FINANCIAL CAPITAL

KEY FEATURES

• 11-week strike at Zondereinde – estimated loss in revenue of
  R750 million
• Total capex for the
  year reaches R891.1 million (Booysendal:
  R539.6 million
  Zondereinde:
  R351.5 million)
• R1 billion
  raised in successful fund raising
• Employees lost
  R151 million
  in wages
• Group tax down at R26.2 million
• Northam acquires a
  further 10% in Northam Chrome Producers (NCP)*
• Booysendal ramp-up progressing
• Smelter at Zondereinde recommissioned in October 2013

• ^*Post the year-end NCP became a wholly-owned subsidiary of Northam.

APPROACH

In terms of market capitalisation, Northam ranks as a mid-tier PGM producer. The company is distinguished from its peers and other smaller PGM producers in that its activities are integrated; from the underground mining function, through to the concentrating, smelting and base metal removal processes.

Final precious metal concentrate is transported from Zondereinde platinum mine and metallurgical complex for refining to the Heraeus facilities in Hanau, Germany, and also to the Heraeus refinery in Port Elizabeth. Northam’s in-house marketing department administers sales of precious metals to customers in Europe, Japan and North America. By-product metals, copper and nickel sulphate, are extracted at the on-site base metals removal plant and sold in the domestic market.

For about 20 years, Zondereinde was Northam’s only operating asset. Construction of the shallow mechanised Booysendal mine started in 2010 and, for Northam, represents a significant diversification in terms of geography, mining method, costs and, consequently, lowers the risk that the company is exposed to with a single operating asset. Booysendal came into production on 1 July 2013. Ramp-up to reach steady-state production in F2016 continues. Booysendal plans to produce some 2 250 000 tonnes of ore per annum at steady state, generating around 160 000oz of metals in concentrate (3PGE+Au), together with associated precious and base metal by-products.

F2014 FINANCIAL PERFORMANCE

• 79 production days lost at Zondereinde owing to industrial action, resulting in the loss of approximately 48 000oz in production, R750.0 million in revenues and R151.0 million in employee wages
• Two-year wage deal of 7.5% to 9.5% per annum reached, concluded at Zondereinde resulting in an increase of R49 million to the total wage bill
• 20.9% increase in Zondereinde’s unit operating costs to R395 629/kg (F2013: R327 331/kg)
• 18.9% decline in metals in concentrate produced at Zondereinde to 235 693oz (3PGE+Au) (F2013: 290 675oz (3PGE+Au)
• Impact on sales revenue mitigated by first-time contribution to production of 92 668oz (3PGE+Au) from Booysendal
• 96.3% decline in annual group profits to R19.6 million (F2013: R528.0) resulting in headline earnings per share of 2.2 cents (F2013: 136.5 cents per share)
• Year-on-year the value of the rand weakened by 17.4% against the US dollar, averaging R10.35/US$ (F2013: R8.82/US$)

For production and financial performance see the Chief financial officer’s review and the Annual financial statements respectively.

F2014 ECONOMIC IMPACTS

• The Toro Employee Empowerment Trust received R9.2 million (F2013: R24 million)
• In its first pay-out to employees, the Toro Employee Empowerment Trust disbursed R54.8 million to 6 332 individuals at Zondereinde
• A total of 6 889 permanent employees at Zondereinde and Booysendal
• R1 499 million paid to employees in wages and benefits
• R26.2 million paid in corporate tax (F2013: R169.1 million)
• A total of 359 affordable housing units sold to employees to date
• Corporate social investment (CSI) expenditure amounted to R2.9 million
• No significant financial assistance received from government

Black economic empowerment

Northam was one of the first resource companies in the South African mining space to comply with the requirement imposed by the South African Minerals Petroleum and Resources Act (MPRDA) and the associated South African Mining Charter for 26% HDSA equity ownership. However, given the economic downturn post 2008, and the associated decline in the price of platinum equities, including those of Northam, certain of Northam’s BEE shareholders were obligated to dispose of a significant portion of their holdings in order to address breaches of covenants applicable in their BEE financing agreements in 2012.

Northam is currently working on a transaction to restore the group’s empowerment credentials. The new scheme, which seeks to balance the requirements of current shareholders with legislative compliance, is based on the following key principles:

• Compliance with the provisions and principles of the Mining Charter and the Mineral and Petroleum Resources Development Act, 2008 (Act No 49 of 2008) (MPRDA);
• A BEE transaction that is sustainable and beneficial for all stakeholders;
• A secure shareholding structure so that the BEE status cannot be threatened again in future;
• Broad-based participation as much possible; and
• Northam’s historically disadvantaged South African (HDSA) employees and communities should participate in and benefit from the scheme.

In pursuit of further satisfying BEE criteria, Northam submitted its Mining Charter Annual Report in April 2014, while its Work Skills Plan and Annual Training Report for both operations were completed and submitted by the end of May 2014.

In February 2014, Zondereinde was subjected to the Mining Charter Impact Assessment audit conducted by Moloto Solutions, an external consultant to the DMR. The overall audit findings indicated that all elements of the Mining charter were valid, verifiable and accurately reported.

A number of areas were, however, highlighted indicating shortfalls (these included local enterprise and supplier development) in order to improve procurement from local black-owned enterprises, and a requirement of more proactive community engagement since the municipality channels may not be adequate in the future.

Preferential procurement

Northam accords preferred-supplier status to HDSA suppliers subject to commercial competitiveness. Northam spent R3.1 billion in F2014 (F2013: R2.9 billion) on procurement, of which 57.70% or R1.6 billion was allocated to BEE suppliers.

In compliance with the Mining Charter, Northam is committed to giving preference to local businesses in the communities surrounding its operations. Northam’s procurement policy accordingly gives local BEE companies preferred supplier status.

1. ^* Excluding custom purchases and toll smelting

Local employment and economic development

Given the rural isolation of both the Zondereinde and Booysendal operations (and indeed of the majority of mining operations) employment opportunities are scarce and frequently the level of education and skills in these communities is low. Consequently the expectations in local communities are frequently unrealistic. Northam works closely with municipal officials to manage these expectations and has assisted in identifying economic targets which could be developed by way of SMEs or SMMEs in collaboration with local entrepreneurs.