Implats

As of the current reporting period, production and unit costs are reported in terms of 6E platinum group metals (“6E”), the sum of platinum, palladium, rhodium, iridium, ruthenium and gold, and no longer in terms of platinum.

This reporting change reflects the Group’s value-driven strategy, which seeks to enhance the competitiveness and diversity of the asset portfolio, while reducing exposure to high-cost, deep-level conventional mining and shifting our metal mix to assets better aligned to anticipated future market requirements.

In addition, the acquisition of Impala Canada (previously North American Palladium (“NAP”)), a primary producer of palladium, became effective on 13 December 2019. This reporting period therefore includes 18 days of consolidated operating and financial results from this operation.

Following the incorporation of Impala Refining Services (“IRS”) into the Impala business entity, the Group revised the way in-process metal inventory quantities are allocated between the Impala and IRS segments during the reporting period. In prior periods, IRS was allocated a metal pipeline based on its contractual terms, whereas all deviations in processing inventory, after accounting for this pipeline, were allocated to Impala. In the current period, this allocation was amended as a change in estimate on a prospective basis and now the allocation of pipeline inventory between the two segments is based on actual volumes processed for each operation. This will result in a more accurate and appropriate allocation of in-process metal inventory in future for each business unit.

Safety remains the Group’s foremost priority. Despite improvements in the lost-time and all injury frequency rates, Implats mourns the loss of three employees at managed operations during the reporting period. The Board and management team extend their sincere condolences to the families and friends of our late colleagues and remain steadfast in our resolve to eliminate all fatal work-related accidents from our portfolio.

Implats delivered solid results for its half year ended 31 December 2019. Sustained operating performances from mining operations, together with robust rand PGM pricing during the period, offset short-term challenges associated with concentrator maintenance and constrained smelter availability, resulting in significantly improved free cash inflow and strong headline earnings.

This enabled the funding of the acquisition of Impala Canada through a combination of cash, a forward sale of metal and debt, and the reinstatement of dividends, based on a pay-out ratio of free cash flow before growth capital of 30%.

The Group’s strategic repositioning as a high-value, profitable and competitive PGM producer was meaningfully advanced through initiatives to improve organisational effectiveness at key operations, with Impala Rustenburg bedding down the operational and financial turnaround achieved in FY2019.

A three-year wage settlement was signed with the Association of Mineworkers and Construction Union (“AMCU”) at Impala Rustenburg and Marula without operational interruptions or intervention by a third party.

The Group delivered stable 6E in concentrate production of 1,53 million ounces, despite several challenges including a break-down of the primary mill at Mimosa and poor metallurgical performance at Two Rivers. Intermittent load shedding by power utility Eskom added to the complexities of the operating environment.

The Group’s refined 6E production was 17% lower than the prior comparable period, heavily impacted by constrained smelter availability largely due to a planned furnace rebuild at Zimplats.

Increased volumes of high base metal concentrate received from Zimplats during its furnace rebuild resulted in an additional 135 000 ounce 6E inventory accumulation during the period. Between 100 000 to 150 000 ounces 6E of accumulated excess inventory is expected to be released during the second half of the financial year.

Stock-adjusted unit costs per 6E ounce were impacted by inflationary pressures and low treatment rates at our smelting and refining operations. This resulted in stock-adjusted unit costs rising 15% to R13 157 per 6E ounce.

The adjustment in the stock allocation policy resulting in a reallocation of stock between Impala Rustenburg and IRS, mitigated the increase in unit costs per refined 6E ounce, which rose 13% to R12 312 per ounce (H1 2019: R10 855 per ounce).

Free cash inflow of R5,0 billion improved year on year as received 6E pricing rose by 41%, offsetting a 16% decline in 6E sales volumes due to the increase in metal inventories. Revenue improved by 19% to R28,0 billion, gross profit increased by more than 90% to R6,2 billion and headline earnings rose by 52% to R3,4 billion or 436 cents per share.

Net cash generated from operating activities amounted to R6,0 billion for the six months, negatively impacted by a build-up in inventories, but benefiting from the receipt of cash from forward sales of R2,0 billion which were concluded to ensure the optimal and efficient funding of the acquisition of Impala Canada. The incentivised early conversion of the US dollar bond resulted in a R3,1 billion reduction in debt as 64,3 million Implats shares were issued and the Group ended the half year in a net debt position of R1,9 billion.

The Group’s core business philosophy and values of “respect, care and delivery” are underpinned by our goals of eliminating harm to the health and safety of our employees. Safety is our foremost priority and we are committed to achieving our vision of zero harm.

A regression in safety performances during the final quarter of the previous financial year, which extended into the first quarter of FY2020, has been met with increased leadership focus and greater collaboration with all stakeholders to prioritise safe production across all operations.

Despite significant improvements in the lost-time injury frequency rate (“LTIFR”) and the all injury frequency rate, it is with deep sadness and regret that Impala Rustenburg recorded three employee fatalities in the period under review – loco operator Odirile Thipe (1 Shaft), and scraper winch operators Mnonopheli Mkwebiso (11 Shaft) and Sibusiso Jalisa (12 Shaft). Implats offers ongoing support to the families in recognition of the severe impact of their loss. In addition, Two Rivers, a non-managed joint venture operation, recorded its first fatal incident in seven years – LHD operator Mphedi Lalatji. The Board of Directors and management team have extended their sincere sympathies to the families and friends of our four colleagues.

Each incident was subject to a rigorous independent investigation and remedial action was taken to prevent reoccurrence. The emphasis remains on ensuring effective leadership, responsible behaviour and driving a culture of personal accountability and interdependence.

The LTIFR and the all injury frequency rates improved by 9% and 6% from FY2019. Nine of the 16 Group operations are on millionaire or multi-millionaire status in terms of fatality-free shifts.

The Group continues to make headway on delivering into its stated value-driven strategy, which includes:

• Protect and strengthen our licence to operate
• Optimise the balance sheet and capital allocation
• Enhance the competitiveness of the portfolio
• Repositioning Implats to the lower half of the cost curve.

Impala restructuring

The restructuring of Impala Rustenburg is aimed at enhancing the capital efficiency, competitiveness and sustainability of the operation through a focus on producing safely and profitably from its best assets. During the period under review, a section 189 process was initiated in preparation for the closure of 9 Shaft and the outsourcing, or closure, of 1 Shaft. The timeframe communicated for the planned closure of 1, 9, 12 and 14 Shafts was premised on: a “lower-for-longer” PGM basket price; the impact of limited available mine life remaining at 1 and 9 Shafts; and poor productivity and efficiency at both 12 and 14 Shafts.

Options to extend the life at 1 Shaft to preserve jobs were considered as part of the restructuring process, including an outright sale and a fully outsourced operational model. A thorough investigation highlighted several challenges and risks associated with pursuing this course of action. Together with a structural repricing of the revenue basket, Implats made the decision subsequent to the end of the reporting period to rather convert 1 Shaft to the same operating model currently deployed successfully at 9 Shaft. Internal projections based on reserve and price assumptions estimate a life extension of at least three years at a production rate of 100 000 ounces of 6E per annum. This development secures more than 2 500 jobs at the operation.

The contractor mining model deployed at 9 Shaft, with core infrastructure managed by Impala, continues to deliver profitable mine life extension. However, in line with original guidance, limited remaining mineral reserves will soon be depleted and will lead to closure of this shaft in the near term.

Sustained operational and cost improvements at 12 and 14 Shafts over the past two years, initiated with the restructuring strategy, have fundamentally shifted the relative performance of the shafts. During the period under review the shafts not only met the operating and cost thresholds set at the time, but were the most profitable operations at Impala Rustenburg. The fundamental improvement in operating performance, combined with our view of a structural repricing of the medium-term 6E revenue basket, now fully warrants continued operation of these assets for the foreseeable future.

This is not a departure from the stated strategy to operate a lower-cost, more sustainable suite of high-quality assets. These shafts will be operated in a manner different from the longer-life core assets and employ contracted mining teams to support experienced mining staff. This will afford the business the opportunity to generate cash for shareholders while prices remain supportive, and ultimately, also provide the flexibility to more rapidly cease production in future if the market turns and/or performance weakens below internal thresholds.

Keeping 12 and 14 Shafts in production will also secure more than 10 000 jobs at a time when the economy and region can ill afford further job losses.

The strategy with respect to ramping-up 16 and 20 Shafts remains unchanged. Both shafts are now generating cash much earlier than originally estimated on the back of improved 6E PGM pricing – breakeven was achieved for the half year after capital expenditure.

Competitive portfolio

The ongoing optimisation of the Implats portfolio, to prioritise low-cost, mechanised, PGM-rich and cash-generative assets continues.

To this end, the acquisition of Impala Canada in the period under review is notable. The transaction closed and Implats took over the cash-generating asset on 13 December 2019, effectively diversifying Implats’ production base geographically and operationally while enhancing the Group’s mix of attributable mine production, sourced from a diverse range of PGM-bearing reef types. Integration of the Impala Canada business is progressing with the relevant teams.

The definitive feasibility study (“DFS”) on the low-cost, shallow, palladium-rich Waterberg Project was completed in September 2019. The JV partners resolved to roll Implats’ 90-work-day option trigger date until the outstanding mining right is received and executed. In the interim, further study and optimisation work will be completed to derisk the project implementation programme. The Group will cover expenditure related to this work, up to an amount of R55 million, during this period.

Management continues to explore ways to improve safety, productivity and cost efficiency at all other operations, with an increased focus on securing the resilience and reliability of our considerable processing assets.

Balance sheet and capital allocation

Implats’ continued operational and financial performance has further strengthened the Group’s balance sheet. Free cash inflow of R5,0 billion benefited from higher received 6E PGM pricing and the receipt of R2,0 billion in forward sales of excess metal inventory, which was concluded to ensure optimal and efficient funding of the cash acquisition of Impala Canada. Following the conclusion of the transaction in mid-December 2019, US$100 million of the US$350 million acquisition bridge facility was repaid in two tranches of US$50 million in each of December 2019 and January 2020. The remaining US$250 million of the bridge facility was repaid on 29 January 2020 from the proceeds of a four-year term loan of US$250 million, which was secured by Impala Canada.

Net cash generated from operating activities amounted to R6,0 billion for the six months, negatively impacted by the build-up in metal inventories, but benefiting from higher prices and the proceeds of the R2,0 billion forward sale.

Material progress in reducing debt obligations was achieved with the successful incentivised conversion of the Group’s US dollar bonds, due in 2022. Together with the cancellation of the cross-currency interest rate swap (“CCIRS”), the incentivised conversion reduced the Group’s gross debt by R3,1 billion and lowered the Group’s future interest charges by R319 million per annum. A total of 64,3 million new Implats shares were issued in August 2019 at a total cost of R524 million, representing an incentive premium of R509 million and accrued interest of R15 million. In addition, residual debt of US$42,5 million at Zimplats was repaid in December 2019.

After funding the Impala Canada acquisition of R10,9 billion, Implats ended the reporting period in a net debt position of R1,9 billion and had liquidity headroom of R8,0 billion comprising R6,0 billion in cash and R2,0 billion in available banking facilities.

The underlying mining performance remained strong during the first half of the financial year. Tonnes milled from managed operations (Impala Rustenburg, Zimplats and Marula, together with an 18-day contribution from Impala Canada) were largely unchanged, rising 1% to 10,31 million tonnes (H1 2019: 10,24 million tonnes).

A 2% lower milled grade at Impala due to a planned increase in on-reef development rates aimed at driving increased operational flexibility, together with lower recoveries at Two Rivers due to the mining of split-reef and a primary mill repair at Mimosa, resulted in a 2% decline in mine-to-market 6E concentrate produced to 1,34 million ounces (H1 2019: 1,38 million ounces).

Third-party concentrate receipts increased by 4%, buffering the decline in mine-to-market production, with gross 6E concentrate of 1,53 million ounces, declining by 2% from the comparable operating period.

Gross refined output was impacted by a scheduled furnace rebuild at Zimplats and acid plant maintenance at Impala Rustenburg in Q1 2020. High matte fall in the Rustenburg smelter, due to increased volumes of high base metal concentrate received from Zimplats during its furnace rebuild, further impacted the Group’s smelting performance during Q2 2020 and resulted in 135 000 ounces of additional 6E stock inventory in the period.

Refined 6E production consequently declined by 17% to 1,32 million ounces (H1 2019: 1,59 million ounces) from the prior comparable period, which had benefited from a release of in-process stocks. Progress was made in several key areas to optimise processing capacity to release the current elevated levels of excess inventory to the market during the second half of FY2020 and in FY2021. The focus remains on derisking operations and building resilience at a time when demand for PGMs is robust, resulting in substantial increases in pricing, profits and free cash flow.

Inflationary cost increases, investment in increased development rates to strengthen mineable ore reserve face length, the weaker rand on the dollar cost base at Zimplats and initial consolidated costs from Impala Canada resulted in total cash operating costs increasing by 11% from the prior comparable period. While rand per tonne milled costs increased by 10% to R1 157 (H1 2019: R1 049 per tonne), lower stock-adjusted 6E production resulted in a 15% increase to unit costs on this measure. During the period, an adjustment in the stock allocation policy resulted in a reallocation of stock between Impala and IRS, mitigating the increase reported per unit cost of R12 312 per refined 6E ounce to 13% (H1 2019: R10 855 per ounce).

Capital expenditure at managed operations of R1,9 billion increased by 13% compared to the comparable period. This was primarily due to the accelerated capital expenditure at Marula (where the construction of a new tailings storage facility has been initiated) and the inclusion of R37 million capital expenditure at Impala Canada. Capital expenditure at Impala declined by 2% to R998 million with the completion of spend on 20 Shaft.

The overall stock lock-up for the six months was 135 000 ounces 6E. At the start of the period excess stock was 215 000 ounces bringing the total excess ounces that can be released over time to 350 000 ounces 6E at the end of December 2019. The Group forecasts a drawdown of between 100 000 to 150 000 ounces 6E during the second half of the financial year.

Impala Rustenburg

The improvement in operational momentum achieved during FY2019 was largely maintained into the first half of FY2020. Mined volumes improved at 11, 12, 14, 16 and 20 Shafts, but were lower at 1 and 9 Shafts on a planned ramp down, and fell at 6 and 10 Shafts as a result of constrained mineable face length.

Tonnes milled decreased by 4% to 5,74 million tonnes (H1 2019: 5,97 million tonnes). The 6E mill grade deteriorated by 2% to 3,91g/t largely due to increased ore reserve development and higher stoping widths associated with rolling UG2 reef at 10, 11 and 14 Shafts.

Initial tailings retreatment work undertaken during the period delivered 6 000 6E ounces, while production from other sources, including high-grade smelter reverts in the prior period, declined by 14 000 ounces year on year. 6E concentrate production, partially buffered by improved concentrator recovery, declined by 3% to 652 000 ounces (H1 2019: 673 000 ounces). On a stock-adjusted basis, 6E production decreased by 5% to 645 000 ounces (H1 2019: 682 000 ounces).

Smelter availability at Impala Rustenburg was constrained in Q1 2020 as a result of scheduled annual acid plant maintenance and further impacted due to difficulties in treating Zimplats concentrates. While this impacted refined volumes for Impala Rustenburg disproportionately in Q1 2020, the implementation of a revised stock reallocation policy between IRS and Impala resulted in a reallocation of refined volumes in Q2 2020. The stock reallocation resulted in refined 6E volumes increasing by 2% to 761 000 ounces (H1 2019: 744 000 ounces).

Total cash costs, including all allocated corporate and marketing costs, increased by 10% to R9,4 billion (H1 2019: R8,5 billion) with above-CPI increases on utilities and labour. In addition, costs were impacted by inefficiencies at 1 Shaft during the extended outsourcing investigation, increased rates of working cost development to improve mineable face, and a pilot project to treat old tailings which impacted concentrator costs. On a stock-adjusted basis, unit costs increased by 16% to R14 515 per 6E ounce (H1 2019: R12 461) with lower stock-adjusted metal volumes exacerbating inflationary pressures. The inventory allocation adjustment resulted in refined unit costs increasing by 8% to R12 305 per 6E ounce (H1 2019: R11 426).

Capital expenditure, impacted by timing issues, declined by 2% to R998 million (H1 2019: R1,0 billion). Project capital declined by 27% to R173 million (H1 2019: R237 million) while stay-in-business capital increased by 6% to R825 million (H1 2019: R780 million). Of this, a total of R102 million was invested in smelting and refining (H1 2019: R132 million).

During the first half of the year, Impala delivered R7,1 billion in free cash flow, a three-fold increase from the comparable period mainly due to the inventory reallocation, as well as higher rand PGM pricing and the receipt of R2,0 billion in forward sale proceeds. Impala made a gross profit of R3,9 billion and contributed R2,6 billion to Group headline earnings (H1 2019: R1,0 billion).

Impala Refining Services (“IRS”)

PGM receipts in matte and concentrate from mine-to-market operations declined by 9% to 631 000 ounces (H1 2019: 696 000 ounces) as processing constraints at Two Rivers and Mimosa were compounded by a temporary increase in smelter inventory at Zimplats following furnace maintenance. Third-party PGM receipts increased by 4% to 190 000 ounces (H1 2019: 184 000 ounces). In total, gross PGM receipts of 822 000 ounces were 7% lower than the previous comparable period (H1 2019: 879 000 ounces).

Reported operational and financial metrics for IRS were further impacted by the reallocation of stocks between IRS and Impala in Q2 2020, which increased IRS working capital. Consequently, refined 6E volumes declined by 35% to 549 000 ounces (H1 2019: 846 000 ounces) and sales volumes were materially lower. This resulted in negligible reported gross profit and a deemed free cash outflow in the reporting period, which will normalise in future with the treatment of accumulated excess IRS pipeline inventory.

Marula

Marula continues to deliver an improved operational performance.

Tonnes milled improved by 2% to 970 000 tonnes (H1 2019: 955 000 tonnes), while focused mining resulted in a reduction in stoping width and a higher delivered head grade, which increased 5% to 4,60g/t (H1 2019: 4,37g/t). Consequently, 6E in concentrate production increased by 6% to 124 000 ounces (H1 2019:118 000 ounces).

Total cash costs were impacted by inflation and higher bonus payments due to improved productivity and rose by 11% to R1,3 billion (H1 2019: R1,2 billion). Continued operating stability and the delivery of a strong second quarter compensated for a lower plant running time due to unplanned maintenance in Q1 2020. Volume gains helped offset inflationary pressures and unit costs increased by 5% to R10 265 per 6E ounce (H1 2019: R9 779).

Capital expenditure accelerated in line with progress on the new tailings storage facility and mining fleet replacement, with spend increasing from R33 million to R204 million in the period.

The benefit of higher sales volumes and strong palladium and rhodium pricing lifted sales revenue, gross profit and free cash flow, which increased to R2,7 billion, R1,2 billion and R431 million respectively. Marula contributed R385 million to Group headline earnings.

Management continues to make good progress towards securing a lasting resolution to community issues and operated without community disruptions during the period.

Two Rivers

Challenging operating conditions persisted at Two Rivers.

Extensive concentrator optimisation work to address weak recoveries from variable mineralogy in the first quarter resulted in improved metallurgical performance and secured a significantly improved second quarter at the operation.

Milled volumes were largely unchanged year on year, however, increased tonnage from the accelerated development of the main decline, together with lower mined grade from split-reef areas resulted in a 2% weaker delivered grade. This was compounded by poor recoveries through the concentrator plant in Q1 2020, resulting in 6E production declining by 14% to 138 000 ounces (H1 2019: 161 000 ounces). Total cash costs were well contained, rising 7% to R1,3 billion. The impact of lower concentrate volumes saw unit costs increase by 24% to R9 616 per ounce (H1 2019: R7 727 per ounce).

Capital expenditure increased by 58% to R391 million (H1 2019: R247 million) in line with accelerated deepening and development activity, fleet purchases and the commencement of the tailings storage facility project. Capital was also impacted by a once-off R99 million charge due to a change in accounting standards applied to leases in the period. The benefit of strong UG2 pricing buffered Two Rivers’ financial performance with gross profit improving by 97% to R944 million and free cash flow more than doubling to R154 million.

During the period, the JV partners advanced plans for a more sustained solution to the future geological realities of the operation with a 40 000 tonne per month plant expansion project approved in principle and an adjudication process now under way. The estimated cost of the project is R427 million and will be incurred between FY2020 and FY2022 with improved volumes expected by FY2022. The expansion will secure recoveries, increase throughput and return the mine to historical levels of metal production. The quality and efficiency of the Two Rivers operation, together with expected strength in the basket price, should ensure a high internal rate of return and short pay-back period for the project.

Zimplats

Zimplats again delivered a strong operational performance, despite being impacted by processing maintenance undertaken during the period, with the smelter recommissioned in October 2019 and the planned mill relines at the Selous concentrator taking place in the second quarter.

Tonnes milled were 2% higher at 3,38 million tonnes. Stable grade (at 3,48g/t) and recoveries resulted in 6E in concentrate production of 299 000 ounces, up 2% period on period. 6E production in matte, including concentrates sold, reduced by 7% to 267 000 ounces due to the temporary increase in smelter revert inventory following the three-month furnace rebuild. While a mix of concentrate and matte was delivered to IRS during the period, sales volumes declined by 12%.

Total cash costs were well controlled and increased by 3% to US$181 million (H1 2019: US$175 million). With the impact of a weaker rand, costs grew by 7% to R2,7 billion on translation (H1 2019: R2,5 billion). Unit costs per tonne milled increased by 2% to US$54 per tonne (H1 2019: US$53), while costs per 6E ounce in matte increased by 12% to US$675 per ounce (H1 2019: US$606 per ounce) impacted by concentrate transport costs and lower matte volumes.

Capital expenditure increased 1% to US$47 million (H1 2019: US$46 million) with stable stay-in-business spend of US$33 million and marginally higher project spend of US$14 million (H1 2019: US$13 million) as the furnace refurbishment was completed and the Mupani project was progressed. Zimplats achieved gross profit of R2,2 billion (H1 2019: R1,0 billion), generated R789 million in free cash flow and contributed R956 million in headline earnings to the Group.

Impala Canada

The inclusion of Impala Canada for 18 days from acquisition, resulted in a modest tonnage and 6E production contribution of 8 000 ounces. The transaction closed on 13 December 2019 and the operation was formally renamed and began operating as Impala Canada on 14 December 2019. All integration workstreams are progressing well. Impala Canada is expected to produce 120 000 to 150 000 ounces 6E in H2 2020, with expected capital expenditure of CAD$64 million.

Mimosa

Mimosa recovered well from a difficult Q1 2020, when concentrate volumes were heavily affected by the breakdown of the primary mill. Tonnes milled declined by 7% to 1,3 million tonnes (H1 2019: 1,4 million tonnes) while delivered grade was stable at 3,84g/t. Lower yields due to the plant outage and subsequent start-up resulted in a 9% decline in the volume of 6E concentrates produced of 120 000 ounces (H1 2019: 132 000 ounces).

Steps to derisk the processing plan bottlenecks at Mimosa have been taken by the JV partners through the procurement of additional concentrating equipment sourced from a decommissioned site in South Africa. This has allowed for the start of a process optimisation project, which will be completed over the course of 18 months. Negotiations to secure neighbouring ground to extend Mimosa’s life-of-mine by two years were completed in the period. A royalty payment of US$4,5 million has been agreed. An upfront payment of US$1,5 million will be paid during H2 2020, followed by three US$1,0 million annual instalments.

Cash costs at Mimosa increased by 2% to US$100 million (H1 2019: US$98 million) and were impacted by bad ground conditions. While costs per tonne milled rose 10%, unit costs per 6E ounce rose 12% to US$830 per ounce (H1 2019: US$741 per ounce) and were 16% higher on translation into rand. Mimosa delivered a significant increase in gross profit to R830 million, with contributions to headline earnings of R65 million impacted by intercompany adjustments due to the increase in the unearned profit adjustment on metal in the pipeline.

Implats’ key projects and business development activities are focused on low-cost, predominantly mechanised assets which can deliver defensive cash generation to entrench the Group’s competitive position and sustain profitability well into the future.

Impala Rustenburg: 16 Shaft

There have been continued improvements in total and mineable face-length at 16 Shaft resulting in higher panel availability, which increased to 162 panels at the end of the period from 143 at the end of the first quarter.

The ramp up is 61% complete, marginally behind schedule due to ore pass rehabilitation and a slower build-up in teams. The C ore pass is expected to be completed in the third quarter of this financial year, with the D ore pass completion scheduled for the first quarter of FY2021. Steady-state 6E production of 330 000 ounces per annum is expected from June 2022.

To date, capital spend has totalled R7,5 billion of the R7,9 billion approved project vote, with the completion of this expenditure expected by November 2021.

Impala Rustenburg: 20 Shaft

The capital project scope has been completed with final expenditure of R7,9 billion.

The focus at 20 Shaft remains on creating mineable face to meet the planned ramp-up in stoping tonnes. Mineable face length improved well ahead of plan to 2 400 metres.

Zimplats: Mupani Mine

Decline development at Mupani Mine, which will replace Ngwarati and Rukodzi Mines, remains ahead of schedule, with two project fleets currently developing in both ore and waste. The mine will receive the first stoping fleet from Rukodzi in the final quarter of FY2020. A total of 115 316 tonnes was mined in the first half year at an average grade of 3,07g/t, bringing the production to date to 127 552 tonnes at an average head grade of 3,03g/t 4E.

The infrastructure focus is on commissioning the surface ore handling and crushing plant in March 2020. The raise bore contractor has been mobilised to site to establish two exhaust ventilation raises, the first of which is due for completion in April 2020.

A total of US$80 million out of the budgeted US$264 million had been spent by the end of the half year.

There has been no material change during the half-year assessment of the Implats Mineral Resources and Mineral Reserves estimates. Adjustments to the planned production profile of Impala Rustenburg – due to the benefit of efficiency gains and pricing improvements – are anticipated to positively impact year-end consolidation.

In addition, it is expected that the maiden reporting of the Attributable Mineral Resources from the Waterberg Project and the Mineral Resources and Mineral Reserves from Impala Canada’s Lac Des Iles Mine may have a positive impact on Implats’ palladium-to-platinum ratio – both currently being validated for SAMREC Code (2016) compliance in line with Implats’ governance processes.

The revised Implats Mineral Resource and Mineral Reserve statement, as at 30 June 2020, will provide the detailed updated estimates.

Revenue at R28,0 billion was R4,5 billion or 19% higher than the previous comparable period:

• Improved dollar metal prices benefited revenue by 29%, or R6,7 billion in the period. While platinum and nickel pricing improved, it was the marked price rise in both palladium and rhodium that was the primary contributor of this gain. Dollar revenue per 6E ounce sold was 36% higher at US$1 420 (H1 2019: US$1 044)
• The rand weakened by 4% to R14,71 from R14,18 in the previous period and contributed R1,0 billion to the increase in Group revenue with the achieved rand basket price of R20 888 per ounce sold increasing 41% year on year
• The benefit of these gains on revenue was partially offset by the R3,3 billion impact of the 14% decrease in sales volumes resulting from the constrained smelting capacity.

Cost of sales at R21,9 billion increased by R1,6 billion from the previous period:

• Higher rand metal prices resulted in a R3,0 billion increase in the cost of IRS metal purchased
• The combination of South African mining inflation of 7%, a weaker rand on the conversion of Zimplats US dollar costs and increased spend on development to secure operational flexibility at Impala Rustenburg resulted in a R1,4 billion or 11% increase in cash costs
• These increases were partially offset by the movement in inventory, which resulted in a credit to the costs of sales of R3,6 billion in the period. In the current year, costs were deferred due to a substantial increase in metal pipeline stocks as a result of constrained smelting capacity. Conversely in H1 2019, a draw-down of inventory largely offset movements in the value of stock with a R202 million credit to cost of sales.

As a result of the above, the Group generated gross profit for the period of R6,2 billion, a gain of 91% from the R3,2 billion achieved in the previous period.

Profit before tax of R4,8 billion improved from R3,4 billion achieved in H1 2019, with the R2,9 billion improvement in gross profit partially offset by a decrease in other income of R494 million, while other expenses increased by R1,1 billion.

Other income in H1 2019 benefited from the refund of customs duty penalties to Zimplats of R136 million and the receipt of export incentives by Zimplats of R417 million. In H1 2020, insurance proceeds on Rustenburg’s No 5 furnace insurance claim rose to R353 million from R150 million in the comparable period with the claim now settled. Other expenses were impacted by the once-off cash expense of R509 million relating to the incentivised early conversion of the US dollar convertible bonds, the provision for restructuring costs of R331 million (primarily related to 1 and 9 Shafts at Impala Rustenburg) and the transaction costs of R147 million incurred on the acquisition of Impala Canada.

The increased tax charge of R1,3 billion (H1 2019: R895 million) was largely due to the improved profitability of the operations and higher dividend withholding tax paid by Zimplats.

Basic earnings increased to R3,4 billion from R2,3 billion in the comparable period. After adjusting for the after-tax profit on the sale of property, plant and equipment of R14 million, and the R11 million purchase gain on the acquisition of Impala Canada, headline earnings of R3,4 billion was achieved. The weighted average number of shares in issue increased to 774,4 million as a result of the issuance of 64,3 million Implats ordinary shares on 1 August 2019 following the successful incentivised conversion of the US dollar convertible bond. The resultant headline earnings per share of 436 cents increased 41% from 310 cents achieved in the comparable period.

The Board of Implats has approved the declaration of an interim cash dividend of R1,25 per ordinary share, in terms of the newly approved dividend policy, which is aligned to the Company’s capital allocation framework. The dividend policy states that a dividend will be declared from 30% of free cash flow, pre-growth capital, for any given period, subject to the Board’s discretion. The dividend has been declared from retained earnings and will be subject to a 20% dividend withholding tax for shareholders who are not exempt from, or do not qualify for, a reduced rate of withholding tax. The interim dividend will be paid on 23 March 2020.

Net cash from operating activities of R6,0 billion was at similar levels to that generated in the comparable period. The impact on cash of improved earnings and the receipt of R2,0 billion from a forward sale of metal was partially offset by the lock-up of inventory amounting to R3,8 billion in the half year.

Capital expenditure at managed assets increased to R1,9 billion (H1 2019: R1,7 billion). Of this, R147 million (H1 2019: R207 million) was spent on 16 and 20 Shafts at Impala Rustenburg while R292 million was spent on Mupani and Bimha (H1 2019: R333 million) at Zimplats. R117 million was incurred at the tailings storage facility under construction at Marula and a further R37 million at the newly acquired Impala Canada in the closing weeks of the year.

With effect from 13 December 2019, Implats acquired 100% of the outstanding shares in Impala Canada for a cash consideration of CAD$983 million (US$747 million or R10 859 million), using a combination of existing cash (US$277 million), proceeds from a forward sale of excess inventory (US$120 million) and the proceeds raised on a bridge loan facility (US$350 million). The cash consideration paid excludes the cash utilised by Impala Canada to settle certain share option payments that vested on the closing of the transaction. As part of the closing process, NAP amalgamated with Implats’ wholly owned Canadian subsidiary, and was subsequently renamed Impala Canada Limited, which is now a wholly owned subsidiary of Implats. At the date of acquisition, Impala Canada had a cash balance of R1,4 billion. Prior to period-end, US$50 million of the bridge loan was repaid from cash by Impala Canada and, subsequently a further US$50 million was repaid by Implats in January 2020, with the remaining US$250 million of the facility being repaid from the proceeds of a US$250 million term loan raised by Impala Canada.

Borrowings increased as a result of the US$300 million bridge loan, but benefited from the early conversion of the US dollar convertible bond and Zimplats debt repayment of US$42,5 million in December 2019. Cash and cash equivalents at the end of the period under review amounted to R6,0 billion. Net debt, excluding finance leases, was R1,9 billion at 31 December 2019, an increase of R967 million on the comparable period (H1 2019: R976 million) and a swing of R3,0 billion from year-end (30 June 2019: net cash of R1,1 billion).

The balance sheet remains strong with unutilised revolving credit facilities of R4,0 billion, available until 7 June 2021. Therefore, at 31 December 2019, the Group had liquidity headroom of R8,0 billion, comprising cash of R6,0 billion (30 June 2019: R8.2 billion) and available banking facilities of R2,0 billion (30 June 2019: R4,0 billion), compared to the R12,2 billion available at the end of June 2019.

All three major PGM markets recorded fundamental deficits during 2019. While investment demand primarily drove the 277 000 ounce shortfall in the platinum market, strong growth in autocatalyst loadings resulted in deficits of 982 000 ounces and 7 000 ounces in the palladium and rhodium markets respectively. Structural demand growth from tightening emission standards in Europe and China, and Asian investment in industrial capacity, underpinned demand for PGMs, despite a year marked by slowing economic activity, weak sentiment due to unresolved trade wars, geopolitical tensions and the form of an eventual Brexit.

The impact of COVID-19 is likely to result in downgrades to expected global economic activity in H1 2020 with China, the epicentre of the coronavirus, likely to bear the brunt of negative revisions. China’s role in global growth, world trade and tourism has increased materially over the past two decades and the comparisons between COVID-19 and the impact of the 2003 SARS virus outbreak are likely to underestimate the potential economic impact of the coronavirus. It will be some time before the severity and duration of the COVID-19 epidemic is clear and hence the impact on metal demand in 2020 remains uncertain.

In our view, the support from increased automotive loading requirements, together with expected supply shortfalls in both rhodium and palladium, suggests limited impact on customer requirements and hence little risk to expected deficits in both metals.

Awareness of the potential of hydrogen and fuel cell technology to facilitate decarbonisation continues to grow and underpins the medium-term demand outlook for platinum. While we remain encouraged by progress made on the reintroduction of platinum in gasoline catalyst systems in the North American market, it remains our view that this is likely to impact positively from 2021 onwards and, as such, in the absence of substantial investment demand in 2020, the platinum market is likely to revert to a surplus once again.

Platinum ended 2019 at US$971 per ounce, 22% higher than the opening London Bullion Market Association (“LBMA”) trade and averaged US$863 per ounce in 2019, 2% lower than the previous year (2018: US$879 per ounce). Platinum benefited from improving investor sentiment driven by its association with, and discount to, gold and palladium. Investor support boosted pricing throughout 2019 and while Exchange Traded Fund (“ETF”) inflows slowed materially in the final quarter of the year, speculative length expanded materially. Finally, in December, news of Eskom power outages supported a year-end rally and, at the margin, limited the availability of physical metal in the spot market into year-end.

Palladium’s march higher continued apace in 2019, closing the year at US$1 920 per ounce, 52% higher than the opening LBMA trade and averaged US$1 539 per ounce in 2019, 49% higher than the previous year (2018: US$1 031 per ounce). The price was supported by increasing physical tightness and in the absence of substantial speculative investment activity. ETF selling was muted during the year, materially reducing the supply provided by this source of market liquidity in prior years. Stronger than expected auto growth was driven by increasing gasoline market share in Europe and the early introduction of China VI standards in certain cities. Tightness in early 2020 has been compounded by South African refined shortfalls and maintenance and closures at certain northern hemisphere refineries.

The rhodium price increased by US$3 590 per ounce in 2019 closing the year at US$6 050 per ounce and registering a gain of 146% over the year. The metal averaged US$3 312 per ounce, 76% higher than the prior year (2018: US$2 220 per ounce). Rhodium prices were driven by increased auto demand due to the implementation of tighter NOx limits for gasoline-powered internal combustion engines. Demand growth for rhodium has resulted in universal customer requests for additional metal, with producer market activity also adding to the perception of market tightness and lending price support. This continued in the first weeks of 2020, where extreme physical tightness and Asian industrial buying have seen prices trade up to US$13 000 per ounce.

Automotive

2019 marked the second consecutive year of falling global light-duty sales, with volumes of 90,3 million units indicating a 4,4% contraction relative to 2018. The overhang of deepening economic frictions weighed heavily on consumer sentiment, while regional idiosyncrasies also played a part in the weak result. The current outlook for 2020 is uninspiring and hinges on the performance of the Chinese market, which comprises over a quarter of the global expected sales and was the key source of market weakness in 2019.

The global heavy-duty market also posted a decline (of 3% to 3,1 million units) in 2019 due to trade tensions and the impact of general economic uncertainty on investment. The truck cycle is heavily cyclical and influenced by tightening legislation, which increases costs and can result in buying being pulled forward in certain years. The introduction of Bharat VI in April 2020 together with early implementation of China VI standards (ahead of nationwide implementation in July 2021) is therefore likely to lead to a more material contraction in heavy-duty sales volumes in 2020.

Jewellery

Demand for platinum in the jewellery sector contracted again in 2019 – double digit growth in India and modest gains in Japanese demand were insufficient to offset the sustained weakness in the Chinese market where the impact of slowing economic growth due to domestic and external challenges led to increased consumer caution. In addition, escalating social unrest in Hong Kong was an unforeseen impediment to the previously hoped for stabilisation in 2019 and we expect a double-digit contraction in jewellery demand as a result. In North America, concerns about a potential economic recession increased, reflected in a drop in retail sales, and platinum jewellery sales are expected to have contracted marginally from the strong base created in 2018.

The impact of COVID-19 is likely to substantially lower Chinese retail activity in Q1 2020 limiting the potential for a near-term recovery in demand. Near-term headwinds are balanced by the demographic argument for growth potential, where the ability to penetrate and promote in lower-tier Chinese cities and capture rising wealth levels supports continued optimism on continued jewellery promotion.

Industrial

Industrial demand for PGMs continues to be robust, but eased slightly relative to recent years as capacity expansion slowed in China where recent demand was supported by the construction of sizeable integrated chemical complexes and LCD plants. Platinum continues to benefit from growth in demand from the non-road mobile machinery and the nascent fuel cell sector and we retain our view of a firm medium-term outlook for industrial demand.

Industrial demand for palladium benefited from strong chemical demand, impacted by high pricing and hence substitution in the dental sector. Some medium-term relief is expected from an uptick in the performance of the electrical components sector, which has been particularly hard-hit by “trade wars” and “tariff tiffs” and a slowing mobile phone upgrade cycle in early 2019.

Investment

Physical investment in small platinum bars and coins contracted in 2019, with substantially lower Japanese purchases offsetting modest growth elsewhere. Conversely, ETF buying accelerated in 2019 with net purchases in excess of one million ounces, as investors reassessed their view of the relative value of platinum to both palladium and gold. Palladium net sales of just 14 000 ounces indicate a dramatic shift in ETF disinvestment versus the previous five-year period, when sales averaged approximately 550 000 ounces per annum. This contributed to a shift in market liquidity and undoubtedly provided price support during the year.

Net paper (“NYMEX” and “TOCOM”) positioning in platinum increased by 2,26 million ounces in 2019, reaching record levels in the final months of the year and closing at 3,58 million ounces. Conversely, palladium net length declined by 300 000 ounces over the period to close at 1,16 million ounces, reflecting a market where price has been driven by fundamental physical tightness rather than speculative investor support.

Investment activity in platinum has been supported by its price discount to palladium and a rise in gold investment action – while palladium investor flows have remained muted after the lease rate spike and subsequent price weakness in March 2019. This has been confirmed by market commentary with trading desks noting investor caution towards palladium given substantial volatility and rising lease rates.

Fundamentals

After renewed optimism in the final quarter of 2019, the outlook for near-term global growth has once again become uncertain with the emergence of the unexpected threat presented by the COVID-19 outbreak. Despite this, in our view, the market fundamentals for both palladium and rhodium remain robust in the medium term, with strong auto-led growth and a limited supply response likely in the short term, despite higher prices.

While we assume robust growth in secondary supply, we continue to highlight the impediments to a rapid acceleration of primary supply growth: increased corporate focus on capital allocation; regulatory uncertainty; the longer-term auto outlook; a shortage of readily available processing capacity for both primary and secondary supply; a weak project pipeline; and funding constraints at several emerging producers. We expect to see capital expenditure at producing assets edge up in the near term as corporates seek to extend mine life, play “catch-up” on delayed capital and maintenance projects and secure the stability of processing assets in an uncertain energy supply environment.

In the absence of substantial investment flows, we expect the platinum market to remain in surplus in the medium term, before tightening towards the end of the decade as increased industrial and automotive use erodes recently accumulated above-ground inventory.

Fundamental deficits in palladium and rhodium are expected to persist and expand in the medium term and support stronger-for-longer pricing of these metals.

Implats has made excellent progress on several strategic imperatives and is well positioned to generate significant value for stakeholders. The Group’s balance sheet and financial position have been materially strengthened allowing the Board to reinstate dividends at a free cash flow pay-out ratio of 30%.

The focus for the rest of the FY2020 will be multi-pronged and include completing the Furnace 4 rebuild and reducing the Group’s excess processing stockpile.

Other key priorities include further strengthening operational performance across the Group, aligning to the current favourable metal pricing environment, integrating Impala Canada into the Implats Group and delivering on the business case as communicated to the market at the time of acquisition.

The Group is mindful of the potential impact of continued electricity supply constraints on its operations in South Africa and Zimbabwe and continues to actively engage with both governments to secure continuity of our business as far as possible.

Implats remains fully committed to our long-term, value-driven strategy favouring value over volume in a zero harm environment, enhancing operational performance, building sustainability and returning value to shareholders.

Guidance

The Group is pleased to largely reiterate the operational guidance provided with its FY2019 results release, with adjustments reflecting the inclusion of Impala Canada and our reporting transition to 6E metrics.

Full-year refined production guidance is unchanged at 3,00 to 3,10 million 6E ounces for FY2020, which corresponds with our previous guidance of 1,45 to 1,55 million platinum ounces for FY2020. While the inclusion of Impala Canada increases concentrate production, these ounces are sold to a third party in terms of existing contractual requirements and therefore do not benefit the Group’s refined volumes.

Group stock-adjusted operating costs are expected to be between R12 500 and R13 500 per 6E ounce (R25 500 and R26 500 per platinum ounce, and impacted by the inclusion of Impala Canada which has a low platinum content) for the full financial year. Group capital expenditure is forecast at R4,9 billion to R5,2 billion (previously guided at R4,2 to R4,5 billion and adjusted for the R0,7 billion expected spend at Impala Canada).

Full-year production estimates for the operational entities are as follows*:

* The financial information on which this outlook is based has not been reviewed and reported on by Implats’ external auditors.

In August 2019 Implats announced the resignation of Mr Udo Lucht as a non-executive director of the Board of Directors. Ms Boitumelo Tapnis Koshane was appointed as non-executive director of the Board replacing Mr Lucht as a representative of the Royal Bafokeng Nation.

The Board adopted the Independent Regulatory Board for Auditors Mandatory Audit Firm Rotation rule earlier than required, and appointed Deloitte as Implats’ external auditor from FY2020.