A challenging operating environment
Mining companies in South Africa operate in a challenging operational and socio-political context as well as within difficult global markets, which has negatively impacted costs and production. In recent years, the industry has had to contend with rising wage demands, labour unrest, low labour productivity, above-inflation electricity and water price increases, community protests, and electricity supply disruptions. Continued low global commodity prices combined with rising costs have resulted in sustained pressure on industry margins and forced an increased focus on financial sustainability. Lonmin continued to be hamstrung by its capital structure and liquidity constraints.
Despite these challenges, Lonmin retains many positives, including its relatively shallow mining assets, processing expertise and an integrated mine-to-market business. Platinum Group Metals (PGMs), Lonmin’s primary products, continue to play a key role in reducing harmful emissions through their use in catalytic converters and other green technologies such as hydrogen fuel cells.
Volatile global commodity markets amid global political uncertainty
Sales and PGM prices
During the financial year, rhodium and palladium prices performed strongly, gaining 72% and 30% respectively. However, platinum underperformed with the price declining 11%, which resulted in palladium trading at a premium to platinum in September for the first time since 2001.
Global platinum output was essentially flat compared to 2016, while automotive, jewellery and industrial demand softened, leaving the market close to balance this year (excluding stockpiled resources).
Market outlook 2018
Cuts to production by South African producers in 2017 are expected to result in reduced platinum output next year, while demand is forecast to recover to 2016 levels, leaving the market in a deficit (excluding stockpiled resources).
Automotive demand is expected to be marginally lower as diesel’s share continues to decline faster than growth in the vehicle sale market. Most automakers continue to develop new light duty diesel powertrains, recognising their role in meeting tough fleet greenhouse gas targets.
Global demand for jewellery is anticipated to improve as jewellery demand in China is expected to stabilise and growth continues in most other regions, especially India.
Industrial demand is set to grow again in 2018, as glass and petroleum demand cyclically rebounds, as well as demand from chemical catalysis.
|1||Data reported in 2016 restated by SFA (Oxford).|
A challenging political environment in South Africa
Local communities are critically important stakeholders in mining operations. The communities around our Marikana operations in the Bojanala Platinum1 region have grown rapidly with the development of local physical and social infrastructure development not keeping pace. Increasing community unrest is linked to demands for delivery of basic services, employment opportunities, social infrastructure, procurement and business opportunities.
|1||District in the North West province.|
Protests at Lonmin’s operations in May 2017 by unemployed youth from the surrounding community kept two shafts closed for 10 days, resulting in the loss of production. In June 2017, there was a march to the Johannesburg Stock Exchange (JSE) by hundreds of people from the Greater Local Mining Communities Business Forum. They demanded jobs and highlighted the socio-economic conditions of miners in the Bojanala Platinum region. Local community unrest has a direct impact on Lonmin’s operations and its community infrastructure investments. Lonmin employees commuting to work were targeted during community protests in August 2017, and community-owned buses used to transport employees and school children were burned.
We acknowledge the pressing need for accelerated socio-economic development in our surrounding communities and are committed to contributing to viable solutions to community challenges. We engage with representatives of the various community stakeholder groups to understand their legitimate needs and expectations, and to ensure that our socio-economic development investment projects are effective in addressing the most significant community needs.
Details of the community projects, black economic empowerment (BEE) and preferential procurement transactions, which aim to align the interests of the Company and our local communities, can be found in the Community Relationships and Investment chapter.
A changing regulatory and policy environment
The South African mining industry is regulated by various laws, including the Mineral and Petroleum Resources Development Act, 2002 (MPRDA), which directly impact the Company’s operating licence and prospecting and mining rights. The Reviewed Broad-Based Socio-Economic Empowerment Charter for the South African Mining Industry (the Mining Charter) released in June 2017 (Reviewed Mining Charter) contains several controversial provisions. These could impact the attractiveness of mineral assets in the country and are the subject of several legal challenges. We are collaborating with the Chamber of Mines on its engagements with the Department of Mineral Resources (DMR) in this regard.
Mining companies operating in South Africa face potential risks from regulatory developments such as changes to laws and policies regarding taxation, royalties, divestment, repatriation of capital and resource nationalism. Potential regulatory changes with the most significant financial impact on the Company include:
- The imposition of increased taxes or royalties
- The obligation to sell at discounted development prices
- The requirement to sell product locally, which could impact long-term supply agreements with existing customers
- The increase and reorganisation of BEE structures
Lonmin views government and regulators as key stakeholders in ensuring compliance with safety, health, environmental and social requirements. The Company remains committed to sustaining constructive relationships with them. The Company interacts with government and regulators through direct engagements and industry bodies to present a unified view with our peers.
More detail on how we interact with and respond to these key stakeholders can be found in the chapter on Constructive Engagement: Government, Regulatory and Other Stakeholders.
Growing stakeholder expectations and declining levels of trust in business and government
Many of the mining industry’s key stakeholder groups have increasing expectations for the industry to play a role in addressing the broader socio-economic challenges facing the country. This is evident in the rising expectations of mining communities and local and national government. Expectations focus on areas such as job preservation, community infrastructure development and housing delivery, which are traditionally the responsibility of government. Labour relations remain challenging and are compounded by continuing rivalry between labour unions and federations.
At the same time, employees and mining communities face challenges to their health and wellbeing from diseases such as tuberculosis (TB) and HIV/Aids. The industry faces increasing natural resource competition and supply constraints, especially regarding water and energy/electricity, and growing societal demands.
In the context of these broader industry challenges, Lonmin faces a continuing reputation deficit following Marikana 20122, and perceptions regarding the nature of the Company’s subsequent actions.
|2||Marikana 2012 (referred to by Lonmin as “the week that changed our lives”) refers to the week-long protest that took place in August 2012. (See Employee Relationships for further details)|