Viability statement where there is a material going concern uncertainty

Lonmin Plc – Annual report – 30 September 2017

Industry: mining

PRINCIPAL RISKS AND VIABILITY (extract)

Viability

Principal risks facing the Group

The Board monitors the Group’s risk management and internal control systems on an ongoing basis and carries out a robust assessment of the principal strategic risks, their potential impact and the mitigating strategies in place as described on pages 22 to 27. The principal risks include those that would threaten the Group’s strategic business model, future performance, liquidity and solvency.

For the purposes of assessing the Group’s viability, the Directors considered in detail all of the principal risks in three groups. Some of these, for example changes in government policy, are not sensibly analysed numerically but could have serious repercussions (for example resource nationalisation and other threats to our licences). However, other elements such as PGM prices and exchange rates can be modelled to show the limits of our financing arrangements, and the management presented to the Board an array of scenarios and stress tests to illustrate this. The Directors considered also the correlations between these parameters, which provide some natural offsets in some cases. The Directors further considered those elements that are essentially within our control, such as costs, safety and productivity drivers of our business. These matters are kept under constant review and are specifically considered as part of the Board Strategy Review.

Sufficiently adverse movements in these parameters, if not countered by timeous management action, and if persisting for a lengthy period, can threaten the viability of the organisation, as can some of the non-measurable risks. The management has established regular cash flow forecasting tools, and the Board considers these matters as part of the budgeting and results oversight process to ensure that any such trends receive urgent attention.

How we assess the Group’s prospects

The Directors have had detailed and ongoing discussions as a Board regarding the longer term viability of the Group. The TNW debt facility covenant was in breach at 30 September 2017 but this covenant was waived after the year end until 28 February 2019, the long stop date of the Sibanye-Stillwater acquisition of the Group. The waiver is conditional on the completion of the deal and will cease if the deal is terminated, withdrawn or lapses, subject to a 4 week grace period provided that the Company is engaging with the lenders. At current PGM prices, Rand:USD exchange rate and productivity levels there is significant risk that the Group could be in breach of its debt facilities in the event that the acquisition does not complete.

In December 2015 Lonmin completed a rights issue which raised $395 million in gross proceeds and executed an amended facilities agreement with its lenders, together with a new business plan. These were intended to put the Lonmin Group in a stronger financial position and enable it to deal with a low PGM pricing environment. The 2015 rights issue was the third rights issue undertaken by the Lonmin Group since 2009, with approximately $1.6 billion of aggregate gross proceeds raised from the three rights issues.

In recent months, and in parallel with work on the Operational Review, the Board of Lonmin has also been in discussions with Sibanye-Stillwater about an offer for Lonmin. The Board of Lonmin has concluded that the acquisition of Lonmin by Sibanye-Stillwater represents a comprehensive and more certain solution to the challenges facing Lonmin than Lonmin could achieve by any alternative route.

The Board of Lonmin believes that a combination of Sibanye-Stillwater and Lonmin creates a larger and more resilient company, with greater geographical and commodity diversification, that is better able to withstand short-term commodity price and foreign exchange volatility. By combining Sibanye-Stillwater’s existing, and contiguous, South African PGM assets with Lonmin’s operations, including Lonmin’s processing facilities, Sibanye-Stillwater is expected to be able to unlock operational synergies and become a fully integrated PGM producer in South Africa, thereby creating value for all stakeholders. Sibanye-Stillwater has developed a conservative Lonmin operating plan, which is not contingent on the development of new major capital projects and therefore limits downside risk while providing upside optionality in a higher South African Rand PGM price environment. Lonmin’s processing facilities will allow Sibanye-Stillwater in due course to smelt and refine ore from its existing Rustenburg Operations, enhancing and improving the economics of those operations, while simultaneously ensuring a sustainable source of material for these facilities, therefore maximising return on assets.

Executive Management annually prepares a Life of Business Plan (LoBP) which covers a period in excess of 40 years detailing operational plans to utilise the Group’s long-life mineral resources. Focus has been given to the short to medium term with key consideration given to the ability of individual assets to generate cash and levers which can be pulled to ensure that those assets continue. The LoBP forecasts total mining production volumes and costs based on geological modelling and capital expenditure budgets. Capital allocation is determined based on portfolio optimisation models with the aim of ensuring that capital expenditure is invested only in the most valuable ore reserve development and expansion projects that are available to the Group.

Mining production and cost forecasts are then aggregated with concentrating, processing and overhead costs. Key financial assumptions including PGM prices, Rand / Dollar exchange rates and cost escalations are reviewed and incorporated into the LoBP. The LoBP output is incorporated into a Working Capital Model (WCM) which produces short and medium term financial forecasts. A detailed annual budget covering the following year is prepared and reviewed by the Board on an annual basis.

The key assumptions applied in the LoBP and WCM are disclosed on note 29 to the financial statements under impairment of non-financial assets. The Directors have interrogated the key assumptions and have satisfied themselves that they are appropriate. The financial forecasts from the WCM are then subjected to stress testing using the key downside risks of adverse PGM prices and exchange rates and lower than planned production.

The period over which we assess longer term viability

Within the context of the planning cycle described above, the Board has and continues to review all potential strategic options, the resource extraction plan and production metrics over the period covered by the LoBP. Given the inherent uncertainty involved in setting key financial assumptions, specifically PGM prices and Rand / Dollar exchange rate, the period over which the Directors consider it possible to form a reasonable expectation as to the Group’s longer term viability, based on the planning and the stress testing described above, is the period to 28 February 2019 in line with the long-stop date of the Sibanye-Stillwater acquisition and the covenant waiver period.

Assessment of viability

Lonmin has experienced financial constraints for a number of years caused by a range of external factors such as a persistently low PGM pricing environment and the inflationary cost pressures of operating in the South African PGM mining industry, which have been further exacerbated by internal factors including operational, social and labour issues. As part of a larger entity, Lonmin’s operations will be less constrained by significant fixed overhead costs which have in the past driven the need to fill processing capacity. The Board of Lonmin believes that a combination of Sibanye-Stillwater and Lonmin creates a larger and more resilient company, with greater geographical and commodity diversification, that is better able to withstand short-term commodity price and foreign exchange volatility.

In the event that the deal is terminated, withdrawn or lapses the covenant waiver allows for a four week grace period whilst other options are pursued. During the four week grace period a default will not occur provided that the Company is engaging with the lenders. During this period, the feasibility of an asset sale to Sibanye-Stillwater, as contemplated in the 2.7 announcement on 14 December 2017 as well as any other alternative transactions will have to be assessed by the Board. If alternative transactions turn out not provide a feasible alternative, the Board will have to consider, subject to the financial position of the Group at that time, the Group’s ability to continue as a going concern. On completion of the acquisition the term loan of $150 million would be repaid and debt facilities cancelled. Based on cash flow projections using assumptions that were duly considered by the Board, the repayment of the facilities at the closing of the deal is considered a reasonable expectation.

If the acquisition does not complete as a result of Sibanye-Stillwater shareholders not approving the acquisition then Sibanye-Stillwater and Lonmin have agreed in principle that they will, at Lonmin’s option, enter into good faith discussions to enter into an asset transaction as envisaged as part of the Operational Review pursuant to which Sibanye-Stillwater would acquire Lonmin assets of sufficient quantum to ensure Lonmin could continue to operate as a going concern in the medium term. Such an arrangement would be subject to all necessary approvals including by Lonmin shareholders.

Without the completion of the proposed acquisition by Sibanye-Stillwater there is a material uncertainty that may cast doubt about the Group’s and parent Company’s ability to continue as a going concern and viability such that they may be unable to realise their assets and meet their liabilities in the normal course of business.

Nevertheless based on the Group’s expectations that the acquisition will be completed as expected and based on a robust assessment of the principal risks facing the Group, a well-developed strategic management board process and stress testing of various drivers described above, the Directors have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the period to 28 February 2019.

NOTES TO THE ACCOUNTS (extract)

Basis of preparation (extract)

Going concern

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.

Lonmin’s business has experienced ongoing financial constraints for a number of years caused by a range of external factors such as a persistently low PGM pricing environment and the inflationary cost pressures of operating in the South African PGM industry. These have been further exacerbated by internal factors including operational, social and labour issues.

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. The assumptions used in the model are disclosed in note 29. The Directors have also considered the debt facilities available to the Group which are disclosed in note 16.

At 30 September 2017 the term loan of $150 million was fully drawn and the Group had gross cash of $253 million.

The Group’s loan facility agreements require it to test two covenants related to its tangible net worth (TNW) every six months. At 30 September 2017 the TNW of the Group, after recognising an impairment charge of $1,053 million to non-financial assets in the year was $674 million some $426 million below the TNW covenant threshold of $1,100 million.

After the year end Sibanye Gold Limited trading as Sibanye-Stillwater made an offer to buy the Group which was unanimously recommended by the Board of Lonmin Plc. The Board of Lonmin believes that the offer is in the best interests of Lonmin shareholders and all other stakeholders of Lonmin and provides Lonmin with a comprehensive and sustainable solution to the adverse challenges it faces. The combination of Sibanye-Stillwater and Lonmin creates a larger and more resilient company, with greater geographical and commodity diversification, that is better able to withstand short-term commodity price and foreign exchange volatility. The long stop date of this acquisition is 28 February 2019.

As a result of the Sibanye-Stillwater offer, the Company’s lenders have agreed to a waiver of the Tangible Net Worth covenants for the period from 30 September 2017 to 28 February 2019 on the condition that the Company cancels $66 million of its revolving credit facilities and leaves undrawn the remaining revolving credit facilities during the waiver period. The waiver is conditional on the completion of the acquisition and will lapse if the acquisition does not complete, lapses or is withdrawn, subject to a four week grace period which will apply if the Company is engaging with the lenders.

The key conditions precedent to the acquisition are receipt of relevant clearances from the competition authorities in South Africa and the UK and approval from Lonmin Plc and Sibanye-Stillwater shareholders. The Directors anticipate that Sibanye-Stillwater shareholders would have a strong preference for Lonmin to be in a net cash position after repaying the $150 million term loan. We are not in full control of the approvals and their receipt is uncertain. Furthermore there is a risk that the Group net cash position could be materially impacted by a substantial economic downturn or operational factors.

On, or immediately prior to completion of the acquisition the term loan of $150 million is required to be repaid and debt facilities cancelled. Based on cash flow projections using assumptions that were duly considered by the Board, the repayment of the facilities at the closing of the deal is considered a reasonable expectation. In addition, based on discussions with Sibanye-Stillwater to date the Directors consider that there is no indication that Lonmin Plc and its significant subsidiaries will not continue to operate after the acquisition for a period of at least 12 months.

In the event that the deal does not complete, the waiver will cease to apply and the TNW covenants will be reinstated. If the TNW covenants are breached, the $150 million may be required to be repaid. The covenant waivers allow for a four week grace period whilst other options are pursued provided that the Company is engaging with the lenders. During the four week grace period the Group will not be required to repay the loan. During this period, the feasibility of an asset sale to Sibanye-Stillwater, as contemplated in the 2.7 announcement as well as any other alternative transactions will be assessed by the Board. If alternative transactions turn out not to provide a feasible alternative, sufficient to repay the Group’s borrowings, or the Group does not have sufficient cash to repay the borrowings itself, then the lenders are likely to withdraw their facilities and the Group is likely to be unable to meet its liabilities.

In assessing whether the Group is likely to have cash to repay the term loan of $150 million either on completion of the acquisition or in the event the acquisition fails and no feasible alternatives are found, the Directors have considered various scenarios 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.

Under reasonably possible downside scenarios this results in gross cash for the Group falling below $150 million meaning the Group would be unable to repay the loan or it would fall into a net debt position.

The factors highlighted including the uncertainty around the completion of the Sibanye-Stillwater transaction given the possible scenarios which may result in the deal falling through, and the uncertainty that the Group will be able to repay the $150 million loan represent a material uncertainty that may cast significant doubt about the Group’s and parent Company’s ability to continue as a going concern such that the Group and parent company may be unable to realise their assets and discharge their liabilities in the normal course of business. Nevertheless, based on the Group’s expectation of the acquisition completing by the long stop date of 28 February 2019, the Directors believe that the Group will continue to have adequate financial resources to meet obligations as they fall due. Accordingly, the Directors have formed a judgement that it 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.

 

 

 

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