RECONFIGURING THE BUSINESS
WITH THE FUTURE IN MIND
In the past year Amplats, together with the rest of the platinum mining industry, continued to face unremitting headwinds. These have now eroded margins to the point where the Company has posted a headline loss of R1.5 billion in 2012. The company is committed to taking the action needed to create a sustainable, competitive and profitable business for all its stakeholders.
Steady progress has been made in improving the Company’s safety performance since 2008. In 2012, the number of work-related fatalities decreased to seven − from 12 the previous year. Along with my fellow directors, I extend my heartfelt condolences to the families, friends and colleagues of the deceased. We have investigated the underlying causes of each and every one of these fatalities, to ensure that they are avoided in future. Our efforts to achieve the safety of our employees have been stepped up yet again, and our goal of zero harm is constantly being woven into the very fabric of our business through carefully considered programmes aimed at all levels of our organisation. We will not rest until every employee is assured of returning home safely at the end of the working day.
The platinum industry faced three significant external challenges in 2012: an average platinum market price of $1,551 per ounce in response to slow market demand for platinum group metals (PGMs), particularly in Europe; the substantial operational challenges related to two months of unprotected and violent illegal industrial action, linked to unrealistic wage demands, which resulted in 305,600 ounces of lost platinum production, equating to revenue of R6 billion; and the above-inflation cost pressures being experienced by the platinum mining industry in general.
Net platinum demand declined by 140,000 ounces or 2% in 2012, as a consequence of weaker demand for autocatalyst and industrial applications, partially offset by an increase in demand for platinum jewellery. The platinum market moved into deficit during the year, owing to a fall in newly mined and recycled supplies. Supplies of platinum were negatively affected by labour stoppages and mine closures in South Africa.
The palladium market moved from a surplus in 2011 to a significant deficit in 2012 as South African output was lower, also owing to labour stoppages and mine closures. Additionally, less palladium was sold from Russian stockpiles. Gross demand for palladium rose by 15% in 2012, owing to an increase in demand from the autocatalyst sector and a significant increase in investment demand.
PLANNING FOR THE LONG TERM
Clearly, the Company’s operational and financial performance is not sustainable. At this time last year, I announced that we would be undertaking a comprehensive review of the business during 2012. This review was conducted across the entire value chain of the business, to address structural challenges that have eroded profitability over time. Building on the varied and effective steps taken to contain operational costs in recent years, the objective of the proposed action is to create a safe, sustainable, competitive and profitable platinum business for the long-term benefit of all our stakeholders.
This will be achieved by aligning baseline production with long-term demand expectations and focusing on a high-quality portfolio of operations to produce PGMs on an economically sustainable basis. Overheads have been reviewed and reduced, while a new organisational design is in the process of being developed to ensure that the operations are appropriately supported.
The commercial strategy has also been revised to guarantee value and stability for platinum and its customers, while we promote new applications for PGMs.
The proposed plan will increase exposure to lower-risk, higher-margin, less capital-intensive mines, supporting a significant reduction in the cost base and a more efficient allocation of capital. Ongoing improvements in the reliability of its production capability, and the continued promotion of cost management throughout the business, will allow the Company to be well positioned to extract optimal value from the assets. At the same time, flexibility for long-term growth options will be retained, to ensure that the Company is well positioned should demand increase above expectation.
As part of the business review, it is proposed that our Rustenburg operations be reconfigured into a sustainable 320,000 to 350,000 ounces per annum platinum producer, across three operating mines. Four unsustainable, high-cost shafts will need to be put on long-term care and maintenance. These are Khuseleka 1 and 2, and Khomanani 1 and 2. Rustenburg’s processing operations will also be reconfigured to align with the revised mining footprint. We have come to the conclusion that the Union mines are likely to be of greater value under different ownership and the intention, therefore, is to dispose of these operations, at the right time. In the interim, Union mines will be reconfigured to protect near-term value. This will be achieved by stopping mining activities at the Union North declines, combining the Union North and South mines into one operation, and putting the Mortimer Merensky Concentrator on long-term care and maintenance.
An extensive consultation process with the Department of Mineral Resources, union leadership and employees is continuing. We will continue to take our social responsibility seriously, particularly to our employees and the communities neighbouring our operations. Anglo American Platinum remains committed to ensuring a sustainable business for all of its stakeholders, including the approximately 45,000 employees who depend on its ongoing viability.
"A consultative process with the Department of Mineral Resources, union leadership and employees is being followed to evaluate options, and to minimise any potential job losses."
MINERAL POLICY AND LEGISLATION
It is imperative for businesses to operate in the context of a stable regulatory framework and a clear and fair fiscal regime. The South African Government’s plans to attract and promote the significant private-sector investment required to ensure a thriving mining sector, that contributes meaningfully to society at large, rests on three critical components: ensuring policy predictability and certainty; enforcing the rule of law; and investing in the enabling infrastructure required.
We welcome the resolution taken by the African National Congress (ANC), South Africa’s ruling political party, at its recent policy conference, that wholesale mine nationalisation is not a reasonable nor sustainable option for South Africa. Nationalisation has now been firmly ruled out as an option for the mining industry. The ANC’s decision will create greater certainty among investors and will encourage investment in the country’s mining sector.
The ANC did, however, endorse proposals for a new resource rent tax. It has argued that the proposed new tax is necessary to ensure that the state benefits appropriately from the profits the mining industry earns. We remain of the view that the existing royalty regime was introduced for exactly this purpose, and that combined with the existing system of taxation, it already ensures a fair distribution of the benefits of mining. Further changes to the tax and royalty regime could well make South Africa uncompetitive internationally, and we will continue to engage the ruling party and the Government on any proposals for a resource rent tax.
The Mineral and Petroleum Resources Development Amendment Bill was published by the Minister on 27 December 2012. The Bill proposes an amendment to both the current Mineral and Petroleum Resources Development Act (the MPRDA), as well as the MPRDA Amendment Act of 2008. While several of the proposed amendments are positive and will assist in achieving one of the key stated objectives – greater policy certainty – there are also key areas where the amendments, as proposed, would increase the discretion to be applied by the Minister and other Government officials, on important matters, including, inter alia, relating to granting and transferring mineral rights and imposing restrictions on export volumes and pricing. This increased discretion will in fact decrease certainty in policy and its application, and, in so doing, in our view, deter investment which requires long-term stability and certainty. Amplats has contributed to formal representations on this matter and will continue to engage Government with a view to finding more appropriate policy alternatives.
Despite the less than optimistic outlook for global economic growth, Anglo American Platinum believes that the global platinum market is likely to be balanced in the short term, as a result of reduced production by Anglo American Platinum and possible supply disruptions. If South African platinum production returned to pre-strike levels, then the market would be oversupplied. Overall gross platinum demand is expected to grow marginally in 2013, despite the lack of economic growth in the European market. Tightening emissions legislation in all markets, particularly the implementation of Euro VI and the overall global increase in vehicle production, especially in China and India, are expected to offset the lower volumes in Japan, North America and Europe.
Jewellery demand is expected to grow, primarily owing to increased disposable income spent on platinum jewellery in China and India, underpinned by an increase in organised retail and strong marketing campaigns. Continued expansion of retail outlets in mainland China by Hong Kong jewellers continues to support demand growth. The decline in industrial demand for platinum in 2012 is expected to recover somewhat in 2013 as LCD glass, glass fibre and chemical capacity growth resumes. The growing popularity of cloud computing and the associated demand for high-capacity hard drives will increase platinum demand from the electrical sector.
Primary supply challenges are expected to continue during 2013 with higher mining inflation putting pressure on margins and increased risk of supply disruptions from industrial action in South Africa. Supplies of metal from the recycling of spent autocatalysts are expected to rise as pipeline stocks are processed.
Palladium demand is expected to grow in 2013, supported by global vehicle production growth and tightening emissions legislation, with growth in gasoline vehicle production in China remaining a dominant driver. Industrial demand, dominated by the electronics sector, is expected to remain flat in 2013. Primary supply is also expected to be constrained by the same factors impacting platinum production. The palladium market is therefore expected to remain in deficit in 2013.
The rhodium market is expected to remain depressed in 2013. Autocatalyst and new industrial demand is expected to increase modestly. Recycling continues to grow, resulting in the market remaining in surplus.
Anglo American’s revised commercial strategy includes diversifying our customer portfolio and increasing net revenue. During 2012, contracts representing 20% of sales were either renegotiated or terminated, which improved revenue by approximately R100 million and these actions are forecast to have a full-year impact of approximately R170 million in 2013. Existing contracts attracting discounts and commissions, that terminate in 2013, will not be renewed and will improve revenue in 2014 by a further R600 million. Our revised commercial strategy is on track to achieve R700 million per annum profit before tax improvement in 2013, reaching R1 billion per annum by 2015.
CHANGES TO THE BOARD
Mr Tom Wixley retired from the board as an independent non-executive director on 30 March 2012, after not standing for re-election. I express my deepest appreciation for the distinguished service rendered by Tom during his 11-year association with the board and I wish him the very best for the future.
Mr Neville Nicolau left as an executive director and the chief executive on 19 July 2012 to pursue other interests. On behalf of the board I would like to thank Neville for his many contributions to the Company since 2008. Following the resignation of Neville, Mr Chris Griffith was appointed as an executive director and the chief executive, effective from 1 September 2012. Chris returns to the Company following his success over four years as CEO of Kumba Iron Ore Limited. He brings with him more than 22 years of mining knowledge, much of it deeply rooted in direct operational experience and including 18 years in the platinum business. Chris also has an impressive track record of delivering safe operational performance and leading effective change.
"On behalf of the board I would like to thank Neville for his many contributions to the Company since 2008."
Other changes to the board included the resignations of Ms Albertinah Kekana on 25 September 2012, following her appointment as CEO of Royal Bafokeng Holdings; and of Mr Godfrey Gomwe, who resigned on 15 October 2012, following his appointment as CEO of Anglo American’s thermal coal business. I wish both Albertinah and Godfrey success in their new roles. Ms Khanyisile Kweyama joined the board as a non-executive director on 15 October 2012; and Mr John Vice as an independent non-executive director on 30 November 2012. We welcome both Khanyisile and John to the board and look forward to the invaluable contribution they will undoubtedly make.
Lastly, I took a decision in October 2012 to step down as chief executive of Anglo American plc and chairman of Anglo American Platinum at the respective annual general meetings of the companies. It has been a great honour to chair the board, and I am extremely proud of what has been achieved during my period as chairman. I will retain enormous admiration and affection for this great company and its outstanding people. The decision to leave was a difficult one to make, but I feel that the time will be right to hand over to a successor, who can build on the strong foundations we have laid and complete the work on the Company’s reconfiguration, in consultation with all stakeholders.
1 February 2013