Lonmin Regulatory News (LMI)

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Annual Report and Accounts for the year ended 30 September 2015 (the "Annual Report and Accounts")

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Circular relating to the Annual General Meeting to be held on 28 January 2016

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Forms of Proxy for shareholders on the UK and SA registers

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A statement on the principal risks and uncertainties

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A statement on related party transactions

1. FAILURE TO COMPLETE THE RIGHTS ISSUE AND REFINANCING

Description

The five month strike action in 2014 reduced the Company's sales of metal below levels previously expected, such that significant fixed costs could not be recovered as production effectively stopped for the duration of the strike. The impact of the 2014 strike was exacerbated by weakness in the PGM pricing environment, which further deteriorated during the year ended 30 September 2015. As a result, the Group has experienced operating losses in each of the last two financial years, which has resulted in a deterioration in the Group's net debt position.

Impact

The Directors believe that the Group's operating cash position is such that, unless the resolutions have been passed at the General Meeting convened by the Circular dated 2 November 2015, Lonmin's proposed rights issue has been completed and the amended facilities agreements have come into effect, thereby removing restrictions on the transfer of cash from the Company to its operating subsidiaries, Lonmin is unlikely to have sufficient funds to meet its obligations and commitments as they fall due.

Mitigation

Lonmin has published a circular and prospectus proposing a rights issue to raise approximately US$407 million in gross proceeds ("Rights Issue") and has signed an amended facilities agreements with its existing lenders providing for a total of US$370 million ("Amended Facilities").The Amended Facilities will only come into effect if a resolution approving the planned Rights Issue to be held at a General Meeting on 19 November 2015 is passed by the Company's shareholders and at least $350 million of net cash proceeds are received.

Change

This represents a risk not present in the Company's risk profile as at the date of the previous report.

2. FAILURE TO IMPLEMENT ITS BUSINESS PLAN

Description

In response to prolonged weakness in PGM prices and the losses sustained as a result of the 2014 strike action, the Company has begun implementing a business plan which aims to reduce fixed cost expenses, remove high-cost PGM production ounces and reduce capital expenditure, whilst preserving the ability of the Group to increase its production as and when PGM prices improve (the "Business Plan").

Certain factors may affect the implementation of the Business Plan, for example, the planned reduction in the workforce may not run to schedule or there may be an adverse reaction from various stakeholders, higher costs than expected may be incurred in connection with the implementation of the Business Plan, the reduction in production over the next two financial years as part of the Business Plan may lower the Company's revenues and reduced capital expenditure may result in more limited growth opportunities for the Company in the short to medium term. The Company derives a substantial portion of its revenue from sales to three key customers, the loss of any one of which could affect the Company's financial position and its ability to implement the Business Plan.

Impact

Any failure by the Company to successfully implement the Business Plan or to achieve the expected savings may affect the Company's business and financial condition. To the extent a failure to implement the Business Plan means Lonmin has insufficient funds available to meet the needs of its business, it may affect the Company's ability to continue as a going concern. The failure to address operational difficulties could prevent Lonmin from reaching its production and sales targets, reduce cash flows, increase unit costs and result in the incurrence of further consequential losses, any of which could affect the Group's business and financial condition.

Mitigation

The Company's business plan has been developed in detail by the Company's management and reviewed by external experts. The Company has an experienced management team, most recently augmented by the appointment of a COO. Detailed plans are in place for the immediate future which are stretching and which will be incentivised through the Company's remuneration arrangements. The Company also has established and long-standing relationships with its customers with multi-year contracts in place or under negotiation. Additional metal sales are made in the spot market.

Change

The failure to implement the Business Plan or more general operational plans is an existing risk, however, due to the potential impact on the business and financial condition, the relative ranking of this risk has increased compared to the prior year.

3. IMPACT OF METAL PRICES AND RAND/US DOLLAR EXCHANGE RATE

Description

The Company derives its revenues and a significant proportion of its operating cash flow from the production, processing and sale of PGMs, particularly platinum, palladium and rhodium and, to a much lesser extent, from the sale of other PGMs, including gold, ruthenium and iridium. The majority of the Company's sales of PGMs are made under multi-year contracts at prices related to certain average market reference prices for the month in which the sale occurs, such that the Company is a price-taker rather than a price-maker. The remainder of the Company's sales of PGMs are made in the spot market at prevailing market prices. Accordingly, the Company's revenues are dependent on the prevailing market prices for PGMs, which are outside its control. As a result, the Company's financial performance has been and is expected to continue to be significantly affected by the market prices of the PGMs that it sells, particularly the prices of platinum, palladium and rhodium. The market prices of PGMs historically have tended to fluctuate widely from the impact of normal demand and supply factors.

In addition, the Company's profits are sensitive to the Rand/US dollar exchange rate because the majority of its revenues derive from sales denominated in US dollars whilst the majority of its operating costs, capital expenditures and taxes are incurred in Rand. The Company presents its accounts in US dollars. Appreciation of the Rand against the US dollar therefore increases the Company's operating costs when they are translated into US dollars, resulting in lower profit and operating margins.

Impact

For the year ended 30 September 2015, the Company had an operating loss of US$2,018 million (including a special impairment charge of US$1,811 million related to the Company's Marikana, Akanani and Limpopo assets largely driven by a decline in long-term PGM price assumptions and changes in assumptions regarding production levels and other factors under the Business Plan). Due to limited forward visibility, any changes in the levels of production and/or sales by the Company in response to present or projected PGM prices could be based on inaccurate estimates as to future market prices. In addition, US dollar PGM market prices have not adjusted in recent periods, and may not adjust in future periods, to reflect the costs of production in the PGM industry and as such have not provided, and may not provide, the Company protection from movements in the Rand US dollar exchange rate and increases in Rand production costs. Persistent PGM price weakness has had an adverse effect on, and may continue to adversely affect, the Company's business and financial condition.

Mitigation

The Company does not, in general, hedge either metal prices or currencies, but notes that over long periods these two risks tend to offset each other, although there can be no certainty that this is true over the short to medium term.

Change

Risk in this area remains unchanged from 2014 as metal and currency markets continue to remain volatile accompanied by the significant decline in the platinum price.

4. EMPLOYEE AND UNION RELATIONS

Description

The industrial relations environment has stabilised over the last 12 months, evidenced by the Voluntary Separation Programme ("VSP") currently underway. The Company has also undertaken two parallel consultation processes under the Section 189 framework in connection with its planned workforce reductions. While the environment has remained stable, the potential for volatility remains and could result in disruptions to operations and have a material adverse effect on the Group's financial position, business and results of operations.

In the wake of the unlawful work stoppage and related violence, unrest and tragic deaths at Marikana in 2012 (the "Events at Marikana"), a commission of inquiry under the chairmanship of retired Judge Farlam (the "Marikana Commission") was established to investigate the Events at Marikana and contributing factors. The report of the Marikana Commission (the "Marikana Commission Report") was released on 25 June 2015 and included a number of findings in relation to the tragic Events at Marikana. In relation to Lonmin, the Marikana Commission Report concluded that:

• the Company failed to adequately protect its workers during the Events at Marikana and failed to inform employees of the dangers of attending work and withdraw their call to work during the strike;

• the Company failed to comply with housing obligations under the social and labour plans submitted to and approved by the DMR in connection with the Company's applications to convert to New Order Rights, which created a climate conducive to unrest amongst the workforce; and

• the Company did not use its best endeavours to resolve the disputes arising between itself and its striking workers and did not respond appropriately to the threat and outbreak of violence.

Impact

A substantial majority of the Group's workforce is represented by AMCU. There are also several minority unions, two of which have limited organisational rights. Relations amongst the unions have been characterised by a high degree of rivalry and volatility and a substantial number of workers have on occasion switched allegiance between unions. Recruitment drives by rival unions can sometimes be accompanied by coercion and intimidation of the workforce and other unions not currently recognised by the Group have also actively sought to recruit members within the Group's workforce. Once a new union has gained an initial level of membership, it may seek formal recognition by the Group and may also request collective bargaining rights. To demonstrate its power base, a new or expanded union may also instruct its members to commence certain forms of industrial action, such as working-to-rule and a refusal to work overtime. Furthermore, the risk of labour disruptions may be increased by the difficulties inherent in counting union membership, disputes between unions in relation to changes in their membership levels and any renegotiations of union recognition agreements arising from such changes, resulting in further union membership recruitment drives and labour unrest.

A continuation of weak PGM prices or a further deterioration in economic conditions may necessitate further reductions in the Group's workforce. Workforce reductions may result in strikes, industrial relations disputes and other related disruptions to production that could adversely affect the Group's business, financial condition, results of operations and prospects.

Work slowdowns, stoppages, high levels of absenteeism, disputes and rivalries with, within or between employee unions or other labour-related developments or disputes have contributed, and may continue to contribute, to a significant decrease in the Group's production levels and adverse publicity. The Company has also experienced and is subject to the risk of violent and protracted labour disputes, which could result in employee injuries and fatalities, cause significant disruption to its production and harm to its assets and its relationship with its employees. In addition, many of the contractors who provide services to the Company, such as shaft sinking and ore reserve development activities, are also unionised, and the Group's operations may be adversely affected by labour disputes between these contractors and their employers.

In relation to the Marikana Commission's findings, the Company cannot predict the outcome of any legal, governmental or regulatory proceedings which may follow or the precise impact these may have on its business. Adverse legal, regulatory and governmental proceedings or judgements could, however, result in restrictions or limitations on the Company's operations, significant economic costs and a material adverse effect on the Group's reputation and financial condition. On 20 October 2015, Lonmin was served with a summons from the High Court of South Africa issued on behalf of 329 persons who were allegedly injured and/or arrested during or in the aftermath of the police activities in respect of the Events at Marikana. The summons demands that Lonmin pay damages of approximately ZAR1. 14 billion ($82.6 million equivalent based on a Rand/US dollar exchange rate of ZAR13.83 to $1.00). In addition, Lonmin has received eight other civil claims relating to the events at Marikana which, in aggregate, seek damages of approximately ZAR30 million.

Mitigation

Since the Events at Marikana in 2012, the Company has made progress toward a more constructive relationship with its collective bargaining partners and employees. A relationship building programme and charter to govern relations between unions and the company have been established. In order to increase employee ownership in the Company an Employee Share Ownership Programme has been launched and to improve transparent dialogue appropriate structures have been established to enable effective union engagement. These structures include consultation on the VSP as well as Section 189 processes.

The Company denies the allegations made against it by the 329 claimants on the basis that the allegations are legally and factually unfounded and unsustainable and therefore intends to defend itself in these court proceedings.

Lonmin is fully committed to participating in any meaningful reconciliation process with respect to those who were injured or arrested during the Events at Marikana.

In addition, through the Sixteen-Eight Memorial Trust, the Company is supporting the primary, secondary and tertiary education needs of the children of the families that tragically lost loved ones in the Events at Marikana.

5. SAFETY

Description

Our belief is that Zero Harm is possible to our employees and contractors and our aim is to provide a safe working environment for our employees, our contractors and the communities we operate in. By the nature of our mining activities we have inherent risks that can cause fatalities or injuries.

Impact

Poor safety performance has direct impacts 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 local communities. Stoppages may be mandated by regulatory authorities, imposed on the Company through the actions of organised labour or voluntarily entered into by management or any combination of those factors. Safety-related suspensions of operations, whether voluntary or mandated by regulators, contribute to disruption of production reduced revenues and increased unit costs, which could have a material adverse effect on its business, financial condition, results of operations and prospects.

Mitigation

Safety Improvement Plans are being implemented with an enhanced focus on accident analysis and pro-active preventive measures. As part of improving relations with the regulator and ensuring appropriate accountability, the Operational General Managers interact directly with the Chief Inspector of the DMR. In order to improve and enhance employee productivity a wellness and health improvement plan has also been established. Lonmin focuses on continuously improving its operational safety processes and as part of enabling this, a revision of all risk assessments, standards & operating procedures headed by the Operational General Managers was undertaken. A clearly defined employee safety engagement strategy has been established with safety protocols and standards which are monitored and managed by various operational committees and ultimately the Executive Committee.

Change

The relative ranking in this risk has reduced as a result of a change in the rankings of other risks and does not reflect a change in the Company's perception of the importance of safe production. The safety environment has deteriorated as demonstrated by the LTIFR which increased in 2015 to 5.41 per million man hours worked from 3.34 in 2014 and the number of Section 54 stoppages also increased during the year. Regrettably, we suffered 3 fatalities during the year and another fatality following the conclusion of the financial year but prior to the publication of this report. We continue to engage and build relationships at various levels of management with the DMR and always strive to upkeep a safety mindset.

6. COMMUNITY RELATIONS

Description

In line with a number of mining companies operating in South Africa, the Company has also experienced high levels of community unrest in the areas adjacent to its operations. These could persist or worsen in scale, intensity and duration. 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

Deteriorating relationships with the local communities as a result of poor services and high unemployment can result in civil unrest which could severely disrupt our operations. As many of our employees live locally, any disruptions within the communities and poor living conditions 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 relationships with these stakeholders are not managed effectively. The environmental, health and social impacts of mining can be felt by those communities who live and work in close proximity to the operations. Even though the Group engages regularly with representatives of the local communities, there can be no certainty that unrest will cease or moderate. Community unrest has resulted, and may in the future result, in employee injuries, disruptions to mining and processing operations and harm to the Group's assets. In addition, certain procurement opportunities granted to the Bapo Community under the Bapo Transaction may be a source of tension between the Bapo Community and other community parties interested in the same opportunities.

A minority group within the larger Bapo Community launched an application in the High Court of South Africa (Gauteng, Johannesburg) on 4 June 2015 to have the Bapo Transaction invalidated, principally on the basis that the Bapo Traditional Council was not properly constituted and did not follow Bapo customary law in obtaining the Bapo Community's approval of the Bapo Transaction. If the Bapo Transaction is ultimately invalidated, the Group, may have to conclude a further transaction with an HDSA group in order to reinstate its 26 per cent. HDSA equity ownership. The applicants have taken no legal steps to progress the application since 4 June 2015.

Mitigation

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 has 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 the Bapo and Madibeng Rustenburg communities. The engagement meetings address employment, economic development, community infrastructure programmes and the SLP status. Lonmin also entered into mediation proceedings with the Bapo community to improve relations. The Bapo Transaction and Lonmin's other BEE transactions announced in November 2014 resulted in the establishment of two community development trusts, each receiving a minimum of R5 million per annum, and an undertaking by the Company to provide the Bapo with R200 million of procurement opportunities.

Change

The Company's relationships with the local communities that surround our operations has been adversely affected in recent months due, in part, to a stakeholder engagement process that was not well received by the local communities.

7. ACCESS TO SECURE ENERGY AND WATER

Description

Recent increases in electricity tariffs, the Company's inability to reduce this cost any further, its reliance on sole state-owned suppliers along with unreliable electricity supply have severely compromised Lonmin's operations and margins. Rolling power outages, voltage imbalances or reductions in availability may restrict production or could require Lonmin to shut down production. A more stable electricity environment, in terms of both pricing and supply is therefore critical. Water utilization has also been challenging; both from an infrastructure point of view as well as availability. Lonmin's smelting, mining and refining activities require significant amounts of water and shifting rainfall patterns and increasing demands on the local water supply have and will in the future caused water shortages.

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. Government must find the balance between authorizing water uses and also supply water and deliver services as required by communities: however this is very challenging, especially due to informal settlements and pressures from development.

Mitigation

The Company recognises that the national power utility is experiencing challenges in terms of supplying energy in terms of required national demand. 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 and monitors water conservation and demand management initiatives.

Change

Any further increases in electricity prices, which may be at similarly high levels, will contribute to higher operating costs for Lonmin, leading to lower operating profits and cash flows, as well as hampering growth and development of new projects and affecting their financial viability. Any cuts and interruptions in the supply of electricity could also lead to disruptions to production and have a material adverse effect on the Group's business, financial condition, results of operations, ability to meet our production targets and prospects. Risk in this area has increased due to aging power stations, resulting in an increased amount of unplanned outages.

8. CHANGES TO THE POLITICAL, LEGAL, SOCIAL AND ECONOMIC ENVIRONMENT INCLUDING RESOURCE NATIONALISM

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 in connection with taxation, royalties, divestment, currency, labour standards, historic and cultural preservation, repatriation of capital and resource nationalism. Resource nationalism 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 (with or without compensation). It is a global phenomenon, not limited to a single country. In South Africa, the threat of nationalisation has previously been rejected, however, debate continues regarding future policies relating to South Africa's natural resources.

Lonmin is also heavily regulated by a vast array of regulatory requirements including the Mineral and Petroleum Resources Development Act ("MPRDA"). This legislation is critical as it impacts Lonmin's operating license and prospecting and mining rights. Alongside these legal and regulatory obligations and, equally critical, are the Company's social responsibility obligations by which we earn our social licence to operate in the communities that host our operations.

Impact

A wide range of stakeholders have proposed ways in which the state could extract greater economic value from the South African mining industry. The Company cannot predict the outcome or timing of any amendments or modifications to policy or applicable regulations or the interpretation thereof, the implementation of new policies or regulations and the impact these may have on Lonmin's business. The ongoing debates in respect of resource nationalism have created policy uncertainty and this has 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 operational performance and financial position. For example, profits could be negatively impacted by the imposition of additional taxes and revenues could be impacted by the sale of metals at discounted developmental prices. Any implementation of an obligation to sell one or more PGMs locally could impact long-term supply agreements with our customers and give rise to concerns about security of supply from South Africa. The costs associated with compliance with existing laws and regulations are already substantial: possible future changes to laws may cause us to incur additional expense, capital expenditure or operational restrictions or delays.

Lonmin's New Order Mining Rights are conditional upon the performance of obligations set out in the social & labour plans agreed with the Department of Mineral Resources ("DMR") and which detail the Group's responsibilities under the Mining Charter. Failure to meet these obligations can impact Lonmin's operating licence and could ultimately lead to the suspension or cancellation of its mining rights and the suspension or disposal of some or all of its operations in South Africa. A failure by Lonmin to meet its obligations could also result in deteriorating relationships with our stakeholders, reputational damage, regulatory fines and other punitive measures. Although the Directors believe that Lonmin has achieved the 26 per cent. HDSA equity participation target required under the Mining Charter, it has not received formal confirmation from the DMR that the target has been met and there can be no assurance that the methodology used by the Company for measuring HDSA ownership could not be subject to challenge by the DMR, HDSA investors or BEE partners.

The Group provided funding to Shanduka Resources (Pty) Limited in 2010 to enable Shanduka to acquire, through a number of intermediary companies, an 18% interest in the Group's principal operating subsidiaries, WPL and EPL. The principal source of income to fund the settlement of this loan is dividend flow from WPL and EPL. There is a risk that, with no obligation on the wider Shanduka Group, the Shanduka subsidiary may not repay the loan when it falls due.

Mitigation

As part of ensuring ongoing proactive compliance to required regulatory requirements, regular engagement occurs between the company and its various regulators. Appropriate governance structures in the form of EXCO and the Board have been established to ensure monthly reporting of progress against agreed Social and Labour Plan targets. 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. In addition, issues of concern to stakeholders are being addressed in the government- driven Project Phakisa. Project Phakisa for the mining industry is scheduled to commence during November 2015 and is aimed at creating win-win solutions for all industry stakeholders Lonmin is also endeavouring to engage with representatives of local communities, but it has no certainty that community unrest will cease or moderate.

Change

The risk and associated costs in this area have increased due to uncertainty regarding certain policy decisions, for example in regard to Black Economic Empowerment requirements and the possible designation of one or more PGMs as strategic minerals. In the DMR's 2014 Mining Charter compliance feedback, an 88% compliance level was achieved based on an initial electronic assessment, however, formal confirmation of the Group's compliance has as yet not been received from the DMR.

9. LACK OF GEOGRAPHICAL DIVERSIFICATION

Description

Lonmin's mining operations are concentrated in one location and one sector, which increases the level of risk in the event of operational disruptions or, more broadly, in the event of uncertainty in the macro environment. PGM mining at Marikana accounted for approximately 98 per cent. of our total tonnes mined in the year ended 30 September 2015. In addition, our PGM processing plants, other than the precious metals refinery are also located nearby.

Impact

The Group's financial performance is significantly dependent upon production at its Marikana operations and any interruption could have an adverse effect on Lonmin's business and financial condition.

Mitigation Plans

Lonmin has developed a Business Plan that drives cost savings and efficiency improvement to enable the Group to endure the low price environment, while also retaining development and diversification options in the longer term.

Change

The risk remains unchanged due to the concentration of Lonmin's operations at Marikana.

10. LOSS OF CRITICAL SKILLS

Description

Increased global investment in mining over the past few years, particularly in other African states, has driven demand for skilled workers around the world. The current shortage of skilled and experienced personnel in the mining industry in South Africa is likely to continue in the future. The competition for skilled and experienced employees is exacerbated by the fact that mining companies operating in South Africa are legally obliged to recruit and retain HDSAs and women with the relevant skills and experience.

Impact

The loss of critical skills could negatively impact safety, production, the ability to deliver against targets and Lonmin's ability to do so at a commercially viable cost. Failure to meet our HDSA targets in regard to skilled positions could also negatively impact Lonmin's mining rights.

Mitigation

As part of ensuring the development and retention of critical skills Individual Development Programmes (IDPs), succession planning and retention strategies for scarce skills have been established. Monitoring the remuneration practices of Lonmin's peers is ongoing. Graduate development, mentorship programmes & internship programmes have also been established to ensure development of existing and future human resources capacity. 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.

Change

The risk remains unchanged. Although the mining sector is currently shedding jobs and more skills are becoming available in the market, developing mines in other African jurisdictions are attracting those skills from South Africa.

2015

$m

2014

$m

Transactions:

Purchases from joint venture - Pandora

15

30

Amounts due from joint venture - Pandora

5

8

Amounts due from associate - Incwala

1

1

Dividends to minorities - Incwalai

19

37

Interest accrued from HDSA investors in Incwala

20

18

Subscription paid to the Platinum Jewellery Development Associationii

10

9

Balances:

Amounts due from HDSA investors in Incwalaiii

409

417