Commentary

SUMMARISED CONSOLIDATED ANNUAL RESULTS FOR THE YEAR ENDED 30 JUNE 2017

Introduction

Implats’ focus during the 2017 financial year has remained firmly on the continued implementation of its strategic response plan to succeed in a low-price environment. Our view is that the current metal price environment could conceivably stay lower for even longer and could be viewed as ‘the new normal’.

The plan encapsulates overall cost optimisation, reprioritising and rescheduling capital expenditure, productivity improvements at Impala Rustenburg, strengthening the Group balance sheet, implementing the Impala Lease Area strategy and retaining its social licence to operate in an ethical manner. While this plan is advancing, further considerable change initiatives are needed to ultimately ensure the sustainability and profitability of the Group.

There has been good progress in some areas with excellent operational performances from many operations. Group platinum production reached 1.53 million platinum ounces for the year (2016: 1.44 million). Sub-optimal performances were delivered by Impala, Rustenburg and Marula, while all other operations performed at or above expectation, supplemented by a 35% increase in tolling throughput at Impala Refinery Services (IRS).

While Impala produced 654 600 ounces of platinum for the year (as guided at the half year), it nonetheless incurred a headline loss after tax of R2.68 billion. This was largely a result of sustained low rand basket prices, a cost base that is structured for a higher level of production and persistently low operational efficiencies. It is clear that we cannot accept it being business as usual for Impala. A comprehensive strategic review of this operation is planned to ensure that it will operate at a cash neutral level in what is perceived to be the new normal pricing environment. The review will be focused on returning the mine to profitability by prioritising profitability and value, over volume.

Similarly, Marula made a headline loss after tax of R737 million. This was largely due to disruptions to its operations by surrounding communities. A comprehensive stakeholder engagement process has been initiated to mitigate against further disruptions and, in addition, the mine undertook a section 189 retrenchment process to restructure its cost base. The target for Marula to be at least cash positive at Group level in 2018 has been set, and will be strictly monitored each quarter throughout the coming year.

Safety and sustainability

While there has been Group-wide progress in terms of its safety performance, it is with deep sadness and regret that Implats reports nine work-related fatalities during the year. Safe production is vital to Implats’ sustainability. Human behaviour continues to contribute to many safety incidents and the emphasis is on ensuring effective leadership, responsible behaviour, and driving a culture of personal accountability and interdependence.

During the year, Zimplats completed a consecutive 365 days without a single lost-time injury – a safety milestone well worth highlighting. Several other operations also reached significant safety achievements during the year.

The LTIFR improved 8.8% from the previous year to 5.92 per million man-hours worked (including contractors) compared to 6.49 per million man-hours last year.

The Group recognises that its ability to enhance delivery and sustain Group-wide operational efficiencies depends on the skills, safety, well-being and motivation of employees. Pleasing progress has been made in enhancing the relationships with unions, communities and other key stakeholders.

Implats continued to deliver against commitments in terms of the Group’s social and labour plans (SLPs) at its South African operations, and targeted corporate social investments in Zimbabwe. Phase 2 of the Platinum Village, a home ownership project in Rustenburg, is almost complete and 321 houses have been built this year, taking the total units to 849 at this complex. There is strong ongoing demand for these houses and approval for phase 3 is being motivated.

Year in review

Group headline earnings per share decreased from 12 cents per share to a loss of 137 cents per share.

Revenue was assisted by a marginally improved rand basket and rose to R36.8 billion from R35.9 billion. Overall, production from the Group’s operations increased year-on-year, but this benefit was more than offset by planned higher levels of refined stock at year end.

Increases in Group unit costs, year-on-year, were contained at 4.4% and cost of sales increased by 4.0%. However, revenue only increased by 2.5% as all production was not sold. This combination, largely resulted in the decline in gross profit from R4 million to a loss of R529 million.

In 2007, Impala prepaid the estimated contractual Royal Bafokeng royalty and the Royal Bafokeng used this prepayment to subscribe for shares in Implats. The prepayment was raised on the balance sheet and is amortised annually based on units of production. Our current view of the estimated value of what would have been the royalty payments has changed materially since 2007 given unexpected persistently low metal prices and depressed levels of production. A decision was therefore taken by management to impair the full amount of R10.2 billion, which after deferred tax amounts to R7.3 billion.

The income tax credit for the current year includes deferred tax of R2.8 billion on the impairment of the prepayment. This is excluded from the headline earnings. Current tax (on headline earnings) increased compared to 2016 as a result of a non-recurring tax credit on a bad debt in 2016 and an increase in additional profits tax for Zimplats in the current year.

The Group’s mine-to-market output was 1.28 (2016: 1.25) million platinum ounces. Lower deliveries from Marula and Two Rivers were offset by higher volumes from Impala and Zimplats. Third-party platinum production increased by 35% to 246 700 ounces. Consequently, gross refined platinum production increased by 6.4% to 1.53 million ounces.

The cash preservation programme has continued. Capital expenditure of R3.43 billion was maintained at similar levels to the previous year (2016: R3.56 billion). Over the last year, R1.14 billion was spent on the two development shafts, 16 and 20, at Impala Rustenburg. In other areas, additional capital was deferred as a response to the ongoing low-price environment. Cost containment has also been successful with the Group recording cost savings in excess of R1 billion over the last two years.

Importantly, Implats has further strengthened its balance sheet through the conclusion of the R6.5 billion new convertible bond issue, which was raised mainly to early refinance the 2018 convertible bonds of R4.5 billion. At 30 June 2017, R300 million and US$29 million of the 2018 convertible bonds remain unredeemed and will be settled on maturity in February 2018.

Cash generated from operations reduced to R1.0 (2016: R2.7) billion mainly as a result of the operating challenges at Impala Rustenburg. At year end, the Group had gross cash of R7.8 (2016: R6.8) billion on hand and R4 billion in unutilised bank debt facilities, which remain available until 2021.

Impala Rustenburg: Impala Rustenburg was impacted by two extraordinary events that reduced output during the year. The first event was the fire at 14 Shaft in January 2016, resulting in the temporary closure of the decline section at this shaft to effect repairs. The second event was the collapse of ground incident at 1 Shaft in May 2016, resulting in the introduction of reduced UG2 panel lengths in certain areas. The required work at both the shafts has progressed well. The rehabilitation work at the 14 Shaft decline was completed ahead of schedule in April 2017. Production from 1 Shaft will be back at steady state from July 2017.

During the first half of the financial year, the Impala Rustenburg operations were significantly impacted by section 54 safety stoppages. Following close engagement between management, employees and government authorities, there has been a notable reduction in all stoppages, including section 54 stoppages. It is hoped that the relentless pursuit of compliance with safety policies will result in further reductions in section 54s and internal stoppages.

During May 2015, Implats raised R3.9 billion in equity for the purpose of completing construction of the new 16 and 20 Shafts in order for those shafts to ramp up to steady state production. At the end of June 2017, R2.4 billion of the money raised had been spent, leaving a balance of R1.5 billion.

At 30 June 2017, the work anticipated at the time of raising the money was 98% complete for 16 Shaft and 92% for 20 Shaft. Both projects have been thoroughly reviewed to determine their ability to deliver 310 000 platinum ounces sustainably. The tonnage and grade expectations from the mine layout have been reaffirmed, but logistic studies have revealed that additional ore and men/material capacity will be required at full production. At both the shafts it also became necessary to line ore passes that experience excessive scaling. At 16 Shaft, the third phase of the refrigeration requirements has now been added to the scope to complete the project as it will now be required in the medium term. Collectively, a total of R2.2 billion remains to be spent on these projects over the next five years. Given the R1.5 billion remaining from the equity raise, there is a shortfall of R700 million to complete the projects. The inclusion of these items above have now reduced the project completion percentages to 86% and 88% for 16 and 20 shafts, respectively.

An Impala Rustenburg mining optimisation project was initiated in January 2017, one of several initiatives being implemented to ensure that Impala returns to profitability. A priority target of returning Impala to a cash neutral position by 2019 has now been set assuming the current low platinum price environment remains as is. This incorporates an assessment of each shaft and production area and will result in a mining complex that is likely to be somewhat different to the large and intricate operation that is known today. This may lead to the disposal or suspensions or harvesting of marginal and loss-making shafts. Such decisions, will be made in the best interests of all stakeholders, the sustainability of the Group and with restoration of shareholders’ returns.

Impala’s leadership has been strengthened and realigned to ensure that a fit for purpose team is in place to drive performance, to increase production volumes, and improve efficiencies and productivity.

Marula: Mining activities at Marula were severely disrupted by community protest action resulting in the operation producing only 67 900 (2016: 77 700) ounces of platinum in concentrate. Community members are dissatisfied with the way their 50% interest in the Makgomo Chrome project is being managed by the community’s appointed leaders, leading to the suspension of all chrome operations from February 2017 to date.

Prior to the end of the financial year, an organisational restructuring was successfully completed to better position the mine for future profitability in the prevailing low-price environment. Overall staff complement has reduced by some 980 people, including retrenchments of 268 own employees through a section 189 process through the closure of the unprofitable hybrid section at Clapham. Operations are now focused on the low cost footwall section at Clapham. Production levels have improved over recent months and the focus is on retaining this momentum.

While ongoing engagement with all stakeholders to address community concerns and external disruptions show progress, it is imperative the operation become cash generative within the immediate short term. If Marula does not meet the stated objective of being cash neutral at Group level for whatever reason, there will be no other option but to suspend operations.

Zimplats: The redevelopment of Bimha Mine has progressed as planned and the mine is successfully ramping up to reach full production in April 2018. By utilising additional material mined from the temporary opencast section, platinum production was maintained at 281 100 ounces in matte for the year. The development of the US$264 million Mupani Mine (Portal 6) was approved in November 2016 and the new underground mining complex, with a design capacity of 2.2 million tonnes per annum, is targeted to reach full production in 2025. Mupani, a replacement portal for the Rukodzi and Ngwarati Mines, will sustain the mining operation well into the future.

The focus is now on generating cash for the Group and to this end a dividend policy of 3.5 time headline earnings has been approved by the Zimplats board.

Mimosa: Regrettably, Mimosa incurred one fatality during the year. Operations were sustained through the low-price environment to record another exceptional year. The operation produced a record, 121 600 ounces of platinum in concentrate, its highest production level ever. The feasibility study for the construction of a smelter at Mimosa has been completed, to align with the Zimbabwean Government’s beneficiation ambitions, but which is unaffordable in the new normal pricing environment. Mimosa is continuing to consult government with regard to the proposed implementation of a 15% export levy on unbeneficiated platinum, which has been deferred to 1 January 2018. It has been communicated that neither the smelter nor the export levy is affordable and could result in mine closure.

Two Rivers: Two Rivers posted another outstanding year in terms of safety and production. This operation has been fatality free for more than five years and produced 181 900 ounces of platinum in concentrate. Two Rivers is Implats’ lowest-cost producer and has now secured optionality to maintain and potentially increase its production levels through access to the Tamboti mineral rights. When these rights are transferred into Two Rivers, Implats’ interest in Two Rivers will decrease from 49% to 46%.

IRS: IRS remains an important Group asset. Over the last year, the unit delivered platinum production of 875 200 (2016: 811 500) ounces from a combination of mine-to-market operations, third-party purchases, and toll volumes. One of the major opportunities for the Group is IRS’s access to spare smelting and refining capacity from Impala to ensure the processing of planned production from other operations and contracted third-party material, as well as additional material from new customers.

Market review

Overall demand for PGMs from major demand sectors remained stable during 2016 and into the first half of 2017. Demand for platinum was supported by a combination of rising vehicle sales and higher loadings in Western Europe, as well as increased industrial requirements in both North America and China. Palladium demand remained healthy on the back of increasing vehicle sales in China and the US. Increased demand from the automotive and chemical industries underpinned rhodium.

On the other hand, the primary supply of PGMs remained constrained, while secondary supply was muted, recovering only in the last months of the 2016 calendar year on the back of higher steel and palladium/rhodium prices. The secondary supply of platinum, however, experienced an unusual hike as Chinese jewellery stocks were recycled.

The supply environment remains under continued risk largely due to a lack of capital investment. The low rand prices continue to place unprofitable shafts at risk, along with challenges related to safety incidents and associated operational stoppages, as well as increasing production costs.

Market performance

The platinum and palladium markets remained in fundamental deficit for most of the year, and there was a small surplus in the rhodium market. The platinum price ended this financial year 11% lower at US$922 per ounce, compared to the start of the financial year (US$1 033 per ounce). The average price for the year was 4% higher at US$988 per ounce, compared to the previous financial year.

Platinum price movements during the year continued to show a disconnect to market fundamentals, which made platinum pricing susceptible to investor sentiment around global risk. Additionally, anti-diesel sentiment in Europe/India and the fall in Chinese jewellery demand continue to weigh on platinum prices.

Negative sentiment towards the internal combustion engine, and diesel in particular, has increased over the last 12 months. Much is being made of battery electric vehicles as the solution to effective carbon dioxide and NOx reduction. However, to be truly effective, these will require a significant increase in renewable energy generation, which is potentially decades away. It is interesting to note that the reduction in diesel vehicle share in the Western European market has been offset by an increase in sales of gasoline vehicles, not battery. Growth in the electric vehicle space has been via hybrid vehicle sales, which do provide a more immediate answer to emissions reductions. Given the introduction of Real Driving Emissions (RDE) testing, these will require higher loadings of PGM’s to negotiate the more frequent ‘stop-start’ conditions.

In contrast, palladium prices were 42% higher at US$841 per ounce, compared to the start of the financial year (US$593 per ounce). Palladium prices reached a high of US$900 per ounce during June 2017, while the average price for the year was US$737 per ounce. Support for palladium was driven by robust demand from autocatalyst fabricators, positive sentiment towards the automobile sector and expectations of further palladium price gains.

Rhodium performed exceptionally well, showing the largest rally in the PGM basket for the year. Rhodium prices closed the financial year 60% higher at US$1 018 per ounce after opening at US$638 per ounce. The average price for the year was US$803 per ounce, largely on the back of the absence of liquidity and the increasing demand from both the automotive and industrial sectors.

The gradual recovery of the global economy, with the anticipated revival in industrial production and consumer demand, is expected to be the biggest driver of increased PGM demand in the medium to long-term. The platinum and palladium markets are expected to remain in a fundamental deficit in 2017, while rhodium is expected to remain in a small surplus.

Implats expects a slight decline in the use of platinum in the automotive industry in 2017, in favour of palladium and driven by an increasing share of gasoline vehicle sales. However, with increasing palladium prices, it is forecast that research into the back substitution of platinum in three-way catalysts will result in increased usage of platinum in gasoline engines in the coming years.

Current environment

The mining industry in both South Africa and Zimbabwe, the two jurisdictions where the Group operates, is characterised by rapidly increasing uncertainty. This is evidenced by the gazetting and then suspension of the new Mining Charter in South Africa and increased calls for beneficiation as well as a potential 15% export levy on unbeneficiated platinum in Zimbabwe. Community activism continues to escalate and poses a material risk to sustainable mining operations. These are risks that require considerable attention at executive level. To supplement the Group’s existing executive capability, action has been taken to develop strength in and across the leadership team.

Internally, progress has been made over the last two years to ensure cost saving and optimisation throughout the Group, while advancing commitments related to our social licence to operate, which continue to benefit Implats’ wide-ranging group of stakeholders. Increased organisational effectiveness is, however, required to improve the delivery of cost effective ounces. Senior leadership changes have been made and will continue across the Group with the primary objective being improved role clarity and accountability. Systems are being introduced to improve interdivisional relationships so that these are more collaborative and value adding.

Mineral Resources and Mineral Reserves

There is no material change in Implats’ total attributable Mineral Resource estimate at 30 June 2017, which reduced by 2.4 million ounces of platinum to 191.6 million from that reported previously in June 2016. This can mainly be ascribed to mining depletion. The grouping of platinum ounces per reef shows that the Zimplats Mineral Resource makes up 49% of the total Implats inventory.

Overall the total attributable Group Mineral Reserve estimate did not change significantly and increased by 0.8 million ounces of platinum to 22.4 million as at 30 June 2017 compared to 21.6 million platinum ounces in the previous financial year. Some 54% of the total attributable Mineral Reserves are located at Impala and a further 33% is hosted within the Main Sulphide Zone at Zimplats.

Prospects and outlook

One of the core pillars of Implats’ strategy has been to strengthen the balance sheet and this has necessitated an enhanced focus on capital allocation and cash management. This is continuing as a focused priority. Implats has one of the best-in-sector balance sheets and this strength is, and will be, a critical element of its ambition to develop strategic optionality. The enforcement of strict capital allocation will be equally important as management re-examines the Impala Rustenburg’s lease investment case.

It is imperative to continue developing the Group’s strategic agility. Market dynamics are being re-examined, specifically long-term price forecasts, and an assessment aimed at enhancing strategic optionality is also being completed, within and beyond the current portfolio. The assessment is reviewing all operations and will result in the elimination of loss-making production, while interrogating future dependence on high-cost, deep, conventional mining operations. Implats is intent on securing assets that provide optionality for cheaper, shallower and mechanised resources.

The Group has made some progress in delivering its strategic response to the current price environment. The operational strategy and planning is directed toward the expectation of ongoing price constraints and all operations are being adapted to this reality. Implats remains committed to the strategic nature and future fundamentals of the PGM market. While short-term volatility in the demand and pricing of these rare and unique metals is recognised, they remain critical to the ever growing needs and requirements of a global economy, with increasing demands for cleaner air.

Given our view that current PGM prices may be the new normal, the board has decided to maintain 17 Shaft on care and maintenance until there is more confidence in a rising metal price environment.

The transition to a more concentrated, low cost operation at Impala Rustenburg continues. However, a slower build-up at 16 and 20 Shafts, lower production levels at the mature shafts and the earlier closure of the end-of-life shafts will impact on the production profile over the next five years. It is now expected that 750 000 ounces of platinum will be achieved in 2022. This may be further affected by the strategic review being conducted.

A tremendous amount of excellent work has been done to facilitate acceptance within the Group’s host communities and to secure relationships with government and other authorities. This will remain a key focus area as commitments to responsible environmental stewardship and the wellbeing of employees are unwavering.

For the next financial year, production estimates are as follows:

  • Rustenburg – between 680 000 and 720 000 ounces
  • Marula – 85 000 platinum ounces in concentrate
  • Zimplats – 260 000 platinum ounces in matte
  • Two Rivers – 175 000 platinum ounces in concentrate
  • Mimosa – 115 000 – 120 000 platinum ounces in concentrate.

The Group’s operating cost is expected to be less than R23 100 per platinum ounce for the next financial year.