Manufactured capital and intellectual capital
Sustaining and growing the business
Our ability to sustain our dividend policy in the long term will require organic or acquisitive growth. Strategic decisions relating to growth are directed by our ability to sustain or enhance our dividend strategy. As a result, growth is funded from cash flow after dividends or alternative funding options may be considered where appropriate.
A dedicated project team has been appointed to assess organic projects, which may be value-accretive and support our dividend yield strategy.
Strict filters are applied to organic projects, including assessing each project for risk, returns and the impact of financing on returns.
We embarked on an evaluation of our organic projects in 2014. The Group’s extensive project pipeline extends from early-stage scoping studies to feasibility studies for new projects and existing operations. Project evaluation criteria have been developed to guide the evaluation, prioritisation and progress of internal projects.
The majority of these projects are at a sufficiently advanced stage for discounted cash flow models to be developed to determine the potential impact of our projects on our existing LoM plans. Early indicators are that we have potential to extend our LoM operating profile at approximately 1.6Moz per annum on a sustainable basis, for a period exceeding 10 years, if all projects are developed.
Acquisitive growth must be earnings-accretive or strategic with medium-term potential to support our core dividend strategy. We will also pursue value and growth in mining sectors other than gold if our core dividend strategy is supported by these endeavours.
Based on current project studies, annual capital requirements do not exceed R4.5 billion, and remain relatively constant on a unit cost basis at approximately US$250/oz (in 2014 terms). The net result is a potential sustained cash flow profile well beyond 10 years, which supports a dividend payout of at least R1 billion per annum while fully funding all projects from cash flows.
While it is likely that some projects may not meet the required evaluation criteria, and hence may not be implemented, initial assessment demonstrates sufficient organic growth flexibility to state confidently that we are able to maintain our targeted production and economic output levels for more than 10 years.
URANIUM BY-PRODUCT STRATEGY
On 29 May 2014, we delivered our first 10t of ammonium diuranate (ADU) to the Nuclear Fuels Corporation of South Africa Limited (Nufcor SA).
Production of by-product uranium, which will enable us to extract value from otherwise uneconomical gold Mineral Resources, is a critical component of the operational turnaround at Cooke. Profit from the sale of uranium byproduct, which is associated and mined with gold, will be offset against the gold production costs, thereby lowering gold production costs and enabling economic extraction of the medium-grade gold Mineral Resources. Uranium production from Cooke is forecast at approximately 275,000lb per annum by 2016.
Extraction of uranium from our 15 tailings storage facilities (TSFs) is also an environmental imperative, which will facilitate the extraction of up to 6.5Moz of gold contained in the West Rand Tailings Retreatment Project (WRTRP) resources. Up to 350,000lb of uranium per annum could be realised from the initial phases of this project.
The development of our existing uranium business will enable us to secure offtake contracts at higher prices through partnerships or acquisitions.
MINERAL RESOURCES AND MINERAL RESERVES
The acquisitions of Wits Gold and the Cooke Operations resulted in a significant increases in Sibanye’s declared Mineral Resources and Mineral Reserves:
- total Group gold Mineral Reserves increased by 44% from 19.7Moz (before Wits Gold and Cooke acquisitions) at 31 December 2013 to 28.4Moz and gold Mineral Resources increased by 60% to 103.9Moz;
- total underground gold Mineral Reserves increased by 41% from 15.2Moz declared at 31 December 2013 to 21.5Moz;
- surface gold Mineral Reserves increased by 55% to 7.0Moz, primarily due to the addition of the Cooke tailings storage facilities to the WRTRP; and
- uranium Mineral Reserves have increased to 102.5Mlb and uranium Mineral Resources increased by 158.6Mlb to 227.4Mlb since the 31 December 2013 declaration, with the addition of Cooke’s tailings storage facility to the WRTRP, together with Wits Gold’s Beisa North and South uranium Mineral Resources.
Our surface operations have been restructured into a separate standalone business unit to focus more keenly on the development of our sizable gold and uranium resources contained in its West Rand tailings storage facilities, which form part of the WRTRP.
We intend to develop a strong, long-life and high-yield surface business strategy, the WRTRP, which contains 6.5Moz of gold and 98.7Mlb of uranium. A prefeasibility study concluded in 2013 confirmed the economic viability of the WRTRP, which involves the construction of a large-scale central processing plant (CPP) for the economical extraction of gold and uranium from the retreatment of historic and current tailings. A further objective of the project remains the re-deposition of the residues in accordance with modern sustainable deposition practices, thus reducing future environmental liabilities.
A definitive feasibility study (DFS), which will further advance concepts developed during the pre-feasibility study is due for completion in March 2015.
The DFS will focus on leveraging existing surface infrastructure, including the Driefontein 2 and 3, and Kloof 1 surface gold plants as well as the available uranium treatment capacity at the Ezulwini gold and uranium processing plant to sustain surface gold production prior to development (subject to approval) of the CPP. Our revised strategy focuses on developing the WRTRP in phases to allow for staged capital. The DFS will target capex and opex accuracy estimates of about 10%.
On 5 July 2013, Wits Gold announced to its shareholders that it had submitted a final binding offer (the Offer) to Peter van den Steen, the business rescue practitioner of SGEO, to acquire SGEO, the sole owner of Burnstone, located in South Africa’s Mpumalanga province. The Offer was included in the business rescue plan that was approved by the creditors of SGEO on 11 July 2013.
All the outstanding conditions precedent were met on 1 July 2014, and Sibanye, through the acquisition of Wits Gold, took control (100%) of Burnstone from that date, also the date on which SGEO came out of business rescue. Sibanye acquired all of the shares of SGEO together with all shareholders and inter-group loans against SGEO for a purchase consideration of approximately US$7.5 million.
Burnstone presents an attractive opportunity for Sibanye, from a strategic and operational perspective, in terms of the purchase of existing infrastructure, underground access and metallurgical plant, and favourable debtfunding terms.
A detailed study and review has derisked the orebody by way of:
- the application of appropriate and wellunderstood mining methods;
- immediate footwall development from multiple attack points;
- an achievable ramp-up profile benchmarked against similar operations; and
- further enhancement of the project economics without the requirement for material rework through orebody modelling and associated mine plan optimisation.
COOKE 4 SECTION 189 PROCESS
In terms of Section 189 of the Labour Relations Act, a joint consensus-seeking process is prescribed in an attempt to, inter alia, reach consensus on implementing appropriate measures to minimise job losses.
Facilitated by the Commission for Conciliation, Mediation and Arbitration (CCMA), the Section 189 consultation process at Cooke, which began on 12 September 2014, culminated in an agreement with employees and organised labour on 12 November 2014.
The agreed measures required to return the shaft to sustainable profit included:
- an alternative work cycle at Cooke 4, implemented on 24 November 2014;
- reduction of 392 employees in the Cooke 4 mining employee complement (approximately 16% of a total of 2,403 employees);
- reduction of 38 employees at the Ezulwini plant (approximately 16% of a total of 238 employees);
- rationalisation of management structures at the Cooke operations;
- a moratorium on strike action in support of wage increases in 2015;
- a moratorium on external recruitment for the Cooke Operations;
- minimising the use of contractors; and
- ongoing monitoring in order to ensure successful implementation.
The outcome of these retrenchment avoidance measures is that, from a possible 1,776 employees at risk at Cooke 4, no forced retrenchments were implemented. The required reduction in the employee complement was primarily achieved through voluntary separation packages and voluntary early retirement. In order to minimise job losses, vacancies were filled at other Group operations and contractors were displaced where possible, and those positions were filled with affected employees from Cooke 4.
The alternative work cycle will result in better utilisation of the Cooke 4 asset as the mine will be worked Monday to Saturday (six days a week) every week as opposed to the existing 11-shift fortnight arrangement (11 shifts over 14 days). The net result of the implementation of the alternative work cycle will be an additional 22 working shifts per annum. Importantly, an additional 213 jobs were saved due to additional employees required to accommodate the extra shifts. It was also agreed that operations would continue to operate over four of the statutory public holidays. The forecast net impact of implementing the alternative work cycle is to increase profitability at Cooke 4 by approximately R40 million to R50 million per annum (assuming a gold price range of between R415,000/kg and R470,000/kg).