Ben Magara, Chief Executive reflects on 2016 and outlines the Lonmin strategy.

A challenging operating environment

This year has been marked by complex and competing themes, and the environment in which Lonmin operates remains challenging. With the global mining industry under pressure from weak commodity prices, South African mining companies face a range of additional stressors, some of which are unique to the country. The combination of these factors has contributed to increased costs and disruptions that negatively impact production efficiencies. These factors cover the spectrum of societal concerns and clearly demonstrate the interconnectedness of social, environmental, governance and financial value.

Lonmin’s operations delivered good progress against the business plan and we expect to continue momentum to withstand the low pricing environment and improve cash generation. Costs were well managed and a reduction of R1.3 billion was achieved against the target of R700 million. Underlying operating profit increased to R124 million1 from a previous year loss. The reorganisation of the business which started in 2015 was successfully completed in the first half of the year, with a reduction of 5,433 employees and contractors, and 1,426 people were successfully reskilled and redeployed into vacant, more productive roles. The successful completion of this headcount reduction as well as concluding the wage negotiations with no labour unrest were undoubted highlights. The rights issue concluded in December 2015 considerably strengthens the Company’s balance sheet and provides funding certainty.

1 Conversion factor of R14.77/US$1.

In order to further create, preserve and enhance long-term equity value, we signed a sale and purchase agreement to acquire Anglo American Platinum’s (AAP) 42.5% stake in the Pandora Joint Venture post year end. This acquisition aims to consolidate the Company’s position in Pandora’s relatively shallow and high‑grade mineral resource and provide an option for development by Eastern Platinum in both the short and longer term.

The tough decisions made last year have been difficult, but the business is now cash positive after capital expenditure, even in the current challenging operating and macro-economic conditions.

Despite an improvement in the Company’s lost-time injury frequency rate for the year, we deeply regret the loss of four of our colleagues. Mr Zilindile Ndumela, Mr Goodman Mangisa, Mr Fanelekile Giyama and Mr Siphilo Makhende succumbed to injuries suffered in separate incidents at Rowland and E3 shafts in October 2015, April, May and July 2016. Post year end we regret to have suffered the loss of Mr Joao Macamo who was fatally injured at E1 shaft. We extend our deepest condolences to their families and friends.

Our strategy remains in place and is delivering results. The primary strategic focus this year was to implement the business plan to strengthen cash flows, reduce costs and manage capital expenditure responsibly. Without a profitable business we have no future. Lonmin also faces a range of social and environmental challenges that equally cannot be neglected if we are to be able to generate value for all our stakeholders over the long term.

“The primary strategic focus this year was to implement the business plan to strengthen cash flows, reduce costs and manage capital expenditure responsibly. Without a profitable business we have no future.”

Stakeholder engagement

We refined our approach to engaging stakeholders to deepen our understanding of their concerns and to communicate the realities of the Company’s situation. Strengthening our relationships with our employees and unions continues to be an area of focus. We engage more frequently and are building towards a common understanding of the financial constraints and realities the business faces.

The improved traction we are seeing in these relationships is evident in the relatively smooth implementation of the reorganisation and the successful completion of the wage negotiation process. Together with the President of the Association of Mineworkers and Construction Union (AMCU), I visited the 143 beneficiaries of the 1608 Memorial Trust set up for the dependant children of the Lonmin employees who died in August 2012. The visit aimed to demonstrate care and respect to these dependants and to assure them that Lonmin has committed resources to fund their education. I was also proud to see the first beneficiary of the Trust graduating from Fort Hare University in May 2016.

In the context of the safety challenges facing the mining industry, a safety Tripartite visit to our shafts attended by the Principal Inspector of Mines for the Rustenburg region, the President of AMCU (our majority union), and myself re-established the commitment and shared responsibility of all Tripartite parties to work together to achieve Zero Harm.

Extensive engagements were held during the year with BASF, a long-standing customer, to establish Lonmin’s commitment and compliance with the human rights, labour, social and environmental standards in their Supplier Code of Conduct.

Progress update

Lonmin has been through a period of intense introspection since the tragic events of August 2012 and the release of the Farlam Commission of Inquiry Report in June 2015. As a result of the conclusions we drew from these deliberations, we reviewed and updated our security policy and conducted a human rights gap analysis to identify areas for improvement in our human rights policies and procedures. We have also identified indebtedness as a burden on our employees and continue using external experts to challenge excessive rates of interest and to negotiate lower interest rates for our employees. As Lonmin, we believe in risk management and continuous improvement and learning from lessons brought by any unfortunate disruptive or tragic events with the hope that all stakeholders can take their individual and collective responsibilities to ensure that such events never happen again.

Strengthening employee relationships

We recognise that the operating environment has become more complex resulting in a “new normal”, which is a state of increased conflict, disruption and resentment that must be continually analysed, understood and negotiated. A new model of management and leadership, with the skills to navigate these constantly changing dynamics, is required to address this. We are rolling out a leadership development programme for frontline supervisors that emphasises the capabilities required to manage the legal, safety and people management challenges posed by these changes.

Our efforts to rebuild relationships with our employees and unions were instrumental in the constructive resolution to the multi-year wage negotiations we concluded this year. The final agreed outcome represents a fair balance between the constrained financial realities of the Company and the need to ensure our employees are fairly remunerated.

Demonstrating visible felt leadership through regular shaft visits by senior management has, I believe, improved the Company’s understanding of employees’ particular concerns and deepened our relationship with them. With the Company now stabilised and the distractions of the local government elections and wage negotiations behind us, we have an excellent opportunity to build the organisational culture we want to see. This will be driven through our culture change initiative “The Way We Work at Lonmin” to move us away from the uncertainty of all the recent change and to build momentum towards a higher performance culture and the brighter future we see ahead.

The housing challenge

There has been an increased focus on the housing challenges in the communities around our operations. The lack of decent housing is a problem around the country and for the mining industry as a whole. Lonmin is certainly not unique in facing this challenge. The housing challenges facing South Africa cannot be addressed unless each stakeholder plays its role and Lonmin is committed to playing its part. We are reviewing our housing strategy and working closely with the Department of Mineral Resources and local government to find a sustainable solution. I am confident that we will deliver a clear housing plan that meets government requirements and I am encouraged by the many engagements my team and I have had with the DMR minister Mr Mosebenzi Joseph Zwane and his team to find a solution that reflects the urgency and realities of Lonmin.

Our employees deserve decent living standards, and should have the choice of how and where they live. We recognise that improved living conditions support employee wellbeing, which contributes to a more productive, more available, more alert, more safety-conscious workforce. The need to find a sustainable solution is therefore both a social and a business imperative.

The financial challenges the Company has negotiated in the recent past have required many difficult choices and the strategic reprioritising of spending. While housing is undoubtedly a desperate need in mining communities, so is the preservation of jobs. Financial constraints in no way affect the level of our commitment to address the housing challenge, but they do dictate the pace at which a sustainable solution can be implemented.

Lonmin’s integrated human settlement strategy made progress during 2016 with the completion of 325 units in the infill apartment project. Construction by provincial government continued on the 50 hectares of serviced land donated by Lonmin in 2014.

Promoting employee and contractor safety and health

I believe that safety is a proxy for good performance. We engage with the DMR around safety on an ongoing basis and I have a standing appointment with the Principal Inspector of the DMR after every quarterly results to discuss our business performance and, in particular, safety performance. These meetings offer context of the realities facing the Company and are very useful for Lonmin to understand the regulators’ concerns and priorities.

The Principal Inspector attended the September 2016 SHE Committee of the Board meeting to be part of our highest level deliberations around safety. We believe that achieving Zero Harm requires all members of the Tripartite1 alliance to share in a common vision. I remain convinced that Zero Harm is possible.

1 Tripartite is an alliance between representatives of government, employees and mining companies.

The wellbeing of our employees remains crucial and we have extended our nutrition programme from three days to five days a week in support of this. We have also implemented a project to understand and address the challenge of workplace absenteeism.

Maintaining our social licence to operate

I am pleased that the procurement contracts finalised with the Bapo Ba Mogale communities during the year have delivered on our commitments under the 2014 BEE transaction. These contracts go beyond the initial commitment of R200 million in opportunities over an 18-month period. Four transactions were concluded during 2016 in the areas of passenger transport, stockpile management, ore transport and the supply of personal protective equipment. These represent an opportunity of approximately R260 million a year and a total value of R1.65 billion over the next eight years. We continue to avail support to the Bapo Ba Mogale procurement company to help it entrench the structures and processes required to build a sustainable business beyond the life of these contracts.

The successful finalisation of these contracts provides a good starting point to improving the relationship between the mines and the Bapo Ba Mogale community. Internal conflict within the community shifts the focus away from the priority of ensuring that the average Bapo Ba Mogale citizen experiences the benefits of the strengthened relationship in their daily lives.

Environmental management and opportunities

Water is our most significant environmental concern and water-related risks have been compounded by the drought across the country. We received authorisation to access water from the anthropogenic aquifers in our backfilled opencast pits and from shaft dewatering on the eastern side of our operations. While the electricity supply challenges of previous periods have eased somewhat, securing access to sufficient potable water and a stable supply of electricity for our operations remain risks.

Ongoing compliance with minimum emissions standards at the smelter complex is another environmental challenge in the context of the current financial constraints. We remain committed to demonstrating environmental stewardship by managing our impact on the natural environment in a responsible manner. Tighter emission legislation creates an opportunity to produce by-products from the calcium sulphite residue produced from the scrubbers at the smelter, which can be used in other applications such as gypsum ceiling boards. Lonmin continues to investigate opportunities to collaborate with like-minded organisations to create viable by-products that can offset the operating costs of these projects.

Improving relationships with government

Constructive engagements with regulators and other government entities are critical to the sustainability of the Company, as is evident from the numerous examples discussed throughout this letter. To a large degree, Lonmin’s priorities align with the safety, job preservation, community investment and broader developmental goals of the South African government. Effective collaboration requires not only a shared vision for the future of the industry and the country, but also a clear understanding of and commitment to the reciprocal roles and responsibilities of each party.

2016 also saw high-level efforts between business and government to avoid downgrading of the country by international credit rating agencies. The five work streams and initiatives led by the Minister of Finance galvanised business and government to realise the benefits of working together for the benefit of the country. I have been extremely heartened by the positive collaboration and strong relationships established that bode well for the success and sustainability of South Africa. We also participated in the steering committee of the Courageous Conversations initiative that aims to address the most significant challenges facing the mining industry.

Outlook

It remains my belief that in structuring Lonmin for lower PGM prices, every stakeholder has had to take some short-term pain to preserve and to share in the long-term gain of keeping the Company viable into the future. The work we have done to date has successfully repositioned the business to sustainably withstand the pressures of the current low PGM price environment. We must, however, remain focused on delivering against the business plan and make sure that we establish the ongoing sustainability of the business. When PGM prices finally turn, our current structure gives Lonmin the optionality and flexibility to benefit.

Through our membership with the International Council on Mining and Metals (ICMM) and the United Nations Global Compact (UNGC), we remain committed to collectively and continually improve our sustainable development performance.

I would like to thank all of our stakeholders, and particularly management and our employees, for your support in the hard work that has been done to return Lonmin to the right footing for the changed circumstances. I continue to be impressed by the entrepreneurial and innovative efforts of the operating teams to optimise value in the business, such as through the bulk tailings treatment project which secured funding in August 2016. We appreciate your support in what has been a challenging year, and I ask all of you to continue with your best efforts so that Lonmin can continue to deliver good results despite the persistent challenging macro-economic conditions.

Ben Magara
Chief Executive Officer
25 January 2017