Lonmin Plc – Half year report – 31 March 2017
1 Statement on accounting policies (extract)
In determining the appropriate basis of preparation of the financial statements, the Directors are required to consider whether the Group can continue in operational existence for the foreseeable future. The debt facilities available to the Group are summarised as follows:
- Revolving credit facilities totalling $71 million and a $150 million term loan, at a Lonmin Plc level.
- Revolving credit facility totalling R1,980 million, at Western Platinum Limited (WPL) level.
At 31 March 2017 the term loan of $150 million was fully drawn and the Group had gross cash of $229 million. This capital structure places the Group in a strong financial position to ride the normal working capital cycles while providing a buffer to withstand the effects of operational shocks that the business may face. The financial performance of the Group is also dependent upon the wider economic environment in which the Group operates. Factors exist which are outside the control of management which can have a significant impact on the business, specifically, volatility in PGM commodity prices and the ZAR / USD exchange rate.
In assessing the Group’s ability to continue as a going concern, the Directors have prepared cash flow forecasts for a period in excess of 12 months. Various scenarios have been considered to test the Group’s resilience against operational risks including:
- Adverse movements in PGM commodity prices and ZAR/ USD exchange rate or a combination thereof;
Failure to meet forecast production targets.
The Directors have concluded that the Group’s capital structure provides sufficient headroom to cushion against downside operational risks and minimises the risk of breaching debt covenants.
Given the challenging market conditions for the platinum industry the Board established sub-committee in 2016 to oversee strategy development and execution which meets more regularly than the full Board. This ensures that all options available to the Group to improve viability and value creation are continuously reviewed. This includes consideration of all strategic options ranging from business structure through to merger, debt restructuring, sale and acquisition opportunities.
The debt facilities available to the Group are subject to financial covenants which include that the consolidated tangible net worth (TNW) of the Group will not be at any time less than $1,100 million. At 31 March 2017 the TNW of the Group was $1,434 million and the headroom in the TNW covenant was $334 million.
As disclosed in the impairment review in note 10, adverse movements in key assumptions in the value in use modelling could result in an additional impairment which would reduce the Group’s TNW. These assumptions are kept under review and are specifically considered by the Board. Should a further impairment result in the TNW falling below $1,100 million this debt covenant would be breached which could reduce the debt facilities available to the Group.
The sensitivity of the Marikana CGU to reasonably possible changes in assumptions may lead to a reduction or increase in the impairment charge as follows:
The potential impact of changes in assumptions arising from matters outside the Group’s control which are used to calculate the value-in-use of the Group’s assets may result in a further impairment charge which could give rise to a breach of the Group’s financial covenants and absent a change in those covenants, the potential loss of its banking facilities. This eventuality would require a substantial and difficult adjustment to the Group’s operations and the further curtailment of capital expenditure, which represent a material uncertainty that may cast significant doubt about the Group’s ability to continue as a going concern such that the Group may be unable to realise its assets and discharge its liabilities in the normal course of business.
Nevertheless, based on the Group’s expectation of the assumptions used in the impairment review the Directors believe that the Group will continue to have adequate financial resources to meet obligations as they fall due and comply with its financial covenants and accordingly have formed a judgement that is appropriate to prepare the financial statements on a going concern basis. Therefore, these financial statements do not include any adjustments that would result if the going concern basis of preparation is inappropriate.
INDEPENDENT REVIEW REPORT TO LONMIN PLC (extract)
Emphasis of matter – Going concern
In forming our conclusion on the condensed set of financial statements, which is not modified, we have considered the adequacy of the disclosures made in note 1 to the condensed set of financial statements concerning the Group’s ability to continue as a going concern; in particular, the sensitivity of the carrying value of the Marikana CGU to movements in key assumptions which could in downside scenarios result in a banking covenant breach and the potential for withdrawal of facilities. These conditions, along with the other matters explained in note 1 of the condensed set of financial statements, indicate the existence of a material uncertainty which may cast significant doubt on the Group’s ability to continue as a going concern. The condensed set of financial statements do not include the adjustments that would result if the Group were unable to continue as a going concern.