Lonmin Plc 4 Grosvenor Place London SW1X 7YL United Kingdom T: +44 (0)20 7201 6000 F: +44 (0)20 7201 6100 www.lonmin.com REGULATORY RELEASE 16 May 2016 2016 Interim Results Lonmin Plc, ( Lonmin or the Company ), one of the world s largest primary platinum producers, today publishes its Interim Results for the period ended 2016 and an update on events to today s date. Lonmin has published today its Q2 Production Report in a separate announcement. KEY FEATURES Highlights Significant progress in the delivery of the Business Plan following successful refinancing. Net cash has improved to $114 million as at 2016. This is compared with $185 million net debt at 30 September. Total liquidity of $474 million (circa ZAR 7 billion) comprised gross cash of $264 million, before deducting the drawn term loan of $150 million and undrawn debt facilities of $210 million. Reorganisation and s189 process successfully completed with 5,433 people having left the Group by. A further 1,428 employees were reskilled and redeployed into vacant, more productive roles. Cost savings well ahead of schedule with R469 million savings achieved in H1 2016 (in FY15 money terms). This represented 67.0% of the full-year target of R700 million. Continuing and sustained unit cost improvement. Half year PGM unit costs of R10,668, with PGM unit cost contained to R10,390 per PGM ounce in Q2. Full year guidance of R10,400 is maintained. Implementing and delivering on our Business Plan as outlined in November has resulted in the business being cash positive after capital expenditure in the second quarter of the year. Operational Results LTIFR improved by 5.7% to 5.10 at 2016 from 5.41 at 30 September on a 12 month rolling basis. Regrettably our colleague, Mr Zilindile Ndumela, was fatally injured in October and after the period end Mr Goodman Mangisa and Mr Fanelekile Giyama were fatally injured in separate incidents in April and May. We extend our deepest condolences to their families and friends. Total tonnes mined of 5.1 million in H1 2016 of which 76.6% was produced by our core Generation 2 shafts where production of 3.9 million tonnes was broadly flat on H1. At our Generation 1 shafts production of 1.2 million tonnes in H1 2016 was down 0.5 million tonnes, or 27.7% in line with our promise to cut high cost production in an oversupplied market. Q1 saw a significant increase in section 54 safety stoppages, but improvements in our safety performance resulted in minimal safety stoppages in Q2. Productivity at our Generation 2 shafts at 5.9 square metres per mining employee in H1 2016 improved by 3.9% on H1. Operational flexibility was preserved with the immediately available ore reserve position of 4.0 million square metres, or 22 months average production. 1
Refined Platinum production of 348,885 ounces was up 33.0% or 86,582 ounces on prior year period. Processing throughput in the prior year period was impacted by smelter stoppages in December 2014. Smelter complex running normally in H1 2016. Number Two furnace was safely and successfully rebuilt and commissioned on schedule in early December. The smaller Pyromet furnaces were utilised during this time. The Other Precious Metals Plant was successfully commissioned resulting in a cash-flow benefit of circa R116 million as a result of permanently reducing our metal in process stock. Platinum sales of 361,882 ounces were up 95,942 ounces or 36.1% on the prior year period when processing throughput was constrained. Merger of our BEE partner Shanduka with Pembani was completed thereby allowing Lonmin to maintain its BEE compliant status. Lonmin and Pembani are both committed to a long-standing mutually beneficial relationship. Financial Results Full ZAR basket price of R10,962 was down 2.7% on the prior year period. The 25.4% decrease in Dollar PGM prices was largely offset by Rand weakness. Gross costs at R6,828 million were down R427 million on H1 largely due to the reorganisation. EBITDA for the period was $36 million, this was $42 million higher than the LBITDA of $6 million H1 largely due to the beneficial impact of our cost reductions. Loss per share at 1.8 cents was an improvement of 162.8 cents on the H1 loss of 164.6 cents. Capital expenditure in H1 was contained to $27 million in-line with the Business Plan and benefitting from the weaker Rand by circa $5 million. Market Outlook: For the remainder of 2016 we expect automotive and chemical industry demand for platinum to remain firm despite current concerns over the diesel market and the economic headwinds in China. Demand should lift as emerging markets continue to catch up with the ever tightening emission standards of developed markets, leading to potentially higher PGM loadings. The jewellery market is expected to be static during the year but still offers upside opportunity over the medium to long term. Though current prices have trended upwards since the lows of Q1, prices are expected to remain lower than incentive prices for long term projects in the platinum industry. Guidance: Sales guidance maintained at circa 700,000 platinum ounces. Unit costs guidance maintained at circa R10,400. Capex guidance reduced from $132 million to $105. Ben Magara, Chief Executive Officer, said: These results reflect the positive momentum in Lonmin, we have delivered on our promise to restructure and cut high cost production in this oversupplied market while simultaneously reducing costs and improving cashflows. Quarter on quarter, Lonmin has reduced unit costs to R10,390 per PGM ounce and improved the net cash to $114 million; thus delivering on our promise at the time of the Rights Issue to be cash positive after capital in this subdued PGM pricing environment. There is still a lot of hard work ahead as we squeeze out more costs and drive operational improvements and our key risks remain safety and its related stoppages and relationships. Lonmin has long life, shallow mining assets and unrivaled processing expertise and an invaluable mine to market business. Going forward, our investment in relationships and the concept of shared value will be extensively tested in the coming wage negotiations especially with the backdrop of local government elections. I am cautiously optimistic about wage negotiations as we have engaged continuously with our employees and unions on the economic realities that our Company has gone through, including the inevitable 5,433 colleagues that we had to sacrifice and lost their jobs. 2
FINANCIAL HIGHLIGHTS 2016 Revenue $515m $508m Underlying i EBITDA ii $29m $8m EBITDA / (LBITDA) ii $36m $(6)m Underlying i operating loss iii $(22)m $(70)m Operating loss iii $(15)m $(84)m Underlying i loss before taxation $(26)m $(77)m Loss before taxation $(21)m $(118)m Underlying i loss per share ix (3.2)c (127.1 )c Loss per share ix (1.8)c (164.6)c Trading cash outflow per share iv, ix (24.9)c (354.1)c Unit cost of production per PGM ounce R10,668/oz R10,516/oz Capital expenditure $27m $65m Free cash outflow per share v, ix (37.3)c (529.1)c Net cash / (debt) as defined by the Group vi $114m $(282)m Interest cover (times) vii - - Gearing viii - 8% Footnotes: i Underlying results and loss per share are based on reported results and loss per share excluding the effect of special items as disclosed in note 3 to the interim statements. ii iii iv v vi vii viii ix EBITDA / (LBITDA) is operating profit / (loss) before depreciation, amortisation and impairment of goodwill, intangibles and property, plant and equipment. Operating loss is defined as revenue less operating expenses before impairment of available for sale financial assets, finance income and expenses and before share of loss of equity accounted investments. Trading cash flow is defined as cash flow from operating activities. Free cash flow is defined as trading cash flow less capital expenditure on property, plant and equipment and intangibles, proceeds from disposal of assets and dividends paid to non-controlling interests. Net cash / (debt) as defined by the Group comprises cash and cash equivalents, bank overdrafts repayable on demand and interest bearing loans and borrowings less unamortised bank fees, unless the unamortised bank fees relate to undrawn facilities in which case they are treated as other receivables. Interest cover is calculated for the twelve month periods to 2016 and on the underlying operating profit divided by the underlying net bank interest payable excluding exchange differences. Gearing is calculated as the net debt attributable to the Group divided by the total of the net debt attributable to the Group and equity shareholders funds. The number of shares held prior to 20 November has been adjusted by a factor of 0.08 to reflect the bonus element of the Rights Issue. 3
ENQUIRIES Investors / Analysts: Lonmin Tanya Chikanza (Head of Investor Relations) +44 207 201 6007 /+27 11 218 8358 Media: Cardew Group Anthony Cardew +44 207 930 0777 Sue Vey +27 72 644 9777 Notes to editors Lonmin, which is listed on both the London Stock Exchange and the Johannesburg Stock Exchange, is one of the world's largest primary producers of PGMs. These metals are essential for many industrial applications, especially catalytic converters for internal combustion engine emissions, as well as their widespread use in jewellery. Lonmin's operations are situated in the Bushveld Igneous Complex in South Africa, where nearly 80% of known global PGM resources are located. The Company creates value for shareholders through mining, refining and marketing PGMs and has a vertically integrated operational structure - from mine to market. Lonmin's mining operations extract ore from which the Process Operations produces refined PGMs for delivery to customers. Underpinning the operations is the Shared Services function which provides high quality levels of support and infrastructure across the operations. For further information please visit our website: http://www.lonmin.com 4
CHIEF EXECUTIVE OFFICER S REVIEW 1. Key Achievements Implementing and delivering on our Business Plan as outlined in November has resulted in the business being cash positive after capital expenditure in the second quarter of the year. The Rights Issue was successfully completed in December and the revised bank debt facilities extended to May 2020 (assuming Lonmin exercises its option to extend the term until this date). Net cash has improved to $114 million at 2016. Gross cash, before deducting the drawn term loan of $150 million, was $264 million resulting in total liquidity of $474 million after taking into account undrawn bank facilities of $210 million. Reorganisation of the Group in line with the Business Plan has been completed with 5,433 employees and contractors having left the Company by 2016 and a further 1,428 employees having been reskilled and redeployed into vacant, more productive roles. Planned cost savings of R0.7 billion in FY16 are on track with R469 million already saved in H1 (in FY15 money terms), representing 67.0% of the annual target. This has brought unit costs down from R10,959 in Q1 to R10,390 per PGM ounce in Q2, a 2.6% decrease on Q2 despite an annual wage increase of 8.2%. The improvement in profitability generated underlying EBITDA of $29 million in H1 2016 up $21 million on the $8 million achieved in H1. The weak PGM price continued in the period, however, its impact has been offset by Rand weakness. Capital expenditure was contained to $27 million in line with the Business Plan and benefitted by circa $5 million from the Rand weakening against the Dollar. Production from our Generation 2 shafts at 3.9 million tonnes was broadly flat on H1 and production from the Generation 1 shafts at 1.2 million tonnes was down by 27.7% as these shafts are shut as part of our strategy to remove production of high cost ounces. Our smelting complex is running in line with expectations. Platinum sales of 361,882 ounces in H1 2016 were up 36.1% or 95,942 ounces on the prior year period when the processing throughput was impacted by smelter stoppages in December 2014. 2. Safety Pleasingly our safety performance is showing improvements following renewed focus in this area. The rolling twelve month average Lost Time Injury Frequency Rate to 2016 was 5.10 incidents per million man hours and shows a steady improvement of 5.7% on September at 5.41. Despite most safety indicators showing improvements, regrettably one of our colleagues, Mr Zilindile Ndumela, was fatally injured on 26 October at Rowland shaft. Subsequent to the period end two of our colleagues were fatally injured, Mr Goodman Mangisa at Pandora JV E3 Shaft on 6 April and Mr Fanelekile Giyama at Rowland shaft on 7 May. We extend our deepest condolences to their families and friends. Focus on safety improvements remains a priority. Whilst production from our mining operations was negatively impacted by section 54 safety stoppages in Q1 the improvement in our safety performance saw these reduce significantly in Q2. However, Q3 will be negatively impacted by sections 54 safety stoppages following the fatalities in April and May. During the period our focus remained on injury and fatality prevention. Safety campaigns were launched with interventions to prevent finger injuries, a major contributor to our lost time injuries. Additional focus areas included the improvement of strata controls relating to Falls of Ground. The Fall of Ground controls include support, barring and entry examination. Lonmin continued with the mining industry occupational safety and health (MOSH) initiatives and during the period fitted underground equipment with signalling devices as well as improving the scraping and rigging practices. Focus areas for the second half of the year include continuing with the MOSH initiatives implementation; the implementation of Bapo Ba Mogale personal protection equipment contracts; cross-site safety audits to continue at all operations; the roll out of people and vehicle detection systems and the vehicle detection system on all trackless mobile equipment on surface 5
and underground; implementation of the new explosive regulations; compliance audits on contractors and contractor management; and training will continue through on-the-job team coaching and leadership coaching sessions. 3. Delivering on the Business Plan Balance Sheet Liquidity at 2016 was $474 million comprising gross cash of $264 million and undrawn bank facilities of $210 million. After deducting the term loan of $150 million, net cash at 2016 was $114 million. Reorganisation of the Group and Removal of High Cost Production We have completed the reorganisation programme and the Commission for Conciliation, Mediation and Arbitration (CCMA) facilitated our s189 process. By 2016 5,433 people had left the Group and 1,428 employees had been reskilled and redeployed into vacant, more productive roles. This was achieved through active engagements and consultation with the trade unions, especially the majority union, AMCU and job losses were minimised and strike action and operational disruptions avoided. We believe that efforts invested by both Lonmin and the unions in building relations enabled this significant achievement. The voluntary and forced separation packages included severance pay and access to a portable skills training programme. One off redundancy costs paid in H1 2016 amounted to $13 million but was $22 million lower than originally anticipated due to the reskilling and redeployment of employees combined with a greater proportion of contractors departing and natural attrition. The Business Plan s operating model has now been fully implemented and the requisite structures are in place to ensure the success in line with the Business Plan. The closure of inefficient areas and shafts with the highest cost of production is on track. 1B shaft was closed and placed on care and maintenance in October resulting in a decrease in tonnes mined in H1 2016 of circa 100,000 tonnes or about 4,800 saleable Platinum ounces when compared to H1. Opencast operations have been wound down with only a small amount of ore recovered in H1 2016. This has resulted in a decrease on H2 of circa 100,000 tonnes or about 4,625 saleable Platinum ounces. Newman shaft will be closed and put on care and maintenance at the end of 2016 in line with our Business Plan. Circa 1,100 people are currently employed at this shaft of whom about 200 are contractors. Hossy shaft is to be closed and placed on care and maintenance by the end of FY17. This shaft currently employs circa 1,500 people of whom about 200 are contractors. Mining operations at E1 and W1 shafts are to continue at least until the end of the financial year. These shafts currently employ circa 1,100 people of whom about 1,000 are contractors. Productivity and Efficiencies In order to further enhance the granularity of our reporting the following productivity and efficiency metrics have been included in the Operating Statistics section of this report. square metres per person the average monthly square metres broken underground at the shaft divided by the average number of direct shaft employees (own employees and contractors working on the shaft excluding any other central services employee). square metres per crew the average monthly square metres broken underground at the shaft divided by the average number of stoping crews and white area mining crews on the shaft. shaft head cost per tonne - direct shaft head costs, excluding any overheads and central service costs, per tonne hoisted shaft head cost per PGM ounce - direct shaft head costs, excluding any overheads and central service costs, per saleable PGM ounce produce Productivity improved at our Generation 2 shafts, in terms of square metres per person, by 3.9% to 5.9 in H1 2016 from 5.7 in H1. In terms of square metres per crew, productivity improved by 4.4% to 308 from 295 in H1. Our Generation 2 shafts contributed 76.6% of total production with all seven Generation 1 shafts only contributing 23.4%. 6
At Saffy shaft productivity increased significantly compared to H1 as this shaft was ramped up to full production by September. Square metres per person were up 23.8% to 5.4 and square metres per crew were up 22.8% to 278. Productivity at K3 and Rowland compared to H1 was negatively impacted by an under complement of production employees whilst employees affected by the s189 process and reorganisation were reskilled and redeployed into vacant roles. o K3 shaft - square metres per person were down 2.7% to 5.7 and per crew down 6.6% to 286 o Rowland shaft - square metres per person down 5.5% to 5.4 and per crew down 2.6% to 319 o We expect productivity at these shafts to improve in H2 2016 4B/1B shaft has the highest productivity and the closure of 1B has further improved efficiencies with square metres per person at 7.5 being 10.5% higher than the prior year period and square metres per crew at 386 were up 19.4% on the prior year period. Cost Savings In H1 2016 we achieved cost savings of R469 million in money terms. This represents 67.0% of our annual target of R0.7 billion cost savings in 2016 to be achieved through the reduction in the size of the Group s workforce, overhead costs and support service structures and the total cost of ownership projects. In H1 2016 labour costs were R416 million lower than the prior year period (in FY15 money terms) and total cost of ownership savings amounted to R53 million (in FY15 money terms). In addition a further cash-flow benefit of circa R116 million has been realised as a result of permanently reducing our metal in process stock following the commissioning of the Other Precious Metals Plant at the Precious Metals Refinery. The first product was produced from the upgraded facility in December. Built at a cost of R110 million, the project is primarily aimed at improving the Rhodium and Iridium recoveries using third generation PGM refining technologies. Further benefits of a one-off reduction in metal in process are expected to be realised in the second half of the year once an optimised steady state of operation is reached. Cost of Production per PGM ounce Unit costs in H1 2016 at R10,668 per PGM ounce were only 1.4% higher than the prior year period despite the 8.2% year on year increase in labour costs. The distorting impact of the holidays in December typically results in unit costs peaking in the first half of the financial year and this is built into our plans. The increase in mining and concentrating unit costs on H1 were contained to 5.8% and 4.7% respectively. This was largely offset by a 21.6% decrease in smelting and refining unit costs as the processing throughput in the H1 was impacted by smelter stoppages. Shared service unit costs and management and marketing services reduced year on year by 2.3% and 10.3% respectively due to the beneficial impact of the reorganisation and cost savings including the total cost of ownership programme. Delivering on our Business Plan has resulted in the cost of production per PGM ounce in Q2 2016 being R10,390. This was 5.1% lower than Q1 of R10,959 and in line with the R10,339 achieved in FY15. Our stated aim is to achieve unit costs in FY16 which are flat on FY15 and we are pleased to be delivering on this objective. The second half of the financial year is anticipated to benefit from the full impact of the reorganisation, driven by the Business Plan, which was completed in the first half of the financial year. Whilst the fourth quarter of the financial year bears the impact of the annual wage increases which will come into effect on 1 July 2016 in line with the rest of the Platinum majors, unit costs are anticipated to be lower in H2 than H1. We are maintaining our full year guidance for unit costs of R10,400 per PGM ounce. We are on track with our cost savings programme and remain vigilant in containing our costs. Our stated aim is to manage the Business to be cash flow positive after capital expenditure in the near term low PGM pricing environment whilst maintaining optionality to grow production when pricing improves. Adding the cost of capital expenditure per PGM ounce sold to the cost of production per PGM ounce produced shows that the business was cash flow positive in Q2 2016 and that the initiatives we have implemented are enabling us to turnaround our business to achieve our goals. 7
Shaft head cost per tonne and per PGM ounce Increases in shaft head cost per tonne and per PGM ounce at the Generation 2 shafts against H2 were contained to 3.3% and 4.2% respectively despite the 8.2% year on year wage increase. At K3 shaft the shaft head cost per tonne and per PGM ounce was R868 and R7,270 respectively, an increase on H1 of 3.6% and 1.2%. At Rowland shaft the shaft head cost per tonne and PGM ounce at R954 and R7,576 respectively represented an increase on H1 of 17.9% and 23.5% reflecting the reduction in volumes produced during the reskilling and redeployment of certain employees. Saffy is now one of our lowest cost Generation 2 shafts at R847 per tonne and R6,755 per PGM ounce. This was an improvement in H1 of 5.7% and 4.5% respectively. 4B/1B, also a lower cost Generation 2 shaft at R724 per tonne and R7,028 per PGM ounce, improved on H1 by 2.9% and 0.8% respectively. The cost per PGM ounce at the Generation 1 shafts at R7,056 was 1.4% lower than the Generation 2 shafts at R7,158 due to the ore body mined (Merensky only) and less dilution from development as these shafts are being managed for closure. Bulk Tailings Treatment Plant As reported on 28 January 2016 we are progressing towards securing third party funding for the Bulk Tailings Treatment plant. We have signed an agreement with the counterparty which is subject to various conditions precedent, including obtaining lender consent to the agreed terms. 8
Capital Expenditure Our strategy is to minimise capital expenditure whilst ensuring compliance to regulatory and safety standards and ensuring that the immediately available ore reserve position is maintained at the level necessary to support planned production at the Generation 2 shafts. Capital expenditure in H1 was limited to $27 million, benefitting from the weaker Rand by circa $5 million versus the Business Plan. Capital invested in the period included $6 million for the Rowland MK2 project to mine the Middelkraal 2 UG2 ore from levels 18 to 27 via the Rowland shaft infrastructure. As in previous years, capital expenditure is expected to be H2 weighted, however, as a result of the Rand being weaker than anticipated and a delay in the funding of the Bulk Tailing Treatment project (BTT) at the concentrating operations, capital expenditure guidance for FY16 has been reduced from circa $132 million to about $105 million (including circa $10 million for the Bulk Tailing Treatment plant expected to be funded by a third party). We do not expect the impact of the delay in the BTT project to be material to the production profile. Summary of Capital Expenditure: 31 Mar 31 Mar 2016 12 months to 30 Sep 2016 Revised Guidance K3 11 7 19 Rowland 10 1 5 Rowland MK2-6 13 Saffy 5 - - Generation 2 shafts 26 14 37 K4 9 1 1 Hossy 6-0 Generation 1 & 3 shafts 15 1 1 Central and other mining 4 2 17 Total Mining 45 17 55 Concentrators 4 3 27 Smelting & Refining 12 5 13 Total Process 16 8 40 Hostel / Infill Apartments 3 2 8 Other 1 0 2 Total 65 27 105 4. Production Performance Mining Operations Total tonnes mined of 5.1 million in H1 2016 was a decrease of 10.6% or 0.6 million on the prior year period due the planned decrease in production from our Generation 1 shafts in line with the Business Plan strategy to remove high cost production. Generation 2 shafts Production from our Generation 2 shafts (K3, Rowland, Saffy and 4B/1B) was 3.9 million tonnes in H1 2016, broadly flat on the prior year period despite the planned closure of the 1B shaft. Since we are commencing an orderly shutdown and placement on care and maintenance of Hossy shaft, this shaft is reported as a Generation 1 shaft and prior periods have been restated accordingly. 9
K3, our biggest shaft, produced 1,318,000 tonnes in H1 2016, a slight decrease of 1.4% on the prior year period. Saffy shaft produced 990,000 tonnes in H1 2016, an increase of 19.2% on the prior year period. This shaft has performed exceptionally well and is now operating at full production and achieved a record 200,079 tonnes in November. Rowland shaft produced 807,000 tonnes in H1 2016, which was a decrease of 12.9% on the prior year period driven by safety shut downs following the fatality in October and a delay in filling critical production vacancies due to the time taken to reskill and redeploy employees in line with the Group s reorganisation. 4B/1B produced 769,000 tonnes in H1 2016 as planned, a decrease of 6.3% or 52,000 as the 1B shaft was closed and placed on care and maintenance in October. Generation 1 shafts Production from our Generation 1 shafts (Hossy, Newman, W1, E1, E2, E3 and Pandora (100%)) was 1.2 million tonnes, 27.7% or 0.5 million tonnes, lower than the prior year period but in line with the managed closure of high cost production. K4 shaft remains on care and maintenance and a small amount of opencast ore was recovered in the period as this operation wound down. Ore reserve development The reserve position remains healthy such that our immediately available ore reserves at Marikana at the end of the H1 2016 were 4.0 million square metres. This was 0.1 million square metres lower than 30 September due to the planned depletion of immediately available ore reserves at the Generation 1 shafts as these shafts wind down. The immediately available ore reserves at the Generation 2 shafts, however, have not been depleted by the cost cutting initiatives. This level of ore reserves represents 22 months at average production (September : 22 months) and provides operational flexibility. Summary of Immediately Available Ore Reserves million square metres (centares) 30 Sep 31 Mar 2016 centares centares Generation 2 3.0 3.0 Generation 1 0.9 0.8 Generation 3 (K4 shaft on care and maintenance) 0.2 0.2 Total 4.1 4.0 Production Losses Q1 2016 experienced a significant increase in Section 54 safety stoppages but due to the improvement in safety performance there were minimal safety stoppages in Q2. Overall for the half year, tonnes lost due to management induced safety stoppages, Section 54 safety stoppages and industrial action at 0.25 million tonnes were lower than the prior year period. H1 2016 H1 tonnes tonnes Section 54s 234,000 229,000 Management Induced Safety Stoppages 7,000 56,000 Industrial action 9,000 16,000 Total tonnes lost 250,000 301,000 Process Operations Total tonnes milled in the half year period at 5.0 million tonnes were down 16.3% or 1.0 million tonnes on the prior year period. There was a small amount of opencast ore milled as stock piles were wound down. 10
Underground milled head grade was flat at 4.57 grammes per tonne in H1 2016. Overall the milled head grade was 4.55 grammes per tonne, up 0.8% on the prior year period at 4.52 grammes per tonne due to the decrease in lower grade opencast ore in the mix. Underground and overall concentrator recoveries for the half year at 86.8% continue to be strong. Total Platinum-in-concentrate for the period under review at 321,444 saleable ounces was 15.8% lower than H1. Total refined Platinum production for H1 2016 at 348,885 ounces was 33.0% or 86,582 ounces higher than the prior year period when the processing throughput was impacted by smelter stoppages in December 2014. Total PGMs produced in the period were 667,399 ounces, an increase of 33.1% on H1. A planned shutdown of the Number Two furnace took place at the end of September for scheduled refractory brick replacement and design upgrades on the roof and off gas system. It was successfully rebuilt and commissioned safely in early December. The Pyromet furnaces were utilised during this time to provide the additional smelting capacity required. Platinum sales for H1 2016 at 361,882 ounces were up 36.1% or 95,942 ounces on the prior year period and PGM sales were up 35.8% to 699,269 ounces. During the period we have renewed our multiple year agreements with all our key customers who actively promote and deliver Lonmin s PGMs to a wide range of industrial customers in the US, Europe, Japan and other Asian countries. The US Dollar basket price (including base metal revenue) at $736 per ounce during H1 2016 was down 25.4% on the prior year period while the corresponding Rand basket price at R10,962 per ounce was only 2.7% lower than H1, favourably impacted by the Rand weakness. The average Rand to US Dollar exchange rate was 30.8% weaker at 15.02 compared to 11.48 in the prior year period. Production statistics for Quarter Two of the year can be found in a separate announcement published today and on the Company s website: www.lonmin.com. 5. Preparations for the 2016 Wage Negotiations The next wage increases will be effective from 1 July 2016. We are applying the collaborative relationship with our representative unions as part of the preparation for the 2016 wage negotiations. To date the Company and the union have completed work on the process issues from the 2014 wage agreement, providing the backdrop for constructive engagement between parties. 6. Our People and Corporate Citizenship Agenda Relationship Building with Unions and Employees The Company continues to focus on strengthening relations with the unions and ongoing communication about the state of the business. As a result of the maturing relationships, we concluded an agreement on the Easter work-in arrangements, resulting in improvements in attendance and production. The Way We Work at Lonmin Pivotal to delivering on our Business Plan has been the continued focus on communication and relationship building with our employees, further entrenching The Way We Work at Lonmin vision. As part of this process, we have embarked upon increased leadership site visits by all levels of management and union leadership. Bapo ba Mogale Community - Procurement Benefits and Skills Upliftment As announced on 26 November 2014, we successfully completed three BEE transactions in 2014 thus achieving the target of 26% HDSA equity empowerment required by the Mining Charter as well as more closely aligning the interests of Lonmin, our employees and our communities. As part of this the Bapo acquired a direct equity interest in Lonmin Plc in a transaction which included an undertaking by Lonmin to afford procurement opportunities to the Bapo. The awarding of these procurement contracts to the Bapo was designed to share the value created by Lonmin, to upskill local community members who are employed in these projects to the extent possible and to achieve a closer alignment of the interests of Lonmin and the Bapo, our host community. This, in turn, should make a real difference to the lives of community members, help improve 11
living conditions and provide Lonmin with a stable and peaceful operating environment which is key to running the business. The objective of awarding contracts worth over R200 million to the Bapo has been achieved and we continue to look at additional procurement opportunities. The Reviewed Mining Charter and Once Empowered Always Empowered Principle The Reviewed Mining Charter was gazetted on 15 April 2016 for public comment during a 30 day consultation which the DMR Minister has subsequently indicated would be extended. Moreover the principle of Once Empowered Always Empowered is itself presently being considered by the courts, a judicial process which has yet to conclude. In South Africa, the Chamber of Mines is responding to the DMR on behalf of all potentially affected companies, and Lonmin plays a full part in that organisation and that process. Whilst elements of the proposed Charter give cause for concern, we are confident that the various legal obstacles that the DMR will have to overcome prior to publication of the final Reviewed Charter, combined with on-going dialogue between industry and government, mean it is likely that the Revised Charter will ultimately be agreed through a consultative process. In the meantime Lonmin s 26% empowerment status remains unaffected. Update on the Farlam Commission of Inquiry The Farlam Commission of Inquiry submitted its findings and recommendations to the President of South Africa on. Lonmin fully cooperated with the Commission, has learnt from its findings and has implemented actions to give effect to such findings. In addition, Lonmin has fulfilled its promise to employ the widows or relatives of the deceased miners. All statutory payments have been made to the families of the deceased miners and Lonmin continues to seek ways of assisting these families through the Sixteen Eight Memorial Trust founded in late-2012. Currently 143 dependent children are being educated through the Trust, with one beneficiary Mandla Yawa having just graduated with Honours in Animal production science and has enrolled for his masters. Building a Shared Future with Communities Lonmin continues to invest in socio-economic development projects that are aligned to enterprise and skills development, education and training, community health and social infrastructure, including housing, aimed at improving the quality of life of our employees, their families and our communities. 7. Pembani Group (Pembani) and Limpopo As previously reported, the merger between Shanduka Group (Shanduka), our former BEE partner and Pembani completed in December with Pembani assuming all the rights and obligations previously held by Shanduka in Lonmin. Lonmin retains its BEE status. Pembani has indicated its commitment to the Platinum sector and we anticipate developing a longstanding mutually beneficial relationship. The deadline for Pembani to exercise its option over Limpopo has been extended until 30 April 2017. 8. PGM Market Overview Demand for Platinum Group Metals (PGMs) from our customers has remained consistent during the first half of our financial year. We have also expanded our customer base during this time to allow for increased diversity and value optimisation in line with our revised business plan. Platinum Commentators are aligned that the fundamental demand for platinum in 2016, though increasingly positive will be muted for the most part. Autocatalyst demand as the biggest demand segment at 43% is forecast to grow by circa 2%. Jewellery demand is anticipated to remain the second biggest demand segment for platinum at circa 36% and demand is expected to remain in line with levels. Industrial demand collectively is anticipated to make up about 17% of demand in 2016. The potential for growth particularly in glass and petrochemical refining is expected to see the segment growing by close to 7%. 12
In the longer term, total platinum demand is expected to grow by nearly one million ounces between and 2025. Autocatalysts are expected to remain the largest market and as emissions legislation globally continues to tighten demand for platinum should continue to grow. Western Europe is set to remain the most important diesel light vehicle market despite recent turmoil. Japan and North America are expected to be stable markets together contributing circa one million ounces. Growth is expected from India and the Rest of the World driven by expanding vehicle production and legislation of tighter emissions standards. India offers longer term growth potential. The jewellery demand segment, at near parity with autocatalyst demand over the last few years, may rise more slowly than previously anticipated due to the anaemic economic conditions forecast for China. Industrial demand is anticipated to lead the growth, especially in chemical and glass manufacturing. Chemical sector demand is set to be lifted by greater silicone elastomer and nitric acid production, mainly in China and the rest of the world, whilst the emerging fuel cell market should increase consumption reported in other end-uses. The average growth rate over the next 10 years is expected to be about 4.0%. Palladium Demand for palladium is expected to grow by circa 1% in 2016. The lacklustre performance is largely due to the downward revision in automotive production in China. Industrial demand for palladium does offer some meaningful growth in the chemical sector this year with growth expectations of about 8% which is somewhat off-set by contractions expected in the dental (down approximately 3%) and jewellery (down circa 4%) sectors. Total global palladium demand is forecast to grow by a compound annual growth rate of 2.5% over the next 10 years. Palladium is now overwhelmingly an autocatalyst metal with growth from this sector forecast to add 1,626,000 ounces from to 2025, offsetting declines from industrial and jewellery demand expected over the same period. Rhodium Stable growth from the automotive sector and healthy growth in the glass sector is expected to result in a circa 6% increase in demand for Rhodium this year. Outlook Near term the increasing visibility of healthy demand fundamentals should reassert and subdued prices should gain upward momentum. 9. Management and Board Update As announced on 12 April 2016, Simon Scott, who has served as our Chief Financial Officer for the last five and a half years will step down as CFO and Director of the Company following these Interim Results on 16 May 2016. After the Interim Results, Simon will continue to be involved in a transitional role. We all owe Simon a great deal of gratitude for the enormous effort he has made and the commitment and contribution he has given to our Company. I thank Simon for his support and wisdom over what has been a challenging period for our Company and I wish him the best for the future. Information pursuant to Section 430(2B) of the Companies Act 2006 in respect of Simon Scott is available on the Company's website. We are pleased to be welcoming Barrie van der Merwe as Chief Financial Officer and Director with effect from 17 May 2016. He has extensive experience in the mining industry and brings with him a significant amount of knowledge of South Africa. Barrie is a Chartered Accountant and between 2012 and he was the Chief Financial Officer of Debswana Diamond Company (Pty) Limited, the world s leading producer of rough diamonds by value and a joint venture between the Botswana government and De Beers. Prior to this, he held several senior financial management positions with Anglo American Plc and Anglo Platinum Limited, spanning 10 years between 2002 and 2012, the last being Head of Finance, reporting directly to Anglo Platinum s then Finance Director. As announced on 12 February 2016, Kennedy Bungane joined the Board as a Non-executive director effective from 1 March 2016. Kennedy is the CEO of Pembani Group Proprietary Limited (Pembani), which recently merged with Shanduka, Lonmin s Black Economic Empowerment partner. He was nominated to the Board pursuant to a contractual arrangement with 13
Shanduka. Prior to Pembani, Kennedy was CEO of Barclays Africa Limited and was Chairman of both the UK incorporated Barclays Africa Limited board and the Barclays Africa Regional Management Executive Committee. Kennedy was also CEO of the Corporate and Investment Bank at Standard Bank of South Africa and a member of the Standard Bank Group Executive Committee. 10. Outlook and Guidance The subdued PGM pricing environment appears likely to continue, offset by Rand weakness. In the absence of any unforeseen events, we are maintaining our sales guidance for the full year at circa 700,000 Platinum ounces. The completion of our restructuring programme, the aggressive cost reduction programme and pleasing operating performance has reduced unit costs from R10,959 in Q1 2016 to R10,393 in Q2 2016 which enables us to maintain the unit cost guidance of circa R10,400 per PGM ounce produced. We are cutting our capital expenditure guidance for the year from about $132 million to circa $105 million. Ben Magara Chief Executive Officer 13 May 2016 14
Financial Review Overview We significantly strengthened our balance sheet during the period through a revised capital structure achieved by a successful Rights Issue in December and amendment and extension of bank debt facilities. This platform has allowed the Group to implement the Business Plan. We are pleased with the significant progress we have made during the period on delivering on the plan s key aspects, namely removing high cost production, reducing fixed cost expenses by right sizing the business, containing costs and minimising capital expenditure. In Dollar terms, PGM prices were significantly lower in H1 2016 than H1 but this was offset by a substantial increase in PGM volumes sold due to processing throughput constraints in H1. This resulted in a slight increase in revenue for the six months compared to the period. The continued focus on cost containment coupled with the positive impact of the stronger Dollar has seen a decline in operating costs over the period. Unit costs for the period at R10,668 per PGM ounce were only 1.4% higher than the comparative period. EBITDA for the period was $36 million, this was $42 million higher than the LBITDA of $6 million achieved H1 largely due to the beneficial impact of our cost reductions. The Rights Issue raised $373 million net of expenses and exchange rate differences. A portion of the proceeds was used to repay original debt facilities. The amended bank facilities which became effective in December mature in May 2019 with Lonmin having the option to extend the maturity date to May 2020. At 2016 net cash for the Group stood at $114 million. Before deducting the drawn term loan of $150 million, gross cash was $264 million which when combined with undrawn revolving facilities of $210 million resulted in the Group having $474 million of total liquidity available. Income Statement The $48 million movement between the underlying operating loss of $22 million for the six months ended 2016 and the underlying operating loss of $70 million for the six months ended is analysed below: Period to reported operating loss (84) Period to special items 14 Period to underlying operating loss (70) PGM price PGM volume PGM mix Base metals (174) 169 21 (9) Revenue changes 7 Cost changes (including positive foreign exchange impact of $180m and negative metal stock movement impact of $205m) 41 Period to 2016 underlying operating loss (22) Period to 2016 special items 7 Period to 2016 reported operating loss (15) 15
Revenue Total revenue for the six months ended 2016 of $515 million reflects a marginal increase of $7 million compared to the prior year period. As noted in the Overview, the Dollar PGM prices were significantly lower than the prior year period and the average prices achieved on the key metals sold are shown below: Six months ended 2016 Six months ended $/oz $/oz Platinum 905 1,187 Palladium 551 784 Rhodium 689 1,182 PGM basket (excluding by-product revenue) 697 916 PGM basket (including by-product revenue) 736 988 ZAR PGM basket (excluding by-product revenue) R10,394 R10,449 The US Dollar PGM basket price (excluding by-products) decreased by 24% compared to the comparative period, resulting in a reduction in revenue of $174 million. It should be noted that whilst the US Dollar basket price decreased compared to the period, in Rand terms the basket price (excluding by-products) remained largely flat supported by the weaker Rand. The PGM sales volume for the six months to 2016 was 36% higher compared to the six months to which resulted in an increase in revenue of $169 million. The prior period was impacted by production throughput constraints due to smelter shut downs. The mix of metals sold also resulted in a positive impact of $21 million mainly due to the higher proportion of Rhodium sold in the period under review as a result of the commissioning of the Other Precious Metals plant in December. Base metal revenue decreased by $9 million as a result of a reduction in volumes of Chrome sold as well as the reduction in metal prices of Nickel, Copper and Chrome compared to the period. Operating costs (including metal stock movement) Total underlying costs in US Dollar terms decreased by $41 million compared to the prior year period on the back of the weaker Rand, reorganisation, removal of high cost production and progress in cost reduction initiatives partially offset by the impact of metal stock movements. A track of the movements in operating costs is shown in the table below: Six months ended underlying costs 578 Increase / (decrease): Marikana underground mining Marikana opencast mining Concentrating, smelting and refining Overheads (17) (4) (6) (5) Operating costs (32) Ore, concentrate and other purchases Metal stock movement Foreign exchange Depreciation and amortisation (7) 205 (180) (27) Cost changes including foreign exchange and metal stock movement impact (41) Six months ended 2016 underlying costs 537 16
The positive impact of the removal of high cost production and reorganisation are evidenced across all our operations with the Marikana underground mining costs decreasing by $17 million or 4% during the review period, and concentrating, smelting and refining costs decreasing by 5% or $6 million when compared to the six months ended. Marikana opencast mining costs decreased from $4 million to a total of under $1 million as these operations have ceased and are being rehabilitated. Overheads reduced by $5 million largely due to cost containment and the reorganisation programme while ore and concentrate purchases decreased by $7 million mainly due to lower volumes produced by the suppliers. The movement in metal stock of $205 million comprises a decrease of $81 million in the six months ended 2016 and an increase in the prior year period of $124 million which was largely due to the processing throughput constraints in H1. The US Dollar strengthened significantly against the Rand during the period under review averaging ZAR15.02 to USD1 compared to an average of ZAR11.48 to USD1 in the period resulting in a $180 million positive impact on operating costs. Depreciation and amortisation decreased by $27 million over the 2016 period mainly due to the impairment of assets in September. The reduced production from the Generation 1 shafts in line with our closure plans also had an impact on the depreciation charge as depreciation is calculated on a units-of-production basis, spreading costs in relation to proven and probable reserves. Cost of production per PGM ounce Unit cost per PGM ounce of R10,668 for the six months under review was 1.4% higher than the prior year period reflecting the progress made in reducing high cost production and cost control. Further details of unit costs can be found in the Chief Executive Officer s review and the Operating Statistics. Special operating costs Special operating costs for the six months ended 2016 are made up as follows: Six months ended 2016 Restructuring and reorganisation costs (reversal of provision) (22) - Debt refinancing costs 10 - Share based payments 5 - BEE charges - Lock-in premium - Legal and consulting fees - 13-2 Other - (1) (7) 14 Net special costs decreased by $21 million to $7 million net special profit for the six months ended 2016. The planned reorganisation of the business was achieved at a lower cost due to the reskilling and redeployment of employees combined with a greater proportion of contractors departing as well as natural attrition resulting in a $22 million reversal of the provision for restructuring costs. Costs incurred to amend the bank debt facilities amounted to $10 million while 17
the revision of pre-existing employee share option schemes as a result of the Rights Issue resulted in the acceleration of share based expenses to the amount of $5 million. For the period ended, $14 million was incurred which largely comprised $13 million for the lock-in premium paid to the Bapo in relation to the BEE transaction concluded in December 2014 as well as legal and consulting costs of $2 million related to the transaction. Net Finance costs 2016 Net bank interest and fees (9) (11) Capitalised interest payable and fees 1 6 Exchange 9 4 Other (3) (4) Underlying net finance costs (2) (5) HDSA receivable (7) (27) Foreign exchange gains on the Rights Issue proceeds 5 - Net finance costs (4) (32) The total net finance costs of $4 million for the six months ended 2016 represent a $28 million reduction compared to total net finance costs of $32 million for the six months ended. Net bank interest and fees decreased from $11 million to $9 million for the six months ended 2016 largely as a result of the repayment of debt facilities following the successful Right Issue. This resulted in a reduction in drawn facilities during the period under review. Interest totalling $1 million was capitalised to assets ( - $6 million). The Historically Disadvantaged South Africans (HDSA) receivable, being the Sterling loan to Pembani Group (Proprietary) Limited (Pembani) was impacted by interest accruals and exchange movements. The loan was granted to Shanduka Resources Group (Proprietary) Limited, our former BEE partner, that has now merged with Pembani, and the merged entity operates as Pembani Group (Proprietary) Limited. Net finance costs of $7 million for the period to 2016 consist of adverse exchange movements of $21 million which were partially offset by accrued interest of $14 million. The $5 million foreign exchange gains on the Rights Issue comprise the gains on translation of advanced cash proceeds received prior to the effective date of the Rights Issue as well as hedging gains on forward exchange contracts entered into to minimise the risk of the exposure to currency fluctuations on the Rand and Pound Sterling proceeds. Taxation Reported tax for the six months ended 2016 was a credit of $15 million compared to $33 million for the period ended. The underlying tax credit of $15 million in 2016 is largely made up of temporary differences giving rise to deferred tax credits and also takes into account exchange gains on the retranslation of Rand denominated deferred tax liabilities ($5 million) and the tax impact of special items ($5 million). In the prior year period exchange gains had an effect of $21 million on the tax credit while special items had an effect of $3 million. Our philosophy on taxation is to comply with the tax legislation of all the countries in which we operate by paying all taxes due and payable in those countries in terms of the applicable tax laws. Transactions entered into by the Group are structured to follow bona fide business rationale and tax principles. We recognise that in order to be a sustainable and responsible business, the Group must have appropriate tax policies that are adhered to and managed properly. We seek to maintain a proactive and cooperative relationship with local tax authorities in all our business and tax transactions and conduct all such transactions in a transparent manner. 18