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Nothing off table as Lonmin pursues value in low platinum price environment

BEN MAGARA The Lonmin CEO is also donning the COO mantle and taking direct hands-on control of all operations

FOUR BIGGEST Four of Lonmin’s biggest shafts – K3, Rowland, Saffy and 4B – contribute close to 80% of its production; all these shafts are well capitalised and can still produce at steady state going well into the future. The promising K4 shaft can be brought back at short notice and E3, acquired though the Pandora joint venture with Anglo American Platinum, is the shallowest and thickest of the company’s upper group two reefs

Photo by Lonmin

SAFFY SAFETY Rock drill operators in Lonmin’s Saffy shaft stopes under the cover of safety nets that protect employees in temporarily supported working areas from fall-of-ground injuries

7th April 2017

By: Martin Creamer

Creamer Media Editor

     

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The tough new circumstance confronting platinum mining companies demands business unusual to cope with the low price environment.

“Right now, sustainability is more important than anything,” says Lonmin CEO Ben Magara, who has also assumed direct hands-on COO control of all the operations in addition to his chief executive role.

During his days as COO of New Denmark Colliery in the 2000s, Magara saved the coal mine from closure and eventually doubled employment. (Also see pages 24 and 25.)

Now, as he dons the COO hard hat in addition to his role as CEO, he makes it clear that nothing is off the table as Lonmin pursues value over volume in an over-supplied market.

Mining Weekly took the opportunity to press him on the statement made by Bank of America Merrill Lynch (BofAML) at last month’s Prospectors and Developers Association of Canada (PDAC) convention, in Toronto, that the platinum price would rally if platinum producers cut supply by 300 000 oz to 400 000 oz.

BofAML charged, at the well-attended PDAC, that the blame for the lack of supply discipline lay especially at South Africa’s door.

Lonmin has itself exercised supply discipline by taking 150 000 oz of supply out of the market.

“As an industry, we need to go for it. We must be bold about cutting supply. The price is telling us that we’re in oversupply and we’ve got to react,” Magara commented to Mining Weekly on the supply issue.

This discipline can take place in short timeframes, with idled employees potentially being given special training during production lulls, as happened in chrome some years back.

South Africa is by far the largest producer of platinum and Lonmin one of only three integrated primary platinum-group metal (PGM) producers globally.

Its Marikana operations are among the best hard rock narrow tabular mining operations on the western limb of the Bushveld Igneous Complex, the world’s platinum treasure chest.

Given the present low ebb of the PGMs market, Lonmin is going all out to bring about sustainable improvements in productivity, generate cash and bolster financial liquidity. (Also see page 24.)

Wisely, the recapitalisation programme was also premised on the platinum price remaining lower for longer and, as at September, the company reported net cash of $50-million and bank facilities of $300-million.

“The bottom line is that we have sufficient liquidity,” says Magara, who is encouraged that the pick-up in production during the first quarter of this calendar year has lifted spirits.

The company is also being buoyed by collective management, union and government representation tackling issues in unison.

As Lonmin’s Generation 1 shafts reach the end of their lives, the company’s focus is firmly on its larger Generation 2 shafts, which will reduce its sales profile into the 650 000 oz to 680 000 oz range in 2017.

Generation 2 shaft production was 4% up at 8.1-million tonnes in 2016 and productivity 5% up on a 19%-smaller workforce.

High-cost production continues to be wound down and the closure of inefficient areas and shafts is set to continue through 2017.

The Hossy shaft remains on track for planned care-and-maintenance closure in 2017, the Newman shaft has ceased production by Lonmin crews and the E1 and W2 shafts are contractor-managed.

The large, long-life reserves provide the London- and Johannesburg-listed company with a source of platinum supply that will last for decades at the 600 000 oz/y to 700 000 oz/y mining rate.

The company’s 2017 guidance points to platinum sales of between 650 000 oz and 680 000 oz, with the proposed bulk tailings treatment project offering promise.

Following the reduction of the employee complement by 6 000, Lonmin currently employs 33 000 people, including contracting personnel.

The 600-m-below-surface average depth of its mining operations provides a cost advantage over the industry’s 900 m to 1 000 m average.

Shareholders, including South Africa’s Public Investment Corporation (PIC) as the single biggest shareholder with a 29% holding, have been supportive, and management and labour last year succeeded in turning 2015’s net $134-milion operating loss into an operating profit of $7-million.

Without profitable businesses, mining companies have no chance of contributing to South Africa’s pressing socioeconomic needs.

For instance, Lonmin would like to double the pace of its infill accommodation programme, but just cannot afford to do so during this period of low platinum price. (Also see page 18.)

The company has a long horizon ahead of it. The South African government has granted its core operations a new-order mining licence which extends to 2037 and which is renewable to 2067.

In November, it entered into a sale and purchase agreement to acquire Anglo American Platinum’s 42.5% stake in Pandora, taking ownership to 92.5% of an asset with long-term development potential.

Overall, it has a 181-million-ounce resource base and a 32-million-ounce reserve base.

In the longer term, the company has a number of attractive brownfield expansion opportunities that could potentially be developed when the platinum price improves and its processing plants are achieving industry-leading PGM recoveries.

The promising K4 shaft has been put on care and maintenance. When this shaft ramps up, it will be the lowest-cost operation on the western limb because it will co-extract both Merensky and upper group two (UG2) reefs.

Lonmin E3 shaft, acquired in the Pandora deal, is the shallowest and thickest of the company’s UG2 reefs, the chrome content of which Lonmin is particularly adept at extracting and monetising.

The company is going to have to fight itself out of the current impasse and decide how the held-back K4 shaft can be brought back into service, because it provides real opportunity for return on capital.

Ideal would be to time its steady state to coincide with a better platinum price.

Lonmin will have to think out of the box on how to fund K4, because there appears to be general consensus that it is a potentially lucrative project.

K4 is again confirmation that Lonmin has high-quality mining assets served by sound downstream processing insight that achieves impressive concentrator, smelting and refinery recoveries.

In the interests of sustainability, it may once again be forced to consider a further lowering of the number of people it employs.

Lonmin will remain labour intensive well into the future and, on the basis of each employee supporting ten dependants, currently touches the lives of 330 000 people.

This is a massive number and prompts one to ask whether the shareholders have received an adequate return for this level of employment.

Most of the 6 000 people affected by the restructuring left on a voluntary basis, with more than 1 000 of them being redeployed into alternative productive roles.

Only 62 employees had to be forcefully retrenched, which speaks volumes about the maturing nature of the relationship with the majority Association of Mineworkers and Construction Union (AMCU).

Lonmin is going all out to continue to build on the successful relationship that it has with AMCU and will be working with the union over the next number of months to review its housing strategy, to go through an employee housing census and to reach a point where it is able to go back to government on the issue of housing compliance.

Much has been reported about the commitment to build 5 500 houses as part of its social and labour plan, which the company made clear at the time was dependent on being able to raise funding and securing partnerships.

In 2005, Lonmin built 1 149 houses in Marikana Extension One on a rent-to-buy scheme.

All those houses were occupied by employees but, to date, only 370 have taken ownership of the houses, a number that is exceedingly low.

The challenge is that many employees are still grappling with indebtedness and their ability to access funding from banks because of their indebtedness is an issue.

The accommodation review is one of Lonmin’s key deliverables over the next 12 months and the company is confident of compliance through its infill apartment scheme and its donation of 50 ha of land to government. (Also see report on page 18.)

Lonmin has shown relentless resilience in surviving many arduous challenges that might have sunk lesser companies.

The strike of 2011 was followed by the horrific Marikana killing of 44 people by police in 2012 and then the five-month strike of 2014, the longest in South Africa’s history.

The recapitalisation of 2015 required restructuring in 2016 and that the company enlist the cooperation of labour during the reduction of its workforce.

Yet, during part of that tough phase, it managed to remain fatality free for 18 months and conclude a multiyear wage agreement in a peaceful, nondisruptive manner.

The new relationship that Lonmin managed to forge with its majority union has had the beneficial outcome of AMCU president Joseph Mathunjwa taking it upon himself to stage a mass meeting to explain how the rock-drill operators, winch operators and general workers can contribute to Lonmin during the tough period that it is facing.

The company’s ability to recover from setbacks gives one confidence that it also has the wherewithal to emerge from the current tough period of low platinum prices.

Lonmin has been challenged many times in its history, and each time it has seized the opportunities that those challenges have presented.

If you look at the housing challenges it has, without a profitable business, it is unable to fix them, and the only way to ensure that it has a profitable business is for the industry as a whole to ensure that the supply-demand equation is right. (Also see pages 24.)

All the platinum mining companies have been pulling in their horns and moving down the same cost curve together by cutting capital expenditure and removing high-cost production, but the platinum price has still not responded.

A game changer is needed and both employees and government need to acknowledge the industry’s plight, which impacts not only on South Africa but also on the Southern African region.

All stakeholders need to be aware that low prices can result in even the best individual response not being good enough and the only way out being collective industry action.

The option of reducing the employee complements still further is becoming increasingly difficult, which is why changing the game in collective consultation is possibly the next big thing.

Edited by Creamer Media Reporter

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