Sustaining business in a challenging operating context

Humphrey Tlou, a cutter at the salvage yard, cutting a bin into smaller steel sections.
Driving efficiencies is fundamentally important to operate in the challenging environment.


South African mining companies have, for the past number of years, experienced a combination of factors that have increased the industry cost base and hindered efficient production. These factors include rising wage demands, labour unrest, low labour productivity, above-inflation electricity and water price increases and electricity supply disruptions. In the context of this persistent upward pressure on costs, the extended decline in commodity prices has compressed margins in the local mining industry and forced an increased focus on financial sustainability.

Within the margin-stressed South African mining sector, it is important to not lose sight of Lonmin’s many positive attributes, relative shallow mining assets, unrivalled processing expertise and an invaluable integrated mine-to-market business.

This chapter provides an overview of the external factors impacting our business and how these are being addressed by the Company in order to remain viable for the long term.

Kamogelo Letshwithi and Siyabulela Chulayo separating waste at the salvage yard.

Market overview 2016

During the financial year, platinum and palladium prices staged a strong comeback, with platinum gaining 14% from US$908 on 1 October to US$1,034 by 30 September and palladium 10% from US$659 to US$722 over this period. This recovery helped to improve operating margins for primary producers towards the end of the year. Metal prices subsequently retraced on the back of weaker-than-expected market sentiment. Disruptions in production at mines in South Africa, and lower-than-expected recycling growth from scrapped autocatalysts, assisted to widen the fundamental market deficit compared to 2015.

Sadly, market sentiment has remained subdued such that the fundamental deficit has not translated into improved prices.

Demand has remained steady. Diesel market share has not fallen as much as some may have expected in Europe, and the rhodium prices failed to join the rally in platinum and palladium and was down 13% year-on-year.

It has been a tough year for jewellery in China with difficult retail trading conditions, lower manufacturer restocking and fewer wedding registrations. Nonetheless, lower platinum prices have motivated higher investment sales in Japan. This and the ongoing rise in demand in India and the United States recently offset the slowdown in China.


In 2016 Lonmin sold 735,747 ounces of platinum into the market. Platinum sales contributed 65% to turnover. Palladium was the second highest contributor to the revenue basket with 334,319 ounces sold, constituting 18% of Lonmin’s income. Combined sales of rhodium, ruthenium and iridium contributed a further 12.5% and gold and base metals made up the balance.

PGM prices

During the financial year, platinum outperformed both palladium and rhodium. However, the average price of each metal was substantially lower than was seen in FY2015. Refer to the Financial Review section (page 32) of the Annual Report and Accounts for details on average prices.

Platinum in October 2015 was at $908 per ounce, but fell to a multi-year low of $814 per ounce on 21 January 2016, before rallying and closing at $1,034 on 30 September 2016. The Rand started at R13.92 to the US Dollar in October 2015 and fell to a record low of R16.87 on 18 January 2016 against the US Dollar, dragging the platinum price down in US Dollar terms.

The South African economy remained weak and the average exchange rate achieved for FY2016 was R14.77 to the US Dollar.

Source: Bloomberg

Source: SFA (Oxford) estimates

Market outlook 2017

The outlook for platinum is for demand to be virtually unchanged. In Western Europe diesel’s market share has been edging slightly lower, and is projected to continue to do so, but will be somewhat offset by continued growth in vehicle sales. In addition, tightening emissions legislation and increased vehicle production in emerging markets should further offset any further decline in Europe. So a stable outlook for autocatalyst demand is projected.

Global demand for jewellery is forecast to improve slightly after weakening in 2016. Solid investment demand is anticipated as bar, and coin and ETF investment are expected to be positive. Several new glass fabrication facilities in the rest of the world are set to lift platinum industrial requirements slightly next year, offsetting declining demand for nitric acid production and slower propane dehydrogenation (PDH) capacity growth in China.

Though primary producers are indicating similar production levels in 2017, there is a real risk due to the current PGM basket price for further mine closures and continued underinvestment in capital projects. We believe that, ultimately, mine closures and the sustained underinvestment in mining projects due to low prices will drive further deficits.

Socio-political pressures

Employment opportunities, support for social infrastructure and business opportunities are some of the needs communities have. The rapid influx of people into the communities surrounding mines has increased the pressure on local physical and social infrastructure, further heightening these expectations.

We continue to engage with stakeholders to understand community needs, communicate about current community projects and highlight the Company’s current reality. Various community BEE and preferential procurement transactions have been concluded to align the interests of the Company and the community.

More detail can be found in the Social Licence to Operate chapter.

Regulatory and policy environment

The regulatory environment in the South African mining industry poses certain potential risks for a company such as Lonmin, including any changes to the country’s laws and policies in connection with taxation, royalties, divestment, repatriation of capital and resource nationalism. The mining industry is regulated by an array of regulatory requirements, including the Mineral and Petroleum Resources Development Act, 2002 (MPRDA), which directly impacts our operating licence and prospecting and mining rights.

Uncertainty around mining policy, including the Mining Charter released for comment in April 2016, creates further uncertainty.

Regulatory changes could potentially have a serious financial impact on the Company. For example, the imposition of increased taxes or royalties, the obligation to sell at discounted development prices or being forced to sell product locally, could impact long-term supply agreements with existing customers.

Lonmin is committed to continually building constructive relationships with government and regulators, as they are key stakeholders in ensuring compliance with safety, health, environmental and social requirements. Interactions with government and regulators take place both through direct engagements and through industry bodies to present a unified view with our peers.

More detail can be found in the Relationships with Government chapter.

Driving efficiencies

Various factors work against operational efficiencies, including absenteeism, labour disruptions and safety stoppages. Further to this are challenges related to our continued ability to access a sustainable and uninterrupted supply of essential inputs for the mining and processing operations, primarily electricity and water (refer to water management and energy consumption and efficiency). Our commitment to operational excellence includes a focus on operational efficiencies, which drives the efficient use of water and electricity and minimises waste generation. (For more detail, refer to the Environment chapter.)

The restructuring, labour reorganisation and closure of high-cost shafts position the Company to continue operating in an environment of consistently low metal prices. The successful implementation of Lonmin’s business plan continues to drive production increases, cost savings and a stronger balance sheet.

Wage negotiations 2016

We concluded the wage negotiations with our majority union in October 2016 by successfully reaching a multi-year agreement. The collaborative relationship established with our representative union through the Relationship Charter and our investment in the concept of shared value established a platform for constructive engagement between the parties.

We believe that the wage increase represents an appropriate balance between the need for employees to receive a higher wage while balancing the current financial realities, as well as other socio-economic development commitments of the Company.

More detail can be found in the Employee Relationships chapter.

Performance indicators

We use the following 11 key performance indicators (KPIs) to measure our performance:

Relevance to strategy:

1 Operational excellence
2 Our people
3 Corporate strategy
4 Corporate citizenship


Some KPIs are used as a measure in the incentive plans for the remuneration of executives. These are identified with the symbol

The Directors’ remuneration report can be found in the Annual Report and Accounts 2016.


Lost-time injury frequency rate (LTIFR) is measured per million man hours worked and reflects all injuries sustained at work where the injured party is unable to return to work on the next shift.


The LTIFR improved by 8% compared to the previous year. This was due to intensified focus on a number of safety initiatives, including visible felt leadership and direct employee engagement.

More detail can be found in Safety and Health.


Platinum ounces sold are those ounces we produce either as refined ounces or recoverable ounces sold in concentrate at 99.95% purity.


Platinum sales exceeded guidance of 700,000 ounces in 2016, as we benefited from the smelter clean-up initiative as well as various efficiency enhancement projects at the smelting and refining operations.

More detail can be found in the Annual Report and Accounts 2016.


Cost per unit is key to being able to operate profitably through down cycles. This measure includes direct mining, concentrating, smelting and refining costs, as well as services cost including marketing cost associated with supporting the operations. Once-off (special items) and non-trading costs are excluded.


The unit costs achieved of R10,748 per ounce reflect an increase well below the current inflationary levels, albeit above our original guidance due to the production shortfall in mining. This was partially offset by the benefits associated with the cost containment and productivity improvement projects as they gained momentum.

More detail can be found in the Annual Report and Accounts 2016.


Immediately available ore reserves, in square metres or centares, excludes partially developed ore reserves in line with industry best practice.


Our immediately available ore reserves at Generation 2 shafts at our Marikana operations remain healthy and continue to provide operational flexibility. Overall, the immediately available ore reserves decreased slightly, in line with our strategy which allowed for the orderly closure of high-cost shafts.

More detail can be found in the Annual Report and Accounts 2016.


Square metres mined per total employee including contractors (up to shaft head excluding all central services) The KPI is focused on our Generation 2 shafts. (K3, 4B, Rowland and Saffy). Historical information has been restated to exclude Hossy which is scheduled for closure in 2017 and is now reported as part of Generation 1 shafts.


Productivity improved by 5% in 2016, largely driven by improved performances at Saffy and 4B shafts notwithstanding the production losses associated with safety stoppages. Labour reductions at all shafts, as a result of the restructuring, also contributed to the improvement. We expect that as our productivity improvement projects and safety initiatives gain further momentum during 2017, more improvements can be delivered.

More detail can be found in the Annual Report and Accounts 2016.


The instantaneous recovery rate is the product of the recoveries achieved at each step of the processing value chain and measures the efficiency of the recovery of metals.


The instantaneous recovery rate achieved in 2016 reflected further improvements versus historical performances. The smelter clean-up project supported by various optimisation and improvement plans across our processing operations delivered these exceptional results.

More detail can be found in the Annual Report and Accounts 2016.


Production tonnes missed due to social disruptions and industrial action is considered to be an indicator of the employee and social relations climate.


The minimal loss of production due to social disruptions or industrial action demonstrates the continued progress made in improving relationships with employees, unions and communities.

More detail can be found in Employee Relationships.


For any business the ultimate aim is to grow underlying EBIT and deliver value to shareholders. Underlying EBIT excludes the effect of once-off and non-trading items.


The Company is highly geared towards metal prices and costs, which drive volatility in profitability. Notwithstanding metal prices decreasing further during 2016, the Company moved from a loss making position to generating profit in 2016 due to cost cutting. Detailed variance analysis is set out in Material Focus Areas, under Financial Review.

More detail can be found in the Annual Report and Accounts 2016.


Trading cash flow after capital expenditure and minority dividend payments.


Excluding restructuring cost and the timing of benefits associated with the reorganisation, the Company operated on a cash neutral basis after capital expenditure. Following the rights issue during the first quarter of the year, the subsequent three quarters generated cash of US$104 million.

More detail can be found in the Annual Report and Accounts 2016.


This KPI measures the percentage of Historically Disadvantaged South Africans (HDSAs) in management as defined by the Mining Charter.


We are pleased to report a further increase of 4.6% in our HDSA representation to 52.4%, despite the restructuring process, which remains well above the Mining Charter target of 40%.

More detail can be found in Employee Relationships.


Total gigajoules of direct (gas, petrol, diesel, coal) and indirect (electricity) energy consumption per ounce of PGMs produced including toll processed material.


Continued focus on improvement initiatives in this area has resulted in the development of a pleasing downward trend.
More detail can be found in Environment.

Lonmin’s principal risks, their impact, mitigation and change during the year, as well as the Company’s viability statement, can be found in the Annual Report and Accounts 2016.

Value-added statement

Through business operations, shareholdings, investments, procurement contracts and development projects, Lonmin distributes financial value to a variety of stakeholders.