Wrap Text
Annual Report and Accounts 2018
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 : GB00BYSRJ698 ("Lonmin")
LEI: 213800FGJZ2WAC6Y2L94
30 January 2019
Lonmin Plc ("Lonmin" or the "Company")
Annual Report and Accounts 2018
On 29 November 2018 Lonmin announced its Final Results for the year ended
30 September 2018 (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 submitted to the National Storage Mechanism a copy of the Annual
Report and Accounts for the year ended 30 September 2018 (the "Annual Report and
Accounts"). This document 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 are also available to view or download in pdf format from the Lonmin website,
www.lonmin.com.
Copies of the Annual Report and Accounts will be posted in due course to shareholders
who have opted to receive hard copies.
The appendix to this announcement contains additional information which has been
extracted from the Annual Report and Accounts dated 29 November 2018 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
Investors should refer to the Company's announcements made since 29 November 2018
for updates on certain matters contained in the appendix to this announcement.
Enquiries:
Seema Kamboj
Company Secretary
00 44 20 3908 1071
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Tanya Chikanza
Executive Vice President: Corporate Strategy, Investor Relations and Corporate
Communications
00 44 20 3908 1073
APPENDIX - EXTRACTED FROM THE ANNUAL REPORT AND ACCOUNTS DATED
29 NOVEMBER 2018
LONMIN'S PRINCIPAL RISKS AND UNCERTAINTIES
These risks are ranked considering 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 the risks that 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 FAILURE TO COMPLETE TRANSACTION WITH SIBANYE-STILLWATER
Description
In light of the challenges facing Lonmin and the PGM industry, the Company’s strategic
response in 2015 was to right-size the business, cut costs, enhance working capital
management and contain capital expenditure. These initiatives have proved effective
resulting in the Company remaining net cash positive. Notwithstanding these
improvements and the good performance achieved during 2018, notably from solid
production, higher PGM basket prices and weaker USD/ZAR exchange rate, Lonmin still
remains financially constrained. Further mitigating measures undertaken during 2018 led
to refinancing the business in October 2018 by concluding the $200 million forward metal
sale agreement; however this financial measure only provides relief during the short-term
and regrettably does not provide an opportunity to avoid retrenchments and shaft
closures. In spite of the effectiveness of the measures undertaken, the viability of Lonmin
on a stand-alone basis is more vulnerable when compared to being part of a larger group.
Consequently, failure to complete the Sibanye-Stillwater transaction will significantly
impede Lonmin in funding the significant investment required in sustaining the business in
the future. The outstanding conditions precedent to the Transaction is the approval by the
shareholders of Lonmin and Sibanye-Stillwater and the UK courts sanctioning of the
scheme of arrangement.
Impact
The potential impact of failure of the acquisition of the Group by Sibanye- Stillwater
represents a threat to the Group’s viability, in spite of the initiatives undertaken, including
the refinancing arrangement. Consequently the pending approval by the shareholders of
Lonmin and Sibanye- Stillwater in conjunction with the need for an alternative solution in
mitigating the adverse longer term challenges faced by the Lonmin Group if the
transaction does not complete represent a material uncertainty that may cast significant
doubt on Lonmin’s ability to continue as a going concern over the period in excess of 12
months. Should the Transaction not conclude by 28 February 2019, the feasibility of an
asset sale to Sibanye-Stillwater, as contemplated in the 2.7 announcement, as well as any
other alternative transactions will have to be assessed by the Board. Should the
acquisition conclude successfully, the consolidation of Lonmin into Sibanye-Stillwater will
create a more diversified and resilient company, overcoming the prevailing financial
constraints. In addition, Lonmin’s lack of geographical and product diversification risks
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should decrease significantly. The decrease in product diversification risk is further
attributable to the rise in prominence of palladium, rhodium and iridium contributing
significantly to basket prices in comparison to the prior year.
Mitigation
UK Competition and Markets Authority cleared the Transaction, including formal
recommendation of the Transaction by the Competition Commission SA to the
Competition Tribunal SA. On 21 November 2018 the Competition Tribunal SA approved
the transaction subject to agreed conditions, including:
- a six month moratorium placed on all forced retrenchments from the implementation
date, pending the outcome of a detailed study by Sibanye-Stillwater.
2 LIQUIDITY – THE AVAILABILITY OF FUNDS TO MEET BUSINESS NEEDS
CAN AFFECT THE GROUP’S ABILITY TO CONTINUE AS A GOING CONCERN
Description
The availability of funds to meet business requirements can affect the Group’s ability to
continue as a going concern. Key factors affecting the Group’s liquidity position are
adverse market conditions, lower than planned production, escalation in operating costs
and the successful completion of the all share Sibanye-Stillwater transaction.
Impact
The oversupply in the platinum market persisted during 2018, resulting in the platinum
price declining by 12%. However, the price of rhodium almost doubled to $2,580/oz,
followed by a 17% increase in the palladium price, as well as the positive increase in
iridium prices resulting in an overall higher basket price. Strong production, including PGM
sales exceeding initial market guidance, supplemented by higher basket prices and a
weaker USD/ZAR exchange rate experienced during Q4 2018 contributed to an increase
in the Group’s net cash position to $114 million at 30 September 2018 ($103 million at 30
September 2017). The pending approval by the shareholders of Lonmin and Sibanye-
Stillwater including alternative solutions in mitigating the adverse longer term challenges
faced by the Lonmin Group if the Transaction does not complete represent a material
uncertainty that may cast significant doubt on Lonmin’s ability to continue as a going
concern over the period in excess of 12 months.
Mitigation
- The Group has refinanced the business which improved Group liquidity and secured
tenure in the short-term and removed the Tangible Net Worth covenants from the
Group’s facilities;
- Disposal of 50% interest in Petrozim due to conclude in Q1 2019;
- Identification of impact of risks and opportunities on cash flow forecasted period;
- Regular review of supply and demand dynamics of key products and the factors that
could affect metal price volatility and forecasting processes;
- Sensitivity testing based on exchange rate changes or production losses;
- Liquidity dashboard monitoring as part of the Price Risk Committee;
- Strict monitoring and tightening of controls over operating costs;
- Analysis of cash-flow variances to the prior forecast period;
- Customer engagement for early payment; and
- Cash-flow monitoring and management by ExCo through weekly cash forecasting
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reports
Change
Exposure to this risk remains unchanged, however the weakening of the Rand in Q4 2018
and higher ZAR basket price has partly off-set liquidity challenges experienced by the
Group.
KPI
Free Cash Flow
3 OPERATIONAL EXECUTION – THE ABILITY TO DELIVER REQUIRED
OPERATIONAL PERFORMANCE (PRODUCTION AND EFFICIENCY) COULD
ADD OR DESTROY VALUE FOR COMPANY SHAREHOLDERS AND IMPACT
ADVERSELY ON OTHER STAKEHOLDERS
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
include a decline in profitability and cash generation, ultimately impacting negatively on
the company’s liquidity position.
Mitigation
- Management focus on improving operational attendance levels which includes root
cause analysis and management of absenteeism;
- Operations Steering Committee monitoring of sick leave and absent without official
permission dashboards;
- implementation of the Labour Management Programme;
- Implementation of an Operational Turn Around Plan and ongoing operational deep
dive reviews;
- Rigorous performance monitoring against Business Plan targets (cost and
production);
- A cost restructuring review process is continuing;
- Continued Department of Mineral Resources (DMR) engagement to address
safety stoppages and increased operational focus to improve overall safety
performance and culture; and
- Operational oversight was improved through rigorous tracking of crew
performance by the Business Support Office.
Change
This risk has reduced relative to the prior year’s ranking.
Robust, continuous safety initiatives amongst others, resulted in a significant reduction in
the number of Section 54 safety stoppages (FY2017:42 vs. FY2018:24) as well as lost
production days (FY2017:86 vs. FY2018:11). The DMR has issued localised Section 54
safety stoppages which mean only sections of a shaft or plant are stopped and not the
whole operations.
Other factors which can affect production execution include community unrest, poor
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productivity, absenteeism, management induced safety stoppages, industrial action,
difficult geological conditions and operational expenditure.
KPIs
Unit cost, refined Platinum ounces, 6E ounces & tonnes delivered
4 SAFETY PERFORMANCE – A POOR SAFETY PERFORMANCE CAN RESULT
IN LOSS OF LIFE AND SERIOUS INJURY TO OUR EMPLOYEES. IT CAN
ALSO NEGATIVELY IMPACT PRODUCTION, AFFECT COSTS, CAUSE
REPUTATIONAL DAMAGE AND RESULT IN UNFAVOURABLE REGULATORY
INTERVENTION
Description
Safety incidents can cause loss of life and injuries to employees resulting in work
stoppages and regulatory stoppages that will impact the Company’s ability to achieve
production and financial targets.
Impact
A failure in following safe working processes could result in injury or loss of life, which
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 following safe working
procedures may be caused by noncompliance and/or poor management practices. Work
stoppages and Section 54 safety stoppages have an impact on the working rhythm, cost,
production at the operations and could result in suspension of Lonmin’s operating licence.
Mitigation
- Focus by the operations on leading indicators that trigger risk awareness and
proactive action;
- Proactive shaft by shaft cross audits, validating compliance with Lonmin Life
Rules;
- Continuous monitoring and safety key performance indicators established per
mine manager, including management interaction with employees through Visible
Felt Leadership;
- OPSCO weekly engagement of overall organisation wide safety performance;
- Enforcement of contractor safety management protocols;
- Behaviour based intervention focussing on employee behaviour; and
- Implementation of Incident Cause Analysis Method findings post investigation.
Change
The increased focus on proactive safety management, safety culture and consequence
management resulted in the Group operating fatality free for 15 months. The Group also
won four of seven categories at the 2018 MineSafe conference. While our safety initiatives
improved, regrettably K3 shaft recorded a fatality on 30 September 2018. Notwithstanding
the fatality recorded, the Group achieved 15 months’ fatality free, notably K3 and Saffy
shafts, achieved 9.3 million and 6 million fatality free shifts respectively. The Assay
Laboratory and Precious Metals Refinery achieved 12 years and 2 years LTI-free,
respectively. Lost Time Injury Frequency Rate (LTIFR) improved by 11.5% from 4.52 in
2017 to 4.00 in 2018. There were 308 Lost Time Injuries (LTI) recorded in 2018 (FY2017:
373), while medical treatment cases decreased to 473 (FY2017: 509). The safety
initiatives have further resulted in a steady decline of the Total Recordable Injury
Frequency Rate (TRIFR) since 2015. Despite recording a decrease in 2018, the Group
still remains focussed in reaching and/or exceeding the international industry average.
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KPI
LTIFR, LTI, TRIFR
5 EMPLOYEE AND UNION RELATIONS – OPTIMAL RELATIONS CAN
SIGNIFICANTLY ENHANCE OPERATIONAL EXECUTION AND IMPROVE
EMPLOYER–EMPLOYEE RELATIONSHIPS, WHILST A BREAKDOWN IN
RELATIONS COULD RESULT IN PRODUCTION STOPPAGES AS WELL AS A
BREAKDOWN OF TRUST
Description
The industrial relations environment has stabilised from prior years which is attributed to
continuous and improved dialogue between unions and Company management. Whilst
this 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. A major concern is the perceived continuing rivalry between Association
of Mineworkers Construction Union (AMCU) and National Union of Mineworkers (NUM).
Impact
Various internal as well as external factors could influence the employee relations,
potentially leading to a breakdown of employer-union relations. The embarking of labour
unrest potentially leading to production stoppages could negatively impact the Company
financially.
Mitigation
- Structured engagement forums with unions across all levels e.g. Senior leadership,
shaft forums and Future Forum;
- Engagement with AMCU at all levels, and with relevant authorities to enhance safety
and security in the area; and
- As part of improving employer relations, the established relationship building
programme and charter to govern relations between unions and the Company are also
under review
Change
Despite improvement experienced in terms of engagement processes with the major
union, the industrial relations environment still remains a major focus area.
KPI
Industrial action/production stoppages
6 UTILITIES – ACCESS TO SECURE ENERGY AND WATER ARE CRITICAL
FOR THE GROUP’S MINING AND PROCESSING OPERATIONS
Description
The higher than inflation tariff based increases in electricity and water are set to continue.
Near term uncertainty is set to continue with continued pressure for above inflationary
increases. Water availability has also been challenging, due to ageing infrastructure and
increased water demand from local communities, mining and agricultural sectors in the
area. Rustenburg Municipality has notified all mines that it intends taking over water
distribution from Rand Water Board (RWB). Reduced dependency on RWB supply, to the
Lonmin operations, is set to be an ongoing strategic drive.
Impact
Supply constraints in respect of energy or water could impact our ability to operate
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effectively and meet our production targets. Furthermore, cost increases above inflation in
respect of these utilities impact the Group’s liquidity and ultimately margins.
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 RWB 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 RWB. Lonmin is exploring further
opportunities 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 conducting monthly and daily monitoring of electricity consumption and reporting.
Additional initiatives to ensure optimal usage are the electricity conservation programme
and load-shedding 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 of water and power monitoring and management is
fully aligned. Substitution of RWB with other water sources will remain an ongoing focus,
in order to reduce reliance on this supply.
Change
The current increase in electricity tariffs of 4.1% and request for 15% by Eskom could
have an impact on costs. From an energy perspective, the risk in this area remains
unchanged due to ageing municipal infrastructure that could result in an increase in the
amount of unplanned outages, however, from a water perspective the risk has increased
due to lower precipitation levels and the ongoing impact of climate change. The
expectations of surrounding communities especially on water supply and services are
ever increasing and the inability of local and provincial government’s structures to address
the expectations will continue to transfer the pressure to mining operations to step into this
gap and supply the requirements in various forms to communities around their operations.
The Rustenburg Municipality’s notification of taking over water distribution from RWB is
being contested by the Mineral Council SA on behalf of mining companies to maintain the
status quo with RWB.
KPI
Water and Electricity usage
7 COMMUNITY RELATIONS – A SOUND RELATIONSHIP WITH SURROUNDING
COMMUNITIES WILL ENHANCE RELATIONS AND THE GROUP’S
REPUTATION WHILST A FAILURE TO DO SO COULD RESULT IN COMMUNITY
UNREST, POTENTIALLY DISRUPTING OPERATIONS
Description
There may be occasions where expectations by a host community cannot be met and
may result in conflict, unrest and production stoppages. The relationship with host
communities is particularly vulnerable due to expectation gaps between community
leadership structures and the Company. This results in informal and unstructured
engagement between different splinter groups engaging the Company on varying matters
and at times results in unrealistic expectations by the communities.
Impact
Lack of consensus on the nature of Social and Labour Plan (SLP) projects and/or on-site
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disruption of projects in execution by local communities and splinter groups may result in
delays and impacts adversely on the Group’s ability to deliver on its SLP commitments,
which ultimately impacts the Group’s licence to operate. Lonmin acknowledges the
important role of communities as a critical stakeholder and has implemented various
engagement platforms and development initiatives to ensure appropriate upliftment.
Procurement and employment have become focus areas as communities view them as
opportunities to improve their livelihood through improved income. Lonmin has identified
this need and has introduced procurement and employment opportunities for the
communities.
Mitigation
- Standing meetings with Ward Councillors, Unemployment Groups, Bapo ba
Mogale;
- A structured process for employment opportunities was made available to
surrounding communities;
- Continuous engagement of Municipal leadership and capacitation (support on
technical matters related to SLP);
- Community roadshows were rolled out to address infrastructure requirements and
education requirements;
- Implementation of a 24 hour Community Grievance Hotline to address community
grievances in a structured and timely manner;
- Implementation of revised project risk management process which incorporates
stakeholder requirements; and
- Greater consultation with stakeholders which includes upliftment measures being
initiated. This approach will increase community ownership of both the challenges
facing communities and the solutions provided as part of the SLP implementation
plan.
Change
Revised SLP approved by DMR Regional office directing the company to start
implementing targets set out in Section 102 application, subject to approval of the
application at National level. Relationships with local communities that surround our
operations have improved from prior years. This is largely attributed to engagement with
communities in a more structured and meaningful manner. The company also introduced
Buang Le Rona/Thetha Nathi, a 24 hour Grievance Hotline to address community issues,
which allows the company to respond and address grievances timeously.
KPI
SLP Expenditure: Health, Education and Social Infrastructure, Stakeholder Engagement
and Management
8 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 regulations. A change in the
ruling party’s leadership and ultimately SA President during February 2018 has resulted in
an announcement by the new DMR Minister of the potential withdrawal of the Mineral and
Petroleum Resources Development Act (MPRDA) Amendment Bill. The initial release of
Mining Charter III (MC III) in July 2017 created much controversy and concern for the
11/54003892_1 8
mining industry at large, however, the initiation of the public engagement process and
commentary and resultant promulgation of the revised charter during September 2018,
has brought more certainty and clarity to the industry. The Mining Charter III in its current
form seeks to create a balance between improving transformation and ensuring the
industry’s viability during volatile times.
Impact
The change in the ruling party’s leadership continues to positively impact the country and
economy. The DMR has demonstrated its intent in stabilizing policy and regulatory
compliance within the mining industry, which is a positive development.
Key changes contained in MC III are:
- The continuing consequences of past empowerment transactions will be
recognised i.e. the “once empowered, always empowered principle” has been
partially recognised albeit subject to a mining company and the HDSA partner
meeting certain criteria;
- Scrapping of the trickle down dividend payment of 1% of earnings before interest,
tax, depreciation and amortisation to communities and employee empowerment
partners;
- 10% ownership to communities and employees for free on issuance of a new
mining right;
- Companies can offset up to 5% of their BEE entrepreneurship ownership
requirement through local beneficiation. The 2010 Charter allowed them to offset
11%;
- Employment equity requirements have increased and further defined. Positions
from board to management levels have risen from 40% (2010 Charter) to between
50% and 60% to be filled by black South Africans in line with provincial and
national demographics. The definition changed from HDSAs to black South
Africans to include white women filling HDSA positions; and
- Companies must obtain 70% of goods and 80% of services from BEE entities.
Mitigation
- Regular engagement directly with DMR and through the Minerals Councils SA,
acting on behalf of the SA mining industry; and
- Appropriate governance structures in the form of Executive and Board Committees
have been established to ensure ongoing reporting of progress against agreed
Charter targets and potential factors impacting on the political, legal, social and
economic environments.
Change
The risk in this area has remained unchanged from prior years notwithstanding an
increase in policy and regulatory certainty. The increase in 30% black ownership for new
mining rights applied prior to promulgation of MC III, including 10% employee and
community interest for free, may prove costly for mining companies.
KPIs
Compliance with MPRDA, DMR review
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9 LOSS OF CRITICAL SKILLS
Description
The loss of critical skills remains a challenge for the Company. The uncertainties related
to the Company’s financing and viability remain, amplified by the continued uncertainty in
the mining sector at large. Under these conditions, the loss of key skills is a significant risk
to the organisation.
Impact
The loss of critical skills in key positions could play a significant role in our ability to deliver
against production and financial targets. In order to retain our skilled labour, we
continuously review our remuneration packages and the incentive and retention schemes.
This allows our pay structures to remain in line with the packages offered by our peers. An
inherent risk of attracting and retaining employees of the required calibre is that it can
result in increased costs.
Mitigation
- Introduction of retention bonuses and Staggered Deferred Cash Plan;
- Individual Development Plans, succession planning and retention strategies for
scarce skills have been established as part of ensuring the development and
retention of critical skills;
- Ongoing monitoring of remuneration practices which match Lonmin peers;
- Retention programmes for key skills;
- Categorisation of skills, establishment of promotional pools and career paths
reviews to remain relevant to the organisation have been established; and
- Graduate development, mentorship programmes and internship programmes
have also been established to ensure development of existing and future human
resources capacity.
Change
The retention of critical skills remains a key risk to the organisation. One of the key
safeguards at the moment is the fact that a large part of the mining sector is experiencing
similar challenges to the ones that Lonmin is experiencing which has limited the number
of opportunities that are available. The risk for Lonmin is that it may not always be able to
replace the critical skills understanding the business and the environment with resources
available in the market.
KPIs
Turnover rates
Strategic Report
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 4) and its equity accounted investment
(note 11).
The Group’s related party transactions in the year and balances at 30 September are
summarised below:
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2018 2017
$m $m
Transactions in the year:
Purchases from joint venture – Pandora i 7 33
Amounts due from joint venture – Pandora i - 6
Amounts due from associate – Incwala 1 1
Interest accrued from HDSA investors in Incwala 29 26
Subscription paid to the Platinum Jewellery 3 5
Development Association ii
Balances at 30 September:
iii
Amounts due from HDSA investors in Incwala 433 416
All related party transactions are priced on an arm’s length basis.
Footnotes:
i The ore purchases relate to October and November 2017. On 6 December 2017 Eastern Platinum Limited acquired 50% of the
Pandora Joint Venture (Pandora JV) bringing Eastern Platinum Limited’s ownership to 100%, therefore the joint venture is no longer a
related party at 30 September 2018.
ii The subscription paid by Lonmin is material to the Platinum Jewellery Development Association of which Lonmin is a member.
iii Refer to note 12 for details regarding the amounts due from HDSA investors in Incwala. This amount is before deducting the
accumulated impairment charge of $433 million.
Sponsor: J.P. Morgan Equities South Africa (Pty) Ltd
END
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