The significant factors currently impacting the South African PGM industry are likely to continue into 2010.
PGM industry continues to be cash constrained
South African mining inflation remains relatively high, putting pressure on industry margins and capital investment. Recent improvements in US dollar based PGM pricing have been largely offset by South African Rand strength, which has resulted in capital shortages and new projects being delayed. Cash flow management remains a high priority in the industry.
Labour environment remains challenging
The labour environment continues to be a significant influence on the performance of producers, from both a productivity and cost perspective. Industry wage settlements for 2010 have once again been above inflation. Lonmin’s negotiations take place late in the year and, at the time of writing this report, we remain in discussions with our recognised unions on this matter. Furthermore, the shortage of key skills remains an issue for the mining industry in general. With these challenges in mind, Lonmin recognises the importance of employee engagement strategies.
Section 54 safety stoppages increasing in frequency
We support the Department of Mineral Resources’ increased focus on safety. This focus was evidenced in 2009 by an increase in prevalence and severity of Section 54 safety stoppages throughout the industry. Lonmin lost over half a million tonnes of ore production as a result of these stoppages during the 2009 financial year, representing some 30,000 Platinum ounces or 5% of total underground production. These stoppages are likely to continue in 2010 and beyond. Our challenge is to improve on our industry leading safety record in order to reduce the impact of these stoppages on our operational and financial performance.
Producers who are able to deliver the strongest safety performances should benefit from fewer interruptions and higher productivity. Our safety performance remains strong and improved slightly in 2009. However, it was with regret that we reported the death of three of our employees during the year.
Increasingly difficult and more complex geology
The Bushveld Complex is a mature geological environment and mines in the area will continue to deepen over time, with many of the easier to access reserves becoming steadily depleted. This is expected to have a consequent impact on industry costs, grades and recoveries in the future. Lonmin is in the fortunate position of having access to relatively shallow reserves and resources.
Outlook for supply and cost of electricity remains uncertain
Challenges in the supply and cost of electricity in South Africa remain. Electricity pricing tariffs are expected to increase by over 45% in 2010 and there will be similar power price increases in the subsequent years. In addition, there is a possibility that security of supply could again come under pressure in the medium term, adding to the supply side challenges outlined above.