13th Dec 2010 11:43
13 December 2010
Lonmin Plc ("Lonmin" or the "Company")
Annual Report and 2011 Annual General Meeting
On 15 November 2010 Lonmin announced its Final Results for the year ended 30 September 2010. The announcement made on that date included inter alia a condensed set of financial statements and a management report, as required by DTR 4.1.
Lonmin has today posted to shareholders and, in accordance with LR 9.6.1 R, has submitted to the National Storage Mechanism, printed copies of the following documents:
• Annual Report and Accounts for the year ended 30 September 2010 (the "Annual Report")
• Circular relating to the Annual General Meeting to be held on 27 January 2011
• 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.Hemscott.com/nsm.do.
As required by DTR 6.3.5 R (3), the Company confirms that the Annual Report 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.
Pursuant to DTR 6.1.2 R, Lonmin confirms that one of the resolutions to be proposed at the Annual General Meeting is the adoption of a new employee share scheme, the Annual Share Award Plan. In accordance with its obligations under LR 13.8.11 R, Lonmin confirms that a copy of the draft rules will be available on the National Storage Mechanism and are also available from the Company Secretary's Office, Lonmin Plc, 4 Grosvenor Place, London SW1X 7YL and, on the date of the Annual General Meeting, at the Church House Conference Centre, Dean's Yard, Westminster, London SW1P 3NZ from at least 15 minutes before the commencement of the meeting until its conclusion.
The appendix to this announcement contains additional information which has been extracted from the Annual Report and Accounts for the year ended 30 September 2010 (the "Annual Report and Accounts") for the purposes of compliance with the Disclosure and Transparency Rules and should be read together with the Final Results Announcement, which can be downloaded from the Company's website at 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 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 internal control and the principal risks and uncertainties
• A statement on related party transactions
• Certain financial statements
APPENDIX
INTERNAL CONTROLS AND RISK MANAGEMENT
This section explains the Group's internal control environment, how we assess its effectiveness and how we identify, evaluate and manage risk. There is also a discussion of the principal risks and uncertainties facing the Group, the consequences if these are not managed, and the mitigations currently relied upon by management.
Internal controls
The Company complied throughout the year under review, and continues to comply with, the provisions of the Combined Code on internal controls and the relevant parts of the Turnbull and Smith guidance. While the Board has overall responsibility for the Company's system of internal control, management is responsible for implementing agreed Board policies. It is important to recognise that systems of internal control can only be designed to manage, rather than eliminate, the risk of failure to achieve the business objectives and cannot provide absolute assurance against material mis-statement or loss.
Key features of the Company's internal control framework include:
• a schedule of matters reserved for the Board's decision;
• detailed terms of reference for the Board Committees;
• a Code of Business Ethics and external whistle-blowing hotline;
• Human Resources policies which establish a consistent set of values and standards for managing employees and contractors throughout the group;
• a document summarising the delegation of authority cascade from the Board to the various levels of Group management;
• documented policies and procedures for certain key group wide matters, including treasury, capital investment, risk management, human capital and procurement, supported by local policies and procedures as necessary;
• the Group strategy and Life of Business Plan, supported by the mineral resource database and model, and annual technical and financial budgets;
• systems including the SAP enterprise resource planning system, a bespoke metallurgical tracking system and a detailed mine planning system;
• management reporting against plans, budgets and forecasts;
• external audit and other assurance, including a biennial audit of mineral reserves and resources; and
• internal audit and other in-house review processes including control self assessments.
To ensure the Audit and Risk Committee has full oversight of the work of the internal audit function, the Head of Internal Audit reports to the Chairman of the Audit and Risk Committee, with a joint reporting line with effect from 1 October to the CFO (previously it was to the VP, Treasury and Risk). The Audit and Risk Committee meets regularly with both the internal and external auditors to discuss internal control and other matters arising from the assurance process.
The Board is responsible for reviewing the effectiveness of the system of internal control, including financial, operational and compliance controls and systems for the identification and management of risk. This task is carried out on behalf of the Board by the Audit and Risk Committee, which has undertaken a review of the internal control environment following the year end. To do so, the Committee assessed the following:
• responses provided by c.90 senior managers in management confirmation letters completed at the end of the financial year and designed to provide assurance on the effectiveness of internal controls and compliance with Group policies and procedures;
• a number of external parties providing assurance to different parts of the business on its control environment;
• progress made by management in identifying and mitigating the key risks facing the Group;
• routine management reporting on business performance and results; and
• reports provided to the Audit and Risk Committee by both internal and external auditors and other specialist advisors in relation to the Group's risk and control environments.
Action has been, or is being, taken where necessary to address as far as practicable any significant failings and weaknesses identified in the reviews of effectiveness of internal controls whether they are financial, operational or compliance.
Risk management
We have an integrated approach to risk management and internal controls to ensure that our review and assessment of risk is used to inform the internal audit process and the design of the internal controls environment. The risk management process, which has been in place throughout the year under review and to the date of approval of the accounts, identifies, evaluates, manages and monitors the significant risks facing the business. The Audit and Risk Committee regularly reviews this process and monitors its effectiveness on behalf of the Board, in line with the guidance appended to the Combined Code.
The approach taken is systematic and combines both a "top-down" and a "bottom-up" review and approval process. All senior managers are responsible for managing and monitoring risks in their area of responsibility that could impede the achievement of business objectives and these are recorded in a risk register. It is mandatory for this process to take place at least once a year but in practice, reviews take place more frequently in most business areas. For each risk identified, management assesses the root causes, consequences and mitigating controls in relation to the risk. An assessment is then made of the maximum risk exposure and the effectiveness of the controls in place to mitigate that risk. A numerical scoring matrix is used to derive a risk score and priority after taking account of mitigating controls. Where the risk score and priority remains high after mitigating controls are taken into account, action plans are devised to reduce these risks further and progress against these plans is regularly reviewed. Each of the business areas is supported by an Operational Risk Champion who co-ordinates all risk management activity in that business area and ensures that actions are implemented appropriately. Applying this risk management process across all business activities ensures all risks are measured, monitored and reported on a consistent basis.
Due to the nature of our operations, a significant part of our risk register relates to safety, environmental and social matters. To further enhance our focus on such matters, each business area has dedicated personnel responsible for managing environmental and safety matters respectively, including monitoring the progress of action plans recorded in the risk register. In this way, we ensure accountability and responsibility for these matters remains with the operational management team.
The principal risks faced by the Company are considered and reviewed regularly by the Board. Risks specifically relating to safety, environmental and social matters are reviewed separately and in more detail by the Safety & Sustainability Committee, which then provides views on the management of these risks to the Board.
Lonmin groups risks into strategic, financial, external and operational risks. The key risks faced by Lonmin, based on our current understanding, along with their potential impact and the mitigation strategies developed are detailed on the following pages. There is no implied ranking in the order of disclosure. The Company's strategy takes into account these known risks, but risks will exist of which we are currently unaware and the severity or probability of the occurrence of known risks may change from time to time.
Strategic Risk
Impact - Ineffective or poorly executed strategy fails to create shareholder value or fails to meet shareholder expectations.
Risk | Impact | Mitigation |
Investment and business decisions fail to deliver shareholder value | Shareholder value not optimised. | Review of strategy at Board level on an annual basis with monthly monitoring of operational and financial performance. Consistent investment appraisal process applied to new capital spend. Opportunities have been taken to restructure the business to maximise shareholder value. |
Access to a secure supply of water* | Could impact on the ability to run current operations and deliver future expansion plans. | Measurement of water usage and water saving initiatives implemented. Plans aligned with long term strategy of the Company. Water supplies secured for key areas of the business and strategies developed to support expansion plans. Active participation in relevant Industry Bodies. |
Access to a secure supply of electricity* | Could impact on the ability to run current operations and deliver future expansion plans. | Measurement of energy usage and energy saving initiatives implemented. Load shed and contractual agreements in place with Eskom (SA energy supplier). Continuity planning in place and additional supply for key areas to be secured accordingly e.g. additional power supply secured for the new K4 mining shaft. Active participation in relevant Industry Bodies. |
* see Sustainable Development Review for more detailed disclosure.
Financial Risk
Impact - Asset performance and / or excessive leverage results in the Group not being able to meet its financial obligations.
Risk | Impact | Mitigation |
Foreign exchange risk (specifically US Dollar/SA Rand) | Significant fluctuations in exchange rates to which the Group is exposed could have a material adverse effect on the Group's financial condition. | Current policy is not to hedge this currency pair. There is a long term correlation between US Dollar/SA Rand and PGM basket price, although this can dislocate over the shorter term. |
Commodity price risk | Significant fluctuations in commodity prices to which the Group is exposed could have a material adverse effect on the Group's financial condition. | Current policy is not to hedge PGM basket prices. There is a long term correlation between US Dollar/SA Rand and PGM basket price, although this can dislocate over the shorter term. Hedging of base metals and gold is undertaken under the remit of the Price and Risk Committee. |
Uncompetitive gross and/or unit costs | Could have a material adverse effect on the Group's competitive position and future financial condition. | High cost per ounce operations put on care and maintenance. Cost base was significantly reduced in 2009 and we continue to monitor this closely. Clear understanding of our competitive position and significant focus on productivity improvement plans. Balanced scorecard measures incentivise cost control and productivity. Introduced additional cost controls such as the "Bill of Materials" which better aligns usage of consumables with production. |
Access to cost effective funding** | The Group may not be able to obtain cost effective funding when required which could impact on the ability of the Group to meet its liabilities as they fall due. | All debt matures beyond FY11. Key covenants in banking lines constantly monitored through rolling cash flow forecasts. Regular contact with our banking group. Financing for the Shanduka transaction facilitated by an equity placing. |
** see Financial Review for more detailed disclosure.
External Risk
Impact - The political, industry or market environment may negatively impact on the Group's ability to independently manage and grow its business.
Risk | Impact | Mitigation |
Changing political landscape in any of the countries in which we operate negatively impacts the business | The occurrence of such a change could have a material adverse effect on the Group's future operational performance and financial condition. | Ongoing dialogue with government at all relevant levels and other key stakeholders. Effective communications programmes with key stakeholders. Many PGM mining companies would face the same issue. |
PGM supply & demand volatility | Significant changes to either/both the demand and supply side in the PGM industry (e.g. product substitution or supply side constraints) could have a material adverse effect on the Group's future operational performance and financial condition. | Gathering market information from customers and other sources. Monitoring market segments and trends in the industry. Continue to support initiatives to develop existing and new markets for PGMs. Longer term volume contracts with key customers. |
Operational Risks
Impact - Operational event impacting staff, contractors, communities or the environment leading to loss of revenue and / or reputation or increased costs.
1. Losing Licence to Operate
Risk | Impact | Mitigation |
Failure of safety routines and/or safety strategy | Could result in a catastrophic loss of life, severely disrupt operations and have a material adverse effect on the Group's financial condition. | The Safety & Sustainability Committee oversees all safety matters. Safety standards set and monitored regularly throughout the Company. Clearly defined safety protocols including Safe Behaviour Observations. Plant maintenance programmes supported by critical spares inventory. Regular safety audits carried out by the company and independent experts as well as inspections by the Department of Mineral Resources (DMR). Business interruption insurance cover in place. Balanced scorecard measure and other bonus schemes incentivise appropriate safety behaviour. |
Impairment to Lonmin's mineral rights | Lonmin's right to mine may be compromised in some measure. | In 2010, Lonmin received confirmation from the DMR of its mineral rights including the right to mine associated minerals. A private challenge may exist in relation to a limited portion of the estate which Lonmin intends to contest vigorously. |
Corporate & Social Responsibility* | Non-delivery of our Social and Labour plan could result in the withdrawal of our Mining Licence. | Social and community programmes are monitored by the Executive Committee and the Safety and Sustainability Committee. KPIs are set and measured on a regular basis. Ongoing dialogue with the relevant authorities. Balanced scorecard measures incentivise delivery of a selection of targets. |
Failure to comply with Black Economic Empowerment (BEE) codes in relation to mining e.g. failure to achieve BEE equity participation of 26% by 2014 | Results in a deteriorating relationship with the DMR in South Africa and puts mineral rights at risk. | Engagement with the DMR in South Africa and with all other stakeholders to ensure compliance. We have transformed our BEE vehicle (Incwala) by focusing on one strong partner (Shanduka) and have financially supported the transaction that facilitated this change. |
Theft of explosives | Lives are put at risk both internally and externally e.g. where explosives are stolen to perpetrate a further criminal act outside of the business. | Delivery and tracking of explosives is strictly controlled and independently audited. Audit points are closely followed up. Access points are controlled across the property and identification checks and employee searches are conducted. |
* see Sustainable Development Review for more detailed disclosure.
Operational Risks (continued)
2. Serious Impairment in Production
Risk | Impact | Mitigation |
Inadequate and/or poor quality ore reserves | Significant changes to our assessment of the quality and extent of our ore reserves could have a material adverse effect on the Group's future operational performance and financial condition. | Bore hole sampling and seismic surveys conducted under the supervision of specialist geologists coupled with independent audits of reserves. Quality in-house technical team with multiple internal review processes. |
Lack of long term ore reserve depletion planning | Shareholder value not optimised over the long term. | Independent peer review of Long Term Plan before submission to the Board. |
Lack of short term ore reserve development planning and resultant shortfalls in mining output | Could severely disrupt operations and have a material adverse effect on the Group's financial condition. | Technical Services functions acting independently of mine management located at mine shafts scrutinising flexibility and working areas. Clear mining management structure with defined accountabilities and responsibilities. Performance measured and reported to the Board. Balanced scorecard measure incentivises appropriate ore reserve development. |
Theft of equipment and materials e.g. copper cable | Lives are put at risk e.g. electronic safety equipment no longer functions effectively where copper cable has been stolen. | Access points are controlled across the property and identification checks and employee searches are conducted. Constant vigilance required. |
Metal recoveries throughout operations not maximised | Could have a material adverse effect on the Group's financial condition. | Grade targets set and measured by assay and sampling in Mining. In Processing, plant maintenance programmes ensure plant stability to assist in optimising recoveries. Technical Services functions acting independently of operational management scrutinise management information. Experienced management teams and clear benchmarks set. Balanced scorecard measure ensures focus on recoveries. Third party audits and peer reviews conducted. |
Inadequate smelting performance & back-up capacity | Could severely disrupt operations and have a material adverse effect on the Group's financial condition. | Pyromets provide an element of back-up capacity. Spare capacity in Number One furnace currently gives ability to catch up. Number One furnace includes improved monitoring and fault detection technology. The Board has approved the necessary investment to increase smelting capacity by the construction of an additional furnace and for ongoing improvements to the Number One furnace. |
Major fault on key piece of equipment e.g. smelter | Could severely disrupt operations and have a material adverse effect on the Group's financial condition. | Plant maintenance programmes coupled with an on-site stock of critical spares. |
Deteriorating industrial relations and/or union disruption | Could result in an unstable workforce that severely disrupts operations and has a material adverse effect on the Group's financial condition. | Full engagement strategy with the unions and employees. This strategy is supported by our other external relationships, community projects and regular communication with our employees. New union meeting structure in place. |
3. Major Financial Fraud or Theft
Risk | Impact | Mitigation |
Fraud and/or theft of PGM product | Could have a material adverse effect on the Group's financial condition. | Fraud awareness training and security reviews supported by a code of ethics and a whistle blowing programme. Security and Investigations department operations carried out in key areas of the business. New management structure for Security has been implemented to improve line accountability and to provide a better check and balance within the security function. |
Failure of internal controls | Could severely disrupt operations and have a material adverse effect on the Group's financial condition. | Clear organisational structure with appropriate segregation of duties which is independently monitored on an ongoing basis. Significant focus on tracking the ounces through the production process. Independent internal and external audits with follow up of outstanding action points. Aligning the Risk Management framework to the Internal Audit framework to provide further assurance that key controls effectively mitigate key risks. |
4. Catastrophic Environmental Event
Risk | Impact | Mitigation |
Catastrophic environmental event results in contamination and/or emissions that impact on the surrounding environment and communities* | Could lead to loss of life, health concerns in local communities, withdrawal of relevant licences and potential litigation. | Flood barriers in place at mine shafts. Safety and monitoring procedures in place on return water and tailings dams. Surface and ground water contamination levels monitored. Emissions monitored by regular sampling and scrubber systems in place. Business interruption insurance cover in place. |
* see Sustainable Development Review for more detailed disclosure.
Transactions with Related Parties
In March 2010 the Company announced that it had entered into long-term contracts with two parties to supply low-grade PGM but chrome-rich tailings to those counterparties, who would construct chrome recovery plants to treat the tailings and return a chrome-depleted concentrate to Lonmin for further reprocessing. One of the counterparties is the Xstrata-Merafe Chrome Venture, which involves a subsidiary of Xstrata Plc, which owns a significant shareholding in the Company. The UK Listing Authority concurred with the Company's assessment that this transaction was of a revenue nature in the ordinary course of business, and no shareholder approval was required.
The transaction with Shanduka Resources referred to above resulted in a financial benefit flowing to the selling shareholders in Incwala Resources (Pty) Ltd. Two of the selling shareholders, being the Thelo Consortium and the Vantage Consortium included certain individuals who had been nominated by Incwala to serve as directors of Lonmin's operational subsidiaries. As such, Thelo and Vantage were considered to be related parties of the Company. Of the £200 million provided to Shanduka by Lonmin, approximately £96 million of this was used by Shanduka to purchase Thelo and Vantage's interests in Incwala. It was these elements of the Shanduka transaction which were therefore technically transactions with related parties for the purposes of the UK Listing Rules. The quantum of these transactions did not require shareholder approval.
As detailed above, part of the funding provided to Shanduka by Lonmin was funded by an equity placing. Pursuant to the placing, Xstrata Zinc BV, a subsidiary of Xstrata Plc, subscribed for 2,233,600 new ordinary shares of $1 each at a cost of approximately £39.4 million and M&G Investment Management Limited, part of the Prudential plc group of companies, subscribed for 998,377 new ordinary shares of $1 each at a cost of approximately £17.6 million. Both Xstrata Plc and the Prudential plc group of companies own significant shareholdings in the Company. The quantum of these transactions did not require shareholder approval.
Statement of Directors' responsibility
The following responsibility statement is repeated here solely for the purpose of complying with Disclosure and Transparency Rule 6.3.5. This statement relates to and is extracted from page 91 of the Annual Report and Accounts. Responsibility is for the full Annual Report and Accounts not the extracted information presented in this announcement or the Final Results Announcement.
"We confirm that to the best of our knowledge:
·; the financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole; and
·; the directors' report includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.
Roger Phillimore Alan Ferguson
Chairman Chief Financial Officer"
end
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