8th May 2008 07:01
Lonmin PLC08 May 2008 Lonmin Interim Results (Part 1 of 2) Focusing on Operational Performance • Record financial results in a strong pricing environment • Continued progress in safety performance with a 45% improvement in LTIFR • New mining team embedded and implementing plans to optimise mine performance • Production impacted by four day Eskom power outage, safety shutdowns and absenteeism • Refined production of 282,650 ounces of Platinum and 536,128 ounces of total PGMs • Pre-feasibility studies for Limpopo and Pandora completed • Attributable Indicated Resource for Akanani significantly increased to 8.8 million ounces of PGMs (3PGE+Au) • Interim dividend increased by 7.3% to US$0.59 per share +--------------------------------+-------+-------------+------------+----------+|Financial highlights - | | | | ||Continuing Operations | | | | || | | 2008 | 2007 | Variance ||Six Months - 31 March 2008 | | | | |+--------------------------------+-------+-------------+------------+----------+|Revenue | US$m | 907 | 631 | 43.7% |+--------------------------------+-------+-------------+------------+----------+|Underlying EBIT (i) | US$m | 371 | 228 | 62.7% |+--------------------------------+-------+-------------+------------+----------+|EBIT (ii) | US$m | 368 | 229 | 60.7% |+--------------------------------+-------+-------------+------------+----------+|Underlying profit before | US$m | 399 | 235 | 69.8% ||taxation (iii) | | | | |+--------------------------------+-------+-------------+------------+----------+|Profit before taxation | US$m | 396 | 132 | 200.0% |+--------------------------------+-------+-------------+------------+----------+|Underlying earnings per share |cents | 132.5 | 81.5 | 62.6% ||(iii) | | | | |+--------------------------------+-------+-------------+------------+----------+|Earnings per share |cents | 181.1 | (2.0) | - |+--------------------------------+-------+-------------+------------+----------+|Declared Dividend per share |cents | 59 | 55 | 7.3% |+--------------------------------+-------+-------------+------------+----------+|Free cash flow per share (iv) |cents | (19.2) | 25.8 | - |+--------------------------------+-------+-------------+------------+----------+|Net debt (v) | US$m | 506 | 665 | - |+--------------------------------+-------+-------------+------------+----------+|Gearing (vi) | % | 17 | 27 | - |+--------------------------------+-------+-------------+------------+----------+ NOTES ON HIGHLIGHTS (i) Underlying EBIT is defined as EBIT excluding special items (see note (iii)) (ii) EBIT is defined as revenue and other operating expenses before net finance costs and before share of profit of associates and joint ventures. (iii) Underlying earnings are calculated on profit for the period excluding special items being pension scheme payments to fund augmentations of transfer values as part of a liability reduction exercise, profits on disposal of subsidiaries, foreign exchange on tax balances and effects of changes in corporate tax rates on deferred tax. For prior periods, special items also includes profit on the sale of Marikana houses, impairment of non-mining investments and movements in the fair value of the embedded derivative associated with the convertible bonds. (iv) Free cash flow is trading cash flow from operating activities less expenditure on property, plant and equipment, intangibles, proceeds from disposal of assets held for sale and dividends paid to minority interests. (v) Net debt as defined by the Group comprises cash and cash equivalents, bank overdrafts repayable on demand, interest-bearing loans and borrowings, and convertible bonds. (vi) Gearing is calculated on the net debt attributable to the Group divided by the total of the net debt attributable to the Group and equity shareholders' funds. Commenting on the results, Brad Mills, Lonmin's Chief Executive said: "Financial results for the first six months were at record levels on the back ofstrong PGM price appreciation. Our safety performance continued to improve andwe made further progress with our sustainability efforts. Production wasimpacted by the Eskom power interruption at the end of January, safety shutdownsand absenteeism. Our new mining team is now in place with a primary focus onimproving operational performance. We are making steady progress with our growthprojects, which position Lonmin to take advantage of the strong expected growthin PGM demand in the coming years." Chief Executive's Comments Introduction The strong pricing environment for our metals continued during the first half of2008 as the supply of PGMs from South Africa remained constrained. In thishigher price environment, we report today record half year revenue and earnings.Revenue for the period was US$907 million, up 44% on the same period for 2007and underlying profit before tax was US$399 million, an increase of 70% on thefirst six months of the 2007 financial year. Underlying earnings per share were132.5 cents, up 63% on the first half of 2007. Our average price received forPlatinum rose to US$1,578 per ounce an increase of 43% on the same period lastyear. The average basket price per PGM ounce was up 41% to US$1,558 per ounce. Total refined production for the first half was 282,650 ounces of Platinum and536,128 ounces of total PGMs and we achieved sales of 288,963 ounces of Platinumand 557,276 ounces of total PGMs. Our metallurgical production was impacted bylower throughput from the mines, the four day Eskom power outage at the end ofJanuary and the planned Number One furnace inspection and repair which webrought forward as a result of the Eskom power crisis. The work on the NumberOne furnace was successfully completed in four weeks with the furnace tappingmatte again on 2 March 2008. Total mining production for the first six months of the year was 6.0 milliontonnes of ore, 13% less than the same period last year. Production at both ourMarikana and Limpopo operations was impacted by the four day Eskom power outageat the end of January which, we estimate, resulted in the loss of around 15,000saleable ounces of Platinum in concentrate. In addition we saw an increase inthe number of safety related shutdowns in the period and high levels ofabsenteeism around Christmas and Easter particularly among key skill groups. We made steady progress with our development projects during the period.Our new Saffy and Hossy mechanised shafts continued to increase production withmechanised operations contributing 552,000 tonnes of ore, a 134% increase on theperformance for the first half of 2007. Our K4 shaft will complete shaftequipping later this month at which point we will begin ore reserve development. We completed pre-feasibility studies on both the Limpopo phase 2 and Pandoraproject during the six months and we have continued our drilling programme andmine design work at Akanani. Using these new drill results we have updated ourresource estimate for Akanani with Attributable Indicated Resources of 8.8million ounces of PGMs (3PGE+Au) now defined for the southern P2 section of theproperty. We remain confident about the prospects for this project which isideal for large scale mechanised mining and aim to complete pre-feasibility workon phase one of the Akanani project during the last quarter of this year. We estimate that sales for the 2008 financial year will be around 775,000 ouncesof Platinum. This guidance is based on a steady improvement in the underlyingperformance of our mines in the second half as the initiatives implemented bythe new mining team gain traction. This guidance also takes account of thecurrent constraints in relation to electricity supply. However any deteriorationof the current power supply situation or any further significant safetystoppages would be risks to this target. Power Situation One of the key issues facing the mining industry in South Africa today is theavailability and security of electricity supply. Since the beginning of Februarywe have been operating within a 90% of normal consumption constraint imposed byEskom. In order to manage within that constraint we have scheduled plannedmaintenance in the concentrators to coincide with periods when our powerconsumption peaks. In addition we have rolled out energy saving initiativesacross the business including maximising the efficiency of the compressed airnetworks in our shafts, running a number of energy saving programmes forelectrical equipment and better managing our internal energy network. On 24April 2008, Eskom gave notice that we could increase our power utilisation to95% of normal consumption, giving us increased operational flexibility for theremainder of the financial year. In addition, we are investigating a number of medium to longer term options toimprove power supply to our operations, including self generation. Eskom has indicated that they will provide more definitive information to themining industry on power availability and how power demands for new projectswill be treated in June of this year. Once we have more clarity around this wewill develop plans with the aim of ensuring that we have adequate power to matchour growth requirements. Safety Our safety performance improved further during the half with our lost timeinjury frequency rate (LTIFR) falling to 6.76 per million man hours worked, adecrease of 45% on the LTIFR for the first six months of 2007. Our severity rate(number of days lost per million man hours worked) also fell by 48% during theperiod from 122.4 for the first half of 2007 to 64.0 for 2008(1). We regrettably suffered one industrial fatality at our Marikana operationsduring the six months. We completed the roll out of our mine wide safety campaign based on learning maptechnology during the period and have extended this initiative to cover theProcess Division. This campaign is based around the 2010 World Cup usingfootball as a means to highlight safe behaviours and procedures. Initial signsindicate that the campaign has been well received and we will continue to raiseawareness and increase its visibility in the second half. We have alsostrengthened our corporate safety team during the period with the appointment ofAlvaro Pinto as Vice President, Safety. Alvaro joined us in December 2007 fromthe Canadian Albian Sands Energy project, owned by Shell where he was OperationsExpansion HSE Manager. Alvaro will be responsible for the design andimplementation of the Group safety strategy and for tracking our safetyperformance at a Group level. Sustainability We have continued to make good progress with our sustainability and communitydevelopment efforts during the six months. The Lonmin-IFC Technical AssistanceProgramme, which was signed in March 2007, has made significant progress sinceits inception. One key piece of this programme is the development and promotionof suppliers and service providers within the communities around ouroperations. To date we have awarded 13 contracts to local suppliers nurturedunder this scheme to the value of US$25 million. Another successful part of theprogramme is the peer education and training of our local community workers onHIV and AIDS. We have now trained 34 workplace and 56 community based peereducators. One of our key focus areas is to facilitate the delivery of quality education inour communities. We have constructed sanitation facilities at three schoolsbenefiting 1,500 children and we support the school nutrition programme atfifteen schools in collaboration with the national education department toensure that all children have at least one balanced meal a day. Mining Chris Sheppard and the new senior mining team joined us at the beginning of theperiod and have now completed their initial assessment of the mining operationsand their potential. The team has implemented a number of initiatives tooptimise our mining operations and increase efficiency and productivity. Theseinclude the optimisation of our mining extraction strategy; a renewed focus onincreasing productivity and reducing costs, through improvement programmescentred on half level optimisation and the acceleration of development atcertain shafts; a review and upgrade of our management operating system in theshafts; and a focus on tackling non-attendance through communication with theworkforce combined with a zero tolerance policy towards offenders. Marikana Overall production from the Marikana operations was 5.5 million tonnes for thesix months, a decrease of 12% on the same period last year. Production wasimpacted by safety related shutdowns (including the loss of seven shifts at ourK3 and Rowland shafts following the fatal accident at K3 in October), the fourday Eskom power outage in January and high levels of absenteeism aroundChristmas and Easter. The majority of our safety shutdowns during the period were initiated bymanagement as we continue our drive to Zero Harm. We have also seen, in commonwith the rest of the industry, an increased focus on safety from the Departmentof Minerals & Energy ("DME") including more numerous inspections and orderedshaft closures in conjunction with these inspections. We fully support the DMEin its safety drive and will continue to partner with them in ensuring safeproduction at our operations. Our underground operations hoisted 4.9 million tonnes in the period down 12% onthe same period last year. Conventional underground mining contributed 4.4million tonnes, a fall of 19% on the first half of 2007. These operations, inparticular our two deep shafts K3 and Rowland, were impacted by the issuesalready noted as well as an increased emphasis on accelerating ore reservedevelopment. Production from our mechanised operations in the half increased to 552,000tonnes hoisted, a rise of 134% on the first half of 2007 as we continue toincrease production from Hossy and Saffy shafts. This was behind our aggressiveramp up schedule partly as a result of the slower than anticipatedimplementation of continuous operations which still awaits approval by relevantstakeholders. Mechanised operations contributed around 11% of our undergroundore in the period. We have revised our targeted production for Hossy and Saffyfor the second half of the year to take account of the performance of theseshafts for the year to date and the lack of continuous operations. Productionwill continue to increase steadily for the remainder of the year and we expectfor the full year mechanised production will be around 13% of our undergroundtonnages or more than double the 6% it contributed for the 2007 financial year. Opencast production for the period was 624,000 tonnes mined, a decrease of 11%on 2007. These mines are near the end of their lives and will continue todecline over the coming years. Limpopo - Baobab Shaft Our Limpopo Baobab shaft operation produced 264,000 tonnes of ore in the period,a decline of 32% on the prior year. Production continued to be constrained by alack of flexibility in the mine due to the ore reserve disruption caused by theIRUP occurrence. We will continue during the second half of the year to focus ondevelopment at Baobab shaft in order to build a higher degree of ore reserveflexibility at the mine. Limpopo produced 8,589 saleable ounces of Platinum in concentrate for theperiod, a decline of 54% on the same period in 2007 due to the lower throughputfrom the mine and the shutdown of the Limpopo concentrator for 6 weeks duringthe period for repairs. Pandora Joint Venture Our share of production from the Pandora Joint Venture ground during the periodthrough our E3 shaft and UG2 opencast operations was 169,000 tonnes mined (adecrease of 20% on the first half of 2007) primarily as a result of plannedtiming of the start up of our new opencast UG2 pit on the property. Lonminpurchases 100% of the ore from the Pandora Joint Venture and this orecontributed 17,824 saleable ounces of Platinum in concentrate and 32,875saleable ounces of total PGMs in concentrate to our production. The Pandora Joint Venture contributed US$11 million of profit after tax for ouraccount in the half year. Process Division The concentrators produced a total of 346,892 saleable ounces of Platinum inconcentrate for the first half, a fall of 22% on the first half of the 2007financial year, mainly as a result of the lower throughput from the mines.Overall recoveries improved slightly during the half year to 78.8% from 78.1%for the first half of 2007. Underground recoveries remained flat at 81.5% versuslast year. Our focus on campaigning our opencast ore had a positive impact onopencast recoveries which rose to 56.8% versus 56.0% last year. Underground milled head grade was 4.8% lower than the prior year at 4.72 grammesper tonne (5PGE+Au) as a result of the increased percentage of lower gradedevelopment ore from the Marikana mechanised shafts and other ore mix issues.Opencast milled head grade was 3.18 grammes per tonne (5PGE+Au) as we continuedto mill more oxidised shallow material. The Smelting operations performed well during the period. We brought forward theplanned inspection and repair of the Number One furnace to coincide with theEskom power outage at the end of January. We successfully completed the work onthe furnace in four weeks and it returned to full operations on 2 March 2008.The next planned shutdown of the Number One furnace will take place in the firstquarter of the 2009 financial year to implement design changes to allow forlonger operational campaigns. Our Base Metal Refinery and Precious Metal Refinery also performed well in thesix months. Total refined production for the half was 282,650 ounces of Platinumreflecting the lower level of throughput from the mines and a build up of metalin process across the Process Division of around 70,000 saleable ounces ofPlatinum partly as a result of the Number One furnace shutdown. It isanticipated that this metal in process will be released during the second halfof the financial year. Final metal sales for the half year were 288,963 ounces of Platinum and 557,276ounces of total PGMs, slightly ahead of the same period in the 2007 financialyear. Costs and Capital Expenditure Our C1 cost per ounce during the first half of 2008 was significantly impactedby lower production volumes, increasing by 24% over the same period last year toR5,003 per PGM ounce sold for Marikana and Limpopo combined before base metalcredits. Base metal credits were R493 per ounce sold, which was significantlylower than the R867 per ounce recorded for the prior year period, due to lowersales of nickel in the half reflecting a stock release in the prior period andthe reduced proportion of Limpopo ore in the mix while the Limpopo concentratorwas offline. Our gross costs have been impacted, in common with the rest of the South Africanmining industry, by continued increases in the cost of power, water and otherkey consumables. The shortage of, and difficulty in retaining, skilled labourhas also increased the cost base as we have had to stay competitive in ourpackages for certain key skills. Our capital expenditure for the first half was US$139 million. We expect thatour capital spending will be around US$400 million for the financial year. Markets Supply side concerns from the South African producers continued to dominate thePGM pricing environment during the period. In particular, the dual impact of DME enforced stoppages of mining operationsdue to safety incidents and the on-going power supply crisis have had animmediate effect on the mining sector as a whole, in particular PGM supply, 80%of which originates from South Africa. These supply constraints coupled withcontinuing current and forecast fundamental strong demand, in particular fromthe autocatalyst sector, has underpinned and exerted upward pressure onPlatinum, Palladium and Rhodium prices. Interest from investors increased asevidenced by higher volumes of Platinum and Palladium Exchange-Traded Funds. During the period the Platinum price moved from US$1,382 per ounce to US$2,045per ounce, an increase of 48.0%; the Palladium price rose by 26.2% from US$355per ounce to US$448 per ounce; and the Rhodium price, historically the mostvolatile metal increased significantly during the six months to US$9,025 fromUS$6,150 per ounce. Growth Projects We have made significant progress with our growth projects during the six monthsincluding completing pre-feasibility studies on the Limpopo expansion projectand Pandora. Based on greater clarity surrounding these projects as well as anemerging view of the potential of our Akanani project, we have started a totalvalue chain optimisation project. This project will look at matching oursmelting capacity in Marikana with our mining operations on the Marikanaproperty and determine the required size of a northern smelting and refiningcomplex to support our Akanani and Limpopo projects. This work will determinethe timing of the phase 2 expansion at Limpopo and, in conjunction with ourplans to address the issues around electricity supply, will drive our long termgrowth profile. Marikana At Marikana, we continue to focus on a number of growth projects to expandfuture production from both our mechanised and conventional operations. Ourexisting fully mechanised shafts, Saffy and Hossy, are expected to reach acombined steady state production of around 3.5 million tonnes per annum by 2010.Shaft equipping at K4, our third mechanised shaft, is on track to be completedlater this month, at which point ore reserve development will commence, withreef development expected in late 2009. At the conventional operations, on 2 May2008, the Board approved a sub-decline project at our K3 shaft to mine a portionof the ore reserve above the K4 mining block and below the current K3 miningblock, with full production from this expected by 2011. Our power requirements for the Marikana operations will not increasesignificantly in the short term. Limpopo We completed our additional pre-feasibility work on the Limpopo expansionproject in April this year and have approved the project to enter thefeasibility stage which will be completed during the second quarter of 2010. Theexpansion area covered by the study encompasses two farms, Dwaalkop andDoornvlei. Doornvlei is 100% owned by Lonmin and Dwaalkop is a 50/50 jointventure between Lonmin and Mvelaphanda Resources. The pre-feasibility work looked at ways to optimise the output of the Limpopoground taking account of the existing operations at Baobab shaft and confirmedthe viability of developing a mechanised operation on the property with accessto the ore body through a series of spiral declines. Given the shallow nature ofthe ore body, this mine design allows quick access to the ore and is scaleableas the mine develops. The completed pre-feasibility study indicates the combinedproperty supports a mine producing around 360,000 tonnes per month at fullproduction. Our current expectation is that power supply for the construction of the Limpopoexpansion is relatively secure. We have in place a contract with Eskom for theprovision of power to the Limpopo expansion project. However, Eskom hasindicated it will start to re-evaluate growth projects in June this year anduntil this review is completed no real certainty can be given around theprovision of power by Eskom to growth projects. Following Eskom's review in Junewe will evaluate our options for securing power for this project. Later thismonth, we expect to sign a memorandum of agreement with the Department of WaterAffairs and Forestry to provide water to the Limpopo expansion project. Wecontinue to look for additional water sources. Pandora A pre-feasibility study has been completed on the standalone Pandora projectduring the first half looking at the development of a 240,000 tonne per monthoperation on the property using a hybrid mining method combining mechaniseddevelopment and conventional down dip stoping. This study has been submitted tothe Joint Venture partners. Subject to our partner's approval, we anticipatebeginning the work on the feasibility study, which underpins the full value ofthis asset. Akanani We have continued drilling at Akanani during the six months. Based on this workand on a better understanding of the variability of Platreef mineralisation atAkanani, we are today announcing a significant upgrade to the P2 (Platreef 2)Unit Mineral Resource of the southern portion of the project, where we havedrilled an additional 26 holes since March 2007. Attributable indicated P2resources have increased from the previous resource estimate published in March2007 to 8.8 million ounces of PGMs (3PGE+Au) at a grade of 5.15 grammes pertonne. This same drilling has also indicated that we will need fairly closespaced drilling to classify P1 (Platreef 1) Unit mineralization as Inferred orIndicated resources and we are consequently downgrading our certainty aroundareas of the P1 Unit deposit until such time as we can complete the detailedinfill drilling required to ensure the mineability of mineralized intercepts inthe P1 unit. The overall drilled mineralised envelope of the Akanani projectcontinues to grow and we are confident that ultimately, much of thismineralisation will be converted to mineable reserves. The updated resourcestatement is set out below: Summary of P2 Unit Attributable Mineral Resource+----------------+------------------------------------------+------------+| Category | 29 April 2008 | || +---------+-----------+--------------------+------------+| | | Mt | 3PGE+Au | Pt || +---------+ +----------+---------+------------+| | | | g/t | Moz | Moz |+----------------+---------+-----------+----------+---------+------------+| Indicated | 53.5 | 5.15 | 8.8 | 3.8 | |+----------------+---------+-----------+----------+---------+------------+| Inferred | 72.9 | 4.27 | 10.0 | 4.3 | |+----------------+---------+-----------+----------+---------+------------+| Total | 126.4 | 4.64 | 18.8 | 8.1 | |+----------------+---------+-----------+----------+---------+------------+ Summary of P1 Unit Attributable Mineral Resource+----------------+----------------------------------------------------------+-----------+| Category | 29 April 2008 | || +------------+--------------+------------------------------+-----------+| | | Mt | 3PGE+Au | Pt || +------------+ +---------------+--------------+-----------+| | | | g/t | Moz | Moz |+----------------+------------+--------------+---------------+--------------+-----------+| Inferred | 28.1 | 3.39 | 3.1 | 1.2 | |+----------------+------------+--------------+---------------+--------------+-----------+ Notes on the Mineral Resource Estimates a. The Mineral Resource estimate has been completed by Mr. J. C. Witley (BSc Hons, Pr. Sci Nat.) of Lonmin who is a Competent Person as defined by the SAMREC Code (2007). Mr. Witley is registered as a Professional Natural Scientist with the South African Council for Natural Scientific Professions (SACNASP) and a member of the Geological Society of South Africa (GSSA), with approximately 20 years' experience in the Base and Precious Metals Resource Industry and more than five years' experience relevant to PGE resource estimation. b. The Mineral Resources at Akanani comprise stratiform disseminated PGM, Ni and Cu mineralisation that occurs within the Platreef pyroxenites of the Northern Limb of the Bushveld Complex. The Mineral Resource occurs between approximately 800 m and 1,900 m below surface in two sub-divisions of the Platreef known by Lonmin as the P2 and the P1 Units. The thickness of the P2 Mineral Resource, although variable, is on average approximately 20 m thick. Mineralisation in the P1 Unit is less well constrained than the P2 and occurs within a package of pyroxenites that are in the order of 100's metres in thickness. The thickness of the P1 Unit mineralisation is also variable and the P1 Unit mineralisation currently identified as Mineral Resource is also on average approximately 20 m thick. c. The Mineral Resources were estimated using composited sample assays that have passed the relevant Quality Assurance and Quality Control (QAQC) tests, from over 60 drillhole intercepts and their deflections. Grades were interpolated by Ordinary Kriging into geological and/or grade constrained three dimensional block models. d. The P2 Unit Mineral Resource was defined using a lithological hanging wall and a 2g/t 3PGE+Au (Pt, Pd, Rh and Au) assay footwall. The P1 Unit resource occurs in the P1 lithologies immediately below and contiguous with the P2 Unit resource and is constrained to a mineralized envelope of greater than 2g/t 3PGE+Au that is comparable between drillhole intersections. e. The P2 Unit Mineral Resource was classified into the Indicated category taking into account continuity of mineralisation, structure and lithology within a drillhole grid of less than 250 m. Over 60% of the Inferred P2 Mineral Resource is covered by this drill grid and the maximum extrapolation distance for the P2 Unit Inferred Mineral Resources is 450 m. The P1 Unit Mineral Resource was classified as Inferred Resources due to this mineralisation exhibiting less continuity than the P2 Unit mineralisation. f. Geological losses of 10% have been applied to the P2 Unit Mineral Resource and 20% for the P1 Unit. Geological losses include those from dykes and veins, fault loss, calc silicates and minor alteration. g. Tabulated estimates have been rounded to two decimal places for grade and one decimal place for tonnage and content. h. All Mineral Resources and Reserves have been restated to reflect Lonmin's 74% attributable shareholding in Akanani. Incwala Resources owns the remaining 26% in Akanani. We have completed an additional 2 drill holes in the northern section of theproperty. This drilling indicates that the Platreef mineralisation continues inthis area, but with a higher degree of variability than we have seen in thesouthern section of the property. The most recent drill results from thenorthern section are set out below: +----------------+----------------+----------------+----------------+----------------+| Borehole | Drilled width | 3PGE+Au | Cu | Ni || | | | | || | (metres) | (g/t) | (%) | (%) |+----------------+----------------+----------------+----------------+----------------+| MO021 | 12.06 | 3.70 | 0.09 | 0.17 |+----------------+----------------+----------------+----------------+----------------+| MO022 | 2.00 | 5.74 | 0.14 | 0.24 |+----------------+----------------+----------------+----------------+----------------+ These results, especially the grade enhancements in the P2 reef, confirm ourconfidence in the longer term potential of the Akanani project and we are in theprocess of evaluating options for large scale mechanised mine development forthis project. The supply of power to Akanani is subject to the building of one of Eskom'splanned new power stations which is expected to be completed in 2013. Wecurrently have a contract in place with Eskom for power supply for theconstruction of the Akanani project. We are in the process of securing water forthe Akanani project and we expect to enter into a memorandum of agreement forthe provision of water with the Department of Water Affairs and Forestry laterthis month. The local municipality is planning the development of the bulk waterinfrastructure needed to support mining development in the region and we arecontinuing discussions with them to secure the additional water we need. Dividend As a result of our continued confidence in the long term prospects for thebusiness, the Board has approved an interim dividend of 59.0 cents per share, anincrease of 7.3% on the interim dividend paid last year. This dividend will bepayable on 8 August 2008 to shareholders on the register on 11 July 2008. Outlook We estimate that Platinum sales for the 2008 financial year will be around775,000 ounces of Platinum. This guidance is based on a steady improvement inthe underlying performance of our mines in the second half as the initiativesimplemented by the new mining team gain traction. This guidance does takeaccount of the current constraints in relation to electricity supply but anydeterioration of the current power supply situation or any further significantsafety stoppages are risks to this target. The contribution of Lonmin employees, contractors and community members duringthe last year is highly valued and their hard work and dedication is greatlyappreciated. The production environment remains challenging with the uncertainty overelectricity supply, a tight market for certain skill groups and a continuedemphasis on safety likely to continue in the medium term. These factors willcontinue to constrain PGM supply and should continue to support the currenthigher price environment. Bradford A MillsChief Executive8 May 2007 Financial Review Introduction The financial information presented has been prepared on the same basis andusing the same accounting policies as those used to prepare the financialstatements for the year ended 30 September 2007. Analysis of results Income Statement Reported operating profit has increased by $139 million, or 61%, to $368 millionin the six months to 31 March 2008. A comparison with the six months to 31 March2007 is set out below: $m Reported operating profit for the six months to 31 March 2007 229 PGM price 239 PGM volume 45 PGM mix 15 Base metals (22) Cost changes (including foreign exchange impact) (134) Movement on special items (4) ----- Reported operating profit for the six months to 31 March 2008 368 ----- The PGM metal markets have continued to strengthen over the last six months withsupply issues evident for most South African producers. The average price perPGM ounce has increased 41% to $1,558 per ounce resulting in an additional $239million of profit generated. The PGM sales volume for the six months was up by40,000 ounces, or 8%, giving an additional $45 million profit. This performance,however, was below our expectations with metal production in the periodadversely impacted by a variety of factors including the four-day shutdownimposed by Eskom due to electrical power supply constraints throughout SouthAfrica, an increase in the number of safety closures implemented, high levels ofabsenteeism around Christmas and Easter and an increased focus on ore reservedevelopment. The Number 1 furnace was also shut down for a planned inspectionand repair in the period. The PGM mix was favourable by $15 million with Rhodiumincreasing by 0.75% points to almost 8% of the basket of ounces sold. Thecontribution from base metals fell by $22 million with Nickel sales falling byjust over a 1,000 tonnes partly reflecting a one-off stock reduction in theprior period and ore mix factors. Other cost changes (increase) / decrease: $m Productive costs (87) Safety, health, environment and community (12) Exploration, development and marketing (10) Shared services and support functions (6) Depreciation and amortisation (3) Foreign exchange (16) ----- (134) ----- Productive costs increased by some $87 million in the period. These principallyarose from the very significant inflationary pressures in South Africa both inthe mining sector and in respect of raw materials. In addition, some otherfactors were at play. Since half one of financial year 2007 we have ramped-upour mechanised operations significantly and moved from a development to anoperational phase resulting in the recognition of operating costs. The businessalso has continued to experience higher levels of labour absenteeism whichnecessitated increased staff numbers and resulted in lower productivity andincreased use of contractors. Whilst we are taking steps to improve thissituation the effects are likely to continue into the second half. The ProcessDivision is also undertaking a major enhancement of its plant maintenanceprogramme which, whilst increasing costs today, will improve the reliability ofour operations over time. We recognise the vital role we have in caring for our employees both within thework environment and in the wider community and have spent an incremental $12million in the six months to March. Safety has remained a major area of focusand we have invested in training programmes, improved equipment and haveextended our programme to enhance our roof-bolting to help prevent fall ofground incidents. The Group continues to develop its growth opportunities and has recentlycompleted the pre-feasibility studies on the Limpopo and Pandora expansionprojects. The capital projects team is being developed to ensure that we havethe appropriate delivery capability on our portfolio of projects. Ourexpenditure rate on exploration projects is increasing reflecting marketconditions and several new exploration projects. Costs of shared services and other functions which support the business havealso increased and reflect a continuation of the expansion highlighted at yearend. We have a number of projects underway which aim to optimise our usage ofour SAP system and to enhance significantly our metallurgical accounting systemsand improve our stock control. Foreign exchange has been a negative factor with the Rand strengthening againstthe dollar versus the comparative period by 2%. The Group C1 cost before by-product credits increased by 24% to R5,003 per PGMounce sold. It should be noted that stock levels at September 2007 were higherthan previous year ends and the Group has benefited by selling these cheaperounces in the first half. After adjusting for the stock movement, the C1 cost per ounce produced at R5,492is 33% adverse to the prior period. This increase essentially has been caused bythe increase in mining cost per unit at Marikana which is up by R1,113 per PGMounce with costs up 21% and production volume down 21%. Further details of unitcosts analysis can be found in the operating statistics table within the InterimReport. Summary of net finance income / (costs): 6 months to 6 months to 31 March 31 March 2008 2007 $m $mNet interest charges (12) (11)Capitalised interest 15 6Movement in fair value of embedded derivative of convertible bonds 0 (104)Other 4 2 --------- --------Net finance income / (costs) 7 (107) --------- -------- Net interest charges at $12 million were in-line with the prior period.Capitalised interest for the period has increased to $15 million of which $7million relates to the acquisition funding of the Akanani asset which was not amaterial factor in the prior half year. The convertible bonds redeemed by thecompany in the second half of financial year 2007 had a significant impact inthe six months to March 2007 with $104 million of fair value movements reflectedas a cost. This change is the major factor in the $114 million reportedimprovement in the period. Reported profit before tax for the current six months at $396 million hasincreased by $264 million versus the comparable period. This has been driven bythe $139 million improvement in operating profit, the $114 million improvementin net finance costs and an increase of $11 million in the Group's share ofprofit from associates and joint ventures. On an underlying basis profit beforetax was up $164 million, or 70%, to $399 million. The 2008 interim reported tax charge at $41 million was substantially lower thanthe reported $112 million to March 2007. However, this comparison is materiallydistorted by the special impacts of foreign currency retranslation differencestogether with a 1% reduction in the South African corporation tax rate to 28%for the 2008 financial year. On an underlying basis tax expense has increased from $84 million to $137million which has been driven by the improvement in profit before tax. Theunderlying tax rate decreased from 36% to 35%. The Group does not expect thefull year underlying tax rate to be above that applied in half one although thisis subject to the impact on secondary taxes based on the timing of dividendsremitted. Profit for the period attributable to equity shareholders amounted to $283million (2007 - $3 million loss) and earnings per share were 181.1 centscompared with a loss per share of 2.0 cents in 2007. Underlying earnings pershare, being earnings excluding special items, amounted to 132.5 cents (2007 -81.5 cents) an increase of 63%. Balance sheet A reconciliation of the movement in equity shareholders' funds over the sixmonths to 31 March 2008 is given below. $m Equity shareholders' funds as at 1 October 2007 1,968 Total recognised income and expense 250 Dividends (94) Share scheme related and other 9 -------- Equity shareholders' funds as at 31 March 2008 2,133 -------- Equity shareholders' funds were $2,133 million at 31 March 2008 compared with$1,968 million at 1 October 2007, an increase of $165 million. Equityshareholder's funds in the period increased by $250 million through therecognition of attributable income, however, this was partially offset by thepayment of the final dividend in respect of financial year 2007 of $94 million.The issuance of shares in respect of share option schemes together with othershare based payment adjustments contributed a further $9 million. Net debt at $506 million has increased by $131 million in the period with a cashoutflow of $134 million (as explained below). Gearing was 17% compared with 15% at 30 September 2007 and 27% at 31 March 2007calculated on net borrowings attributable to the Group divided by thoseattributable net borrowings and the equity interests outstanding at the balancesheet date. Cash flow The following table summarises the main components of the cash flow during theyear: 6 months to 6 months to March March 2008 2007 $m $mOperating profit 368 229Depreciation and amortisation 46 43Change in working capital (100) 44Other 1 6------------------------------------------------------------------------------Cash flow from operations 315 322Interest and finance costs (12) (11)Tax (144) (149)------------------------------------------------------------------------------Trading cash flow 159 162Capital expenditure (139) (105)Proceeds from asset held for sale 1 3Dividends paid to minority (51) (21)------------------------------------------------------------------------------Free cash flow (30) 39Disposals / (acquisitions) 3 (393)Financial investments (17) (3)Shares issued 4 19Equity dividends paid (94) (85)------------------------------------------------------------------------------Cash outflow (134) (423)Opening net debt (375) (458)Bond conversion - 213Foreign exchange 3 3------------------------------------------------------------------------------Closing net debt (506) (665)------------------------------------------------------------------------------ Trading cash flow (cents per share) 101.8c 107.3c------------------------------------------------------------------------------Free cash flow (cents per share) (19.2)c 25.8c------------------------------------------------------------------------------ Despite the significant increase in operating profit the cash flow generatedfrom operations at $315 million was marginally down compared to the priorperiod. This was entirely due to changes in working capital with the comparativeperiod benefiting from abnormally high receipts from debtors which was a resultof high volumes of concentrate sales at the end of the 2006 financial year.Furthermore, the first half profits and therefore cash flows have been impactedby the operational issues described above and the significant accumulation ofinventory mainly due to the Number 1 smelter shut down and repair. Afterinterest and finance costs of $12 million and tax payments of $144 million,trading cash flow to March 2008 amounted to $159 million against $162 million toMarch 2007, with trading cash flow per share of 101.8 cents in 2008 against107.3 cents in 2007. Capital expenditure of $139 million was incurred during the six months, up $34million on the prior period. This rate of spend is expected to accelerate in thesecond half as we continue to develop the mechanised operations, complete our K4shaft and invest in sub declines at Rowland and K3. Dividends paid to minorities in the period at $51 million was $30 million higherthan the prior period reflecting a timing difference on the payment of dividendsfrom South African subsidiaries. As a result of the above free cash flow generated fell from a positive $39million at the prior interim to a negative $30 million in 2008 with free cashflow per share falling from positive 25.8 cents to negative 19.2 cents. After asmall increase in investments and the payment of $94 million on equity dividendsthe overall cash outflow for the period was $134 million which increased netdebt accordingly. Dividends As dividends are accounted for on a cash basis under IFRS the amount shown inthe accounts represents the 2007 final dividend of 60.0 cents. In addition theBoard has approved an interim dividend of 59.0 cents in respect of the period(2007 - 55.0 cents). Financial risk management The Group's reporting currency remains the US Dollar and the share capital ofthe Company is based in US Dollars. The Group's business is mining and it does not undertake trading activity infinancial instruments. Interest rate risk Monetary assets and liabilities are exposed to movements in interest rates. Theborrowings at 31 March 2008 comprised $181 million of borrowings in the UKtogether with an overdraft of $1 million, and in South Africa a long-term bankloan of $300 million was drawn together with an overdraft of $37 million. Cashdeposits represented balances of $4 million in the UK and $9 million in SouthAfrica. Liquidity risk Liquidity risk measures the risk that the Group may not be able to meet itsliabilities as they fall due and, therefore, its ability to continue trading.The Group's policy on overall liquidity is to ensure that there are sufficientcommitted facilities in place which, when combined with available cashresources, are sufficient to meet the funding requirements in the foreseeablefuture. At 31 March 2008 the Group had $1,127 million of committed facilities inplace of which $519 million were drawn down. Foreign currency risk Foreign currency risk arises when movements in exchange rates, particularly theUS Dollar against the South African Rand, affect the transactions the Groupenters into, reported profits and net assets. Most of the Group's operations arebased in South Africa and the majority of the revenue stream is in US Dollars.However the bulk of the Group's costs, and taxes, are in Rand. Most of the cashheld in South Africa is in US Dollars and is normally remitted to the UK on aregular basis. Short-term working capital facilities required in South Africaare drawn primarily in US Dollars. Fluctuations in the Rand to US Dollar exchange rate can have a significantimpact on the Group's results. A strengthening of the Rand against the US Dollarhas an adverse effect on profits due to the majority of costs being denominatedin Rand. Commodity price risk Commodities are traded on worldwide commodities markets and are subject to pricefluctuations. Therefore the prices obtained are dependent upon the prevailingmarket prices. Any change in prices will have a direct effect on the Group'strading results. Forward sales are undertaken where the Board determines that itis in the Group's interest to hedge a proportion of future cash flows. Noforward sales of Nickel and Copper were undertaken in the six months to 31 March2008. Fiscal risk Changes in governmental fiscal policy in the territories in which the Groupoperates will impact on Group profitability. In South Africa the Government isfinalising a Royalty Bill which will come into effect on 1 May 2009. Theoriginal royalty structure proposed was based on turnover, however, this hasrecently been amended. The current proposal is that the royalty rate will becalculated with reference to either profitability or taxable income which willbe applied to turnover or a deemed concentrate value to calculate the royaltypayable. Until the Bill is finalised it is difficult to be definitive about itsfinancial impact. Our guidance remains that over time the charge is likely torepresent around 3% of revenue and that this will be deductible for corporationtax purposes. Principal risks and uncertainties The Group faces many risks in the operation of its business. The Group'sstrategy takes into account known risks, but risks will exist of which we arecurrently unaware. There is an extensive discussion of the principal risks anduncertainties facing the Company on pages 14 to 16 of the 2007 Annual Report,available from the Company's website, www.lonmin.com. As identified in the ChiefExecutive's comments during the half year the availability of electrical powerin South Africa has worsened considerably and the issues facing the world'sbanking and financial sectors have potentially reduced the availability ofcapital and the willingness of banks to lend. Aside from this, there has been nosignificant change in the Company's risk environment. Alan FergusonChief Financial Officer8th May 2008 -------------------------- (1) We have previously reported a severity ratio calculated as the averagenumber of days lost per lost time injury. In line with the guidelines of theInternational Council of Mining and Metals we have moved to report a severityrate which is calculated as the number of days lost per million man hoursworked. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
Lonmin