Commentary
Introduction
The first half of financial year 2017 was characterised by an ongoing focus on the Group’s strategic response to succeed in the continued low price environment and challenging operating conditions. Increased production and good cost management were a feature at most operations over the past six months, with Impala Refining Services again delivering robust cash flows. Safety remains our first priority and given the difficult 12 months experienced by Impala Rustenburg, significant efforts continue to transform the safety culture at this operation.
Market review (all references to years in this section refer to calendar years unless otherwise stated)
The platinum market experienced a fifth consecutive fundamental deficit in 2016. The deficit this year was an approximate 700 000 ounces and a further deficit of around 450 000 ounces is expected in 2017 provided investment demand is maintained. The reduced deficit expected in 2017 is largely due to a modest decrease in industrial demand and declining platinum jewellery demand in China, moderated by primary supply constraints from South Africa.
We estimate that by the end of 2017, supply deficits experienced since 2012 will have consumed approximately four million ounces of platinum from above-ground stocks. Sustained demand in key market sectors, together with a more muted supply outlook from the South African producers should support improved market fundamentals into the future.
Platinum, palladium and rhodium all showed positive gains in 2016, closing 3.3%, 23.5% and 16.6% higher at US$907, US$676 and US$770 per ounce, respectively. This is in stark contrast to 2015, where platinum, palladium and rhodium traded 28%, 31% and 41% lower respectively. The average platinum price realised during the period under review was 7.1% higher at US$1 015 per ounce compared to the previous comparable period, while palladium increased by 11.4% to US$680 per ounce. Support for platinum came from a combination of rising vehicle sales in Western Europe, which grew for the third consecutive year in 2016, investment demand in Japan and constrained PGM output from South Africa.
Palladium performed well on the back of increasing vehicle sales in China and the US. The rhodium price traded 16.3% lower during the period under review averaging US$672 per ounce, despite increased demand from the automotive and chemical industries.
Calendar year 2016 was positive for the automotive industry, with global light duty vehicle sales estimated to have reached 93 million units on the back of continued growth in the US, Western Europe and China, despite a slowdown in sales in Japan, Eastern Europe and Latin America. US light duty vehicle sales, which were largely sustained at 17.51 million units, continue to be driven by low gasoline prices, widespread credit availability, an increase in leasing and employment gains. Western European light duty vehicles demand was better than expected after the Brexit vote. Sales in this region reached 13.95 million units, a 5.8% increase from 2015. Chinese light duty vehicle sales recorded a 14.9% year-on-year growth reaching 24.38 million units. This was stimulated, in part, by tax cuts on small-engine vehicles. The Japanese market was the exception with a decline of 1.5% to 4.97 million units in 2016. However, there are signs that this market may be recovering demonstrated by 7.4% and 7.6% improvements in sales during November and December 2016 respectively.
Despite strong growth in the automotive sector and the continued adoption of stricter emission legislation globally, the continued preference for palladium over platinum in catalyst systems remains a concern and is not sustainable in our view. The automotive sector needs to align long-term use with the ratio in which the metals are mined to ensure sustainable supply, which will require automakers to switch back to platinum in the near future. Current platinum/palladium price differentials are at a six year high, providing strong financial impetus for such switching.
The Chinese market remains the major consumer of platinum jewellery globally. Structural changes in the Chinese economy have impacted consumer behaviour and indications are that platinum jewellery retail sales may have dropped by as much as 9% during 2016. However, other markets have offset some of the declines from China, particularly in India, which has grown by 23%. In Japan, platinum jewellery continues to recover market share from white gold and is expected to have grown by 1% during 2016. The US market experienced strong growth, capitalising on the low platinum price, and is estimated to have grown by approximately 6% in 2016.
We continue to support the Platinum Guild International (PGI). Its stated strategy aims to arrest the decline in Chinese jewellery demand by aligning its marketing efforts to the changing socio-economic landscape in China. Initiatives include among others, targeting gem set, branded collections and higher sales volumes.
The platinum and palladium Exchange Traded Funds (ETFs) both experienced liquidations during 2016. Palladium liquidations were significant at 640 000 ounces, largely due to strong market fundamentals and rising metal prices, which incentivised profit taking. Platinum experienced strong investment demand for small bars and coins in Japan, with accumulative investment of approximately 425 000 ounces during 2016, offsetting a modest 9 000 ounce ETF liquidation during the year. The World Platinum Investment Council (WPIC) continues to prioritise strategic partnerships and investment products that will incentivise and sustain future investment demand.
The platinum paper markets (NYMEX/TOCOM) remained relatively stable during 2016, with a modest 65 000 ounce decline. Palladium, however, followed its strong physical supply/demand fundamentals and recorded an increase of 710 000 ounces during the year.
The market fundamentals for platinum, palladium and rhodium remain well supported by resilient global demand and constrained primary supply. Near-term, growing and unsustainable deficits in palladium will further underpin this market, and also support platinum and rhodium as consumers seek to optimise their metal mix into the future. Fundamental deficits for both platinum and palladium are expected to continue for the foreseeable future.
Safety review
The realisation of zero harm remains the Group’s key priority and the strategic focus is centred on a cultural transformation among employees, supported by effective leadership, supervision and compliance with leading safety practices to create an inherently safe working environment. Success demands a strong resolve from every employee and the leadership of representative unions and government. To this end, management continues to engage with all stakeholders and is leading the process with the ultimate goal of having every workplace free from serious injury and fatal incident.
Over the past five years, the Group has invested significantly in safety initiatives, resulting in significant improvements in safety performance across all operational units – with many setting new safety records. Currently, Implats has 13 safety “millionaire” sites, 12 of which have operated for more than two years without a fatal incident, including four with over four years and three who have worked for over 15 years without a fatal incident.
Despite a keen focus on safe operational performance, safety remains a significant challenge for some of the Rustenburg mining operations. In particular, multiple fatalities at 14 Shaft and 1 Shaft during the past 12 months had a significant impact on our safe production efforts. While no fatal incidents were recorded across other Group operations, regrettably four employees suffered fatal injuries at Impala Rustenburg during the six months ended 31 December 2016, (three in the first quarter and one in the second). The board of directors and the management team express their sincere condolences to the friends, families and colleagues of the deceased.
Targeted behaviour change programmes continue to be implemented across the Rustenburg operation and training in high risk occupations including rock drill operators (RDO), scraper winch operators, panel operators, loco operators and TMM operators has been completed. The desired safe work behaviours are now being entrenched. In addition, a comprehensive multi-stakeholder health and safety awareness campaign was conducted at the Rustenburg operation. Management will continue to boost safe production compliance and drive the change from a dependent to an interdependent culture, where every employee looks after their own safe behaviour and the safety of others. In addition, employees who have an elevated risk of experiencing a safety incident due to ill health, emotional and financial concerns or are compromised are identified, monitored and assisted to mitigate against further safety incidents.
Strategic response
Several initiatives were announced in February 2015 in response to persistently low US dollar metal prices. Key strategic objectives included cost optimisation, reprioritising and rescheduling capital expenditure, implementing the Impala lease area strategy, which aims to transform Rustenburg into a more concentrated mining operation, and strengthening the Group balance sheet.
The reduction in operating costs realised a saving of about R1.4 billion in 2016. Further initiatives are being pursued to contain costs below inflation. Despite the impact on production as a result of the 14 Shaft fire and other safety-related incidents, Group unit costs benefited from increased production volumes, as well as cost containment in response to low dollar metal prices, increasing by only 1.9% to R22 797 per platinum ounce in the period under review from R22 380 in the prior comparable period.
Capital expenditure remains a focus area and the estimated spend for financial year 2017 is R4.0 billion. In the first six months R1.6 billion was spent, a 15.9% reduction from the previous comparable period (H1 FY2016: R1.9 billion). The majority of the capex was spent at Impala (R1.2 billion) – mainly on the completion of 16 and 20 shafts in Rustenburg – and projects at Zimplats (R353 million). The new shafts at the Rustenburg operations still require R2.0 billion to complete, of which some R1.2 billion is expected to be spent in the current financial year.
Operational review
Zimplats, Two Rivers, Mimosa and Impala Refining Services (IRS) all delivered good operational performances. Difficult operating environments challenged the performance at both Impala Rustenburg and Marula. Gross refined platinum production during the six months to 31 December 2016 increased by 12.5% to 778 500 ounces, compared to 692 100 ounces in the previous comparable period. This was largely due to a lock-up of platinum to accommodate planned furnace maintenance at the Rustenburg smelters in the previous comparable period.
Managed operations
IMPALA PLATINUM
Mill throughput decreased by 14.4% to 5.0 million tonnes (H1 FY2016: 5.9 million). This was largely due to the temporary closure of the decline section at 14 Shaft to effect repairs after the January 2016 fire, a delay in operations at 1 Shaft following the fall-of-ground incident in May 2016, reduced UG2 panel lengths and ongoing regulatory safety stoppages. Re-establishing the decline section at 14 Shaft has progressed well and full infrastructure capacity is expected by March 2017. The resizing of the UG2 conventional panel lengths across the operation in line with assessed ground conditions and to significantly reduce the operational risk, has been completed.
Approximately 39 000 ounces of platinum (600 000 mined tonnes) were lost due to repair work at 14 Shaft during the six months under review. The number of Section 54 safety stoppage instructions issued by the Department of Mineral Resources (DMR) posed a significant challenge for the Rustenburg team. During the period under review, Impala recorded 58 Section 54 safety stoppages, which led to a direct loss of some 25 000 platinum ounces (400 000 mined tonnes), equating to about R570 million in lost revenue. While Impala remains mindful of the safety issues that have affected its operations over recent months, it continues to engage with the DMR to minimise the negative impacts of these stoppages on its safety risk profile and operational performance.
Mill head grade was maintained at 4.15 g/t, despite a higher percentage of UG2 material treated during the period under review. The additional Merensky Reef tonnage from the recommissioned 14 Shaft decline section, as well as the ongoing ramp-up of production volumes from 16 and 20 shafts, will contribute to increasing mill head grades in the near future.
Refined platinum production decreased by 2.2% to 318 700 ounces (H1 FY2016: 325 900), due to a higher build-up of processed material in the previous comparable period. The material built up in the period under review is expected to be released by the fourth quarter.
Cash costs were well contained increasing by only 2.1% to R7.43 billion compared to expected mining inflation of 7.2%. Lower production volumes offset the beneficial impact of various cost saving initiatives and unit costs increased by 4.4% to R23 304 per platinum ounce refined (H1FY2016: R22 326). Capital expenditure was reduced by 19.3% to R1.20 billion (H1 FY2016: R1.48 billion), of which R581 million was spent on 16 and 20 shafts. The overall reduction was mainly due to the deferment of ongoing capital and 17 Shaft being on low cost care and maintenance.
16 and 20 shafts are still scheduled to deliver combined annual production of 310 000 platinum ounces.
Impala remains focused on meeting its build-up target on stoping teams and delivering planned team efficiencies, while delivering safe production to minimise avoidable work stoppages. A mining optimisation project was initiated with external support to interrogate the mining cycle, supervisory management skills, change management and the contractor strategy with the goal of securing and/or enhancing production from the shafts. This work started in January 2017 and is expected to continue for nine months.
IMPALA REFINING SERVICES (IRS)
IRS remains a strategic competitive advantage for Implats and it once again contributed significantly to the Group’s bottom line, despite low PGM prices. Over the six months to 31 December 2016, production increased 25.6% to 459 800 ounces of platinum from 366 200 ounces.
Platinum production from mine-to-market operations increased by 7.4% to 310 800 ounces (H1 FY2016: 289 300), due to higher deliveries from Zimplats and Two Rivers. Third-party purchases and toll volumes increased from 76 900 to 149 000 platinum ounces, largely as a result of a release of in-process metal, while there was also a build-up in the previous comparable period.
ZIMPLATS
Tonnes milled increased by 6% to 3.3 million tonnes (H1 FY2016: 3.1 million) as all mining units sustained outstanding operational performances and benefited from increased production from the Mupfuti and Bimha mines. Platinum in matte production (including concentrate sales to IRS) increased 5.2% to 137 100 ounces (H1 FY2016: 130 300).
Unit costs increased 2.0% in dollar terms to US$1 233 per platinum ounce in matte (H1 FY2016: US$1 209). In rand terms unit costs increased 6.6% to R17 316 per platinum ounce in matte (H1 FY2016: R16 247) impacted by a weaker rand over the period.
The redevelopment of the Bimha Mine is progressing well, with on-reef development offsetting re-establishment costs, and full production, which will replace all current open pit operations, is expected from April 2018. The development of the 2.2 million tonnes per annum Mupani mine was approved by the Zimplats and Implats Boards in November 2016. This replacement portal for the Rukodzi and Ngwarati mines will access 4.65 million 4E ounces of reserves through high-productivity, modern, mechanised mining methods at a total capital cost of US$260 million.
Implats supports and shares Zimbabwe’s aspirations to grow and diversify its PGM industry. A bankable feasibility study for a second furnace has been approved and construction will commence as soon as management believes the construction can be funded from internal cashflows.
Zimplats remains in discussions with the Government of Zimbabwe regarding its indigenisation implementation plan. Zimplats has recently announced the implementation of an employee share ownership trust (ESOT), which now holds a 10% equity stake in Zimplats’ operating subsidiary, Zimbabwe Platinum Mines (Private) Limited (Zimplats Pvt). The beneficiaries are the permanent employees (excluding the executive directors and company secretary). The ESOT paid US$95 million for the 10% equity stake, vendor financed through an interest-bearing loan advanced by Zimplats Pvt to the ESOT. The ESOT will repay the loan from a portion of dividends received from Zimplats Pvt.
MARULA
The operational performance at Marula was disrupted by the members of the Winnaarshoek/Driekop community, who are dissatisfied with the way in which their 50% interest in the Makgomo Chrome project is being managed by appointed/elected community leaders. Members from the community applied to the DMR to intervene and, subsequent to the period under review, the chrome operation has been suspended.
Despite these disruptions, which resulted in a loss of 5 600 ounces of platinum in concentrate, tonnes milled increased 2.5% to 909 000 tonnes (H1 FY2016: 887 000). The head grade improved marginally to 4.42 g/t (H1 FY2016: 4.37 g/t) benefiting from the optimisation initiative at Marula. Consequently, platinum in concentrate production increased 3.1% to 43 100 ounces (H1 FY2016: 41 800).
Unit costs increased 7.3% to R24 060 per platinum ounce in concentrate (H1 FY2016: R22 416). Capital expenditure was limited to R58 million (H1 FY2016: R42 million) in an effort to preserve cash.
The optimisation of Marula’s existing infrastructure enables the mine to increase its targeted output to 90 000 ounces of platinum per annum. However, community disruptions continue to impact the successful implementation of the optimisation strategy. Stakeholder interventions to facilitate a resolution to the community disruptions are being prioritised by management.
Non-managed operations
MIMOSA
Mimosa delivered another excellent operational performance. Tonnes milled improved 4.3% to 1.37 million tonnes (H1 FY2016: 1.31 million), while the head grade declined 2.4% to 3.83 g/t. This resulted in platinum in concentrate production increasing to 60 900 ounces (H1 FY2016: 60 000). Unit costs increased 5.0% in dollar terms to US$1 539 per platinum ounce in concentrate (H1 FY2016: US$1 466) due to higher mined tonnage that was not milled.
A further deferment of the 15% export levy on unbeneficiated platinum to 1 January 2018 has been regularised by the Government of Zimbabwe. Mimosa continues to consult with the Government of Zimbabwe in this regard.
TWO RIVERS
Two Rivers also had a first-rate six months. Tonnes milled increased 2.8% to 1.75 million tonnes (H1 FY2016: 1.70 million), of which 58 700 tonnes was milled by Modikwa. The head grade was marginally lower at 4.03 g/t (H1 FY2016: 4.09 g/t). Platinum in concentrate production increased by 5.3% to 96 700 ounces (H1 FY2016: 91 800). Unit costs increased 6.6% to R12 172 per platinum ounce in concentrate (H1 FY2016: R11 416).
Mineral Resources and Mineral Reserves
There has been no material change to the technical assumptions, assessment criteria, and information relating to the Group’s Mineral Resource and Mineral Reserves, or legal title to its mining and exploration activities, as disclosed in the integrated report for the financial year ended 30 June 2016.
Main features relating to Implats’ Mineral Resources and Mineral Reserves as at 31 December 2016 relative to 30 June 2016 are:
- Estimated total attributable Mineral Resources decreased by 1% (3 Moz 4E) to 362Moz; the total attributable platinum ounces decreased by 1.5 Moz Pt to 193 Moz
- The attributable platinum Mineral Resources remain dominated by Zimplats and Impala; the Zimplats Mineral Resources make up the bulk of these (49%)
- Total attributable Mineral Reserves increased by 9% (4 Moz 4E) to 43 Moz; the attributable platinum ounces increased by 2 Moz to 23.6 Moz
- The main contributor to the variance in Mineral Reserves is the inclusion of Portal 6 (Mupani mine) at Zimplats.
The revised Implats Mineral Resource and Mineral Reserve statement, as at 30 June 2017, will provide the detailed updated assessment and reporting criteria.
After the end of the period under review, on 13 January 2017, the Government of Zimbabwe issued, through a Government Gazette Extraordinary, a preliminary notice in terms of which the Government has given fresh notice it intends to compulsorily acquire land measuring 27 948 hectares within Zimplats’ special mining lease area. The new notice has repealed all previous notices issued by the government in respect of its proposed compulsory acquisition of this portion of the mining lease area. Zimplats lodged an objection on 10 February 2017 and is engaging positively with the Government of Zimbabwe in this regard.
Financial performance
- Revenue at R18.2 billion was R1.4 billion or 8.3% higher than the comparative six months as a result of:
- A negative volume variance of R75 million. The negative variance is due to an inventory draw down for the six months to December 2015, which was not repeated in the six months under review, partially offset by higher production volumes.
- A positive dollar metal price variance of R714 million resulting from the average dollar revenue basket per platinum ounce sold of about US$1 775, which was about US$151 or 9.3% higher than the comparative period. The average prices achieved for platinum and palladium were 4.8% and 6.6% higher, while rhodium and nickel dollar prices were 16.3% and 6.4% lower.
- A positive R749 million exchange rate variance was the result of the average rand-dollar exchange rate of R14.04/US$ being approximately 4.5% weaker than the R13.45/US$ achieved during the prior comparable period.
The average 4.5% depreciation in the value of the South African rand benefited the rand revenue basket per platinum ounce, which rose 14.1% to R24 921.
Cost of sales at R18.5 billion increased by R1.7 billion from the comparable six months. The main contributors to this increase were:
- An increase in operating costs of R546 million or 5.0% to R11.5 billion. The increase of 5.0% was contained below the mining inflation of 5.8%, comprising South African operations mining inflation of 7.2% and Zimplats rand inflation which was at 0.9%;
- A share-based compensation expense of R79 million compared to a credit of R138 million in the previous comparable period;
- An increase in the cost of metals purchased of R717 million as a result of higher volumes purchased by IRS and higher rand metal prices.
As a result of the above, the Group generated a gross loss for the period of R318 million (H1 FY2016: R40 million gross loss).
The R411 million loss before tax was an improvement from the comparable period’s pre-tax loss of R552 million, largely due to an impairment charge of R257 million in the prior period. The pre-tax loss for both periods was not materially impacted by exchange rate movements on the dollar bond due to the effectiveness of the hedge.
The major reason for the decline in headline earnings (a loss of R508 million compared to profit of R347 million for the period to December 2015), was a tax credit in the comparable period due to a previously written-off amount owed by a debtor.
Cash generated from operations (before changes in working capital) improved from R1.2 billion to R1.8 billion. An increase in inventories of R1.2 billion and trade and other receivables of R230 million were largely responsible for the reduction in cash from operations (after changes in working capital) to R446 million (H1 FY2016: R1 454 million). The increase in inventories on the balance sheet was affected by an increased net realisable value adjustment of some R660 million.
Capital expenditure, amounted to R1.6 billion, of which R581 million was spent on 16 and 20 shafts.
Gross cash at the end of the period under review amounted to R5.4 billion. Debt (excluding leases and net of the cross currency interest rate swap) amounted to R6.5 billion resulting in net debt at 31 December 2016 of R1.1 billion (June 2016: R19 million cash net of debt).
The balance sheet remains strong with unutilised facilities of R4.75 billion, R4.0 billion of which is available until 2021. This liquidity provides security and flexibility to address upcoming debt maturities as well as to service the ongoing needs of the business.
Given the continued cash conservation strategy, the board has resolved not to declare an interim dividend for the six months to 31 December 2016.
Prospects
Looking ahead, the challenges and uncertainties confronting the southern African PGM mining industry remain significant and will continue to constrain primary metal supply.
Aligned with the forecasts for strong global demand for these metals – supported by growing vehicle sales, tightening emission standards and the growing unsustainable use of palladium in automotive catalytic systems – the Group expects fundamental market deficits to persist. This, coupled with reduced above-ground stock liquidity, bodes well for much healthier future supply/demand fundamentals. However, near-term metal prices could remain muted given persistent global political and economic factors impacting investor sentiment.
Against this outlook, the board recently approved the construction of the Mupani replacement mine at Zimplats, as well as modernisation and detailed re-scheduling studies to restart the 17 Shaft replacement project at Impala Rustenburg in two years’ time.
Despite a more positive market outlook, the operating environment in southern Africa remains fluid and challenging, particularly at the more labour-intensive South African mines where safety challenges and community disruptions continue to impede optimum performance.
Within this environment, Implats will continue to prioritise measures to achieve the Group’s safe production goals (zero harm), preserve cash, enhance productivity and increase profitability. To this end, the Group will continue implementing its strategic response plan, which has already yielded significant improvements, realised material cost savings and secured the Group’s balance sheet. Further measures to bed down improvements and strengthen our response to the challenging operating environment have been introduced, specifically at Impala Rustenburg where external technical capacity has been secured to regain lost momentum after the recent safety incidents. The intervention targets safe production and mining efficiencies to ensure the transition to a more concentrated, low-cost operation producing at least 800 000 platinum ounces a year from 2020.
Given the severe impact of safety stoppages at Impala Rustenburg and the community disruptions at Marula in the first half of the financial year, the full-year production estimates for these operations have been revised to 650 000 refined platinum ounces and 80 000 platinum ounces in concentrate, respectively. The guidance for Zimplats, Two Rivers and Mimosa remains unchanged at 260 000 ounces platinum in matte, and 175 000 and 115 000 ounces of platinum in concentrate, respectively.
Gross refined platinum ounces for the Group is expected to reach 1.5 million ounces of platinum for the full financial year.
Unit costs are expected to be approximately R22 200 per platinum ounce for the full financial year with Group capital expenditure forecast at about R4 billion.
The financial information on which this outlook is based has not been reviewed and reported on by Implats’ external auditors.
Change in leadership
The board of directors has expressed its appreciation to Terence Goodlace for his significant contribution and guidance to the Group. Terence resigned as chief executive and executive director with effect from 1 December 2016. Nico Muller has been appointed as chief executive and an executive director of Implats with effect from 3 April 2017.