The past year has been one of great contrasts for Implats; a year of unbelievable high points, a year of great challenges on the operational front and a year of some despair regarding matters beyond our control. The group has excelled financially and achieved record sales and profitability on the back of soaring metal prices and a weakening rand.
However, we had to grapple with an extremely difficult operating environment dominated by the well publicised power crisis, a sharply decreased availability of skills and a significantly higher inflationary environment than usual. Revenue increased by 19.5% to R37.6 billion and net profit increased by 141.7% to a record level of R17.7 billion. This superb performance was marred by costs having escalated by 17% to R6 930 per platinum ounce (excluding share-based payments), driven largely by operational cost escalation of which a significant part was the additional spend associated with the attraction and retention of skills. Going forward, the upward pressure on labour and consumable costs is likely to continue and improvements in productivity will remain the key factor in mitigating the impact and improving our cost competitiveness relative to our peers in the platinum industry.
Our resolve to stop incidents leading to injuries in the workplace remains undiminished and this issue remains at the forefront of our efforts. Having committed to a policy of ‘Zero Harm’ in the longer term, we welcome the Presidential Safety Audits and indeed any other initiatives which may serve to improve our safety performance and that of the mining industry. The various safety measures implemented over the last few years at Implats have taken effect and during the past year our fatality rate improved by 19% and the lost-time injury frequency rate dropped to below three injuries per million man hours for the first time ever. Notwithstanding these achievements, 12 of our employees lost their lives at work during the year. This is completely unacceptable. We are deeply saddened by the loss and extend our sincere condolences to the family and friends of these colleagues.
I have mentioned above the ‘Zero Harm‘ objective of the company and wish to elaborate a little on incidents leading to injuries in the workplace. In a perfect world, if all employees receive the correct workplace safety training and – most importantly – comply perfectly with these rules in the workplace, very few, if any, injuries would occur. That much seems obvious and the question then is whether the training is adequate or whether the compliance to safety standards is inadequate. Our experience at Implats is that more than 90% of incidents that result in injuries have a non-compliance connotation at a critical stage leading up to the event. We therefore focus on better training to improve compliance with safety standards in order to eliminate any such events. Notwithstanding the emphasis that we place on this matter, we fail dismally to modify a perverse attitude to risk that sometimes pervades certain individuals in the workforce and leads to non-compliance. Such non-compliance and their consequences are manifested not only in the South African mining industry safety statistics when compared to other countries, but also in many other areas of our everyday lives, an example being the well publicised fact that South Africa has among the worst road fatality statistics in the world.
It is an attitude to risk and thus to compliance that is difficult to fathom, and the question is why such an attitude exists. Perhaps the example set by society at large in South Africa is a contributing factor; non-compliance with accepted norms and acceptable social behaviour by prominent individuals are often reported in the press. These actions do not go unnoticed, nor does it go unnoticed that such behaviour often goes unpunished; with the impression being created that non-compliance is somehow acceptable or may be condoned. The challenge that we face therefore is to modify significantly the attitude of the workforce towards risk and compliance, because, until such day as the workforce achieves 100% compliance with safety standards and practices, the ‘Zero Harm‘ objective will not eventuate. We believe that behaviour can be modified – as has been demonstrated by the world-class safety performance of Impala Refineries in Springs – and will pursue our objective with renewed vigour.
During 2007 the platinum market remained in deficit due to a combination of strong growth in demand coupled with a decline in supply, primarily from South Africa. The automotive sector remained the backbone of the industry with growth continuing to be driven by increasing light-duty vehicle sales in Europe and the tightening of legislation for heavy-duty diesel vehicles worldwide. Demand was also boosted by further growth from industrial applications and by investment demand which benefited from the introduction of the new exchange traded funds (ETFs). Prices moved up in the tighter market during the latter half of 2007 and rocketed in late January – fuelled by the Eskom power crisis – to a record level of $2 276/oz in early March. The euphoria associated with the high platinum prices must however be tempered by the very real possibility that thrifting and substitution of platinum in autocatalysts must be at the forefront of research programmes worldwide. Also, disinvestment by ETFs may add supply to the market when least needed.
The fundamentals for the palladium market continued to improve, however the market registered another significant surplus which, coupled with above ground stocks, continued to cap the price. The rhodium market remained in deficit for a second successive year and this, in a thinly traded market, translated into further price appreciation. The prices of these metals in relation to that of platinum will play a key role in both the substitution and thrifting endeavours referred to above.
Gross platinum production for Implats, excluding one-off toll treatment ounces, increased by 2% to 1.9 million ounces during the past year. This was primarily due to increases in third party processing contracts and represents a good performance in extremely trying circumstances. Operationally it was another difficult year for Impala Rustenburg where the grade remained a challenge. We have thoroughly investigated the reasons for this ongoing issue and have implemented various initiatives to address and rectify the problems. The reduction in ounces that occurred due to the grade issue was exacerbated by lower platinum production as a result of the power crisis, additional public holidays, safety interruptions associated with incidents and the shortage of skills.
The severe lack of skills currently being experienced throughout all sectors of the South African economy is presently the biggest challenge facing the group and, indeed, the mining industry in South Africa. The retention and attraction of skilled workers has reached critical proportions for Implats and various strategies have been implemented but these will have a profound impact on our cost base going forward. Fundamentally the situation has arisen because of the high levels of activity in metals and minerals businesses globally. Given the demand for skills worldwide, companies in South Africa have difficulty in competing with this drain of skills because even the most ardent patriot is ultimately swayed not only by money, but also by a better education for his or her children and the prospect of living in an environment that conforms to reasonable law and order.
It is clear that a massive concerted effort is required by the mining industry together with Government if skills are not to become a permanent Achilles heel for economic growth in South Africa. Government's response to the skills shortage in the short term is to allow certain companies to recruit skills outside of South Africa with immediate clearance for two-year work permits. Such a course of action buys the time to address the fundamental issue of training locals for these jobs but potentially adds to the volatility of the skills situation in two years time. Also, it should be borne in mind that such training may ultimately be futile unless the other reasons that have contributed to the skills drain are addressed – such as the education crisis and the issue of law enforcement.
The power crisis will definitely curtail Implats' performance going forward. Last year we announced the expansion of our processing capacity to accommodate the next stage in our growth to 2.8 million ounces of platinum per annum. Indeed, during the early part of the past year we contemplated a further expansion when it became clear that our competitors would not meet their production targets in even the medium term. Unfortunately the lack of guaranteed power has not only tempered these plans but has impacted our interim target to produce 2.5 million ounces by 2012. This target has effectively been moved out by three years. The key expansions that have been affected are the Leeuwkop Project and the development of the Merensky Reef at the Marula mine, both of which require a firm commitment on power for mining from Eskom. The lack of power will also slow the development of the junior sector of the industry, which in turn will temporarily impact Implats' ability to utilise its distinctive competence in processing and refining to full effect. An expansion of our processing and refining capacity nonetheless remains an option that is presently under consideration given that the lead time to achieve significantly increased production moves the start-up date sufficiently far into the future that security of power supply should be assured.
Despite the worsening of the socio-economic situation to a level not previously imagined and the unstable political environment in Zimbabwe, the expansion at Zimplats to 180 000 ounces per annum is progressing most satisfactorily. This superb achievement has to be seen in the light of the fact that Zimplats has to contend not only with an unstable socio-economic and political situation but additionally with the same critical issues of power and skills as our operations within South Africa. Our mining activity in Zimbabwe has increasingly been criticised recently as being beneficial to the existing ruling party and that we are effectively prolonging their tenure. It is true that, in the normal course of business, our operations do contribute in a significant way to Government coffers. However, I wish to state unequivocally that Implats has and always has had a non-aligned political posture within Zimbabwe; we operate in Zimbabwe because we believe it is in the interests of our shareholders to do so and we will cease operating in Zimbabwe when it is in the interests of our shareholders to do so or if the safety and security of our workforce is compromised. Consequently, our medium- to long-term strategy is still to increase production at Zimplats to 1 million ounces of platinum per annum.
Implats' objective is to be the pre-eminent platinum producer in the world, having already established itself as one of the lowest cost producer of any consequence. Indeed, the recently reported cost performance of the industry illustrates how well Implats has done on the cost front during the past years. Some ten years ago the group was fighting for survival with insufficient mining reserves; now that we have the reserves to grow the business, we are constrained by matters beyond our control. Shareholders will understand therefore the absolute feeling of despair brought about by the twin challenges of power and skills that pervade the economy. However, we are resolute in our commitment to growth and have in place an enthusiastic management team that will deal with the challenges most adequately.
In terms of corporate activity during the year, the group disposed of its holdings in both Aquarius Platinum Limited and Aquarius Platinum (South Africa) (Proprietary) Limited in a restructuring exercise that was predicated upon our assessment of the outlook for that company. These proceeds will be applied towards our ambitious growth objectives. We successfully secured our mining rights conversions for Impala and Marula and obtained our mining right for the Leeuwkop project. In addition, Marula enhanced its black economic empowerment credentials by concluding agreements with its three partners which sees them increasing their stakes in the company to 9% each, resulting in a composite BEE holding of 27%.
I would like to take this opportunity to thank my fellow board members for their dedication and wise counsel during the past year. In particular, I thank John Roberts who resigned from the board in October 2007 having been a member since 1998. His contributions over the years, both towards board matters and on the various committees of which he was a member, were invaluable. The board wishes him well in any future endeavours. I am pleased to welcome Fatima Jakoet who joined the board in August 2007 as an additional independent non-executive director. Her corporate business experience will surely benefit Implats and we look forward to the contribution that she will make.
My personal gratitude and that of the board goes out to David Brown and his management team, all employees and contractors, as well as to customers, suppliers and other business partners. Your efforts during the year in the face of a tough operating environment have ensured a solid operational performance. Thank you for your respective contributions. Going forward, we will continue to look for and initiate new growth opportunities that will enable all of us to achieve higher and sustainable growth together.
Fred Roux
Chairman
Implats - Annual Report 2008
| Forward-looking statements