TIDMLMI
RNS Number : 6455S
Lonmin PLC
22 December 2016
22 December 2016
Lonmin Plc ("Lonmin" or the "Company")
Annual Report and 2017 Annual General Meeting
On 14 November 2016 Lonmin announced its Final Results for the
year ended 30 September 2016 (the "Final Results Announcement").
The announcement made on that date included inter alia a condensed
set of financial statements, a management report and a directors'
responsibility statement, all as required by DTR 4.1.
Lonmin has today posted to shareholders and has submitted to the
National Storage Mechanism, copies of the following documents:
-- Annual Report and Accounts for the year
ended 30 September 2016 (the "Annual Report
and Accounts")
-- Circular relating to the Annual General
Meeting to be held on 26 January 2017
-- Forms of Proxy for shareholders on the
UK and SA registers
These documents will shortly be available for inspection on the
National Storage Mechanism www.morningstar.co.uk/uk/nsm.
As required by DTR 6.3.5 R (3), the Company confirms that the
Annual Report and Accounts and the Circular relating to the Annual
General Meeting are now available to view or download in pdf format
from the Lonmin website, www.lonmin.com.
The appendix to this announcement contains additional
information which has been extracted from the Annual Report and
Accounts for the purposes of compliance with DTR 6.3.5 and should
be read together with the Final Results Announcement, which can be
downloaded from the Company's website, www.lonmin.com. This
announcement should be read in conjunction with and is not a
substitute for reading the full Annual Report and Accounts.
Together these constitute the information required by DTR 6.3.5.
which is required to be communicated to the media in full unedited
text through a Regulatory Information Service. Page and note
references in the text below refer to page numbers and notes in the
Annual Report and Accounts:
A statement on the principal risks and
-- uncertainties
-- A statement on related party transactions
S
APPIX
LONMIN'S PRINCIPAL RISKS AND UNCERTAINTIES
These risks have been ranked on a residual basis according to
the magnitude of potential impact, probability and taking into
account the effectiveness of existing controls. The risks represent
a snapshot of the Company's current risk profile. This is not an
exhaustive list of all risks the Company faces. As the macro
environment changes and country and industry circumstances evolve,
new risks may arise or existing risks may recede or the rankings of
these risks may change.
1 OPERATIONAL EXECUTION
------------------------------------------------------------------------
Description
Failure to deliver against production and cost
targets can result from a variety of reasons,
including, poor productivity, high absenteeism,
safety stoppages, industrial action, difficult
geological conditions as well as ineffective
control of operational expenditure.
Impact
Poor operational delivery can lead to not achieving
the Business Plan deliverables which includes
a decline in profitability and cash generation,
which in turn pose threats to our liquidity position
and impacts profitability.
Mitigation
Critical measures implemented to address this
exposure were:
* Enhanced focus on improving operational attendance
levels which included the root cause analysis and
mitigation of absenteeism;
* The rollout of operational performance bonuses at
targeted operational levels. Rigorous performance
monitoring against business plan targets (cost and
production);
* A more rigorous approvals framework (delegation of
authority) was implemented;
* Continued DMR engagement to address safety stoppages
and increased operational focus to improve overall
safety performance and culture;
* Productivity improvement plans have been established
to enhance current resource efficiency;
* Operational oversight was improved through rigorous
tracking of crew performance by the Business Support
Office; and
* As part of ensuring that potential operational
bottlenecks are managed, the Theory of Constraints
method was implemented across various operational
areas.
--
Change
This risk remains unchanged due to the ongoing
impact of the Section 54 operational stoppages
experienced as well as other operational challenges
experienced. The downside risk was however offset
to some extent through the excellent Processing
performance during the year.
------------------------------------------------------------------------
2 PRICE AND MARKET VOLATILITY
------------------------------------------------------------------------
Description
Commodity price and currency volatility exacerbates
the uncertainties in managing a mining business.
This is especially because mining requires long
planning horizons to plan new mines and make
decisions regarding the expansion and contraction
of existing operations. These decisions often
need to be made based on assumptions regarding
future metal prices (which drive revenue) and
exchange rates (in our case primarily the USD/Rand
exchange rate as the majority of our cost and
capital expenditure are incurred in South African
Rand). When these cash flows are less than anticipated,
it can have a significant negative financial
impact on the business.
Impact
The uncertainty related to metal price and exchange
rate assumptions used in long-term planning can
lead to incorrect planning decisions and have
negative financial consequences. In addition,
volatile metal prices may also affect the decisions
made by our customers and may result in them
considering substituting our products with other
alternatives.
Mitigation
Measures implemented to address exposure:
* Quarterly review of supply and demand dynamics of key
products and the factors that could affect metal
price volatility and forecasting processes;
* Longer term volume contracts with key customers to
mitigate off-take risk;
* Weekly short-term cash flow forecasts to manage
liquidity and pro-actively flag negative cash flow
impacts;
* Monthly Price Risk Committee meetings, as well as
consideration of forward selling and hedging
strategies as and when appropriate;
* The Company collects market information from a number
of different sources to better understand the supply
and demand dynamics of key products and the factors
that could affect metal price volatility. This
includes the participation in various local and
international Platinum related forums and
associations; This information serves as input to the
forecasting processes;
* A detailed cost response strategy has been
implemented, including the responsible closure of
Hossy shaft, resizing of concentrator capacity and
all overheads;
* In addition, the Company has embarked on developing
an in-house market intelligence portal to assist in
improving its ability to forecast prices; and
* The Company is refocusing its market development
strategy to focus on areas with maximum potential.
Change
Risk in this area remains unchanged from 2016
as metal and currency markets continue to remain
volatile accompanied by the significant decline
in the platinum price.This was more than offset
by the weakening of the Rand.
------------------------------------------------------------------------
3 EMPLOYEE AND UNION RELATIONS
------------------------------------------------------------------------
Description
The industrial relations environment has stabilised
over the last 12 months as evidenced by the improved
dialogue between unions and Company management.
Whilst the environment has remained stable, the
potential for volatility remains, which could
result in disruptions to operations and have
a material adverse effect on the Company's financial
position.
Impact
Various internal as well as external factors
could influence the employee relations space
and could lead to disruption of operations and
breakdown of employer-union relations.
Mitigation
To ensure open and transparent dialogue, appropriate
structures have been established to enable effective
union engagement across all levels. These structures
includes a Future Forum which enabled the consultation
process for voluntary severance as well as the
Section 189 process. A relationship building
programme and charter to govern relations between
unions and the Company have been established.
As part of enhancing employee ownership, a Employee
Profit Share Scheme has been established.
Change
The Industrial Relations environment has improved
as the Company concluded a three-year wage agreement.
------------------------------------------------------------------------
4 SAFETY PERFORMANCE
------------------------------------------------------------------------
Description
Employee injuries and / or work stoppages due
to Section 54's will impact the Company's ability
to achieve production and financial targets.
Impact
Poor safety performance has a direct impact on
the life of employees, contractors and their
families and risks such as fall-of-ground, tramming,
working at heights, scraping and rigging incidents,
exposure to gases, fire, molten metal, electrocution
and many other hazards have to be controlled
to reduce and eliminate fatalities and injuries.
A failure in safety processes could result in
injury or loss of life, which would have tragic
implications for employees, their families and
the communities. It would also severely disrupt
operations and could result in safety stoppages
which have a direct impact on the people, cost
and reputation. The failures in safety procedures
may be caused by employees or poor management
practices. DMR could also temporarily suspend
part or all of the operations under the Mine
Health and Safety Act (commonly referred to as
a Section 54 stoppage) and this have an impact
on the working rhythm, cost and production. This
suspension could potentially result in Lonmin's
Operating licence becoming under scrutiny by
the regulator.
Mitigation
Safety awareness and training such as rollout
of the Du Pont leadership programme, called the
Lonmin Safety Leadership DNA programme. This
programme develops individual's safety competencies,
knowledge of the safety theory, how to apply
it and practise safety management. Structured
workplace coaching is also part of this programme
which is conducted one-to-one to bridge individual
competency gaps and to improve safety performance
over time. Training has been delivered to executive
and senior management, union health and safety
structures and 16 'train the trainers' candidates.
Safety Improvement Plans are being implemented
with an enhanced focus on accident analysis and
pro-active preventive measures. Visible Felt
Leadership (VSL) is such a pro-active measure
which has been accelerated during this year.
VSL is senior management being visible in the
operational areas confirming that safety is a
core belief and showing passion to work safely.
Safety audits are also conducted and include
internal and external audits that measure the
safety maturity of each operational business
unit. Cross-site safety audits support learnings
across the operations and the sharing of best
practices.
Change
Collaboration between Lonmin, the regulator and
unions have started to show results, as we have
experienced a reduction in the duration and frequency
of Section 54 stoppages and more localised application
of the stoppages in the fourth quarter on the
year.
------------------------------------------------------------------------
5 COMMUNITY RELATIONS
------------------------------------------------------------------------
Description
Mining is conducted in areas where communities
are present and the communities have various
expectations of the mines, such as employment
opportunities, socio-infrastructure support and
business opportunities. When these expectations
are not met, it may result in conflict and unrest.
Impact
As many of our employees live locally, any disruptions
within the communities can have a direct impact
upon production. The failure to deliver social
upliftment projects, triggering protests or violence
and corporate reputational damage can result,
if the relationship with these stakeholders is
not managed effectively. Lonmin has acknowledged
the important role of communities as a critical
stakeholder and has implemented various engagement
platforms and development initiatives to ensure
appropriate upliftment. Procurement has become
another focus area as communities view it as
an opportunity to improve their livelihood through
improved income. Lonmin has identified this need
and has introduced procurement opportunities
for communities.
Mitigation
The development of a revised stakeholder strategy
with emphasis on continuous engagement at all
levels and all communities (Bapo and non-Bapo
communities) as well as involvement of the communities
in the implementation of the SLP. Greater consultation
with stakeholders which includes upliftment measures
to be initiated. This approach has increased
community ownership of both the challenges facing
communities and the solutions provided as part
of the SLP implementation plan.
As part of enhancing relations with communities,
the Company has reviewed its engagement process
and implemented a revised stakeholder management
process. In order to improve governance and project
execution of community related investments, a
procurement framework with appropriate project
management office capabilities have been established.
Other aspects of community investment included
the establishment of a Cadette Training programme
as part of the Company enhancing its potential
future employment capacity. Formal engagement
structures have also been established in the
form of bilateral forums with Bapo, Madibeng
and Rustenburg communities. The engagement meetings
addresses employment, economic development, community
infrastructure programmes and the SLP status.
The transaction with Bapo Ba Mogale resulted
in community trusts being entitled to a minimum
of R5 million per annum and the provision of
R1.65 billion worth of procurement contracts.
Change
Our relationships with local communities that
surround our operations have improved tremendously
since the 2014 transaction. However, the socioeconomic
challenges that face the Bojanala district in
which Lonmin resides, have put a lot of pressure
on the community and its leadership to an extent
that the gains seem to be eroded by the challenges.
The procurement opportunities given to the Bapo
community, particularly the visible bus service,
have given hope to the communities that Lonmin
is keeping its promises. The level of trust between
the communities and Lonmin has improved significantly.
Despite this, Lonmin strives for improvement
with pressure from the regulator as well as access
to opportunities through local procurement. Lonmin
needs to develop and implement a clear strategy
around this, to meet local and DMR expectations.
------------------------------------------------------------------------
6 UTILITIES
------------------------------------------------------------------------
Description
The higher than inflation tariff based increases
in electricity and the Company's inability to
reduce this cost any further, have impacted the
operating costs of Company operations. A stable
electricity environment, in terms of pricing
is critical in ensuring its long-term sustainability.
Water utilisation has also been challenging,
both from an infrastructure point of view as
well as availability. Capacity deterioration
within local municipalities is also adding to
this challenge. The establishment of informal
settlements resulted in communities requesting
water and electricity supply as a basic need
and keeps adding to the burden of local municipalities
and industries for service delivery.
Impact
Supply constraints in respect of energy or water
could impact upon our ability to operate effectively
and meet our production targets. Furthermore,
cost increases in respect of these utilities
impact our margins. Water availability is becoming
a critical component of any business to survive
and still remains a basic human need.
Mitigation
Ongoing implementation of the electricity conservation
programme as well as water optimisation through
demand management. An integrated water management
plan for Lonmin has been developed with the goal
to reduce Rand Water reliance as far as possible,
within the operations, and to maximise the recovery
and re-use of all other sources of water. Longer
term plans to treat some streams of these alternative
sources to potable level to make the business
more independent of Rand Water. Explore further
opportunity to supply communities out of such
streams. As part of ensuring optimal electricity
usage, Lonmin is a member of the Eskom energy
intensive user groups, as well as conducts Monthly
and Daily electricity consumption and reporting.
Additional initiatives to ensure optimal usage
is the Electricity conservation programme and
loadshedding contractual agreements to manage
supply side constraints. As part of ensuring
appropriate continuity during an outage, the
Company has implemented risk based scenario planning
based on available Eskom capacity. From a water
optimisation perspective, the Company has implemented
water conservation and demand management initiatives.
The process as to how water is being monitored
and managed is aligned with how power is being
managed in the business.
Change
Current supply constraints and proposed tariff
increases in respect of energy and water have
a significant impact on the Company's ability
to operate effectively and to meet our production
targets. From an energy perspective the risk
in this area remains unchanged due to aging power
stations that could result in an increase in
the amount of unplanned outages, however from
a water perspective it has increased due to lower
precipitation levels and ongoing impact of climate
change.
------------------------------------------------------------------------
7 CHANGES TO THE POLITICAL, LEGAL, SOCIAL AND
ECONOMIC ENVIRONMENT
------------------------------------------------------------------------
Description
The Company is subject to the risks associated
with conducting business in South Africa, including
but not limited to changes to the country's laws
and policies regarding taxation, royalties, divestment,
repatriation of capital and resource nationalism.
The latter is a broad term that describes the
situation where a government attempts to assert
increased authority, control and ownership over
the natural resources located in its jurisdiction.
The MPRDA Amendment Bill currently remains the
subject of Parliamentary debate. In particular,
beneficiation is a major consideration with the
Bill proposing that the Minister be granted a
discretion to declare certain minerals as strategic,
that the Minister determine what percentage of
strategic minerals are to be made available locally
and the developmental price at which strategic
minerals are to be sold, as well as the Minister
being able to determine the conditions applicable
to export permits. In addition, the Davis Commission
is currently looking at the tax regime with a
view to determining whether additional taxes
including a carbon tax should be imposed on mining
companies. The mining industry is also awaiting
clarity of the interpretation of the applicability
of the "Once Empowered Always Empowered (OEAE)"
principle. Currently engagements on not only
the OEAE principle, but the new Mining Charter
are taking place. The DMR has also recently come
under pressure to demonstrate that it is taking
action to monitor compliance with undertakings
made in the SLP's submitted by mining companies.
This has led to the DMR issuing s93 Notices to
mining companies on a more regular basis. Lonmin
has received s93 notices in respect of its Housing
and Living Conditions obligations and continues
to engage with the DMR to reach a constructive
solution. In addition, the Department of Trade
and Industry is attempting to legislate a policy
of creating black industrialists.
Impact
The ongoing debates in respect of resource nationalism
have created policy uncertainty and this has
inevitably led to a decline in investor appetite
for South African investment risk. If some of
the issues under consideration are implemented,
this could have a material adverse effect on
the Group's future. For example, profits could
be negatively impacted by the imposition of additional
taxes and revenue could be impacted by the sale
of metals at discounted developmental prices.
The obligation to sell locally could impact long-term
supply agreements with our customers and give
rise to concerns about security of supply from
South Africa, potentially expediting the growth
of the recycling industry and increasing substitution
concerns.
Mitigation
Lonmin participation in the Chamber of Mines
process to engage the DMR with regards to concerns
regarding the revised Mining Charter, as well
as broad engagement with government regarding
this exposure. Appropriate governance structures
in the form of Executive and Board Committees
are being established to ensure ongoing reporting
of progress against agreed SLP targets. Bilateral
and industry level discussions with the DMR and
other government agencies are ongoing. Lonmin
and other mining companies are continuing to
engage with the South African government and
the broader community in order to raise awareness
of the risks associated with resource nationalism.
Change
The risk in this area has increased due to uncertainty
regarding certain policy decisions i.e. BEE requirements
and strategic minerals. Other factors include
the impact of political party actions, as well
as the lack of clarity in terms of our social
licence to operate.
------------------------------------------------------------------------
8 LACK OF GEOGRAPHICAL AND PRODUCT DIVERSIFICATION
------------------------------------------------------------------------
Description
Lonmin's principal operating subsidiaries are
concentrated in one geographical location, which
increases the level of risk of localised disruptions
having an impact on the majority of our operations.
In addition, Lonmin is a PGM producer and does
not have exposure to other commodities or sectors.
Impact
Local events in the vicinity of Marikana have
the potential to disrupt Lonmin's operations
in this area, which represent all of the Company's
operating mines as well as the majority of our
processing operations. Such a disruption could
significantly impact the Group's operating and
financial performance.
The Group is also a focused PGM producer and
is not exposed to other commodities. In times
when the PGM market is depressed the Company's
financial performance is likely to be negatively
impacted as it does not have exposure to alternative
commodities that may have a different economic
cycle and offset this PGM pricing weakness.
Mitigation Plans
The Company continues to review its portfolio
of projects, which includes Limpopo and Akanani.
These projects are located in other parts of
South Africa and if developed would provide some
degree of geographic diversification. Other opportunities
that could mitigate the risk arising from lack
of geographical and product diversification are
also reviewed from time to time.
Change
The risk remain unchanged due to concentration
risk of Marikana Operations.
------------------------------------------------------------------------
9 LOSS OF CRITICAL SKILLS
------------------------------------------------------------------------
Description
Due to the depressed mining sector, the risk
of the loss of critical skills remains high.
Uncertainties related to a Company's financing
and sustainability following the recapitalisation
of the business earlier this year contributed
to employees looking for new opportunities.
Impact
The loss of critical skills could negatively
impact safety, production and the ability to
deliver against targets. In order to retain our
skilled labour, we continuously review market
related remuneration packages as compared to
the incentive and retention schemes offered by
Lonmin. This continuous monitoring of remuneration
practices and matching the packages offered by
our peers in order to attract and retain employees
of a suitable calibre can result in increased
costs.
Mitigation
Implementation of a scheme to retain key critical
skills. Ongoing review and analysis of our remuneration
practices in order to ensure that we remain competitive
and are able to attract and retain the skills
required during this challenging time. We also
use counter-offers selectively in order to retain
the most critical employees. The implementation
of an employee value proposition which focuses
on employee wellbeing.
As part of ensuring the development and retention
of critical skills Individual Development Plans,
succession planning and retention strategies
for scarce skills have been established. Ongoing
monitoring of remuneration practices which matches
Lonmin peers are monitored in an ongoing manner.
Graduate development, mentorship programmes and
internship programmes have also been established
to ensure development of existing and future
human resources capacity.
Change
The risk remains high despite a general high
number of job losses in the mining sector. One
is not always able to replace critical skills
who understand the business and the environment
with resources available in the market and therefore
it remains a key risk to the organisation.
------------------------------------------------------------------------
TRANSACTIONS WITH RELATED PARTIES
The Group has a related party relationship with its Directors
and key management (as disclosed in the Remuneration Report and in
note 5) and its equity accounted investments (note 13).
The Group's related party transactions and balances are
summarised below:
2016 2015
$m $m
--------------------------------- ------ ------
Transactions:
Purchases from joint venture
- Pandora 15 30
Amounts due from joint
venture - Pandora 5 8
Amounts due from associate
- Incwala 1 1
Dividends to minorities
- Incwala(i) 19 37
Interest accrued from
HDSA investors in Incwala 20 18
Subscription paid to the
Platinum Jewellery Development
Association(ii) 10 9
Balances:
Amounts due from HDSA
investors in Incwala(iii) 409 417
================================= ====== ======
All related party transactions are priced on an arm's length
basis.
Footnotes:
i These advance dividend payments were made by a Group company,
WPL, to Incwala Platinum (Proprietary) Limited (IP) as explained in
note 9.
ii The subscription paid by Lonmin is material to the Platinum
Jewellery Development Association of which Lonmin is a member.
iii Refer to note 14 for details regarding the amounts due from
HDSA investors in Incwala. This amount is before deducting the
accumulated
impairment charge of $307 million.
This information is provided by RNS
The company news service from the London Stock Exchange
END
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