Commentary

Introduction

The Group’s performance in the first half of the 2015 financial year was impacted by the ramp-up of the Rustenburg operations following prolonged industrial action across the platinum industry in early 2014, suspension of operations at Bimha mine at Zimplats, as well as depressed platinum group metal (PGM) prices and industrial action at Marula. The ramp-up at Rustenburg progressed well, but was interrupted by four fatal accidents and subsequent work stoppage effects. Full production rates were achieved in November 2014.

While the underlying medium- to long-term demand drivers for PGMs remain robust, it is expected that excess metal inventories will continue to constrain prices over the medium term. Taking cognisance of this and of the impact of the strike on the profitability at Impala, a strategic review of the Group’s operations has been completed that will conserve cash in the short term but nonetheless position the business to deliver sustainable returns to all stakeholders.

Market review

(All references to years in this section refer to calendar years)
The South African platinum industry had a challenging year which was exacerbated by global economic pressures and constrained supply following the five-month platinum industry labour disruption. The strike reduced total South African platinum production by more than 700 000 ounces in 2014. Sluggish South African supply and healthy demand, driven mainly by the automotive sector, led to a fundamental deficit in excess of one million platinum ounces. This was offset by above-ground inventories, which disappointingly led to depressed platinum prices throughout 2014.

The automotive industry showed good growth in the US, China and Europe in 2014. Improving economic fundamentals in the US market supported passenger vehicle sales, which rose by 6% for the full year, the highest level since 2006. Despite slower economic growth in China, the market posted a healthy 10% growth in passenger vehicle sales. Similarly, even though the economy remains weak in Western Europe, growth in vehicle sales was 5% in 2014, the best progress in the past five years. There is no reason not to expect this trend to continue given the European Central Bank stimulation programme. Vehicle sales in Japan were disappointing after tax hikes in April. Nevertheless, the market was still able to achieve 3.5% growth in 2014, recording a third consecutive year of increases. Globally, passenger vehicle sales are expected to increase by 4% in 2015, to an estimated 90 million light-duty vehicles. This, together with stricter regulations pertaining to emissions and the recent declines in fuel prices, should be positive for platinum, palladium and rhodium demand in 2015.

Platinum jewellery market growth was flat in 2014, with demand in China remaining constant, but with lower growth in the US and Europe offset by strong growth in India. Chinese platinum demand, which is by far the largest consumer, is anticipated to remain largely unchanged over the next year.

The growth in demand of 155 000 ounces in platinum exchange traded funds (ETFs) was lower than last year’s strong performance as depressed prices impacted investment decisions. Future demand is expected to be driven by the World Platinum Investment Council (WPIC), which was launched during the period under review, and the International Platinum Association (IPA) promotional programme. While there were some liquidations on the mature palladium ETFs, the new South African funds more than offset these by accumulating in excess of 1.2 million ounces in 2014, resulting in the growth of global palladium ETFs in excess of 900 000 ounces.

Muted palladium supply growth from Russia and South Africa, combined with increased demand from the automotive sector and the new South African funds, drove palladium to a fundamental deficit in excess of 1.5 million ounces in 2014.

Safety review

Implats’ safety performance has improved significantly since the 2010 financial year. The fatal injury frequency rate has improved by 34% over this period, while the total injury frequency and the lost-time injury frequency rates improved by 22% and 25% respectively. Despite the overall improvement the Group deeply regrets to report that four employees and one contractor suffered fatal injuries in August and September 2014. The board of directors and the management team have extended their sincere and deepest sympathies to their families, friends and colleagues.

Following these tragic incidents all affected shaft and production units at Impala Rustenburg were stopped in September 2014 for an extended period while full investigations were completed. In addition, all mining operations were suspended for a period of four days as management actively consulted all key stakeholders, including employees, union leaders and representatives from the Department of Mineral Resources (DMR), in a collaborative effort to improve safety at this operation. Post these consultations, Impala Rustenburg amended its safety plan to include, among others, the implementation of a critical safe behaviours initiative. This programme culminated in a three-day safety summit which was attended by 600 safety representatives. This will remain an ongoing initiative.

The lost-time injury frequency rate (LTIFR) improved by 11% from the end of the previous financial year to 3.47 per million man hours worked, demonstrating the success of the various initiatives that have been undertaken to address employee safety. Currently, Impala Services has achieved 10 million fatality-free shifts: 12 Shaft achieved five million, Zimplats and Two Rivers two million, and 9 Shaft and 20 Shaft one million. In addition, Springs Refineries has achieved one year without a lost-time injury and 7 and E&F Shafts have achieved a similar status for six months.

The Group’s safety strategy is premised on the achievement of zero harm, and focuses on three key areas: cultural transformation supported by effective leadership and supervision, compliance with leading safety practices and, lastly, creating a working environment that supports safety. Team mobilisation has been identified as a key element in ensuring the safe behaviour of employees, with the objectives of enhancing trust, building commitment and accountability, and achieving collective results. As at the end of December 2014, 73 stoping teams (out of a total of 515) had participated in this intervention.

Operational review

Mine-to-market output decreased by 20.4% to 539 200 ounces of platinum from the previous comparable period, primarily due to lower production from Impala Rustenburg, Zimplats’ Bimha Mine and Marula. Third party production decreased by 16.3% to 91 400 ounces due to one-off material treated in the previous comparable period. Gross refined platinum production decreased by 19.8% to 630 600 ounces. Group unit costs were impacted by the lower volumes and increased by 40.7% to R22 952 per platinum ounce.

Managed operations

IMPALA PLATINUM

Impala met its stated production target for the first half of the 2015 financial year despite the interruptions caused by the four tragic, separate fatal incidents and the subsequent closure of the mining operation for four days in September 2014. The second restart progressed well and full production rates were achieved in November 2014.

Mill throughput decreased by 31.5% from the previous comparable period to 4.01 million tonnes, and refined platinum production declined by 35.2% to 252 400 ounces. Unit costs were severely impacted by the lower throughput given costs incurred during the ramp-up and increased to R26 430 per platinum ounce refined.

Capital expenditure was strictly controlled during the period, in line with the Group’s cash preservation strategy, and decreased by 26.6% from the previous comparable period to R1.50 billion with the bulk of this expenditure still being incurred on the development of the new shafts.

Reef access, development and stoping have resumed at 20 Shaft and an assessment is underway to open a mechanised section to further improve the work environment from a safety aspect and boost stoping throughput.

ZIMPLATS

Production was impacted by the precautionary closure of Bimha Mine following the underground collapse in August 2014. Six of the eight affected production fleets at Bimha were redeployed to offset potential production losses. Productivity from these teams has been impacted by the constrained availability of work areas; however, this redundancy issue is being addressed and is expected to improve. The ramp-up of production from Mupfuti Mine partially offset the lost production, resulting in tonnes milled decreasing by only 16.9% from the previous comparable period, to 2.48 million. Head grade was maintained at 3.47 grams per tonne and platinum in matte production decreased by 11.7% to 102 400 ounces.

Unit costs per platinum ounce in matte were affected by the lower volumes and increased by 11.8% to US$1 504. In rand terms, unit costs rose by 21.9% to R16 455 per platinum ounce in matte, which was impacted by the weaker rand/dollar exchange rate.

Detailed assessments to fully understand the nature and extent of the ground collapse and the structural geological settings at Bimha Mine have been advanced, and re-development of the mine was initiated in December 2014. Three new on-reef access haulages have been designed to isolate the existing workings and create new mining areas to the north and south of the mine. An extensive monitoring programme remains in place to continually assess the ground conditions.

In an effort to further ameliorate the impact of re-establishing Bimha Mine, contracted open-pit mining has been initiated to supplement the ore supply to the processing operations in order to fully utilise the available processing capacity. Contractor mobilisation is currently in progress and first production is expected in the third quarter of the 2015 financial year. In addition, the Phase 2 expansion (Mupfuti Mine) remains on track to achieve its expected steady-state capacity in the third quarter of the 2015 financial year.

Zimplats continues to engage with the Government of Zimbabwe with regard to the indigenisation implementation plan and the securing of a more conducive regulatory and fiscal framework for the mining industry in Zimbabwe.

MARULA

Marula has made steady progress in opening up ore reserves but continues to be impacted by safety and labour issues. Industrial action and safety stoppages affected efficiencies during the period and tonnes milled, at 829 000, were 10.9% lower than the previous comparable period. Head grade declined by 2.9% to 4.14 grams per tonne and platinum in concentrate production decreased by 10.6% to 37 000 ounces. Unit costs per platinum ounce increased by 21.0% to R22 000, negatively impacted by the lower volumes.

IMPALA REFINING SERVICES (IRS)

Refined platinum production at IRS from third-party contracts decreased by 16.3%, to 91 400 ounces, due to the once-off material treated in the previous comparable period. This impact was offset to some extent by the 30 000 ounces of platinum reduction in the pipeline. Overall, IRS platinum production (including mine-to-market operations offtakes) decreased by 4.7% to 378 200 ounces.

Non-managed operations

TWO RiVERS

Tonnes milled rose by 1.8% to 1.69 million. Head grade declined marginally to 3.97 grams per tonne due to some lower-grade stockpile material. Platinum in concentrate production decreased by 3.1% to 87 300 ounces, and unit costs rose by 10.6% to R12 165 per platinum ounce in concentrate.

Subsequent to the half-year end, transactions to transfer the mineral rights on the Kalkfontein, Buffelshoek and Tweefontein farms from Impala to Two Rivers, in return for an additional 4% stake in Two Rivers and a royalty agreement, have become unconditional. These transactions have increased the Group’s shareholding in Two Rivers to 49% and will enable Two Rivers to maintain production above 150 000 ounces of platinum in concentrate in the medium term.

MIMOSA

Mill throughput increased by 5.4% to 1.30 million tonnes, and platinum production in concentrate increased by 12.4% to 59 100 ounces from the previous comparable period. Unit costs per platinum ounce in concentrate benefited from the higher volumes and declined by 6.1% in dollar terms, to US$1 562, but increased marginally in rand terms, to R17 090. The Government of Zimbabwe imposed a 15% export levy on unbeneficiated platinum, effective 1 January 2015. The Government had stated that the export tax would be deferred until 1 January 2017; however, the recently promulgated 2015 Finance Bill does not provide for this. The imposition of this levy will have a material impact on the profitability of Mimosa.

Mineral resources and mineral reserves

There has been no material change to Implats’ combined attributable mineral resources and mineral reserves, or legal title to the mining and exploration activities, as disclosed in the integrated report for the financial year ended 30 June 2014.

The main features relating to Implats’ mineral resources and mineral reserves as at 31 December 2014, relative to 30 June 2014, are:

• Estimated total attributable mineral resources increased marginally by 0.5% (2Moz 4E) to 397Moz; the total attributable platinum ounces increased by 0.7% (1Moz Pt) to 213Moz
• The estimated total attributable mineral reserves decreased by 9% (4Moz 4E) to 46.1Moz; the total attributable platinum ounces decreased by 8% (2Moz Pt) to 26.5Moz. The decrease can be mainly ascribed to the reduction at Zimplats due to a revised mine design to address ground stability.

Financial performance

The financial performance of the Group for the six months to December 2014 was significantly impacted by the ramp-up at the Rustenburg operations following the prolonged industrial action and the temporary closure of the Bimha Mine at the Zimplats operations.

Revenues, at R15.9 billion, were R599 million or 3.6% lower than those achieved in the six months to December 2013, as a result of:

• A reduction in sales volumes of platinum, palladium and nickel due to lower Impala production, accounting for a negative variance of R2 billion
• The average dollar revenue per platinum ounce sold of US$2 333, was US$107 or 4.8% higher than the prior period and this had a positive impact but was mitigated by the lower volumes to increase revenue by a net R93 million
• The average R/US$ exchange rate achieved of 11.01 was 9.1% weaker than the 10.09 achieved during the prior comparative period leading to a positive variance of R1.3 billion.

Cost of sales decreased by R358 million (2.4%) compared to the prior comparable period as a result of:

• Direct operating costs decreasing by R440 million or 5% as R808 million was transferred to ‘other operating expenses’ as non-production costs during the ramp-up
• Depreciation decreased by R266 to R1.1 billion. The main contributor to this decrease was lower production for the period
• A change in share-based compensation of R478 million moving from a charge in December 2013 of R288 million to a credit of R190 million. This is mainly due to the closing share price of R78.78 per share at 31 December 2014 (versus R106.88 at 30 June 2014) versus the share price at 31 December 2013, which was R123.00 (R93.00 at June 2013) per share.

The above decreases were offset by metals purchased by IRS increasing by R536 million due to higher rand metal prices and a change in metal inventories of R336 million.

As a result of the above, gross profit declined by R241 million to R1 519 million.

Group unit costs increased by 40.7% from R16 310 per platinum ounce to R22 952 per ounce due to:

• Group inflation of 10.4% comprising:
  • mining inflation for the South African operations of 10.5% due to above-inflationary increases in utilities and wages
  • Zimplats inflation of 10.3% comprising dollar inflation of 1.1% compounded by a weaker rand
• The lower mine-to-market production volumes from Impala (build-up after strike), Zimplats (closure of Bimha) and Marula (strike and DMR stoppages) resulted in the balance of the of the 40.7% increase in unit costs.

Headline earnings decreased by R460 million or 53.5% to R400 million (66 cents per share). Additional to the movements described in gross profit and apart from R158 million for the partial asset write-down as a result of the Mutambara shear collapse at Bimha, which was added back for headline earnings, headline earnings was affected by the following:

• The transfer of R808 million from cost of sales to other income and expenses as mentioned above
• R200 million variance on net foreign exchange gains. The charge for the revaluation of the dollar bond was not offset (as in the prior period) by the revaluation of positive dollar balances.

The above negative impacts were partially offset by:

• A positive variance of R387 million resulting from the revaluation of the IRS creditors due to metal prices declining towards the end of the period
• Higher equity accounted earnings from associates in the amount of R101 million
• A reduced tax charge of R212 million due to lower taxable income.

Net cash from operating activities amounted to R160 million (December 2013: R1.9 billion). Cash utilised on capital expenditure amounted to R2.1 billion (December 2013: R2.7 billion) mainly on 20, 16 and 17 Shafts at Impala Rustenburg. Cash (net of overdraft) decreased from R4.3 billion at year end to R2.7 billion at December 2014. Net debt at 31 December 2014 amounted to R5.4 billion (June 2014: R3.5 billion).

Given the continued cash conservation strategy, the board has resolved not to declare an interim dividend for the six months to 31 December 2014.

Prospects

The fundamentals for PGMs remain robust, even though excess above-ground stocks continue to impact prices. The lack of capital investment by the platinum industry will curtail future supply from southern Africa and should, together with expected improving demand from recovering world economies, augur well for these metals. Deficit markets, forecast for the next three to five years, are expected to steadily erode the level of inventories, positively impacting prices in the medium- to long-term.

Implats remains strongly focused on increased operating efficiencies and profitability, and equally on the health and safety of employees across the Group. To further advance this, a new employee share ownership trust, which now owns 4% of Impala Platinum Limited, was implemented to substantially increase employees’ alignment with the future profitability of Impala. Efforts to mobilise teams, and optimise cash and capital expenditure will underpin sustainable earnings going forward. Cash preservation does not compromise the long-term positioning of the Impala operations within the Group to achieve 850 000 platinum ounces per annum by 2019 and to maintain this production profile if the market warrants it.

The current Eskom crisis is impacting on Implats’ South African operations. Eskom media briefings have indicated that the country will experience a constrained power system for at least the next two to three years. Implats is considered by Eskom to be a ‘Key Customer’ or ‘Energy Intensive User’ and Impala Rustenburg and the Springs Refinery are considered by Eskom as one business unit. Calls from Eskom to reduce load are therefore dealt with in Rustenburg, while the Refinery carries on with operations without additional load curtailment. Marula is considered by Eskom as a separate business unit. There is a signed load curtailment document (NRS 048-9) in place and when the Eskom power system becomes severely constrained, Impala Rustenburg is cautioned timeously to implement load curtailment as per the agreement. The critical period for Eskom has typically been between 13:00 and 22:00 daily, and this is the most likely period when load curtailment is required. Implats has a comprehensive electrical power control system in place and the electrical power usage profile has been adjusted to offset the national power grid requirements. The Group will continue to seek energy efficiency opportunities to reduce its dependence on Eskom.

A strategic review of the Group has been conducted and is the subject of a separate announcement on 26 February 2015.