Wrap Text
Annual Report
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")
22 December 2016
Lonmin Plc ("Lonmin" or the "Company")
Annual Report and 2017 Annual General Meeting
On 14 November 2016 Lonmin announced its Final Results for the year ended
30 September 2016 (the "Final Results Announcement"). The announcement made on that
date included inter alia a condensed set of financial statements, a management report and a
directors' responsibility statement, all as required by DTR 4.1.
Lonmin has today posted to shareholders and has submitted to the National Storage
Mechanism, copies of the following documents:
• Annual Report and Accounts for the year ended 30 September 2016 (the "Annual
Report and Accounts")
• Circular relating to the Annual General Meeting to be held on 26 January 2017
• Forms of Proxy for shareholders on the UK and SA registers
These documents will shortly be available for inspection on the National Storage Mechanism
www.morningstar.co.uk/uk/nsm.
As required by DTR 6.3.5 R (3), the Company confirms that the Annual Report and
Accounts and the Circular relating to the Annual General Meeting are now available to view
or download in pdf format from the Lonmin website, www.lonmin.com.
The appendix to this announcement contains additional information which has been
extracted from the Annual Report and Accounts for the purposes of compliance with DTR
6.3.5 and should be read together with the Final Results Announcement, which can be
downloaded from the Company's website, www.lonmin.com. This announcement should be
read in conjunction with and is not a substitute for reading the full Annual Report and
Accounts. Together these constitute the information required by DTR 6.3.5. which is
required to be communicated to the media in full unedited text through a Regulatory
Information Service. Page and note references in the text below refer to page numbers and
notes in the Annual Report and Accounts:
• A statement on the principal risks and uncertainties
• A statement on related party transactions
ENDS
APPENDIX
LONMIN'S PRINCIPAL RISKS AND UNCERTAINTIES
These risks have been ranked on a residual basis according to the magnitude of potential
impact, probability and taking into account the effectiveness of existing controls. The risks
represent a snapshot of the Company’s current risk profile. This is not an exhaustive list of
all risks the Company faces. As the macro environment changes and country and industry
circumstances evolve, new risks may arise or existing risks may recede or the rankings of
these risks may change.
1 OPERATIONAL EXECUTION
Description
Failure to deliver against production and cost targets can result from a variety of reasons,
including, poor productivity, high absenteeism, safety stoppages, industrial action, difficult
geological conditions as well as ineffective control of operational expenditure.
Impact
Poor operational delivery can lead to not achieving the Business Plan deliverables which
includes a decline in profitability and cash generation, which in turn pose threats to our
liquidity position and impacts profitability.
Mitigation
Critical measures implemented to address this exposure were:
- Enhanced focus on improving operational attendance levels which included the root
cause analysis and mitigation of absenteeism;
- The rollout of operational performance bonuses at targeted operational levels.
Rigorous performance monitoring against business plan targets (cost and
production);
- A more rigorous approvals framework (delegation of authority) was implemented;
- Continued DMR engagement to address safety stoppages and increased operational
focus to improve overall safety performance and culture;
- Productivity improvement plans have been established to enhance current resource
efficiency;
- Operational oversight was improved through rigorous tracking of crew performance
by the Business Support Office; and
- As part of ensuring that potential operational bottlenecks are managed, the Theory of
Constraints method was implemented across various operational areas.
Change
This risk remains unchanged due to the ongoing impact of the Section 54 operational
stoppages experienced as well as other operational challenges experienced. The downside
risk was however offset to some extent through the excellent Processing performance during
the year.
2 PRICE AND MARKET VOLATILITY
Description
Commodity price and currency volatility exacerbates the uncertainties in managing a mining
business. This is especially because mining requires long planning horizons to plan new
mines and make decisions regarding the expansion and contraction of existing operations.
These decisions often need to be made based on assumptions regarding future metal prices
(which drive revenue) and exchange rates (in our case primarily the USD/Rand exchange
rate as the majority of our cost and capital expenditure are incurred in South African Rand).
When these cash flows are less than anticipated, it can have a significant negative financial
impact on the business.
Impact
The uncertainty related to metal price and exchange rate assumptions used in long-term
planning can lead to incorrect planning decisions and have negative financial consequences.
In addition, volatile metal prices may also affect the decisions made by our customers and
may result in them considering substituting our products with other alternatives.
Mitigation
Measures implemented to address exposure:
- Quarterly review of supply and demand dynamics of key products and the factors
that could affect metal price volatility and forecasting processes;
- Longer term volume contracts with key customers to mitigate off-take risk;
- Weekly short-term cash flow forecasts to manage liquidity and pro-actively flag
negative cash flow impacts;
- Monthly Price Risk Committee meetings, as well as consideration of forward selling
and hedging strategies as and when appropriate;
- The Company collects market information from a number of different sources to
better understand the supply and demand dynamics of key products and the factors
that could affect metal price volatility. This includes the participation in various local
and international Platinum related forums and associations; This information serves
as input to the forecasting processes;
- A detailed cost response strategy has been implemented, including the responsible
closure of Hossy shaft, resizing of concentrator capacity and all overheads;
- In addition, the Company has embarked on developing an in-house market
intelligence portal to assist in improving its ability to forecast prices; and
- The Company is refocusing its market development strategy to focus on areas with
maximum potential.
Change
Risk in this area remains unchanged from 2016 as metal and currency markets continue to
remain volatile accompanied by the significant decline in the platinum price.This was more
than offset by the weakening of the Rand.
3 EMPLOYEE AND UNION RELATIONS
Description
The industrial relations environment has stabilised over the last 12 months as evidenced by
the improved dialogue between unions and Company management. Whilst the environment
has remained stable, the potential for volatility remains, which could result in disruptions to
operations and have a material adverse effect on the Company’s financial position.
Impact
Various internal as well as external factors could influence the employee relations space and
could lead to disruption of operations and breakdown of employer-union relations.
Mitigation
To ensure open and transparent dialogue, appropriate structures have been established to
enable effective union engagement across all levels. These structures includes a Future
Forum which enabled the consultation process for voluntary severance as well as the
Section 189 process. A relationship building programme and charter to govern relations
between unions and the Company have been established. As part of enhancing employee
ownership, a Employee Profit Share Scheme has been established.
Change
The Industrial Relations environment has improved as the Company concluded a three-year
wage agreement.
4 SAFETY PERFORMANCE
Description
Employee injuries and / or work stoppages due to Section 54’s will impact the Company’s
ability to achieve production and financial targets.
Impact
Poor safety performance has a direct impact on the life of employees, contractors and their
families and risks such as fall-of-ground, tramming, working at heights, scraping and rigging
incidents, exposure to gases, fire, molten metal, electrocution and many other hazards have
to be controlled to reduce and eliminate fatalities and injuries. A failure in safety processes
could result in injury or loss of life, which would have tragic implications for employees, their
families and the communities. It would also severely disrupt operations and could result in
safety stoppages which have a direct impact on the people, cost and reputation. The failures
in safety procedures may be caused by employees or poor management practices. DMR
could also temporarily suspend part or all of the operations under the Mine Health and
Safety Act (commonly referred to as a Section 54 stoppage) and this have an impact on the
working rhythm, cost and production. This suspension could potentially result in Lonmin’s
Operating licence becoming under scrutiny by the regulator.
Mitigation
Safety awareness and training such as rollout of the Du Pont leadership programme, called
the Lonmin Safety Leadership DNA programme. This programme develops individual’s
safety competencies, knowledge of the safety theory, how to apply it and practise safety
management. Structured workplace coaching is also part of this programme which is
conducted one-to-one to bridge individual competency gaps and to improve safety
performance over time. Training has been delivered to executive and senior management,
union health and safety structures and 16 ‘train the trainers’ candidates. Safety Improvement
Plans are being implemented with an enhanced focus on accident analysis and pro-active
preventive measures. Visible Felt Leadership (VSL) is such a pro-active measure which has
been accelerated during this year. VSL is senior management being visible in the
operational areas confirming that safety is a core belief and showing passion to work safely.
Safety audits are also conducted and include internal and external audits that measure the
safety maturity of each operational business unit. Cross-site safety audits support learnings
across the operations and the sharing of best practices.
Change
Collaboration between Lonmin, the regulator and unions have started to show results, as we
have experienced a reduction in the duration and frequency of Section 54 stoppages and
more localised application of the stoppages in the fourth quarter on the year.
5 COMMUNITY RELATIONS
Description
Mining is conducted in areas where communities are present and the communities have
various expectations of the mines, such as employment opportunities, socio-infrastructure
support and business opportunities. When these expectations are not met, it may result in
conflict and unrest.
Impact
As many of our employees live locally, any disruptions within the communities can have a
direct impact upon production. The failure to deliver social upliftment projects, triggering
protests or violence and corporate reputational damage can result, if the relationship with
these stakeholders is not managed effectively. Lonmin has acknowledged the important role
of communities as a critical stakeholder and has implemented various engagement platforms
and development initiatives to ensure appropriate upliftment. Procurement has become
another focus area as communities view it as an opportunity to improve their livelihood
through improved income. Lonmin has identified this need and has introduced procurement
opportunities for communities.
Mitigation
The development of a revised stakeholder strategy with emphasis on continuous
engagement at all levels and all communities (Bapo and non-Bapo communities) as well as
involvement of the communities in the implementation of the SLP. Greater consultation with
stakeholders which includes upliftment measures to be initiated. This approach has
increased community ownership of both the challenges facing communities and the solutions
provided as part of the SLP implementation plan.
As part of enhancing relations with communities, the Company has reviewed its engagement
process and implemented a revised stakeholder management process. In order to improve
governance and project execution of community related investments, a procurement
framework with appropriate project management office capabilities have been established.
Other aspects of community investment included the establishment of a Cadette Training
programme as part of the Company enhancing its potential future employment capacity.
Formal engagement structures have also been established in the form of bilateral forums
with Bapo, Madibeng and Rustenburg communities. The engagement meetings addresses
employment, economic development, community infrastructure programmes and the SLP
status. The transaction with Bapo Ba Mogale resulted in community trusts being entitled to a
minimum of R5 million per annum and the provision of R1.65 billion worth of procurement
contracts.
Change
Our relationships with local communities that surround our operations have improved
tremendously since the 2014 transaction. However, the socioeconomic challenges that face
the Bojanala district in which Lonmin resides, have put a lot of pressure on the community
and its leadership to an extent that the gains seem to be eroded by the challenges. The
procurement opportunities given to the Bapo community, particularly the visible bus service,
have given hope to the communities that Lonmin is keeping its promises. The level of trust
between the communities and Lonmin has improved significantly. Despite this, Lonmin
strives for improvement with pressure from the regulator as well as access to opportunities
through local procurement. Lonmin needs to develop and implement a clear strategy around
this, to meet local and DMR expectations.
6 UTILITIES
Description
The higher than inflation tariff based increases in electricity and the Company’s inability to
reduce this cost any further, have impacted the operating costs of Company operations. A
stable electricity environment, in terms of pricing is critical in ensuring its long-term
sustainability. Water utilisation has also been challenging, both from an infrastructure point
of view as well as availability. Capacity deterioration within local municipalities is also adding
to this challenge. The establishment of informal settlements resulted in communities
requesting water and electricity supply as a basic need and keeps adding to the burden of
local municipalities and industries for service delivery.
Impact
Supply constraints in respect of energy or water could impact upon our ability to operate
effectively and meet our production targets. Furthermore, cost increases in respect of these
utilities impact our margins. Water availability is becoming a critical component of any
business to survive and still remains a basic human need.
Mitigation
Ongoing implementation of the electricity conservation programme as well as water
optimisation through demand management. An integrated water management plan for
Lonmin has been developed with the goal to reduce Rand Water reliance as far as possible,
within the operations, and to maximise the recovery and re-use of all other sources of water.
Longer term plans to treat some streams of these alternative sources to potable level to
make the business more independent of Rand Water. Explore further opportunity to supply
communities out of such streams. As part of ensuring optimal electricity usage, Lonmin is a
member of the Eskom energy intensive user groups, as well as conducts Monthly and Daily
electricity consumption and reporting. Additional initiatives to ensure optimal usage is the
Electricity conservation programme and loadshedding contractual agreements to manage
supply side constraints. As part of ensuring appropriate continuity during an outage, the
Company has implemented risk based scenario planning based on available Eskom
capacity. From a water optimisation perspective, the Company has implemented water
conservation and demand management initiatives. The process as to how water is being
monitored and managed is aligned with how power is being managed in the business.
Change
Current supply constraints and proposed tariff increases in respect of energy and water have
a significant impact on the Company’s ability to operate effectively and to meet our
production targets. From an energy perspective the risk in this area remains unchanged due
to aging power stations that could result in an increase in the amount of unplanned outages,
however from a water perspective it has increased due to lower precipitation levels and
ongoing impact of climate change.
7 CHANGES TO THE POLITICAL, LEGAL, SOCIAL AND ECONOMIC
ENVIRONMENT
Description
The Company is subject to the risks associated with conducting business in South Africa,
including but not limited to changes to the country’s laws and policies regarding taxation,
royalties, divestment, repatriation of capital and resource nationalism. The latter is a broad
term that describes the situation where a government attempts to assert increased authority,
control and ownership over the natural resources located in its jurisdiction.
The MPRDA Amendment Bill currently remains the subject of Parliamentary debate. In
particular, beneficiation is a major consideration with the Bill proposing that the Minister be
granted a discretion to declare certain minerals as strategic, that the Minister determine what
percentage of strategic minerals are to be made available locally and the developmental
price at which strategic minerals are to be sold, as well as the Minister being able to
determine the conditions applicable to export permits. In addition, the Davis Commission is
currently looking at the tax regime with a view to determining whether additional taxes
including a carbon tax should be imposed on mining companies. The mining industry is also
awaiting clarity of the interpretation of the applicability of the “Once Empowered Always
Empowered (OEAE)” principle. Currently engagements on not only the OEAE principle, but
the new Mining Charter are taking place. The DMR has also recently come under pressure
to demonstrate that it is taking action to monitor compliance with undertakings made in the
SLP’s submitted by mining companies. This has led to the DMR issuing s93 Notices to
mining companies on a more regular basis. Lonmin has received s93 notices in respect of its
Housing and Living Conditions obligations and continues to engage with the DMR to reach a
constructive solution. In addition, the Department of Trade and Industry is attempting to
legislate a policy of creating black industrialists.
Impact
The ongoing debates in respect of resource nationalism have created policy uncertainty and
this has inevitably led to a decline in investor appetite for South African investment risk. If
some of the issues under consideration are implemented, this could have a material adverse
effect on the Group’s future. For example, profits could be negatively impacted by the
imposition of additional taxes and revenue could be impacted by the sale of metals at
discounted developmental prices. The obligation to sell locally could impact long-term supply
agreements with our customers and give rise to concerns about security of supply from
South Africa, potentially expediting the growth of the recycling industry and increasing
substitution concerns.
Mitigation
Lonmin participation in the Chamber of Mines process to engage the DMR with regards to
concerns regarding the revised Mining Charter, as well as broad engagement with
government regarding this exposure. Appropriate governance structures in the form of
Executive and Board Committees are being established to ensure ongoing reporting of
progress against agreed SLP targets. Bilateral and industry level discussions with the DMR
and other government agencies are ongoing. Lonmin and other mining companies are
continuing to engage with the South African government and the broader community in order
to raise awareness of the risks associated with resource nationalism.
Change
The risk in this area has increased due to uncertainty regarding certain policy decisions i.e.
BEE requirements and strategic minerals. Other factors include the impact of political party
actions, as well as the lack of clarity in terms of our social licence to operate.
8 LACK OF GEOGRAPHICAL AND PRODUCT DIVERSIFICATION
Description
Lonmin’s principal operating subsidiaries are concentrated in one geographical location,
which increases the level of risk of localised disruptions having an impact on the majority of
our operations. In addition, Lonmin is a PGM producer and does not have exposure to other
commodities or sectors.
Impact
Local events in the vicinity of Marikana have the potential to disrupt Lonmin’s operations in
this area, which represent all of the Company’s operating mines as well as the majority of
our processing operations. Such a disruption could significantly impact the Group’s operating
and financial performance.
The Group is also a focused PGM producer and is not exposed to other commodities. In
times when the PGM market is depressed the Company’s financial performance is likely to
be negatively impacted as it does not have exposure to alternative commodities that may
have a different economic cycle and offset this PGM pricing weakness.
Mitigation Plans
The Company continues to review its portfolio of projects, which includes Limpopo and
Akanani. These projects are located in other parts of South Africa and if developed would
provide some degree of geographic diversification. Other opportunities that could mitigate
the risk arising from lack of geographical and product diversification are also reviewed from
time to time.
Change
The risk remain unchanged due to concentration risk of Marikana Operations.
9 LOSS OF CRITICAL SKILLS
Description
Due to the depressed mining sector, the risk of the loss of critical skills remains high.
Uncertainties related to a Company’s financing and sustainability following the
recapitalisation of the business earlier this year contributed to employees looking for new
opportunities.
Impact
The loss of critical skills could negatively impact safety, production and the ability to deliver
against targets. In order to retain our skilled labour, we continuously review market related
remuneration packages as compared to the incentive and retention schemes offered by
Lonmin. This continuous monitoring of remuneration practices and matching the packages
offered by our peers in order to attract and retain employees of a suitable calibre can result
in increased costs.
Mitigation
Implementation of a scheme to retain key critical skills. Ongoing review and analysis of our
remuneration practices in order to ensure that we remain competitive and are able to attract
and retain the skills required during this challenging time. We also use counter-offers
selectively in order to retain the most critical employees. The implementation of an employee
value proposition which focuses on employee wellbeing.
As part of ensuring the development and retention of critical skills Individual Development
Plans, succession planning and retention strategies for scarce skills have been established.
Ongoing monitoring of remuneration practices which matches Lonmin peers are monitored in
an ongoing manner. Graduate development, mentorship programmes and internship
programmes have also been established to ensure development of existing and future
human resources capacity.
Change
The risk remains high despite a general high number of job losses in the mining sector. One
is not always able to replace critical skills who understand the business and the environment
with resources available in the market and therefore it remains a key risk to the organisation.
TRANSACTIONS WITH RELATED PARTIES
The Group has a related party relationship with its Directors and key management (as
disclosed in the Remuneration Report and in note 5) and its equity accounted investments
(note 13).
The Group’s related party transactions and balances are summarised below:
2016 2015
$m $m
Transactions:
Purchases from joint venture – Pandora 15 30
Amounts due from joint venture – Pandora 5 8
Amounts due from associate – Incwala 1 1
Dividends to minorities – Incwalai 19 37
Interest accrued from HDSA investors in 20 18
Incwala
Subscription paid to the Platinum Jewellery 10 9
Development Associationii
Balances:
Amounts due from HDSA investors in Incwalaiii 409 417
All related party transactions are priced on an arm’s length basis.
Footnotes:
i These advance dividend payments were made by a Group company, WPL, to Incwala
Platinum (Proprietary) Limited (IP) as explained in note 9.
ii The subscription paid by Lonmin is material to the Platinum Jewellery Development
Association of which Lonmin is a member.
iii Refer to note 14 for details regarding the amounts due from HDSA investors in Incwala.
This amount is before deducting the accumulated
impairment charge of $307 million.
Sponsor: J.P. Morgan Equities South Africa (Pty) Ltd
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