half of the 2009 financial year were around 45% of
the full year Platinum sales target for our core Marikana operations, which we
first published in November 2008, and this was ahead of our initial
expectations for the period. The key driver of this was the performance of the
Process Division, where metal in process inventory was drawn down faster than
had been expected following the Number One furnace rebuild during the first
quarter of the 2009 financial year.
For the second half of the 2009 financial year, management will be focused on
minimising the possible disruption resulting from the execution of our
significant restructuring programme, particularly as crews are redeployed
around the Marikana property, and the closure of a small uneconomic decline
shaft and a further five uneconomic half levels at Marikana as part of this
restructuring programme. In addition, the continuing ramp up of Saffy shaft is
a key area of focus. It is anticipated that any impact of these factors on
production and sales will be compensated for by the normalising of metal in
process inventory from the Process Division, with an expected weighting
towards the fourth quarter of the financial year.
With respect to costs, our previous guidance was that Rand-based gross
operating costs would increase by less than South African inflation, which was
around 11% at that time. Following the actions taken we are now targeting Rand-
based gross operating costs to be lower than last year`s level.
Future growth optionality
In positioning the business to be able to react positively to a market
recovery, when it comes, it is crucial that we maintain a range of growth
options from which to develop the business in the future.
In the short term, we aim to access growth from our core asset base at
Marikana, supported by incremental capital investment. Specifically, short
term growth is expected to come from Saffy and Hossy shafts, which are
currently ramping up towards full capacity. In addition, K4 shaft is currently
being equipped and developed, with a view to producing initial reef tonnes in
2011. These three shafts will provide the basis of short term production
growth at Marikana. The Pandora project also represents an additional growth
option, adjacent to our core Marikana operation. We are in the feasibility
study stage of this expansion programme, which continues to run on a self-
funded basis at this time.
Looking further into the future, our major long term growth projects at
Akanani and Limpopo remain on care and maintenance. We plan to give an update
on our view of the longer term growth potential of the business at our Final
Results for the 2009 financial year.
Board Changes
On 29 January 2009, we announced the retirement of Sir John Craven as Chairman
of Lonmin and the Board is extremely grateful to Sir John for his contribution
to the development of the Company since his appointment in 1997.
Subsequently, on 23 March 2009, we announced the appointment of Roger
Phillimore as Lonmin`s new Chairman. Roger has a deep knowledge of both the
Company and the industry, and has already made a significant contribution in
his new role, at a time when the Company is going through a number of
significant changes. The Board is extremely appreciative of his ongoing
support for Lonmin`s executive and operational management as we look to
continue to improve the health of the business.
Incwala
The Historically Disadvantaged South African shareholders of Incwala Resources
(Pty) Ltd, our Black Economic Empowerment partner in which we hold a 24%
stake, have a refinancing event in September 2009. If these shareholders are
unsuccessful in this regard, there is a possibility that Lonmin could be
called upon under guarantees given at the time of the formation of Incwala.
Further details on our contingent liabilities in this regard can be found in
Note 10 in the Notes to Accounts in this report.
Employees` contribution
The first half of the 2009 financial year has been a particularly challenging
period for our employees, contractors and community members, given the
unsettling impact of global economic conditions and the restructuring
programme. I would like to thank them all for continuing to deliver safely and
diligently at this difficult time, their contribution and hard work is greatly
appreciated.
Ian Farmer
Chief Executive
10 May 2009
Financial Review
Introduction
The first half of the 2009 financial year was impacted by four significant
factors:
- Pricing: as a result of the global economic downturn and its impact on
the PGM demand markets during the period, the pricing environment was
significantly weaker than the first half of 2008. This had a major
impact on our revenues during the first half of 2009, down $471m or
51.9%, with the average PGM basket price 55.1% lower than the prior
period;
- Costs: total Rand costs in the first half of 2009 were significantly
higher than the first half of 2008, however, costs were lower than the
second half of 2008 despite the 12.5% pay award which took effect from 1
October 2008. In Dollar terms the Company benefited from the Dollar
strengthening against the Rand by approximately 40% versus the
comparative period;
- Restructuring: we expect the positive trend on costs to continue into the
second half of 2009, enhanced by benefits arising on the completion of
the significant restructuring programme at our operations, as discussed
in the Chief Executive`s Review in this Report. This restructuring
programme has incurred a one-off cost of $44 million, but is expected to
deliver annualised cost benefits of approximately $90 million;
- Balance sheet: we completed the refinancing of $575 million of existing
credit facilities which has extended, albeit at some cost, the debt
maturity profile.
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 2008.
Analysis of results
Income Statement
The underlying operating profit for the six months to 31 March 2008 of $371
million has fallen to a loss of $98 million in the six months to 31 March
2009. An analysis of the movement between the periods is given below:
$m
Six months to 31 March 2008 reported operating profit 368
Six months to 31 March 2008 special items 3
Six months to 31 March 2008 underlying operating profit 371
PGM price (459)
PGM volume 41
PGM mix (41)
Base metals (12)
Cost changes (including foreign exchange impact) 2
Six months to 31 March 2009 underlying operating profit (98)
Six months to 31 March 2009 special items (44)
Six months to 31 March 2009 reported operating profit (142)
Revenue:
The PGM market was extremely strong in the first half of the 2008 financial
year supported by supply-side issues in the industry, which were exacerbated
by the power constraints experienced in the period, and a strong demand
environment. This enabled the Group to achieve a PGM basket price of $1,558
per ounce for this period (with Platinum at $1,578 per ounce and Rhodium at
$7,121 per ounce).
The worldwide economic downturn began in the second half of financial year
2008 and this has had a significant impact on the Group in the six months to
31 March 2009. Vehicle manufacturing is the principal demand market for PGM
metals, in particular Rhodium, and it has been one of the most affected
sectors in the downturn. The Directors also believe that the market for PGM`s
was significantly impacted by destocking, some selling of inventories by
vehicle manufacturers, and a reduction in the investment holdings of exchange
traded funds and other investment products. The jewellery market was also
subdued with concerns over consumer confidence. The market price of Platinum
fell to a low point of $756 per ounce on 27 October 2008 and Rhodium fell to a
low point of $1,000 per ounce on 25 November 2008. Prices have, recovered
recently with average prices in the month of March 2009 for Platinum at $1,085
per ounce and Rhodium at $1,169 per ounce, driven for Platinum primarily by
increasing investment and jewellery demand. Overall for the six months to 31st
March the PGM basket price was $699 per ounce, a fall of 55.1%, with Platinum
prices falling by 40.0% to $947 per ounce and Rhodium prices falling by 76.8%
to $1,650 per ounce (which benefited from some delayed deliveries at higher
prices at the beginning of the period). The decline in pricing has led to a
reduction in revenue of $459 million.
The PGM sales volume for the period at 583,873 ounces was 4.8% above the prior
period resulting in a favourable revenue impact of $41 million. The factors
contributing to the improved performance are discussed in the Chief
Executive`s Review of this report. The mix of metals sold resulted in an
adverse impact to revenue of $41 million with the fall of Rhodium volumes as a
percentage of sales from 7.9% to 6.6% the key factor. The contribution from
base metals fell by $12 million with Nickel prices falling by 42.3%.
Costs:
(Increase) / Decrease $m
Core productive costs (65)
New shafts (22)
Initial restructuring savings 29
Pandora ore purchases 5
Incremental metal stock movement
Foreign exchange (143)
198
Costs 2
Core productive costs in the period increased year-on-year by $65 million, or
21.6%, during the six months to 31 March 2009. This included an additional $6
million on ore reserve development and $5 million incremental safety-related
expenditure to improve our roof-bolting procedures and reduce the risk of fall
of ground incidents (which have declined by 7.9%). It should be noted that
during financial year 2008 there was very significant and progressive
inflationary pressure in the mining sector in South Africa. Costs in the
second half of 2008 were substantially higher than those in the first half.
Core productive costs for the first half of 2009 in Rand terms were only 4.4%
higher than those in the second half of 2008 despite the 12.5% wage rise
effective from 1 October 2008.
During 2008 the new shafts, Hossy and Saffy, first become fully operational
and began to incur working costs. In the six months to 31 March 2009 the
shafts were fully operational during the whole period, with production
increasing by nearly 40%. This, together with the costs incurred in migrating
Saffy shaft to a hybrid basis, and an additional $5 million spent on ore
reserve development, has increased costs in these shafts by $22 million.
The cost benefits from the restructuring programme are starting to have a
positive impact on our financial performance. The London Head Office has been
refocused with a reduction of approximately one third of the staff. The
majority of this change was implemented in quarter one. The scope of
Exploration activities have been reduced significantly with expenditure
falling to half that of the prior period. Opencast operations ceased on the 31
December 2008 with subsequent costs incurred only with respect to
rehabilitation. The intention to close the Limpopo Baobab shaft was announced
in November 2008. After a 21 day wage related strike in December effective
operations, and therefore production, ceased. Costs incurred from December
2008 to March 2009, when the shaft went on to care and maintenance, have been
treated as special costs related to the restructuring. Going forward into the
second half a minimal ongoing cost will be required to keep Baobab shaft on a
care and maintenance basis. The overall benefit of the above actions was $29
million. The restructuring at Marikana has involved an intensive consultation
process with the Unions and employees. The agreed restructuring actions have,
in all material respects, been implemented in March 2009 and so there was no
cost benefit in the period.
The cost of ore purchased from the Pandora joint venture is $5 million lower
than the prior period despite an increase in the volume purchased due to the
fall in market metal prices.
Movements on metal stock inventory were very different between first half of
2009 versus 2008. Over the first half of 2008 stock levels increased by $112m
from a low point at September 2007, which was exacerbated by escalating costs
and an inventory build up resulting from the Number One Furnace inspection and
repair being completed in March 2008. In the first half of 2009 the metal
inventory value has reduced by $31m with reduced costs at the end of the first
half in 2009 relative to the opening position assisted by a stronger Dollar
exchange rate. These two movements in aggregate have caused a $143 million
adverse effect.
Foreign exchange has been an extremely positive factor with a $198 million
benefit arising on the translation of costs with the average Rand to Dollar
rate of exchange for costs weakening by 41.0% and favourable movements arising
from the translation of working capital.
In summary, whilst total Rand costs are much higher than the first half of
2008 they have reduced by 15.2% since the second half of 2008, the bulk of the
reduction being due to opencast, Limpopo and administrative functions. This
leaves ongoing productive costs 5.3% lower despite the 12.5% wage increase. In
the second half of 2009 the restructuring programme is expected to deliver
significant benefits such that Rand-based gross operating costs for the full
2009 financial year are expected to be below those of 2008.
Cost per PGM ounce:
The cost per PGM ounce sold before by-product credits for the six months to 31
March 2009 at R7,059 was 41.1% higher than the comparative period in 2008. The
first half of 2008 benefitted from selling cheaper ounces which were in stock
at the end of financial year 2007. A better comparison is the cost per PGM
ounce produced which at R6,956 was 26.7% higher than the first half of 2008,
primarily driven by the $65 million, or 21.6%, increase in core productive
costs and the $22m increase in new shaft costs. The C1 cost per PGM ounce
produced at R6,956 was however marginally lower than the second half of 2008.
Further details of unit costs analysis can be found in the operating
statistics table in this Report. It should be noted that with the
restructuring of the business the cost allocation between business units has
been changed and therefore whilst the total is on a like-for-like basis
individual line items are not totally comparable.
Special operating costs:
Whilst net special operating costs had a limited impact on reported operating
profits in the first half of 2008 there has been a charge of $44 million in
the first half of 2009. This one off cost primarily reflect costs associated
with the reduction in employees together with the abnormal operating costs for
Limpopo operations, subsequent to the announcement of closure and the cost of
the programme itself. In total the restructuring will result in around 4,800
employees leaving the Group, with 3,600 of these leaving as part of the
restructuring programme and a net reduction of 1,200 through natural
attrition. Of those leaving through the programme around 3,000 have left as at
31 March and of these less than 300 have been forcibly retrenched.
Summary of net finance income / (costs):
Six months to 31
March
2009 2008
$m $m
Net bank interest and fees (8) (12)
Capitalised interest payable and fees 10 15
Exchange (26) 3
Other 0 1
Net finance income / (costs) (24) 7
Net interest charges at $8 million were $4 million below the prior period due
to lower interest rates. $10 million of interest payable and fees incurred in
the current period was capitalised on qualifying capital work-in-progress and
evaluation assets. The volatility and significant weakening of the Rand
against the Dollar during the six months to 31 March 2009 had a marked impact
on Rand cash balances held for operational and funding purposes resulting in
$24 million of losses which, combined with a $2 million exchange loss on long
term debtors, gave a total $26 million charge. The total net finance cost of
$24 million for the period was therefore $31 million adverse to the prior
period six months.
Profit before tax and earnings:
Reported losses before tax for the six months to 31 March 2009 at $196 million
was an adverse movement of $592 million from the comparative period. This has
been driven by the $510 million decline in reported operating profit, the $31
million adverse on net finance costs, a write-off on mark-to-market
investments of $39 million (mainly relating to Platmin shares) and a decrease
of $12 million in the Group`s share of profit from associates and joint
ventures. On an underlying basis the loss before tax of $113 million was $512
million below the six months to 31 March 2008.
Reported tax for the current period was a $69 million credit. This was largely
a result of $50 million favourable exchange arising on the retranslation of
Rand liabilities which are treated as special. In comparison to the $41m
charge for reported tax in the prior period this resulted in a $110 million
benefit.
Loss for the period attributable to equity shareholders amounted to $112
million (2008 - profit $283 million) and the loss per share was 71.2 cents
compared with earnings of 181.1 cents in the first half of 2008. Underlying
loss per share, being earnings excluding special items, amounted to 50.2 cents
(2008 - earnings per share 132.5 cents).
Balance sheet
A reconciliation of the movement in equity shareholders` funds for the six
months to 31 March 2009 is given below.
$m
Equity shareholders` funds as at 30 September 2008 2,147
Recognised income and expense (126)
Shares issued 16
Equity shareholders` funds as at 31 March 2009 2,037
Equity shareholders` funds were $2,037 million at 31 March 2009 compared with
$2,147 million at 1 October 2008, a decrease of $110 million. This was due to
the recognition of $126 million of attributable losses, which were partially
offset by the receipt of $16 million from the issue of shares, largely to the
International Finance Corporation under the financing arrangements entered
into during 2007.
Net debt at $449 million has increased by $146 million since the 2008 year
end.
Gearing, calculated on net borrowings attributable to the equity shareholders
of the Group divided by those attributable net borrowings and the equity
interests outstanding at the balance sheet date, was 17% for both 31 March
2009 and 31 March 2008.
Cash flow
The following table summarises the main components of the cash flow during the
year:
Six months to 31
March
2009 2008
$m $m
Operating profit (142) 368
Depreciation and amortisation 47 46
Change in working capital 146 (100)
Other (10) 1
Cash flow from operations 41 315
Interest and finance costs (7) (12)
Tax (48) (144)
Trading cash flow (14) 159
Capital expenditure (106) (139)
Proceeds from disposal of - 1
assets held for sale
Dividends paid to minority (17) (51)
Free cash flow (137) (30)
Disposals / (acquisitions) - 3
Financial investments - (17)
Shares issued 15 4
Equity dividends paid - (94)
Cash inflow (outflow) (122) (134)
Opening net debt (303) (375)
Foreign exchange (24) 3
Closing net debt (449) (506)
Trading cash (outflow) / 101.8c
inflow (cents per share) (8.9)c
Free cash (outflow) / inflow (19.2)c
(cents per share) (87.1)c
Cash flow generated from operations at $41 million was impacted by the
restructuring programme which caused a cash outflow of around $39 million in
the period. Compared to the prior period cash flow generated from operations
was down by $274m due to the adverse impact of the fall in operating profit by
$510 million being partially offset by the $246 million turnaround in the
working capital position. This principally reflects the movement on stock, as
described above, together with a $122 million higher inflow from trade and
other receivables in the period. Some of this benefit will reverse in the
second half due to seasonal factors. After interest and finance costs of $7
million and tax payments of $48 million, trading cash outflow for the six
months amounted to $14 million against $159 million inflow in the prior half
year. The trading cash outflow per share was 8.9 cents in the six months to 31
March 2009 against 101.8 cents inflow in the six months to 31 March 2008.
Capital expenditure at $106 million was $33 million below the prior period
with the Group reducing expenditure in the current difficult economic
environment. In Mining the expenditure was focused on development of the
operations at Hossy and Saffy, equipping at K4 and investment in sub-declines
at K3 as well as securing certain water resources at Akanani. In the Process
Division we invested mainly in the Smelter upgrade and in improvements at the
Concentrators. We maintain our forecast capital spend for the year at $250
million.
Dividends paid to minorities in the year at $17 million were $34 million lower
than the prior year. The dividend paid in the period related to profits
generated in 2008. In light of the trading losses incurred in the period, by
the operating subsidiaries in which the minority has holdings, no further
dividends have been paid.
Free cash outflow at $137 million was $107 million adverse to the prior period
with free cash outflow per share deteriorating from 19.2 cents to 87.1 cents.
As reported at the 2008 final results the Directors decided to pass the final
dividend and consequently no cash outflow occurred in the period. The overall
cash outflow for the six months to 31 March was $122 million which increased
net debt accordingly.
Dividends
The Board`s policy remains that dividends are based upon reported earnings for
the period with due regard for the projected cash requirements of the
business. As a result of our financial results for the first half and the
continued weakness and unpredictability of PGM prices the Board has decided
not to pay a dividend in respect of the six months to 31 March 2009.
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. The Group also has a
number of contingent liabilities.
Liquidity risk
The policy on overall liquidity is to ensure that the Group has sufficient
funds to facilitate all ongoing 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.
Lonmin has recently completed the refinancing of $575 million of existing
committed facilities comprising, in the UK, a $250 million revolving credit
facility and a $150 million amortising term loan (both now maturing in 2012)
and, in South Africa, a $175 million revolving credit facility maturing in
2010 (together the ``New Facilities``). Amounts drawn on the New Facilities
have been used to repay one of the Group`s existing bank facilities early, and
the Board intends to use additional funds available under the New Facilities
to repay further borrowings which mature in August 2009. This refinancing
significantly lengthens the tenure of the Company`s banking facilities.
As at 30 September 2008, Lonmin had net debt of $303 million. At 31 March
2009, Lonmin`s net debt had increased to $449 million, comprising $525 million
of drawn down facilities and $76 million of cash and equivalents. This
represents an increase in net debt from 30 September 2008 of $146 million.
Lonmin has $975 million of committed facilities in place, with $575 million of
these comprising new facilities. The main elements of the new facilities can
be summarised as follows:
- For the period commencing April 2009, Lonmin has agreed a new $250
million revolving credit facility in the UK, which will expire in
November 2012;
- For the period commencing August 2009, Lonmin has agreed a new $150
million forward-start amortising loan facility in the UK, which will
expire in November 2012. The amortisation of this facility consists of
$20 million payable every six months starting in July 2010, with a final
repayment of $50 million in November 2012;
- The margin on both these facilities is 400 basis points up to 31 March
2010, and will thereafter be determined by reference to net debt/ EBITDA
and will be in the range 250bps to 400bps;
- Key covenants for these facilities include a maximum net debt/EBITDA
ratio of 4.0 times, to be first tested in March 2010; a minimum
EBITDA/net interest ratio of 4.0 times, to be first tested in March 2010;
and a maximum net debt/tangible net worth ratio of 0.75 times, to be
tested in September 2009 and March 2010, and moving to 0.7 times on a
semi-annual basis thereafter;
- In South Africa, Lonmin has secured an extension to the maturity of the
existing $175 million multi-currency revolving credit facility to
November 2010; this facility was previously due to mature in October
2009. The margin is 141bps over JIBAR until 30 September 2009 if drawn in
South African Rand, pricing on US Dollar draw downs is negotiated at the
time. Pricing after 1 October 2009 will be set at that time but will be
significantly higher than 141bps over JIBAR and;
- Key covenants for this facility, which are to be tested at the WPL/EPL
level in South Africa, include a minimum EBITDA/net interest ratio of 3.5
times, and a maximum net debt/EBITDA ratio of 2.75 times; these covenants
are to be tested on a rolling 12 month basis every 6 months on 31 March
and 30 September. These covenants are consistent with our $300 million
term loan which expires in mid 2013.
As part of the refinancing, Lonmin has agreed to pay an increased margin and
commitment fee to syndicate banks that have committed to participate in the
New Facilities. One-off up-front arrangement and lending fees associated with
the debt refinancing amounts to $14 million and will be amortised over the
life of the facilities they relate to.
With the commencement of the New Facilities the second half interest payable
and fees will increase substantially and an effective funding rate of circa 6%
is anticipated.
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 current market rates, 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 current policy is not to hedge 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.
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.
Fiscal risk
In South Africa, the Mineral and Petroleum Resources Royalty Act (the "MPRRA")
came into operation on 1 May 2009. Due to downward pressure on commodity
prices, the imposition of royalties has been postponed until 1 March 2010. The
royalty 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 calculating the percentage royalty payable for refined
products (capped at 5%) 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.
Contingent liabilities
The contingent liabilities of the Group total some $108 million and are
explained in detail in note 10 to the Interim Financial Statements.
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. There is an extensive discussion of the principal risks and
uncertainties facing the Company on pages 34 to 36 of the 2008 Annual Report,
available from the Company`s website, www.lonmin.com. Since that summary was
prepared, the pricing environment has continued to be unpredictable in the
short term while significant economic uncertainty prevails and there have been
large fluctuations in the Rand/US dollar exchange rate. As a consequence,
profitability and cash flows will remain under pressure and there is a risk,
should the Rights Issue not proceed, that the covenants in the Group`s
facilities may be breached when they are tested during the next 12 months.
There is a fuller discussion of the principal risks and uncertainties facing
the Company and Group in the Prospectus to be published on or about 11 May
2009, available on the Company`s website (save for those in Australia, Canada,
Japan or the United States, for regulatory reasons).
Alan Ferguson
Chief Financial Officer
10 May 2009
Date: 11/05/2009 08:00:01 Supplied by www.sharenet.co.za
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