Implats delivered a stellar financial performance during the year, driven undoubtedly by the record prices achieved for our products. Demand fundamentals remained robust and, together with decreased production from South Africa, supported the exceptional price performance of all the platinum group metals. Sales reached a new high of R38 billion (or $5 billion), with an overall group margin of 47% having been achieved.
As is our practice, shareholders will be well rewarded, with some R8.9 billion (US$1.2 billion) being returned by way of dividends. Our decision to lower our dividend cover is a clear indication of our continued confidence in both our own performance and that of the markets for our products. A detailed financial review may be found under financial review.
Not truly reflected in this performance is the fact that the operating environment of the past year was one of the toughest we have had in recent times. Among the challenges faced were safety, the power crisis in South Africa, industry-wide skills shortages, escalating input costs and socio-political issues in Zimbabwe. The first three have combined to effect supply shortfalls from the South African producers, with a more significant impact expected on medium- to long-term supply growth prospects.
Implats’ platinum production, excluding the Lonmin ounces treated, increased slightly year-on-year to 1.9Moz, the only major producer in South Africa to have done so. This was despite unavoidable production losses from power and safety stoppages, which are discussed below. These accounted for approximately 20 000oz of platinum during the 2008 financial year. Growth in production at Marula and Two Rivers, which are in ramp up phase, was encouraging.
In our drive to become the best platinum group metals producing company, we continue to plan and measure our performance against the six pillars of our strategy articulated in our report last year. These pillars are: improving safety, growing production and our resource base, cost leadership, capital efficiency and delivery, maintaining a holistic contract with employees, and managing the balance sheet.
Our group structure (see Corporate profile) has been refined further to illustrate the elements of our business:
As an indication of our increasing attention to managed mine-to-market operations, 67% of our total production came from this part of our business in FY2008. Production from purchased or contracted material amounted to an additional 17%, with toll treatment (11%) and production from non-managed operations (5%) making up the balance.
As part of this focus on production that we can direct and manage, we took the opportunity to tidy up our organisational structure and redefine our relationship with Aquarius Platinum Limited with the sale of our interests in that company and its subsidiary Aquarius Platinum (South Africa) Proprietary Limited (AQPSA) for a consideration of R5.7 billion ($744 million). Our involvement with AQPSA will continue in terms of the offtake agreements in place with its Everest and Marikana operations.
While safety has been and remains a priority for Implats, much remains to be done to achieve our goal of ‘Zero Harm’. Key to our success is the embedding of a culture of safety awareness at all levels of the organisation.
Although there was an improvement in our safety performance over the past year – almost six million fatality free shifts were achieved – I am very distressed to report that 12 of our fellow employees lost their lives at work during the course of the year (FY2007: 13 fatalities). The board and management team join with me in extending our sincere condolences to the families and colleagues of those who died, and pledge to our colleagues that we will not relax our vigil on safety until we meet our target of zero harm, something which we firmly believe can be achieved.
Our safety and health performance and some of the achievements and challenges we have faced are dealt with in greater detail in a new section of this report, Safety management.
Having spent a great deal of time and effort in engaging with people – management, employees and unions – since I became CEO two years ago, I am convinced that the safety procedures and policies we have in place are of a high standard. What we need to ensure is that these are implemented and do not simply remain on paper.
There are two areas of specific focus for us. Firstly, we must enforce an intolerance of non-conformance with safety standards no matter how unpopular this may be. Secondly, in the current skills crisis and given the high staff turnover levels experienced across the industry, there must be a greater and renewed emphasis on the content, frequency and intensity of safety training.
Government’s recent attention to safety is most welcome. I firmly believe that by uniting forces – companies, the unions and government – we can make the progress that is required. I would like to see the recent Presidential Safety Audits, conducted under the auspices of the Department of Minerals and Energy (DME), used to develop the programmes and processes that will take us forward as we collectively strive to improve safety. There is no room for finger-pointing from any side; incidents and unsafe conditions are our collective enemies, and we are all equally part of the solution. All parties must work towards the common goal.
Implats held a steady course during the year, maintaining headline production in the midst of a general decline in production from our primary competitors. This was indeed an excellent achievement by the operational team and was delivered in spite of the challenges of the past year – safety, power and skills, in particular.
We have continued to seek opportunities to supplement our resource base while simultaneously growing our third party processing business. The Afplats acquisition, which includes the Leeuwkop project, was completed during the previous year, although the delay in the granting of the new order mining right has meant that the Leeuwkop project development timeline has been moved out. The final go-ahead for this project will still depend on the availability of power for mining, further impacting the timeline. Other positive developments in 2008, were the signing of offtake arrangements between Impala Refining Services and the Smokey Hills and Blue Ridge projects.
Our original target for annual platinum production of 2.5Moz by FY2012 has been impacted by delays to the Leeuwkop and Marula Merensky projects. Annual production of 2.5Moz of platinum is now expected in FY2015.
Spiralling costs are perhaps the most worrying of all challenges that we currently face, particularly as we are price-takers for so many of our cost inputs. Despite the unsatisfactory sharp increase in costs that we have reported, Implats remains in the lower cost quartile in the industry.
The three major contributors to cost increases were:
The escalating costs of consumables are also having an effect on capital costs. As we have no direct influence on the prevailing prices of our products, cost management will be even more important in maximising the benefits of prices received. It will be imperative to produce as cost and capital efficiently as possible. This places the focus on productivity. By and large, productivity improvements across the group were less than satisfactory, mostly as a result of the shortage of skills and the high turnover of staff experienced at all operations. This too is an area of focus for the coming year.
Delivery on time and within budget on our capital investments is essential to future cost efficient production. This is especially important given the size of our capital expenditure programme of approximately R30 billion over the next five years. Shortfalls in delivery can have serious implications for our production targets down the line, as well as for capital costs, which ultimately affects profitability.
The current capital expenditure programme covers 16, 17 and 20 shafts at Impala, (viewed as maintenance capital as this is an investment in the development of new shafts to replace the older shafts which are coming to the end of their working lives), as well as the development of the Leeuwkop project and Marula’s Merensky project.
Implats is committed to its maxim of ‘One team, one vision, with pride’. In line with this, we have adopted a policy of engaging with our employees as we move towards creating a united, holistic team comprising all our employees. This entails creating cohesion between management and all levels of staff, empowering all and giving each employee a sense of pride in being part of the Implats team. Staff training is an important element of this policy and will have a vital role to play in the retention, replacement and transfer of skills. Also important in this regard are the provision of housing, the Employee Share Ownership Programme (ESOP), the payment of market-related salaries and the production bonus system. More information on these can be found in the section under People, in this Annual Report as well as in the Corporate Responsibility Report 2008.
Implats ended the 2008 financial year with a substantial amount of cash on hand – R10.4 billion available for acquisitions, our capital expenditure programme and for distribution to shareholders. Cognisance must be taken of competing needs and that is why we have decided to lower our dividend cover to 1.4 times, which is an appropriate balance between returns to shareholders and building for future profits. In addition, we have embarked on a share buy-back programme of 16.4 million shares associated with the ESOP. To date we have purchased 826 000 shares at an average price of R307 per share. This brings the total number of shares in issue outside the group at 30 June 2008 to 605 million. We will look to extend our buy back programme over and above the ESOP shares in the future.
In response to the major power supply constraints in South Africa, the mining industry has developed and maintained close ties with Eskom, the power utility, to understand and even assist in developing plans to overcome the crisis. Non-Eskom options being looked at include utilising power produced by independent power producers, and the co-generation or self-generation of power. The economic costs of each option would have to be weighed up so as to establish the option which is most economical. It is our view that independent power producers should be encouraged to provide much-needed flexibility in the energy supply sector, as well as healthy competition and the influx of skills.
We are well aware that concerns around power and the shortage of supply have affected not only current production but growth across the industry, and have had a significant impact on investor confidence. We, as a company and a sector, need to develop a plan to mitigate the damage done.
Operating with less than 100% power is not ideal, but is tolerable. We have plans in place to minimise the effect of these cut-backs on our production profile. Our energy savings initiative is about ensuring a more efficient consumption of energy.
Of greater worry to us is that if we cannot grow output (for which we need power), the resultant supply shortfalls will lead to even further increases in PGM prices, which are likely to be more damaging to the industry fundamentals in the longer term. Should this happen, South Africa will forfeit its unique position in the global platinum industry.
We would also be concerned should new entrants be allocated power at the expense of ourselves. It has to be remembered that we have co-operated with Eskom and have reduced consumption temporarily when called upon to do so. Strong, firm leadership and a transparent plan, able to withstand scrutiny, is required from the regulators and government and would acknowledge the importance of the mining sector – and the PGM industry in particular – as a creator of jobs and economic activity, and a generator of much-needed foreign exchange.
In Zimbabwe too, power shortages have both short- and long-term implications. Our operations in Zimbabwe – Zimplats and Mimosa – have, as part of an industry initiative in conjunction with ZESA, the Zimbabwean Electricity Supply Authority, signed a long-term power agreement with Cahora Bassa. This power, to be paid for in US dollars, will, however, be more expensive.
Attracting and retaining skills is a significant problem in South Africa. Highly skilled employees have left and the country has not produced enough semi-skilled and skilled people in recent years. Initiatives to provide a solution must be driven and co-ordinated nationally by government which is responsible and should be accountable for the current severe lack of skills which is limiting economic growth. Companies need to be part of the solution by working with government.
Implats has a detailed, all-encompassing human resources strategy to attract, provide and retain the right skills by improving the quality of life of employees – by providing housing, addressing health concerns and making employees proud to be part of the Implats team. We wish to create a positive energy within the company, to provide a working environment in which employees want to remain and in which they have a sense of pride.
One of the benefits to a company such as Implats of the tougher operating environment is the increasing need for and potential of consolidation in the South African platinum industry. A significant feature of the past year has been a change in the risk profiles of junior companies (as a consequence of the power supply constraints, cost pressures, the availability of skills and safety concerns), a tightening in equity markets and the rising cost and availability of debt.
Against this background, our growth plans, which remain strong and focused, comprise four avenues:
Risk management and risk mitigation are embedded in our business, both in the management of current operations and in the evaluation of future opportunities. A summary of our risk management process and risk evaluation philosophy may be found under Strategic risk focus – summary, and a more comprehensive document (PDF - 223KB) on these issues is available on our website .
The current operating environment in Zimbabwe is deteriorating. The power and skills shortages and the foreign exchange management system are challenging. As the current socio-economic situation is aggravating the skills crisis, we have made the retention package for employees at our Zimbabwean operations as attractive as possible. The company is caring for workers and their families, providing housing and investing in infrastructure in the vicinity of our operations. This all comes at a cost which is justified by our belief that, in the long term, there will be an improvement in the situation in that country.
Given the pressures being borne by the average citizen, the prognosis for the Zimbabwean economy is not good. The creation of a stable, positive economic arena in which to function in the short term is unlikely. This is an enormous shame as Zimbabwe is a country with huge potential. Despite this, we have a responsibility to support our workforce, their dependants and management, and to secure our tenure for shareholders. Implats has minimised its risk in Zimbabwe and will not invest in new expansions until the investment climate improves.
In many ways, South Africa too is at a watershed right now and it is important to ensure that the correct course is chosen for the future of the country. We are confident, however, that the prudent fiscal regimes that have been in place since the inauguration of the first African National Congress (ANC) government will continue to guide the country as a powerhouse of Africa.
We recognise our obligations to our employees, their communities and the countries in which we operate. We were pleased to once again be admitted to the Socially Responsible Investing (SRI) index of the JSE Limited and have produced a Corporate Responsibility Report in line with the guidelines of the Global Reporting Initiative (GRI).
Impala and Marula successfully secured the conversion of their mining rights and this together with the granting of the Leeuwkop mining right was significant not only for our production outlook, but also as an indication of the cooperative relationship which is being established with the DME.
The focus in the year ahead will be safety, the retention of skills and increasing production. We anticipate platinum production increasing in FY2009 as our ramp-up projects continue to grow. Cost pressures will continue and cost increases are likely to be higher than in FY2008. Capital expenditure is expected to rise to R8 billion in the year ahead.
We anticipate the market moving closer to balance in the short term. While global jewellery demand – for both platinum and palladium – has fallen in response to higher price levels, and the fuel price is steering the choice of vehicles towards smaller cars in the United States and Europe, car sales in China, India and elsewhere in Asia remain strong. Although demand fundamentals were affected by global economic woes and high fuel prices, the impact was countered somewhat by decreases in South African supply.
In conclusion I wish to thank all employees of Implats for their dedication and commitment to the group over the past year. I thank too, my fellow board members and management teams for their support. All the signs indicate that the coming year will be no less challenging than the 2008 financial year was, and I call on all of them to give of their best to ensure that Implats becomes the best platinum producer in the world.
David Brown
Chief Executive Officer
Implats - Annual Report 2008
| Forward-looking statements