Lonmin Regulatory News (LMI)

1 FAILURE TO COMPLETE TRANSACTION WITH SIBANYE-STILLWATER

Description

In light of the challenges facing Lonmin and the PGM industry, the Company's strategic response in 2015 was to right-size the business, cut costs, enhance working capital management and contain capital expenditure. These initiatives have proved effective resulting in the Company remaining net cash positive. Notwithstanding these improvements and the good performance achieved during 2018, notably from solid production, higher PGM basket prices and weaker USD/ZAR exchange rate, Lonmin still remains financially constrained. Further mitigating measures undertaken during 2018 led to refinancing the business in October 2018 by concluding the $200 million forward metal sale agreement; however this financial measure only provides relief during the short-term and regrettably does not provide an opportunity to avoid retrenchments and shaft closures. In spite of the effectiveness of the measures undertaken, the viability of Lonmin on a stand-alone basis is more vulnerable when compared to being part of a larger group. Consequently, failure to complete the Sibanye-Stillwater transaction will significantly impede Lonmin in funding the significant investment required in sustaining the business in the future. The outstanding conditions precedent to the Transaction is the approval by the shareholders of Lonmin and Sibanye-Stillwater and the UK courts sanctioning of the scheme of arrangement.

Impact

The potential impact of failure of the acquisition of the Group by Sibanye- Stillwater represents a threat to the Group's viability, in spite of the initiatives undertaken, including the refinancing arrangement. Consequently the pending approval by the shareholders of Lonmin and Sibanye- Stillwater in conjunction with the need for an alternative solution in mitigating the adverse longer term challenges faced by the Lonmin Group if the transaction does not complete represent a material uncertainty that may cast significant doubt on Lonmin's ability to continue as a going concern over the period in excess of 12 months. Should the Transaction not conclude by 28 February 2019, the feasibility of an asset sale to Sibanye-Stillwater, as contemplated in the 2.7 announcement, as well as any other alternative transactions will have to be assessed by the Board. Should the acquisition conclude successfully, the consolidation of Lonmin into Sibanye-Stillwater will create a more diversified and resilient company, overcoming the prevailing financial constraints. In addition, Lonmin's lack of geographical and product diversification risks should decrease significantly. The decrease in product diversification risk is further attributable to the rise in prominence of palladium, rhodium and iridium contributing significantly to basket prices in comparison to the prior year.

Mitigation

UK Competition and Markets Authority cleared the Transaction, including formal recommendation of the Transaction by the Competition Commission SA to the Competition Tribunal SA. On 21 November 2018 the Competition Tribunal SA approved the transaction subject to agreed conditions, including:

· a six month moratorium placed on all forced retrenchments from the implementation date, pending the outcome of a detailed study by Sibanye-Stillwater.

2 LIQUIDITY - THE AVAILABILITY OF FUNDS TO MEET BUSINESS NEEDS

CAN AFFECT THE GROUP'S ABILITY TO CONTINUE AS A GOING CONCERN

Description

The availability of funds to meet business requirements can affect the Group's ability to continue as a going concern. Key factors affecting the Group's liquidity position are adverse market conditions, lower than planned production, escalation in operating costs and the successful completion of the all share Sibanye-Stillwater transaction.

Impact

The oversupply in the platinum market persisted during 2018, resulting in the platinum price declining by 12%. However, the price of rhodium almost doubled to $2,580/oz, followed by a 17% increase in the palladium price, as well as the positive increase in iridium prices resulting in an overall higher basket price. Strong production, including PGM sales exceeding initial market guidance, supplemented by higher basket prices and a weaker USD/ZAR exchange rate experienced during Q4 2018 contributed to an increase in the Group's net cash position to $114 million at 30 September 2018 ($103 million at 30 September 2017). The pending approval by the shareholders of Lonmin and Sibanye-Stillwater including alternative solutions in mitigating the adverse longer term challenges faced by the Lonmin Group if the Transaction does not complete represent a material uncertainty that may cast significant doubt on Lonmin's ability to continue as a going concern over the period in excess of 12 months.

Mitigation

· The Group has refinanced the business which improved Group liquidity and secured tenure in the short-term and removed the Tangible Net Worth covenants from the Group's facilities;

· Disposal of 50% interest in Petrozim due to conclude in Q1 2019;

· Identification of impact of risks and opportunities on cash flow forecasted period;

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

· Sensitivity testing based on exchange rate changes or production losses;

· Liquidity dashboard monitoring as part of the Price Risk Committee;

· Strict monitoring and tightening of controls over operating costs;

· Analysis of cash-flow variances to the prior forecast period;

· Customer engagement for early payment; and

· Cash-flow monitoring and management by ExCo through weekly cash forecasting reports

Change

Exposure to this risk remains unchanged, however the weakening of the Rand in Q4 2018 and higher ZAR basket price has partly off-set liquidity challenges experienced by the Group.

KPI

Free Cash Flow

3 OPERATIONAL EXECUTION - THE ABILITY TO DELIVER REQUIRED

OPERATIONAL PERFORMANCE (PRODUCTION AND EFFICIENCY) COULD ADD OR DESTROY VALUE FOR COMPANY SHAREHOLDERS AND IMPACT ADVERSELY ON OTHER STAKEHOLDERS

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 include a decline in profitability and cash generation, ultimately impacting negatively on the company's liquidity position.

Mitigation

· Management focus on improving operational attendance levels which includes root cause analysis and management of absenteeism;

· Operations Steering Committee monitoring of sick leave and absent without official permission dashboards;

· implementation of the Labour Management Programme;

· Implementation of an Operational Turn Around Plan and ongoing operational deep dive reviews;

· Rigorous performance monitoring against Business Plan targets (cost and production);

· A cost restructuring review process is continuing;

· Continued Department of Mineral Resources (DMR) engagement to address safety stoppages and increased operational focus to improve overall safety performance and culture; and

· Operational oversight was improved through rigorous tracking of crew performance by the Business Support Office.

Change

This risk has reduced relative to the prior year's ranking.

Robust, continuous safety initiatives amongst others, resulted in a significant reduction in the number of Section 54 safety stoppages (FY2017:42 vs. FY2018:24) as well as lost production days (FY2017:86 vs. FY2018:11). The DMR has issued localised Section 54 safety stoppages which mean only sections of a shaft or plant are stopped and not the whole operations.

Other factors which can affect production execution include community unrest, poor productivity, absenteeism, management induced safety stoppages, industrial action, difficult geological conditions and operational expenditure.

KPIs

Unit cost, refined Platinum ounces, 6E ounces & tonnes delivered

4 SAFETY PERFORMANCE - A POOR SAFETY PERFORMANCE CAN RESULT IN LOSS OF LIFE AND SERIOUS INJURY TO OUR EMPLOYEES. IT CAN ALSO NEGATIVELY IMPACT PRODUCTION, AFFECT COSTS, CAUSE REPUTATIONAL DAMAGE AND RESULT IN UNFAVOURABLE REGULATORY INTERVENTION

Description

Safety incidents can cause loss of life and injuries to employees resulting in work stoppages and regulatory stoppages that will impact the Company's ability to achieve production and financial targets.

Impact

A failure in following safe working processes could result in injury or loss of life, which 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 following safe working procedures may be caused by noncompliance and/or poor management practices. Work stoppages and Section 54 safety stoppages have an impact on the working rhythm, cost, production at the operations and could result in suspension of Lonmin's operating licence.

Mitigation

· Focus by the operations on leading indicators that trigger risk awareness and proactive action;

· Proactive shaft by shaft cross audits, validating compliance with Lonmin Life Rules;

· Continuous monitoring and safety key performance indicators established per mine manager, including management interaction with employees through Visible Felt Leadership;

· OPSCO weekly engagement of overall organisation wide safety performance;

· Enforcement of contractor safety management protocols;

· Behaviour based intervention focussing on employee behaviour; and

· Implementation of Incident Cause Analysis Method findings post investigation.

Change

The increased focus on proactive safety management, safety culture and consequence management resulted in the Group operating fatality free for 15 months. The Group also won four of seven categories at the 2018 MineSafe conference. While our safety initiatives improved, regrettably K3 shaft recorded a fatality on 30 September 2018. Notwithstanding the fatality recorded, the Group achieved 15 months' fatality free, notably K3 and Saffy shafts, achieved 9.3 million and 6 million fatality free shifts respectively. The Assay Laboratory and Precious Metals Refinery achieved 12 years and 2 years LTI-free, respectively. Lost Time Injury Frequency Rate (LTIFR) improved by 11.5% from 4.52 in 2017 to 4.00 in 2018. There were 308 Lost Time Injuries (LTI) recorded in 2018 (FY2017: 373), while medical treatment cases decreased to 473 (FY2017: 509). The safety initiatives have further resulted in a steady decline of the Total Recordable Injury Frequency Rate (TRIFR) since 2015. Despite recording a decrease in 2018, the Group still remains focussed in reaching and/or exceeding the international industry average.

KPI

LTIFR, LTI, TRIFR

5 EMPLOYEE AND UNION RELATIONS - OPTIMAL RELATIONS CAN

SIGNIFICANTLY ENHANCE OPERATIONAL EXECUTION AND IMPROVE EMPLOYER-EMPLOYEE RELATIONSHIPS, WHILST A BREAKDOWN IN RELATIONS COULD RESULT IN PRODUCTION STOPPAGES AS WELL AS A BREAKDOWN OF TRUST

Description

The industrial relations environment has stabilised from prior years which is attributed to continuous and improved dialogue between unions and Company management. Whilst this 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. A major concern is the perceived continuing rivalry between Association of Mineworkers Construction Union (AMCU) and National Union of Mineworkers (NUM).

Impact

Various internal as well as external factors could influence the employee relations, potentially leading to a breakdown of employer-union relations. The embarking of labour unrest potentially leading to production stoppages could negatively impact the Company financially.

Mitigation

· Structured engagement forums with unions across all levels e.g. Senior leadership, shaft forums and Future Forum;

· Engagement with AMCU at all levels, and with relevant authorities to enhance safety and security in the area; and

· As part of improving employer relations, the established relationship building programme and charter to govern relations between unions and the Company are also under review

Change

Despite improvement experienced in terms of engagement processes with the major union, the industrial relations environment still remains a major focus area.

KPI

Industrial action/production stoppages

6 UTILITIES - ACCESS TO SECURE ENERGY AND WATER ARE CRITICAL

FOR THE GROUP'S MINING AND PROCESSING OPERATIONS

Description

The higher than inflation tariff based increases in electricity and water are set to continue. Near term uncertainty is set to continue with continued pressure for above inflationary increases. Water availability has also been challenging, due to ageing infrastructure and increased water demand from local communities, mining and agricultural sectors in the area. Rustenburg Municipality has notified all mines that it intends taking over water distribution from Rand Water Board (RWB). Reduced dependency on RWB supply, to the Lonmin operations, is set to be an ongoing strategic drive.

Impact

Supply constraints in respect of energy or water could impact our ability to operate effectively and meet our production targets. Furthermore, cost increases above inflation in respect of these utilities impact the Group's liquidity and ultimately margins.

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 RWB 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 RWB. Lonmin is exploring further opportunities 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 conducting monthly and daily monitoring of electricity consumption and reporting.

Additional initiatives to ensure optimal usage are the electricity conservation programme and load-shedding 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 of water and power monitoring and management is fully aligned. Substitution of RWB with other water sources will remain an ongoing focus, in order to reduce reliance on this supply.

Change

The current increase in electricity tariffs of 4.1% and request for 15% by Eskom could have an impact on costs. From an energy perspective, the risk in this area remains unchanged due to ageing municipal infrastructure that could result in an increase in the amount of unplanned outages, however, from a water perspective the risk has increased due to lower precipitation levels and the ongoing impact of climate change. The expectations of surrounding communities especially on water supply and services are ever increasing and the inability of local and provincial government's structures to address the expectations will continue to transfer the pressure to mining operations to step into this gap and supply the requirements in various forms to communities around their operations. The Rustenburg Municipality's notification of taking over water distribution from RWB is being contested by the Mineral Council SA on behalf of mining companies to maintain the status quo with RWB.

KPI

Water and Electricity usage

7 COMMUNITY RELATIONS - A SOUND RELATIONSHIP WITH SURROUNDING COMMUNITIES WILL ENHANCE RELATIONS AND THE GROUP'S REPUTATION WHILST A FAILURE TO DO SO COULD RESULT IN COMMUNITY UNREST, POTENTIALLY DISRUPTING OPERATIONS

Description

There may be occasions where expectations by a host community cannot be met and may result in conflict, unrest and production stoppages. The relationship with host communities is particularly vulnerable due to expectation gaps between community leadership structures and the Company. This results in informal and unstructured engagement between different splinter groups engaging the Company on varying matters and at times results in unrealistic expectations by the communities.

Impact

Lack of consensus on the nature of Social and Labour Plan (SLP) projects and/or on-site disruption of projects in execution by local communities and splinter groups may result in delays and impacts adversely on the Group's ability to deliver on its SLP commitments, which ultimately impacts the Group's licence to operate. Lonmin acknowledges the important role of communities as a critical stakeholder and has implemented various engagement platforms and development initiatives to ensure appropriate upliftment. Procurement and employment have become focus areas as communities view them as opportunities to improve their livelihood through improved income. Lonmin has identified this need and has introduced procurement and employment opportunities for the communities.

Mitigation

· Standing meetings with Ward Councillors, Unemployment Groups, Bapo ba Mogale;

· A structured process for employment opportunities was made available to surrounding communities;

· Continuous engagement of Municipal leadership and capacitation (support on technical matters related to SLP);

· Community roadshows were rolled out to address infrastructure requirements and education requirements;

· Implementation of a 24 hour Community Grievance Hotline to address community grievances in a structured and timely manner;

· Implementation of revised project risk management process which incorporates stakeholder requirements; and

· Greater consultation with stakeholders which includes upliftment measures being initiated. This approach will increase community ownership of both the challenges facing communities and the solutions provided as part of the SLP implementation plan.

Change

Revised SLP approved by DMR Regional office directing the company to start implementing targets set out in Section 102 application, subject to approval of the application at National level. Relationships with local communities that surround our operations have improved from prior years. This is largely attributed to engagement with communities in a more structured and meaningful manner. The company also introduced Buang Le Rona/Thetha Nathi, a 24 hour Grievance Hotline to address community issues, which allows the company to respond and address grievances timeously.

KPI

SLP Expenditure: Health, Education and Social Infrastructure, Stakeholder Engagement and Management

8 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 regulations. A change in the ruling party's leadership and ultimately SA President during February 2018 has resulted in an announcement by the new DMR Minister of the potential withdrawal of the Mineral and Petroleum Resources Development Act (MPRDA) Amendment Bill. The initial release of Mining Charter III (MC III) in July 2017 created much controversy and concern for the mining industry at large, however, the initiation of the public engagement process and commentary and resultant promulgation of the revised charter during September 2018, has brought more certainty and clarity to the industry. The Mining Charter III in its current form seeks to create a balance between improving transformation and ensuring the industry's viability during volatile times.

Impact

The change in the ruling party's leadership continues to positively impact the country and economy. The DMR has demonstrated its intent in stabilizing policy and regulatory compliance within the mining industry, which is a positive development.

Key changes contained in MC III are:

· The continuing consequences of past empowerment transactions will be recognised i.e. the "once empowered, always empowered principle" has been partially recognised albeit subject to a mining company and the HDSA partner meeting certain criteria;

· Scrapping of the trickle down dividend payment of 1% of earnings before interest, tax, depreciation and amortisation to communities and employee empowerment partners;

· 10% ownership to communities and employees for free on issuance of a new mining right;

· Companies can offset up to 5% of their BEE entrepreneurship ownership requirement through local beneficiation. The 2010 Charter allowed them to offset 11%;

· Employment equity requirements have increased and further defined. Positions from board to management levels have risen from 40% (2010 Charter) to between 50% and 60% to be filled by black South Africans in line with provincial and national demographics. The definition changed from HDSAs to black South Africans to include white women filling HDSA positions; and

· Companies must obtain 70% of goods and 80% of services from BEE entities.

Mitigation

· Regular engagement directly with DMR and through the Minerals Councils SA, acting on behalf of the SA mining industry; and

· Appropriate governance structures in the form of Executive and Board Committees have been established to ensure ongoing reporting of progress against agreed Charter targets and potential factors impacting on the political, legal, social and economic environments.

Change

The risk in this area has remained unchanged from prior years notwithstanding an increase in policy and regulatory certainty. The increase in 30% black ownership for new mining rights applied prior to promulgation of MC III, including 10% employee and community interest for free, may prove costly for mining companies.

KPIs

Compliance with MPRDA, DMR review

9 LOSS OF CRITICAL SKILLS

Description

The loss of critical skills remains a challenge for the Company. The uncertainties related to the Company's financing and viability remain, amplified by the continued uncertainty in the mining sector at large. Under these conditions, the loss of key skills is a significant risk to the organisation.

Impact

The loss of critical skills in key positions could play a significant role in our ability to deliver against production and financial targets. In order to retain our skilled labour, we continuously review our remuneration packages and the incentive and retention schemes. This allows our pay structures to remain in line with the packages offered by our peers. An inherent risk of attracting and retaining employees of the required calibre is that it can result in increased costs.

Mitigation

· Introduction of retention bonuses and Staggered Deferred Cash Plan;

· Individual Development Plans, succession planning and retention strategies for scarce skills have been established as part of ensuring the development and retention of critical skills;

· Ongoing monitoring of remuneration practices which match Lonmin peers;

· Retention programmes for key skills;

· Categorisation of skills, establishment of promotional pools and career paths reviews to remain relevant to the organisation have been established; and

· Graduate development, mentorship programmes and internship programmes have also been established to ensure development of existing and future human resources capacity.

Change

The retention of critical skills remains a key risk to the organisation. One of the key safeguards at the moment is the fact that a large part of the mining sector is experiencing similar challenges to the ones that Lonmin is experiencing which has limited the number of opportunities that are available. The risk for Lonmin is that it may not always be able to replace the critical skills understanding the business and the environment with resources available in the market.

KPIs

Turnover rates

2018

$m

2017

$m

Transactions in the year:

Purchases from joint venture - Pandora i

7

33

Amounts due from joint venture - Pandora i

-

6

Amounts due from associate - Incwala

1

1

Interest accrued from HDSA investors in Incwala

29

26

Subscription paid to the Platinum Jewellery Development Association ii

3

5

Balances at 30 September:

Amounts due from HDSA investors in Incwala iii

433

416