Description

Failure to deliver against production and cost targets can result from a variety of reasons, including, poor productivity, high absenteeism, safety stoppages, industrial action, difficult geological conditions as well as ineffective control of operational expenditure.

Impact

Poor operational delivery can lead to not achieving the Business Plan deliverables which includes a decline in profitability and cash generation, which in turn pose threats to our liquidity position and impacts profitability.

Mitigation

Critical measures implemented to address this exposure were:

?     Enhanced focus on improving operational attendance levels which included the root cause analysis and mitigation of absenteeism;

?     The rollout of operational performance bonuses at targeted operational levels. Rigorous performance monitoring against business plan targets (cost and production);

?     A more rigorous approvals framework (delegation of authority) was implemented;

?     Continued DMR engagement to address safety stoppages and increased operational focus to improve overall safety performance and culture;

?     Productivity improvement plans have been established to enhance current resource efficiency;

?     Operational oversight was improved through rigorous tracking of crew performance by the Business Support Office; and

?     As part of ensuring that potential operational bottlenecks are managed, the Theory of Constraints method was implemented across various operational areas.

?    

Change

This risk remains unchanged due to the ongoing impact of the Section 54 operational stoppages experienced as well as other operational challenges experienced. The downside risk was however offset to some extent through the excellent Processing performance during the year.

2          PRICE AND MARKET VOLATILITY

Description

Commodity price and currency volatility exacerbates the uncertainties in managing a mining business. This is especially because mining requires long planning horizons to plan new mines and make decisions regarding the expansion and contraction of existing operations. These decisions often need to be made based on assumptions regarding future metal prices (which drive revenue) and exchange rates (in our case primarily the USD/Rand exchange rate as the majority of our cost and capital expenditure are incurred in South African Rand). When these cash flows are less than anticipated, it can have a significant negative financial impact on the business.

Impact

The uncertainty related to metal price and exchange rate assumptions used in long-term planning can lead to incorrect planning decisions and have negative financial consequences. In addition, volatile metal prices may also affect the decisions made by our customers and may result in them considering substituting our products with other alternatives.

Mitigation

Measures implemented to address exposure:

?     Quarterly review of supply and demand dynamics of key products and the factors that could affect metal price volatility and forecasting processes;

?     Longer term volume contracts with key customers to mitigate off-take risk;

?     Weekly short-term cash flow forecasts to manage liquidity and pro-actively flag negative cash flow impacts;

?     Monthly Price Risk Committee meetings, as well as consideration of forward selling and hedging strategies as and when appropriate;

?     The Company collects market information from a number of different sources to better understand the supply and demand dynamics of key products and the factors that could affect metal price volatility. This includes the participation in various local and international Platinum related forums and associations; This information serves as input to the forecasting processes;

?     A detailed cost response strategy has been implemented, including the responsible closure of Hossy shaft, resizing of concentrator capacity and all overheads;

?     In addition, the Company has embarked on developing an in-house market intelligence portal to assist in improving its ability to forecast prices; and

?     The Company is refocusing its market development strategy to focus on areas with maximum potential.

Change

Risk in this area remains unchanged from 2016 as metal and currency markets continue to remain volatile accompanied by the significant decline in the platinum price.This was more than offset by the weakening of the Rand.

3          EMPLOYEE AND UNION RELATIONS

Description

The industrial relations environment has stabilised over the last 12 months as evidenced by the improved dialogue between unions and Company management. Whilst the environment has remained stable, the potential for volatility remains, which could result in disruptions to operations and have a material adverse effect on the Company's financial position.

Impact

Various internal as well as external factors could influence the employee relations space and could lead to disruption of operations and breakdown of employer-union relations.

Mitigation

To ensure open and transparent dialogue, appropriate structures have been established to enable effective union engagement across all levels. These structures includes a Future Forum which enabled the consultation process for voluntary severance as well as the Section 189 process. A relationship building programme and charter to govern relations between unions and the Company have been established. As part of enhancing employee ownership, a Employee Profit Share Scheme has been established.

Change

The Industrial Relations environment has improved as the Company concluded a three-year wage agreement.

4          SAFETY PERFORMANCE

Description

Employee injuries and / or work stoppages due to Section 54's will impact the Company's ability to achieve production and financial targets.

Impact

Poor safety performance has a direct impact on the life of employees, contractors and their families and risks such as fall-of-ground, tramming, working at heights, scraping and rigging incidents, exposure to gases, fire, molten metal, electrocution and many other hazards have to be controlled to reduce and eliminate fatalities and injuries. A failure in safety processes could result in injury or loss of life, which would have tragic implications for employees, their families and the communities. It would also severely disrupt operations and could result in safety stoppages which have a direct impact on the people, cost and reputation. The failures in safety procedures may be caused by employees or poor management practices. DMR could also temporarily suspend part or all of the operations under the Mine Health and Safety Act (commonly referred to as a Section 54 stoppage) and this have an impact on the working rhythm, cost and production. This suspension could potentially result in Lonmin's Operating licence becoming under scrutiny by the regulator.

Mitigation

Safety awareness and training such as rollout of the Du Pont leadership programme, called the Lonmin Safety Leadership DNA programme. This programme develops individual's safety competencies, knowledge of the safety theory, how to apply it and practise safety management. Structured workplace coaching is also part of this programme which is conducted one-to-one to bridge individual competency gaps and to improve safety performance over time. Training has been delivered to executive and senior management, union health and safety structures and 16 'train the trainers' candidates. Safety Improvement Plans are being implemented with an enhanced focus on accident analysis and pro-active preventive measures. Visible Felt Leadership (VSL) is such a pro-active measure which has been accelerated during this year. VSL is senior management being visible in the operational areas confirming that safety is a core belief and showing passion to work safely. Safety audits are also conducted and include internal and external audits that measure the safety maturity of each operational business unit. Cross-site safety audits support learnings across the operations and the sharing of best practices.

Change

Collaboration between Lonmin, the regulator and unions have started to show results, as we have experienced a reduction in the duration and frequency of Section 54 stoppages and more localised application of the stoppages in the fourth quarter on the year.

5          COMMUNITY RELATIONS

Description

Mining is conducted in areas where communities are present and the communities have various expectations of the mines, such as employment opportunities, socio-infrastructure support and business opportunities. When these expectations are not met, it may result in conflict and unrest.

Impact

As many of our employees live locally, any disruptions within the communities can have a direct impact upon production. The failure to deliver social upliftment projects, triggering protests or violence and corporate reputational damage can result, if the relationship with these stakeholders is not managed effectively. Lonmin has acknowledged the important role of communities as a critical stakeholder and has implemented various engagement platforms and development initiatives to ensure appropriate upliftment. Procurement has become another focus area as communities view it as an opportunity to improve their livelihood through improved income. Lonmin has identified this need and has introduced procurement opportunities for communities.

Mitigation

The development of a revised stakeholder strategy with emphasis on continuous engagement at all levels and all communities (Bapo and non-Bapo communities) as well as involvement of the communities in the implementation of the SLP. Greater consultation with stakeholders which includes upliftment measures to be initiated. This approach has increased community ownership of both the challenges facing communities and the solutions provided as part of the SLP implementation plan.

As part of enhancing relations with communities, the Company has reviewed its engagement process and implemented a revised stakeholder management process. In order to improve governance and project execution of community related investments, a procurement framework with appropriate project management office capabilities have been established.

Other aspects of community investment included the establishment of a Cadette Training programme as part of the Company enhancing its potential future employment capacity. Formal engagement structures have also been established in the form of bilateral forums with Bapo, Madibeng and Rustenburg communities. The engagement meetings addresses employment, economic development, community infrastructure programmes and the SLP status. The transaction with Bapo Ba Mogale resulted in community trusts being entitled to a minimum of R5 million per annum and the provision of R1.65 billion worth of procurement contracts.

Change

Our relationships with local communities that surround our operations have improved tremendously since the 2014 transaction. However, the socioeconomic challenges that face the Bojanala district in which Lonmin resides, have put a lot of pressure on the community and its leadership to an extent that the gains seem to be eroded by the challenges. The procurement opportunities given to the Bapo community, particularly the visible bus service, have given hope to the communities that Lonmin is keeping its promises. The level of trust between the communities and Lonmin has improved significantly. Despite this, Lonmin strives for improvement with pressure from the regulator as well as access to opportunities through local procurement. Lonmin needs to develop and implement a clear strategy around this, to meet local and DMR expectations.

6          UTILITIES

Description

The higher than inflation tariff based increases in electricity and the Company's inability to reduce this cost any further, have impacted the operating costs of Company operations. A stable electricity environment, in terms of pricing is critical in ensuring its long-term sustainability. Water utilisation has also been challenging, both from an infrastructure point of view as well as availability. Capacity deterioration within local municipalities is also adding to this challenge. The establishment of informal settlements resulted in communities requesting water and electricity supply as a basic need and keeps adding to the burden of local municipalities and industries for service delivery.

Impact

Supply constraints in respect of energy or water could impact upon our ability to operate effectively and meet our production targets. Furthermore, cost increases in respect of these utilities impact our margins. Water availability is becoming a critical component of any business to survive and still remains a basic human need.

Mitigation

Ongoing implementation of the electricity conservation programme as well as water optimisation through demand management. An integrated water management plan for Lonmin has been developed with the goal to reduce Rand Water reliance as far as possible, within the operations, and to maximise the recovery and re-use of all other sources of water. Longer term plans to treat some streams of these alternative sources to potable level to make the business more independent of Rand Water. Explore further opportunity to supply communities out of such streams. As part of ensuring optimal electricity usage, Lonmin is a member of the Eskom energy intensive user groups, as well as conducts Monthly and Daily electricity consumption and reporting. Additional initiatives to ensure optimal usage is the Electricity conservation programme and loadshedding contractual agreements to manage supply side constraints. As part of ensuring appropriate continuity during an outage, the Company  has implemented risk based scenario planning based on available Eskom capacity. From a water optimisation perspective, the Company has implemented water conservation and demand management initiatives. The process as to how water is being monitored and managed is aligned with how power is being managed in the business.

Change

Current supply constraints and proposed tariff increases in respect of energy and water have a significant impact on the Company's ability to operate effectively and to meet our production targets. From an energy perspective the risk in this area remains unchanged due to aging power stations that could result in an increase in the amount of unplanned outages, however from a water perspective it has increased due to lower precipitation levels and ongoing impact of climate change.

7          CHANGES TO THE POLITICAL, LEGAL, SOCIAL AND ECONOMIC ENVIRONMENT

Description

The Company is subject to the risks associated with conducting business in South Africa, including but not limited to changes to the country's laws and policies regarding taxation, royalties, divestment, repatriation of capital and resource nationalism. The latter is a broad term that describes the situation where a government attempts to assert increased authority, control and ownership over the natural resources located in its jurisdiction.

The MPRDA Amendment Bill currently remains the subject of Parliamentary debate. In particular, beneficiation is a major consideration with the Bill proposing that the Minister be granted a discretion to declare certain minerals as strategic, that the Minister determine what percentage of strategic minerals are to be made available locally and the developmental price at which strategic minerals are to be sold, as well as the Minister being able to determine the conditions applicable to export permits. In addition, the Davis Commission is currently looking at the tax regime with a view to determining whether additional taxes including a carbon tax should be imposed on mining companies. The mining industry is also awaiting clarity of the interpretation of the applicability of the "Once Empowered Always Empowered (OEAE)" principle. Currently engagements on not only the OEAE principle, but the new Mining Charter are taking place. The DMR has also recently come under pressure to demonstrate that it is taking action to monitor compliance with undertakings made in the SLP's submitted by mining companies. This has led to the DMR issuing s93 Notices to mining companies on a more regular basis. Lonmin has received s93 notices in respect of its Housing and Living Conditions obligations and continues to engage with the DMR to reach a constructive solution. In addition, the Department of Trade and Industry is attempting to legislate a policy of creating black industrialists.

Impact

The ongoing debates in respect of resource nationalism have created policy uncertainty and this has inevitably led to a decline in investor appetite for South African investment risk. If some of the issues under consideration are implemented, this could have a material adverse effect on the Group's future. For example, profits could be negatively impacted by the imposition of additional taxes and revenue could be impacted by the sale of metals at discounted developmental prices. The obligation to sell locally could impact long-term supply agreements with our customers and give rise to concerns about security of supply from South Africa, potentially expediting the growth of the recycling industry and increasing substitution concerns.

Mitigation

Lonmin participation in the Chamber of Mines process to engage the DMR with regards to concerns regarding the revised Mining Charter, as well as broad engagement with government regarding this exposure. Appropriate governance structures in the form of Executive and Board Committees are being established to ensure ongoing reporting of progress against agreed SLP targets. Bilateral and industry level discussions with the DMR and other government agencies are ongoing. Lonmin and other mining companies are continuing to engage with the South African government and the broader community in order to raise awareness of the risks associated with resource nationalism.

Change

The risk in this area has increased due to uncertainty regarding certain policy decisions i.e. BEE requirements and strategic minerals. Other factors include the impact of political party actions, as well as the lack of clarity in terms of our social licence to operate.

8          LACK OF GEOGRAPHICAL AND PRODUCT DIVERSIFICATION

Description

Lonmin's principal operating subsidiaries are concentrated in one geographical location, which increases the level of risk of localised disruptions having an impact on the majority of our operations. In addition, Lonmin is a PGM producer and does not have exposure to other commodities or sectors.

Impact

Local events in the vicinity of Marikana have the potential to disrupt Lonmin's operations in this area, which represent all of the Company's operating mines as well as the majority of our processing operations. Such a disruption could significantly impact the Group's operating and financial performance.

The Group is also a focused PGM producer and is not exposed to other commodities. In times when the PGM market is depressed the Company's financial performance is likely to be negatively impacted as it does not have exposure to alternative commodities that may have a different economic cycle and offset this PGM pricing weakness.

Mitigation Plans

The Company continues to review its portfolio of projects, which includes Limpopo and Akanani. These projects are located in other parts of South Africa and if developed would provide some degree of geographic diversification. Other opportunities that could mitigate the risk arising from lack of geographical and product diversification are also reviewed from time to time.

Change

The risk remain unchanged due to concentration risk of Marikana Operations.

9          LOSS OF CRITICAL SKILLS

Description               

Due to the depressed mining sector, the risk of the loss of critical skills remains high. Uncertainties related to a Company's financing and sustainability following the recapitalisation of the business earlier this year contributed to employees looking for new opportunities.

Impact

The loss of critical skills could negatively impact safety, production and the ability to deliver against targets. In order to retain our skilled labour, we continuously review market related remuneration packages as compared to the incentive and retention schemes offered by Lonmin. This continuous monitoring of remuneration practices and matching the packages offered by our peers in order to attract and retain employees of a suitable calibre can result in increased costs.

Mitigation

Implementation of a scheme to retain key critical skills. Ongoing review and analysis of our remuneration practices in order to ensure that we remain competitive and are able to attract and retain the skills required during this challenging time. We also use counter-offers selectively in order to retain the most critical employees. The implementation of an employee value proposition which focuses on employee wellbeing. 

As part of ensuring the development and retention of critical skills Individual Development Plans, succession planning and retention strategies for scarce skills have been established. Ongoing monitoring of remuneration practices which matches Lonmin peers are monitored in an ongoing manner. Graduate development, mentorship programmes and internship programmes have also been established to ensure development of existing and future human resources capacity.

Change

The risk remains high despite a general high number of job losses in the mining sector. One is not always able to replace critical skills who understand the business and the environment with resources available in the market and therefore it remains a key risk to the organisation.