Commentary
Introduction
Subdued platinum group metal (PGM) prices continued to affect the platinum industry, and together with escalating cost pressures and industrial relations disruptions have had a severe impact on Implats’ operating and financial performance for the year ended 30 June 2014. While the unprecedented five- month industry strike at Impala Rustenburg was resolved with a negotiated wage settlement on 24 June 2014, it severely impacted its operational performance.
Despite the impact of the strike, the operations outside the Rustenburg area, specifically Zimplats, Mimosa and Two Rivers, all performed admirably and delivered good results. Throughout the strike period, normal deliveries continued to key customers, albeit at reduced levels in the last two months. In particular, the South African market remained adequately stocked.
A realignment of strategic imperatives including, safety, health, productivity and profitability is currently being undertaken. The Group has committed significant time and resources to the Rustenburg operations to ensure an uninterrupted return to work and a safe and successful operational start-up. The final assessment of the strike effect indicates total lost production, compared to plan, has amounted to 312 000 platinum ounces to June 2014.
Safety review
During the year, the Group’s fatal injury frequency rate (FIFR) improved by 33.8% to 0.043 per million man- hours worked, a significant achievement given the 25.3% improvement reported in 2013. The lost-time injury frequency rate improved by 6.9% to 3.92 per million man-hours worked.
The Impala team delivered on its health and safety plans during the first half of the year, but unfortunately implementation was affected by the protracted strike in the second half of the year. Zimplats, Mimosa, Marula and Two Rivers delivered a satisfactory health and safety performance.
Regrettably, four colleagues lost their lives on duty during the year and the board and management team has extended its sincere condolences to the families and friends of the deceased. We remember Mr Osika Chidhakwa, Mr Lebogang Abednego Moiteri, Mr Khalepile Joseph Matama and Mr Shaun Pelser.
Our safety strategy involves a number of initiatives, which include active participation in the industry CEO Elimination of Fatalities task team as well as the Mine Occupational Safety and Health (MOSH) task teams. These task teams are focused on falls of ground, mobile machinery and dust in the workplace. We continue to build on changing the culture of the organisation, improving our supervision and adopting and implementing various technical initiatives, which aim to improve workplace safety.
Employee relations review
Progress was made across the Group in delivering on employee relations commitments with various initiatives aimed at improving communication with employees, building supervisors and mine managers’ leadership skills, and ensuring the success of various change management activities. Unfortunately, many of these initiatives were placed on hold during the second half of the financial year, which was dominated by efforts to conclude wage negotiations and resolve the strike at the Rustenburg operation.
Employee relationships were challenged in the Rustenburg area and the breakdown of the wage negotiations with Association of Mineworkers and Construction Union (AMCU) and the subsequent five- month strike came at a profound social, economic and financial cost to all parties concerned. In seeking to mitigate the safety and health impact of the industrial action, a health and safety agreement pertinent to the Rustenburg operations was concluded with AMCU paving the way for advancing an employee relations strategy that will foster a more collaborative environment.
Implats has a committed obligation to advance relationships with employees that was supported by the wage agreements reached with AMCU, the National Union of Mineworkers (NUM) and the United Association of South Africa (UASA). The Group will be implementing a range of activities over the short and medium term aimed at building better relationships across the organisation.
Recent developments at Marula point to the possibility of an AMCU majority at the mine and formal meetings structures have been established for the necessary continued engagement.
Market review (all references to years in this section refer to calendar years) The platinum and palladium markets remained in deficit on a fundamental basis for a second year driven by reduced primary supplies from the South African producers. Demand growth, particularly in jewellery and investment, has outpaced supply. Despite this, abundant above-ground stocks have constrained any upward price movement.
The average price for platinum in 2013 was US$1 487 per ounce, while the average price achieved during the first six months of 2014 was US$50 per ounce lower at US$1 437 per ounce. The palladium price, on the other hand, which averaged US$725 per ounce in 2013, increased to US$857 per ounce for the first six months of 2014 indicating healthier demand. Rhodium averaged US$1 047 per ounce in 2013, which increased to US$1 069 per ounce in the first six months of 2014 reflecting a fundamentally balanced market. The rand depreciation that began in 2012 continued in 2013 and was supportive of rand prices for PGMs.
The past year has seen positive growth in the global automotive industry as light-duty vehicle sales grew by 3% and the global market exceeded 83 million vehicle sales for the first time. An estimated 87 million light-duty vehicles are expected to be sold in 2014, primarily driven by China and supported by the continued economic recovery in North America. Tightening emission standards were also supportive of demand.
The platinum jewellery market, a significant component of platinum demand, grew by 6% in 2013 and is expected to achieve a further 5.3% in the current year. Investment growth was underpinned by the South African platinum exchange traded fund (ETF), which exceeded 900 000 ounces by the end of 2013, and is now the largest fund in the world at more than 1.1 million ounces. The removal of this quantum of metal from the market without any significant impact on the platinum price highlights the extent of above- ground inventory.
Financial review
Revenue per platinum ounce was 8.2% lower than the previous year at US$2 299 (2013: US$2 505) per ounce. The average rand/ dollar exchange rate achieved of R10.36 to the dollar was 17.6% weaker than the prior year. Consequently, although the dollar revenue per platinum ounce decreased by 8.2%, the rand revenue per platinum ounce increased by 7.9%.
Group production deteriorated from 1.582 million ounces of platinum to 1.178 million ounces primarily due to the industrial action at Impala Rustenburg. The higher rand metal prices, assisted by destocking, resulted in revenues reducing by only R816 million. Group unit costs per platinum ounce, excluding share based compensation, rose by 18% to R19 430 per platinum ounce. On a normalised basis, Of the total revenue realised of R29 billion, R8.8 billion was used to fund metals purchases and R21.0 billion was deployed as illustrated in the chart below . adjusting for the savings in operational costs during the strike and the 312 000 ounces of lost platinum production, unit costs would have been R17 308, an increase of 5% on the prior year.
Gross profit was down by R1.47 billion to R3.24 billion and the gross profit margin for the year declined to 11.2% (2013: 15.8%).
Headline earnings per share was 74% lower at 86 cents (2013: 329 cents) per share. Basic earnings per share was one cent (2013: 167 cents).
Due to stringent cash preservation measures during the strike, the Group had largely unchanged cash reserves of R4.3 (2013: R4.1) billion at year end. Total borrowings for the Group (including finance leases) were higher at R7.8 (2013: R7.5) billion, leaving the Group in a net debt position at year end of R3.5 billion.
Given the length of the industrial action and concomitant start-up costs in financial year 2015, the board has resolved not to declare a final dividend for the year as part of its ongoing strategy to preserve cash (2013: 95 cents per share comprising an interim dividend of 35 cents per share and a final dividend of 60 cents per share).
Operational review
Gross refined platinum production was 25.5% lower at 1.18 (2013: 1.58) million ounces, largely as a result of the strike at Impala. Mine-to-market production decreased by 18.8% to 0.99 (2013: 1.21) million ounces. At IRS, the ramp-up of the Phase 2 expansion project at Zimplats in conjunction with toll material from Northam and Platmin was more than offset by lower deliveries from other third-party customers and production declined by 12% to 767 000 ounces of platinum.
Group unit costs increased by 17.6% to R19 430 (2013: R16 526) per platinum ounce largely as a result of mining inflation of 10.8% and the significantly reduced production from Impala. The main contributors to the inflation were wage increases of 10.7% at the South African operations and power increases of 9.0%. Costs at Impala were reduced to approximately 30% of the normal operating expenditures during the strike and capital expenditure was contained in line with the requirement to reduce cash outflows.
Managed mine-to-market operations
IMPALA
The strike severely interrupted a good operational start to the financial year and initiatives to ramp-up production at the mine over the next five years have been impacted. Ore milled decreased by 43.3% to 6.2 (2013: 10.9) million tonnes, while refined platinum decreased by 42.0% to 411 000 (2013: 709 200) ounces. Milled head grades (6E) were marginally higher at 4.34 (2013: 4.32) grams per tonne. Recoveries improved to 87.4% (2013: 85.3%) as a result of better efficiencies at the tails scavenging plant and lower opencast volumes milled.
Total development activity decreased to 61.3 (2013: 97.4) kilometres, while on-reef development declined by 28.9% to 21.1 (2013: 29.7) kilometres. In the period before the strike commenced, 17.4 kilometres of face was mined at an average panel length of 24.1 metres and a face advance of 9.9 metres per month. Currently, there is 20.5 kilometres of mineable face length, which remains a constraint. The key to reversing this situation and improving reserve flexibility is to optimise development, equipping, construction and ledging activities on existing shafts and at the newly commissioned 20 and 16 shaft complexes.
The impact of the strike, above-inflation wage increases, lower productivity and above-inflation power costs (in conjunction with lower volumes) all affected unit costs, which increased by 27.8% to R22 036 (2013: R17 241) per refined platinum ounce.
The protracted industrial action has also led to significant delays in project and development build-up profiles. The ramp-up to normal production rates will take approximately four months to achieve, which will result in reduced projected volumes and current indications are that production at Impala will be approximately 575 000 ounces of platinum in 2015. These factors, together with lower metal prices, will result in margins at Impala being under pressure in the short to medium term.
A comprehensive strategic planning exercise has been initiated to assess the full impact of low PGM prices and the strike consequences on the profitability at Impala. This is due for completion by December 2014.
ZIMPLATS
Ore milled increased by 26.8% to 5.9 (2013: 4.7) million tonnes due to the increased mining cut and the ramp-up of the Mupfuti Mine (Portal 3). Platinum in matte increased by 21% to 239 700 (2013: 198 100) ounces. Platinum unit costs in matte benefited from this increase, partly offset by US dollar inflation of 6.4% (2013: 6.2%), and decreased by 1.2% to US$1 291 (2013: US$1 307) per ounce. The weaker exchange rate impacted rand unit costs, which increased by 16% to R13 383 (2013: R11 524) per platinum ounce in matte.
A strategic decision was taken to refurbish the Base Metal Refinery (BMR) at Selous as an important first step in a multi-phased plan for local beneficiation. A prefeasibility study was initiated to establish cost estimates, which currently are estimated at approximately US$100 million. Project implementation started on 1 July 2014 and is estimated to take 24 months to complete.
Post-year end, in July 2014, a collapse within a section of the underground working area of the Bimha Mine was triggered by the accelerated deterioration of ground conditions associated with a major fault, the Mutambara Shear, which transgresses through the mining area. As a result of the proactive response from the Zimplats management team and the timely evacuation of all personnel, no injuries or damage of mobile equipment were reported.
By 20 August 2014, ground conditions had continued to deteriorate and as a consequence, it was decided to withdraw all employees across the rest of the mine. A team of Company and independent advisers has been appointed to conduct detailed investigations to reengineer and/or arrest the current mine stability concerns. Consequently, there is a possible production impact of up to 70 000 platinum ounces in 2015.
MARULA
Ore milled increased by 10.2% to 1.8 (2013: 1.6) million tonnes as additional mining crews were employed during the year. Platinum in concentrate increased by 9.5% to 78 500 (2013: 71 700) ounces in line with higher throughput. Marula’s costs per platinum ounce in concentrate, increased marginally by 1% mainly due to mining inflation of 7.3%, offset by increased production. The optimisation of the existing infrastructure over the past few years has provided a solid foundation to reach 86 000 ounces of platinum by 2015.
IMPALA REFINING SERVICES (IRS)
Third-party refining volumes declined by 48% as 174 800 less ounces were treated due to the termination of the auto-catalyst recycling contract and the suspension of deliveries from the Everest South, Crocodile River and Smokey Hills operations, which were placed on care and maintenance due to the prevailing market conditions. As a consequence, overall IRS platinum production (including mine-to-market operations offtakes) decreased by 12% to 767 000 (2013: 872 300) ounces.
Other mine-to-market operations
MIMOSA
Tonnes milled increased by 3% to 2.45 (2013: 2.38) million for the year and platinum in concentrate increased by 9.9% to 110 200 ounces. Mimosa’s unit costs decreased by 3.9% from US$1 782 per platinum ounce in concentrate to US$1 713 per platinum ounce in concentrate mainly due to the increased PGM production levels and cost reduction initiatives. In rand terms unit costs increased by 13% to R17 768 as a result of the weaker rand/dollar exchange rate.
TWO RIVERS
Tonnes milled were 3.4% higher at 3.3 (2013: 3.2) million for the year and platinum in concentrate increased by 8% to 175 100 (2013: 162 200) ounces. Costs per platinum ounce in concentrate were 2.1% lower at R11 433 (2013: R11 683) per ounce on the back of higher volumes.
Capital expenditure and progress on major capital projects
Capital expenditure for the year was significantly reduced as a result of the Impala Rustenburg strike and amounted to R4.4 (2013: R6.3) billion. Expenditure was primarily on the Impala 20 Shaft (R585 million) and 16 Shaft build-up projects (R782 million), the Impala 17 Shaft sinking project (R555 million) and the Phase 2 mine and concentrator plant expansion at Zimplats (R668 million).
The new shafts (at Impala) and portal complexes (at Zimplats) are essential to ensuring that the Group regains its competitive position and benefits from the long-term PGM market fundamentals. All the Impala capital projects will also be subject to the same replanning and stringent strategic review process that is intended for the operations and this will also be completed by December 2014.
The 20 Shaft project, which is scheduled to produce 1.7 million tonnes per annum, equivalent to 125 000 ounces of platinum, achieved 262 000 (2013: 352 000) ore tonnes in the seven-month period before the strike (17 000 platinum ounces). Build-up to full production has now been delayed from 2018 to 2019.
The 16 Shaft project was successfully and safely commissioned during June 2013 with development and stoping commencing in the period ahead of the strike. Planned production for 16 Shaft is 2.7 million tonnes per annum or 185 000 ounces of platinum. The shaft achieved 89 000 (2013: zero) ore tonnes in the seven-month period before the strike resulting in platinum production of 3 000 ounces. As a result of the strike, slower development to reef, bad ground conditions and difficulties in reef access development due to the Hex River fault, full production is only expected to be reached in 2020 as opposed to 2018.
17 Shaft is expected to produce 2.7 million tonnes per annum, equating to 180 000 ounces of platinum at full capacity. The project was affected by contractor performance challenges and was further slowed down during the year as a result of cash preservation measures relating to the strike. As a consequence, ore reserve development did not commence. First production from this shaft is now only expected in financial year 2020, which is one year later than previously planned. Ramp-up to full production is expected to take five years.
At Zimplats, the concentrator plant was successfully commissioned in April 2013 and mining rates improved throughout the year at the new Mupfuti portal (Portal 3). This new mine achieved 963 000 tonnes and 38 000 ounces of platinum for the year and is still expected to achieve full production of 2.0 million tonnes per annum and 90 000 ounces of platinum per annum in 2015.
Sinking at Afplats continued to progress well and the shaft depth at 30 June 2014 was at 1 022 metres. This sinking programme (phase 1 of the overall project) will continue to a shaft depth of 1 154 metres, which is the natural strategic decision point to convert to a mechanised layout. A bankable feasibility study is currently in progress on this option.
Mineral resources and mineral reserves
As at 30 June 2014, there has been no material change to the technical information or legal title relating to the Group’s mineral reserves and resources.
Zimbabwean Government engagement
Management continues to engage with the Government of Zimbabwe in respect of the indigenisation implementation plan, corporate taxation, royalty dispensation and the commitment to primary beneficiation within Zimbabwe. A commitment has been made to the government for a first stage refurbishment of the existing Selous-based base metals refinery to treat Zimplats material.
Prospects
Demand fundamentals remain strong for platinum, palladium and rhodium against the backdrop of both increased automotive sales and tightening emissions legislation. This, combined with constrained supply, should be positive for PGM prices in the future. In general, platinum, palladium and rhodium markets are expected to remain in fundamental deficit for the next three to five years.
Implats’ management, taking direction from the board, are intensely focused on the health and safety of employees across the Group. Efforts to reenergise and rebuild Impala, increase the volumes at Marula, as well as successfully mitigate the effect of the Mutambara shear at Zimplats are ongoing. Furthermore, Implats continues to invest in its replacement projects, which are essential to restore its production profile into the future. In the short term, a strategic review of Impala’s operations and projects to determine a new way forward is being undertaken.