 JOHANNESBURG (miningweekly.com) – Platinum miner Lonmin's revenue slumped 50%-plus in the year to September 30 and the company decided not to declare a final dividend for the second year in a row.
The flagship Marikana platinum mine in Rustenburg came in 2% below guidance.
Looking forward, the London- and JSE-listed Lonmin said mined production would return steadily to 850 000 oz and said it would sell 700 000 oz in 2010, implying a slight increase on the 682 955 oz of platinum sold in the 2009 financial year.
Capital expenditure would rise to $270-million in 2010 and gross rand operating costs were targeted at 2% below inflation.
Recoveries in the process division were improving, against the background of the No 1 furnace being taken out of operation and later operated at reduced capacity.
"There is much to be done before the operational health of Lonmin is fully restored," said CEO Ian Farmer.
Management cut 75 000 oz of "non value adding" platinum production in the year to September 30, along with a fifth of its jobs, and decided to move its executive management team from London to Johannesburg in order to reflect South Africa's operational dominance.
Lonmin received 49% less for an ounce of platinum group metal (PGM), lopping $1,2-billion off revenue.
Second-half restructuring cut costs of $64-million from an annualised target of $90-million.
Lonmin's Hossy and Saffy shafts both achieved year-end productivity and production targets and ore reserve development was improved.
Current financial headroom comes from shareholders chipping in an additional $458-million in a rights issue, extension of debt facilities beyond short term horizons and a waiving of debt-facility-related earnings covenants until September 2010.
Constructive engagement formed the basis of the company's current wage negotiations, which were taking place against a background of South African mining industry settlements being above inflation, "despite the harsh revenue environment and lack of profitability".
Lonmin chairperson Roger Phillimore said that the long term health of the South African mining industry in general and Lonmin in particular, depended on an appropriate balance being reached between increased wage awards, productivity improvements and the imperative of profitability to enable the business to invest for growth and earn appropriate shareholder returns.
Safety stoppages had caused the loss of 30 000 oz of platinum, or 5% of 2009 underground production, "high economic cost" to both the company and South Africa, owing to the reduction in foreign exchange and tax receipts.
"There is an argument for the Department of Mineral Resources to sponsor and lead a co-operative process with PGM producers and organised labour to agree procedures to achieve a consistent application of monitoring measures and remedies, without jeopardising the pursuit of improved safety and reasonable economic returns," Phillimore said.
He believed that performance improvements would flow from the relocation of Lonmin executive management to Johannesburg, the decision reflecting the company's commitment to South Africa and its willingness to continue to play a full part in the national transformation process.
The board's key functions of management oversight, strategic direction, decision-making and corporate governance would remain in London, where the majority of Lonmin's shareholders were located.
Lonmin would update the market on the future of its black economic empowerment (BEE) partnership with Incwala Resources once the talks with its BEE partner had been concluded.
The objective of the talks with its BEE partner was to ensure a relationship of mutual trust and also that Incwala had both the leadership capacity and financial independence without further recourse to Lonmin's balance sheet.
The Lonmin board had decided not to declare a final dividend for the second year in a row as a result of profitability and cash flow remaining under pressure.
Lonmin's elimination of non-value adding production included placing the Baobab shaft in Limpopo province on care-and-maintenance for the foreseeable future; closure of its opencast mines high-cost underground production at Marikana.
On removing 75 000 oz of platinum from the market place and cutting 20% of the personnel, Farmer said: "This was a significant, but essential, exercise as we right sized the organisation and reduced costs."
Farmer said that South Africa's PGM industry continued to be cash constrained and that South African mining inflation remained relatively high, putting pressure on industry margins and capital investment.
Recent improvements in dollar-based PGM pricing had been largely offset by South African rand strength, which had resulted in capital shortages and new projects being delayed.
Cash flow management remained a high priority in the industry and the labour environment continued to be a significant influence on the performance of producers, from both a productivity and cost perspective.
The shortage of key skills remained an issue for the mining industry in general.
Lonmin was in the fortunate position of having access to relatively shallow reserves and resources against the background of expected challenges in the supply and cost of South African electricity.
There was the possibility of a positive surprise in the PGM pricing, with supply expected to continue to struggle to keep up with recovering demand from 2010 onwards.
As demand returned, there should be a recovery in PGM profit margins. The behaviour of investors in the exchange-traded funds would continue to influence short-term price movements.
In early to mid-2011, Farmer expected to see the start of a more significant upturn in demand, supported by increasing momentum in the automotive and industrial sectors followed by a more pronounced market rebound, with the market moving back into deficit.
In the longer term, the future of PGM market fundamentals remained strong, primarily as a result of PGM applications in autocatalysis, which was underpinned by the various emissions legislation being introduced to combat global climate change.
In addition, PGMs were expected to be critical in the application of fuel-cell technology, which continued to advance in a number of sectors, including a growing number of commercial applications for stationary fuel cells.
The platinum market, in particular, was also supported by continuing demand from the Asian jewellery market.
"We expect to deliver several years of steady growth from our core Marikana operations through production from our three new shafts, Saffy, Hossy and K4.
"The majority of the capital needed to initiate and ramp-up production at these shafts has already been invested.
"Capital expenditure is now predominantly focused on ore body development to support the production ramp-up of these shafts," Farmer said.
At the Saffy shaft, he said that the company was converting its mining method from fully mechanised to hybrid mining, achieving its target of 80 000 t/m, up from 45 000 t at the end of the 2008 financial year.
In 2010, the company expected Saffy to continue to ramp-up towards its production capacity of 200 000 t/m.
A decision was taken a year ago to continue to run Hossy shaft on a fully mechanised basis.
At that time, the company set a productivity target for Hossy for the end of the 2009 financial year of an average of 1 500 m2/m per suite of equipment.
That target was achieved in September, with the best performing suites at Hossy reaching productivity of 1 800 m2/m per suite.
Furthermore, the shaft achieved monthly production of 60 000 t from 20 000 t/m in September 2008.
"While this performance does not yet make production costs competitive with conventional mining methods, it is encouraging to see what can be done once the appropriate degree of focus is applied," Farmer said.
Consequently, the company had decided to continue with a fully mechanised mining method at Hossy for the foreseeable future, targeting to reach 2 200 m2/m per suite of equipment by September 2011.
Initial production from K4 was anticipated in the first half of the 2012 financial year, although development ounces would be produced in 2011.
By the time K4 ramped up to full production of 225 000 t/m, Farmer expected the three shafts to be contributing more than 50% of total underground production at Marikana.
That organic growth would be supplemented by a number of other Marikana projects, including the extraction of chrome from mined production and the re-treatment of tailings following the processing of this chrome.
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