Published on 20 August 2015
Sustained focus on costs in challenging markets
The company's results for the 2015 financial year were released on SENS this morning and posted to shareholders today, Thursday 20 August.
The main features of the year:
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Empowerment status secured
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Successful capital raising of R4.6 billion
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Acquisition of Everest signals strategic growth on track
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Satisfactory performance from operations
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Booysendal ramp-up on track
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Depressed market fundamentals persist
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Three-year wage deal signed (post year-end)
The R6.6 billion Black Economic Empowerment (BEE) equity transaction with Zambezi Platinum (RF) Limited (Zambezi Platinum), was the singlemost important development of the year. With its empowerment status now pegged at 35.4%, Northam was ideally placed to acquire the Everest mine assets and mineral reserves from Aquarius Platinum South Africa Proprietary Limited (AQPSA) during the year. This asset will be integrated into Northam's Booysendal South operation which has a large unmined resource.
Developing the Booysendal South property is expected to continue over the next five years.
However, commenting on the lacklustre markets, Northam chief executive Paul Dunne said today, "Dollar-denominated metal prices have progressively declined over the year, reflecting an oversupplied platinum market. The simultaneous weakening of the South African (SA) rand has not fully compensated for this decline.
"With the pressure on our revenue line from a declining basket price, our focus has been and continues to be on containing the unit costs of producing each platinum group metal ounce."
Financial overview
Main features of the income statement
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Sales revenues up 13.0% to R6.1 billion
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SA currency weakens to an average of R11.45/US dollar (F2014: R10.35/US dollar)
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Operating profit of R595.8 million
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Corporate transactions incur once-off expenditure amounting to R1 587 million
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Loss of R1 033.9 million (F2014: profit of R19.6 million), in line with guidance
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Loss per share of 264.3 cents (F2014: profit of 2.4 cents per share)
A 6.6% increase in PGM sales for the year at 422 630oz, combined with a weaker South African rand, contributed to the 13.0% rise in sales revenues to R6 035.5 million. Year on year, the rand was 10.6% weaker against the US dollar. The higher sales volumes are on the back of increased production volumes for the group (excluding purchased concentrates) which were up 15.1% to 378 070 oz.
Booysendal's new production, higher power and wage costs, combined to push operating costs up by 22.8% The increase in the cost of sales was only 3.1% however, and Northam's operating profit for the year was R595.8 million (F2014: R61.4 million), attributed to the solid operating performance of the group's underlying assets.
Sundry expenditure amounted to R1 587.3 million (F2014: R26.7 million) reflecting accounting charges and costs associated with the two major corporate deals undertaken in the current year. These expenses impacted negatively on the bottom line, resulting in the group reporting a loss of R1 033.9 million (F2014: profit of R19.6 million), and a loss per share of 264.3 cents (F2014: profit of 2.4 cents per share) reflecting the year's loss and the effect of the increase in the weighted average number of shares in issue of 391 834 708 shares (F2014: 390 969 652).
The cash balance of the group at year end was a healthy R4 138.2 million, most of which was received in May 2015, following a capital raising in conjunction with the BEE transaction.
Operations
Zondereinde
Turning to the operations, Dunne commented, "The Zondereinde mine is operating at steady state, and its performance during the year under review reflects this stability and our confidence in its sustainability." Despite the shaft incident early in the financial year, and the one-week work stoppage in January, Zondereinde's tonnages were 7.9% higher. The UG2 performance was good, as management works towards shifting the mining ratio at Zondereinde towards 65:35 UG2: Merensky. This has necessarily had an impact on the average head grade which declined marginally year on year to 4.9g/t (F2014: 5.0g/t).
Metals produced from underground increased by 8.4% to 255 595oz, while concentrates purchased grew by 18.4% to 75 168oz.
Challenging geology continues to put pressure on mining flexibility on the Merensky reef horizon. With modifications planned to the processing plant, the smelter will be in a position to accommodate the higher proportion of UG2 reef.
Construction of the decline section for the deepening project has progressed satisfactorily; an underground refrigeration plant was commissioned during the year which has considerably improved environmental conditions in the deepening section of the mine. The completion of infrastructure associated with the deepening project will provide access to good quality Merensky reef and increase the life of Zondereinde to more than 20 years.
Wage negotiations got underway in May 2015 and were successfully concluded after the year end when a three-year agreement was signed with the National Union of Mineworkers.
Northam has taken a cautious approach to capital spending. Certain non-essential expenditure was deferred resulting in total spend of R303.2 million at Zondereinde, including the deepening project.
Commenting on this cutback, Dunne said, "We cannot, however, defer capital projects indefinitely and we shall persist with projects that are of strategic importance to the business.
"This will include the construction of a new furnace, an upgrade to the UG2 concentrator and the development of mining infrastructure to 18 level to extend the life of the mine. The annual cost of this five-year deepening project is expected to run to R130 million and is included in Zondereinde's F2016 stay in business capital estimate of R303.0 million.
Processing and refining
The group's processing and refining capability is a strategic advantage. A decision has been made to increase the throughput of the UG2 concentrator from the current 90 000 tonnes per month. Testwork is currently in progress, the results of which will inform the final design parameters for the upgrade. This project is expected to cost R60 million.
The board has approved capital expenditure for the installation of an additional 20MW furnace as part of the smelter expansion and de-risking programme. To date, a sum of R10.0 million has been committed for design and drawing work for the new furnace. The additional capacity will add mining flexibility, allowing for higher volumes of UG2 ore to be mined and treated and will support the growth in production from Booysendal.
Earlier this year a new autoclave with sufficient capacity to match the potential throughput from the expanded smelter facility was installed and commissioned at the base metal removal plant at a cost of R31.0 million.
Booysendal
Booysendal continued the ramp-up to its annual steady-state PGMs production target of 160 000oz planned to be reached in the first half of F2016. For the year as a whole Booysendal's run-of-mine production totalled 1 670 437 tonnes (F2014: 1 233 089 tonnes) with the tonnage milled increasing to 1 786 375 tonnes (F2014: 1 517 109 tonnes) at a head grade of 2.6g/t (F2014: 2.6g/t). The concentrator performed well above its nameplate capacity in the last three months of the year, achieving an average recovery of 86%.
Underground the last two production sections are being equipped, thereby completing the original capital footprint. There have been significant advances in planning to exploit the Merensky reef, with bulk sampling work in progress. A decision to develop a Merensky mining module will be taken in the second half of F2016.
Conceptual design work on exploiting the Booysendal South orebody (including the former Everest mine infrastructure) will be progressed to a feasibility study. The decision to begin construction of new mining modules will be informed by market conditions and the potential return on investment. The feasibility is expected to cost R22.0 million and will be completed by May 2016.
With the progression towards steady-state levels, costs are approaching more realistic levels. Booysendal's total operating costs were R1 192.2 million against R806.8 million in F2014 with unit operating costs 0.9% lower at R358 554/kg (F2014: R361 902/kg) and cash costs 11.3% higher at R308 719/kg (F2014: R277 308/kg).
As Booysendal reaches its design capacity, capital expenditure levels have declined accordingly. Total capital expenditure since the start of the phase 1 Booysendal mine development is expected to close out at R4.5 billion.
Business Outlook
Prospects for PGMs in the short to medium term seem to remain subdued. Higher costs, mainly from labour and power inputs have eroded margins. However, Northam remains well placed to take advantage of opportunities that may arise from the current adverse economic conditions.
The recent three-year wage agreement with the recognised union at the Zondereinde mine provides stability going forward and allows management to focus on operational matters. On the eastern limb social unrest poses a risk to normal operations at Booysendal.
The group's financial performance depends largely on better metal prices, and a stable working environment. Management is confident that the group's strong balance sheet and prudent financial controls will provide support until such time that metal prices rise sustainably.