JOHANNESBURG (miningweekly.com) – Platinum miner Lonmin on Monday raised its production guidance for the full 2013 financial year to 700 000 oz of metals-in-concentrate, up from previous expectations of 680 000 oz.

The company produced 366 059 oz of platinum-in-concentrate and sold 326 142 oz of the precious metal during the six months ended March 31.

Lonmin acting CEO Simon Scott said the company had exceeded its renewal plan and delivered a strong operational and financial performance in the first half of the financial year.

This reflected the successful execution of the operational plans the company had implemented for the safe restart and ramp-up of production, following the labour unrest in August and September last year.

Scott noted, however, that the momentum established in the first three months of the financial year was tempered by higher-than-anticipated Section 54 stoppage time, management-induced safety stoppages, as well as intermittent labour disruptions towards the end of the half-year.

“We continue to operate ahead of our renewal plan but slightly below the levels we consider ultimately acceptable,” he noted.

Further, the combination of better-than-expected production volumes, a marginally better platinum group metals (PGMs) price environment, a favourable rand/dollar exchange rate and effective cost containment resulted in Lonmin achieving an operating profit of $90-million in the half year, compared with $14-million in the prior period, and profit before tax of $54-million, up from $18-million in the first half of the previous financial year.

The miner raised $767-million net of costs and foreign exchange movements from its rights issue announced late last year, which enabled it to de-risk its balance sheet. Scott noted that Lonmin had used the proceeds to settle its bank debt and reduce the overall facilities from around $915-million to $615-million, based on March 31 exchange rates.

The combination of the rights issue and a good first-half performance resulted in a net cash balance of $194-million as at the end of March. This was a marked shift from the net debt position of $421-million Lonmin had at the end of September.

The business generated positive free cash flows after capital expenditure of $116.2-million in the second quarter, while unit costs were well contained, increasing by 5.8% to R8 648/oz of PGMs when compared against the comparable prior-year period and $73-million was spent on capital.

Supply Deficit

Meanwhile, Scott pointed out that Lonmin expected the global platinum supply deficit to increase to about 200 000 oz for 2013, largely owing to supply disruptions in late 2012, rising costs and resultant cutbacks.

Data from the Chamber of Mines showed that costs in the South African platinum mining industry had risen by 14% a year on average since 2007, driven in large part by higher wages and electricity and raw material costs.

“Our view is that, whereas companies’ costs were more differentiated in the past, the cost curve has flattened as companies are increasingly being impacted on by factors affecting the industry as a whole, such as challenging labour relations, tougher safety and regulatory issues, electricity constraints and escalating costs,” Scott added.

He indicated that Lonmin expected the platinum deficit to deepen in the years ahead, as supply constraints persisted and demand recovered. However, platinum stocks, excluding exchange-traded fund holdings, were estimated at around six months of supply and could take more than a year to be drawn down in various parts of the value chain.

Further, Lonmin also expected the deficit in the palladium market to be larger and exceed one-million ounces for a few years, as Russian exports were reportedly drying up and palladium continued to benefit from substituting platinum in autocatalysts. Palladium stocks were estimated at around ten-million ounces and would, therefore, take longer than platinum stocks to be drawn down to critical levels.

Scott indicated that the implication of this was that palladium would remain competitive against platinum for several years.

Union Negotiations

Last week, Lonmin said it welcomed the Association of Mining and Construction Union’s (AMCU’s) decision to refer the negotiations around a new union recognition agreement to the Commission for Conciliation, Mediation and Arbitration.

Lonmin’s union membership profile had changed significantly over the past year, which necessitated negotiations of a new recognition agreement with workers’ representatives, which started in January.

AMCU grew its presence significantly and currently represented 70% of Lonmin category 4 to 9 employees, while the National Union of Mineworkers, which was formerly the majority union, currently represented about 20% of the category 4 to 9 employees.

“We started a process of negotiating a new recognition dispensation at the beginning of the calendar year, with a view to establishing an all-inclusive recognition agreement that provides appropriate representation to all the unions and associations representing our employees. I am confident we will reach a negotiator agreement that meets our and their needs.

He noted, however, that the company anticipated significant challenges in relation to wage negotiations in the year ahead, against a backdrop of weak profitability in the industry and its poor ability to sustain hefty wage increases.

“We will approach wage negotiations in a positive way and are looking to form good and constructive relationships with all our unions,” Scott emphasised.

On the safety front, Lonmin achieved industry safety records by setting new levels of safety across its Marikana operations. The company’s lost-time injury frequency rate continued to improve, reaching 3.66 per million man-hours worked, compared with 4.69 per million man-hours worked in the prior corresponding period.

“Regrettably, since the end of the half-year, we have had two fatalities resulting from fall-of-ground incidents at our Rowland and K3 shafts, respectively,” Scott said, adding that operations at both shafts had resumed.