Lonmin's platinum production at Marikana drops

Cape Town - The unit costs of platinum production will remain under pressure for the foreseeable future until there's a sustained improvement in production throughput from mining, said platinum mining company Lonmin [JSE:LON] on Thursday in a notice to shareholders. 

"We remain vigilant in containing our costs and continue to work to reduce our operating costs in order to preserve the achievement of our unit cost guidance in the range of R10 800 to R11 300 per PGM ounce for the full financial year," Lonmin said in the notice.

Mining output at Lonmin's Marikana mine was 2.3 million tonnes for the fourth quarter of 2016 to 31 December 2016. The production at Marikana was 7.8% lower than output in the comparative period in 2015, partly due to a the closing of some of Lonmin's high-cost shafts. 

 READ: Lonmin signals rising costs as safety stoppages hurt production  

"While the first quarter of our financial year is historically our lowest producing quarter, the mining performance was disappointing with production at our Generation 2 shafts down 5.2% from the prior year period," the company said in its notice.

The implementation of initiatives to improve productivity is also taking longer than planned, particularly in respect to improving absenteeism.

Mining production from Lonmin's Generation 2 shafts totalled 1.8 million tonnes, representing a 5.2% decrease compared to the last quarter in 2015. The company ascribed the lower production to Shaft K3's 13.8% decrease in output in comparison with the prior year. 

"This shaft was most impacted by the reorganisation from 2016 and during the quarter experienced high management induced safety stoppages resulting in 60 000 tonnes of lost production," Lonmin said in the notice.

"Overall, the relationship between operational management and unions at this shaft is not working as effectively as we expected and the yielding of results from the implementation of business improvement initiatives at this shaft is taking longer than we would have liked to see.

"As a result, we are deploying additional stoping and vamping crews to the shaft to take advantage of the immediately available ore reserves and improve production. This may have an adverse impact on the shaft head cost per tonne which we would seek to mitigate by further reducing our overhead costs."

Production losses

Lonmin said it is encouraged that the number and duration of Section 54 stoppages has continued to improve, as experienced during the final quarter of 2016.

This resulted in a 71% improvement in lost production due to Section 54 safety stoppages of 139 000 tonnes. This was partially offset by an increase in management induced safety stoppages which illustrate our non-negotiable stance on safety.

Update on business improvement initiatives

Lonmin said it will continue to implement the initiatives announced at the time of the release of its full year results in 2016, aimed at improving productivity.  

These include:  

- Establishing a labour skills buffer: following a successful trial of the labour skills buffer concept during the first quarter of 2017, a decision has been made to introduce labour buffers to all high producing half levels on Generation 2 shafts during the second quarter.

- Addressing employee absenteeism: this project continues with dedicated teams assigned to each operation to analyse absenteeism trends and to ensure that appropriate action is taken to address the behaviour of employees who repeatedly absent themselves from work.

- Introducing a programme aimed at the empowerment of frontline supervisors: The roll out of the programme will start at the beginning of February at the K3 and Saffy shafts.

Unit costs

The distorting impact of the holidays in December typically results in unit costs peaking in the first quarter of the financial year. An additional public holiday declared in December by the President of The Republic of South Africa extended the Christmas breakperiod in the quarter and impacted production and costs.

READ: Platinum wage deal a boon for SA 

Unit costs of R12.296 per PGM ounce were 12.3% higher on the prior year period, in part reflecting the increase in labour costs as set in the multi-year agreement, signed at the end of October 2016, but also reflecting the weak mining performance. 

Balance sheet and liquidity

Lonmin is highly geared to PGM prices and at current levels, would not be cash neutral. We continue to proactively manage our cashflows and balance sheet through initiatives such as seeking ways of containing our capital spend.

Net cash at 31 December 2016 was $49 million, after working capital and capital expenditure investment of $106 million during the quarter.

The working capital impact is typically greater in the first quarter of our financial year due to the December holidays and the nature of the company's sales profile, which is weighted towards the second half of our financial year. Total liquidity at 31 December 2016 was $414 million.

Lonmin's share price was 13.82% lower at R25.94 at 11:55 on Thursday.