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Johannesburg - Lonmin [JSE:LON] will continue to use the operational and capital expenditure levers within its control to reduce costs and preserve cash to navigate the effects of a low platinum group metals (PGM) price environment, according to CEO Ben Magara.
The company, the world's third largest primary platinum producer, announced on Monday that its mining production was up 72% to 5.7 million tonnes for the interim period ending March 31 2015, compared to the strike impacted prior year period.
"Persistently low PGM prices and lower volumes sold due to smelter outages have resulted in much reduced revenue, partially offset by a weaker rand/US Dollar exchange rate," the company said.
"In order to protect the long term value of the business we have started the process of reorganising our business. We are aiming for a 10% saving in labour cost through voluntary separation packages and early retirements. This may result in a headcount reduction of around 3 500 people."
READ: Lonmin aims to cut 3 500 SA jobs
As a result of the review of its operating model, Lonmin has entered into a consultation process with stakeholders to reorganise the business.
"As well as driving ownership, empowerment and accountability, the objective of the resultant reorganisation of the business is to optimise efficiencies, reduce costs and improve profitability and cashflows at current metal prices," the company said in a statement.
"We have continued to make good progress in a tough PGM pricing environment. I am encouraged by our ongoing efforts to manage the controllables including the constructive dialogue through engagement with the unions to reduce costs including labour costs," said Magara.
"We are working well within our debt facilities and this position will improve further during the second half as stockpiles unwind. Lonmin's operations and capital expenditure are scalable."
The latest results reflect platinum sales of 265 940 ounces – up 0.9% on the prior year period.
By comparison, unit costs have risen 8.3% per annum since the first half of 2013. Labour increases of 12.9% and 8.8% in the last two years have, however, been offset by cost saving initiatives - R376m to date of the R600m target over three years. Rand unit costs were R10 516 per PGM ounce.
READ: Lonmin wields the axe as platinum price dips
Earnings and debt
There has been underlying earnings before interest, taxes, depreciation and amortisation (Ebitda) of $8m compared to $103m in the prior year period, which excluded strike related costs of $165m.
The smelter complex is now fully operational and there is a build-up of concentrate stock ahead of the smelters to be processed in the second half of the year.
The refined production of 262 303 platinum ounces was only 2.0% up on the prior year period due to the impact of furnace shutdowns during the first half of 2015.
The latest results show net debt of $282m, which the company said is due to disruption caused by the smelter shutdowns, but is well within available committed debt facilities of $563m.
Safety record
"Safety is our number one priority and we are encouraged to have been fatality free for 18 months," the company said in a statement.
Lonmin achieved ten million fatality free shifts on April 22 2015. It said this is a first for the South African platinum mining industry.
A safety improvement plan has been developed to curb the increase in injuries and potential accidents.
Market outlook
Although the long term fundamentals remain strong in Lonmin's view, it is planning on the basis that the low PGM prices will persist for at least two years.
Improving automotive demand of 3.7% growth in platinum is expected in 2015 and jewellery demand is expected to remain at 38% of total platinum demand as its growth is sustained.
Lonmin expects to incur costs of around R400m in the current year and subsequent ongoing annual value benefits of around R840m.
Since September 30 2014 labour numbers have reduced by 432 as at March 31 2015 and were 1 128 down compared to March 31 2014.
The company is in close consultation with our unions, including our majority union Amcu, over this issue.
"We are pleased with the cost savings achieved during this period. We will maintain our unit cost guidance of R10 800 per PGM ounce for the full year," said Lonmin.
"We are planning on the basis that the ongoing low dollar PGM prices persist for around two years and as a result we are again reducing our expected capital expenditure for 2015 from $185m to $160m."
The company expects to continue to limit its capital expenditure over the next two financial years to around $150m per annum while maintaining sales of around 750 000 platinum ounces per annum.
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