Pressure on ARM Zambia division

[Laf1986]

African Rainbow Minerals (ARM) is dragging all its divisions down the cost curve, but its troublesome copper business in Zambia may not stay in the company if it underdelivers on company expectations.

Another business that was coming under review is the Cato Ridge ferromanganese smelter in KwaZulu-Natal after ARM and its Chinese and Japanese partners commissioned a two-furnace ferromanganese smelter in Malaysia, which had low electricity costs and a long-term power supply agreement, said CEO Mike Schmidt.

An announcement on Cato Ridge would be made before the end of 2017.

Chunky impairments of ARM’s nickel and platinum mines masked what was a strong interim financial performance from the diversified mining company, with its ferrous division benefiting from higher iron ore and manganese prices, and its Two Rivers platinum operation standout performers.

"Iron ore was the star performer," said Schmidt, adding the mines, equally shared with Assore in a company called Assmang, were targeting 17-million tonnes for the year to June.

ARM, chaired by billionaire Patrice Motsepe whose family trust is a significant shareholder of the company, reported a R734m post-tax impairment of the Modikwa platinum mine and a R711m impairment of its Nkomati nickel operation. These impairments contributed to ARM reporting a R283m loss for the six months to December compared with a R1.3bn loss a year earlier.
FERROUS DIVISION
However, profit before tax and special items nearly doubled to R1.5bn from R769m the year before. Headline earnings increased to R1.7bn from R507m before, with ARM attributing the strong increase to its ferrous division and its Two Rivers platinum operation.

The R23bn company’s shares shot up 11.5% to R105.27.

Motsepe pointed out the difficulties for mining companies in engaging political parties and communities, which had high expectations for shares, dividend flows, jobs and senior positions in mining companies as well as supply contracts.

‘FASTEN SHOELACES’
"You’ve got to build credibility and trust [with communities], saying, hey, listen, if we don’t work together and make this mine successful we are going to close this mine. Then there are others who are misleading them for political reasons and say let them close the mine and we’ll run it ourselves. They can’t even fasten their shoelaces, those political people," he said.

The coal division and Nkomati swung to profit from losses a year earlier. ARM cautioned that Nkomati was heading for a difficult three-year period in which output would decline. The copper division narrowed its headline loss to R178m from R275m as a result of a restructuring exercise.

[Laf1986]

The mine performed well during a very difficult period by downsizing production and associated personnel. The C1 cash
unit cost of production decreased by 7% during 1H F2017, to US$2.22/lb of copper produced (1H F2016: US$2.39/lb). The
largest contributors to the unit cost savings were a reduction in labour cost due to a 66% reduction in expatriate labour, a
reduction in stoping dilution obtained through an improvement in the mining stoping method, and a 4% increase in plant
recoveries obtained through plant optimisation initiatives.
During the period under review, the average realised copper price of US$5 004 per tonne was 1% lower than the
corresponding period in F2016. In November and December 2016, the copper price substantially increased and the
average price for December 2016 was US$5 666 per tonne (US$2.57/lb)
Lubambe Copper Mine
1H F2017 represents the first reporting period in which Lubambe operated in accordance with the reduced production
target of 80 000 tonnes of ore per month. The reduced target was implemented in March 2016 to curtail operating losses,
save cash and preserve the orebody whilst implementing a strategy to upgrade the underground dewatering infrastructure.
Notwithstanding these challenges, Lubambe milled 545 162 tonnes and achieved the target for the first phase of the
dewatering strategy with a 30% reduction on capital costs compared to 1H F2016. A 5% improvement in the head grade
combined with a 4% increase in the concentrator plant recovery, resulted in copper production of 9 644 tonnes which is a
9% improvement in copper produced.
During 1H F2017, more than 300% increase in underground pumping capacity was obtained through the successful
upgrade of the underground pumping infrastructure. The upgrades enabled Lubambe to dewater all declines that were
previously flooded for a period of 10 months. Following the dewatering, substantial progress was made in the development
of the declines. During November and December 2016, decline development advance was well in excess of requirements
for sustainable production. This achievement will enable Lubambe to obtain access to new ore development areas at a
faster rate, which will enhance the ability to ramp-up mining production.
During the period under review a labour restructuring programme was successfully concluded which aligned the total
labour complement with the revised lower production rate of 80 000 tonnes per month.
Ongoing capital expenditure was curtailed to preserve cash with the majority of expenditure being incurred for mine ramp
development.
The Lubambe Extension Project
The Lubambe Extension Project has been put on hold until an opportune time when conditions are suitable for additional
investment.
This high-grade area remains an integral part of the future development of the Lubambe ore body.