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Operating Update Quarter Ended 31 March 2019
SALIENT FEATURES FOR THE QUARTER ENDED 31 MARCH 2019
- Maintained solid H2 2018 safety performance - numerous historic safety milestones achieved
- The transition to a Toll processing arrangement at Rustenburg adds both strategic and commercial value - direct access to end users and margin enhancing relative to the PoC arrangement
- The improved financial performance from the combined PGM operations more than offset strike related losses at SA gold operations
- Adjusted EBITDA of R1,819 million (excl. Rustenburg) from the combined PGM operations resulted in positive Group adjusted EBITDA of R176 million
- Including Rustenburg, pro-forma adjusted EBITDA from the combined PGM operations would have been R2,574 million
- Strike at SA gold operations brought to a successful conclusion post quarter end
- Section 189 restructuring process at SA gold operations well advance and expected conclusion by mid May 2019
- Five year wage agreement reached for the Stillwater mine and Columbus metallurgical complex post quarter end
- Strategic balance sheet management through equity placing and gold prepayment
- Appropriately positioned with R10 billion available facilities and reduced leverage
- Net debt: adjusted EBITDA at 3.0x at 31 March 2019- reduced to 2.54x on a pro-forma basis (excl. Rustenburg)
OVERVIEW AND UPDATE FOR THE QUARTER ENDED 31 MARCH 2019
Q1 2019 was an important period for Sibanye-Stillwater, with the Group successfully navigating complex operational and financial challenges and achieving some significant milestones which, we believe, have positioned us to sustainably benefit from higher prevailing precious metal prices and to better withstand any challenges that may occur during the year.
The notable improvement in safety across during H2 2018 was maintained in Q1 2019, with the Group achieving improvements in most safety measures across the operations and achieving a record seven million fatality free shifts on 7 March 2019. This was sadly curtailed by a fatal fall of ground incident at the SA PGM operations on 20 March 2019. The SA gold operations recorded a second successive quarter without any fatalities and continued to improve on other safety measures. Safe production continues to be the highest priority across the Group and we remain focused on maintaining and improving on our safe production performance at all of our operations.
The Association of Mineworkers and Construction Union (AMCU) strike which began at the SA gold operations on 21 November 2018 continued throughout Q1 2019, concluding after almost five months on 17 April 2019. The operational and financial impact of this extended strike at the SA gold operations, was mitigated by another solid operational performance from the SA PGM operations enhanced through significantly higher palladium and rhodium prices, which, combined with a 17% depreciation in the average rand:dollar exchange rate, boosted earnings and cash flow from both the SA and US PGM operations. A slower than anticipated start to the year at the US PGM underground operations and temporary flexibility constraints resulted in lower than anticipated production mined production and which resulted in elevated unit costs for this reporting period. The commissioning of the second electric furnace (EF2), enabled an increase in recycling processing volumes and a reduction in metal inventory, resulting in higher sales volumes .
Average unit commodity prices were higher across the Group operations for Q1 2019 relative to Q1 2018. The 27% increase in the average 2E PGM basket price to US$1,305/oz in Q1 2019, resulted in adjusted EBITDA from the US PGM operations increasing by 33% to US$105 million. In rand terms, this amounted to R1,466 million, a 56% year-on-year increase.
The gearing of the SA PGM operations to the higher rand PGM basket price was similarly evident, with the 33% higher average 4E basket price of R17,104/oz significantly boosting earnings and cash flow. Reported adjusted EBITDA of R353 million from the SA PGM operations was 38% higher than for Q1 2018. This result was achieved despite the change in the contractual processing arrangement with Anglo American Platinum from a Purchase of Concentrate (PoC) to Toll processing arrangement (discussed in more detail in the operations section below). From an accounting perspective this contractual change resulted in zero revenue recognition of 4E production from the Rustenburg operations. Cash flow due to the contractual change was not affected and on a normalised basis, the pro-forma adjusted EBITDA (including Rustenburg), would have been R1,108 million (US$79 million), which is a 330% increase relative to Q1 2018. Attributable adjusted EBITDA from Mimosa, of approximately R198 million (US$14 million) generated during Q1 2019 is equity accounted and also excluded from Group adjusted EBITDA.
The combined adjusted EBITDA from the PGM operations (US and SA) of R1,819 million (US$130 million) for Q1 2019, more than offset the R1,661 million adjusted EBITDA loss from the SA gold operations due to the strike action, resulting in Group adjusted EBITDA of R176 million for Q1 2019. Including the deferred adjusted EBITDA from the Rustenburg operations, normalised adjusted EBITDA from the combined PGM operations would have been 131% higher at R2,574 million (US$184 million) with normalised Group adjusted EBITDA higher at R931 million (US$66 million). We remain focused on deleveraging the Group balance sheet with net debt to adjusted EBITDA at the end of Q1 2019 of 3.00x, was below the Group’s 3.5x covenant ceiling for 2019. Following the 5% share placing of approximately R1,700 million (US$120 million) and gold prepayment (announced on 10 and 11 April 2019) of approximately R1,750 million (US$125 million), pro-forma net debt to adjusted EBITDA would be approximately 2.54x.
Whilst the strike action and the gradual build-up post the strike will continue to negatively impact the SA gold operations during Q2 2019, unit revenues for both the gold and PGM operations are expected to exceed those in the comparative period in 2018 and further deleveraging is anticipated during the course of the year.
SA gold operations
On 17 April 2019, the five month long strike, which was called by AMCU at our SA gold operations on 21 November 2018, was resolved. Our ongoing attempts to end the strike both through legal means and through ongoing engagement with AMCU, were frustrated by ongoing legal challenges and significant intimidation and violence at the operations and in surrounding communities. Despite these vexing actions, we remained resolute and committed to honouring the collective agreement we had reached with the National Union of Mineworkers (the NUM), Solidarity and UASA in respect of wages and conditions of service for the period 1 July 2018 to 30 June 2021. It was therefore pleasing to ultimately resolve the strike in a sustainable manner which did not undermine our values and other stakeholders.
Under the terms of the agreement reached with AMCU, its members will be subject to the same conditions of the original collective wage agreement reached with the other three unions on 15 November 2018. Furthermore, the union committed to concluding a peace pact with the company and the other unions within 30 days as well as engaging in future on a constructive basis across the entire South African segment. .
In recognition of the difficulties experienced by employees during the strike, the Group has agreed to an ex-gratia ‘return to work’ payment of R4,000 for all employees (not just AMCU members) at the SA gold operations. In addition the Company has offered a cash advance to AMCU members up to a maximum of R5,000 which will be repayable over a 12- month period. Debt consolidation and counselling as part of the existing ‘Care for iMali’ program will also be freely available. Furthermore, the Company waived its rights to reclaim costs incurred on behalf of employees during the strike, including contributions made to medical aid and pension/provident funds, accommodation and meal costs.
SA PGM operations
The PGM sector wage negotiations will commence in the next few months at the Rustenburg operations, with the three year Kroondal wage agreement up for renewal only in July 2020.
US PGM operations
Wage negotiations with the United Steelworkers Union at the Stillwater mine and Columbus metallurgical complex were successfully concluded during April 2019. The new five-year agreement is on similar terms to the previous agreement with minor revisions, and pay increases broadly in line with other industrial and mining operations. The four-year contract for East Boulder mine, which was agreed in December 2015, remains in place until December 2020.
It is extremely pleasing to note that there have been no fatalities at the SA gold operations since August 2018, with a significant milestone of four million fatality free shifts achieved on 8 April 2019. This is a record for these operations.
A safe build up to normalised production levels following the extended strike will be the primary focus for the SA gold operations during Q2 2019. Ensuring that the work places, many of which have been dormant for almost five months, are safe and conducive to mining and re-integrating the teams will require a measured and gradual approach, with normalised production rates expected to be achieved during Q3 2019.
The Total Reportable Injury Frequency Rate (TRIFR) (measured per million hours) for the US PGM operations of 16.0 for Q1 2019 improved from 17.8 for Q1 2018. There was a notable improvement in the safety performance during the quarter, which started poorly with 60% of the reportable injuries occurring in January 2019.
A fall of ground incident at the SA PGM operations on 20 March 2019 tragically claimed the life of Madodana Manzenze, a rock drill operator at Thembelani shaft in Rustenburg. The Board and management of Sibanye-Stillwater extend their sincere condolences to the family and friends of Mr Manzenze. Prior to this incident, the SA PGM operations achieved 4.4 million fatality free shifts over a six month period.
US PGM operations
Mined PGM production from the underground operations of 130,899 2Eoz for Q1 2019, was 12% lower than the comparable period in 2018 primarily due to flexibility constraints caused by sequencing challenges at both the Stillwater and East Boulder mines. This temporarily restricted access to higher grade production stopes. Whilst total operating costs and capital expenditure were in line with expectations, lower production resulted in elevated All-in Sustaining Cost (AISC) per unit for the quarter. Production is expected to ramp up over the balance of the year and annual production and cost guidance remains unchanged. Following the re-commissioning of EF2 in February 2019, the Columbus Metallurgical Complex, increased throughput of mined and recycled material resulting in a record throughput for the quarter. During the period the recycling operation fed an average of 25.6 tonnes of material per day (tpd), enabling a reduction in metal inventory of approximately 32,000oz during the quarter.
The US PGM operations renegotiated its refining and certain sales agreements during Q1 2019, resulting in the reversal of the Group deferred tax charge of R1,545 million (US$108 million), recognised in December 2018. The 2019 effective combined federal and state cash tax rate for the US operations/segment are expected to be between 5 and 10%. The change of tax is a result of sales moving to a different tax jurisdiction.
SA PGM operations
The financial implications of the transition from a PoC to a Toll processing arrangement with Anglo American Platinum effective from 1 January 2019 were discussed in detail in the operating and financial results for the six-months and year-ended 31 December 2018, which were released on 21 February 2019.
In terms of the Toll arrangement, Sibanye-Stillwater pays an agreed toll fee to Anglo American Platinum to smelt and refine concentrate from the Rustenburg operations, but retains ownership of the refined metal produced. From a financial reporting perspective, Sibanye-Stillwater will receive and recognise all the recovered metal at the full average 4E PGM basket price once sold and no longer reflect a discount in its revenue, though costs and unit costs will be higher than under the PoC arrangement, reflecting the additional tolling costs.
At the current spot 4E PGM basket price, the net financial impact of this contractual change is positive, with the increased revenue more than offsetting the additional toll cost and as a result is beneficial both commercially and strategically. The change in the arrangement however results in a delay in the recognition of 4E PGM revenue, due to the point of sale being extended to the end of the processing pipeline, which resulted in no 4E PGM revenue or adjusted EBITDA being recognised from the Rustenburg operations in Q1 2019 (as discussed in the introduction).
Attributable 4E PGM production from the SA PGM operations (including Mimosa) of 263,508 4Eoz and AISC (excluding Mimosa) of R12,741/4Eoz (US$909/4Eoz) are in line with annual guidance. Production guidance for 2019 was lower relative to 2018 due to a reduction in lower grade surface material processed, which is uneconomical under the toll arrangement. In order to further optimise margins by managing tolling costs and revenue, a revised mass pull strategy was implemented at Rustenburg to reduce the volume of underground concentrate sent for processing (causing a slight decline in recoveries), with processing of lower grade surface material also significantly reduced. Kroondal continued its strong performance, with production marginally higher and AISC 4% higher at R10,916/4Eoz, reflecting a real reduction in unit costs.
Q1 2019 chrome sales of 199,343 tonnes were significantly higher than the 94,140 tonnes in Q1 2018 due to a greater availability of cargo vessels relative to early 2018. Chrome revenue of R304 million for Q1 2019 was therefore higher than the Q1 2018 chrome revenue of R117 million despite lower chrome prices in Q1 2019.
SA gold operations
Total gold production from the SA gold operations for Q1 2019 of 4,456 kg (143,278oz), includes 1,130kg (36,330oz) of production from DRDGOLD. Like-for-like, production from the SA gold operations, excluding DRDGOLD, declined 63% to 3,326kg (106,948oz) for Q1 2019 quarter compared with Q1 2018, reflecting the impact of the AMCU industrial action.
Implementation of strike mitigation plans at the SA gold operations and the “no work no pay principle”, resulted in a significant reduction in operating costs in absolute terms during the quarter. Unit costs were however negatively affected by the lower production volumes, resulting in AISC (excluding DRDGOLD) of R1,002,350/kg (US$2,225/oz), significantly higher than expected ASIC of around R550,000/kg, at more normalized production levels.
Striking employees began to report for work at the SA gold operations from 24 April 2019, following the conclusion of the five month AMCU industrial action on 17 April 2019. As a result of the extended period that large sections of the SA gold operations stood dormant during the strike and in order to ensure the safety of employees, the buildup in production will be measured and gradual, with normalised production rates only anticipated during Q3 2019. A full review of all the workplaces is currently underway and following any necessary re-planning, production guidance will be provided to the market.
Section 189 consultations
On 14 February 2019 notice was given to relevant stakeholders regarding the possible restructuring of the SA gold operations, in terms of Section 189A (Section 189A) of the Labour Relations Act, 66 of 1995 (LRA and associated services) (S189).
Despite an attempt by AMCU to interdict the S189 process, consultations proceeded and the process is expected to be concluded in mid May 2019. Subject to the outcome of the S189 process, approximately 5,870 employees and 800 contractors may be directly impacted. The outcome of the S189 consultation process will be communicated to all stakeholders once concluded.
The proposed Lonmin acquisition
On 25 April 2019, it was announced that the Boards of Sibanye-Stillwater and Lonmin had reached agreement on the terms of an increased recommended all-share offer to be made by Sibanye-Stillwater for the entire issued and to be issued ordinary share capital of Lonmin (the Increased Offer). Under the terms of the Increased Offer, Lonmin shareholders will be entitled to receive one new Sibanye-Stillwater share for each Lonmin share that they hold (the Revised Exchange Ratio), reflecting a an additional 0.033 new Sibanye-Stillwater shares per Lonmin share held relative to the Exchange Ratio of 0.967 new Sibanye-Stillwater shares for each Lonmin share held, as announced on 14 December 2017. The Increased Offer for Lonmin reflects the recent recovery in the PGM pricing environment, balanced against the fact that Lonmin continues to be financially constrained and unable to fund the significant investment required to sustain its business and associated employment. The Increased Offer is proposed to be effected by means of a UK scheme of arrangement (the Scheme) and remains subject to a number of conditions, including the relevant approvals of Lonmin shareholders and Sibanye-Stillwater shareholders and of the High Court of Justice of England & Wales.
On 25 April, Sibanye-Stillwater advised that a circular (Circular) containing, inter alia, an ordinary resolution regarding the issuance and allotment of shares as the consideration payable by Sibanye-Stillwater to Lonmin shareholders in respect of the Increased Offer (Ordinary Resolution), a notice convening the general meeting (General Meeting) and a form of proxy, had been posted to Sibanye-Stillwater Shareholders.
The Circular is available, subject to certain restrictions relating to persons in certain restricted jurisdictions, on Sibanye-Stillwater’s website at www.sibanyestillwater.com/....
The outcome from the Competition Appeal Court of South Africa, which was heard on 2 April 2019, is expected to be provided in due course.
The General Meeting of Shareholders will be held at the Sibanye-Stillwater Academy, Rietkloof 349, Glenharvie, 1786, South Africa, on Tuesday, 28 May 2019 at 08:30 a.m. (South African time), immediately before the Sibanye-Stillwater annual general meeting, to consider and, if deemed fit, pass, with or without amendment, the Ordinary Resolution set out in the Circular. Sibanye-Stillwater also notes that a circular in relation to the Increased Offer and the Scheme (the Lonmin Scheme Circular) was published by Lonmin on 25 April 2019 and is available, subject to certain restrictions relating to persons in certain restricted jurisdictions, on Lonmin’s website at www.lonmin.com/... and on Sibanye-Stillwater’s website at the address noted above.
Share placing and gold prepayment
On 9 April 2019 the Group announced that it would be raising equity capital through a non pre-emptive cash placing of new Sibanye-Stillwater shares through an accelerated book build process with new and existing institutional investors. On 15 April 2019, Sibanye-Stillwater announced that a total of 108,932,356 new ordinary no par value shares, representing approximately 5% of Sibanye-Stillwater’s then in issue ordinary share capital, had been placed with new and existing institutional investors. The cash placing closed at a price of R15.50 per share to raise gross proceeds of approximately ZAR1,700 million (US$120 million). The new shares were admitted to listing on the Main Board of the Johannesburg Stock Exchange on 15 April 2019. On 11 April 2019, it was further announced that US$125 million (approximately R1,750 million) had been raised through a forward gold sale arrangement (gold prepayment) in terms of which, 105,906oz (3,294kg) of gold would be delivered during Q4 2019, subject to a floor price of US$1,200/oz and a cap price of US$1,323/oz.
The equity raise and the gold prepay significantly enhanced the Group balance sheet flexibility and liquidity position, providing the Company with approximately R10 billion (US$700 million) of undrawn available facilities.
Mined 2E PGM production guidance from the US PGM operations for 2019 of between 645,000oz and 675,000oz and AISC guidance of between US$690/2Eoz and US$730/2Eoz remains unchanged.Total capital expenditure for the year is guided at between US$235 million and US$245 million for the year. Approximately half of this anticipated spend is growth capital in nature, including expenditure on the Fill the mill project.
4E PGM production from the SA PGM operations for 2019 is unchanged at between 1,000,000oz and 1,100,000oz with AISC between R12,500/4Eoz and R13,200/4Eoz (US$922/4Eoz and US$974/4Eoz), reflecting the transition to the Toll processing arrangement. Capital expenditure is forecast at R1,400 million (US$103 million), which includes approximately R230 million (US$17 million) of project capital. The dollar costs are based on an average exchange rate of R13.55/US$.
Guidance for the SA gold operations will be provided once we have sufficient clarity of the production build up.
Precious metals prices remain significantly elevated and at current spot prices further deleveraging towards an anticipated target of 1.8x net debt to adjusted EBITDA is expected by year-end.
This announcement contains “forward-looking statements” within the meaning of the “safe harbour” provisions of the United States Private Securities Litigation Reform Act of 1995. Forward-looking statements may be identified by the use of words such as “target”, “will”, “would”, “expect”, “can”, “potential”, “could” and other similar expressions that predict or indicate future events or trends or that are not statements of historical matters. These forward-looking statements, including among others, those relating to our future business prospects, financial positions, debt position and our ability to reduce debt leverage, plans and objectives of management for future operations, our ability to obtain the benefits of any streaming arrangements or pipeline financing, our ability to service our Bond Instruments (High Yield Bonds and Convertible Bonds), our ability to achieve steady state production at the Blitz project and the anticipated benefits and synergies of our acquisitions are necessarily estimates reflecting the best judgement of our senior management and involve a number of known and unknown risks, uncertainties and other factors, many of which are difficult to predict and generally beyond the control of Sibanye-Stillwater, that could cause Sibanye-Stillwater’s actual results and outcomes to be materially different from historical results or from any future results expressed or implied by such forward-looking statements. As a consequence, these forward-looking statements should be considered in light of various important factors, including those set forth in the Group’s Annual Integrated Report and Annual Financial Report, published on 29 March 2019, and the Group’s Annual Report on Form 20-F filed by Sibanye-Stillwater with the Securities and Exchange Commission on 9 April 2019 (SEC File no. 001-35785). These forward-looking statements speak only as of the date of this announcement. Sibanye-Stillwater undertakes no obligation to update publicly or release any revisions to these forward-looking statements to reflect events or circumstances after the date of this announcement or to reflect the occurrence of unanticipated events, save as required by applicable law.
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