15th Dec 2014 15:30
15 December 2014
Lonmin Plc ("Lonmin" or the "Company")
Annual Report and 2015 Annual General Meeting
On 10 November 2014 Lonmin announced its Final Results for the year ended 30 September 2014 (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 2014 (the "Annual Report and Accounts") |
• | Circular relating to the Annual General Meeting to be held on 29 January 2015 |
• | 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.
Risk tolerance
Risk tolerance is an indication of the amount of risk a company is willing to accept in pursuit of its strategic objectives. This is reflected in a company's capacity to sustain losses yet continue to meet its obligations under different trading conditions. Lonmin has a matrix scoring system in place in terms of which risks are rated based on their probability of occurrence and potential
severity. These ratings are then used to drive mitigating actions.
1) Safety | ||||
Description | Impact | Mitigation | Change | KPIs/Performance metrics |
At Lonmin we value our people. We try to position ourselves as an employer of choice, and provide a safe working environment for our employees, our contractors and the communities we operate in. However, the mining industry has inherent risks that can cause fatalities or injuries. These include falls-of-ground, tramming, working at heights, scraping and rigging incidents, exposure to gases, fire, molten metal, electrocution and many other hazards. | A failure in safety routines could result in injury or loss of life, which would have tragic implications for employees, their families and the local communities. It would also severely disrupt operations and could result in safety stoppages. These may be instigated by management, or the DMR could temporarily suspend part or all of the operations under the Mine Health and Safety Act (commonly referred to as a Section 54 stoppage). | There is a clearly defined employee safety engagement strategy, safety protocols and standards that are set, monitored and managed by various operational committees and ultimately the Exco. The SHE Committee oversees all safety matters on behalf of the Board. Certain targets in the Balanced Scorecard are designed to incentivise safe behaviour, as discussed in more detail in the Remuneration Implementation Report. After this year's strike, as part of the production ramp up process, the Company invested many hours in safety training and induction before re-commissioning operations in order to minimise the risk of any safety failures, either underground or on surface, as our main focus was on our people. | Allowing for the impact of the strike, there has been an overall improvement in the safety environment as demonstrated by a year-on-year improvement in LTIFR of 4.6%. The number of Section 54 stoppages decreased during the year, as did the number of shifts lost as a result of these stoppages. Regrettably, however, we suffered one fatality during the year. We continue to engage and build relationships with the DMR at various levels of management. | LTIFR
Number of LTIs
Number of fatalities
Severity rate |
2) Employee and union relations | ||||
Description | Impact | Mitigation | Change | KPIs/Performance metrics |
A volatile industrial relations environment characterised by poor communication, mistrust and industrial action, including strikes, exacerbated by poor macroeconomic and socioeconomic factors, could result in disruptions to operations and have a material adverse effect on the Group's financial position. | The three largest South African PGM producers, including the Company, experienced significant industrial action during the year due to a breakdown in wage negotiations with the majority union, AMCU. The five month long strike at our Marikana operations resulted in the loss of around 391,000 saleable Pt ounces and an estimated revenue loss of R8.3b. Striking employees lost, on average, 45% of their earnings and many suffered deterioration in their health and wellbeing due to poor nutrition and reduced access to health care and medication. The protracted strike also severely impacted local communities and businesses, suppliers and, more broadly, led to a deterioration in investor confidence in the sector and in the region. | The strike concluded with a three year wage agreement negotiated in tandem with the other two major PGM producers, which will be effective until 30 June 2016. A relationship charter has also been established with AMCU including, importantly, a commitment from AMCU that there would be no further industrial action in respect of the issues covered by the three year wage agreement. A process of structured engagement with AMCU with clear governance structures and capacity development initiatives has been established. The Company intends to extend the charter to its minority unions. In addition, management has embarked on a programme to re-establish direct communication with our employees, using a variety of communication channels such as open forums (legotlas). | The industrial relations environment deteriorated during the course of FY2014. However, the settlement agreement and the relationship charter represent a significant step forward in our with AMCU and with our employees | Tonnes lost due to industrial action |
3) Failure to deliver required operational performance | ||||
Description | Impact | Mitigation | Change | KPIs/Performance metrics |
Failure to deliver against production and cost targets can result from a variety of reasons, including poor operational management, poor productivity, safety stoppages, industrial action and difficult geological conditions. | Poor operational delivery can lead to a decline in profitability and cash generation, which would in turn pose threats to our liquidity position and impact profitability. | A clear and focussed short and medium term operational strategy has been developed. The appointment of a Chief Operating Officer to oversee both mining and processing operations together with the supporting functions has improved operational alignment across the business. The cost control programme implemented in FY2013 continues to gain traction and is delivering cost savings across the business. | The level of risk increased significantly during FY2014 as a result of the five month strike. | Productivity
Platinum sales
Immediately available ore reserves
PGM instantaneous recovery rate
Cost of production per PGM ounce |
4) Community relations | ||||
Description | Impact | Mitigation | Change | KPIs/Performance metrics |
Dysfunctional relationships with local communities hinder transformation and can lead to operational disruption. | Deteriorating relationships with the local communities as a result of poor services and high unemployment can result in civil unrest which could severely disrupt our operations. As many of our employees live locally, any disruptions within the communities and poor living conditions can have a direct impact upon our employees. The failure to deliver social upliftment projects (triggering protests or violence) and corporate reputational damage can result if communication with these stakeholders is not managed effectively. The environmental, health and social impacts of mining can be felt by those communities who live and work in close proximity to the operations. | A number of initiatives aimed at improving the quality of life of our employees, their families and their communities are underway. These projects are being driven through a structured stakeholder engagement process. There are also various community projects underway, many of which are particularly focused on increasing levels of local recruitment. | There has been a significant step forward in our relations with the local communities that surround our operations. An agreement has been reached with the Bapo ba Mogale Traditional Community to convert their existing entitlement to future royalties and their interest in the Pandora JV in to equity participation in Lonmin and a deferred payment paid over five years as well as the opportunity for the Bapo to participate in the procurement and business value chain activities. In addition, two community trusts have been established for the Bapo and the community residing in the western portion of our Marikana operations on land not belonging to the Bapo for the purpose of funding community upliftment projects. | Community spend
Number of bursaries
Number of learnerships
Sustainability and social agenda |
5) Metal prices and currency volatility | ||||
Description | Impact | Mitigation | Change | KPIs/Performance metrics |
Commodity price and currency volatility increase the risks 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/ZAR exchange rate as the majority of our cost and capital expenditure is incurred in South African Rand). Our business plans and projections have been based on mildly increasing PGM prices, which may not be realised. | Incorrect metal price and exchange rate assumptions used in long-term planning can lead to incorrect planning decisions and 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. This could then negatively affect the demand for our products and hence our revenue. Underachievement of projected levels of profitability and cash flows can impact our ability to fund and undertake projects and spending planned in future years. | Lonmin gathers market information from a number of different sources to better understand the supply and demand dynamics for our key products and the factors that could affect metal price volatility. We do this to try and develop more accurate assumptions in our forecasting. We also enter into longer term volume contracts with key customers to mitigate off-take risk. Although historically there has been a degree of correlation between the USD/ZAR exchange rate and the PGM basket price, this does not always hold true and can dislocate. Such dislocations can be both positive and negative. Currently it is not our policy to hedge, partially because the cost of hedging metal prices for the products which Lonmin produces are high and the forward markets in these metals are not very liquid. Update business plans and projections on an ongoing basis, and adjust the same for continuing lowered PGM prices. | Metal and currency markets continue to remain very volatile. In particular 2014 has seen lower USD PGM metal prices but these have been off-set by a weaker South African Rand which has meant that cost and capital expenditure increases (as reported in USD) have been contained. This has helped maintain margins. However, the continued volatility and uncertainty in commodity price and currency markets continue to make longer term planning and investment decisions challenging. | Dollar price per PGM ounce
Rand Basket price
Platinum price
Dollar/Rand exchange rate |
6) Inadequate Liquidity Levels - Unavailability of funds to meet business needs | ||||
Description | Impact | Mitigation | Change | KPIs/Performance metrics |
The availability of funds to meet business needs can affect the Group's ability to continue as a going concern. Key factors affecting the Group's liquidity position are weak metal prices, a stronger USD/ZAR exchange rate and lower than planned production. | Inadequate liquidity can lead to insufficient funds to facilitate on-going operations, reduced facility headroom or a breach of certain covenants to which our bank facilities are subject. | The Group's philosophy is to maintain an appropriately low level of financial gearing given the sensitivity of the business to fluctuations in PGM commodity prices and the USD/ZAR exchange rate. Mitigation measures include cash conservation and prudent management of bank debt facilities. The Board reviews and approves the financial strategy and the output from annual budgeting, long-term planning and cash flow forecasting are reviewed by the Board and senior management. | Exposure to this risk increased as the five month long strike consumed our net cash. | Free cash flow
Net debt
Amount of available banking facilities |
7) Mining Charter obligations, other regulatory requirements and social licence to operate | ||||
Description | Impact | Mitigation | Change | KPIs/Performance metrics |
Lonmin is heavily regulated by a vast array of regulatory requirements including the MPRDA. This legislation is critical as it impacts Lonmin's operating licence. Various other regulatory requirements are also required to be complied with and it is therefore critical that they are understood and appropriate measures are implemented to achieve compliance. Alongside these legal and regulatory obligations and, equally critical, are our social responsibility obligations by which we earn our social licence to operate in the communities that host our operations. | Lonmin's New Order Mining Rights are conditional upon the performance of obligations set out in the social & labour plans agreed with the DMR and which detail the Group's responsibilities under the Mining Charter. Failure to meet these obligations can impact Lonmin's operating licence and can result in deteriorating relationships with our stakeholders, reputational damage, regulatory fines and other punitive measures. In addition, certain of our BEE partners are reliant on funding provided by the Company and have significant balances owing to us. | Social and community programmes have been implemented. Progress against our commitments is closely monitored by the Exco, SET Committee and the Board. There is a stakeholder engagement programme in place, including on-going dialogue with the relevant authorities in South Africa and all other stakeholders. The Balanced Scorecard includes specific metrics which have been designed to incentivise delivery against specific targets. Lonmin holds security over shares of certain of its BEE partners or their underlying investment in Lonmin Group companies, which could be enforced should these counterparties default on their obligations to us. | There has been an overall increase in the level of risk in this area. Whilst the Group has been successful in reaching an agreement with the local communities to enable them to achieve equity participation in Lonmin and an ESOP is expected to be implemented for the benefit of our employees, there are certain commitments in relation to, for example, housing and employment equity, which will not be satisfied to the extent and within the timescales originally envisaged. During the year, an advance dividend was made to Incwala and interest was rolled up on the debt owed by an entity in the Shanduka Group. Overall, sums owed to the Group by its BEE partners increased during the year. The Farlam Commission of Inquiry is nearing completion with final arguments due to be presented mid November 2014 and the findings and recommendations are due to be presented to the President in March 2015. The extent to which these proceedings impact our social licence to operate and other potential impacts on our business will only become clear once the Commission's report is released by the State President. | Level of equity participation
Level of HDSA% representation
Number of hostels converted
Level of BEE procurement
Level of spend on Human Resources Development
HDSA receivable and recoverability
Level of community spend |
8) Changes to the political, legal, social and economic environment including resource nationalism | ||||
Description | Impact | Mitigation | Change | KPIs/Performance metrics |
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 in connection with 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. Resource nationalism is a global phenomenon, not limited to a single country. In South Africa, the threat of nationalisation appears to have dissipated to some extent, however, debate continues regarding future policies relating to South Africa's natural resources. This includes debate regarding the identification of strategic minerals, the extent of beneficiation required, the role of the state owned mining company, whether there should be increased taxation of the South African mining industry and whether the State should be entitled to a free carried interest in certain petroleum and gas projects. The above issues have all largely been incorporated within the Mineral and Petroleum Resources Development Act (MPRDA) Amendment Bill which remains the subject of governmental 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 differentiated 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 current tax regime with a view to determining whether additional taxes should be imposed on mining companies or whether mining taxation should be restructured. | 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. This is reflected in decreased offshore investor appetite for both South African equity and debt exposure. If some of the issues under consideration are implemented this could have a material adverse effect on the Group's future operational performance and financial position. For example, profits could be negatively impacted by the imposition of additional taxes and revenues could be impacted by the sale of metals at discounted differentiated 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. | Bilateral and industry level discussions with the DMR and other government agencies are ongoing with a view to balancing the need for the country to benefit more from its natural resources with the need to attract and retain mining investment and jobs. Mining companies and industry bodies have made representations regarding the content of the MPRDA Amendment Bill with a view to highlighting areas of concern and motivating for amendments to the Bill. This appears to have had a positive impact given Presidential consent of the Bill and industry engagement. 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 | There has been an improvement in the level of risk. The move away from the concept of nationalisation in the resource nationalism debate has been positive. However, many of the issues as described herein could be included within the MPRDA Amendment Act (once signed into law). | - |
9) Loss of Critical Skills | ||||
Description | Impact | Mitigation | Change | KPIs/Performance metrics |
Increased global investment in mining over the past few years has driven demand for skilled workers around the world. In South Africa, this is compounded by the requirement to increase the proportion of HDSAs represented in management to 40% by the end of 2014. | The loss of critical skills could negatively impact safety, production and the ability to deliver against targets. Failure to meet our HDSA targets could also negatively impact Lonmin's mining rights. In order to retain our skilled labour, we continuously review market related remuneration packages as compared to the incentive and retention schemes offered by 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. | There are processes in place for individual development programmes, succession planning and retention strategies for scarce skills. There is also a particular focus on bursaries, graduate development, mentorship programmes and an internship programme to assist students who need to complete their practical work in order to obtain tertiary qualifications. When recruiting, preference is given to HDSA applicants. The Leadership Staircase programme has been rolled out in mining and processing. This programme maps the developmental path for those employees that have been identified for fast tracking to management positions. | Risk in this area increased due to the increasing competition for individuals with critical skills, including HDSAs. | Level of HDSA representation at various levels
Number of women in mining
Number of women in core mining positions
Age profile of RDOs
Attrition rate
Level of HDSA bursaries |
10) Access to secure energy and water | ||||
Description | Impact | Mitigation | Change | KPIs/Performance metrics |
Lonmin faces potential supply constraints in energy and water together with increased costs in the consumption of these utilities. Electricity supply is likely to be especially at risk in the next two years until Eskom's new power stations, which are currently behind schedule, come on stream. In 2013, the National Energy Regulator of South Africa granted Eskom an 8% average increase per annum over the next five years. Despite these tariff increases being lower than those in the previous few years, they continue to be higher than inflation. Water availability is particularly problematic in provinces such as the North West and Limpopo where the infrastructural capacity to store and transfer water is limited and where long periods of drought are common. Furthermore, water for mining is increasingly competing with other priorities, such as water for communities, agriculture and other industries. | 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. This is then compounded by the imminent implementation of a carbon tax which would place further pressure on our operational costs. | Lonmin has implemented numerous energy saving initiatives. There are also load shedding and contractual agreements in place with Eskom to manage any supply side constraints from the grid. Trial renewable generation and additional energy saving projects are currently under investigation or implementation. Similarly, with regard to securing water, an Integrated Water Balance project is underway and forms part of the Water Conservation and Demand Management Plan for Marikana. The aim of this strategic project is to optimise water use efficiency, minimise fresh water consumption and improve our long-term access to water. | Risk in this area has decreased from 2013. Despite the actual energy efficiency performance for 2014 being skewed due to the five month long strike, FY2014 was nonetheless successful in terms of our energy efficiency journey with several initiatives completed and a significant increase in general awareness evident amongst the management teams across the operations. | Energy efficiency
Water efficiency
Freshwater consumption |
11) Lack of geographical diversification | ||||
Description | Impact | Mitigation | Change | KPIs/Performance metrics |
Lonmin's principal operating subsidiaries are concentrated in one location and one sector, which increases the level of risk in the event of operational disruptions or, more broadly, in the event of uncertainty in the macro environment. | Excess concentration of our business activities makes the Group vulnerable to disruptive events, which could significantly impact the Group's operational and financial performance. | Whilst delivering greater shareholder value from our Marikana operations remains a key priority, we actively consider opportunities in and outside of South Africa, both organically, through acquisition or through commercial arrangements with other companies. Lonmin has an established greenfield growth opportunity at Akanani and we have a modest PGM resource in Canada. Exploration projects in Canada and Northern Ireland are ongoing. | There has been no change in this risk exposure. However, the likelihood of the risk materialising has increased. | - |
TRANSACTIONS WITH RELATED PARTIES
The Group has a related party relationship with its Directors and key management (as disclosed in the Directors' Remuneration Report and in note 5) and its equity accounted investments (note 13).
The Group's related party transactions and balances are summarised below :
| 2014 $m | 2013 $m |
Purchases from joint venture - Pandora | 30 | 46 |
Amounts due from joint venture - Pandora | 8 | 9 |
Amounts due from associate - Incwala | 1 | 2 |
Dividends to minorities - Incwalai | 37 | 11 |
Interest accrued from HDSA investors in Incwala | 18 | 17 |
Subscription paid to the Platinum Jewellery Development Associationii | 9 | 7 |
Purchases made from Glencore Xstrata Plcii | - | 1 |
Sales to Glencore Xstrata Plciii | 19 | 36 |
Amounts due from Glencore Xstrata Plciii | - | - |
Amounts due from HDSA investors in Incwalaiv | 417 | 399 |
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. |
In addition, the Group has committed to provide an additional loan facility to IP of R242 million which they can draw down on to meet their funding obligations. | |
ii | The subscription paid by Lonmin is material to the Platinum Jewellery Development Association of which Lonmin is a member. |
iii | Glencore Xstrata Plc has a 24.54% shareholding in Lonmin Plc. |
iv | Refer to note 14 for details regarding the amounts due from HDSA investors in Incwala. |
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