Commentary

Overview

During an extremely challenging year we had to respond rapidly to preserve cash and protect our balance sheet in a depressed PGM market. This involved a material reduction in construction activities and the related capital expenditure at our Styldrift I project and an increased focus on mining and processing the Merensky Reef at our Bafokeng Rasimone Platinum Mine (BRPM). Styldrift I remains our core platform for organic growth. However, it is not deemed appropriate to ramp up our platinum ounces from the high-qualityMerensky Reef into a currently depressed market and it is also not prudent to burden our balance sheet by raising debt under the prevailing market conditions.

Human capital

Safety, health and wellness
The five fatal accidents that occurred in our operations during 2015 are of great concern to us. The RBPlat Board of directors (the Board) and management extend their condolences to the families, friends and colleagues of Mr Paquete, Mr Muchanga, Mr Sidumo, Mr Bendzane and Mr Seoehla. The safety, health and wellness of our employees is paramount to RBPlat achieving its goal of operational excellence. We have done well in terms of reducing our lost time injury frequency rate (LTIFR), which improved 22.8%year-on-year and has reduced by 59% since we took operational control of the BRPM Joint Venture in January 2010, and our serious injury frequency rate (SIFR) which improved 54.1% year-on-year and has reduced 75% over the past six years.

We commissioned investigations by an independent safety specialist to establish the reasons behind the serious deterioration in fatal accidents during 2015 when we are achieving a steady, and clearly sustainable improvement in our injury frequency rates. The investigations identified that leadership, behavioural maturity and contractor management needed addressing.

We have revised our safety management strategy and introduced several additional safety initiatives to address these areas more effectively. These initiatives include:

  • behaviour-based leadership programmes
  • establishment of a best practice and mentoring team
  • additional occupation technical training programmes
  • reviewing and aligning our volume contractor safety management strategies with RBPlat requirements
  • review and revise safety incentive systems.

Notwithstanding the fatal accidents we have suffered this year, RBPlat remains resolute in its drive to achieve zero harm through our uncompromising commitment to the safety of our employees and our objective of zero harm will be a major focus in our operations during 2016.

Noise-induced hearing loss (NIHL) is the most prevalent occupational health issue in our operations and we are encouraged by the 50% decrease in the number of cases diagnosed with NIHL exceeding 10% year-on-year.

We also achieved our commitment to ensure that all the employees of our contractors are members of a medical aid scheme.

Labour stability
Labour stability continued to play an important role in our performance in 2015. Our management, the union representatives and our workforce all continue to invest time and effort in maintaining a partnership based on trust, mutual respect, transparency and fairness. The commitment of all parties to constructive engagement plays a key role in our labour stability.

During 2015 we started work on Phase 2 of our employee home ownership scheme and 417 employees purchased homes in Phase 1 of the scheme.

Social and relationship capital

Our purpose is to create economic value that we can share with all our stakeholders. The communities in which we operate are key stakeholders of RBPlat. Our close-out report for our social and labour plan (SLP) projects for the period 2010 to 2014 was submitted to the Department: Mineral Resources (DMR) in November 2015. It is often extremely challenging to ensure the sustainability of community projects, however, we are proud of what we have achieved through our investment of R487.9 million in our SLP since we took over operational control of the BRPM Joint Venture in 2010.

We took the decision that the main focus of our SLP for 2016 will be human resource development and education support. Our investment in education support, which was designed to address maths and science learning, governance, school management skills at all levels including school governing bodies, infrastructure, safety and security has made good progress. We will continue to focus on improving maths and science learning, governance and school management skills in 2016.

Manufactured capital

Our ability to meet production targets, keep costs below mining inflation and deliver against our organic growth strategy was impacted by:

  • an increase in safety stoppages due to the fatal accidents suffered
  • weak PGM market conditions
  • Eskom power supply constraints
  • industry inflationary pressures.

The operational flexibility we have developed however, made it possible for us to minimise the impact of disruptions to production and respond effectively to current market conditions. These measures included:

  • maintaining our immediately stopable reserves at optimal levels
  • establishing the UG2 mining platform
  • ensuring our Phase III Merensky replacement project remained ahead of schedule
  • our modular approach to our processing requirements.

In response to the prevailing market conditions our focus during the second half of the year was on managing our operations through a depressed market cycle and reducing non-critical expenditure. This required several cost management initiatives and structural changes to the business at both an operational and project level. These included:

  • scaling down of mining and construction activities at Styldrift I
  • deferring the 250ktpm BRPM concentrator upgrade
  • deferring the 100ktpm concentrator module construction
  • deferring the construction of Phase III 14 and 15 levels planned for 2016 into 2017
  • deferring the Styldrift II feasibility study and exploration drilling
  • suspending UG2 development at South shaft into 2017, as current reserves are sufficient for mining requirements during 2016
  • reducing the number of UG2 trial mining stoping teams at South shaft and transferring them to higher grade Merensky Reef panels
  • reducing stay-in-business capital expenditure to between 4 and 5% of operating costs
  • aligning our employees with revised project and operational requirements
  • transferring experienced development resources from Phase III to Styldrift to assist with early development of key infrastructure.

Overall, our tonnes delivered decreased by 1% or 15kt to 2 456kt from 2 471kt in 2014. Our Merensky tonnes delivered reduced by 2% to 1 872kt with UG2 tonnes delivered increasing by 4% to 585kt, compared to 2014. The reduction in Merensky tonnes is directly attributable to the increase in safety-related stoppages.

Total development reduced by 11% or 4.4km to 35.5km when compared to 2014. This reduction was due to the increase in safety stoppages and the deferment of South shaft UG2 footwall development, as part of our cash preservation strategy. Despite this reduction development remains aligned with stoping depletion rates, with our IMS panel ratio of 1.51 being in line with our target of 1.5.

Our power management strategy, which involves reducing our overall load by restricting crushing operations at the plant proved effective in minimising the direct impacts of stage 1 and 2 curtailments on production, enabling our underground operations to continue unaffected. Stage 3 load curtailments however, resulted in several unscheduled stoppages negatively impacting on our milling volumes and recoveries.

During 2015 an estimated 275kt of milling production was lost due to safety stoppages compared to 79kt for the comparative 2014 period. The majority of the stoppages were directly related to the five fatalities and were necessary to address statutory requirements and correct specific operational deficiencies. The stoppages affected mainly Merensky production sections with Merensky related losses estimated at 227kt.

Our 4E built-up head grade reduced by 4% from 4.29g/t in 2014 to 4.11g/t in 2015. The reduction in grade was due to the increased contribution of UG2, on-reef development tonnes from the BRPM Phase III and Styldrift I projects and higher than planned North shaft on-reef stoping dilution as a result of the introduction of in-stope bolting. Our strategy remains to preferentially mine and treat Merensky, with UG2 being used to supplement production volumes.

Total tonnes milled reduced by 1% to 2 461kt. Merensky tonnes milled reduced by 2% to 1 874kt, while UG2 tonnes milled increased by 4% to 587kt. This resulted in the percentage of UG2 tonnes milled increasing marginally to 24% from 23% in 2014. The reduction in total milled volumes and the increase in UG2 contribution were directly related to mining volumes. The recoveries from the BRPM concentrator were in line with expectations, given the reduction in head grade.

The 1% reduction in milled volumes and 4% reduction in built-up head grade yielded a 5% reduction in 4E and platinum ounce production, with 278koz (4E) and 180koz platinum metals being produced in concentrate.

Operating costs
Our cash operating costs increased by 8% to R2 548 million and, combined with the 1% reduction in milled volumes, resulted in the unit cost per tonne milled increasing by 11% to R1 066. The 4% reduction in built-up head grade and marginally lower associated recovery resulted in the unit operating costs per 4E and platinum ounce increasing by 16% to R9 359 and R14 504, respectively.

Capital expenditure
Stay-in-business (SIB) capital expenditure decreased by 28% in 2015 compared to 2014 and equated to 4.4% of operating expenditure. The decrease in SIB, which was as a consequence of our current cash preservation strategy, will not have a negative impact on operational sustainability in the short to medium term. We expect our SIB expenditure to remain between 4 and 5% in 2016.

Replacement and expansion capital expenditure is in line with project construction progress for the year.

The increase in our total capital expenditure for 2015 of R285 million, or 17% to R2 009 million, is attributable to Styldrift Iconstruction-related expenditure preceding the scaling down of construction activities during the second half of the year.

Projects

Styldrift I expansion project

On 4 August 2015 the Board implemented a strategic decision to materially reduce construction activities and the related capital expenditure on the Styldrift I project. The material reduction in PGM prices experienced during the first half of the year and the view that the PGM market is likely to remain depressed in the medium term influenced this decision. This resulted in:

  • suspension of all major contracts, notably the mining contract with Aveng, contracts involved with the overland conveyor belt construction and deferral of all major contracts relating to the supply of mining equipment, fleet and infrastructure
  • the transfer of RBPlat’s experienced development resources from Phase III at BRPM to Styldrift I to assist with the early development of key infrastructure.

In order to better align the timing of the ramp up of Styldrift I to the prevailing market conditions, the start of ramp up has currently been delayed by 12 months, which will result in steady state production of 230ktpm being achieved in the first quarter of 2020.

Our revised mining and construction plan is based on a self-funding strategy with the majority of the work being funded from surplus BRPM cash flows and revenues generated from on-reef development at Styldrift I. The plan focuses on developing key infrastructure and establishing sufficient stoping face length to enable us to sustainably deliver 50kt per month to the concentrator and position Styldrift I favourably to initiate an aggressive ramp up when market conditions permit.

We completed 1.6km of development in 2015, delivered 65kt of on-reef development ore to the concentrator, completed the support and lining of Silo 2 and commissioned Ventilation shaft 1. Project expenditure for the year was R1 659 million, which brought the cumulative expenditure to R5 477 million project to date.

Our revised project scope requires a total of 7.8km of development to be completed by the end of 2016 with 1.0km completed in 2015 and 6.8km planned for completion in 2016. This will result in:

  • four pre-established stoping sections equating to approximately 800m of face length
  • four equipped workshops and 32 pre-developed workshops
  • 900m of footwall development including associated ore-passes on 642 level
  • reaming and lining of Silo 4 and sliping of Settler 1 to establish the necessary ore handling and pumping infrastructure on 708 level.

This will position us well to commence with ramp up during 2017, market conditions permitting.

The completion of the 250ktpm upgrade of the BRPM concentrator, originally scheduled for 2015, was affected by our cash preservation strategy. As a result, its completion was deferred to the first quarter of 2016.

BRPM Phase III replacement project

The North shaft Phase III replacement project involves the extension of the North shaft Merensky decline system and associated infrastructure from 10 level down to the mining boundary at 15 level. The project was 88% complete against a plan of 81%, with development 1 158m, or 10 months, ahead of schedule at year-end. This allowed us to divert some of our most experienced development resources to the Styldrift I development programme and defer the construction of the last two levels (14 and 15) to 2017, which will reduce capital expenditure in 2016. This deferment will have no impact on the handover dates for those levels or the mine extraction plan as project completion remains set for 2017, as per the project schedule.

The project remains below budget, with expenditure for 2015 amounting to R203 million and a cumulative amount of R992 million for the project to date.

Financial capital

Our focus on cash preservation to maintain a strong balance sheet and our decision to slow down Styldrift I has positioned the Group favourably to benefit from stronger PGM prices when the PGM price environment improves.

RBPlat’s results reflect the impact of low growth in demand for PGMs, an average US$ platinum price received that was 28% lower than in 2014 and lower grades and throughput.

Our revenue of R3 044.7 million for 2015 is down 19% year-on-year due to a 13% lower realised average rand basket price and 5% lower PGM production and sales compared to 2014.

While we had grade and throughput challenges throughout the year we were able to achieve a significant improvement in our cash operating cost in the second half of the year. We closed the year with an average cost per platinum ounce of R14 504, which was a 7% improvement on our cash operating cost for the first half of the year. The cash unit cost per platinum ounce increased by 16% from R12 463 to R14 504 due to a 5% decrease in platinum ounce production, the front-end loading of the wage increases in terms of our five-year wage agreement and above inflation utility increases.

The 19% decrease in our revenue and 6% increase in our cost of sales resulted in a significant reduction in our gross profit margin from 23% in 2014 to a gross loss margin of 1% in 2015.

Given the decrease in PGM prices and the reduction in the market value of the company, the components of the BRPM JV (BRPM, Styldrift I and Styldrift II), and goodwill allocated to each of these components, were assessed for impairment resulting in an impairment charge of R4 466.2 million (attributable after tax R2 886.2 million).

Our loss before tax which includes the abovementioned impairment charge is R4 520.3 million for 2015 compared to a profit of R844.5 million in 2014.

Total SLP expenditure for 2015 amounted to R74.5 million of which R63.8 million was expensed and R10.8 million was capitalised to the Styldrift I project.

Other income increased by 172% from R25.2 million in 2014 to R68.7 million in 2015. This increase is due to higher royalty income from Implats and a gain of R21.4 million on the fair value of forward exchange contracts (FECs) (ZAR:US$ and euro FECs) and call options entered into in 2015. We entered into the euro FECs to hedge our euro exposure resulting from the acquisition of equipment for our Styldrift I project from Europe. In 2014 our royalty income from Implats was negatively impacted by the lengthy industrial action during the first five months of the year.

Our administration costs increased by 20% from R137.3 million in 2014 to R164.1 million in 2015, mainly due to a R22.7 million increase in costs relating to the RBPlat home ownership scheme.

Finance income increased by 10% from R96.4 million in 2014 to R106.2 million in 2015 largely due to the treasury management system that we implemented during 2015 which resulted in a 3% improvement (R21 million) in our return on cash investments and cash balances.

Finance costs increased from R5.1 million in 2014 to R25.1 million in 2015, mainly due to a R18.8 million interest expense incurred on the PIC housing facility put in place in 2015.

The income tax charge increased to R76.9 million in 2015 mainly as a result of a R50 million once-off charge relating to RBR’s 2008, 2009 and 2010 tax settlement. Deferred tax decreased from an expense of R222.0 million for the 12 months ended 31 December 2014 to a credit of R830.2 million for 2015. The deferred tax credit relates mainly to the impairment charge (R855 million credit) and mining losses (R23 million credit) offset against a R60 million deferred tax charge relating to the RBR tax settlement mentioned earlier.

RBPlat made a headline loss of 83 cents per share for the year ended 31 December 2015 compared to headline earnings of 239 cents per share for the year ended 31 December 2014. The main contributors to this negative movement of 322 cents per share were:

  • 144.2 cents resulting from the 13% reduction in the average rand basket price of R17 256/Pt ounce
  • total negative movement of 41.9 cents in 2015 due to the pipeline revaluation
  • 57.5 cents attributable to the settlement of the tax dispute with SARS described previously (R50 million income tax and R60 million deferred tax)
  • 90.6 cents attributable to mining inflation increase in cash costs
  • positive 12.4 cents relating to other movements.

Natural capital

Addressing the causes and adapting to the impacts of climate change is core to our strategy, which seeks to deliver More than mining by creating economic value for all our stakeholders. During 2015, our new climate change policy and strategy was approved by the Board in line with our endorsement of the UN Caring for Climate initiative, which is the largest business movement to address climate change. We have participated in the Preparing Business for Paris Campaign (COP21) and have committed ourselves to:

  • ensuring responsible corporate engagement in climate policy
  • providing climate change information in mainstream corporate reports.

The Board approved the water and energy targets for the next ten years and also adopted detailed plans for achieving our energy targets following a detailed review of energy efficiencies in our operating businesses.

We have taken steps to reduce our dependence on Magalies Water by building a water treatment plant at BRPM which was commissioned during the year. It will provide us with four megalitres of treated industrial water for use in certain concentrator processes, which is expected to reduce our use of Magalies Water in 2016.

We are proud that RPBlat’s latest CDP disclosure and performance score improved 10% in the year of COP21, from 87% C in 2014 to 96% B in 2015.

Market review

Platinum
The average dollar platinum price for 2015 was US$1 053/oz ending off the year at a reduced level of $868/oz with themacro-economic influences that were negative for commodities towards the end of 2014 continuing through 2015. South African platinum supply was at its highest level of 4.1Moz since 2013. Low prices led to a 1% drop in recycling volumes from autocatalysts and jewellery. Automotive demand rose by 4% to a seven-year high of 3.42Moz, largely due to higher diesel output and tighter EU emission limits. Jewellery demand fell 5% to 2.58Moz with the strong growth in India partly offsetting the weak Chinese market. The surge in Japanese investment as platinum fell below ¥4 000 per gram in July 2015 outweighed ETF selling in the USA and Europe.

Palladium
The palladium supply rose by 6% to 6.77Moz in 2015 as South African output recovered. Weak PGM prices have led to hoarding by scrap collectors, but autocatalyst recycling is still up 100koz. Gross palladium demand was up 195koz in 2015 to 10Moz. Autocatalyst consumption set a new record of 7.68Moz in 2015, but the growth rate will slow as the Chinese car market growth slows. Despite negative investment demand the palladium market remained in fundamental deficit of 865koz for 2015.

Rhodium
A rebound in the South African supply pushed rhodium nearer to balance, with a 25koz deficit in 2015. Primary supply rose by 20% to 701koz, partly offset by a 9% drop in autocatalyst recoveries of rhodium. Automotive demand rose slightly in 2015 to 858koz, as vehicle production rose, while industrial and other demand were stable.

Changes to the board of directors

Shareholders were advised during the year under review that Mr LM Ndala resigned and Mr V Nhlapo was appointed to the Board on 24 November 2015. Mr Ndala made a very valuable contribution to the Board during the nearly three years he has been a director of RBPlat. The Board welcomes Mr Nhlapo and looks forward to his contribution as an experienced miner who is familiar with RBPlat’s operations.

Outlook

In 2016 we will continue to focus on achieving operational excellence, zero fatalities, maintaining the improvement in our LTIFR and SIFR, returning to the productivity levels of 2014 at BRPM and delivering 50kt per month from Styldrift I by end of 2016.

Our key operational challenges in 2016 will be to ensure operational stability, volume delivery, grade optimisation and cost containment in order to maximise our cash flow. Zero harm, astute cost control and maintaining stable labour and stakeholder relations will be critical success factors for 2016.

We anticipate that PGM prices will remain at their currently depressed levels at least for the next 12 months. Our business and operational planning for 2016 is based on an assumed average basket price of R17 500/Pt ounce (2015 real terms) with our SIB, BRPM Phase III replacement and Styldrift I expansion related capital expenditure being aligned accordingly.

Styldrift I remains a key component of our organic growth strategy and as such we will continue to develop, construct and equip long lead items and infrastructure required to support ramp up when market conditions improve. Prudent expenditure will however, be required in the medium term to ensure the Styldrift I project continues to progress without impacting the overall health of our business.

At our assumed revenue basket price for 2016, a total of R1 billion capital expenditure is scheduled at Styldrift I during 2016, of which we estimate approximately R600 to R700 million will be funded from cash flow generated by our BRPM operations and Styldrift on-reef development. We have the flexibility to pull back some of the infrastructure spend on the project should the average rand basket price reduce below our assumed level of R17 500/Pt ounce for a prolonged period.

Total joint venture capital expenditure for 2016, including escalation and contingencies, is forecast at around R1.3 billion, the key driver being the Styldrift I capital construction programme. SIB capital expenditure is forecast at between 4 and 5% of operating expenditure.

Joint venture production for 2016, subject to any unforeseen operational disruptions, is forecast to increase (in line with the revised Styldrift I construction schedule) to between 2.75 and 2.9Mt at a 4E built-up head grade of 3.95 to 4.05g/t. The reduction in built-up head grade is directly attributable to the high percentage of on-reef development at Styldrift I (related to workshop infrastructure in 2016), which Styldrift I will contribute to our overall production.

We will also continue to focus on maintaining optimal flexibility and actively pursue value enhancing opportunities which, if appropriate, will be put to our shareholders for their consideration.

We expect the Group after taking working capital requirements and the above assumptions into account, to end 2016 with a positive cash balance, with the likelihood that the R500 million revolving credit facility secured in January 2016 will remain unutilised by end of 2016.