Platinum miner Lonmin on Tuesday announced a four-point plan of action to entrench its low-cost position in the light of what it anticipates to be challenging conditions in the PGM industry ahead.

The plan includes eliminating non-value-adding ounces; maximising output from invested capital including a change of approach for mechanisation; a simplified organisational structure with clear accountability and management emphasis in South Africa; and reducing costs and managing cash.

Lonmin CEO Ian Farmer said Lonmin is a business with unique high-quality long-life assets and an excellent market position.

"However, over the last few years our operational performance has fallen below our expectations."

Since his appointment as CEO six weeks ago, Farmer has conducted a review of operations looking at ways to improve performance and maximise shareholder value.

"Today we are exercising producer discipline by announcing that we will close those portions of our operations which are uneconomic and cut back on capital expenditure. We are also changing our approach to mechanised mining and cutting costs across the business," he said.

The group pointed out that PGM prices are now some way below the cash cost of production for a significant proportion of the industry, and the longer this situation prevails, the more companies, including Lonmin, will need to take action to protect their financial position.

"We anticipate a sharp decline in investment in the industry in the short term, which could include shaft closures and mothballing, resulting in reduction or deferment in the supply of PGMs. This increases the possibility of a rebound in pricing once sentiment and markets improve.

"With these structural shifts in mind, the first priority for Lonmin management has been to look for ways to improve our operational performance, with an emphasis on consistent, low-cost production. We have therefore restructured key parts of the business, with a view to aggressively cutting and better managing costs, while at the same time increasing management's focus on delivery against plans."

Farmer said that Lonmin has reviewed the contribution from its underground business on a shaft-by-shaft basis and intends to initiate consultations with its workforce and the unions in relation to the future of operations at its Limpopo property, which it believes are uneconomic.

"Currently production from Limpopo is included in our 2009 guidance. We have also taken the decision to suspend production from our opencast operations at Marikana with effect from the end of the 2008 calendar year," he said.

The group also plans to change its mechanisation strategy after it failed to significantly improve productivity from its two fully mechanised shafts.

Given the high cost of production, it has taken the decision to change its approach. It plans to switch to hybrid mining at Saffy shaft, where it is introducing conventional stoping methods, while maintaining mechanised development. This change will be completed during the course of 2009 and is likely to cause an initial, short-term dip in output from this shaft.

"We have also concluded that K4 shaft will be developed as a hybrid mine when it comes into production in 2010. This is due to the nature of the ore body and the experience gained from our investment in mechanisation to date."

Hossy shaft will continue to be run as a fully mechanised shaft as it continues to work hard to achieve satisfactory levels of productivity.

"We will review the performance of Hossy shaft in September 2009 if it becomes apparent that we are not able to achieve productivity of 1500 square metres per month per suite of equipment."

In terms of reducing costs, managing cash and capital rationing, a restructuring team, led by Mian Khalil, Executive Vice President Capital Programmes, has been established to review the cost structure.

Lonmin has implemented a series of initiatives to restrict spending, including a freeze on all recruitment. It has also taken the decision to halve its exploration expenditure.

"This spend level protects the value of our portfolio. We will continue to work with our joint venture partners and we will allocate less cost to our wholly owned projects in the short term. In addition, we have reviewed our capital expenditure programmes throughout the business. As a result, our capital expenditure programme will be primarily focused on mine development at Marikana and obligatory spend at our Process Division. We have placed all other growth projects on a care and maintenance basis," it said.

The group has also simplified its organisational structure to bring greater management focus and to give the operations more ownership of the functions required to ensure effective and efficient delivery.

Mahomed Seedat has been appointed Chief Operating Officer with overall responsibility for the operations in South Africa, reporting to Farmer.

The group added that it requires greater management focus in South Africa where all its operations are located.

To achieve this it is reducing the current headcount of the London office by one-third and transferring certain functions to South Africa.

In addition, Farmer, as CEO will spend around half of his time in South Africa.

The combination of these actions will ensure that Lonmin maintains its sound financial position and remains well placed to weather the current challenging PGM market conditions and to exploit the upturn when markets recover, Farmer said.

I-Net Bridge