i

A CONCEPTUAL FRAMEWORK FOR STRATEGIC LONG TERM

PLANNING OF PLATINUM MINING OPERATIONS
IN THE SOUTH AFRICAN CONTEXT

Gordon Leslie Smith

A thesis submitted to the Faculty of Engineering and the Built Environment,

University of the Witwatersrand, Johannesburg, in fulfilment of the
requirements for the degree of Doctor of Philosophy.

Johannesburg, 2011
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DECLARATION

I declare that this thesis is my own unaided work. It is being submitted to the Degree of
Doctor of Philosophy to the University of the Witwatersrand, Johannesburg. It has not been
submitted before for any degree or examination to any other University.

...................................

Gordon Leslie Smith

st
31 day of March 2011
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ABSTRACT

The challenge facing a South African mining company, with multiple mining rights to platinum
mineral resources, is to create sustainable value whilst operating within mandated strategic
bounds, identified constraints, and variable market and economic conditions.

This can be achieved by allowing the fixed physical nature of the mineral asset to drive
definition of the optimal (lowest capital and operating cost) technical solution to mining and
processing activities, and developing and resourcing a strategically aligned portfolio of
production entities that creates flexibility to near and longer term business environment
shifts, i.e. a production mix that allows variation of output (metals, operating cost, capital
intensity) to respond to short term market variation, within a long term context.

The practical achievement of this outcome is enabled by the application of the strategic long
term planning framework. The framework logic, methodology and components are described
and the application demonstrated through a case study (Anglo Platinum Limited).

Prior to definition and description of the strategic long term planning conceptual framework,
the context of the South African platinum industry is described through consideration of the
characteristics of the mineral resource, the platinum value chain, the PGM market, and the
global and local business environment.

The core elements of the framework, and the relationship between them, are expanded:
scenario planning, business value optimisation, long term planning parameters, long term
planning procedures, capital investment prioritisation, project value tracking, the relationship
of the long term plan to the business plan, contingency planning and execution plans for
supporting capability (projects, metallurgical, infrastructure and people).

The implementation of the framework at Anglo Platinum Limited is considered over the
period 2004 to 2007 with a description of the business response, facilitated by the framework
and established capability, following the 2008 global financial crisis.

It is concluded that the strategic long term planning framework is a logic construct that
enables delivery of an optimised, strategically aligned, business plan from the mineral asset
portfolio using a set of tools and techniques with a common language, standards, systems
and processes that align decisions and actions on a cyclical basis.
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DEDICATION

This work is dedicated to the two people who have significantly influenced this work, but in
very different ways.

To Wendy,

without whose unwavering support and gentle urging over the years, I would not have
completed this documentation of three decades of applied learning in the mining industry.

Thank you.

and

To David Diering,

who through his inspirational work at Anglogold, in early 2000,

established mineral resource management

as a discipline within the South African mining industry.

His groundbreaking effort provided the context for adoption of the

strategic long term planning conceptual framework

by Anglo Platinum Limited in 2004.

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ACKNOWLEDGEMENTS

The development and application of this strategic long term planning conceptual framework
would not have been possible without the unequivocal support of the Executive Committee
of Anglo Platinum Limited.

Formal acknowledgment is therefore given to the Executive Committee of Anglo Platinum

Limited, for support and the necessary mandate to develop and implement this strategic long
term planning approach across Anglo Platinum operations, primarily during the period 2004
to 2008, and then through subsequent evolutions during 2009 and 2010.

Further acknowledgement goes to the members of the Strategic Long Term Planning
Department at Anglo Platinum who adopted and executed the conceptual framework over
the period 2004 to 2008, and to their successors, in the Mineral Resource Management
Department, during 2009 and 2010.

Thanks to their tireless efforts, the philosophy of strategic long term planning has been
established within Anglo Platinum; the people, the processes and the systems are in place -
with the efficacy of the results being evident during the trying 2008 global financial crisis and
subsequent recovery period over 2009 and 2010.

Further acknowledgement goes to my supervisor, Professor R.C.A. Minnitt (JCI Chair of

Mineral Resources and Reserves, University of the Witwatersrand), for his invaluable
academic guidance and review of progress.
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CONTENTS page

ABSTRACT..............................................................................................................................III

DEDICATION .......................................................................................................................... IV

ACKNOWLEDGEMENTS........................................................................................................ V

LIST OF FIGURES ............................................................................................................... XIII

LIST OF TABLES ................................................................................................................. XVI

LIST OF SYMBOLS............................................................................................................. XVII

NOMENCLATURE .............................................................................................................. XVIII

1 INTRODUCTION .................................................................................. 1

1.1 Background ........................................................................................ 1

1.2 Research problem .............................................................................. 2

2 RELEVANCE OF WORK & CONTRIBUTION TO KNOWLEDGE ...... 5

3 ORGANISATION OF THIS THESIS .................................................... 9

4 LITERATURE REVIEW...................................................................... 13

5 RESEARCH METHODOLOGY .......................................................... 16

6 CHARACTERISTICS OF THE PGM MINERAL RESOURCE ........... 17

6.1 South Africa ...................................................................................... 20

6.2 Zimbabwe .......................................................................................... 30

6.3 Global ................................................................................................ 30

6.3.1 Russia .....................................................................................................................30

6.3.2 North America ........................................................................................................32

6.3.3 China .......................................................................................................................34

6.3.4 South America .......................................................................................................34

6.4 Contribution to the Conceptual Framework................................... 35

7 THE PLATINUM VALUE CHAIN ....................................................... 36

7.1 Exploration........................................................................................ 38
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7.2 Mining ................................................................................................ 38

7.2.1 Underground – conventional (scattered breast) mining method .....................39

7.2.2 Underground – trackless mechanised mining method (TM3) ...........................39

7.2.3 Underground – hybrid mining method ................................................................41

7.2.4 Surface mining – open pit operations .................................................................42

7.3 PGM recovery processes................................................................. 43

7.3.1 Concentration ........................................................................................................44

7.3.2 Smelting ..................................................................................................................46

7.3.3 Base and precious metal refining ........................................................................48

7.4 Fabrication and end use .................................................................. 50

7.4.1 Integrated mining companies ...............................................................................51

7.4.2 Fabricators .............................................................................................................51

7.4.3 Investors/traders ....................................................................................................51

7.4.4 Auto manufacturers and industrial users ...........................................................52

7.4.5 Jewellers .................................................................................................................52

7.5 Contribution to the Conceptual Framework................................... 52

8 CHARACTERISTICS OF THE PGM MARKET.................................. 54

8.1 Applications of PGMs ...................................................................... 54

8.1.1 Autocatalysis .........................................................................................................54

8.1.2 Jewellery .................................................................................................................56

8.1.3 Industrial applications...........................................................................................57

8.1.4 Investment ..............................................................................................................61

8.2 Demand and pricing ......................................................................... 61

8.2.1 Platinum ..................................................................................................................62

8.2.2 Palladium ................................................................................................................67

8.2.3 Rhodium .................................................................................................................69

8.2.4 Ruthenium and Iridium..........................................................................................70

8.2.5 Demand – summary...............................................................................................71

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8.2.6 Pricing and exchange rate ....................................................................................73

8.3 Supply ............................................................................................... 77

8.3.1 Introduction ............................................................................................................77

8.3.2 South Africa ...........................................................................................................77

8.3.3 Russia .....................................................................................................................81

8.3.4 North America ........................................................................................................83

8.3.5 Zimbabwe ...............................................................................................................84

8.4 Porter’s “five forces” analysis ........................................................ 85

8.4.1 Threat of new entrants ..........................................................................................87

8.4.2 Threat of substitute products or services...........................................................88

8.4.3 Bargaining power of buyers / users ....................................................................88

8.4.4 Bargaining power of suppliers .............................................................................89

8.4.5 Rivalry amongst existing competitors ................................................................89

8.4.6 Market context – summary ...................................................................................90

8.4.7 Industry and competitor analysis ........................................................................91

8.5 Contribution to the Conceptual Framework................................... 95

9 THE GLOBAL BUSINESS ENVIRONMENT ..................................... 97

9.1 Environmental .................................................................................. 97

9.2 Technology ..................................................................................... 102

9.3 Economics ...................................................................................... 105

9.4 Contribution to the Conceptual Framework................................. 107

10 NATIONAL BUSINESS ENVIRONMENT ........................................ 108

10.1 Context ............................................................................................ 108

10.2 Legislative and policy environment .............................................. 109

10.2.1 Introduction ..........................................................................................................109

10.2.2 The Minerals and Petroleum Resources Development Act.............................110

10.2.3 Charters and Codes of Practice .........................................................................112

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10.2.4 Royalties Bill ........................................................................................................113

10.2.5 Other legislation ..................................................................................................113

10.3 Contribution to the Conceptual Framework................................. 115

11 THE STRATEGIC LONG TERM PLANNING (SLTP) CONCEPTUAL

FRAMEWORK ................................................................................. 116

11.1 Introduction .................................................................................... 117

11.2 An overview of the strategic long term planning conceptual

framework ....................................................................................... 118

11.3 Business strategy definition ......................................................... 119

11.4 Scenarios or world views .............................................................. 120

11.4.1 Introduction ..........................................................................................................120

11.4.2 Scenario planning................................................................................................121

11.4.3 Uncertainty and complexity ................................................................................122

11.4.4 Application – workshop methodology ..............................................................123

11.4.5 Contribution to the Conceptual Framework .....................................................125

11.5 Global assumption (GA) methodology ......................................... 125

11.5.1 The context in which mining investment decisions are made .......................126

11.5.2 Global assumptions – key drivers of future value estimates..........................126

11.5.3 Derivation process ..............................................................................................129

11.5.4 Global assumptions and scenarios – link into planning process ..................130

11.5.5 Determination of long term economic and planning parameters – the global
assumptions .........................................................................................................132

11.5.6 Metal price – forecasting.....................................................................................137

11.5.7 Contribution to the Conceptual Framework .....................................................139

11.6 Value based management (VBM) .................................................. 139

11.6.1 Introduction ..........................................................................................................139

11.6.2 Value based management – core concepts ......................................................141

11.6.3 Contribution to the Conceptual Framework .....................................................147

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11.7 Long term planning processes and techniques .......................... 148

11.7.1 The business plan process ................................................................................148

11.7.2 Mine extraction strategy .....................................................................................154

11.7.3 Mining right plan (MRP) ......................................................................................159

11.7.4 Long term plan (LTP)...........................................................................................161

11.7.5 Capital expenditure categories ..........................................................................164

11.7.6 Mineral resource and reserve linkages .............................................................166

11.7.7 Mining right plan to business plan ....................................................................170

11.7.8 Corporate governance ........................................................................................172

11.7.9 Contribution to the Conceptual Framework .....................................................172

11.8 Contingency planning .................................................................... 174

11.8.1 Introduction ..........................................................................................................174

11.8.2 ‘Plan B’ ..................................................................................................................174

11.8.3 Operational ‘Plan B’ submissions .....................................................................175

11.8.4 Financial impact analysis ...................................................................................181

11.8.5 Contribution to the Conceptual Framework .....................................................183

11.9 Valuation logic ................................................................................ 183

11.9.1 Capital investment decisions .............................................................................183

11.9.2 Discounted cash flow valuation .........................................................................184

11.9.3 Capital investment decision – modelling philosophy ......................................193

11.9.4 Business performance – modelling philosophy ..............................................197

11.9.5 Real options – logic and application .................................................................199

11.9.6 Enterprise / portfolio value optimisation...........................................................203

11.9.7 Contribution to the Conceptual Framework .....................................................209

11.10 Project value tracking (PVT) .......................................................... 210

11.10.1 Introduction ..........................................................................................................210

11.10.2 Project value tracking – the HSF solution.........................................................212

11.10.3 Contribution to the Conceptual Framework .....................................................220

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11.11 Supporting capability ..................................................................... 220

11.11.1 Introduction ..........................................................................................................220

11.11.2 Process .................................................................................................................221

11.11.3 Projects .................................................................................................................222

11.11.4 Engineering and infrastructure ..........................................................................222

11.11.5 Human resources ................................................................................................224

11.11.6 Corporate affairs ..................................................................................................224

11.11.7 Marketing ..............................................................................................................225

11.11.8 Finance .................................................................................................................225

11.11.9 Contribution to the Conceptual Framework .....................................................226

12 CONCLUDING CHAPTER ............................................................... 227

12.1 The Challenge ................................................................................. 227

12.2 The conceptual framework ............................................................ 228

12.3 The operating context .................................................................... 230

12.4 Strategic long term planning ......................................................... 234

12.5 Application - Anglo Platinum Limited ........................................... 240

12.6 Conclusion ...................................................................................... 245

13 LIMITATIONS OF RESEARCH ....................................................... 246

REFERENCES ........................................................................................... 247

APPENDIX A - EXAMPLE APPLICATION: ANGLO PLATINUM LTD ...... 258

A.1 Introduction .................................................................................... 258

A.2 2000 to 2003 .................................................................................... 260

A.2.1 Business strategy ................................................................................................260

A.2.2 Comment ..............................................................................................................265

A.3 2004 to 2007 .................................................................................... 265

A.3.1 Introduction ..........................................................................................................266

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A.3.2 Business strategy and market conditions ........................................................267

A.3.3 Value based management ..................................................................................268

A.3.4 Scenario / world view development ...................................................................268

A.3.5 Long term planning parameters (global assumptions) ...................................274

A.3.6 Long term planning procedures ........................................................................276

A.3.7 Definition of the long term plan and business plan .........................................279

A.3.8 Capital investment prioritisation and project value tracking ..........................284

A.3.9 Definition of upside or downside responses (contingency plan)...................286

A.3.10 Execution plans for supporting capability ........................................................291

A.3.11 Comment ..............................................................................................................294

A.4 2008 and beyond ............................................................................ 295

A.4.1 Background ..........................................................................................................295

A.4.2 The PGM market (extracts from Annual Report, 2009) ....................................296

A.4.3 The Anglo Platinum response to the global financial crisis ...........................296

A.4.4 Strategic long term planning – flexibility of response.....................................297

A.4.5 2009 – readjustment to the changed market conditions .................................299

A.4.6 Comment ..............................................................................................................301

A.5 Concluding comment ..................................................................... 302

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LIST OF FIGURES

Figure 3.1 Strategic long term planning – schematic of key components of the conceptual
framework............................................................................................................................... 10
Figure 6.1 Global Pt production (Platinum 2009 – Johnson Matthey) ................................... 19
Figure 6.1.1 Bushveld Complex – location (source Anglo Platinum, GIS, 2010) .................. 21
Figure 6.1.2 Stratigraphic column – UG2 reef and Merensky reef location (after Schouwstra
and Kinloch, 2000) ................................................................................................................. 23
Figure 6.3.1 Russia – major platinum deposit location .......................................................... 31
Figure 7.1 Platinum industry value chain ............................................................................... 36
Figure 7.2 PGM mining and process chain – flexibility lies in the mining portfolio ................ 37
Figure 7.3 Indicative value chain profitability – three generic product streams (after Anglo
Platinum Limited, Industry and Competitor Analysis 2007) ................................................... 37
Figure 7.3.1 Simplified PGM extraction block flow diagram .................................................. 44
Figure 7.3.2 Simplified concentrator flow diagram ................................................................. 45
Figure 7.3.3 Typical PGM producer smelter flow diagram ..................................................... 47
Figure 7.3.4 Base metal refinery block flow diagram ............................................................. 48
Figure 7.3.5 Precious metal refinery block flow diagram ....................................................... 49
Figure 7.4.1 Platinum industry – structure and concentration (after Anglo Platinum Limited,
Industry and Competitor Analysis 2007) ................................................................................ 50
Figure 8.2.1 Platinum price: 2000 to 2010 (source www.kitco.com) ..................................... 73
Figure 8.2.2 Palladium price: 2000 to 2010 (source www.kitco.com) .................................... 74
Figure 8.2.3 Rand / US$ exchange rate: 2000 to 2010 (www.ozforex.com.au) .................... 76
Figure 8.2.4 Rustenburg mines – basket price ZAR/oz ......................................................... 76
Figure 8.4.1 Porter’s “five forces” model – original diagram (Porter, 1980) ........................... 86
Figure 8.4.2 Generic Porter “five forces” (after Porter, 1980) ................................................ 87
Figure 8.4.3 Market context – summary ................................................................................ 91
Figure 8.4.4 Typical investment break-even analysis chart ................................................... 93
Figure 8.4.5 Industry cash cost curve – 2007 (after Anglo Platinum Limited, Industry and
Competitor Analysis 2007) ..................................................................................................... 94
Figure 9.1.1 Summary of emission standards – USA – petrol /gasoline vehicles (after Anglo
Platinum, Industry and Competitor Analysis, 2009) ............................................................. 100
Figure 9.1.2 Summary of emission standards – European Union – petrol vehicles (after
Anglo Platinum, Industry and Competitor Analysis, 2009)................................................... 100
Figure 9.1.3 Summary of emission standards – European Union – diesel (after Anglo
Platinum, Industry and Competitor Analysis, 2009). ............................................................ 101
Figure 9.1.4 Summary of emission standards – China (after Anglo Platinum, Industry and
Competitor Analysis, 2009). ................................................................................................. 101
Figure 9.2.1 Alternate technology to the internal combustion engine .................................. 103
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Figure 11.5.1 Schematic depiction of key drivers or causal factors of change, their
relationships and complexity, in the platinum mining industry ............................................. 127
Figure 11.5.2 Simplified depiction of key drivers or causal-effect factors of change in the
platinum mining industry ...................................................................................................... 128
Figure 11.5.3 Schematic presentation of alternate production profiles aggregated from each
scenario ................................................................................................................................ 131
Figure 11.5.4 Long term metal price estimation based on forecast supply and demand .... 134
Figure 11.5.5 Target scenario – supply / demand and growth estimates ............................ 135
Figure 11.6.1 Value based optimisation – core sources of long term value ........................ 141
Figure 11.6.2 Three core steps to value based management ............................................. 142
Figure 11.6.3 Strategic determinants of value – market and competitive position .............. 144
Figure 11.6.4 Key elements of market intelligence analysis ................................................ 145
Figure 11.6.5 Business model – strategic positioning ......................................................... 147
Figure 11.7.1 MES to MRP to LTP linkages in the business plan ....................................... 153
Figure 11.7.2 Mine scale optimisation profile – schematic .................................................. 156
Figure 11.7.3 Merensky / UG2 transition surface analysis .................................................. 158
Figure 11.7.4 Schematic mining right plan showing investment centre estimate confidence
levels. ................................................................................................................................... 161
Figure 11.7.5 Capital categories – project and stay in business ......................................... 164
Figure 11.7.6 Relationship between exploration results, mineral resources and mineral
reserves (after SAMREC, 2009). ......................................................................................... 167
Figure 11.7.7 Schematic relationship of mineral resources and reserves in the business plan
context .................................................................................................................................. 169
Figure 11.7.8 Resource to reserve – project pipeline perspective....................................... 169
Figure 11.7.9 Relationship of mining right plan to business plan ........................................ 171
Figure 11.8.1 Example ‘Plan B’ prioritisation matrix ............................................................ 177
Figure 11.8.2 Example – impact of ‘Plan B’ on platinum output .......................................... 181
Figure 11.8.3 Example – financial impact of ‘Plan B’ on operations .................................... 182
Figure 11.9.1 Relationship of long term planning level categories for an operation ............ 189
Figure 11.9.2 Project pipeline process ................................................................................. 190
Figure 11.9.3 Components of on-mine cash operating costs .............................................. 191
Figure 11.9.4 Relationship of capital investment decision models ...................................... 194
Figure 11.9.5 Schematic – components of total project value – DCF and real option ........ 202
Figure 11.9.6 Typical integrated PGM producer value chain (n = number of units) ............ 204
Figure 11.9.7 Diagrammatic relationship between production level and investment centre
prioritisation .......................................................................................................................... 208
Figure 11.10.1 Project Value Tracking (PVT) – typical waterfall chart output ..................... 211
Figure 11.10.2 PVT – HSF model methodology .................................................................. 212
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Figure 11.10.3 Schematic representation of the waterfall chart methodology in HSF ........ 214
Figure 11.11.1 Alignment of operating and support activities to the value chain ................ 221
Figure 11.11.2 Typical capacity planning profile for process element ................................. 222
Figure A.3.1 PGM industry – possible world views – 2007 .................................................. 270
Figure A.3.2 Example – summary SLTP production profiles ............................................... 282
Figure A.3.3 Example – decision timing relating to SLTP profiles ....................................... 282
Figure A.3.4 Example – process capacity investment alignment ........................................ 283
Figure A.3.5 Example – SLTP capital requirement by profile .............................................. 283
Figure A.3.6 Example – Ranked and grouped mine production profile ............................... 284
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LIST OF TABLES

Table 6.1 Some physical and chemical properties of PGMs (platinummetalsreview.com) ... 17
Table 6.1.1 Bushveld Complex – mineral resource estimates (after Cawthorn, 2010) ......... 23
Table 6.1.2 PGM (4E) and base metal grade distribution across the Bushveld Complex ..... 27
Table 6.1.3 South Africa – regional geothermal gradients (after Patterson et al, 1999) ....... 29
Table 8.2.1 Global platinum supply and demand (Johnson Matthey, 2010) ......................... 63
Table 8.2.2 Gross platinum demand by application and region (Johnson Matthey, 2010) ... 64
Table 8.2.3 Platinum – supply, demand and price 2005 to 2009 (Johnson Matthey, 2010) . 65
Table 8.2.4 Platinum – supply and demand by application and region (Johnson Matthey,
2010) ...................................................................................................................................... 66
Table 8.2.5 Palladium – supply, demand and price 2005 to 2009 (Johnson Matthey, 2010) 67
Table 8.2.6 Palladium – supply and demand by application and region (Johnson Matthey,
2010) ...................................................................................................................................... 68
Table 8.2.7 Rhodium – supply, demand and price 2005 to 2009 (Johnson Matthey, 2010) . 69
Table 8.2.8 Ruthenium and Iridium – supply, demand and price 2005 to 2009 (Johnson
Matthey, 2010) ....................................................................................................................... 70
Table 9.1.1 Global emission standards – summary (after Impala, 2007) .............................. 99
Table 10.2.1 Legislation applicable to mining and exploration activities in South Africa (after
DME, SAMI, 2005/2006) ...................................................................................................... 114
Table 11.4.1 Scenario planning – areas of purpose (after van der Heijden et al, 2002) ..... 122
Table 11.5.1 Global assumption parameters ....................................................................... 129
Table 11.5.2 Example – linkage of global parameters to world views ................................. 130
Table 11.7.1 Business planning calendar – summary ......................................................... 152
Table 11.7.2 Long term plan – planning level estimate confidence ..................................... 163
Table 11.9.1 DCF – components of relevant cash flow ....................................................... 187
Table 11.9.2 Investment centre prioritisation based on NPV and budget period cash flow 207
Table 11.10.1 Project value tracking analysis – description of waterfall chart components 215
Table A.2.1 Anglo Platinum – summary statistics: 2000 to 2003 (Annual Report, 2003) .... 265
Table A.3.1 Scenario factors – descriptions ........................................................................ 271
Table A.3.2 Global assumptions – data layout .................................................................... 275
Table A.3.3 Example content page – SLTP documentation 2006 ....................................... 280
Table A.3.4 Example content page – SLTP documentation 2007 ....................................... 281
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LIST OF SYMBOLS

oz – ounces troy
koz – thousand ounces troy
Moz – million ounces troy
t – tonne (metric ton)

g/t – 4E grams per tonne (4E referring to the four elements of Pt, Pd, Rh and Au)
ppm – parts per million

Ir – Iridium
Os – Osmium
Pd – Palladium
Pt – Platinum
Rh – Rhodium
Ru – Ruthenium

Au – Gold
Cu – Copper
Ni – Nickel
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NOMENCLATURE

BEE – black economic empowerment

BRIC – referring to the countries of Brazil, Russia, India and China
Bushveld Complex – is the world's largest known mafic-ultramafic intrusion on earth which
forms a platinum mineral resource
CAGR – compound annual growth rate
Capex – capital expenditure can be further broadly categorised as: expansion (increasing
production output), replacement (maintaining current production levels without an increase in
output) or “stay in business” (maintenance of existing infrastructure capacity)
DCF – discounted cash flow – a financial evaluation technique based on discounting of
anticipated future cash flows. Discounted cash flow analysis provides a means of relating the
magnitude of all expected future cash flows to the magnitude of the initial cash investment
required to purchase the asset and develop it for commercial purposes
DMS – dense media separation – the process whereby minerals are separated by virtue of
relative density
EP – economic profit is the net operating profit after tax of the business (or project, or
operation), less a charge for the capital required to earn that return
ETF – exchange traded fund
Geozone – an area, which can be identified and defined, having the same distinctive
geological features within a larger rockmass
Global assumptions – long term economic and planning parameters encompassing
assumptions on exchange rates, metal prices, inflation, capital and operating cost
escalators, on and off-mine costs, based on the prevailing world view (scenario), updated
and released quarterly
HSF – Hyperion Strategic Finance – a customised financial modelling application from
Oracle Corporation. HSF is used to perform valuations and assess capital investment
decisions, and to run, consolidate and produce the long term plan (LTP)
IC – investment centre – the minimum area of analysis of a mining right area. The size of an
investment centre is defined by the area of analysis associated with an application for
development capital funding
IRR – internal rate of return – the rate of return which the expected future cash flows, in a
discounted cash flow analysis, will yield on the original cash investment
JV – joint venture
LHD – load haul dump – a type of rock loading and hauling (rock handling) equipment
LoM – life of mine – the anticipated life of mining operations across a mining right under a
given set of long term planning parameters and strategic intent
LTP – long term plan
MDR – multi discipline review – planning review encompassing all disciplines
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Merensky reef – a platiniferous ore body in the Bushveld Complex

MES – mine extraction strategy – an unconstrained view of how the mineral asset could be
exploited (scale, timing, capital cost)

Mineral asset – any right to explore or mine (or both) that has been granted, or entity holding
such property or the securities of such an entity including but not limited to all corporeal and
incorporeal property, mineral rights, mining titles, mining leases, intellectual property,
personal property (including plant equipment and infrastructure), mining and exploration
tenure and titles or any other right held or acquired in connection with the finding and
removing of minerals located in, on or near the earth’s crust

Mineral resource – is a concentration or occurrence of material of economic interest in or on

the earth’s crust in such form, quality and quantity that there are reasonable and realistic
prospects for eventual economic extraction. The location, quantity, grade, continuity and
other geological characteristics of a mineral resource are known, or estimated from specific
geological evidence, sampling and knowledge interpreted from an appropriately constrained
and portrayed geological model. Mineral resources are subdivided, and must be so reported,
in order of increasing confidence in respect of geoscientific evidence, into inferred, indicated
or measured categories

Mineral reserve – is the economically mineable material derived from a measured or

indicated mineral resource or both. It includes diluting and contaminating materials and
allows for losses that are expected to occur when the material is mined. Appropriate
assessments to a minimum of a pre-feasibility study for a project and a life of mine plan for
an operation must have been completed, including consideration of, and modification by,
realistically assumed mining, metallurgical, economic, marketing, legal, environmental, social
and governmental factors (the modifying factors). Such modifying factors must be disclosed

MRP – mining right plan – a physical depletion plan informed by the mine extraction strategy
MSZ – main sulphide zone – the platiniferous target zone of the Great Dyke
NIB (eng) – a category of investment centres not included in the business plan because,
despite having been subject to extensive study work through to pre-feasibility level, they are
uneconomic for current long term planning parameters
NIB (nw) – a category of investment centres not included in the business plan as they have
not had any study work done on them or where exploitation is planned well in the future
(>30years)
NPV – net present value – a discounted cash flow analysis technique
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OEMs – original equipment manufacturers

Opex – operating expenditure, a generic term for operating cost which is not capital in nature
PGMs – platinum group metals; six elemental metals of the platinum group nearly always
found in association with each other. Also referred to as PGE (platinum group elements).
These metals are platinum, palladium, rhodium, ruthenium, iridium and osmium. Gold, silver,
nickel, copper and cobalt are usually associated with PGMs
Platreef – a platiniferous ore body in the Bushveld Complex
PVT – project value tracking – a methodology for tracking changes in project value over time
SDR – single discipline review – planning review by technical discipline
SIB – stay in business capital – ongoing capital investment required to sustain existing
operations and infrastructure. SIB capital is applicable for all capital equipment replacement,
business improvement, risk mitigation, ore reserve development and shared infrastructure
initiatives after the initial project execution
SLTP – strategic long term plan - the anticipated life of mining operations across a mining
right under a given set of long term planning parameters and strategic intent
UG2 reef – a platiniferous ore body in the Bushveld Complex
VBM – value based management – a business philosophy based on value maximisation
 1

1 INTRODUCTION

1.1 Background

For a mining company to create sustainable value from mineral assets, it is necessary to:

• Optimise the mineral asset portfolio to align with strategic and business
objectives;
• Create and operate long term assets within an anticipated long term business
environment; and
• Create and retain flexibility in the short term tactical response allowing effective
response to long term shifts in the business environment.

On this basis it is necessary to:

• Allow the fixed physical nature of the mineral asset(s) to drive definition of the
optimal (lowest capital cost, lowest operating cost, highest efficiency, maximised
cash flow) technical solution to mining and concentrating activities;
• Define and apply different business environment perspectives, world views or
scenarios, to determine possible economic viability under the different
perspectives, i.e. define the value proposition under different scenarios – what
are the options?
• Develop and resource a portfolio of production entities from the mineral asset
portfolio that creates flexibility to near and longer term business environment
shifts, i.e. a production mix that allows variation of output (metals, operating cost,
capital intensity) to respond to market demand and pricing.

These activities require a structured, integrated approach across all elements of the
business value chain from exploration through to product sales, which allows cyclical
(typically annual) reassessment and adjustment. Integral to this is a common language,
standards, systems and processes to align decisions and actions across the organisation
and over time.

Typically, however, organisational structures and operating philosophies create discipline

specific groupings (“silos”) across the organisation which work against alignment of
purpose and integrated outcomes in the long term planning and exploitation of mineral
assets.
 2

The solution lies in systematic application of a series of tools and techniques, within a
conceptual framework or philosophy, that aligns decisions and actions across the
company and defines the concept of strategic long term planning - the definition of which
is the intent of this work.

1.2 Research problem

The strategic and tactical mining context, which is central to the definition of the research
problem, is described as follows by Smith and Ballington (2005, p.294).

“Until recently, the mine planning function has generally been viewed as an engineering
function, primarily concerned with the design of access and stoping excavations and the
sequence of orebody extraction. Traditionally these planning elements have been
considered in two broad groupings; one primarily concerned with the accuracy of
estimates (conceptual, pre-feasibility, feasibility studies), the other with time frames
(short, medium and long term plans). In reality the elements of these two groups should
be applied across two categories of planning over the life cycle of mining operations –
strategic mine planning and tactical mine planning.

Strategic mine planning deals with those components and decisions that largely impact
the value of the business over the long term. Central to this is the development of a
business model and plan to maximise value from exploitation of the entire mineral
resource available to the organisation. This is achieved through consideration and
optimisation of the key elements of the value chain: exploration strategy, extraction
method, mining sequence, cut-off grade/pay limit, scale of operations, metallurgical
processing route, social and labour plans, environmental and sustainable development
philosophy, and marketing/sales strategy. The efficacy of the selected strategy and
business model, initially defined at the beginning of any business cycle, should be
periodically reviewed as internal and external aspects of the business environment are
continuously changing. In operating mines, the scope of strategic mine planning is related
to the continuous revision of medium and long term business plans (replacement and
expansion projects) to ensure that short term operations are consistent with long term
strategic objectives. The strategic mine plan is thus necessary to provide consistent
direction but also to provide a base against which to assess new exploitation options and
projects.

Tactical mine planning encompasses the routine planning activities required to sustain
existing operations and implement new projects. This implies continuous re-working of
short term plans, preparation of budgets, production scheduling, and process optimisation
 3

to meet changes in the external environment. Every tactical activity needs to be assessed
such that it is not detrimental to the long term strategic objectives of the business.

In essence strategic mine planning is concerned with decisions that determine the value
of the business as a whole whilst tactical mine planning is concerned with the tasks
required to achieve that value. The two processes are not mutually exclusive but rather
interdependent and should therefore not be separated at any time. However, the
respective emphases need to be understood and acknowledged.”

Of key consideration to mineral resource companies is the need to optimise value from a
finite, non-renewable asset, in a specific legislative context whilst operating in a market
environment defined by variable metal prices and exchange rates. The challenge is thus
to develop a portfolio of operations, current and future, to ensure optimal resource
exploitation and create the flexibility to respond to variable market conditions whilst
operating within mandated strategic and legislative bounds.

Strategic mine planning is commonly cited as the solution to the problem however the
understanding of exactly what strategic mine planning is and how it is executed is
variable and contradictory. Common usage of the terminology belies the fact that the
underlying activities tend to be short to medium term planning optimisation rather than
strategic planning of the individual mining right or full company mining right portfolio.

Strategic planning in the manufacturing, trade and service industries tends to be primarily
directed towards the definition of a tactical response to a company’s strategic vision,
mission and values. This approach may be augmented or supplemented by approaches
encompassing issue-based alignment or scenario based logic. Conceptual frameworks
for strategic planning in these industries are well established and widely applied.
However owing to the fundamental difference in the asset base between these industries
and the mineral resource industry, these frameworks do not readily transfer to the mineral
resource industry.

What is thus required is a conceptual framework for the strategic long term planning of
mineral resource companies that acknowledges the nature of the depleting mineral asset
base, the importance of a defined but flexible project pipeline, variability in market
conditions and the requirements of the South African mineral rights legislative
environment.
 4

This translates into the fundamental research question of:

How does a company with rights to exploit multiple platinum group metal mineral
resources of differing characteristics (e.g. location, grade, metal factor,
exploitation method, metallurgical characteristics, physical location, socio-
economic setting), select and implement a strategically aligned project portfolio
that enables optimal mineral resource exploitation whilst operating within
mandated strategic bounds, identified constraints, and variable market and
economic conditions?
 5

2 RELEVANCE OF WORK & CONTRIBUTION TO KNOWLEDGE

During early 2004, the author engaged with the then chief executive officer of Anglo
Platinum and outlined the strategic long term planning (SLTP) conceptual framework.
The logic and intended outcomes were readily accepted and a mandate given to develop
and implement the approach across the company.

Subsequently this research work has been ongoing and evolving in a workplace
environment driven by practical business needs within an annual planning cycle.
Highlights during this progressive development and implementation process have been:

2004

• Inclusion of investment centre logic and categorisation by confidence level into the
strategic business plan for 2005.

2005

• Institutionalisation of common long term planning parameters;

• Standardisation of valuation methodology; and

• Standardisation of DCF modelling logic and tools.

2006/07

• Full alignment of projects, process, human resource and infrastructure planning with
the long term plan profiles;

• Transition from individual computing to server based valuation modelling; and

• Maturity of SLTP processes, systems and competence levels.

2008

• Managing the impact of the Eskom power supply shortfalls using SLTP outcomes; and

• Use of the SLTP framework to identify and evaluate options in anticipation of the
impact of the global financial crisis.

2009/10

• Implementation of contingency plans identified and evaluated in 2008; and

• Definition of recovery trajectories using the SLTP framework.

 6

A number of publications, since 2004, have resulted from this research, and are listed
below:

Andersen, D. C., Pearson-Taylor, J. and Smith, G. L. (2005),The strategic long term

planning process at Anglo Platinum, Proceedings of the First International Seminar on
Strategic versus Tactical Approaches in Mining, South African Institute of Mining and
Metallurgy, Symposium Series S40, Johannesburg, South Africa, 19-21 September 2005,
pp. 9-22.

Ballington, I. R., Smith, G. L., Lane, G. R. and Hudson, J. (2005), The systemic
interdependency of closure decisions at shaft level, Proceedings of the First International
Seminar on Strategic versus Tactical Approaches in Mining, South African Institute of
Mining and Metallurgy, Symposium Series S40, Johannesburg, South Africa, 19-21
September 2005, pp.152-164.

Marsh, A. M., Naidoo, D. and Smith, G. L. (2005), The application of Hyperion Strategic
Finance in strategic long term planning at Anglo Platinum, Proceedings of the First
International Seminar on Strategic versus Tactical Approaches in Mining, South African
Institute of Mining and Metallurgy, Symposium Series S40, Johannesburg, South Africa,
19-21 September 2005, pp. 277-292.

Pearson-Taylor, J. and Smith, G. L. (2006), The concept of project value tracking and its
application in strategic mine planning at Anglo Platinum, Proceedings of the Second
International Seminar on Strategic versus Tactical Approaches in Mining, Australian
Centre for Geomechanics, Perth, Australia, 08-10 March 2006, section 8 pp.1-13.

Smith, G. L., Andersen D. C. and Pearson-Taylor, J. (2009), Strategic long-term planning

at Anglo Platinum, The Journal of The Southern African Institute of Mining and
Metallurgy, vol. 109, no. 3, pp.191-203.

Smith G. L., Andersen D. C., Pearson-Taylor, J. and Marsh A. M.(2006a), Project

valuation, capital investment and strategic alignment – tools and techniques at Anglo
Platinum, Proceedings of the Second International Platinum Conference ‘Platinum
Surges Ahead’, South African Institute of Mining and Metallurgy, Symposium Series S45,
Sun City, South Africa, 08-12 October 2006, pp.35-42.

Smith, G. L., Andersen D. C., Pearson-Taylor, J. and Marsh A. M.(2007), Project

valuation, capital investment and strategic alignment – tools and techniques at Anglo
 7

Platinum, The Journal of The Southern African Institute of Mining and Metallurgy, vol.
107, no. 1, pp. 67-74.

Smith, G. L. and Ballington, I. R. (2005), The application of discounted cash flow

modelling in strategic mine planning, Proceedings of the First International Seminar on
Strategic versus Tactical Approaches in Mining, South African Institute of Mining and
Metallurgy, Symposium Series S40, Johannesburg, South Africa, 19-21 September 2005,
pp. 293-304.

Smith, G. L. and Pearson-Taylor, J. (2006), Alignment of capital and strategic intent –

challenges and responses at Anglo Platinum, Proceedings of the Second International
Seminar on Strategic versus Tactical Approaches in Mining, Australian Centre for
Geomechanics, Perth, Australia, 08-10 March 2006, section10 pp. 1-6.

Smith, G. L., Pearson-Taylor, J. and Andersen, D. C.(2006b), The evolution of strategic

long term planning at Anglo Platinum, Proceedings of the Second International Platinum
Conference ‘Platinum Surges Ahead’, South African Institute of Mining and Metallurgy,
Symposium Series S45, Sun City, South Africa, 08-12 October 2006, pp.301-305.

Smith, G. L., Surujhlal, S. N. and Manyuchi, K. T. (2008), Strategic mine planning –

communicating uncertainty with scenarios, Proceedings of the Third International
Platinum Conference ‘Platinum in Transformation’, Southern African Institute of Mining
and Metallurgy, Symposium Series S45, Sun City, South Africa, 06-09 October 2008,
pp. 335-342.

Van Wyk, L. and Smith, G. L. (2008), The concept of value based management and its
application in developing value maximising strategies at Anglo Platinum, Proceedings of
the Third International Platinum Conference ‘Platinum in Transformation’, Southern
African Institute of Mining and Metallurgy, Symposium Series S45, Sun City, South Africa,
06-09 October 2008, pp.315-317.

These descriptive publications, on the SLTP framework and tools / techniques, were
presented by the author and members of the SLTP department at various conferences.
Subsequently aspects of the SLTP framework logic, terminology and tools have been
adopted across many of the Anglo American Group operating units, following transfer of
staff, as well as by others in the industry.
 8

The core contribution of this work to knowledge thus lies in:

The development, definition and articulation of a conceptual framework for the strategic
long term planning of platinum group metal mining operations in the South African
context.

The conceptual framework provides an integrated logic (philosophy), process and

methodologies that facilitate long term planning of mineral asset exploitation, within a
strategic context. It creates the link between the market requirements, business strategy
and tactical planning activities.

The link is created between the business strategy, the market and differing world views
(scenarios) across multiple, different mineral assets in the South African platinum mining
industry, through the concept of strategic long term planning.

The basis for the development of a portfolio of operations, current and future, that
ensures optimal resource exploitation and creates the flexibility to respond to changing
economic and market conditions whilst operating within legislative and mandated
strategic constraints is defined.

A critical limitation to this work is that the logic developed is primarily suited to a large
platinum group metal (PGM) producer with multiple, geographically distributed mining
rights with different characteristics and not to a single localised source of production.
However the underlying philosophy and approach of this work could be extended to
include other metal / mineral production.
 9

3 ORGANISATION OF THIS THESIS

Following a brief literature review and comment on research methodology, this document
is structured around the nature and interrelationship of the critical components of the
strategic long term planning framework as developed and applied, at Anglo Platinum
Limited, during the period 2004 to 2009. The major components of the overall conceptual
framework are schematically represented in Figure 3.1 which should be read from the
bottom of the diagram, as follows:

• The global and national business environments, in conjunction with the

characteristics of the market for platinum group metals create the context in
which world views or scenarios are developed. This is part A of the diagram.
• World views or scenarios (part B of the diagram) are constructed and used to
develop long term planning parameters called global assumptions or GAs that
represent the relevant underlying assumptions for each scenario, e.g. metal
prices, exchange rates, escalation, etc. These planning parameters inform the
financial analysis and optimisation of the business plan and create the link
between the mineral asset portfolio utilisation and the market.
• The annual cyclical business planning process, as represented in part C of the
diagram, is then executed using the planning parameters or GAs associated with
the preferred or most likely scenario. The composition of the mineral asset
portfolio is reviewed relative to the most likely scenario, the current state of
execution of projects and company strategic intent. The physical characteristics
of the individual mineral assets within the portfolio determine the development of
a mine extraction strategy, the mining right plan, the budget and long term plan
per asset and collectively for a multi-asset business. Concurrently value is
optimised through application of value based management principles during the
development of the strategic long term plan – at mineral asset level and company
level for a multi-asset organisation.
• The business plan, which is the output of the strategic long term planning
process, is then reassessed for a possible shift to the next most likely world view.
Real options arising from evolving alternate trajectories are evaluated and a
contingency plan is developed, based on planning parameters associated with
the alternate scenario. This is the link from part C of the diagram back to part B.

The business plan then forms the basis upon which the organisation is structured
and resourced. Supporting, aligned execution plans are developed for the
necessary supporting activities in finance, human resources, projects,
 10

engineering and infrastructure,

i and sustainable development.
evelopment. All of which takes
place in an annual planning cycle.

Figure 3.1 Strategic long term planning – schematic of key components of the
conceptual framework
 11

Part A of Figure 3.1 is encompassed in Chapters 6, 7, 8, 9 and 10:

• The nature of the PGM mineral asset, which forms the underlying basis of value
creation for the PGM industry, is described in Chapter 6 – Characteristics of the
PGM Mineral Resource, whilst the critical elements of the PGM value chain are
described in Chapter 7;
• The interplay of the nature of the PGM mineral assets and the value chain
manifest in the characteristics of the PGM market which is described in
Chapter 8; and
• Key elements of the global and local context are described in Chapter 9 – The
Global Business Environment and Chapter 10 – National Business Environment.

The main body of work lies in Chapters 11 and 12. In Chapter 11 the critical components
of the strategic long term planning conceptual framework are explored, specifically:

The components outlined in part B of Figure 3.1

• 11.4 – World views or scenarios;
• 11.5 – Global assumptions (common long term planning parameters); and
• 11.8 – Contingency planning.

The components outlined in part C of Figure 3.1

• 11.3 – Business strategy definition;
• 11.6 – Value based management;
• 11.7 – Long term planning processes and techniques;
• 11.9 – Valuation and optimisation logic;
• 11.10 – Project value tracking; and
• 11.11 – Supporting capability.

A final consolidation is provided in Chapter 12, covering aspects of the strategic planning
challenge, the conceptual framework, the operating context, strategic long term planning
and the example application.

A statement of limitations of the research is given in Chapter 13.

The example application is contained in Appendix A, in which aspects of the application

of the strategic long term planning conceptual framework at Anglo Platinum Limited are
explored over three periods; prior to development and implementation of the framework,
during the core development and application period of 2004 to 2007, and then 2008 and
 12

beyond. Information utilised in this appendix is limited by the need to restrict disclosure of
confidential information relating to the activities of a public listed company. However
critical aspects of the application of the conceptual framework are described.
 13

4 LITERATURE REVIEW

Consideration has been given to a limited number of references that highlight areas of
relevance to this research.

Mintzberg and Quinn (1991) in The Strategy Process – Concepts, Contexts and Cases
outline the key characteristics of business strategy through consideration of the “five P’s
for strategy” – strategy as a plan, a ploy, a pattern, a position and a perspective. This
work highlights the fact that strategy and strategic planning exist at differing levels of the
organisation and should be developed and interpreted in terms of overall reach or intent.
Understanding constraints and perspectives is thus important.

Morrison et al. (1984) in Futures Research and the Strategic Planning Process provide an
interrelated model for the strategic planning process which consists of six identifiable
stages: environmental scanning, evaluation of issues, forecasting, goal setting,
implementation and monitoring. This approach highlights the need to integrate
information from the external environment in the form of emerging developments with that
of the traditionally inward focused planning process.

Porter (1980) in Competitive Strategy: Techniques for Analysing Industries and

Competitors established a classic framework for strategic industry and competitor
analysis. The “five forces” model describes the relationship of new entrants, suppliers,
buyers, substitute products/services and rivalry in an industry, thereby defining the likely
nature of engagement between the participants in the business environment. This model
has had a defining impact on strategic thinking in the business environment with much of
the conceptual framework being reflected in subsequent work by a variety of authors.

Kaplan and Norton (2004), in Strategy Maps establish the logic of creating customised
strategy maps to close the gap between strategy formulation and implementation. Their
approach facilitates:

• Strategy clarification and communication to stakeholders;

• Identification of key internal processes that drive strategic success;
• Alignment of investment in people, technology and capital; and
• Exposure of strategy ‘gaps’ so as to allow corrective actions.

The work by Kaplan and Norton demonstrates a widening of perspective to consider

‘softer’ components related to organisational dynamics and systemic dependencies.
 14

The key elements that are commonly held to comprise the concept of strategic planning
are identified in the strategic planning category of the Malcolm Baldridge Criteria for
Performance Excellence (National Institute of Standards and Technology, 2006). In this
organisational assessment process, the strategic planning element is considered in
categories of strategy development and strategy deployment. Strategy development
encompasses customer and market environment, competitive environment, financial and
societal risk, human resource capabilities and needs, company operational capabilities,
and supplier/partnership capabilities. Strategy deployment focuses on the developed
strategy and its implementation (deployment and performance projection).

In the mineral resource industry the emphasis of strategic planning has been placed on
economic optimisation of mining units, predominantly open pit operations. A range of
companies and products offer strategic mine planning solutions (for example Whittle,
Surpac, Gemcom, Minex, Runge) which create the impression that strategic mine
planning comprises the activities of life of mine scheduling, economic analysis /
optimisation, blend and stockpile optimisation, and schedule balancing. In this context
optimisation is generally interpreted as being maximisation of net present value (NPV).

Cut-off grade theory as developed by Lane (1988) provides a rigorous analytical process
that leads to a cut-off policy (a sequence of cut-off grades over the life of mine) which will
maximise net present value for a specified production rate and set of economic criteria.
The approach is highly analytical with limitations to the approach arising in the
consideration / optimisation of other objective parameters (other than NPV) and
understanding of NPV loss associated with optimisation of these other parameters.
Handling of polymetallic deposits, stockpiling and grade-dependent recovery relationships
create further computational challenges that can render the approach unwieldy. No
consideration is given to the other ‘softer’ dimensions of strategic planning as highlighted
by Kaplan and Norton (2004).

Hall and Stewart (2004) describe a number of methodologies that have been employed to
identify optimum mine plans to achieve an objective of ‘maximising shareholder value’. A
critical observation is that companies tend not to implement a strategy that optimises one
of several, often competing, corporate objectives but rather select a strategy that best
meets some or all of the competing goals. The strategy optimisation process must
therefore be able to identify not only the strategic options to deliver against various
objectives but also the trade-offs required to obtain an optimum combination of the
various conflicting objectives. Despite identifying the need for consideration of non-
numerical optimisation parameters, emphasis is largely placed on mine optimisation
aspects such as the effect of increases in cut-off grade and/or mining rates.
 15

Camus (2002) considers the interaction between management of operations and

planning in the minerals industry. The economics of mining, the logic of value (NPV)
maximisation as optimisation and organisation design to achieve planned objectives are
explored. Critically he reinforces the concepts of tactical and strategic planning
frameworks and their inter-relatedness.

The gap that exists between classic business strategic planning and strategic mine
planning can thus be summarised as follows:

• Business strategic planning has evolved from the consideration of discrete

numerical decision parameters in investment decision making, to approaches that
include system related parameters in terms of communication, alignment of intent
and broader stakeholder interests. This is largely manifested in the work by
Porter (1980) which has strongly influenced business practice.

• The commonly applied logic of strategic mine planning is largely focused on

asset optimisation at production unit level. Emphasis is placed more on the
planning than the strategic elements with broad interpretation of the terms
strategic, tactical, short term and long range.

The importance of processes and logic that allow the alignment of capital investment and
strategic intent in a systemic approach to investment decision making in the strategic
mine planning context is highlighted by Smith and Pearson-Taylor (2006) and Smith et al.
(2006a, 2006b). These papers are a high level manifestation of the core of knowledge
that is expanded and documented in this work.
 16

5 RESEARCH METHODOLOGY

The period from 2004 to 2007 during which the research was undertaken can be
described as a period of applied learning, process and systems development, and
progressive implementation of the conceptual framework through application in the
annual planning cycle.

Elements of the framework have been developed at different rates, during each annual
planning cycle, depending on organisational need. There has thus been progressive and
iterative improvement in tools and techniques, each year, driven by successes and
failures during the previous planning cycle.

The challenge has been to transfer the logic in the conceptual framework into a series of
actions that meet the end objective of creating sustainable value whilst operating within
mandated strategic bounds, identified constraints, and variable market and economic
conditions.

The objective of this thesis is to demonstrate the developmental evolution,

implementation and successful adoption of the framework in the work environment.
 17

6 CHARACTERISTICS OF THE PGM MINERAL RESOURCE

The PGM mineral resource is the primary asset underlying value creation through the
mining, recovery and sale of platinum group metals. This chapter briefly describes the
occurrence and nature of the PGM resource in South Africa, Zimbabwe and the rest of
the world. The objective is to facilitate understanding of the nature of the mineral
resource and the context in which the Strategic Long Term Planning Conceptual
Framework operates, as reflected in part A of the conceptual framework schematic in
Figure 3.1.

Platinum group metals (PGMs) are transition metals lying in the d block (groups 8, 9, 10,
periods 5 and 6) of the periodic table. PGMs comprise six elements: platinum (Pt),
palladium (Pd), rhodium (Rh), ruthenium (Ru), iridium (Ir) and osmium (Os). They have
similar physical and chemical properties and tend to occur together in mineral deposits.
The PGMs along with nickel, copper and cobalt are closely associated with industrial
expansion owing to their application across a range of industries. Physical properties
(Table 6.1) such as high density, strength, outstanding catalytic properties, stable
electrical properties and high melting points give these metals unique applications in high
technology engineering. They are also highly wear and tarnish resistant and as such are
well suited to jewellery applications.

Table 6.1 Some physical and chemical properties of PGMs (platinummetalsreview.com)

Ruthenium Rhodium Palladium Osmium Iridium Platinum

Chemical symbol Ru Rh Pd Os Ir Pt

Density (g/cm3) 12.45 12.41 12.02 22.61 22.65 21.45

Melting point (°C) 2 310 1 960 1 554 3 050 2 443 1 769

Vickers hardness number 240 101 40 350 220 40

Electrical resistivity
6.80 4.33 9.93 8.12 4.71 9.85
(microhm.cm at 0°C)

Thermal conductivity
105 150 76 87 148 73
(Watts/metre/°C)

Tensile strength
165 71 17 - 112 14
(kg/mm2)
 18

Ruthenium is primarily used in alloys with platinum and palladium for high temperature -
high wear resistance applications such as electrical contacts and jet engine turbine
blades. Further industrial application is in thick film chip resistors. Research on medical
applications, specifically in cancer treatment, is ongoing.

Rhodium is hard, corrosion resistant and has low electrical resistance. It is usually alloyed
with platinum or palladium and applied as a high-temperature and corrosion-resistive
coating in electrical contacts, furnace windings, thermocouples, bushings for glass fibre
production, electrodes for aircraft spark plugs, and laboratory crucibles. Further
application is in autocatalysis and in jewellery as a coating.

The primary application of palladium is in autocatalysis. However further application is in

electronics (capacitors, plating and solder), dentistry (crowns and bridges), chemical
application (nitric acid production, synthetic rubber and nylon, polyester), fuels cells,
coinage, oil refining, medicine (cancer treatment, surgical instruments) and jewellery.

Osmium is rarely used in its pure state owing to the volatility and extreme toxicity of its
oxide. The metal is almost entirely used to produce very hard alloys with other metals of
the platinum group for fountain pen tips, instrument pivots, turntable needles, and
electrical contacts. An alloy of 90% platinum and 10% osmium is used in surgical
implants such as pacemakers and replacement of pulmonary valves.

The high melting point, hardness and corrosion resistance of iridium and its alloys
determine applicability in high-temperature materials, electrical contacts, high pressure
spinnerets and wear-resistant bearings. Iridium is also used as a hardening agent in
platinum alloys and has limited application in catalysis and medicine (cancer therapy).

Platinum is the most important of the platinoids with characteristics of high malleability
and ductility, infusibility, high oxidation resistance and good electrical and heat
conductivity. In the finely divided state, platinum is an excellent catalyst, having long been
used in the contact process for producing sulphuric acid. It is also used as a catalyst in
cracking petroleum products. There is much current interest in the use of platinum as a
catalyst in fuel cells and in antipollution devices for motor vehicles. Platinum clad anodes
are extensively used in cathodic anti-corrosion protection systems for large ships and
ocean-going vessels, pipelines, steel piers, etc.

Most of the worlds platinum production is derived from South Africa, totalling 79%, whilst
Russia produces 12%, primarily as a by-product of nickel recovery, and North America
produces 4% of the global Pt (Figure 6.1).
 19

Pt Production 2009

5%
4%

12%

South Africa
Russia
North America
Others

79%

Figure 6.1 Global Pt production (Platinum 2009 – Johnson Matthey)

Platinum’s primary occurrence is in base metal ores associated with basic igneous rocks.
A large suite of platinum group metal containing chalcogenide minerals is found
associated with sulphide mineralisation in ultramafic ores in South Africa in the Bushveld
Complex. Platinum nuggets occur naturally as does an alloy of platinum-iridium.

There are four main types of economic PGM resources (Cabri, 2002; Vermaak, 1995):

• Stratiform deposits – where PGMs occur in large Precambrian mafic to ultramafic

layered intrusions; major examples include the Merensky and Upper Group 2
(UG2) reefs of the Bushveld Complex in South Africa, the Great Dyke in
Zimbabwe and the Stillwater complex in Montana, United States. These are
usually considered primary owing to their size (~10 to1 000 Mt) and grade
(3 to10 g/t PGMs, ~0.2 to1% Ni+Cu);
• Norite intrusions – where meteoritic impact is considered to have been
instrumental in allowing PGM emplacement; the major example is the Sudbury
Irruptive Complex in Ontario, Canada (~10 to 1 000 Mt, 1-3 g/t PGMs, ~2-3%
Ni+Cu);
• Ni-Cu bearing sills – related to rift structures, allowing concordant intrusive
sheets; with examples being the Noril’sk-Talnakh District in Russia and the
Jinchuan deposits in China (~10 to 1 000 Mt, 2-15 g/t PGMs, ~3-5% Ni+Cu); and
 20

• Placer deposits – alluvial sedimentary deposits containing coarse PGMs (mainly

Pt).

Initial platinum production was from placer deposits in the Urals followed by exploitation,
in 1935, of PGM containing copper-nickel deposits on the Taimyr Peninsula in northern
Siberia. These remain the most important of Russia's known PGM reserves. The first to
be discovered and exploited was the Noril’sk deposit, which lies just south of the town of
that name which grew to serve the mining operations. Sperrylite (platinum arsenide) is
found with nickel-bearing sulphide ore deposits at Sudbury, Ontario in Canada. Nickel
producers in this region produce platinum and palladium as by-products. According to
Johnson Matthey (2009) world gross demand for platinum in 2009 was around 7 Moz a
year down from ~8 Moz per annum in the period 2005 to 2008.

6.1 South Africa

The Bushveld Complex is the world's largest known platinum deposit and covers an area
2
of approximately 65 000 km in the northern provinces of South Africa. The Bushveld
Complex is the largest known mafic-ultramafic intrusion on earth extending some 450 km
from east to west and 350 km from north to south, forming a rough saucer shape centred
2
on the village of Bela-Bela. The outcrop area of the complex is over 29 450 km with
2
further sub crops of 36 550 km (Von Gruenewaldt, 1976) with an estimated thickness of
9 km.

A variety of orogeneses have been developed and considered for the Bushveld Complex
however current thinking is converging around the concept that the complex was formed
by repeated injections and cooling of magma into a massive underground chamber. This
magma cooled and crystallised over millions of years forming a layered deposit as
different minerals crystallised out at different temperatures and pressures during the
cooling process.

The layered sequence is preserved in five major compartments; the eastern Bushveld,
the south-eastern Bushveld and the Western Limb which form semi-circular basin like
lobes, the far-western Bushveld and the Northern Limb. See Figure 6.1.1.
 21

Figure 6.1.1 Bushveld Complex – location (source Anglo Platinum, GIS, 2010)

Economic concentrations of PGMs, in conjunction with significant quantities of chrome,

gold, nickel, copper and cobalt, occur principally in three stratigraphic units, the UG2
chromitite (UG2), the Merensky reef (MER) and the Platreef. The stratigraphic column
shown in Figure 6.1.2 illustrates the relative positioning of the UG2 in relation to the
Merensky reef, and the position of the Platreef.

The Bushveld Complex is estimated to contain approximately 75% of the world’s known,
estimated, resources of platinum, 52% of palladium, 82% of rhodium and 16% of nickel
(Naldrett, 2004). Commercial exploitation of the Bushveld Complex commenced with
Merensky mining operations owing to simpler concentrator recovery and smelter
characteristics. The UG2 reef has subsequently developed into a significant PGM mineral
resource owing to the progressive depletion of much of the best areas of shallow
Merensky since commencement of mining. PGM mineralisation grade, in the Merensky
and UG2 horizons is typically around 5 g/t (4E) to 7 g/t (4E). The Merensky and UG2
reefs can be identified along two arcs on the eastern and western limbs of the Bushveld
o
Complex, extending from surface, at dips that range from approximately 9 to 18 , to
depths of approximately 2 300 m. The Merensky reef and UG2 reef are separated by a
vertical distance of between ~16 m (northern area of the Western Limb) and ~400m
(eastern Bushveld), depending on location.
 22

On the northern limb of the Bushveld Complex a third PGM bearing stratigraphic horizon,
known as the Platreef, occurs. The Platreef is similar in formation to the Merensky reef,
however the orebody itself is thicker and not as easily defined. Compared to the rest of
the Bushveld Complex, the Platreef is relatively rich in base metals specifically copper
and nickel and has a lower platinum / palladium ratio. Typically the Platreef is about 4 g/t
(4E) or less in the mineralised zone.

Owing to the scale of the Bushveld Complex and because of its unique character most
other layered intrusions are compared with it. The large scale layering forms the basis for
a simple subdivision. A characteristic is that to a large extent the layers are laterally
continuous, except for minor downward magmatic erosion discontinuities known as
potholes. This lateral continuity is a help in the exploration, evaluation (of the economic
sequences), mine planning and operation.

The initial intrusion of the Bushveld Complex was by a suite of mafic sills into the floor
rocks of the Transvaal Supergroup. Felsic volcanics of the Rooiberg Group and intrusive
acidic rocks of the Rashoop Granophyre Suite followed this. The Rustenburg Layered
Suite comprises mafic layered rocks ranging in composition from dunite to diorite,
intruded beneath the Rooiberg Group and Rashoop Granophyres. Bushveld Granites of
the Lebowa Granite Suite intruded these mafic rocks and the overlying Rooiberg Felsites
(Kinnaird, 2005). The Rustenburg Layered Suite contains the main economic
mineralisation. It comprises a package of rocks 7 – 8 km thick and can be sub-divided
into five zones, the Marginal, Lower, Critical, Main and Upper Zones.

The upper Critical Zone of the Bushveld Complex, hosts the largest concentration of
PGMs in the world. Apart from the Upper Group Chromitite No. 2 (UG2) and Merensky
reef, the zone also hosts the Platreef mineralisation of the northern limb of the Bushveld
Complex. The stratigraphic column shown in Figure 6.1.2 (after Schouwstra and Kinloch,
2000) illustrates the relative positioning of the UG2 in relation to the Merensky reef, and
the position of the Platreef.
 23

Figure 6.1.2 Stratigraphic column – UG2 reef and Merensky reef location (after
Schouwstra and Kinloch, 2000)

Bushveld Complex – mineral resource estimate

A number of estimates, by a range of authors, of PGM mineral resources contained in the
Bushveld Complex have been published over the years with a recent summary from
Cawthorn (2010) summarised in Table 6.1.1 below.

Table 6.1.1 Bushveld Complex – mineral resource estimates (after Cawthorn, 2010)

Reserves (Moz) Resources (Moz) Deposit (Moz)

Pt Pd Pt Pd Pt Pd
Merensky reef 55 - 75 33 - 35 524 - 400 302 - 221 345 180
UG2 Chromitite 99 - 116 65 - 69 431 - 404 281 - 354 379 237
Platreef 11 - 10 11 168 - 136 171 - 136 59 66
Total BC deposit 820 720

Indicative
165 - 201 109 - 115 1123 - 940 754 - 711 783 - 820 483 - 720
total

Known platinum mineral reserves therefore represent ~ 20 years at a 2008 peak demand
of 8 Moz pa, whilst mineral resources have the potential for an additional ~100 years.
 24

Merensky reef
The Merensky reef has been traced for 300 km around the entire outcrop of the eastern
and western limbs of the Bushveld Complex, and to depths of ~5 km. Although the
Merensky reef is generally regarded as a uniform reef type, large variations occur in reef
thickness, reef composition, as well as the position of the mineralisation. The rock
forming minerals of the Merensky reef comprise approximately equal amounts of dark
iron-magnesium silicate minerals and lighter calcium-aluminium-sodium silicate minerals
(called a feldspathic pyroxenite) under and overlain by thin (5 to 15 mm) often
discontinuous layers of chromite concentrations. The total thickness of this package is
generally less than 30 cm with dips that range from approximately 9º to 18º. This zone,
commonly known as the Merensky pegmatoid, contains the base metal sulphide grains
and associated platinum group minerals. The major platinum group minerals are
cooperite (PtS), braggite [(Pt,Pd)NiS], sperrylite (PtAs2) and PGE alloys. The rock-
forming silicate minerals of the Merensky reef consist predominantly of orthopyroxene
(~60%), plagioclase feldspar (~20%), pyroxene (~5%), phlogopite (~5%), and occasional
olivine. The base metal sulphides consist of pyrrhotite (~40%), pentlandite (~30%),
chalcopyrite (~15%), and trace amounts of millerite (NiS), troilite (FeS), pyrite (FeS2), and
cubanite (Cu5FeS4).

The extent and relative amount of PGMs and base metal sulphides appears to be a
function of the thickness of the reef, with the highest grades occurring where the reef is
thin. Three principal base metal sulphides occur in the Merensky reef. These are, in order
of decreasing abundance, pyrrhotite (FeS), pentlandite (FeNiS) and chalcopyrite
(CuFeS2). As platinum minerals occur within and associated with these sulphides, the
Merensky reef yields substantial amounts of nickel and copper as by-products, together
with minor amounts of cobalt and selenium. Whereas the grade of the reef is remarkably
constant over extensive strike distances, the composition of the actual platinum group
mineralogy is extremely variable even from mine to mine. Grade and metal ratios vary
across the Bushveld Complex as indicated in Table 6.1.1., however the Merensky reef
can be characterised, typically by a ~60% Pt content, 2/1 Pt/Pd metal ratio, nickel and
copper grades of the order of 0.16 and 0.36% respectively. In general the proportions of
the precious metals are around: platinum 57%, palladium 25%, gold 4%, iridium 1%,
ruthenium 8%, rhodium 4% and osmium 4%.

The geology of the Merensky reef makes it more difficult to mine than the UG2 reef as it
is more prone to disruptions from faulting (particularly in the north-western limb), dilution
from rolling reef and can be extensively potholed, where the reef abruptly transgresses
the footwall rocks. Potholes interrupt the normal mining of the reef. As a result, the
Merensky is usually mined using conventional stoping layouts using handheld drills to
 25

allow greater flexibility and to prevent removal of unnecessary waste rock. The average
cut applied is approximately 100 cm-120 cm.

UG2 Chromitite
The UG2 reef is a platiniferous chromitite layer which, depending on the geographic
location within the Complex, is developed some 20 m to 400 m below the better known
Merensky reef, with the smallest vertical separation in the western Bushveld and greatest
in the eastern Bushveld, at dips that range from approximately 9º to 18º. The chromitite
itself is usually 1 m thick but can vary between ~ 0.4m and ~2.5 m. Thin chromitite seams
(generally less than 20 cm in thickness) may be present in both the footwall and, more
commonly, in the hanging wall rocks. The UG2 consists predominantly of chromite (60 to
90% by volume) with lesser silicate minerals (5 to 30% pyroxene, and 1 to 10%
plagioclase). Total PGE values vary from locality to locality, but on average range
between 4 g/t and 7 g/t. The base metal distribution follows a similar trend to that of the
PGMs, with most of the values occurring in the bottom and top part of the reef. The base
metal content of a typical UG2 reef is approximately 200 to 300 ppm nickel occurring as
nickel sulphide and less than 200 ppm copper occurring as copper iron sulphide. The
platinum group minerals present in the UG2 reef are highly variable, but generally the
UG2 is characterised by the presence of abundant PGM sulphides, comprising
predominantly laurite (RuOsIr sulphide), cooperite (PtS) and braggite [(Pt,Pd)NiS].

The chromite content is 60% to 90%, with an average Cr/Fe ratio of 1.26 - 1.14 with
43.5% Cr2O3. PGM contents are up to 10 g/t 4E (3.6 g/t Pt, 3.81 g/t Pd, 0.3 g/t Rh,
2.3 g/t Au). Cu and Ni are low, generally less than 0.5%. Pt:Pd ratio varies with
geographic location.

In contrast to the Merensky reef, the UG2 is relatively uniform and allows for greater use
of mechanised equipment, which is more cost effective despite the larger mining width
(180 cm to 220 cm). On the downside, the UG2 reef typically has higher chrome content
than the Merensky reef. Chrome negatively affects concentrator recoveries and can build
up within the furnace, necessitating lengthy downtime for removal.

Platreef
In the northern limb of the Bushveld Complex where the Bushveld rocks are in contact
with the floor rocks (that is the Archaean granite and sediments of the Transvaal
Sequence), and the Lower and the Critical Zones are poorly developed, a unique type of
mineralisation has developed. This reef, known as the Platreef consists of a complex
assemblage of pyroxenites, serpentinites and calc-silicates. The different nature of these
rocks, compared to normal Merensky reef, is the result of the hot Bushveld magma
 26

reacting with the lime-rich floor rocks. An exchange of heat and material between the
magma and the floor rocks resulted in the formation of abundant lime-rich minerals (calc-
silicates) as well as the serpentinisation of the overlying pyroxenites. Base metal
mineralisation and PGM concentrations are found to be highly irregular, both in value as
well as in distribution. The mineralisation in places reaches a thickness of up to 40 m.
Although the major platinum group minerals consist of PGE tellurides, platinum arsenides
and platinum sulphides, there appears to be a link between the rock type and the type of
PGMs: serpentinites are characterised by a relative enrichment in sperrylite (PtAs2),
whereas the upper pyroxenites are generally characterised by more abundant PGM
sulphides and alloy. PGM alloys generally dominate mineralisation closer to the floor
rocks. Common base metal sulphides include pyrrhotite, pentlandite, chalcopyrite and
pyrite, and although PGMs frequently occur, enclosed in or on grain boundaries of these
base metal sulphides, a high association of PGMs with silicate minerals is found in some
areas.

The predominantly pyroxenitic Platreef forms the base to the Bushveld Complex north of
Mokopane (formerly Potgietersrus). It is the world’s third largest resource of PGMs after
the Merensky and UG2 reefs. However, it differs considerably from both of these reefs in
o
that it is up to 400 m thick, steep dipping (~45 ) and rests directly on footwall
metasediments and Archaean basement compared to the Merensky and UG2 reefs
which are ~1 m thick layers within a layered sequence of mafic rocks. The Platreef is the
site of the world’s largest opencast platinum mine at Mogalakwena Platinum Mine and is
currently a focus for exploration and expansion.

Visible sulphide mineralisation is frequently encountered in borehole intersections.

Generally the predominant sulphide minerals are pyrrhotite, chalcopyrite with minor
pentlandite, pyrite and occasionally galena and bornite. According to Lee (1996) and
Kinnaird (2005) Cu and Ni range between 0.1-0.25% and 0.15-0.36% respectively. There
is an association between visible sulphides and enhanced PGM grade (Lee, 1996)
although Kinnaird (2005) has shown that there is no direct correlation between sulphur
and PGM content. There appears to be a finite amount of PGM in the system while
sulphur may vary, possibly as a result of contamination by country rocks. PGM grades
vary from < 2.5 to 15 g/t and occasionally up to 25 g/t (Lee, 1996).

Variability of metal ratios across reefs and compartments

The distribution of PGMs across economic zones and compartments across the Bushveld
Complex has significant impact on mine economics and the mix of metal delivered to the
market. Merensky resource grades are generally higher on the western limb than the
 27

eastern limb. Similarly the northern regions have a marginal grade advantage over the
southern parts of each limb. There is no consistent trend relating to the UG2 grades.

Metal ratios (prill splits) and base metal content across the five major regions of the
Bushveld Complex are indicated in Table 6.1.2.

Table 6.1.2 PGM (4E) and base metal grade distribution across the Bushveld Complex

Prill % distribution Base metal grades

Pt% Pd% Rh% Au% Cu% Ni%
Merensky Reef - West Bushveld 63.85 27.38 4.47 4.29 0.10 0.24
Merensky Reef - East Bushveld 59.72 30.16 3.12 7.00 0.10 0.23
UG2 Reef - West Bushveld 56.43 31.57 11.32 0.68 0.01 0.10
UG2 Reef - East Bushveld 44.84 45.26 8.35 1.56 0.03 0.14
Platreef 42.62 47.82 3.03 6.53 0.11 0.19

The Merensky reef in the eastern Bushveld differs from that of the western Bushveld by
having a slightly higher Pd component. The UG2 reef between the two lobes of the
Bushveld follows a similar trend to that of the Merensky reef. The Platreef however has a
1:1 ratio of Pt to Palladium. Pt and Pd on all reefs constitute 80%+ of the total 4E (Pt, Pd,
Rh and Au) value.

The base metal values appear to have a similar trend across the Bushveld indicating the
association of PGMs and base metals but proving no direct association in the tenor
values based on base metal occurrence.

Higher grades and a platinum bias can help explain why the western limb, which is the
source of 70% of platinum produced in South Africa, is home to the largest platinum
mines in the world. Furthermore, lower grades and a palladium bias suggest that mining
on the eastern limb is likely to be relatively less attractive (same costs at a lower revenue)
in a scenario where pricing and demand for Pd is less than that for Pt. For example, the
Merensky reef on the southern part of the western limb contains approximately 2.3 oz of
platinum for each ounce of palladium. This is greater than the 2.1 oz of platinum in the
northern section. In contrast, the Merensky reef on the northern part of the eastern limb
contains twice the platinum, per ounce palladium, of the UG2 reef in the same area (1.9
vs. 0.9). This creates opportunity, within a portfolio that contains mineral assets across
the western, eastern and northern limbs, to schedule production to meet anticipated
metal demand mix over time.
 28

Structure and geological losses

The Merensky reef, especially, is well known for its extreme variability, and this not only
includes its physical characteristics (Viljoen and Hieber, 1986; Chunnett, 1987), but also
its geochemical characteristics (Lee and Brown, 1994; Wilson et al, 1999). Additionally
the Merensky reef can be extensively potholed. There are essentially two types of
pothole, the destructive type and the non-destructive type. The destructive pothole type
typically takes on a steep, jagged soup-bowl profile that does not flatten out to any
appreciable extent at its base. Within such potholes the reef layer is either partially or
completely destroyed (or non-existent). In many western Bushveld potholes of this type,
discontinuous pieces of what can be recognised as the reef layer commonly adhere to
more stable gradients, while steeper portions may host only a chromitite layer, or no
recognisable components of the reef at all. Such an environment may be considered to
host abnormal reef, and it is suggested that this type of reef be termed pothole reef
(where it exists). Non-destructive potholes, although commonly steep at the edges,
typically bottom out onto relatively flat/smooth surfaces (or successive surfaces) of
variable extent. These basal environments commonly host normal reef (at least to some
extent), easily recognisable as such, and for the most part also mineable, only at a lower
than normal stratigraphic elevation (Viljoen and Hieber, 1986; Chunnett, 1987).

Geothermal gradient
The temperature of the working environment in underground mines is determined by the
rate at which heat energy is absorbed by the air as it courses through the excavations
and is affected by various heat sources. In areas where the rockmass temperature
exceeds that of the human body (37ºC), the most significant heat source is the rockmass
itself. Beyond this limit, all other sources, usually air auto-compression and heat from
machinery, become of secondary significance.

The thermal gradient is expressed in terms of the increase in temperature as a function of

depth below surface. Table 6.1.3 indicates generic rock temperature properties used in
the South African mining industry as approximations of regional thermal gradients
(Patterson et al, 1999).

The impact of geothermal gradients on mine design and in particular in the provision of
adequate ventilation and air cooling systems is driven by the need to create and sustain a
steady environment irrespective of the depth and nature of mining activities. This implies
that the introduction of air cooling systems in mines located in the Bushveld Complex will
occur at roughly half the depth of a similar mine in the Witwatersrand – excluding the
effect of air auto-compression which impacts the two examples equally at depths below
1 500 m. Rock temperatures of the world's deepest platinum mine, Northam, can reach
 29

75ºC at depths of 2 200 m. A typical gold mine on the Witwatersrand will only reach this
temperature at ~5 000 m (Patterson et al, 1999; Van der Neut et al, 2010).

The health and safety of workers is determined, amongst other factors, by the ability to
achieve and maintain acceptable environmental conditions in the work place. This
requires targeting an air temperature range that must be kept under control within a
narrow margin irrespective of the depth. Usually the target temperature envelope
o o
extends between (wet bulb) temperatures of 27.5 C and 30.5 C (for a correspondingly
acceptable relative humidity range of 50% to 60%). The air cooling system must be
adaptable enough to absorb the increasing heat energy released – which is proportional
to the difference between the rock temperature and air temperature.

Table 6.1.3 South Africa – regional geothermal gradients (after Patterson et al, 1999)

Surface Temperature VRT [Td]

Ground Gradient
Temperature
o o o
( C) ( C/1000 m) ( C)

Witwatersrand Basin 16.0 9.0 Td = 16.0 + 9.0 x (d/1000)

Bushveld Igneous
21.5 22.0 Td = 21.5 + 22.0 x (d/1000)
Complex
Free State Goldfields 20.0 14.6 Td = 20.0 + 14.6 x (d/1000)

In reality, the air cooling requirements arise from a number of factors in addition to rock
temperature gradients. Other factors that will add to the heat load include air auto-
compression (which increases linearly with increasing depth) and the type and extent of
mining operations that would typically include the degree of scatter of mining operations,
the type of machinery used and the use of backfill.

Therefore the variation in rock temperature with depth affects aspects of operations not
only in terms of safety and productivity but also in terms of operational costs since
mechanical cooling is required to maintain the design temperature conditions.

The cost of cooling the working face at depths greater than ~2 500 m may prohibit
development of deeper mineral resources, impacting long term supply and pricing.
 30

6.2 Zimbabwe

PGM mineralisation in Zimbabwe occurs in the Great Dyke structure. The Great Dyke is a
layered intrusion similar to the Bushveld Complex, running north-east to south-west
through the centre of Zimbabwe. The Great Dyke is estimated to contain about 9% of the
world's known platinum resource. Like the Bushveld Complex, repeated magma
intrusions filled a series of underground chambers, creating three identifiable sequences
or layers. The shallowest sequence of the original intrusion has been removed through
erosion, exposing a layer within the second sequence known as the Main Sulphide Zone
(MSZ). The MSZ is the target reef of platinum mines along the dyke.

The P1 pyroxenite is host to three sulphide zones known as S1, S2 and S3. The
uppermost of these, the S1 zone, is host to the Main Sulphide Zone (MSZ) reef. The MSZ
reef itself consists of the lowermost sulphide concentration of the 2 m to 3 m wide S1
zone, and appears as a variably visible interstitial sulphide-rich layer of between 10 cm
and 30 cm in width, hosted by the uppermost portion of the ~200 m wide P1 plagioclase
pyroxenite. While an immediate upper contact of this lower sulphide concentration may
not be obvious due to overlying sulphides that constitute the remainder of the S1, its
lower contact is usually discernible and is used as a zero datum for sampling and mining.
Somewhat unlike the PGM reefs of the Bushveld Complex, the MSZ reef is remarkably
similar stratigraphically, petrologically and geochemically throughout the entire Great
Dyke. Also, unlike the Merensky and UG2 reefs of the Bushveld Complex, which are
highly visible and easily distinguishable from their adjacent stratigraphy, the MSZ reef
consists only of a relatively thin, variably visible intercumulus sulphide layer within
plagioclase pyroxenite, and is both overlain and underlain by relatively sulphide-poor
plagioclase pyroxenite. Commonly a second sulphide layer, virtually identical in
appearance, occurs at approximately 1.2 m above the MSZ reef. This layer is effectively
PGM-barren. Unlike the Merensky and UG2 reefs, potholes do not occur in the MSZ.
(Wilson, 1992a, 1992b; Wilson et al, 1989; Wilson and Tredoux, 1990; Wilson and
Chaumba, 1997).

6.3 Global

6.3.1 Russia
Although most of the PGMs recovered in Russia are a by-product of nickel-copper
mining, some primary platinum does occur in placer deposits in the Ural Mountains and
Siberia, and is mined by small private production companies. Platinum accounts for 90%
of PGM production from these sources. After platinum, iridium is generally the most
 31

common PGM from Ural Mountain placers, accounting for up to 10% of the PGM content
of these deposits (Roskill Information Services Ltd., 1999, p. 49).

Significant quantities of PGMs are recovered from nickel-copper sulphide deposits in the
Noril’sk-Talnakh area of Siberia. A general location map is provided in Figure 6.3.1. MMC
Norilsk Nickel produces more than 95% of the country’s PGM (Bond and Levine, 2001).
The Russian Government has treated production data for PGMs as a state secret since
1995. Although a new law, signed November 11, 2003, was expected to make Russian
PGM production and trade data available by March 2004, release of the data has since
been delayed. It is known, however, that the Oktyabrskiy mine at the Noril’sk complex
accounted for almost 60% of PGM production in 1999, the Komsomolskiy underground
mine accounted for more than 15% of PGM production from the Noril’sk region, the
Taymirskiy underground mine accounted for more than 10%, and the Zapolyarniy
underground mine accounted for more than 7% of Russian PGM production in 1999
(Piven, Konovalov and Shtern, 1999).

1. Kola Peninsula
2. Ural Mountains placers
3. Noril’sk -Talnakh complex

Figure 6.3.1 Russia – major platinum deposit location

With the long history of nickel-copper production in the Noril’sk-Talnakh region and the
relatively low recovery of PGMs from established mines, mine tailings and stockpiles are
becoming an increasingly important source of PGMs in Russia, given high PGM prices.
MMC Norilsk Nickel recently began recovering PGMs from stockpiles, and additional
concentrator capacity was being adapted to process stockpiles with a reported average
 32

PGM content of 8 g/t. These stockpiles are reported to contain up to 600 000 kg of PGMs
(Interfax Mining and Metals Report, 2001b).

6.3.2 North America

Canada
Primary (not recovered as a by-product) production of PGMs in Canada comes from
North American Palladium Ltd (Lac des Iles Mine), which began production in 1993 as an
open pit mine that produced a concentrate rich in palladium but also contained platinum
and small amounts of base metals. Further exploration in the area is being carried out to
define resources of similar occurrences. Although the average PGM grade at Lac des Iles
is relatively low, generally less than 2 g/t, the PGMs are not confined to a narrow reef as
found in South Africa but occur throughout extensive areas of mineralisation close to the
surface. This makes it possible to mine the deposit using low-cost, open pit mining
techniques (Johnson Matthey Plc, 2001, p. 20).

However PGMs are recovered in Canada by Inco Limited and Falconbridge Limited as
by-products from the mining and processing of nickel-copper ores. Most Canadian PGMs
are recovered from nickel-copper ores mined in the Sudbury Basin in central Ontario,
although small amounts are produced from Inco’s nickel operations in Thompson,
Manitoba and Falconbridge’s Raglan nickel-copper mine in Quebec. The typical
palladium-to-platinum ratio associated with Sudbury ores is 1.16 to 1 with minor amounts
of other PGM included in the ore (Inco Limited, 2001, p. 42). Inco Limited continues to be
a leading PGM producer in Canada, reporting deliveries attributed to Canadian
operations of approximately 7 000 kg palladium, 5 900 kg platinum, and 500 kg of other
PGMs in 2002. Inco’s mining operations send concentrates to the Copper Cliff complex in
Ontario for initial processing; the concentrates are then shipped to Inco’s PGM refinery in
Acton, United Kingdom. The Lac des Iles Mine of North American Palladium Ltd.
produced approximately 11 000 kg of palladium in 2002. Falconbridge Limited contributed
a small amount of Canadian PGM production from by-product production from the Raglan
nickel-copper mine in Quebec and by-product production from the Sudbury Basin nickel-
copper mines, although production figures are not published.

The Raglan nickel-copper mine began operations in 1998. The palladium-to-platinum

ratio in the Raglan ore is estimated to be about 3 to 1 (Johnson Matthey Plc, 2001, p. 19).
Raglan concentrate, from the Strathcona mill, is shipped to the company smelter at
Sudbury; initial nickel-copper matte is shipped to the company’s refinery in Norway where
nickel, copper, PGMs, and other metals are recovered (Fogg and Cornellisson, 1993,
p. 16). Falconbridge is reported to have the capacity to produce up to 500 kg/yr of
 33

platinum and 1 100 kg/yr of palladium (Metals Economics Group, 2000), although actual
production levels are much lower.

In addition to PGM recovery from nickel-copper operations, limited amounts of PGMs are
recovered from materials imported by the CCR Division of Noranda Inc. in Montreal,
Quebec, and at the nickel refinery of Sherritt Gordon Mines Limited at Fort
Saskatchewan, Alberta. Noranda also recovers PGMs from domestic and imported scrap.
As with Canadian production by Inco and Falconbridge, this material is refined in Europe
(McCutcheon, 1996, pp. 45.1-45.14).

USA
U.S. PGM production comes from the Stillwater Complex near Nye, Montana. In 2003,
following U.S. Federal Trade Commission concurrence, MMC Norilsk Nickel purchased
51% interest in Stillwater Mining Company, which operated the Stillwater and East
Boulder mines (with an option to increase its interest to 55%). The Stillwater Complex is
an igneous layered intrusion that is geologically similar to the Bushveld Complex. The
reserves of the Stillwater Complex are found in the Johns-Manville (J-M) reef, which
contains PGM grades averaging about 20 g/t and a typical palladium-to-platinum ratio of
slightly more than 3 to 1. As of December 31, 2002, Stillwater Mining Company reported
proven and probable reserves of 25.3 Moz of PGMs with an additional delineated
resource of 67 Moz of PGMs (Stillwater Mining Company, 2002, p. 8). Resources for the
East Boulder mine, which began production in 2002, were included in this resource
estimate.

The J-M reef has been drilled to a depth of about 1 800 m, but geologic and geophysical
evidence suggests that it continues downward and perhaps flattens to the north. The
higher grades and thicker zone of mineralisation make the deposit amenable to higher
extraction rates and lower underground production costs than the Bushveld mines. Even
so, the high-grade ore is not continuous throughout the J-M reef (Dyas and Marcus,
1998).

Current PGM production is achieved from two mines (Stillwater and East Boulder) in the
Stillwater Complex. During 2002, the Stillwater Complex produced approximately
11 800 kg (379 koz) of palladium and 3 500 kg (113 koz) of platinum, compared with
approximately 12 100 kg (388 koz) of palladium and 3 600 kg (116 koz) of platinum in
2001. The East Boulder mine commenced production in 2002 and produced 3 000 kg
(97 koz) of palladium and 900 kg (28 koz) of platinum in 2002 (Stillwater Mining
Company, 2002, p. 8). The East Boulder mine was scheduled to reach its full production
capacity of 14 000 kg/yr (450 koz/yr) of palladium and platinum by 2006.
 34

6.3.3 China
Jinchuan Group Limited (JNMC) is a large integrated non-ferrous metallurgical and
chemical engineering enterprise engaged in mining, concentrating, metallurgy and
chemical engineering. It produces nickel, copper, cobalt, rare and precious metals and
also some chemical products such as sulphuric acid, caustic soda, liquid chlorine,
hydrochloric acid and sodium sulphite, together with some further processed nonferrous
metals products. Their output of nickel and platinum group metals respectively accounts
for more than 90% of the total production in China. Jinchuan Group Ltd is the largest
producer of nickel and cobalt in China. Jinchuan Group Ltd has had an annual production
capacity of 130 000 t of nickel, 200 000 t of copper, 6 000 t of cobalt, 8 000 kg of platinum
group metals and 1 200 000 t of chemical products. (Jinchuan Group Limited, 2010,
[online]).

The Jinchuan intrusion, situated in Gansu province, China, is an ultramafic dyke-like body
emplaced in the Longshoushan uplifted terrain on the southwest margin of the Sino-Korea
platform. The intrusion is 6 km long, 350 m wide and hosts a major Ni-Cu sulphide
deposit. It comprises three sub-chambers: the west, west-central and east. The two
western sub-chambers are narrow and deep, and both are laterally zoned from dunite in
the core through Iherzolite to olivine pyroxenite toward the margins. The eastern sub-
chamber is shallow and wide, and it shows vertical stratification grading from dunite at the
base upward into Iherzolite and plagioclase Iherzolite, then back to Iherzolite at the top.

The two western sub-chambers of the Jinchuan intrusion represent the main conduit to
the original magma chamber and their zoning was formed by flow differentiation. The
eastern sub-chamber probably represents a higher level of the magma chamber, where
crystallisation was marked by convection and periodic replenishment. After consolidation,
the Jinchuan intrusion was tilted to the east so the deeper parts of the western sub-
chambers are now exposed to the same erosion level as the shallower part of the eastern
sub-chamber (Chai and Naldrett, 1992).

6.3.4 South America

Brazilian PGM production is derived primarily from the Fortaleza nickel-copper-PGM-gold
mine, which in 1997 began production of 10 000 t/yr of nickel matte that contained PGMs.
The nickel matte is exported to the OM Group Inc. Harjavalta nickel refinery in Finland for
PGM recovery. Reserves are reported to contain 7 300 kg of PGMs (Roskill Information
Services Ltd., 1999, p. 29). Caraiba Metals S.A Camacari copper refinery in Brazil is also
reported to produce 150 kg/yr of platinum and 400 kg/yr of palladium. Recovery of PGMs
from other copper deposits in Brazil has been proposed, but to date none of these
projects have come to fruition.
 35

Colombia has produced PGMs since the 16th century. PGM production in Colombia,
primarily platinum, is derived from alluvial placer deposits worked by artisanal miners. In
some places, the deposits are associated with the production of gold. Colombia produced
about 430 kg of PGMs in 1998, 310 kg of PGMs in 2000 and 650 kg of PGMs in 2001
(Torres, 2004). Production is sporadic but was reported to have reached almost 2 000 kg
in 1992.

6.4 Contribution to the Conceptual Framework

The ability to respond to variable metal demand over long time periods and create
strategic planning flexibility, is dependent on being able to source production of PGMs
from mineral assets with different metal ratio characteristics. Thus:

• Variability of metal content by geographical region is a strategic planning

element that allows production portfolio development and creates flexibility to
meet varying PGM demand over time;
• Similarly reef mix (UG2 / Merensky / Platreef / MSZ) will impact saleable metal
ratios and cost of production;
• The cost of production in the Bushveld Complex, despite normal increases with
depth and distance from infrastructure, has a step change at ~750 m below
surface owing to the need to introduce refrigeration and cooling; and
• Holding mineral assets outside of the Bushveld Complex, apart from reducing
sovereign risk, creates longer term strategic flexibility, owing to the marked
differences in Pt/Pd ratios, and is beneficial in reducing long term mineral asset
portfolio risk.
 36

7 THE PLATINUM VALUE CHAIN

This chapter considers the key elements of the platinum mining industry value chain. The
objective is to describe the major elements within the value chain and highlight areas of
strategic planning flexibility. The nature of the value chain is integral to the understanding
of the characteristics of the market (Chapter 8) with both elements being reflected in
part A of the conceptual framework schematic in Figure 3.1.

Value creation in the platinum mining industry can be considered across a value chain
extending from exploration through to fabrication and final use. Value addition beyond
refined metal sales has not been considered on the basis that the prime consideration, of
this work, is the strategic long term planning of metal production not value enhancement
through further metal beneficiation and product development.

A basic industry value chain is indicated in Figure 7.1. It is important to note that the
major industry producers tend to be integrated along the value chain and have
considerable assets in the mining and processing value chain elements.

Processing: c.10% of input from non-integrated miners

Exploration Mining Concentration Smelting Refining Fabrication End Use

Industry 2007:
- PGM Volume 22 M oz 20 M oz 18 M oz 17 M oz
- Total Volume 66 Mt 1.9 Mt 1.7 Mt

Activities Crushing and Drying and

Mining Base Metal Refining Incorporating PGMs
Milling Smelting in
(incl. magnetic concentration for into various end use
electrical
some players) applications
furnace

Flotation
Air Blowing in Base Metal Refining
Converters

Sulphur Precious Metal

Removal Refining

Output • Merensky • Composite • Converter • Nickel • PGMs • Autocatalysts

• UG2 concentrates matte • Copper • Gold • Jewellery
• Platreef • Tailings • Sulphuricacid • By-products (salts) • Silver • Industrial products (e.g.
chemicals, electronics, fuel
cells)
Concentration 2 – 6 g/t 4E 100 – 500 g/t 4E > 2 800 g/t 4E 99.99 % pure metal

Figure 7.1 Platinum industry value chain

Within this value chain the greatest opportunity to vary production lies in the mining
activity owing to the greater number of sources of metal. This is indicated in Figure 7.2 for
a hypothetical multi mining right, vertically integrated PGM producer.
 37

MINING BASE PRECIOUS

SMELTERS/ METAL METAL
RIGHT CONCENTRATOR
CONVERTER REFINERY REFINERY
AREA

n = 17 n = 10 n= 3 n= 1 n= 1
>150 sources
3 reef types
5 geozones

Figure 7.2 PGM mining and process chain – flexibility lies in the mining portfolio

Similarly indicative value chain profitability, across application in autocatalysis, jewellery

and fuel cells (as an industrial application) based on 2007 public domain information is
indicated in Figure 7.3.

Autocatalyst Jewellery Fuel Cell

2007 Market 2007 Market 2007 Market
Value Chain Op. Profit Value Chain Op. Profit Value Chain Op. Profit

$4.5B $0.8B $49.8M

Miners

PGM Mining PGM Mining PGM Mining

c. 65% c. 55% c. 80%
PGM Processing $0.8B PGM Processing $0.2B PGM Processing $13.4M
c. 10% c. 10% c. 20%
Substrate Design and Fabrication
Fabrication Catalyst Component
(Electrode) Manufacture
Fabrication and

Semi-Manufacturing
Assembly

PGM Wash Coating (Design, Casting, $0.1B

$1.3B Stamping, Machining) c. 10% Technology ($6M)
Catalytic Converter c. 20% Development & Fuel Cell (c. 10%)
Design Manufacturing Design

Catalytic Converter $0.1B

Marketing & Distribution Fuel Cell Fabrication
Canning / Assembly c. 5%

Exhaust System
Installation

$0.5B Wholesale and Retail $0.5B System Integration and $6M

& Sales

Assembly and
c. 5% Sales c. 30% Installation(1) c. 10%
Installation(1)

Source: Annual reports : Anglo Platinum, Impala Platinum, Johnson Matthey, Heraeus, Umicore, Ballard Power Systems, Tiffany, Zale

Figure 7.3 Indicative value chain profitability – three generic product streams (after Anglo
Platinum Limited, Industry and Competitor Analysis 2007)

On this basis the bulk (~70%) of operating profit will arise from mining and processing
activities rather than from application and retail.
 38

7.1 Exploration

For a mature producing operation, exploration activities are usually focused on Brownfield
exploration which is the process of improving mineral resource estimates in areas
adjacent to existing operations, into which mining will progress. Greenfield exploration
encompasses activities to identify and acquire new mineral assets, typically covering
aspects of area identification, target generation, data acquisition and analysis, followed
by definition of a mineral resource estimate. Greenfield exploration activities are
structured according to the strategic intent of the organisation and the composition of the
existing mineral asset portfolio. Exploration activity is crucial to the value chain in that it is
the primary mechanism, excluding acquisitive activities, for replacement of depleted
mineral resources.

7.2 Mining

The objective of this section is to briefly describe the more commonly applied mining
methods used in the mining of PGM mineral resources. Mining operations comprise
either surface or underground methods. Surface operations tend to be limited to the
outcrop of UG2 and Merensky with the exception of the Platreef where sufficient mineral
resource width allows significant open pit operations.

Surface mining tends to be less capital intensive and involves shorter lead-times to
production than underground mining. For these reasons, it is often an important initial
phase of an underground mine's development, as cash flows from early production can
be used to subsidise ongoing capital-intensive underground development costs.

Underground operations are typically based on shaft access, either decline or vertical, to
access mineral resources at depths ranging between 50 m to 2 200 m. Stoping methods
range from fully mechanised trackless mechanised mining (TM3) through to conventional
narrow reef tabular stoping with hand held pneumatic rock drills. The extent of
mechanisation varies across operations and depends primarily on geological factors of
reef width, dip and structural elements specifically localised faulting or other disruptive
geological features. Despite significant efforts to develop and implement non explosive
rock breaking techniques, primary rock breaking is conducted using explosives.

A range of underground mining methods are used in the South African platinum mining
industry to extract the narrow reef tabular platinum deposits of the Bushveld Complex.
These underground mining methods fall into three broad categories, namely
conventional, mechanised and hybrid mining. Conventional mining includes up-dip,
 39

down-dip and breast mining. Mechanised mining includes room and pillar, room and pillar
with T-cut, extra low profile (XLP) and continuous rock cutting technology. Hybrid mining
includes two-drive and three-drive on-reef scattered breast mining. Hybrid methods were
developed to maintain the advantages of conventional mining on reef such as low dilution
and a high shaft head grade, while adding the many advantages of mechanised
development such as faster development rates and safer operating procedures (Egerton,
2004).

7.2.1 Underground – conventional (scattered breast) mining method

Crosscuts from the shaft or other access system are developed, at different levels usually
~40 m to 50 m towards the reef plane. Footwall drives are then developed, on strike,
from these crosscuts, at depths of between 20 m and 80 m (depth dependent) below the
reef plane. Development of the orebody is then done on a grid pattern of footwall drives
spaced ~210 m to 240 m apart on dip and raises spaced ~150 m to 200 m on strike.
Approximately every 200 m a stope cross-cut is developed to reef from which the raise is
developed on dip, to hole into the next level. Ore passes (boxholes) out of the stope
cross-cut are developed to intersect the reef in the raise. The shoulders of the raise are
ledged in 6 m on either side, and supported, typically with pre-stressed timber units and
advanced strike gullies (ASGs) established. Breast panels, usually about 30 m in length
are then mined on strike. Local support pillars, approximately 4 m by 4 m, with a 3 m
ventilation holing between, are left at the top of each stoping panel. Temporary support is
installed in the form of mechanical props down the face between the permanent support
and the panel face. A combination of timber elongates and roof bolts is used to provide
local support in the stopes. Regional stabilising pillars are incorporated into the mining
layout to provide regional stability. In shallow mining areas in-stope pillars are designed
to support the overburden to surface whilst in deeper areas in-stope crush pillars are
designed to support the tensile zone between regional pillars and to prevent back breaks
over-running adjacent panels. Panels are cleaned by face scraping down-dip into an
advanced strike gully (ASG) and then along strike to the raise, over a grizzly, and into an
ore pass. The ore is trammed by electric or diesel powered locomotive and hoppers from
the boxholes to the shaft orepass system and hoisted to surface for processing.

Conventional mining is labour intensive and relatively costly but it is inherently flexible (to
cater for unanticipated geological complexities) and allows the greatest control of dilution.

7.2.2 Underground – trackless mechanised mining method (TM3)

TM3 is an adaption, for hard rock mining, of layouts that have traditionally been applied to
coal mining. This form of room and pillar (bord and pillar) mining is best suited to a
reasonably wide and flat dipping reef with best results being achieved with reef widths
 40

between 1.8 m to 2.3 m with efficiency improving with increased reef width. However
there are limited mineral resources that meet this criterion and equipment has been
progressively modified to allow mechanised mining down to widths of 1.2 m. However
because all access and development is on reef, all additional waste mined is integral to
the mining process and cannot be readily separated. This adds to the dilution, and shaft
head grades are lower than for conventional mining.

Access to the orebody is normally via a large single decline developed from surface
whilst in deeper or older mines, access is usually from a vertical shaft crosscut. The
decline is equipped with an ore hauling conveyor belt, power supply, compressed-air
pipes, service water pipes and pump columns, and serves as a roadway and the major
intake airway. When the mineable reef position is reached, the primary decline splits into
a cluster of five separate declines normally about 6.5 m to 9 m wide by about 2 m to
2.5 m high. The centre decline is equipped with a large capacity conveyor belt, which
feeds directly into the decline tip on surface (or shaft). This conveyor belt can extend over
many kilometres as one conveyor ‘piggybacks’ onto another. The declines immediately
on either side of the conveyor are used as roadways for trackless machinery and
personnel. The declines, on either side of these equipment / personnel roadways are
used as return airways during the development phase and intake airways when stoping
starts. There are connecting crosscuts between declines about every 70 m on dip. The
cluster is developed until nine rooms (strike drives or roadways) have been established
on dip. The fifth room on dip, i.e. centre of the nine rooms, is equipped with a conveyor
belt, which is extended on strike as the mining advances. This conveyor belt tips onto the
conveyor belt in the conveyor (centre) decline. The strike conveyor belt in the fifth room is
advanced every 25 m. LHD units tip the run-of-mine rock, onto a feeder situated at the
front end of the conveyor belt. Each strike conveyor belt services a section of 150 m to
190 m on dip.

As a mechanised mining method, trackless machines perform all operations:

• Face drilling is done using electro-hydraulic drill rigs;

• Hanging and sidewall support is done using electro hydraulic roofbolters and
scalers;
• Charging-up is done with purpose-designed emulsion explosive charging-up
vehicles;
• Face cleaning is done with LHDs; and
• Specially designed vehicles are used for personnel and materials transport.
 41

The mining cycle is structured so as to distinctly separate the operation of the various
activities of the primary production equipment during a shift, as follows:
• Blasting takes place at the end of day shift and night shift. Thus there are two
blasts per day; and
• On a three shift per day cycle; six panels are cleaned, six panels supported and
six panels drilled and blasted, aiming for 2.9 m advance per blast.

For low profile equipment the mine design is normally based on a 9 panel per strike
section with 6 m to 12 m face length for the bord and split on both single and dual seam
mining methods. In the strike sections the tips are moved forward or re-established after
every fourth split +/- 50 m. Depending on the geotechnical conditions the roof support
strategy may either include roof bolts, cable anchors or a combination.

The fundamental premise in TM3 is that gains in productivity (resulting in reduced cost)
outweigh increases in dilution, associated with the larger excavations to accommodate
equipment, and reduced overall percentage extraction.

7.2.3 Underground – hybrid mining method

The method is a combination of mechanised bord & pillar and conventional mining
techniques. Underground workings are accessed by vertical shaft or decline systems
dependent on the nature of orebody or history of operations.

Fully mechanised room and pillar systems at narrow stoping widths result in high dilution
and reduced mill feed grade. To keep many of the advantages of mechanisation it is
necessary to hybridise the mining method by introducing elements of conventional narrow
tabular orebody mining, typically all or part of the stope drilling, blasting and cleaning is
as per conventional stoping. Trackless mining equipment is utilised for developing
advanced strike drives (ASDs) and dip roadways, and to deliver material to the stope; viz.
development is fully mechanised, whilst stoping operations are done conventionally. A
stoping production unit would typically comprise of a centrally located strike conveyor with
three panels, two above and one below the conveyor. The footwall development usually
leads the mining faces by about 100 m to allow for geological data collection and
diamond drilling as necessary. The information gathered from this drilling provides
structural and geological information on the mining areas ahead of the mining faces. This
information is used to proactively plan for structural and geological complexities.

A range of variants to this approach exists, for example the inclusion of conveyors in
footwall haulages to eliminate the use of locomotives and hopper transportation.
 42

The system is more labour intensive than room and pillar mining, as all stoping
operations are done conventionally. Waste dilution tends to be lower than for room and
pillar mining but overall efficiencies and utilisation of labour are poorer. The key challenge
in the effective implementation of this mining method is ensuring an appropriate match
between the stoping and development activities.

7.2.4 Surface mining – open pit operations

It is generally considered that surface mining is more advantageous than underground
mining in recovery, grade control, economics, flexibility and safety. However the
application of this mining method is dictated by the physical characteristics of the mineral
resource with both the Merensky reef and the UG2 chromitite not being suitable, primarily
owing to narrow reef width. Apart from initial shallow (40 m highwall), contract mined,
open pits to facilitate early cash flow from Merensky and UG2 outcrops, only one
permanent open pit mine operates in the South African industry (Mogalakwena Platinum
Mine) exploiting the Platreef.

Open-pit mining is a surface mining operation. During the mining process, the surface of
the land is excavated, forming a deeper and deeper pit until it is no longer economically
viable. Consideration must then be given to a shift to underground mining. The final size
and shape of this open pit is subject to continuous optimisation, being driven by changing
economics, geotechnics, mining technology and metallurgical technology and capacity.

Mogalakwena operates in a hard rock environment so drilling and blasting techniques are
applied to fragment the waste and ore bearing rock. Heavy duty, large capacity shovels
are used to load the fragmented rock into large capacity haul trucks. The pits are
planned using a sequenced cutback methodology which maximises the NPV from each
individual pit.

As in all open pit mines the slope angle of the pit wall is crucial to the long term stability of
the operations so monitoring as well as the gathering and analysis of geotechnical data is
of paramount importance. Slope designs are based on a combination of empirical data
and judgement, kinematic analysis, numeric analysis, rock fall analysis and a full
cost/benefit slope optimisation and risk assessment. These slope optimisations are
revised each time a changing trend is observed in the geotechnical and/or geological
data, as well as each time the mining economic parameters or acceptable risk criteria
undergo any significant change. The overall slope angles at Mogalakwena are achieved
by both single and double benching. This establishes catchment berms for every bench
face leaving a 10 m to 30 m high face (highwall) in between berms.
 43

Wall control blasting is practised throughout all pits at Mogalakwena. This is achieved by
means of pre-splitting, trim blasting, buffer blasting within all trim blasts, use of electronic
detonation and careful design of the timing and initiation of the blasting sequence.

The pits are accessed via ramps designed according to the operating requirements of the
truck fleet. Generally ramps are 30 m to 40 m wide and are mined at a 10% gradient.
This may change locally to suite slope stability and operational requirements. The ramp
systems generally include redundancy in the form of multiple accesses to the pits and
cater for main haulages on both the hangingwall and footwall sides of the pits. The pits
are dewatered via sumps and as mining continues to greater depths alternative
dewatering systems (such as toe-drains) are implemented to ensure that the slopes
remain as dry as possible.

After a blast, hydraulic or rope shovels are used to load the muck pile into large capacity
haulers. Depending on the material type, these trucks transport the broken material to
either waste dumps, stockpiles or into a primary crushing facility, all of which are located
in close proximity to the operation.

Surface mining operations are an effective means for utilising lower grade, high
mineralisation width mineral resources. However, given the scale, duration and visibility
of mining operations, they have a large social impact. The major challenge facing current
and future mineral rights holders, where open pit mining would be the preferred
exploitation route, is mitigation of the social and environmental impacts.

7.3 PGM recovery processes

PGMs occur as associations with the base-metal minerals or as discrete particles within
the gangue minerals. The range of minerals present, their relative densities, discrete
particle size and association, present a challenge in the optimisation of PGM extraction
processes.

Primary producers of PGMs extract and refine the metals in a series of metallurgical
plants. The extraction processes can be divided into a number of different stages:

Concentration: Ore from mining operations is crushed and milled prior to being
concentrated by gravity and flotation techniques, which result in a PGM and base-metal-
rich flotation concentrate for smelting.
Smelting: The flotation concentrate is processed further by pyrometallurgical
concentration which produces PGM-rich copper-nickel matte.
 44

Base metal refining: The base metals are hydrometallurgically separated from the matte,
with concentration of residual PGMs.
Precious metal refining: The PGMs are separated and purified using solvent extraction
techniques.

This is summarised and represented in Figure 7.3.1.

Ore Concentrator Tailings

Flotation Concentrate

Smelter Slag

Matte

Nickel
Base Metals Refinery Copper
Cobalt

Precious Metals Concentrate

Platinum
Palladium
Rhodium
Ruthenium
Precious Metals Refinery
Iridium
Osmium
Gold
Silver
AMS 100712-GEO-Gordon2

Figure 7.3.1 Simplified PGM extraction block flow diagram

7.3.1 Concentration
Concentration is the initial process, after mining, to separate waste material from the
PGM rich ore, thereby increasing the concentration of PGMs for subsequent treatment.
Concentration comprises core components of crushing, grinding and flotation. These
processes can be enhanced by the inclusion of dense media separation (DMS), and
tailings retreatment.

Typically a concentrator consists of a crushing plant with primary and secondary crushers
feeding the primary mill. The primary mill is usually operated in a closed circuit with a
hydrocyclone, with the cyclone overflow feeding the primary rougher floatation circuit. The
primary rougher concentrate is fed to cleaner floatation cells with the cleaner concentrate
being fed to a final concentrate storage facility. The primary rougher tails stream is fed to
a secondary ball milling circuit with the product stream being fed to the secondary
rougher flotation circuit. The secondary rougher concentrate is fed to cleaner and re-
cleaner flotation and the re-cleaner concentrate fed to the final concentrate storage
 45

facility. The secondary rougher tails are usually fed to the final tailings disposal facility
however some studies have indicated that there may be economic merit to the addition of
a tertiary milling and grinding circuit dependent on mineralogy, for tailings re-treatment.

A typical concentrator flow sheet for a “Mill-Float 2” arrangement excluding tertiary

tailings re-treatment is indicated in Figure 7.3.2

Ore feed

Primary Primary
And Milling circuit
Secondary
Crushers Roughers

Cleaners

Primary
Flotation circuit

Re-cleaners

Secondary
Milling circuit

Thickener

Roughers

Filter
Secondary
Cleaners
Flotation circuit

Final Tails
Re-cleaners

Final Concentrate

Figure 7.3.2 Simplified concentrator flow diagram

Crushing: Run of mine ore is crushed using jaw and gyratory crushers to reduce average
material size to suit the grinding process.

Grinding: Crusher ore is reduced to a suitable size distribution for floatation through the
use of rod, ball, semi-autogenous or autogenous mills in conjunction with high pressure
grind rollers (HPGR) and ultra fine grinding (IsaMilling).

Floatation: Suitably sized material from the grinding circuits is pumped into floatation cells
and mixed with chemicals that bind to the PGM particles, rendering them hydrophobic.
The solution is aerated and the PGM particles are carried to surface, where they are
skimmed off. This PGM-rich base metal sulphide concentrate material is termed
concentrate and the residual material, tailings.
 46

In cases where the smelter plant is located nearby and transport costs are low,
concentrate is sent to the smelter in a slurry form with grades of 80-170 g/t. Where
transport is necessary, concentrate is upgraded by repeating the floatation process,
thereby increasing grades (and operating costs) to approximately 400 g/t, and reducing
volumes, which are further reduced by pressing the concentrate into a filter cake form to
remove excess moisture.

Retreatment: Concentrate is transported to the smelter for further processing whilst

tailings are deposited in on-site tailings dams. Depending on the PGM grade of tailings
materials it may be reprocessed (or stockpiled for reprocessing). UG2 tailings are
normally further processed to recover chromite as a further by-product prior to deposition
in the tailings dam or reprocessing for further PGM recovery.

Dense Media Separation (DMS): Although not standard industry practice, a DMS loop is
often included in a UG2 concentrator plant, between the crusher and the mills. The DMS
removes the waste material in the crushing circuit, effectively increasing the grade of the
ore for grinding. This increases overall plant throughput but has varying impact on overall
recovery depending on the mineralogy of the orebody.

7.3.2 Smelting
The smelting activity involves three basic steps; drying, smelting and converting. Typically
concentrate is dried and fed to a melting furnace in which the gangue minerals separate
to form a furnace slag and the valuable metals form a furnace matte containing typically
40% iron, 20% nickel, 10% copper and 30% sulphur as its major components. The
furnace slag is granulated and removed from the smelter circuit. The furnace matte is
transferred to converters in which the sulphur content is reduced by blowing oxygen or air
through the molten matte. The iron is oxidised and combined with silica added as a flux to
form converter slag. The final converter matte is either cast into moulds or granulated.
The converter matte typically contains around 50% nickel, 28% copper and about 21%
sulphur with the balance being made up of iron, cobalt, minor elements and PGMs at
concentrations of around 2 000 to 5 000 g/t.

Converter slag can be returned to the melting furnace, discarded with the granulated
smelter slag or re-treated in a slag cleaning furnace to recover entrained base metals and
PGMs before being discarded with the slag. The final discard slag steam is either
transported to a discard slag dump or fed to a slag retreatment plant to recover entrained
metals by milling and floatation. The concentrate from the slag treatment plant is returned
to the smelter feed stream and the tailings discarded to a disposal facility.
 47

Particulate matter in the off gases from furnaces and converters is collected in
precipitators and returned to the melting furnaces, before the gases are treated in a
sulphur recovery plant, usually to produce sulphuric acid. A typical smelter flow diagram
is indicated in Figure 7.3.3.

Primary Toll Feed

Stack
Concentrate Feed Material

Sulphur
Capture

Gas Cleaning
Dust

Driers Furnaces

Furnace
Matte
Furnace
Concentrate Slag

Slag Converters
Slag Milling and Converter
Cleaning
Flotation Plant Slag
Furnace

Converter Matte
Slag to Dump
AMS 100712-GEO-Gordon2 3

Figure 7.3.3 Typical PGM producer smelter flow diagram

Drying: Concentrate is first dried to reduce the moisture levels to below 0.5%. This is
necessary because excessive moisture, once heated in the furnace, would increase the
pressure of the furnace beyond design limits.

Smelting (furnace): Concentrate is then heated in the furnace to approximately 1 500°C.

The molten concentrate separates into precious and base metal bearing matte and slag
(silica, sulphur and iron). The denser matte is tapped on one side of the furnace while the
slag is tapped on the opposite side. The tapped matte is approximately 1 300°C and the
PGM grade ranges between 1 000 and 1 500 g/t.

Converting: The primary purpose of the converter is to remove iron from the matte. This
is achieved by blowing oxygen through the matte, which oxidizes the iron and creates a
slag on the surface that is then skimmed off. The resulting matte, termed converter matte,
has a PGM grade of approximately 5 000 g/t.
 48

7.3.3 Base and precious metal refining

Metallurgical concentration activities to this point in the value chain have been physical
(crushing, grinding and floating) and pyrometallurgical (smelting and converting). Refining
however comprises hydrometallurgical processes in two key areas; base metals and
precious metals recovery.

Base metal refining

The base metal refinery (BMR) provides an upgrading step in the preparation of a PGM
rich concentrate suitable for input to the precious metal refinery. Flow sheets do vary from
operation to operation dependent on the form of matte and base metal products that are
treated, with a simplified generic flow sheet indicated in Figure 7.3.4. Essentially
converter matte is processed through the BMR where base metals (nickel, copper and
cobalt) are chemically removed.

In general, smelter converter matte is milled prior to leaching to recover the bulk of the
nickel and copper. The residue remaining after the secondary copper leach undergoes a
tertiary leaching phase to upgrade a final PGM concentrate for transfer to the precious
metal refinery.

Matte Milling

Primary
Leach

L Nickel purification Nickel

s & extraction Product

Secondary
Iron-rich
Leach M/S Residues

L Copper
Copper
purification &
s Product
extraction

Tertiary M/S Anode Slimes

Leach

Solution returned to
L leaching circuits
Metal
s recovery
L
s

Residues
PGM
Concentrate

AMS 100712-GEO-Gordon2 4

Figure 7.3.4 Base metal refinery block flow diagram

 49

Precious metal refining

Similarly precious metal refinery flow sheets differ from one operation to another
dependent on the specific technology applied. Essentially PGMs and precious metals are
removed in a predefined sequence using ion-exchange, solvent extraction, electrolysis,
crystallisation and/or distillation. Once removed, the metals are refined through an
optimised closed-circuit loop that differs for each metal. The refining time also varies for
each metal and can lock-up metal, in the process, for as long as three months.

Figure 7.3.5 shows a simple, generic block flow diagram for a typical precious metal
refinery. All refining stages operate under negative pressure environments with the
extracted gasses from the various processes and stages being scrubbed before release
to the atmosphere. Scrubbing liquors are further treated to extract any trace amounts of
PGMs.

The individual PGMs are produced in a variety of physical forms depending on customer
and end use specifications – granules, ingot, plate, powder and sponge (calcinations of a
metal chemical compound).

Concentrate Blending Stack

Dissolution Gas scrubbing

Pt product

Pd product

Rh product

Individual PGM Ru product

Extraction and
Refining Ir product

Os product

Au product

Ag product

Metal recovery Residues Toll treatment

To smelter
Liquid effluent

AMS 100712-GEO-Gordon2 5

Figure 7.3.5 Precious metal refinery block flow diagram

 50

7.4 Fabrication and end use

The three main PGMs, platinum, palladium and rhodium, are used primarily as catalytic
converters in emission control equipment. However, they also have other important
specialised applications in the high technology, electrical, chemical and petroleum
refining industries. These include uses in fertiliser and glass manufacturing, in dental
alloys and in fuel cells. Platinum, and to a lesser extent palladium, is also much in
demand for jewellery and as bars and coins for investment purposes.

The PGM value chain is highly concentrated with five integrated suppliers (mining
companies) providing most of the global supply of refined PGMs to a limited number of
key intermediaries who service a broad spectrum of end users (see Figure 7.4.1).
Significant interdependency exists between industry participants, with the security of
supply key for sustainable industry development.

1. PGM Suppliers 2. Intermediaries 3. End Users

Primary Supply

Miners (22)
PGM: 8M oz (incl. Rh, Ru, Ir) Automobile
Manufacturers (54%)

Fabricators (5 major)(1) Industrial (24%)

Integrated Metal PGM: 5M oz
Suppliers (5)
Jewellery (13%)
(i.e. mining, smelting &
refining)
Investors & Traders
Fuel Cells (9%)
PGM: 4M oz
Secondary

Automobile
Supply

Integrated Metal
Suppliers
Fabricators Industrial

Jewellery

Source: Johnson Matthey, AngloPlatinum : December 2007, (1) Johnson Matthey, BASF, Umicore, Heraeus and Tanaka.

Figure 7.4.1 Platinum industry – structure and concentration (after Anglo Platinum
Limited, Industry and Competitor Analysis 2007)
 51

7.4.1 Integrated mining companies

The predominant producers are vertically integrated Southern African mining companies,
typically:
• The primary PGM producers consider platinum as the main product;
• They are vertically integrated pure metal suppliers – from mineral resource to
metal product;
• They are focused on long-term market sustainability to match long term mineral
assets;
• A high volume of production is regionalised to South Africa;
• Long term mineral right tenure is a key success factor;
• Pt and Pd are priced to market with negligible discounts; and
• Mineral rights access could change industry structure causing supply
fragmentation and influencing market dynamics.

Secondary producers of consequence are:

• Primary base metal producers, PGMs are by-products of nickel and / or copper
production; and
• Their strategic objective is to maximise value from PGMs (especially palladium) –
through controlled release of metal to market.

7.4.2 Fabricators
Characteristics of and influences on fabricators include:
• Investment in R&D and own intellectual property (IP);
• Provision of technical solutions to users based on market need and technological
innovation;
• Require access to metal – they hold strategic stockpiles but are not vertically
integrated;
• Some low-margin metal distribution is done to stimulate R&D;
• The majority of metal is accessed through direct sales agreements with primary
producers; and
• Market growth in India and China could encourage the entry of new participants
in these markets; however access to IP and cost of capital would be a barrier.

7.4.3 Investors/traders
The investors and traders in the industry typically:
• Provide market liquidity and price discovery through open market transactions;
• Offer opportunity to hedge price risks;
• Favour price volatility – this creates arbitrage opportunity; and
 52

• Can have a significant influence on short term market prices through speculative
transactions.

7.4.4 Auto manufacturers and industrial users

Influences on auto manufacturers and industrial users include:
• Driven by legislation and technical performance of PGMs offering the best
solution to technological demand;
• They have concerns over the security of supply – large, long term business;
• PGMs are a small percentage of final product cost but highly strategic e.g.
catalyst and gauzes;
• Constant search for cheaper substitutes to drive business efficiency; and
• The motor vehicle industry is an important industry in the economy of countries,
thus making PGMs of strategic importance to governments.

7.4.5 Jewellers
The jewellery industry is characterised and influenced by aspects of:
• Sensitivity to price volatility – there is a long lead time from metal purchase to
jewellery piece sale – this heightens stockholding risk;
• Brand strength is key to sustainability and growth as PGMs are not traditional
default precious metals;
• Require constant market development support to sustain demand;
• Buy the marginal ounce and hence provide price tension in the market; and
• China’s market structure and characteristics support potential growth.

7.5 Contribution to the Conceptual Framework

Insight into the nature of the value chain is crucial for business success in any industry.
This understanding must be acquired at a fundamental structure or composition level but
critically, deeper understanding is required of the financial value associated with each
element of the value chain to allow business optimisation.

Key aspects are:

• The PGM value chain is highly concentrated with five integrated suppliers (mining
companies) providing most of the global supply of refined PGMs to a limited
number of key intermediaries who service a broad spectrum of end users.
 53

Significant interdependency exists between industry participants, with the security

of supply key for sustainable industry development;

• The major industry producers tend to be integrated along the value chain and as
such have considerable assets in the mining and processing value chain
elements. This is a barrier to entry to new participants;

• Owing to the nature of the mineral resource, underground mining of hard rock,
narrow tabular, deposits predominates. This drives high capital intensity for
access infrastructure development and long lead times to production;

• Within the value chain the greatest opportunity to vary production of metals and
the metal mix, lies in the mining activity, owing to the greater number of sources
of metal; and

• The bulk (~70%) of operating profit arises from mining and processing activities
rather than from application and retail.

This understanding of the value chain and the relative contribution of each element and
the participants is an integral part of value based management which is articulated in
Section 11.6, as a critical component of the strategic long term planning conceptual
framework.
 54

8 CHARACTERISTICS OF THE PGM MARKET

The objective of this chapter is to provide broad understanding of the PGM market, which
is a crucial part of the Strategic Long Term Planning Framework as schematically
indicated in part A of Figure 3.1.

Understanding of the market and the participants informs value based decisions and
influences strategic action. This is the critical logic embedded in Porters “five forces”
analysis (Porter, 1980) as widely applied and covered in Section 8.4.

The information in this section has been summarised using statistics and information
largely sourced from Johnson Matthey research publications on PGM metal supply and
demand (2000 to 2010).

8.1 Applications of PGMs

8.1.1 Autocatalysis
Automotive catalytic converters were first developed in the 1970s and were initially fitted
to petrol (gasoline) fuelled cars in North America from 1975 in order to reduce their
emissions of pollutants. The first catalysts used a simple formulation of platinum
deposited on aluminium oxide which in turn was coated onto a support material so that it
could be placed in the exhaust stream of the vehicle. These designs were essentially two-
way oxidation catalysts, which have evolved into the now commonplace three-way
catalysts (for petrol vehicles). Palladium analogues of these platinum catalysts were later
developed and have since become the dominant technology on light duty petrol vehicles.
Volkswagen, in 1989, was the first company to fit platinum-based diesel oxidation
catalysts (DOC) to its diesel cars. In 1993, emissions rules were applied to new diesel
passenger cars sold in the European Union and these catalysts began to be fitted as
standard on new vehicles. Platinum has historically been favoured for use in diesel after-
treatment because the exhaust stream of a diesel engine is a highly oxidising
environment and, under these conditions, palladium is readily converted to the less
catalytically-active palladium oxide, whereas platinum remains in its metallic form.
Palladium has however made inroads into the light duty diesel sector in diesel particulate
filters (DPFs). A typical oxidation catalyst formulation currently in use might have a
platinum to palladium ratio of 2:1 in weight terms (or about 1.2:1 in atomic terms). The
launch of catalysts containing equal amounts of platinum and palladium seems now to be
inevitable and further development beyond this ratio may be possible in some cases,
although it may not prove possible to apply such technology universally. With the global
 55

market for diesel vehicles expected to expand over the medium term, good prospects
exist for enhanced demand for both metals.

Euro VI emission legislation will be implemented from 2014. The legislation promulgates
a decrease of more than 50% in allowable emissions of NOx. It is expected that most
large diesel vehicles will be fitted with selective catalytic converter systems employing
only small amounts of platinum group metals (PGMs) in ammonia slip catalysts.
However, these systems require special tanks for urea that add both volume and weight
to a vehicle, making them unsuitable for small diesel vehicles. It is anticipated that a
proportion of small diesel vehicles may meet the NOx limits through engine adjustments,
while the remainder will be fitted with NOx adsorber traps containing PGMs.

The Japanese government introduced an eco-car subsidy programme in the middle of

2009. Cash incentives were offered to people who scrapped and replaced their vehicles
with more fuel-efficient models. OEMs hastened to develop and offer vehicles meeting
these criteria, for instance hybrids, plug-in hybrids and electric vehicles. The Democratic
Party of Japan has set a greenhouse gas reduction target for 2020, while the prime
minister has proposed a 25% reduction in greenhouse gases from 1990 levels by that
year. In order to attain these levels, OEMs will have to provide more hybrid and non-
conventional technologies. Conventional petrol and diesel vehicles are expected to
account for ~67% of all vehicles in 2015, compared with ~90% at present. Hybrid
technology will require PGM-based exhaust after-treatment and does not therefore
present a threat to the market. Fuel-cell vehicles are set to play an important role in
achieving reductions in CO2 in the long term. Once plug-in hybrid vehicles enter the
market, Japan will be in the unique position of having every motor vehicle propulsion
technology, including fuel-cell vehicles, on its roads.

As details of the new legislation for US vehicle greenhouse gas (GHG) emissions and
corporate average fuel economy standards became available, North American vehicle
manufacturers continue to adjust power train portfolios to meet the requirements for 2012
to 2016. Engine downsizing and turbo charging, hybridisation, an increased number of
speeds for both automatic and manual transmissions, mass reduction, drag reduction and
alternative fuels are among the key measures through which manufacturers are seeking
to reduce fuel consumption in their vehicles. Although a reduction in average engine size
may reduce the PGM loadings required on exhaust after-treatment, the hybridisation of
vehicles presents no threat to PGM technology. In the US, as in other regions of the
world, the implementation of regulations seeking to reduce emissions of greenhouse
gases offers an opportunity for diesel and fuel-cell technologies. The Environmental
 56

Protection Agency and the Department of Transportation in the US are coordinating their
efforts to propose standards for fuel economy and for the control of GHG emissions.

China is the leading vehicle market in the world. Euro IV-equivalent emission legislation is
in place in the major cities of Beijing, Guangzhou and Shanghai, while Euro III-equivalent
legislation applies in the rest of the country. Euro IV is scheduled for nationwide
implementation in 2010, followed by Euro V in around 2012. As most of the vehicles built
in China are petrol driven (with diesel accounting for less than 15% of light-duty vehicle
production), the increase in vehicle production has resulted in a greater increase in
demand for palladium than for platinum (Anglo Platinum, 2009).

8.1.2 Jewellery
In the international jewellery industry, platinum’s strength and tarnish-resistant qualities
have increased its popularity in markets that have traditionally been dominated by gold.
The ability of platinum to be repeatedly heated and cooled without hardening and
oxidation effects, as well as its ability to produce settings which permanently retain their
shape, has made the metal popular among jewellery manufacturers, although the use of
platinum does make certain demands on the skills of the jeweller.

Platinum is widely used in jewellery and extensively promoted by jewellery bodies.

Platinum jewellery has become highly desirous for wedding ceremonies, especially in
China. However, non-bridal platinum jewellery continues to attract new buyers.

Up until 2004 the use of palladium in jewellery was limited to alloying with gold to produce
white gold. Palladium jewellery was introduced in China in 2004. Not only did it offer the
retailer larger margins than platinum, but it also helped manufacturers to use up idle
capacity when demand for platinum was low. However manufacturers are reporting
declining interest in palladium jewellery.

The year 2009 was exceptional for platinum jewellery in China with gross demand rising
from 1.06 million ounces to a record 2.08 million ounces. In the most general terms, this
was due to the twin stimuli of a lower platinum price and a booming domestic economy.
The real picture is rather more complex, with the motivations of consumers,
manufacturers, retailers and wholesalers all playing their part. Imports of fine, lightweight
platinum chain from Japan also benefited, helping to increase Japanese platinum
jewellery manufacturing demand.

The narrowing price differential between gold and platinum also aided platinum demand.
With the gold price stronger in 2009 than in 2008 and the platinum price weaker, the
 57

differential in price between the two metals shrank. Although the gold jewellery market
remains much larger than the platinum market, this made platinum relatively more
attractive to some consumers, with demand for platinum improving accordingly. During
2007 and 2008, an increasing amount of white gold could be seen as retailers tried to
maintain sales in the face of rising prices for platinum and for diamonds. However, white
gold has a lower brand acceptance than platinum within China. Thus, when the platinum
price fell, retailers gladly returned to stocking more platinum at the expense of white gold.
Consumers happily bought platinum at these more affordable prices instead of being
forced to trade down to the cheaper white gold (Johnson Matthey, 2010).

While lower platinum prices have clearly benefited affordability and platinum demand, the
longer term impact of price changes and price volatility on consumer perception of
platinum is more complex. Precious metal jewellery in China is both an adornment and an
investment. Although a rising price hurts affordability, it may make a material more
attractive as an investment. For some consumers, the rising price of platinum in 2009
was therefore a positive factor, encouraging purchasing. For others, the precipitous fall in
the price of platinum of late 2008 may have damaged confidence in its future value. The
balance between these two opposing trends is hard to ascertain but demonstrates the
complexity of consumer thinking in this market.

Although the underlying health of the Chinese platinum jewellery sector remains fairly
good, it is unrealistic to expect the demand levels of 2009 to be sustained in the future.
The factors leading to the heavy stock-building of 2009 are unlikely to be repeated.
Higher bullion prices started to impact upon the affordability of platinum jewellery and
there were some signs of inventory reductions in the first part of 2010.

8.1.3 Industrial applications

The electronic and electrical sectors
Platinum and ruthenium are utilised in the manufacture of hard-disk drives however
reduced amounts of platinum are being used on the disks owing to design and
manufacturing efficiency improvements. Furthermore, solid-state devices (SSDs) or flash
memory are replacing hard-disk drives in certain applications. SSDs are expected to
infiltrate many smaller applications. However, it is anticipated that the demand for hard-
disk drives will continue to grow in the larger segments.

Platinum is also utilised in thermocouples used in the manufacture of steel, glass and
semiconductors.
 58

The largest area of palladium consumption in the electronic sector is in multi-layer

ceramic capacitors (MLCC), which feature a palladium/silver conductive electrode
material layered between insulating ceramic wafers. However nickel-based MLCC
production has grown and now accounts for ~80% of total output. The growth in this
substitution has slowed, however, as the financial disincentive posed by extremely high
palladium prices has dissipated. Furthermore, palladium’s physical properties mean that
palladium based MLCC are still preferred for use in engine management systems in
vehicles and in exacting environments such as aerospace.

Palladium is used with silver to connect electronic components in hybrid integrated

circuits. Palladium is also used to plate connectors that link components in electronic
circuitry. Although gold can also be used in this application, palladium has a lower density
than gold and thus less metal is required. Integrated circuits are connected to other
electronic devices using lead frames. Some manufacturers use palladium to plate the
frames, as an environmentally preferable alternative to tin-lead solder. Gold can also be
used in place of palladium, but a price advantage of palladium over gold would
encourage a move towards palladium.

The chemical sector

Platinum catalysts are used in many chemical processes, including the production of
nitric acid, silicones and paraxylene. The use of platinum catalysts to produce nitric acid
is one of the metal’s oldest industrial applications. In the manufacture of nitric acid
ammonia gas is oxidised over a platinum-rhodium catalyst to produce nitric oxide, and is
further oxidised to form nitrogen dioxide. The nitric dioxide is then added to water to form
nitric acid. Some of the precious metals are lost in the process, but palladium catchment
gauze can be used to reduce the losses. As the demand for fertilisers declined globally in
2008 and 2009, nitric acid plants operated at very low capacity, decreasing the demand
for platinum. Further reducing the demand for new metal was the fact that manufacturers
used metal from mothballed burners to supplement metal lost in operating burners. The
single largest consumer of platinum in the chemical sector is silicones as the platinum is
consumed in their production and cannot be recovered.

Palladium is employed primarily in process catalysts used to produce plastic

intermediates such as purified terephthalic acid (PTA) whilst ruthenium is used in the
production of chlorine.

Glass
Equipment used in the glass industry is made from platinum alloys on account of
platinum’s high melting temperature, strength and corrosion resistance. Platinum is used
 59

in the manufacture of liquid crystal displays (LCDs), cathode ray tube (CRT) displays and
optical glass, while platinum/rhodium bushings are used to manufacture glass fibre.
Demand for speciality glass has benefited in the recent past from improving sales of
personal computers and LCD televisions. The return of metal from the closure of fibre
glass and CRT facilities has sent significant amounts of metal back to the market. The
recent construction of new LCD tanks may be insufficient to make up for this loss of
demand. The decline in rhodium demand was buffered to some extent by a return to
alloys containing a higher proportion of rhodium. Alloys with a higher rhodium content
offer increased durability.

Petroleum refining
Platinum catalysts are used in the reforming and isomerisation steps in the refining of
petroleum. As process losses are small, significant increases in demand occur only when
capacity expansions are undertaken. With the demand for petroleum based fuels
declining as the global economy slowed in 2009, the lifetime of catalysts was extended,
reducing top-up demand. However legislation requiring increased production of
renewable fuels is driving the development of biofuel facilities which is likely to result in
increased capacity requirements. The European Union’s directive is that 5.75% of
transport fuel should come from renewable resources by 2010. Some of the processes in
the production of renewable fuels require platinum catalysts, and the future construction
of refineries in this sector will buoy demand for platinum.

Dental alloys
Palladium and, to a lesser extent, platinum are alloyed with other metals for use in dental
restorations such as crowns. High-gold alloys usually contain platinum while low-gold
alloys contain 50% to 80% palladium. In Japan the government specifies the alloy used
for subsidised dental work. Known as Kinpala alloy, it contains 20% palladium. Japan is
the leading market for palladium dental alloys, with consumption of about 240 koz per
year. Palladium demand decreased in North America, despite a positive price differential
between gold and palladium.

Other industrial applications

Other applications requiring platinum, although individually small, together consume a
significant amount of the metal each year. Key automotive applications are the use of
platinum in oxygen sensors, spark plugs and turbine blades. Platinum also plays an
important role in medical applications, including pacemaker electrodes and guide wires
with coiled platinum tips able to locate blockages in arterial disease. Demand for internal
cardioverter defibrillators continues to buoy demand for platinum in biomedical devices.
 60

The production of anti-cancer drugs, for example cisplatin, carboplatin and oxaliplatin,
underpins increasing demand in cancer treatment around the world.

Non-road engines
Although at present non-road vehicles account for only a small quantity of PGMs, the
introduction of legislation over the next few years will see expanding demand from this
sector. More exacting standards requiring reductions in particulate matter and NOx will
require after-treatment. In Europe this will occur from 2011, when Stage IIIB legislation is
implemented. In the US, emission legislation is harmonised to some extent with that of
Europe and Tier 4 emission standards are being phased in from 2008 to 2015. In Japan,
where present legislation does not require exhaust after-treatment, the Ministry of Energy
is currently considering more exacting standards for non-road vehicles. As Japan is a
large exporter of non-road vehicles, original equipment manufacturers (OEMs) will be
fitting diesel oxidation catalysts (DOCs) and diesel particulate filter (DPF) systems in
order to meet legislation in Europe and the US.

Fuel cells
Fuel cells are electro-chemical generators of electricity, the electricity being produced by
a reaction between hydrogen and oxygen, with platinum as a catalyst. As there is no
combustion of carbon fuel, there are no noxious emissions. The only by-products of the
process are heat and water. Although the concept of fuel cells has long been understood,
it is only recently that their commercial use has been explored. The primary driver behind
research into fuel cells has been the increasingly severe emission controls promulgated
worldwide.

There are different types of fuel cells: alkaline fuel cells (AFCs), which have provided
power on spacecrafts; direct methanol fuel cells (DMFCs); molten carbonate fuel cells
(MCFCs); solid oxide fuel cells (SOFCs); and proton exchange membrane fuel cells
(PEMFCs). These all have specific properties that lend themselves to different
applications. However, the PEMFCs, which contain platinum, are the most versatile and
can be used to power anything from the smallest electronic device through to vehicles.
The PEMFC is seen as the best option in developing an emissions-free vehicle that runs
on hydrogen. A number of issues remain to be resolved prior to the commercialisation of
fuel-cell vehicles; however vehicle manufacturers are launching hybrid vehicles (some
with fuel cells) in the intervening years. One of the first commercial markets for fuel-cell
technology will be the portable power sector, for which products are currently being
developed. Demand for larger, portable fuel-cell systems, particularly by the military, is
strong: such systems have greater power density and are capable of running longer than
conventional batteries, and are also easier to recharge. The small (under 10 kW)
 61

stationary market grew strongly during 2009 with consumer demand for uninterruptible
power supplies increasing owing to concerns over sustainable energy supply. PEMFCs
are expected to remain the dominant technology in the residential sector, which is a
positive development in terms of platinum consumption.

8.1.4 Investment
Exchange-traded funds (ETFs) are designed to enable investment in specific
commodities without the investor having to take physical delivery of the product. These
funds are backed by physical metal and as such are considered part of investment
demand. There were no ETFs for trading in PGMs prior to 2007, but since their
introduction in April 2007, ETFs for platinum group metals are now traded on the London,
New York and Swiss exchanges. ETFs in platinum and palladium posted gains in 2009:
the combined holdings totalled 678 759 ounces and 1.167 million ounces respectively at
year end. Interest in coins has also increased, particularly in North America. In Japan
investors began purchasing small platinum bars towards the end of 2008, and this activity
continued into the first part of 2009. The Royal Canadian Mint produces both platinum
and palladium coins, and the Australian and US mints produce platinum coins for
investment purposes.

8.2 Demand and pricing

Historic supply and demand data and commentary in this section has been sourced from
Johnson Matthey annual reports on the platinum market. The objective of the section is to
provide context and historical awareness of market dynamics and variability, and not
specific analysis of the supply/demand/price dynamic of the PGM industry.

PGMs are attractive or essential in a broad range of industry sectors, offering the most
efficient, cost effective solution to technical challenges. Several physical and chemical
characteristics of PGMs make them critical for commercial applications primarily:

• Low-temperature and durable catalytic activity;

• High melting point / ductility; and
• Resistance to oxidation.

Global demand for platinum, palladium and rhodium has been generally strong over the
past 15 years depending on application. However the nature of application and
associated demand for the metals has shifted in recent years. The demand for PGMs has
been largely driven from four sectors:
 62

• The automotive industry, primarily autocatalysis;

• Industrial applications (chemicals, electronics, glass, petroleum, medical/dental
etc.);
• Jewellery; and
• Investment purposes.

Commentary has been made on the specific applications of PGMs in these sectors (see
Section 8.1) and will not be further covered. Emphasis here is placed on the nature of
demand.

Demand characterisation
The demand for PGMs can be broadly characterised into two groupings; derived demand
and created demand.

Derived demand is where the demand for metal is derived from an underlying product
downstream of the commodity and the metal is a small proportion of the end use product.
Derived demand arises principally from PGMs’ physical and chemical characteristics,
such as in catalytic converters in the automotive industry or for fuel reforming in the
petroleum industry. Derived demand arises in the automotive and industrial demand
sectors. Derived demand for PGMs is typically positively correlated with price.

Created demand is where demand is created for the metal itself through marketing
activities. In created demand the proportion of metal in end product is high. Created
demand is largely generated by jewellery for aesthetics or by investment funds for wealth
retention. Created demand for PGM is typically negatively correlated with price, providing
a measure of protection against sustained, excessively high or low prices.

8.2.1 Platinum
Supply and demand for the period 2000 to 2009 is indicated in Tables 8.2.1 and 8.2.2
 63

Table 8.2.1 Global platinum supply and demand (Johnson Matthey, 2010)
Platinum Supply and Demand
'000 oz 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Supply
South Africa 3 800 4 100 4 450 4 630 5 010 5 115 5 295 5 070 4 515 4 530
Russia 1 100 1 300 980 1 050 845 890 920 915 805 785
North America 285 360 390 295 385 365 345 325 325 260
Zimbabwe - - - - - 155 165 170 180 230
Others 105 100 150 225 250 115 105 120 115 115
Total Supply 5 290 5 860 5 970 6 200 6 490 6 640 6 830 6 600 5 940 5 920

Demand by Application
Autocatalyst 1 890 2 520 2 590 3 270 3 490 3 795 3 905 4 145 3 655 2 230
Chemical 295 290 325 320 325 325 395 420 400 295
Electrical 455 385 315 260 300 360 360 255 230 190
Glass 255 290 235 210 290 360 405 470 315 10
Investment -60 90 80 15 45 15 -40 170 555 660
Jewellery* 2 830 2 590 2 820 2 510 2 160 2 465 2 195 2 110 2 060 3 010
Medical & Biomedical - - - - - 250 250 230 245 250
Petroleum 110 130 130 120 150 170 180 205 240 205
Other 375 465 540 470 470 225 240 265 290 190
Total Gross Demand 6 150 6 760 7 035 7 175 7 230 7 965 7 890 8 270 7 990 7 040

Recycling
Autocatalyst -470 -530 -565 -645 -690 -770 -860 -935 -1 130 -830
Electrical - - - - - 0 0 0 -5 -10
Jewellery - - - - - -500 -555 -655 -695 -565
Total Recycling -470 -530 -565 -645 -690 -1 270 -1 415 -1 590 -1 830 -1 405
Total Net Demand 5 680 6 230 6 470 6 530 6 540 6 695 6 475 6 680 6 160 5 635
Movements in Stocks -390 -370 -500 -330 -50 -55 355 -80 -220 285

* Before 2005 jewellery and electrical demand is net of recycling.

** Before 2005 Medical & Biomedical was included in "Other"

A significant deficit of around 5% - 7% existed through to 2003, followed by the market

being essentially in balance during 2004 and 2005 with a 5% surplus in 2006. The
demand compound annual growth rate during the period 2000 to 2005 was 3.3%. Supply
and demand were in balance in 2007 with a swing back to a 4% deficit in 2008. The year
2009 showed a 5% surplus on the back of demand levels similar to 2000 following the
global financial crisis in 2008 and severe curtailment of global economic activity.

Table 8.2.3 further indicates prices and stock movements associated with the period
2005 to 2009. Analysis by region and demand sector (Table 8.2.4) shows the strength of
the growth in demand from China during the global economic crisis and the flexibility of
the created jewellery demand to absorb significant amounts of metal following the drop
off of autocatalysis and industrial demand during the crisis.
 64

Table 8.2.2 Gross platinum demand by application and region (Johnson Matthey, 2010)
Gross Platinum Demand by Application: Regions
'000 oz 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Europe
Autocatalyst 680 1 060 1 210 1 455 1 680 1 960 2 060 2 055 1 970 970
Chemical 100 105 115 105 115 100 100 110 105 70
Electrical 80 65 40 35 40 40 25 15 20 20
Glass 20 10 10 10 5 10 10 15 -25 5
Investment 0 0 0 0 0 0 0 195 105 385
Jewellery 190 170 160 190 195 195 200 200 205 185
Medical & Biomedical** 0 0 0 0 0 110 110 110 115 115
Petroleum 15 15 15 15 15 15 20 25 30 25
Other 105 155 190 185 190 65 65 75 85 55
Totals 1 190 1 580 1 740 1 995 2 240 2 495 2 590 2 800 2 610 1 830

Japan
Autocatalyst 290 340 430 500 615 600 605 610 610 395
Chemical 20 25 30 40 40 50 50 55 55 45
Electrical 90 80 55 40 50 65 55 35 35 30
Glass 65 85 60 85 90 95 100 85 65 40
Investment -95 45 40 -10 15 -15 -65 -60 385 160
Jewellery 1 060 750 780 660 560 670 585 540 530 535
Medical & Biomedical** 0 0 0 0 0 20 20 15 20 20
Petroleum 5 5 5 5 5 5 5 5 10 10
Other 35 35 55 40 40 25 20 30 25 15
Totals 1 470 1 365 1 455 1 360 1 415 1 515 1 375 1 315 1 735 1 250

North America
Autocatalyst 620 795 570 885 800 820 705 850 505 370
Chemical 100 100 100 95 90 100 100 95 95 65
Electrical 145 120 100 85 90 95 75 55 30 25
Glass 50 35 30 -30 -10 5 10 25 -5 -35
Investment 35 45 40 25 25 25 20 30 60 105
Jewellery 380 280 310 310 290 285 270 225 200 135
Medical & Biomedical** 0 0 0 0 0 110 105 80 85 90
Petroleum 35 40 45 40 35 35 35 30 25 15
Other 210 250 265 215 205 110 120 135 150 90
Totals 1 575 1 665 1 460 1 625 1 525 1 585 1 440 1 525 1 145 860

China
Autocatalyst 10 15 35 60 75 120 155 175 145 130
Chemical 20 10 10 10 10 10 65 70 60 40
Electrical 20 15 15 15 20 25 45 20 30 20
Glass 35 65 40 30 60 70 50 180 85 -90
Investment 0 0 0 0 0 5 0 0 0 0
Jewellery 1 100 1 300 1 480 1 200 1 010 1 205 1 060 1 070 1 060 2 080
Medical & Biomedical** 0 0 0 0 0 0 0 10 10 10
Petroleum 15 15 5 5 5 5 10 10 10 10
Other 5 5 5 5 5 10 10 5 10 10
Totals 1 205 1 425 1 590 1 325 1 185 1 450 1 395 1 540 1 410 2 210

Rest of the World

Autocatalyst 290 310 345 370 320 295 380 455 425 365
Chemical 55 50 70 70 70 65 80 90 85 75
Electrical 120 105 105 85 100 135 160 130 115 95
Glass 85 95 95 115 145 180 235 165 195 90
Investment 0 0 0 0 5 0 5 5 5 10
Jewellery 100 90 90 150 105 110 80 75 65 75
Medical & Biomedical** 0 0 0 0 0 10 15 15 15 15
Petroleum 40 55 60 55 90 110 110 135 165 145
Other 20 20 25 25 30 15 25 20 20 20
Totals 710 725 790 870 865 920 1 090 1 090 1 090 890

Total Gross Demand 6 150 6 760 7 035 7 175 7 230 7 965 7 890 8 270 7 990 7 040

** Before 2005 Medical & Biomedical was included in "Other"

 65

Table 8.2.3 Platinum – supply, demand and price 2005 to 2009 (Johnson Matthey, 2010)
 66

Table 8.2.4 Platinum – supply and demand by application and region (Johnson Matthey,
2010)
 67

8.2.2 Palladium
Supplies of palladium have traditionally been significantly influenced by Russian stocks.
However surpluses were significantly reduced in 2008 and 2009 following liberalisation of
trading constraints. See Table 8.2.5.

Table 8.2.5 Palladium – supply, demand and price 2005 to 2009 (Johnson Matthey,
2010)

Similar to platinum, resilience in demand by China was demonstrated during the global
financial crisis. See Table 8.2.6.
 68

Table 8.2.6 Palladium – supply and demand by application and region (Johnson Matthey,
2010)
 69

8.2.3 Rhodium
Rhodium supply, demand and pricing over the period 2005 to 2009 are indicated in
Table 8.2.7.

Table 8.2.7 Rhodium – supply, demand and price 2005 to 2009 (Johnson Matthey, 2010)
 70

8.2.4 Ruthenium and Iridium

Ruthenium and Iridium supply, demand and pricing over the period 2005 to 2009 are
indicated in Table 8.2.8.

Table 8.2.8 Ruthenium and Iridium – supply, demand and price 2005 to 2009 (Johnson
Matthey, 2010)
 71

8.2.5 Demand – summary

Understanding of the market, specifically demand as the driver of sales revenue, is
essential. This can be summarised as follows:

• It is important to note that the platinum market has a unique mix of created and
derived demand, the combination of which creates flexibility and sustains price
over periods of economic volatility;
• Current PGM revenues are concentrated in two end-use segments: automotive
emission control and jewellery;
• The automotive segment accounts for about 60% of current market revenues and
jewellery about 10%;
• Jewellery, as derived demand, acts as a counter-cyclical ‘shock absorber’ when
the supply/demand balance shifts;
• The industrial demand segment demonstrates the versatility of PGMs and has
achieved high growth rates from a low base; and
• Fuel cells and emission control in the stationary fossil-fuel burning sector are
potentially large opportunities for PGMs that are, as yet, unrealised.

The current macroeconomic climate following the global economic crisis is expected to
reduce forecast PGM demand growth in the near-term. The key drivers of this shift in
demand being:

• Auto industry troubles have led to slowdown in motor vehicle production and
increasing pressure to cut costs;
• Record fuel prices are driving a shift to more fuel efficient vehicles including
smaller and/or hybrid vehicles which (depending on engine system design) may
require lower PGM loadings;
• Slowing consumer spending is expected to hamper jewellery sales, especially in
developed economies; and
• Economic weakness in North America and Europe is slowing chemical and
industrial PGM demand.

Other aspects likely to negatively impact PGM demand growth in the near and medium-
term are:

• Record PGM price levels have increased thrifting (catalyst loading reduction)
efforts and substitution of platinum by palladium in the automotive segment, as
well as slowed down PGM jewellery market penetration;
 72

• Growth in recycling is accelerating due to current high PGM prices; and

• On a like-for-like basis the net effect of increasing thrifting, substitution and
recycling is an estimated 10-15% drop in expected PGM revenues driven by
reduction in overall PGM demand and changing metal mix.

However, medium- and long-term growth opportunities could expand the PGM market but
will depend upon market development, new legislation and sponsorship by governments.
Critical elements of this expansion relate to:

• Growth potential in BRIC economies’ jewellery sector remains an opportunity;

market penetration is low and markets could grow with increasing consumer
income and spending but sustained market development is required.
• Broadening the scope of vehicle emissions legislation to include new pollutants
and other vehicle types (e.g. buses, freight trucks) will expand PGM auto catalyst
demand.
• Energy diversification and independence and regional environmental pressures
are accelerating a shift toward alternative fuels and zero-emissions vehicles.
PGM solutions (e.g. fuel cells) could lead to higher demand, but:
– Competing technologies include battery electric vehicles which
are not expected to use PGMs; and
– Full-scale commercialisation of zero-emission technologies may
require government support to induce investment.
• Currently, however, the auto industry continues to invest in PGM auto catalysts
and ultra low emissions reduction solutions, with similar loadings to conventional
auto catalysts.
• Increases in the cost of energy and societal change are making PGM-based fuel
cell technologies attractive in new industry sectors such as:
– Electricity generation;
– Aviation (auxiliary power);
– Portable power (e.g. substitute for batteries in laptops, cell
phones); and
– Marine.
• PGMs’ unique attributes provide ongoing potential for new applications in a
variety of industry sectors.
• PGM market fundamentals remain strong with growing demand for vehicles using
auto catalysts in developing economies.
 73

8.2.6 Pricing and exchange rate

Metal price is a crucial element of any form of business planning, short term or strategic.
PGM prices are set in international markets, currently designated in US$, but the majority
of world production ~70% arises from South African operations. The Rand / US$
exchange rate and the resultant Rand / oz PGM price is therefore critical. Given the
physical nature of the mineralisation of the Bushveld Complex most production arises
from labour intensive, narrow tabular mining operations. In narrow tabular, conventional
mining, the most significant cost element is labour (at ~60% of cash cost) and is incurred
as a local currency cost in Rand (ZAR).

Global PGM supply is therefore sensitive to the economics of production of South African
PGM producers, with price responding rapidly to short supply variations caused by
production interruptions (industrial action, energy supply shortfalls, safety stoppages,
etc.) and the rate of development of new supply to market (the industry project pipeline).

Figures 8.2.1 and 8.2.2 show a 10 year price window, in US$ / oz for platinum and
palladium respectively. Note that SMA 60 and SMA 200 denote simple moving averages
over 60 and 200 day periods respectively.

Figure 8.2.1 Platinum price: 2000 to 2010 (source www.kitco.com)

 74

Figure 8.2.2 Palladium price: 2000 to 2010 (source www.kitco.com)

During late 2000 and early 2001 both the platinum and palladium prices rose to record
highs with palladium trading near to US$1 100/oz, eclipsing platinum. These moves can
be attributed to:

• Sales in the auto industry increased after declines in the previous three years. In
the European car market, the share taken by diesel engines rose by almost one
third and this, coupled with the imposition of Euro Stage III emissions legislation
boosted platinum use;
• Platinum stock building by auto companies increased in anticipation of increased
use to replace palladium following excessive price rises;
• Industrial demand for platinum increased (computer hard disks and speciality
glass and liquid crystal displays);
• A fundamental imbalance developed over the period between supply and
demand of palladium leading to excessive price rises and substitution for
palladium by platinum in auto catalysts, electronics and dentistry. This imbalance
can be attributed to erratic supply from Russian palladium stockpiles relating to
regulatory conflicts;
• Poor supply performance from South African operations (labour unrest, flooding)
was met by increased export from Russia but still resulted in a 1 Moz industry
supply shortfall over two years. Delays in presidential approval of export quotas
 75

and licences prevented sales in the first quarter of the year and it was not until
April that metal began to flow to the west; and
• There were announcements of significant expansion plans by major South
African producers (Anglo Platinum, Impala and Lonmin).

The period 2001 – 2005 showed a steady increase in PGM prices from a low in late 2001
as both derived and created demand steadily developed whilst supply from South African
expansions lagged demand. Palladium prices returned to levels of ~US$260/oz as supply
issues from Russia were resolved and the full impact of platinum substitution for
palladium in auto catalysts took effect.

Late 2006 to 2007 showed a rapid spike in both Pt and Pd prices as a result of:

• Supply deficit of 480 koz following smelter closures, geological and safety
problems and a difficult industrial relations climate;
• Adoption of stricter Euro IV emissions legislation in January 2006 coupled with an
increase in the utilisation of particulate filters in medium and heavy duty diesel
vehicles produced in Europe, Japan and North America;
• Booming sales in the electronics and glass sectors resulting in increased demand
for both platinum and palladium;
• Platinum and palladium investment demand climbing significantly; and
• Rhodium prices rising to record highs (US$ 6 800/oz) resulting in significant
thrifting in auto catalyst design.

The year 2008 shows the combined impact of then accelerating global economic growth
coupled with the Eskom electricity supply crisis in South Africa followed by the global
economic crisis. PGM prices achieved record highs, during the first half of the year, on
the back of severe power supply disruptions and uncertainty in South Africa during a
period of rampant global industrial growth. However following the global economic crisis
which rapidly evolved during the second half, PGM prices crashed to five year lows as
PGM demand evaporated during the adjustment of the global financial system.
Subsequently PGM prices have steadily increased to more realistic levels as the global
economy has equilibrated and demand returned to realistic levels.

Figure 8.2.3 shows the R/$ exchange rate over the same period.
 76

Figure 8.2.3 Rand / US$ exchange rate: 2000 to 2010 (www.ozforex.com.au)

Figure 8.2.4 indicates the relative movement in Rand basket price over the same period
for mines in the Rustenburg area.

Rustenburg Mines
25 000
Basket price (ZAR/ oz)

20 000

15 000

10 000

5 000

-
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Figure 8.2.4 Rustenburg mines – basket price ZAR/oz

 77

8.3 Supply

Historic supply data and commentary has been gleaned from a range of sources,
primarily the Johnson Matthey Platinum 2010 review and annual reports of PGM
producers. Commentary should be read in conjunction with the demand data provided in
Section 8.2. The objective of these sections is to provide context and historical
awareness of the market dynamics and variability, not specific analysis of the
supply/demand/price dynamic of the PGM industry.

8.3.1 Introduction
Global supply of platinum and PGMs is dominated by South Africa and Russia, with
South Africa accounting for 76.5% of platinum, 33.4% of palladium and 86.1% of rhodium
supply during 2009. South African production is primary mined supply whilst Russian
production is largely as a by-product of nickel and copper mining activities.

Limited production of PGMs also arises from North America and Zimbabwe. Small
amounts of platinum group metals are produced as by-products of mining in a number of
other countries including China and Colombia.

8.3.2 South Africa

Supplies of platinum from South Africa rose marginally to 4.53 Moz in 2009. The
operational climate remained extremely difficult, with the industry hit by safety stoppages,
strike action, smelter outages and geological issues, while production was also affected
by the closure of a number of uneconomic shafts and pits. Palladium supplies decreased
to 2.37 Moz while supplies of rhodium climbed to 663 koz.

Global supply is dominated by South African producers with Anglo Platinum producing
43.6% of global supply in 2009, Impala Platinum 25.2% and Lonmin 11.0%, collectively
accounting for ~80% of world supply.

Anglo Platinum
Anglo Platinum sold 2.58 Moz of refined platinum in 2009, an increase of 16% (or over
350 koz) on 2008. Refined production of palladium rose by 3% to 1.36 Moz, boosted by
expansion at the palladium rich Mogalakwena Mine, while rhodium output (which had
been depressed by an increase in unrefined pipeline stocks the previous year) climbed by
17% to 350 koz. Shaft closures resulted in a fall in output at the Khuseleka and
Siphumelele mines (formerly part of Rustenburg section), but this was offset by higher
production from Mogalakwena – where platinum output rose by 26% to 237 koz –
following the commissioning of the Mogalakwena North expansion project during 2008.
 78

The amount of platinum processed on behalf of joint venture and pool-and-share

operations also grew. Output from the Mototolo Mine – a 50:50 joint venture between
Anglo Platinum and Xstrata – climbed by 25% to 109 koz of equivalent refined platinum
production as the operation reached its rated capacity of 200 000 t/month of ore milled.
Production also increased at Kroondal and Marikana. At the BRPM joint venture
operation, a rise in headgrade and improved recoveries in metal processing were offset
by poor ground conditions and equivalent refined production fell by 1% to 173 koz. At
Modikwa – a joint venture with African Rainbow Minerals – platinum output also fell
marginally, to 134 koz of equivalent refined production, owing to power supply problems
and shortages of skilled labour. There was a decline in purchases of platinum from third
parties, owing to lower output at Xstrata’s Eland Platinum Mine (platinum group metals
from this operation are refined by Anglo Platinum under a concentrate off-take
agreement). Anglo Platinum’s stated production target for 2010 was 2.5 Moz of platinum.
However, the company revealed that production could rise by up to 200 koz above this
level if the market demanded.

Impala Platinum
Output at Impala Platinum weakened during 2009, with platinum production from the
Impala lease area falling by 12% to 867 koz in 2009, the lowest level for a number of
years, while sales were down by 18% at 816 koz. Impala intends to grow platinum output
from the lease area to 1 Moz annually within five years, but the outlook for the immediate
future is flat, with the company forecasting production of around 860 koz in the financial
year to June 2010. Impala Refining Services (IRS) refines platinum group metals on
behalf of other mines, including the Zimplats and Mimosa operations in Zimbabwe (of
which Impala holds 87% and 50% respectively), the Marula Mine on the eastern
Bushveld (of which Impala owns 73%), and the Two Rivers joint venture with African
Rainbow Minerals (of which Impala owns 45%). Additionally, IRS purchases and refines
PGM bearing concentrate from a number of third party operations, as well as processing
autocatalyst scrap. Excluding secondary scrap materials, refined platinum output from
IRS rose by 8% to 627 koz in 2009. It should be noted that much of this increase relates
to expansion in Zimbabwe.

Output at Marula continued to ramp up gradually, reaching 76 koz of platinum in

concentrate in 2009. The mine is undertaking a switch from mechanised to conventional
mining methods, but progress has been slower than previously anticipated and platinum
output has grown slowly. At Two Rivers, the ramp-up to full production is now almost
complete. Following optimisation of the concentrator plant, mill throughput rose by 7% to
2.8 Mt in 2009, while recoveries also improved; output climbed by more than a quarter, to
 79

132 koz of platinum in concentrate. Once at steady state, production should climb to a
rated annual capacity of 150 koz of platinum in concentrate.

Lonmin
Production of platinum in concentrate from Lonmin’s operations fell by 9% to 652 koz in
2009, reflecting the decision to place the Limpopo Mine on care and maintenance, the
closure of one uneconomic mine shaft and several half-levels at Marikana, and the
cessation of open pit operations across the company’s western Bushveld operations.
After consistently declining since 2005, underlying performance at the company’s main
Marikana operation showed signs of stabilising, with production from the new vertical
shafts, Hossy and Saffy, beginning to ramp up, offsetting the effects of safety stoppages
at the two largest shafts, K3 and Rowland. A third new vertical shaft, K4, is under
development and will begin to contribute to refined output in 2011. At the Pandora joint
venture, plant throughput dropped by 26% to 650 000 t last year, following the decision to
terminate open pit mining. However, ore continues to be extracted from underground via
shaft infrastructure located on the adjacent Marikana Mine: output of platinum from this
source totalled 40 koz in 2009.

Northam
At Northam’s Zondereinde Mine, the quantity of newly-mined ore processed through the
mills declined by 7% in 2009, to 2.02 Mt, however, production of PGM in concentrate was
stable at 310 koz. For the first time, concentrate purchase contracts made a significant
contribution to Northam’s business. The company has an offtake agreement with
Platmin’s Pilanesberg Mine, which came on-stream in early 2009, and also processes
small quantities of concentrate from other sources. In total, Northam purchased just
under 50 koz of PGMs in concentrate last year, and this augmented the company’s PGM
sales: platinum shipments rose by 35% to 235 koz. In February 2010, Northam confirmed
that development of its Booysendal project on the eastern limb of the Bushveld Complex
would proceed during the year. The board has approved initial capital expenditure of
R340 million, which will be used to build basic infrastructure such as roads and pipelines,
in advance of the start of mine construction in mid 2010. The project is to be developed in
a modular fashion, with the first phase costing some R3 billion and due to come on-
stream in mid-2013. It is planned to extract 150 000 t/month of ore, yielding 130 koz of
PGM annually including around 75 koz of platinum, with further expansion in later
phases.

Aquarius Platinum
Aquarius Platinum operates four mines and two tailings retreatment operations in South
Africa. At the Kroondal Mine, production of platinum in concentrate rose marginally to
 80

241 koz in 2009, while the Marikana Mine saw a 7% increase in output, to 89 koz. Both
these mines are operated under pool-and-share agreements with Anglo Platinum, which
purchases all concentrate from Kroondal; output from Marikana is refined by both Anglo
and IRS. The mine life of both operations was extended by the acquisition of First
Platinum and Salene Mining in early 2010, with mineral rights in the vicinity of the
Kroondal and Marikana mines.

Aquarius Platinum’s Everest Mine was closed in December 2008, due to subsidence in
mined-out levels of the mine around the decline shaft following a period of exceptionally
heavy rainfall. A decision to redevelop the mine was taken in mid-2009, involving the
construction of two new decline shafts to access the mining areas (which were unaffected
by the subsidence) and will put the company in a position to resume milling ore in late
2010.

In July 2009, Aquarius acquired the UK company Ridge Mining, owner of a 50% stake in
the Blue Ridge Mine, and a 39% stake in a large PGM/nickel project, Sheba’s Ridge,
which is undergoing feasibility studies. Blue Ridge came on-stream during the first half of
2009, and between July and December it produced just under 20 koz of platinum. The
mine is ramping up towards full production, and platinum output should exceed 50 koz
during 2011. Metal from both Blue Ridge and Everest is refined and marketed by IRS.

Aquarius also has 50% stakes in the Mimosa Mine in Zimbabwe, and in two tailings
retreatment operations in South Africa: the Chromite Tailings Retreatment Plant (CTRP),
based at the Kroondal Mine, and Platinum Mile, located on Anglo Platinum’s Rustenburg
lease area. These operations process tailings from adjacent chrome and platinum mining
operations. Together, the two operations produced just less than 17 koz of platinum in
2009.

ARM Platinum
African Rainbow Minerals (ARM) is involved in three PGM producing mining ventures in
South Africa. It has a 55% stake in the Two Rivers Mine (with the remaining 45% held by
Impala), which started up in late 2006. This mine has enjoyed a relatively rapid ramp-up
to full production, with platinum output of over 130 koz achieved in 2009.

ARM participates in a 50:50 joint venture with Anglo Platinum, the Modikwa Platinum
Mine: this operation has now reached steady state production and recorded stable output
of 134 koz of platinum in 2009. Further capital investment is expected to maintain output
at this level. Finally, ARM and its joint venture partner Norilsk Nickel produced just under
30 koz of PGM as a by-product of nickel mining at the Nkomati Nickel mine; an expansion
 81

programme is currently being undertaken at this operation which will lift platinum group
metal output to close to 100 koz annually.

Eastern Platinum
At Eastern Platinum’s Crocodile River Mine, the tonnage of mined ore processed through
the concentrator rose by 4%, while recoveries and grades also improved. Platinum group
metal output climbed from 118 koz in 2008 to 130 koz in 2009, with sales of platinum in
concentrate also rising by over 10% to 65 koz. In January 2010, the company announced
the reactivation of development work at Crocette, a small section adjacent to the existing
Crocodile River operations which had been on care and maintenance since November
2008. At full production, Crocette will contribute some 50 koz of PGM annually. The
company has yet to confirm its plans for the Spitzkop project on the eastern Bushveld,
the development of which was also put on hold in late 2008 owing to low PGM prices.

Other
Platinum Australia’s Smokey Hills Mine commenced production in early 2009. In its first
year of operation, the plant milled 487 000 t of ore, shipping around 27 koz of PGM in
concentrate to IRS. The Smokey Hills concentrator is designed to treat 720 000 t of UG2
ore annually, which at full production should yield some 95 koz of PGM annually over a
mine life of seven years.

Platmin’s Pilanesberg open pit operation commenced mining operations in December

2008, with first delivery of concentrates to Northam taking place in April 2009. During
2009 the company shipped some 28 koz of PGM in concentrate; expected output is to
rise to 160 koz in 2010, with full production (250 koz of PGM annually) being achieved
during in 2011.

Sylvania Resources is developing a series of chrome tailings retreatment plants, known

collectively as the Sylvania Dump Operations (SDO). Two further plants were
commissioned during 2009, bringing the total to four, with a fifth due to be brought on-
stream in May 2010. During 2009, SDO processed some 690 000 t of tailings, yielding
21 koz of PGM.

8.3.3 Russia
Reported Russian production during 2009 comprised 785 koz (13.2% of global supply) of
platinum, 3 635 koz (51.2% of global supply) of palladium, of which 960 koz came from
stockpiles and 70 koz (9.1% of global supply) of rhodium. Despite the significant input
into the palladium market, most of this PGM production is considered to have arisen as
secondary production from nickel and copper recovery activities.
 82

Despite the relative importance of the Russian PGM mining industry to global PGM
markets, information on reserves, production and sales has, historically, been difficult to
obtain, as data was deemed confidential under the Russian State Secrecy Law. A bill was
passed in late 2003 to declassify PGM information, with the exception of government
stocks and sales, and took effect in February 2004, but publication of the PGM data
appeared to have been delayed by regulatory procedures until a decree permitting the
release of the data was signed in March 2005.

Russian PGM production is dominated by Norilsk Nickel, which produces platinum,

palladium and minor PGMs from its copper-nickel mining and smelting complex in
northern Siberia, and from its copper-nickel mines in the Kola Peninsula. Total production
of platinum group metals from Norilsk Nickel’s Russian operations fell slightly from 2008
levels. Palladium output decreased from 2.70 Moz to 2.68 Moz. Platinum output rose
marginally from 632 koz in 2008 to 636 koz in 2009. Nickel production within Russia
remained flat as Norilsk Nickel maintained domestic production but copper output fell,
suggesting that the mix of ore being mined and processed at these Siberian operations
was changed. Nickel production was forecast to rise marginally in 2010 while copper
output was expected to fall, suggesting a decrease in the amount of cuprous ore to be
mined. A 1% rise in palladium output from Norilsk Nickel’s Russian operations to
2.72 Moz in 2010 and a 3% rise in platinum production to 655 koz was anticipated.
Russia’s most important source of PGM reserves is the PGM-containing copper-nickel
deposits on the Tamyr Peninsula in northern Siberia. Exploitation of these deposits began
in 1935. Four copper-nickel deposits were developed, during the 1960’s at Talnakh, all of
which are still in operation.

The large alluvial platinum deposits in Russia’s Ural Mountains have been exploited since
1823. The deposits once represented the richest known underground sources of
platinum, but have since been stripped of the highest-grade ore. From the 1920’s,
production from the Urals started to decline, to a point where the deposits now account
for less than one percent of Russian platinum production. Small quantities of PGMs are
also produced from copper-nickel deposits on the Kola Peninsula, and the past ten years
have seen the exploitation of two alluvial deposits in the far-east region of Russia.

Supplies of platinum from other mining in Russia – mainly from alluvial mining operations
in the far east of the country – decreased from 175 koz in 2008 to 150 koz in 2009. The
largest of these, the Amur Mine, on the Kondjor deposit in the Khabarovsk region,
produced marginally less platinum than in the previous year due to poor weather
conditions. Platinum sales from the Korjak Mine fell to roughly 25 koz. No metal was
 83

supplied from the Inagli placer deposit which had produced almost 5 koz in 2008.
Production from the Urals placer deposits fell slightly lower to close to 10 koz. Palladium
output from these operations remains negligible.

It is estimated that 960 koz of palladium was sold from Russian state stocks during 2009.
This is metal mined at Noril’sk in previous decades but never supplied to the market.
There were large shipments of palladium from Russia to Switzerland in late 2007 and
again in the second half of 2008, amounting to roughly 3 Moz in total. It is believed that
around a third of this metal was priced and sold in 2008 and again in 2009 and that the
remainder was scheduled for sale in 2010. Additionally, more than 10 t of palladium was
shipped into Switzerland in early 2010, apparently from Russian state stocks.

8.3.4 North America

In 2005, North American platinum production, at 260 koz, accounted for 4.3% of total
global production for the year. Palladium output was 755 koz (10.6% of global output) and
rhodium 15 koz (1.9% of global production).

Supplies of palladium from North America declined from 910 koz in 2008 to 755 koz in
2009 due to the temporary closure of North American Palladium’s Lac des Iles Mine and
prolonged strike action at Vale Inco’s Sudbury nickel operations. Supplies from Stillwater
Mining’s two Montana mines were almost unchanged despite a reduced workforce at the
East Boulder property. Platinum supplies dropped from 325 koz to 260 koz. Rhodium
sales decreased from 18 koz to 15 koz.

Stillwater Mining, the only US primary producer of platinum group metals, performed well
during 2009, producing a combined 530 koz of palladium and platinum compared to
499 koz in the previous year. Palladium production rose from 384 koz to 407 koz while
platinum output increased from 115 koz to 123 koz. In the second half of 2008, Stillwater
responded to the low prevailing precious metals prices by refocusing its efforts on activity
at its Stillwater property at the expense of the smaller, higher-cost East Boulder
operation. Palladium accounts for about 75% of the production from the mine, with the
remainder being platinum.

In Canada, PGMs are largely produced as a by-product of nickel mining. The Sudbury
Basin, in central Ontario, discovered in 1883, has the largest number of PGM producing
mines in the country. North American Palladium, the only primary producer of platinum
group metals in Canada, temporarily closed its Lac des Iles Mine in Ontario in late
October 2008 in response to low prevailing precious metals prices. In December 2009,
North American Palladium responded to the strength of the palladium price by
 84

announcing that it would restart part of the Lac des Iles Mine in the second quarter of
2010. Mining was planned to take place at the Roby underground section to produce
140 koz of palladium per year over a two-year period. However, full production will not be
reached until late 2010 and sales of refined metal were expected to remain at relatively
low levels in 2009.

Vale Inco produced less platinum and palladium from its Canadian nickel operations in
2009 than in the previous year. Platinum output fell from 166 koz to 103 koz while
palladium production dropped from 231 koz to 152 koz despite increased PGM
recoveries. Most of this metal comes as a by-product from nickel mining at Vale Inco’s
Sudbury, Ontario mines. Its Copper Cliff South Mine was closed in late 2008 in response
to low base metal prices. The remaining Sudbury operations were temporarily closed by
the company in June 2009. Xstrata, the second major producer of nickel in Canada,
maintained stable output during 2009 despite the closure of two of its mines and is on
schedule to reach its full capacity of 1.25 Mt of ore in 2011.

8.3.5 Zimbabwe
All Zimbabwean PGM production is currently refined in South Africa. Zimbabwe PGM
output during 2009 was 230 koz platinum (3.9% of global production), 180 koz palladium
(2.5% of global output) and 19 koz of rhodium (2.5% of global output).

Zimbabwe’s platinum deposits are located in a geological sequence known as the Great
Dyke – an igneous intrusion 30 km wide and 550 km in length, spanning almost the
length of Zimbabwe in a north-to-south direction.

Despite political tensions and a lack of clarity on indigenous equity ownership, investment
in platinum operations is continuing in Zimbabwe. In early 2006, the Zimbabwean
government announced that mining companies would have to surrender as much as 51%
of their assets to the government, with 25% to be by way of a non-contributory stake, and
the balance by way of a contribution over a period of time. Mining companies are
continuing negotiations with the Zimbabwean government to ensure security of tenure
and long term viability of operations.

Supplies of metal from Zimbabwe climbed significantly in 2009. Platinum supplies rose
from 180 koz to 230 koz while supplies of palladium climbed too, rising from 140 koz to
180 koz, as expansion programmes continued at both operating mines on the Great
Dyke. Output of platinum group metals (4E) at Mimosa – a joint venture between
Aquarius Platinum and Impala – climbed from 160 koz to 194 koz during 2009. The
Wedza 5.5 expansion was completed in May 2009, increasing mill capacity to 185 000 t
 85

and platinum group metal production capacity to nearly 200 koz per annum. Mill
throughput rose by 21% to 2.24 Mt and production of platinum in concentrate increased
by 22.2% to 99 koz. Annual palladium and rhodium production at Mimosa rose by similar
percentages to 75 koz and 8 koz respectively.

Supplies of metal from Zimplats increased in 2009 with platinum production in matte
rising to 131 koz. Palladium output rose to 104 koz and rhodium production reached
12 koz. The Phase 1 expansion project continued during the year and Portal 1 reached
its full production capacity of some 100 000 t of ore per month in June 2009.
Development of Portal 4 continues and should be complete by mid-2011. The Ngezi
concentrator was commissioned in July 2009 and reached full capacity in September.

At Anglo Platinum’s Unki Mine, also on the Great Dyke, development continued in 2009
and the first ore was stockpiled for processing once the concentrator was commissioned
in the final quarter of 2010.

8.4 Porter’s “five forces” analysis

The model of pure competition implies that risk-adjusted rates of return should be
constant across companies and industries over time. However, different levels of
profitability can be observed across these entities over time showing that competitive
advantage can be achieved.

The seminal work done by Porter (1980), to develop a framework for industry analysis
and business strategy, encompassed by the “five forces”, can be applied to develop
understanding of the industry context in which a business operates. The basic
configuration of these “five forces” is indicated in Figure 8.4.1.
 86

Figure 8.4.1 Porter’s “five forces” model – original diagram (Porter, 1980)

The Porter “five forces” analysis is conducted through the identification and analysis of
five competitive forces comprising:

• Entry of competitors. How easy or difficult is it for new entrants to start competing
– what barriers to entry exist?
• Threat of substitutes. How easily can a product or service be substituted, or
produced more cost effectively?
• Bargaining power of buyers. How strong is the position of buyers? Can they work
together in ordering large volumes?
• Bargaining power of suppliers. How strong is the position of sellers? Do many
potential suppliers exist or only few potential suppliers, is there a monopoly?
• Rivalry among the existing players. Does strong competition exist between the
existing players? Is one player very dominant or are all equal in strength and
size?

On this basis the original Porter diagram can be expanded as per Figure 8.4.2
 87

Threat of new Entrants:

•Ease of entry / barriers
•Scale
Porter’s Five Forces of •Capital
Competitive Positioning •Government policy
•Geographical factors
•Incumbents resistance
•New entrant strategy
•Routes to market

Supplier Power Industry: Buyer Power

Competitive Rivalry
• Brand strength •Buyer choice
•Geographical coverage •Number and size of participants •Buyers size/number
•Product/service level quality •Industry size and trends •Change cost/frequency
•Customer relationships •Fixed / variable cost •Product/service importance
•Bidding processes/capabilities •Product/service ranges •Volumes, timing
•Concentration •Differentiation strategy •Forward / backward integration
•Availability of substitutes •Capacity flexibility •Product differentiation
•Exit barriers

Threat of Substitutes:
Product and Technology
Development
after Porter (1980)

•Alternatives – price / quality

•Market distribution changes
•Fashion and trends
•Legislation
•Switching costs

Figure 8.4.2 Generic Porter “five forces” (after Porter, 1980)

Application of the Porter analytical model provides the following insights:

8.4.1 Threat of new entrants

• 80% of known PGM mineral resources in the world occur in Southern Africa.
These are already held or are being re-allocated;
• Security of tenure; the Mineral and Petroleum Resources Development Act
(MPRDA) may result in some mineral assets being re-allocated through
empowerment transactions;
• Likelihood of new extraction technology to extract PGMs from tailings;
• Recycling could increase from current 50% to 90%;
• Threat of other mineral deposits having high PGM content as by- metals;
• New, as of yet, undiscovered deposits;
• The general nature of the mineral resource (narrow tabular ore body) makes the
industry labour and capital intensive;
• High fixed cost component;
• Alternate mining technology could change the cost structure of the industry;
• Skills shortages (technical) existing in South Africa;
• Projects generally have a long lead time to delivery;
 88

• High capital requirements for mining and processing infrastructure;

• Optimisation of ‘farm boundaries’ (mergers and / or ‘pool and share’ agreements);
and
• Opportunities for cross industry / commodity activities e.g. ferro-chrome.

8.4.2 Threat of substitute products or services

• Alternate energy for transportation; different mode of transport; mass transport of
people; electric vehicles;
• A change in the ownership model of platinum, i.e. companies buy and then return
it for recycling / exchange it for new material (buy once, own in perpetuity);
• Changes to legislation in the use of PGMs from a safety, health and environment
perspective;
• Substitution across three areas (feed, process and product):
o Feed - Ore bodies, a new technology opens up previously considered
uneconomic reserves, recycled feed increasing;
o Process - An improvement in concentrating and smelting technology
relating to chrome content. The optimisation of roast reduction
technology or a new heap leach process that skips the smelting phase;
and
o Product – Alternate to PGMs.
• Grades/quality, e.g. An end user finding a new ability to use lower grade product
and backwardly integrating with a producer;
• Price rising too high and driving substitution and thrifting;
• Alternative to PGM jewellery demand (branded accessories such as handbags,
cell phones, etc. taking buying precedence with new generation); and
• A breakthrough in technology to allow lower loadings of PGMs in autocatalysis
applications, e.g. nano technology.

8.4.3 Bargaining power of buyers / users

• Fabricators are highly concentrated (80-85%). As such they influence the market
through R&D and intellectual property;
• Consolidated end use – 60% of end use is for autocatalysis;
• Globally – large number of end users;
• The application/uses for PGM are counter cyclical to each other (autocatalysis,
jewellery and investment);
• Typically, volume sale contracts are long term (~5 years);
• PGMs are a terminal market – price set by the market, producers are effectively
price takers;
 89

• Most demand for autocatalysis is driven by legislation;

• No real benefit to buyers in switching suppliers;
• PGMs are a very small percentage of end users total spend, but are a large
percentage of fabricators spend;
• PGMs are fungible (i.e. product can be traded globally, without necessarily
physically moving the product);
• The power to substitute can occur within limits. Efficient use of PGMs is in the
interest of PGM suppliers; and
• The industry depends on supply-demand balance. Suppliers have marginal
power in this regard.

8.4.4 Bargaining power of suppliers

• Large unionised labour force;
• Risk of disruption to operations – cost and supply impact;
• Sourcing of specialised mining services from third parties albeit that core mining
activities are generally performed with own employees;
• Effective management of a limited pool of skilled engineering contractors;
• Large component of unskilled labour which impacts on productivity. Need to
adapt mining methods to cater for this;
• Availability and security of energy and water resources;
• Availability of accommodation;
• Limited number of mechanised equipment suppliers;
• Limited and concentrated number of suppliers for key commodities (explosives,
tyres, timber, chemicals and grinding media);
• Access and affordability of credit markets;
• Production capacity of supplier in times of high commodity cycles;
• Access to mining resources impacted by community relations – licence to
operate;
• Community relations impacting relationship with government and NGOs; and
• Predictability and stability of regulatory framework.

8.4.5 Rivalry amongst existing competitors

• Limited geology – Bushveld Complex and Zimbabwe:
o Anglo Platinum (AP) has 180 years resources, (+-60% of resources)
which brings potential for longevity (and market dominance once other
producers have run out);
o Limited mergers and acquisition / industry consolidation opportunities
due to competition and regulatory limitations;
 90

o Mostly deep level tabular mining due to nature of deposits – resulting in

increasing costs with depth and distance from infrastructure; and

Only one significant long term open pit mining operation
(Mogalakwena Mine); and

Prior to the refining stage there are very few technology
differentiators.
o Geographical location of ore bodies results in competition for access to
infrastructure and services (electricity, water, etc.).
• Mature market
o Stable competitors – Anglo Platinum / Impala / Lonmin / Aquarius are
~80% of market supply; and
o Possible consolidation of the smaller platinum producers to form a 5th
major player.
• Regulatory environment through BEE has defined the SA competitive landscape
o MPRDA and mining charter have resulted in an increased number of
empowerment driven joint ventures.
• Cost curve positioning
o Owing to high industry producer concentration (80% across four
producers) relative movement creates significant change in producer cost
positioning and limited opportunity to sell high cost assets and buy low
cost assets. Reducing cost therefore limited to organic structuring and
asset optimisation; and
o Benchmarking is crucial.
• Moral (social and legal) licence to operate is key to business longevity
o Variable by community; and
o Affects longer term cost structures.

8.4.6 Market context – summary

Within this context, the overall market context can be summarised as per Figure 8.4.3.
Whilst the key characteristics that may reduce the attractiveness of the PGM industry,
going forward, could be considered as:

• Increased risk to social licence to operate;

• Constrained supply of critical utilities – water and electricity; and
• Substitution and resulting changes in demand mix.
 91

PGM Platinum Palladium Rhodium

Market Size • $20bn revenue (2007) • $9bn revenue (2007) • $3bn revenue (2007) • $5bn revenue (2007)
• $7bn op profit (2007) • Volume: 6.6m ounces • Volume: 6.9m ounces • Volume: 0.9m ounces
• Volume: 14m ounces

Market Growth
• 8% Autocat (1997-2007) • 3% Autocat (1997-2007) • 8% Autocat (1997-2007)
• 4% industrial (2003-2007) • -6% Industrial • 5% Industrial
• -4.6% Jewellery (1997-2008)

Profitability • 51% 2007 EBIT margin

• 43% 2007 NOPAT margin

Price Volatility & • 31% price volatility (1989–2009) • 43% price volatility (1989–2009) • 77% price volatility (1992–2009)
Growth • -0.4% pa real price growth • -1.5% pa real price growth • -6.0% pa real price growth
(1989-2009) (1989-2009) (1991-2009)

Supply/Demand • Historically been in deficit • Historically been in surplus • Historically market has been in
Balance • Large reductions in stocks in • Supply is expected to fall due to deficit
2008 have cleared deficit lower output from Russia and • Rhodium is mined as a by-product
• Large demand reductions, depletion of Russian stockpiles... • With a shrinking market ; due to
countered by near term ...Driving the market in a deficit lack of end use applications,
supply reductions, leaving thrifting and increased recycling
market in balance Rhodium is moving into a strong
surplus

Figure 8.4.3 Market context – summary

8.4.7 Industry and competitor analysis

Revisiting the Porter analysis framework on an annual basis is an integral part of the
strategy development process. In order to effectively exercise this process it is necessary
to develop a set of underlying data and information to inform the process and
participants.

This data and information comprises:

• A market information and intelligence information repository;

• Financial models simulating competitors businesses (financial models in same
format as own operations to allow comparison and consolidation into an industry
model);
• An industry and competitor analysis; and
• Cost curve analysis

The market information and intelligence repository is a compilation of data on all aspects
of the industry. Typically this can be summarised into an executive summary of key
information termed a ‘fact base’.
 92

Financial models are built of all major competitors operations and businesses in order to
simulate overall industry dynamic. This information is a critical input into metal pricing
analysis.

Typically the industry and competitor analysis would comprise content elements such as:

• PGM industry (by participant – asset base, resources and reserves, operations
summary, financial analysis, projects, capital intensity);
• Exploration strategies, mergers and acquisitions;
• Supplier analysis;
• Country analysis;
• National legislative – trends and impact;
• Corporate social investment; and
• Scenario or world view analysis (current world views, signposting, driving forces).

Industry cost curves and investment break-even analysis

Industry operating cost curves allow understanding of relative competitive positioning
based on cost and give an indication of what proportion of overall industry production is
price sensitive and at what level.

The incentive price is the metal basket price, typically expressed in ZAR or US$ per
ounce of platinum, at which projects/operations are expected to meet the required
investment hurdle rate for the industry. This hurdle rate allows for minimum expected
investment return plus a risk premium.

The long term incentive price is calculated as follows:

• Discounted cash flow models are established for known and anticipated industry
operations and projects:
• The long term planning parameters encompassed in the global
assumptions (see Section 11.5 – metal prices, exchange rates, inflation
rates, capital and operating cost escalation rates) are applied uniformly to
best estimates of production rates, operating costs and capital
requirements.
• Additional downstream processing capacity is estimated and capital
allocated to each project. The quantum of the capital cost, calculated at
the project steady state production, is distributed over the build period for
each project.
 93

• The NPV (real terms) is calculated at an appropriate hurdle rate (4% -

6%).
• For each operation/project in the industry, the required basket price (in ZAR) to
break even (i.e. when the NPV at the hurdle rate equals zero) is determined
using their respective valuation models. This is achieved by flexing the PGM
prices in the valuation model until NPVx% real = 0 is achieved for the assumed set
of metal ratios associated with the operation/project.
• The break-even basket prices for each project/operation are arranged
cumulatively from lowest to highest, using their steady state production. This
cumulative chart representation (y axis break-even incentive price, x axis
cumulative production in Moz or percentage) of existing and anticipated metal
production ranked by incentive price indicates potential supply that is viable at a
given price expectation. The chart thus provides a perspective of anticipated
future supply (based on an assumed world view or scenario encompassed in the
global assumptions – see Section 11.4) at a minimum metal price to achieve
targeted return represented by the selected hurdle rate.
• Anticipated industry demand, associated with the future world view, can then be
overlain to highlight shortfall or excess of supply.

This approach allows the identification of a long term price which is necessary for industry
production to come on stream to meet anticipated demand in a scenario of increasing
demand, if undue price increases are to be avoided. Conversely it identifies the amount
of metal which must be removed from the market when supply exceeds demand to avoid
oversupply and metal price reductions. See Figure 8.4.4.

INDUSTRY BREAK-EVEN BASKET PRICE – 202X

35 000
202X demand
scenario 2
30 000

25 000
202X demand
-
Break-even basket price ZAR/Pt oz

scenario 1
20 000

NPV Breakeven Basket Price ZAR/Pt oz @ 6%

15 000

10 000
Supply not modelled :
Autocat recovery
Russian supply,
5 000
other North American supply

0
0 1 Moz 2 Moz 3 Moz 4 Moz 5 Moz 6 Moz 7 Moz 8 Moz 9 Moz 10 Moz 11 Moz
202X - cumulative production - supply (Pt)

Figure 8.4.4 Typical investment break-even analysis chart

 94

This link between world views or scenarios and metal price is critical and accommodated
in the development of the global assumptions (see Section 11.5), in which the incentive
price is used as the long term price forecast, based on the desirability of maintenance of
a balanced market.

Industry cost curves are the near term manifestation of the incentive price curve, in that
they represent the cash operating cost of cumulative industry production from existing
operations and announced investments (see Figure 8.4.5). Viability of operations and
potential risk to supply can be assessed from their position on the cost curve and
comparison with current and near term metal price forecasts.

Industry Cost Curve (2007)

Total Cash Cost ($/oz 4E refined)
Q1 Q2 Q3 Q4
1 200 Twickenham
Lonmin - Limpopo
Anglo/Aquarius - Marikana
Lebowa
1 000 Anglo/ARM - Modikwa
Rustenburg
Union Section
Xstrata SA
Northam
800 Impala - Lease Area
Barplats - Crocodile River PPRust
Anglo/Royal
Amandelbult Bafokeng BRPM
Aquarius/Anglo - Kroondal
600 Lonmin - Lonrho
Impala - Marula
Aquarius/Impala/Savannah - Everest
Xstrata/Anglo - Mototolo
Aquarius/Impala - Mimosa
400 ARM/Impala - Two Rivers
Zimplats
Xstrata - Canada
Norilsk NA Palladium
200 Stillwater

0
0 2 4 6 8 10 12 14
Production (Moz 4E ref ined)

Figure 8.4.5 Industry cash cost curve – 2007 (after Anglo Platinum Limited, Industry and
Competitor Analysis 2007)
 95

Several factors must be considered in the development and utilisation of costs curves:

• Adjustment for reporting periods (money terms);

• Effect of by-metal revenues: Typically cash cost curves are net of by-metal to
allow for variation of metal ratios and differing base metal content across the
different reef horizons;
• Inclusion / exclusion of stay-in-business capital: Not all companies are explicit in
the reporting of SIB capital, which may be grouped with expansion or
replacement project capital, and difficult to identify and separate, or simply
included as a cash cost; and
• Other costs: Despite public reporting standards it is often difficult to ascertain
what centralised or shared cash costs have been included in cash cost
declarations.

It is important to maintain a consistent approach to data as the cash cost curve

provides relative comparison with assumptions being drawn on the relative positions
of operations to each other and an assumed price line. Similar to the incentive pricing
approach, cash cost curves can be developed for future scenarios. Assumptions are
made on metal production, cost management and capital efficiency in order to
develop a cash cost curve for a particular date, from which to develop a view on
supplier composition.

8.5 Contribution to the Conceptual Framework

The market is the key determinant of overall business strategy in the PGM industry. Key
observations that can be made are:

• The PGM industry is an attractive industry due to concentration of producers and

a broad portfolio of end-use applications that provide sustainable long term
demand growth.
• In the near term PGM demand for autocatalysis is expected to grow, driven
predominantly by tightening emissions legislation and expanding vehicle markets,
primarily in China and India.
• Demand for platinum in fuel cells is expected to be driven by growth in stationary
and portable energy applications.
• Platinum and palladium demand for jewellery applications is expected to
increase, driven by increased affluence in the east, especially China.
 96

• PGM pricing is driven by anticipated supply and demand (derived and created),
with created jewellery demand being negatively correlated with price and
providing a measure of protection against sustained excessively high or low
prices.
• Longer term reduction in the dependence on fossil fuels will lead to a reduction in
use of conventional internal combustion engines for portable energy sources.
PGMs have an important role to play in longer term, alternative portable energy
sources, and in near term hybrid applications. However continuous investment in
product development is required to ensure long term relevance of PGMs in the
energy sector.

It is necessary to have a concise means of condensing market understanding and

intelligence into a form that is accessible to the strategy and executive teams to inform
decision making.

Within the Strategic Long Term Planning Framework the key tools to facilitate this are:

• The Porter “five forces” analysis;

• Market information in the form of a ‘fact base’;
• An annual industry and competitor analysis; and
• Industry cost curve analysis.

Critically, the interpretation of market understanding and intelligence manifests in the

strategic long term planning framework through world view or scenario development and
the associated global assumptions that are applied throughout the business planning
process. Understanding of the market and the environment in which it functions (part A of
Figure 3.1) informs the building of world views or scenarios and the associated global
assumptions that are used to develop and optimise the investment centres that comprise
the business plan.
 97

9 THE GLOBAL BUSINESS ENVIRONMENT

The global business environment can be defined as the global environment that
influences local decision making on resource use and capabilities. This includes the
social, political, economic, regulatory, tax, cultural, legal and technological environments.

As businesses have no control over the external environment, their success depends
upon how well they adapt to the external environment. A business’s ability to design and
adjust its internal variables to take advantage of opportunities offered by the external
environment, and its ability to control threats posed by the same environment, determine
its success.

In Figure 3.1, the schematic representation of the key components of the conceptual
framework, the global business environment is placed between the characteristics of the
mineral resource and the market / value chain. This represents the filtering effect that
elements of the global business environment have on market demand and selection of
orebodies for mining.

Within this context this chapter focuses on the elements critical to the platinum mining
industry specifically environmental legislation, technology and the global economic
context.

9.1 Environmental

The critical environmental factor in the development of the PGM industry has been that of
emissions control through legislated standards. Emission standards are requirements that
set specific limits to the amount of pollutants that can be released into the environment.

Background
In 1966 “automobile tailpipe” emission standards for hydrocarbons (HC) and carbon
monoxide (CO) were adopted in California in response to smog in the city of Los Angeles.
Initial emissions regulations were met by engine modifications, but in 1975 the first two-
way (or oxidation) catalytic converters came into use as part of the Motor Vehicle
Emission Control Program of the California Air Resources Board (CARB). They were
followed a year later by the first three-way catalytic converters, to control HC, CO and
nitrogen oxides (NOx). Much of the world has followed this initiative by introducing
limitations on allowable emissions.
 98

Autocatalysis (adapted from Johnson Matthey)

The first catalysts used a simple formulation of platinum deposited on aluminium oxide
which in turn was coated onto a support material so that it could be placed in the exhaust
stream of the vehicle. These designs were essentially two-way oxidation catalysts, so
called because they reduce emissions of both carbon monoxide and hydrocarbons by
oxidising them to carbon dioxide and water. Later, researchers developed the now
commonplace three-way catalysts (for petrol or gasoline vehicles) in order to meet tighter
emissions legislation. In a three-way catalyst (TWC), carbon monoxide and unburnt
hydrocarbons are oxidised at the same time as NOx emissions are reduced to water and
nitrogen. Originally, TWCs used platinum and rhodium as the catalytically-active
components. Palladium analogues of these platinum catalysts were developed later and
have since become the dominant technology on light duty petrol or gasoline vehicles in
most regions. A diesel oxidation catalyst (DOC) functions by oxidising carbon monoxide
and any unburnt hydrocarbons over a platinum group metal. Normally such reactions
would only take place at very high temperatures but the use of a catalyst allows them to
proceed at much lower temperatures (Johnson Matthey, 2004).

Emissions standards
In the United States, emissions standards are managed by the Environmental Protection
Agency (EPA). California's emissions standards are set by the California Air Resources
Board (CARB). Sixteen other States had adopted CARB rules as of mid 2009. CARB
policies have also influenced EU emissions standards. Federal Tier 1 regulations went
into effect in 1994 with Tier 2 standards being phased in from 2004 to 2009. The US has
tightened emissions standards 96-99% from 1970 in areas such as hydrocarbons and
NOx.

The European Union (EU) has a set of emissions standards that all new vehicles must
meet. Currently, standards are set for all road vehicles, trains, barges and 'non-road
mobile machinery' (such as tractors). No standards apply to seagoing ships or
aeroplanes. The EU introduced Euro IV effective January 1, 2008, Euro V effective
January 1, 2010 and Euro VI effective January 1, 2014. The EU has already tightened
emissions standards 83-85% from 1992 in areas such as hydrocarbons, but next
generation standards are focused on diesel vehicles. Stricter emission standards for
diesel vehicles are due in 2014. Currently NOx levels permitted for diesel vehicles are four
to five times higher than for petrol or gasoline vehicles

China enacted its first emissions controls on vehicles, equivalent to Euro I standards, in
2000 with an upgrade to the Euro II standard in 2004. National Standard III, equivalent to
Euro III standards, went into effect in 2007. Plans were for Euro IV standards to take
 99

effect in 2010. Beijing introduced the Euro IV standard in advance on January 1, 2008,
becoming the first city in mainland China to adopt this standard. China has already
tightened emissions standards 83-85% from 2000 in areas such as hydrocarbons; next
generation standards are shifting focus towards other areas (Dieselnet.com [online]).

India adopted the European emission and fuel regulations for four-wheeled light and
heavy duty vehicles in 2000 with specific regulations for two- and three-wheeled vehicles.
In 2010 the Bharat Stage III emission norms for 4-wheelers were to be implemented for
the entire country with Bharat Stage IV (equivalent to Euro IV) to apply in thirteen major
cities(Dieselnet.com [online]).

Japan introduced the Motor Vehicle NOx Law to cope with NOx pollution problems from
existing vehicle fleets in highly populated metropolitan areas in 1992. This regulation was
amended in June 2001 to tighten the existing NOx requirements and to add particulate
matter control provisions (Dieselnet.com [online]).

Current global emission standards are thus a mix of national and regional standards (see
Table 9.1.1) with a global standard envisaged by the G8 by 2050. Standards generally
regulate the emissions of nitrogen oxides (NOx), sulphur oxides, particulate matter (PM)
or soot, carbon monoxide (CO), or volatile hydrocarbons.

Table 9.1.1 Global emission standards – summary (after Impala, 2007)

2001 2002 2003 2004 2005 2006 207 2008 2009 2010
Argentina Euro I Euro II Euro III
Australia (petrol) Euro I Euro II Euro III
Australia (diesel) Euro I Euro II Euro IV
Brazil Euro II Euro III
Columbia Euro I
Russia Euro I Euro II Euro III
Vietnam Euro I Euro II
Singapore (petrol) Euro II
Singapore (diesel) Euro II Euro III
Hong Kong Euro III Euro IV
Mexico Euro II Euro III
China (petrol) Euro I Euro II Euro III E IV
China (diesel) Euro I Euro II Euro III E IV
India (nation) Euro I Euro II E III
India (10 cities) Euro I Euro II Euro III
Korea (petrol) Korea 2000 Korea 2004 CA ULEV
Korea (diesel) Korea 2000 Korea 2004 Euro IV
Thailand Euro II Euro III Euro IV
 100

Figures 9.1.1 to 9.1.4 indicate specific emission standards for the USA, the European
Union and China, indicating future requirements. Note “No ∆” indicates no change on
previous year.

US Standards – Gasoline Passenger Vehicles

Pollutant (grams per km travelled) US Emission Time Line

60 1966 1967 1972 1975 1977 1980 1981 1994 2004 2017
NOx Standard 2.55 No ∆ 1.93 No ∆ 1.24 No ∆ 0.62 0.25 0.04 No ∆
Net change vs
No ∆ -32% No ∆ -35% No ∆ -50% -60% -83% No ∆
50 prior standard
Net change vs
No ∆ -24% No ∆ -51% No ∆ -76% -90% -98% No ∆
1966
40 CO Standard 49.71 21.13 17.40 9.32 No ∆ 4.35 2.11 No ∆ No ∆ No ∆
Net change vs
-58% -18% -46% No ∆ -53% -51% No ∆ No ∆ No ∆
prior standard
30 Net change vs
CO -58% -65% -81% No ∆ -91% -96% No ∆ No ∆ No ∆
1966
VOC Standard 6.59 2.55 2.11 0.93 No ∆ 0.25 No ∆ 0.16 0.04 No ∆
20 Net change vs
-61% -17% -56% No ∆ -73% No ∆ -39% -72 No ∆
prior standard
Net change vs
VOC 1966
-61% -68% -86% No ∆ -96% No ∆ -98% -99% No ∆
10
NOx

0
66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16

Source: US Department of Transportation. Notes: CO = Carbon Monoxide, NOx= Nitrogen Oxide, VOC = Volatile Organic Compounds.

Figure 9.1.1 Summary of emission standards – USA – petrol /gasoline vehicles (after
Anglo Platinum, Industry and Competitor Analysis, 2009)

No material shifts in emissions standards in the USA are anticipated, to alter current PGM
consumption patterns in petrol autocatalysis.

EU Standards – Gasoline Passenger Vehicles

Pollutant (grams per km travelled)
EU Emissions Time Line
1992 1996 2000 2005 2009 2014
4.00
NOx Standards 0.48 0.25 0.15 0.08 0.06 No ∆
Net change vs prior
3.50
standard -48% -40% -47% -25% No ∆
Net change vs 1992 -48% -69% -83% -88% No ∆
3.00 CO
CO Standards 3.16 2.2 2.3 1 No ∆ No ∆
Net change vs prior
2.50 standard -30% 5% -57% No ∆ No ∆
Net change vs 1992 -30% -27% -68% No ∆ No ∆
2.00 HC Standards 0.65 0.29 0.20 0.10 No ∆ No ∆
Net change vs prior
1.50 standard -56% -30% -50% No ∆ No ∆
Net change vs 1992 -56% -69% -85% No ∆ No ∆
1.00 NOx
HC

0.50

0.00
92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17
Source: Diesel Net. Notes: CO = Carbon Monoxide, NOx= Nitrogen Oxide, HC = Hydrocarbon.

Figure 9.1.2 Summary of emission standards – European Union – petrol vehicles (after
Anglo Platinum, Industry and Competitor Analysis, 2009).
 101

Increased stringency in NOx emissions control in the EU post 2010 is likely to impact
catalyst loadings.

EU Standards – Diesel Passenger Vehicles

Pollutant (grams per km travelled)
EU Emissions Time Line
3.50
1992 1996 2000 2005 2009 2014
NOx Standards 0.84 0.67 0.50 0.25 0.18 0.08
3.00 Net change vs prior
standard -20% -25% -50% -28% -56%
CO
2.50 Net change vs 1992 -20% -41% -70% -79% -90%
CO Standards 3.16 1.00 0.64 0.50 No ∆ No ∆
Net change vs prior
2.00 standard -68% -36% -22% No ∆ No ∆
Net change vs 1992 -68% -80% -84% No ∆ No ∆
1.50 HC Standards 0.29 0.23 0.06 0.05 No ∆ No ∆
NOx
Net change vs prior
standard -20% -74% -17% No ∆ No ∆
1.00
Net change vs 1992 -20% -79% -83% No ∆ No ∆

0.50
HC

0.00
92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17

Source: Diesel Net, European Union. Notes: CO = Carbon Monoxide, NOx= Nitrogen Oxide, HC = Hydrocarbon.

Figure 9.1.3 Summary of emission standards – European Union – diesel (after Anglo
Platinum, Industry and Competitor Analysis, 2009).

The European market favours light diesel engines, impacted by the progressive reduction
of NOx emissions. The Euro V emissions rules due to be applied to new light duty
vehicle models in late 2009 (and to all new cars in early 2011) effectively mandate the
fitment of diesel particulate filters (DPFs) to new diesel models. This should add to overall
platinum demand.

China Standards – Gasoline Passenger Vehicles

Pollutant (grams per km travelled) China Emission Time Line
2000 2004 2005 2008 2012
4.00
NOx Standards 0.48 0.25 0.15 0.08 0.06
Net change vs prior
3.50
standard -48% -40% -47% -25%
Net change vs 1992 -48% -69% -83% -88%
3.00 CO CO Standards 3.16 2.2 2.3 1 No ∆
Net change vs prior
2.50 standard -30% 5% -57% No ∆
Net change vs 1992 -30% -27% -68% No ∆
2.00
HC Standards 0.65 0.29 0.20 0.10 No ∆
Net change vs prior
1.50 standard -56% -30% -50% No ∆
Net change vs 1992 -56% -69% -85% No ∆
1.00 NOx HC

0.50

0.00
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Source: Diesel Net. Notes: CO = Carbon Monoxide, NOx= Nitrogen Oxide, HC = Hydrocarbon.

Figure 9.1.4 Summary of emission standards – China (after Anglo Platinum, Industry and
Competitor Analysis, 2009).
 102

Chinese emission standards have effectively aligned with Europe. The greatest impact
here will be the volume of units to service the Chinese market.

Summary
Emissions legislation has been the key driver of PGM demand since the mid 1990’s.
Increasingly strict legislation for vehicle emissions drives and supports PGM consumption
for emissions control. However the positive impact of emissions legislation on PGM
autocatalyst demand may now diminish with modest or no impact from enacted
legislation on ~80% of global production. Critical observations are:

• Although most nations have implemented their own emission standards, the G8
envisions a global emission standard by 2050.
• The US has tightened emissions standards 96-99% from 1970 in areas such as
hydrocarbons and NOx. However no stricter emission standards for passenger
vehicles beyond 2004 have been enacted.
• European Union:
• Emissions standards for petrol / gasoline vehicles have been tightened
83-85% from 1992 in areas such as hydrocarbons, but next generation
standards are focused on diesel vehicles; and
• Stricter emission standards for diesel vehicles are due in 2014 as NOx
and PM for diesel vehicles are currently four to five times higher than for
gasoline vehicles.
• China has already tightened emissions standards 83-85% from 2000 in areas
such as hydrocarbons.
• Next generation emission standards are shifting focus towards additional
pollutants, as well as broadening scope to include, e.g. non-road and marine
vehicles.
• Emission legislative scope is broadening in the near to medium term:
• Geographically;
• With regard to particulates; and
• Heavy duty and off-road vehicles.

9.2 Technology

Platinum group metal demand, as indicated in Section 8.2, is driven by four key sectors:
• The automotive industry, primarily autocatalysis;
• Industrial applications (chemicals, electronics, glass, petroleum, medical/dental
etc.);
• Jewellery; and
 103

• Investment purposes.

Two of the four are technology driven and underpinned by the physical characteristics of
the metals, viz. derived demand.

The largest consumer of PGMs is the automotive industry, primarily for use in auto
catalysis. Critical consideration should thus be given to the likely evolution of transport
technology in an increasingly energy constrained and environmentally conscious world.

Increased fuel cost and growing environmental consciousness is accelerating a move

towards zero emissions objectives. Despite early challenges to the achievement of zero
emissions, adoption of new technology will have an impact on PGM demand.

Current indications are that the technology evolution trajectory, for personal
transportation needs currently met through motor vehicles with internal combustion
engines, could be as follows:

• Hybrids;
• Plug-in hybrids;
• Hydrogen internal combustion engines;
• Battery electric; and
• Fuel cell electric.

Figure 9.2.1 indicates pertinent aspects relating to barriers to widespread adoption of

these technologies and their likely impact on PGM consumption (after Anglo Platinum)
PGM Impact
Technology Description Critical Barriers to Widespread Adoption per unit

Internal combustion engine and • Barriers: Battery technology and battery weight
Hybrid electric motor(s) working together • Investment: Led by auto manufacturers, uses
advancements on current technologies

• Barriers: Battery technology, electrical requirements, lack of

Battery Electric Car with back-up infrastructure
Plug-in Hybrid internal combustion engine • Investment: Led by auto manufacturers, uses advancements
on current technologies

Hydrogen Internal Modified internal combustion engine • Barriers: High cost, hydrogen production & storage
Combustion using only hydrogen fuel • Investment: Led by auto manufacturers and government, uses
advancements on current technologies

Electrical energy from on-board • Barriers: Battery technology, lack of infrastructure

Battery Electric rechargeable battery • Investment: Led by auto manufacturers and
government

• Barriers: Fuel cell technology, high cost, lack of required

Onboard fuel cell creates electricity
Fuel Cell Electric infrastructure, hydrogen production & storage
from hydrogen fuel and oxygen
• Investment: Led by auto manufacturers and government

Source: EV World, Panel of California Air Resources Board. Notes: Fuel Cell Electric Hybrids included under Fuel Cell Electric.

Figure 9.2.1 Alternate technology to the internal combustion engine

 104

The rate of adoption of these new technologies will largely be driven by the industrialised
nations through emissions legislation. However over the next ten years it is probable that
autocatalysts will continue to dominate emission control as new technologies are
developed and implemented. During this period it is likely that:

• Thrifting and substitution will continue;

• New emission legislation, accelerated by environmental pressures and lobbying
will support PGM loadings;
• Improved low emission solutions will be developed in combination with existing
technologies;
• Developing economies will gain a larger share of the vehicle pool with emissions
legislation lagging developed economies;
• Development of next generation technology will continue with little market
penetration; and
• Vehicle pool changes will occur with higher proportion of smaller capacity
vehicles.

The net outcome of this being robust demand for PGMs in the autocatalyst segment
tempered by continued price-driven thrifting.

Over a longer period of ten to twenty five years there could be a significant move to lower
emission vehicles and enabling investment in critical infrastructure. Under these
circumstances it is possible that:

• There would be limited scope for further tightening of emission standards;

• Thrifting and platinum cannibalisation will continue, combined with further
substitution outside PGMs;
• Improved low emission solutions would be developed in combination with existing
technologies;
• Next generation technologies would gain a small share of the market driven by
societal change and improved infrastructure;
• Large scale, government-led infrastructure investment would likely be a major
factor in developing the most cost effective low emissions technology; and
• Smaller vehicles would become more dominant.
 105

Under these circumstances there would be downward pressure on PGM demand owing
to limited scope for tightening of emission standards and the dominance of smaller
vehicles unless, there was widespread adoption of fuel cell based energy solutions.

Beyond the 25 year window it is inevitable that the next generation zero emission
technologies gain significant market share as infrastructure development matches needs.
Autocatalysis would thus be limited to specific approved applications with an upside
potential for the widespread adoption of fuel cells as a primary energy source.

9.3 Economics

Global economic activity is the driver of consumption of product from the minerals and
metal industry. Changes in economic activity have a direct and immediate impact on the
industry as they impact demand and ultimately pricing. The most recent demonstration of
this has been the global financial crisis of 2008/09.

During 2008 the global economy was severely impacted by a financial crisis that moved
much of the industrialised world into a deep recession. On the first page of its
"Declaration of the Summit on Financial Markets and the World Economy," dated
15 November 2008, leaders of the Group of 20 cited the following causes:

“During a period of strong global growth, growing capital flows, and prolonged stability
earlier this decade, market participants sought higher yields without an adequate
appreciation of the risks and failed to exercise proper due diligence. At the same time,
weak underwriting standards, unsound risk management practices, increasingly complex
and opaque financial products, and consequent excessive leverage combined to create
vulnerabilities in the system. Policy-makers, regulators and supervisors, in some
advanced countries, did not adequately appreciate and address the risks building up in
financial markets, keep pace with financial innovation, or take into account the systemic
ramifications of domestic regulatory actions.”

In essence the global financial crisis was triggered by the US sub-prime mortgage
collapse which was characterised by a fall in U.S. housing prices, a rise in mortgage
delinquencies and foreclosures, and severe disruption to the banking system, with major
adverse consequences for the economies of the U.S. and Europe. When US house
prices began falling in the second half of 2006, refinancing of adjustable-rate mortgages
(loans to sub-prime borrowers) became more difficult. As these adjustable-rate
mortgages began to reset at higher rates, mortgage delinquencies soared. Securities
backed by subprime mortgages, widely held by financial firms, lost most of their value.
 106

Global investors then drastically reduced purchases of riskier mortgage-backed debt and
other securities. The result was a rapid decline in the capacity and willingness of the
private financial system to support lending, tightening credit around the world and slowing
economic growth in the US, Europe and the world.

The five largest U.S. investment banks, with combined liabilities or debts of $4 trillion,
either went bankrupt (Lehman Brothers), were taken over by other companies (Bear
Stearns and Merrill Lynch), or were bailed-out by the U.S. government (Goldman Sachs
and Morgan Stanley) during 2008.

This coupled with the subsequent failure of several European banking and insurance
institutions effectively halted global credit markets and forced unprecedented government
interventions. Common measures included interest rate reductions, guaranteeing
domestic bank deposits and inter- bank lending, providing financial bail outs to strategic
companies to avoid large scale job losses, reducing company and personal taxes to
stimulate spending and significant investment in infrastructure (e.g. China invested 7% of
GDP on an infrastructure stimulus package).

The net effect of this crisis on the mineral industry has been:

• A marked drop off in metal prices (see Section 8.2.6);

• Reduced capital availability leading to the curtailment or deferral of projects;
and
• Excessive levels of debt on mineral and metal company balance sheets leading
to increased merger activity.

Subsequently recovery in the metal sector, following significant production cuts, has
largely been driven by China. China has been the primary driver of metal prices this
decade, as Chinese consumption of the main base metals (aluminium, copper, lead,
nickel, tin and zinc) rose by 17% per year, while demand in the rest of the world actually
fell 1.1% per year. In 2009, Chinese demand rose 23%, while demand in the world
outside China fell 13.5%. Much of the rise in Chinese demand went into stocks (both
private and government) but there was also strong stimulus-led consumption for
construction and infrastructure.

Following the onset of the financial crisis in 2008, there were significant cutbacks at
mines and smelters. With the sharp recovery in demand (mainly in China) prices more
than doubled from their troughs in early 2009. Over the next two years, prices are not
expected to rise substantially, partly given the large price appreciation to date, but mainly
 107

due to substantial idle capacity. Further large price increases would require idle capacity
being reabsorbed over the longer-term, but with demand growth slowing towards trend,
pressures for real price increases should be moderate. Over the longer term, declining
ore grades, environmental and land rehabilitation, as well as water, energy and labour
pressures may result in upward price pressure.

9.4 Contribution to the Conceptual Framework

Within the PGM industry the global business environment has greatest impact on
strategic long term planning in the areas of:

• Emission standards: legislated emission standards currently underpin the

demand for PGMs primarily for autocatalysis.
• Technology: changes in transportation technology will ultimately impact demand
for PGMs as the world moves away from fossil fuel dependent internal
combustion engines to zero emission technology.
• Global economy: demand for PGMs is inextricably linked to global economic
activity.

The critical aspects of the global business environment must be incorporated into the
strategic planning framework in order to align long term investment with probable market
demand scenarios. This is done through integration of world views / scenarios, that
adequately encapsulate the key global dimensions, into the planning process. See
Section 11.4.
 108

10 NATIONAL BUSINESS ENVIRONMENT

With reference to Figure 3.1 (schematic of key components of the conceptual framework),
the national business environment is the final element in part A influencing the
parameters considered during the generation of world views or scenarios as illustrated in
part B of the same diagram. Consideration is given particularly to the impact of the
legislative and policy environment.

10.1 Context

Following the democratic election of the ANC to government in 1994, South Africa has
transitioned from the system of apartheid to one of majority rule. The new government
embarked on the Reconstruction and Development Programme (RDP) to address the
socio-economic consequences of apartheid, including alleviating poverty and addressing
the massive shortfalls in social services across the country. A revised macro economic
framework was articulated in 1996, the Growth, Employment and Redistribution strategy
(GEAR). GEAR emphasised the pursuit of economic stability, market friendly policy and
fiscal discipline as prerequisites for economic growth. A stable environment for private
investment, the attraction of foreign investors, labour market flexibility, and sound
industrial policy are policies that according to GEAR would create the potential for a
faster growing economy with higher levels of employment.

Following the 2004 elections the government implemented programmes to sustain and
speed up positive developments and address challenges through:

• Growing the economy as the main area of intervention;

• New measures to help the poor enter the economy so they could move out of
poverty;
• Improving state performance;
• A campaign against crime; and
• Addressing South Africa’s relations with other countries.

Five government clusters were established to lead the changes:

• Governance and administration;

• Social;
• Economic;
• Justice, Crime Prevention and Security (JCPS); and
• International Relations, Peace and Security (IRPS).
 109

The foundation established in the first decade and new initiatives since 2004 have
enabled accelerated growth and development in South Africa. There are, however, still
some challenges. The findings of the Policy co-ordination and Advisory services 15-Year
review (Policy Co-ordination and Advisory Services: The Presidency, 2008) spell out the
areas that require attention for South Africa going forward. These include:

• Speeding up growth and transforming the economy;

• Fighting poverty and building social cohesion;
• International co-operation; and
• Building an effective developmental state.

10.2 Legislative and policy environment

Within the context of the transition from apartheid through to a democratic society,
legislation has become the key driver of sustainable change. The objective of this section
is to highlight key legislation that impacts activities in the South African minerals industry.
The information has been gathered from a wide range of sources with key emphasis on
the Department of Mineral Resources (DMR – www.dmr.gov.za).

10.2.1 Introduction
The exploration for and subsequent exploitation of minerals in South Africa is subject to a
wide range of legislation and regulation (see Table 10.2.1) however mineral asset
acquisition and exploitation is primarily governed by the Minerals and Petroleum
Resources Development Act, No. 28 of 2002 (MPRDA) and associated regulations.

The MPRDA, which came into effect on May 1, 2004, has redefined the regulatory
framework for South Africa’s mining and minerals industry. The aim of the legislation is to
correct historical imbalances in the industry without threatening overall attractiveness to
both domestic and international investors. Prior to 2002 South African mineral rights were
real rights held either by the State or the private sector (natural and juristic entities).
Under the previous Act (Minerals Act, 50 of 1991) mineral rights could be severed from
the ownership of land and registered separately. This dual ownership system represented
an entry barrier to potential new investors owing to the complexity of linking surface right
and mineral right ownership in logical units to allow viable exploitation of mineral rights.
The objective of the MPRDA is for all mineral rights to be vested in the State, with due
regard to constitutional ownership rights and security of tenure.

The MPRDA creates broader access to geological, geochemical and geophysical

information, which, in the past, was held by the entity that conducted the exploration and
 110

was protected by restrictions on disclosure. Through this, and improved access to mineral
rights, the Act is designed to bring an end to the situation in which a few large companies
dominate South Africa’s mining industry.

The intention of this development is to ensure increased access to mining activity for
historically disadvantaged people, to stimulate the ‘Junior’ mining sector and to enable
the State to terminate the practice of hoarding of mineral rights as a competitive barrier to
entry, with a ‘use-it-or-lose-it’ principle. Under this approach if a company fails to use its
mineral rights, under the agreed terms of use with the State, it is at risk of losing those
rights.

10.2.2 The Minerals and Petroleum Resources Development Act

The Minerals and Petroleum Resources Development Act (MPRDA), No. 28 of 2002,
under which the Broad-Based Socio-Economic Empowerment Charter for the South
African mining industry was developed, was promulgated in May 2004. This Act replaces
the Minerals Act, 50 of 1991 and regulates the prospecting for, and optimal exploitation,
processing and utilisation of minerals; provides for safety and health in the mining
industry; and controls the rehabilitation of land disturbed by exploration and mining.

The Act addresses many issues, including the following:

• Transformation of the minerals and mining industry;
• Promotion of equitable access to South Africa’s mineral resources;
• Promotion of investment in exploration, mining and mineral beneficiation;
• Socio-economic development of South Africa; and
• Environmental sustainability of the mining industry.

The underlying objectives of the Act are to promote:

• Economic growth and resource development; and
• Empowerment of historically disadvantaged South Africans (HDSA).

The MPRDA includes a transition arrangement whereby old order mineral rights need to
be converted to new order mineral rights. The relevant principals governing conversion of
old order prospecting and mining rights are:

Prospecting Rights
• Old order prospecting rights remained in force until 30 April 2006.
• The holder of an old order prospecting right had the exclusive right to apply for
conversion to a new order right.
 111

• New order prospecting rights may be granted for a period not exceeding five
years and may be renewed once, for a period not exceeding three years.
• Application for conversion of old order prospecting rights must have been
received by May 2006.
• An environmental management plan must be included in an application.
• The application must be consistent with the objectives of the Act.

Mining Rights
• Old-order mining rights were given a five year transition window during which
operations could continue.
• New order mining rights would be granted before May 2009.
• A mining right may be awarded for a period not greater than 30 years. There is
no limit to the number of renewals, although each renewal period may not exceed
30 years.
• Applications for conversion had to include an environmental impact assessment
and environmental management plan, and promote the objectives of the Act.

All new mining licences, including those for existing mineral rights properties, require
evidence of a black economic empowerment plan, a social plan and an environmental
management plan. The Act also requires that companies consult with government should
they wish to beneficiate locally-produced minerals outside the country. This provision is
designed to promote the use of mineral resources for sustainable economic development,
and to avoid the trap that many developing countries fall into of exporting jobs through the
exportation of un-beneficiated minerals. Based on this, the granting of mineral rights is
influenced by the involvement of historically disadvantaged people, and by plans to
beneficiate the minerals locally.

Under the MPRDA, a transitional period allowed existing holders of mineral and mining
rights to convert their old order rights to new order rights. Mineral rights holders who did
not hold prospecting permits or mining authorisations and who were not actively
prospecting or mining on their properties were given a year from the date on which the
Act came into effect to apply for prospecting or mining rights under the new legislation.
Mineral rights holders who did not apply within this period lost their rights, and any other
persons or groups were able to apply directly to the State for prospecting or mining rights
for the areas formerly covered by those rights. Mineral rights holders who were actively
prospecting or mining on the properties to which their old order rights related (with the
necessary permits or authorisations from the DME) were given two and five years
respectively, from the date on which the MPRDA came into effect, to convert their old
 112

order rights to new order prospecting or mining rights. The lengthy conversion process
and subsequent legal conflicts arising from dual award of rights has been identified by
some as causing widespread uncertainty among mining and exploration companies
operating in South Africa.

10.2.3 Charters and Codes of Practice

Transformation charters are no more than evidence of a commitment to promote black
economic empowerment (BEE) in a particular sector. Codes outrank Charters and must
therefore be utilised as the principle tool for measuring BEE compliance (Department of
Trade and Industry, [online]). However, the mining industry does not fall under the new
Codes, released in February 2007. The tool for the mining industry remains the Mining
Charter enacted in May 2004. The Mining Charter commitments include:

• Increased equity ownership by historically disadvantaged South Africans (HDSA)

to 26% by 2014;
• Promotion of HDSA participation at all levels, especially management;
• Increased participation of women in the industry; and
• Support procurement from HDSA suppliers.

The development of the Charter was provided for in Section 100 of the Mineral and
Petroleum Resources Development Bill, under the heading Transformation of the
Industry, which stated that within six months of the Bill taking effect as an Act, the
Minister of Mineral Resources was to have developed a Charter establishing the
framework, targets and timetable for effecting the entry of historically disadvantaged
South Africans into the mining industry. The Charter establishes how to achieve equitable
access to South Africa’s mineral and petroleum resources for all South Africans, and
outlines how the creation of employment and the advancement of social and economic
welfare can take place through the appropriate use of these resources. The Charter also
sets a framework that ensures that the holders of mining and production rights contribute
towards the socioeconomic development of the areas in which they operate.

The broad-based socio-economic Charter sets out a clear scorecard for the mining
industry. In terms of the MPRDA requirements for conversion of old order rights to new
order rights; the Minister was required to take the entire scorecard into account upon
adjudication of an application for conversion. The Mining Charter requires that 15% of
the ownership of existing mining industry assets must be held by historically
disadvantaged South Africans within five years, and 26% within ten years. First targets
had to be met by 2009 and the full targets by 2014.
 113

10.2.4 Royalties Bill

The Mineral and Petroleum Resources Royalty Bill (Royalty Bill) was introduced in
October 2006 and sets royalties for the platinum industry at 3% and 6% of gross sales
value for refined and unrefined PGM sales, respectively. Although some issues are not
yet finalised, the Bill was due to come into effect in May 2009 and was subsequently
postponed to 1 March 2010. The intent of the Royalty Bill is to promote the development
of a local beneficiation industry.

10.2.5 Other legislation

The Promotion of Beneficiation Bill is expected to provide incentives for upstream
companies that facilitate downstream investments, in order to reduce the exporting of
unprocessed mineral products and to promote local value addition. The process of
drafting this bill has been slowed in order to allow for greater engagement with industry,
which seems opposed to the idea, claiming that it is not reasonable to expect those
involved in primary extraction to get involved in beneficiation.

Although several other Acts govern the operations, support services, hospitals and every
other conceivable aspect of the business (see Table 10.2.1) the impact of this legislation
is largely tactical and it does not fundamentally impact the strategic direction of the
business.

The MPRDA (section 37) also refers to the requirements of the National Environmental
Management Act (NEMA) of 1998. The MPRDA stipulates that any prospecting or mining
operation must be conducted within the generally accepted principles of sustainable
development by integrating social, economic and environmental factors in planning and
implementation. Approval of the environmental management plan that must include all
aspects of rehabilitation, remediation and closure and the financial provision thereof is a
requirement before any permits will be granted.
 114

Table 10.2.1 Legislation applicable to mining and exploration activities in South Africa
(after DME, SAMI, 2005/2006)

Area Applicable Acts Impacts

Central Energy Fund Act, 1977 (58/1977)
Precious Metal Act, 2005 (37/2005)
Diamond Amendment Act, 2005 (29/2005)
Mining Titles Registration Amendment Act,
2003 (24/2003)
Industry: Mineral and Petroleum Resources
Development Act (28/2002)
General administration
National Nuclear Regulator Act, 1999 (47/1999)
of Minerals and Nuclear Energy Act, 1999 (46/1999)
Mine Health and Safety Act, 1996 (29/1996)
Petroleum
Geoscience Act, 1993 (100/1993)
Mineral Technology Act, 1989 (30/1989)
Electricity Act, 1987 (41/1987)
Diamonds Act, 1986 (56/1986)
Petroleum Products Act, 1977 (120/1977)
Mines And Works Act, 1956 (27/1956) (S 9)
Atmospheric Pollution Prevention Act Rehabilitation
Environment Conservation Act Remediation
Gas Act Classification of waste
Environmental
Hazardous Substances Act Handling of tailings
Management National Environmental Management Act Transport of concentrate, matte,
National Road Traffic Act crushed rock
National Roads Act Transport , handling and disposal
National Water Act of waste
Explosives Act and Regulations
Extension of Security of Tenure Act
Asset life
Mining Management Land Reform Act
Safety
Land Survey Act
SAMREC & JORC
Mining Titles Registrations Act
Precious Metals Act
Water Services Act
Project Management
World Heritage Convention Act
and Infrastructure Electricity Act
By-laws: varied
South African Companies Act Reporting requirements
IFRS Auditing requirements
Corporate Governance Income Tax Act King II
Insider Trading Act Corporate Governance
Corporate Laws amendment Bill Sarbanes Oxley
Occupational Health and Safety Act
Basic Conditions of Employment Act
Labour Relations Act
Compensation for Occupational Injuries and
Diseases Act and Regulations
Employee benefits
Constitution of the Republic of south Africa
Human Resources Safety
Employment Equity Acts
PPE
Management Mines Health and Safety Act
Occupational Health issues
Promotion of Equality and Prevention of Unfair
Discrimination Act
Skills Development Act and Regulations
South African Qualifications Authority Act
Skills Development Levies Act
Unemployment Insurance act
Foodstuffs, Cosmetics and Disinfectants Act
Health Act Hospitals
Health Care Medicines and Related Substances Act Hostels
International Health Regulations Canteens and food hygiene
Occupational Diseases in Mines and Works Act ARV programmes
Occupational Health and Safety Act
Others Fire Brigade Service Act Asset life
Safety
 115

10.3 Contribution to the Conceptual Framework

The national business environment is dominated by a legislative environment which has

been created to move South Africa from a racially biased society to a true democracy.
The legislative environment is a key enabler of mining and business activities. Acquisition
and effective exploitation of mineral assets is predicated on a well defined and effective
system of legal tenure that will allow investment in long life assets.

The exploration for and subsequent exploitation of minerals in South Africa is subject to a
wide range of legislation and regulation, however mineral asset acquisition and
exploitation is primarily governed by the Minerals and Petroleum Resources Development
Act, No. 28 of 2002 (MPRDA) and associated regulations. The social licence to operate is
further impacted by the Mining Charter.

Understanding and operating within the context of the legislation applicable to the
minerals industry is requisite for effective business functioning and strategic long term
planning.
 116

11 THE STRATEGIC LONG TERM PLANNING (SLTP) CONCEPTUAL

C
FRAMEWORK

The context (represented

represented in part A of Figure 3.1 repeated below) in which world views or
scenarios are developed and in which the planning process proceeds has been described
in Chapters 6, 7, 8, 9 and 10. Chapter 11 describes and integrates the key components of
the strategic long term planning conceptual framework:
framework: the development of scenarios or
world views (represent
represented in part B) and the business planning process (represented in
part C).

As schematically indicated in Figure 3.1,

3.1 repeated below, the process iss iterative, with the
business plan being dependent on
o the accepted, most likely world view, with fall back
options being identified through real option valuation and contingency planning.
 117

11.1 Introduction

Minerals and metal companies require mineral assets to generate value and attract
investment (financial and social). Value generation from the mineral asset(s) is achieved
through the application of a suitable business model.

Mineral resources are the underlying value construct of the mineral asset. The physical
characteristics of a mineral resource such as type and nature of mineralisation, and
physical structure (depth below surface, shape, extent, dip, surface topography, etc.) are
fixed and do not change over time.

Mineral assets exist at a place (a specific fixed location) so defining a context (e.g.
stakeholders, legal, social, environmental, infrastructural) that may change over time
according to social and political evolution. This is the spatial context that encompasses
location and associated operating environment.

The selection of a mineral asset portfolio is primarily affected, in the business context, by
the perceived financial value (investment quantum, returns and duration), arising from the
mineral asset(s). This value construct is primarily driven by the physical nature of the
mineral resource (size, content and depth, which drive exploitation technology selection),
the anticipated market demand for products arising from the mineral asset(s) and an
accepted level of business risk in realising the perceived value. All of which, except the
physical characteristics, are influenced by near term and forecast long term, economic
and market variables.

The combination of the spatial context, economic, market and technical variables can be
defined in a range of possible strategic scenarios or world views in which the value from
the mineral asset(s) could be realised. The world view attempts to capture the
interdependence and uncertainty associated with key elements of the spatial and
business contexts across the long lead times associated with financial returns from
mining activities.

Strategic long term planning of mineral and metal companies must therefore incorporate
elements of:

• Optimisation of the mineral asset portfolio composition;

• A long term perspective of a possible business environment; and
• Flexibility of exploitation options in short term mine planning.
 118

Within this context strategic long term planning therefore requires a cyclical
reassessment of exploitation options (and the composition of the mineral asset portfolio),
in the context of anticipated changes in the near and long term business operating
environment. This results in a near term tactical response (typically in a budget period)
and a longer term strategic response (the long term plan), both of which are encapsulated
in the company business plan.

11.2 An overview of the strategic long term planning conceptual

framework

As indicated in the introduction and repeated here, for a mining company to create
sustainable value from mineral assets, it is necessary to:

• Optimise the composition of the mineral asset portfolio to align with strategic and
business objectives;
• Create and operate long term assets within an anticipated long term business
environment; and
• Create and retain flexibility in the short term tactical response allowing effective
response to long term shifts in the business environment.

On this basis it is necessary to:

• Allow the fixed physical nature of the mineral asset(s) to drive definition of the
optimal (lowest capital cost, lowest operating cost, highest efficiency, maximised
cash flow) technical solution to mining and concentrating activities;
• Define and apply different business environment perspectives, world views or
scenarios, to determine possible economic viability under the different
perspectives, i.e. define the value proposition under different scenarios – what
are the options?
• Develop and resource a portfolio of production entities from the mineral asset
portfolio that creates flexibility to near and longer term business environment
shifts, i.e. a production mix that allows variation of output (metals, operating cost,
capital intensity) to respond to market demand and pricing.

This is the essence of the strategic long term planning conceptual framework with the
interrelationships and nature of the overall framework schematically represented in
Figure 3.1 and repeated at the beginning of this chapter.
 119

Effective execution of these activities requires a structured, integrated approach across

all elements of the business value chain from exploration through to product sales,
allowing cyclical (typically annual) reassessment and adjustment. Integral to this is a
common language, standards, systems and processes to align decisions and actions
across the organisation and over time. These requirements are met through the
application of a series of tools and processes within a planning cycle that defines
strategic long term planning and leads to mineral portfolio asset optimisation.

These comprise:

• Business strategy definition;

• Scenario planning (world views);
• Definition of long term planning parameters (global assumptions);
• Business value optimisation (value based management for identification and
choice of business model options);
• Long term planning procedures (planning cycle, mine extraction strategies,
mining right plans, long term plans);
• Capital investment prioritisation, real option analysis and project value tracking;
• Definition of the long term plan and business plan;
• Definition of upside or downside responses (contingency plan); and
• Execution plans for supporting capability:
o Project portfolio execution;
o Metallurgical process capacity (smelting, refining ,effluent);
o Infrastructure (water, electricity, roads, rail, housing);
o People (skills, motivation, organisational culture); and
o Community (stakeholder alignment and participation).

Each of these activities is considered in the following sections of Chapter 11. It is

important to note that activities are not necessarily sequential, as feedback loops occur
between different activities at different points in the planning cycle.

11.3 Business strategy definition

Overall company strategy, as defined and communicated by the board directs the
execution of the business objectives and provides the framework for decision making.
This is the starting point for strategic long term planning for metals and minerals entities.

The processes associated with definition of overall company strategy are excluded from
the scope of this work; however it is pertinent to note that the core outputs of the strategic
 120

long term planning process are also critical inputs into the overall company strategic
planning process.

Typically company strategic planning follows elements of:

• Information gathering and analysis (internal, external, market);

• Identification of critical issues facing the organisation;
• Development of a strategic vision statement that sets future direction;
• Mission statement review/revision;
• Development of strategic goals;
• Formulation of strategies for each goal; and
• Preparation for operational planning based on the strategic plan.

In the strategic long term planning approach, the company strategy directs the objectives
of value based management and defines prioritisation logic in the long term planning
process, i.e. the overall mineral asset portfolio optimisation process is directed by the
company strategic intent.

Conversely the global and local context along with the developed world views influence
company strategy as part of the information gathering and analysis processes, in the
overall strategic planning for the business. Similarly, the real option analysis of the value
of possible trajectories / exploitation choices for the business, comprise inputs to the
aspect of identification of critical issues facing the organisation.

11.4 Scenarios or world views

This section introduces and defines the link between long term planning parameters
(global assumptions) and possible future world views as conceived in scenario planning.

11.4.1 Introduction
Developing an understanding of the uncertainty inherent in the external and future
environments and testing the robustness of strategic plans against a set of possible
futures, is a critical component of strategic long term planning. The reality of the business
environment is that it is increasingly complex and dynamic. Analysing key global trends
and seeking to influence the possible business future(s), requires a widening of
perspective to a range of possibilities.

In the strategic evaluation of mineral asset exploitation options, a view must be taken of
possible future(s) and associated parameters that will influence investment decisions.
 121

This view, which is encapsulated in a set of common long term planning parameters (the
global assumptions), can and does change in line with macro-economic drivers. Whilst a
project development and execution team correctly focuses on ways to mitigate risks
associated with local assumptions (project specific, technical uncertainties), it is
imperative that strategic decision makers are aware of, and understand the significance
of global assumptions that have a bearing not only on specific project investments, but
rather the entire portfolio of mineral assets held by the business.

The complexity of long term planning parameters (typically forecasts of exchange rates,
inflation rates, metal prices, cost escalations, capital escalations, working capital, etc.)
and the relationships between them and events that occur in the global economy require
that inherent uncertainty in investment decision making and portfolio planning is
communicated through scenario planning.

11.4.2 Scenario planning

The concept of scenarios and scenario planning is well established in human history. As
a strategic planning tool, scenario planning is rooted in military strategies, in the form of
war game simulations (Brown, 1968). Although scenario techniques have a long history,
their application in strategic planning in the business context is a relatively new
phenomenon (Bradfield et al, 2005).

Scenario planning can be described in terms of:

• An internally consistent view of what the future might turn out to be – not a
forecast, but one possible future outcome, (Porter, 1985);
• That part of strategic planning which relates to the tools and technologies for
managing the uncertainties of the future, (Schwartz, 1996);
• Stories describing plausible futures that are developed using methods that
systematically gather perceptions about certainties and uncertainties, (Selin,
2006); or
• Narrative stories that follow particular paths into the future, (Kortea and
Chermack, 2007).

According to van der Heijden et al. (2002), scenario work can either serve specific once-
off content needs, or an on-going general process aimed at longer-term survival
capability; and /or the work can be undertaken either to open up an organisational mind
for exploration, or to achieve closure on specific decisions and actions. However, being
explicit about the purpose of the scenario development is critical to ensure logic
 122

alignment. Van der Heijden et al. (2002), indentified four main areas of purpose in
scenario work: making sense of particularly puzzling situations; developing strategy;
anticipation; and adaptive organisational learning as indicated in Table11.4.1

Table 11.4.1 Scenario planning – areas of purpose (after van der Heijden et al, 2002)

Comment
The aim is to acquire new understanding of aspects of the
environment. The scenario exercise helps in defining the key
Thinking–Content
Making Sense

research questions, a key requirement in generating new

understanding and possible new action. Examples where
scenarios helped define the important questions are Pierre
Wack’s original oil price scenarios and the Mont Fleur South
African project (van der Heijden at el., 2002 and Kahane, 1991).
The aim here is to develop a preferred strategy. According to van
Developing an Optimal

der Heijden at el., (2002), most failures are here, because

Action–Content

strategic options are generated as part of single cycle scenario

Strategy

process. Van der Heijden at el., (2002), have concluded that

stand-alone scenario projects aiming for a deliverable of a specific
optimal strategy that changes the strategic direction of the
business are difficult to turn into a success.
The aim is to enhance the quality of the ongoing multi-level
Thinking–Process
Anticipation

strategic conversations. The purpose according to van der

Heijden at el., (2002) is to enhance the shared understanding of
the macro-economic and business environment, and thereby of
the anticipatory capacity of the organisation.

They aim to motivate the organisation to engage in new actions -

Action – Process

action-based organisational learning, that will make the

Organisational
Adaptive

Learning

organisation aware of new options, of what works and what does

not. Organisational learning is an action-driven way of learning
from experience how to navigate the business environment (van
der Heijden at el., 2002).

11.4.3 Uncertainty and complexity

Uncertainty means opportunities. How does an organisation find its way in an
environment full of uncertainty? Exploring uncertainty, allows an organisation to indentify
 123

points of familiarity when moving towards the future. The future is uncertain and any form
of prediction and forecasting could be wrong. Without futuristic work geared towards
unpacking uncertainty, how do you decide on the next move? The process of building
new understanding through scenario planning and other futuristic methodologies
becomes critical in this process. This allows the organisation to engage in a process of
learning.

Using uncertain futures in strategic conversations through scenario planning seems a

practical way of managing rationalist assumptions (van der Heijden, 2004). This is
acceptable based on the rationale that the future is uncertain and considering multiple
futures ring fences this uncertainty.

11.4.4 Application – workshop methodology

The development, socialisation and adoption of common world views can be facilitated
through a workshop process where scenarios are created as a way of presenting
alternate future world views, and from which critical long term planning parameters can
be developed.

Developing an understanding of the uncertainty inherent in the external and future

environments and testing the robustness of any strategic plans against a set of possible
futures, is a critical component of long-term and strategic planning. For most companies,
the reality is that the business environment is increasingly complex and changing.
Analysing key global trends and seeking to influence the future(s), requires opening our
minds to a range of possibilities and discontinuities. The complexity of strategic problems
and the need to find acceptable solutions requires using methodologies that are
innovative, rigorous and participatory.

A means to developing and understanding the implications for the business is through
developing scenarios.

Typically the objectives of scenario planning workshops are to:

• Stimulate imaginative dialogue about the future to better prepare for the kind of
challenges that may lie ahead;
• Anticipate circumstances and explore possible outcomes;
• Develop a platform that can be used to pressure test the business strategy; and
• Enhance the strategic planning learning process.
 124

Approach and key questions

Strategic conversations seek to address the following fundamental questions about the
future of the industry:

• What will be the needs, choices and possibilities that will shape the global
‘platinum system’?
• How will the ‘platinum system’ look in the next three, 15 years and beyond?
• What roles will competitors, government, society, employees and different
components of the organisation play in shaping this ‘system’?

The sessions should be facilitated by an external person with little specific knowledge of
the platinum industry in order to avoid entrenchment of ‘accepted truths’. However the
strategic conversation teams should comprise people with expert knowledge of the
platinum industry and global economics. Typically the participants would cover internal
roles across the value chain such as , mineral resource management, strategy, planning,
economics, sustainable development, supply chain, marketing, legal, government liaison,
corporate finance, mining and metallurgical process.

Process, critical steps and timelines

Key elements of this process comprise:
• Learning process: to understand the methodology, theory and set the context;
• Scope definition: Global, 15 years and beyond;
• Determination of the key variables and drivers e.g. demographics; innovation,
science and technology; geopolitical relations and the role of China; the global
economy and globalisation; natural resources and the environment;
• Exploring key themes (e.g. PGM demand, society issues–social licence to
operate, Government issues, environmental issues, technology and alternative
applications, capital and operating cost escalators, competitor actions, etc.);
aimed at raising key drivers, key questions and setting the context;
• Developing scenario themes and storylines;
• Writing up the synthesis and scenarios; and
• Reviews of the outputs.

Outputs and deliverables

The main deliverables are:
• A common view of inputs to the strategic planning process;
• A synthesis report on the outcomes of the exercise and views about the future;
• Group learning;
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• A baseline for future related work; and

• A repository of information about the scenario planning methodology.

11.4.5 Contribution to the Conceptual Framework

The scenarios or world views developed through this process inform the development of
long term planning parameters (the global assumptions) to be applied throughout the
strategic long term planning process. These scenarios or world views create the critical
link between the market, the global and national business environments and the
utilisation of the mineral asset portfolio.

Dependent on the number of scenarios developed (typically three, maximum four)

alternate business options can then be developed with identification of suitable
trajectories between scenarios, depending on changing circumstances or progression
between scenarios over time.

These changing trajectories are reflected in the contingency planning logic (see
Section 11.8) and provide the basis for real option valuations (see Section 11.9).

The critical difference in approach is rational movement towards an identified and agreed
world view (previously established through the scenario development process) rather
than an ad-hoc crisis driven response. The organisation knows what trajectory to follow
as the contingency positions have been previously defined.

11.5 Global assumption (GA) methodology

Cash flow estimates used in discounted cash flow analyses are fundamentally derived
from estimates of revenue, operating cost and capital cost. Extensive effort is directed at
estimating costs (both operating and capital) to accuracy levels of <10% error during the
feasibility studies. Similarly production, grade and metallurgical recoveries are estimated
at comparable levels of accuracy to drive the revenue line.

However an area which is often not subject to the same rigour is the impact on plan
viability of assumptions regarding metal (commodity) prices, exchange rates, inflation
rates (domestic and foreign), and escalation factors (capital expenditure and operating
expenditure) factors.

On the assumption that these global parameters are usually rigorously determined for a
five year period and then maintained at long term trend estimates, the adoption of an
optimistic or pessimistic long term perspective can have a significant effect on projects
 126

with 15 - 30 year life spans. The risk of not undertaking viable projects because of a
pessimistic long term view or conversely undertaking marginal projects because of an
optimistic long term view is mitigated through the use of scenarios or world views plus
real option valuations. Estimation of these long term planning parameters in the context
of anticipated business world views or scenarios is therefore critical.

Global assumptions are a set of long term planning and economic parameters that best
encapsulate the external drivers of value in the exploitation of platinum group metals. In a
sense, the aggregated parameters provide a descriptor of a current and future world view
and transition between the two. When investment decisions are made in the context of
these global assumptions, these decisions are positioned with the expectation that this
future world view will evolve.

11.5.1 The context in which mining investment decisions are made

Directors, executives and strategic planners all have a fiduciary responsibility for
oversight in the organisation (Taylor et al, 2006). This entails identifying, evaluating and
managing risks and uncertainties that the organisation may encounter. The ability to
manage short term risks to stabilise earnings and long term risks to ensure viability of the
business is critical. In respect of major investment decisions in the complex platinum
industry, this can be daunting. The contexts within which such decisions are made are
two-fold.

Firstly, decision makers have to contend with project uncertainty defined by project
specific parameters, the local assumptions. Typically, for minerals projects these are
mineral resource (e.g. size, delineation, grade), mining method and efficiencies,
processing method and efficiencies, project ramp-up rate, initial capital requirements and
operating costs. Getting this right is about committing to and implementing a competitive
strategy – what needs to be done and how it should be done is clear. However
investment decisions are also about other uncertainties, primarily the business
environment in which the project will operate ten or more years hence, following the initial
capital investment. In this context, decision makers need to develop foresight to consider
future circumstances and how these might impact the organisation (Taylor and Leggio,
2003), and the investment made to date. This is where the value of a well structured set
of global assumptions is realised.

11.5.2 Global assumptions – key drivers of future value estimates

A critical step in understanding the future is an understanding of the key drivers that
determine future developments (Postma and Liebl, 2005). These so called driving forces
or causal factors are many and are often complex in their relationships. The inter-
 127

relationship of these driving forces or casual factors for the platinum industry is indicated,
schematically, in Figure 11.5.1 which highlights elements of complexity and
interdependency.

Reduced Emissions Exchange

Carrying Costs Legislation Transfer
(Inventories) Diesel-Powered
Funds
Vehicles
Oil Price Thrifting
US Inflation
Risk Autocat
Autocat Substitution
US$ Exchange Vehicle Demand
Rate
Sales

US Interest Global Jewellery Platinum

rates Economic Substitution Demand
Industrial
Growth
Applic.
Supply-Demand
Asian Balance
US Economic
Economic Platinum (Inventories)
Growth Jewellery
Growth Supply
Sales

Supply Costs
Mine Pt Price
Demand for Accidents (US$)
Resources
Supply
Skills Disruptions
Availability Staffing
R/$
Current
Strike Account
Action Net Capital
Power & Inflows
Infra Technical
RSA
structure
Inflation

Figure 11.5.1 Schematic depiction of key drivers or causal factors of change, their
relationships and complexity, in the platinum mining industry

A useful framework in simplifying them is to classify these factors as either constant,

predetermined or uncertain (Porter, 1985). Constant factors are those structural factors
that are unlikely to change. Factors that are fairly predictable and can be forecast with
reasonable accuracy are classified as predetermined. Both their outcome and their
probabilities are known. Schwartz (1996) best describes these factors as either slowly
moving trends or a result of constrained situations. Uncertainties are those factors whose
outcomes are known, but their probabilities are not, Taylor et al. (2006), propose a similar
framework, using the terms known (predictable) and unknown (uncertainties), and extend
the definition to include the “unknowable”.

The relationships in Figure 11.5.1 can be rearranged, as in Figure 11.5.2, whereby the
key uncertainties are located at the outermost sphere, their determination being based on
a possible future world view (a scenario). These less predictable factors (unknowns /
 128

uncertainties) are used to infer the parameters in the next inner shell, which in turn
influence the parameters in the core sphere. The logic being that once a view of the
outermost parameters has been established (from a scenario), the parameters of the
inner shells can be progressively inferred creating a consistency in the parameter logic
that is driven by the possible future world view.

technology:
mining & processing
oil price

PGM
substitution
PGM supply
projections
business inputs:
supply & demand
projections world economic
exchange rates activity

metal prices
cost escalation

national
PGM demand economy
projections
access to
mineral rights

skills
availability cost of capital

Figure 11.5.2 Simplified depiction of key drivers or causal-effect factors of change in the
platinum mining industry

This framework provides guidance as to which parameters ought to constitute the global
assumptions, keeping in mind the purpose of the global assumptions is to create a link
between the vagaries of a possible future world and actual parameters that are quantified
for investment analysis. In this context the development of alternate global assumptions
to align with alternate future world views is not so much a forecasting exercise, but more
a means of understanding the implications of uncertainty and facilitating the testing of
investment decisions in the context of future uncertainties. Consistency in the logic of
generation of parameters associated with alternate future world views is therefore
paramount.

Table 11.5.1 summarises the core parameters that currently comprise global
assumptions considered as applicable to the South African platinum mining industry.
 129

Table 11.5.1 Global assumption parameters

Economic Fiscal Revenue Costs Technological

US CPI Income taxation PGM prices Capital expenditure Smelter recoveries

RSA CPI Secondary Base metal prices Capital escalation Refinery recoveries
R/US$ taxation on Other metal prices Operating cost Metal pipelines
companies Working capital escalation
Royalties factors

11.5.3 Derivation process

Derivation of the specific global assumptions associated with each scenario is normally
conducted separately to the scenario development process. Various technical experts are
identified (internal and external to the organisation) from different disciplines (economics,
marketing, finance, supply chain, capital projects, estimators, etc.) and presented with the
scenarios with a request for relevant inputs. In some instances, certain parameters
become inputs to other parameters. For example, the view on GDP and inflation is used
as input into the expert opinion regarding cost escalation. On collation, the global
assumptions are circulated within the same expert group for final comment and alignment
as necessary. This approach creates better understanding of parameter interdependency
and clarity on the scenario structure, whilst testing internal consistencies. An example of
the scenario to global assumption linkage is indicated in Table 11.5.2

Within this approach the following logic applies:

• The cost escalations and demand environment will be driven by descriptors

within each scenario.
• The metal price forecast is triangulated using cost margins, incentive prices and
analysts views.
• Long term prices will trend to a flat, real money terms, long term price, when
supply and demand are in balance.
 130

Table 11.5.2 Example – linkage of global parameters to world views

Low Economic High PGM Demand Low PGM demand High PGM Demand
KEY DRIVING FORCES Growth & Low amidst Global & High Economic & High Economic
PGM Demand Economic slowdown growth Growth

World GDP (CAGR : 2008-

2.7% 2.7% 3.4% 3.4%
2018) - Profile over time

Pt Demand Growth
(CAGR: 2008-2018) - 3.5% 4.5% 3.5% 4.5%
Profile over time
Unchanged from Unchanged from
US Dollar over time Weak US$ Weak US$
Real 2005 Real 2005
Global Economic US Interest Rates
Low Low Higher Higher
Drivers (Profile over time)
Inflation Rates (Profile
High High Low Low
over time)

Energy Costs (Oil, Brent) -

Real 2008 US$/barrel - 100 100 70 70
Profile over time

Supply-Demand Balance
Supply surplus Supply deficit Supply surplus Supply deficit
(Inventories) over time
No substitution, Pt No substitution, Pt
Available and in Available and high
Substitution success in Fuel Cell success in Fuel Cell
high usage usage
Technology Technology
Not applicable, as
cheaper
PGM Demand Drivers Thrifting Not applicable Not applicable Not applicable
substitutes are
available
Enviromental thrust for Stringent Stringent
No legislation(?) Stringent legislation
more stringent legislation legislation legislation

Infrastructure Limited, as
Infrastructure
Supply Disruptions & constrained, terse constraints are
None constrained
Constraints relationship with overcome through
(power, water)
labour & govt. Chinese import

PGM Supply Drivers Supply Costs (opex, Cost escalations Low escalations due to Cost escalations
High
capex) are very high high availability are high
Low availability
Readily available
due to high
Skills & Labour Availability Readily available Readily available Chinese labour at
economic growth
lower cost
environment

11.5.4 Global assumptions and scenarios – link into planning process

The strategic long term planning process at Anglo Platinum has been described
previously (Smith et al, 2006a, 2006b, 2007, Andersen et al, 2005). Enhancements to the
process with respect to incorporating uncertainty comprise:

• Inclusion of scenarios in the strategic directive provided to the operation in the

development of the mine extraction strategy;
• Provision for alternate mining right plans by scenario, if warranted; and
• That the strategic long term plans for each mining right area incorporate
contingency plans aligned with agreed scenarios.
 131

Although this enhancement requires additional effort, it does allow the development of
contingency responses that are aligned with possible future world views and so creates
robustness to the planning of long life, long lead time mining assets.

The final result of the application of scenarios in the long term planning context is to
arrive at a set of possible alternate production profiles based on anticipated scenarios /
world views. These are essentially contingency plans per world view and can be
schematically represented as per Figure 11.5.3, where each scenario or world view
comprises three profiles.

These are the mine extraction strategy (MES) profile which represents the unconstrained
production profile (unchanged between scenarios) that assumes implementation of all
possible projects within a mining right area portfolio, the target or business plan profile
that matches the optimal production level, as defined by the constraints applied and
associated global assumptions for each scenario, and the contingency plan profile which
represents the value maximised fallback position from the business plan, based on a
move to a less favourable scenario. Optimisation of all profiles in each scenario is driven
by value maximisation principles.

WORLD VIEW D WORLD VIEW A

Mine Extraction Business Plan: Mine Extraction Business Plan:

output

Strategy Plan: Strategy Plan:

output

Constrained but Constrained but

= unconstrained optimised = unconstrained optimised

Contingency Plan: Contingency Plan:

Fallback position Fallback position

time
time

WORLD VIEW C WORLD VIEW B

Mine Extraction Business Plan: Mine Extraction Business Plan:

Strategy Plan: Constrained but Strategy Plan: Constrained but
output

output

= unconstrained optimised = unconstrained optimised

Contingency Plan: Contingency Plan:

Fallback position Fallback position

time time

Figure 11.5.3 Schematic presentation of alternate production profiles aggregated from

each scenario
 132

The ability of such a representation to convey to decision makers the impact that future
world views may have on the growth of the organisation is powerful.

The ability to realise future value is dependent on developing an understanding of

possible future world views in which the business could operate. This is the critical
function of scenario planning within the strategic mine planning domain – the
development of alternate production portfolios, from the same mineral resource, that are
consistent with plausible future scenarios in which the business may find itself.

These world views are developed using a scenario planning methodology, and are
interpreted into a set of long term planning parameters called the global assumptions.
These global assumptions are the basis for the formulation of alternate project portfolios,
and provide a mechanism through which executive action can initiate a series of actions
for risk mitigation and contingency planning, whilst retaining flexibility to maximise value.

11.5.5 Determination of long term economic and planning parameters – the global
assumptions
The global assumptions are a set of long term economic and planning parameters that
are applied uniformly across the organisation for planning and valuation purposes. No
other use of planning or modelling parameters is permitted except that of the global
assumptions.

It is important to note that the definition of the global assumptions is greater than simply
metal prices and exchange rates, as consideration is given to:

• Inflation (USA and SA);

• Cost escalators (capex, on-mine and off-mine operating costs);
• Exchange rates;
• Tax regime;
• Metal prices;
• Commissions and discounts;
• Metal pipeline;
• Off-mine costs (smelting, refining, metal transport, other);
• Smelting and refining recoveries; and
• Working capital factors.

The long term economic and planning parameters (global assumptions) are assembled
and issued, four times a year, characterised as follows:
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• First quarter – Update of money terms for previous year Q4 data;

• Second quarter – Full analysis and metal pricing forum input. This dataset is core
to the long term planning process, strategy development and ultimately the
mineral resource to reserve conversion process;
• Third quarter – Incorporation of budget parameters for the first three years –
forward price analysis (years one to three), adjust year four to long term
commencement in year six; and
• Fourth quarter –Update of forward prices, long term price.

Note: The economic and planning parameters are kept constant (in real terms for
financial parameters) beyond five years of forecast.

The logic applied in the estimation of long-term PGM prices, based on a world view as
developed in Section 11.4, is indicated in the schematic in Figure 11.5.4.

• A view is taken of the forecast economic environment, and its associated

economic parameters (cost escalation, consumer price index - CPI, exchange
rates, etc.) This is the world view developed from scenario planning.
• A demand forecast is made based on market research and expectations.
Production of current operating mines is forecast, and a supply deficit (or surplus)
is estimated.
• Assuming a supply gap exists, a portfolio of new projects is formulated to fill the
supply gap and achieve a compound annual growth rate in production to meet
the anticipated market status in the world view. An incentive price is determined
that would be required to bring the portfolio of projects into production. Similarly a
floor price (marginal producer price) is determined.
 134

Establish scenario
descriptors, including:
Calculate Identify current Will supply
• GDP growth exceed demand
demand global supply
forecast (Moz) in 2020?
• Demand growth (%)
for scenario Own
• Cost escalation
competitors
YES NO
• CPI forecast New entrants
• R/US$ forecast

Determine “floor” Identify

Generate 2020 Determine Reduce own probable own
long term price from industry cash share of
cost curve at off -mine costs contribution to
cost curve & pipelines for surplus supply fill supply gap
forecast demand
(price = cost of portfolio
marginal producer)

Determine “ceiling” Generate 2020 Generate own Determine own

long term price industry cash incentive price off -mine costs
from incentive cost curve curve & determine & pipelines
price curve at long term
forecast demand incentive price

Figure 11.5.4 Long term metal price estimation based on forecast supply and demand

The key drivers in price determination are considered to be:

• Global supply/demand balance;

• Operating cost;
• Operating and capital cost escalators;
• Metal pipelines and recoveries;
• R/US$ exchange rates;
• Project capital and production schedules; and
• Infrastructure capital requirements.

The business production portfolio should be determined by a view, based on an accepted

scenario, of a likely supply surplus or deficit over a time span of at least ten years. Given
the information on current supply, including that of competitors, as well as probable
competitor projects in their respective pipelines, a target portfolio is determined that
would best enable a supply-demand balance in the long term, as represented
schematically in Figure 11.5.5. It is important to note that Figure 11.5.5 represents a view
taken in early 2007 prior to the global financial crisis of 2008.
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Forecast : 2007- 2016 Platinum Supply-Demand

13,000 300
250
12,000

SD Balance oz (000s)
200
11,000 150
Pt Oz (000s)

10,000 100
50
9,000 0
8,000 -50
-100
7,000
-150
6,000 -200
2007H 2008 2009 2010 2011 2012 2013 2014 2015 2016
Year
SD Balance Medium Term SD Balance Long Term
Estimate of Demand Estimate of Supply

Figure 11.5.5 Target scenario – supply / demand and growth estimates

Operating cost escalation rates are derived for on-mine operating costs and off-mine
operating costs (process division costs). Operating cost escalation rates are derived by
applying the projected budget cost increases for labour, utilities, stores and other costs to
the actual breakdown (historic and forecast) of operating costs into these cost elements.

Capital escalation factors are externally sourced from appropriate industry entities and
aligned with anticipated spend by major project component category.

Process recoveries, pipelines and unit operating costs are generated by the Process
Division (smelters, base metal refinery and precious metal refinery) on the basis of
throughput and process technology modifications reflected in the approved planning
scenario. Unit costs are expressed as R/t smelted, R/t refined base metals (Ni & Cu only)
and R/oz refined PGM 4E.

Off mine costs are a category of costs that include the following:
• Smelting costs;
• Base metals refining costs;
• Precious metals refining costs;
• Base metals transport costs;
• Precious metals transport costs; and
• Other costs (R&D, etc.).

Smelting unit costs are derived from fixed and variable budget operating costs for both
smelting and converting activities supplied by the Process Division Finance Department.
 136

The percentage fixed costs for smelting and converting are allocated per major cost
centre (e.g. labour, stores, utilities, contractors, sundry, total indirect). The percentage
fixed costs for smelting and converting are applied to three year budget operating costs
and forecast throughput (as per the approved SLTP scenario) in terms of concentrate
smelted and converter matte produced for the various smelting and converting unit
operations, including the total indirect costs, to calculate the variable and fixed costs to be
applied in the planning parameters estimation process. Fixed/variable cost ratios are
reviewed and updated annually. Once variable costs have been derived, the final variable
cost is calculated net of the smelting by-product (sulphuric acid). Finally smelting fixed
and variable costs are applied to the forecast concentrate tonnage to calculate overall
smelting average unit costs (R/ton smelted).

The estimation of base metal refining unit costs should be based on existing installed
capacity, forecast expansions and any tolling requirement. Hence base metal refining unit
costs are derived from a combination of both base metal refinery operating costs, based
on fixed and variable budget operating costs, and toll refining costs based on indicative
terms received from tolling companies. This approach must be reviewed annually based
on anticipated nickel processing capacity. Fixed/variable cost ratios are reviewed and
updated annually. Once variable costs have been derived, a final variable cost is
calculated net of base metal refining by-product credit. Finally base metal refining fixed,
variable and toll refining costs are applied to the forecast concentrate tonnage to
calculate overall base metal refining average unit costs.

As with smelting, precious metal refining (PMR) unit costs are derived from fixed and
variable budget operating costs for PMR supplied by the Process Division. The
percentage fixed costs are applied to three year budget operating costs and forecast
throughput in terms of concentrate smelted and converter matte produced for the PMR
unit operation, to calculate variable and fixed costs to be applied in the SLTP global
assumption estimation process. Treatment charges and refining costs associated with
other PGM residues produced within Process Division, along with refining charges
associated with gold produced at the PMR are included in the overall PMR costs. Overall
PMR costs, fixed and variable are applied to the forecast concentrate tonnage to
calculate overall PMR average unit costs.

Precious metal transport costs are analysed from the latest available budget and
expressed as R/oz PGM 4E. Base metal transport costs are based on the latest projected
Ni, Cu and Co production for the latest SLTP. In addition the base metal transport costs
are analysed from the latest available budget and expressed as R/t base metal (Ni and
Cu). Other off-mine costs are analysed from the latest available budget to include all
 137

other operating costs not captured elsewhere (most importantly jewellery, exploration,
marketing and precious metal treatment costs).

Metal pipelines and recoveries information is sourced from the Process Division, and is
based on actual data and latest estimates.

R/US$ exchange rate (and other exchange rates as and when required), USCPI and
SACPI projections are sourced from external expert entities. At the time of the final
budget plan preparation, the economic parameters used in the budget are incorporated
into the first three years of the long term planning parameters. This aligns the planning
parameters with the final budget parameters. Step changes in R/$ exchange rates are
avoided with 'smoothing' being permitted post the three year budget period to effect a
smooth transition to the forecast long term real exchange rate.

Project costs and production schedules are determined for each project as outlined in
project valuation procedures. Capital costs for infrastructure are identified and allocated
to individual projects.

11.5.6 Metal price – forecasting

In order to build shared understanding of the logic and drivers of metal prices included in
the long term planning parameters (global assumptions) a grouping of senior executives
(termed the metal pricing forum) chaired by the CEO, meets two or three times per year
to agree on metal prices and exchange rates, associated with each scenario, to be
applied in the strategic planning process.

The scope of metal prices and the price path considered comprises short term, mid-term
and long term prices. Short-term refers to the immediate three years, viz. the current year
plus two years forward, regarded largely as the budget period. The period between four
and six years is referred to as the mid-term, while the long term period is regarded as the
time beyond six years.

As platinum mining does present with more than just the platinum metal, metals pricing
includes the following:
• Platinum group metals (PGMs) – platinum, palladium, rhodium, iridium,
ruthenium;
• Gold; and
• Base metals – nickel, copper, cobalt.
 138

Iridium and ruthenium revenues are generally not included in investment analyses as
demand for these metals is volatile and unpredictable. As there is no stable significant
demand, they do not generate consistent revenues that can be reliably applied to the
business case for mining projects. Hence their prices are used only for sensitivity
analyses.

Gold is an important by-metal from platinum mines with forecast prices being based on
the outlook of external experts. As with gold; nickel and copper prices are adopted from
results presented by third parties, with a range of consensus exercises being conducted.
The long term cobalt price is subject to contractual off take. As and when these contracts
are re-negotiated, the prices are adjusted accordingly.

Metal pricing information and assumptions are presented to a metal pricing forum for
ratification prior to utilisation in global assumptions. Information presented to the metal
pricing forum for discussion comprises:

• A market perspective of long and short term metal price forecasts: These are
compiled from public domain information (normally banks and investment
analysts).
• An investment break-even price based on a supply portfolio that will sustain a
balanced market: This estimate would be based on historic pricing sensitivity and
provides a long term price estimate based on the growth / contraction of the
market world view.
• Short term (less than 24 months) budget pricing: This is a short term price which
relates to forward price curves.
• Commissioned third party views, e.g. Johnson Matthey, and SFA Oxford – short
and long term.

The process undertaken in the metal pricing forum comprises:

• A metal pricing forum is convened and a presentation is made of the analysis

based on forward prices and current budget prices for the immediate year and a
range of long term prices (beyond five years).
• Real short term (< 24 months) prices from within the data and analysis are
presented, debated and agreed upon.
• A real long term price from within the range presented in the analysis is debated
and agreed on. Normally this trends towards the midpoint of range and slightly
above the investment break-even price. The debate is guided so as to avoid
overly optimistic or pessimistic views within the range.
 139

• Having established the long term price and short term price points, (usually from
the forward price and a six year long term price), the discussion moves to
defining the trajectory between these two points. Minor adjustments are made to
the metal price (in US$ terms) to ensure a smooth transition in ZAR terms to
avoid anomalous ZAR revenue spikes (having conducted the core analysis in
US$ and applied defined foreign exchange rates). This process is repeated for
Pt, Pd, and Rh. Iridium and ruthenium prices are normally held flat at current
prices owing to the uncertainty of this limited demand, specialist metals market.
• Gold and base metal prices are based on averages of expert opinion.

The metal prices (at associated exchange rates) are approved for a given scenario prior
to inclusion in the global assumptions and adoption by the organisation.

11.5.7 Contribution to the Conceptual Framework

The global assumptions are a set of long term planning and economic parameters that
best encapsulate the external drivers of value associated with a scenario or world view to
be applied in business planning.

The aggregated parameters provide a descriptor of a current and future world view and
transition between the two. When investment decisions are made in the context of these
global assumptions, these decisions are positioned with the expectation that this future
world view will evolve.

The global assumptions provide the link between the agreed world views or scenarios
and the associated economic parameters for valuation purposes.

The global assumptions create discipline and uniformity of assumptions, as they are the
only economic planning parameters permitted to be applied across the organisation for
planning and valuation purposes. This facilitates comparison and ranking of options.

11.6 Value based management (VBM)

11.6.1 Introduction
“Central to the success of any mining company is the ability to effectively manage capital
investment so as to ensure acceptable stakeholder returns within an overall strategic
context. Typically a mining company investment portfolio would encompass options
ranging from geological exploration through to market development. A key challenge is
thus to ensure the alignment of investment with strategic intent whilst ensuring that the
day to day viability of operations is not compromised. Critical to this process is the
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effective selection and implementation of a strategically aligned project portfolio that

enables optimal resource exploitation whilst operating within mandated bounds and
identified constraints” (Smith et al, 2006a, p.35).

“Owing to the depleting nature of the mineral resource asset it is necessary to

continuously re-invest to sustain production, let alone expand. Capital investment is thus
the life blood of minerals companies. Within this context there are often many competing
investment imperatives that can divert funding from critical projects. Alignment of capital
investment with strategic intent can be readily achieved through structured planning
processes based on optimisation (value maximisation) of underlying exploitation units
and subsequent structured competition for financial resources” (Smith et al, 2006a, p.41).

Value based optimisation of the mineral asset portfolio provides the basis on which the
most attractive strategic options across the business are identified, prioritised, resourced
and implemented. Similarly value based optimisation provides the basis for optimal
allocation of capital for developing mineral assets and associated business opportunities
through the value chain.

Exemplars in managing for maximum value exhibit key characteristics of:

• Detailed understanding of sources and drivers of value;

• Focused value improvement and delivery agendas; and
• Differentiated business models and differential allocation of resources.

The core sources of sustainable long term value accretion are indicated in Figure 11.6.1,
specifically improving returns on existing assets and accelerating profitable growth.

The key questions that value based optimisation should answer, specifically in terms of
the mineral asset portfolio, are:

• What is profitable growth, now and in a possible future world view?

• Which of the options (or combination of options) should be prioritised to allow
sustainability and flexibility for value accretion?
 141

delivering on
the value goal

improving returns on existing

profitable growth
assets, i.e. asset optimisation

organic growth: expansion value enhancing mergers,

projects acquisitions, disposals

Figure 11.6.1 Value based optimisation – core sources of long term value

Within the inherent characteristics of demand/supply/price cycles in the minerals industry

and the long lead times required to bring mining projects to steady state outputs and
sustainable financial viability, it is important that flexibility be created to respond to
changing market and economic conditions.

11.6.2 Value based management – core concepts

VBM defines the business model and sets out management and strategic agendas using
three steps (Figure 11.6.2):

• Understanding of the sources and drivers of value in the markets;

• Evaluation of options for the largest value improvements; and
• Commitment to a clear implementation plan.
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MARKET BUSINESS MODEL IMPLEMENTATION

INTELLIGENCE ALTERNATIVES COMMITMENTS

market segments & financial

alternatives development & evaluation action plan & accountabilities
assessment

market economics & competitive identification of highest value

resource requirements
positioning assessment business model

business model issues / opportunities multi-period performance

evaluation of extended growth option
definition commitments

Figure 11.6.2 Three core steps to value based management

Market intelligence
The first step is the development of market intelligence that aims to build a deep
understanding of the sources and drivers of value in the markets. The fact base must
address two questions:

1) How attractive is the market today and in the future?

This market analysis covers the overall market value chain, products, key customers,
end-users, commercial side structures and market segments by investigating key sources
and drivers of profitability for each segment and player in the segment. Historical
performance and reporting, as well as anticipated future trends (Smith et al, 2008) per
market segment are reviewed and analysed, and understanding of key drivers is
developed.

The market segment and associated financial assessment therefore addresses key
questions around the profitability of specific outlets and customers in order to prioritise
customers and segments and drive marketing strategy. Within the market for platinum
specifically, contracts are usually long-term in nature and therefore using VBM to identify
and target specific segments or customers could provide competitive advantage in a
market where little or no differentiation in final product exists.

2) What are the sources and drivers of competition in the market?

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The second question requires that an economic profitability analysis be conducted and
understanding of mineral economics and market economics be used to identify drivers of
competitive advantage. Sources of competitive advantage are:

• Pricing position;
• Offering position; and
• Cost position.

Economic profitability (EP) is used to evaluate the different players in the market and
identify sources of advantage. Economic profit (EP) is a reflection of net operating profit
after tax (NOPAT) of the business (or project, or operation) less a charge for the capital
required to earn that return. NOPAT is an operating performance measurement after
taking account of taxation but before financing cost (i.e. interest is excluded). NOPAT
provides a more realistic measurement of the actual cash yield generated from recurring
business activities.

EP = NOPAT - capital charge

= operating profit x (1 - effective tax rate)
- (average capital employed x weighted average cost of capital)

Economic profit will increase if:

• New capital is invested in any project that earns more than the cost of capital;
• Capital is diverted or liquidated from business activities which do not cover the
cost of capital; or
• NOPAT increases without increasing the quantum of economic capital employed.

Economic profit explicitly recognises, by way of the capital charge:

• That capital is not free;

• That if growth is purchased with capital, the growth is not free; and
• Assigns a charge for the capital used to purchase the growth.

The summation of the present value of a stream of economic profit, where the discount
rate is the cost of capital, equals NPV.

EP thus provides the means for value optimisation in the short term whereas potential
overall investment value is predicted by NPV. This allows a link between short term value
 144

optimisation through real options whilst establishing long life production assets where the
initial investment decision is based on a discounted cash flow approach.

Thus if the NOPAT is greater than the capital charge, the entity is generating returns
above the cost of capital and so creating real sustainable value. However it does not
indicate if performance is good or bad relative to competitors or if new investment should
be allocated for growth. It also does not in any way suggest why value is created – this
requires an understanding of the strategic drivers of value.

Strategic Determinants
Market
Financial Determinants Economics

Revenue Market Profitability

x NOPAT Total
Market EP
Operating Margin
(after tax) Market Size
Total Value
- Business Creation
EP
Capital Employed Offering Position
Capital Equity
x
Charge Invested
Share of
Cost of Capital Operating Position
Market EP

Pricing Position

Competitive
Position

Figure 11.6.3 Strategic determinants of value – market and competitive position

Managing for maximum value is not simply a financial measurement exercise. As

indicated in Figure 11.6.3, the strategic decisions and the financial results are directly
related and are impacted by the decisions made about which markets to serve and how
to serve them. It is important to note that there are only two strategic determinants of
value:

• Market economics determine the total size of the profit pool; and
• Competitive position determines the share of the profit pool that is captured.
 145

Mining businesses usually have a good understanding of the financial determinants of

value, however understanding of the strategic determinants of value and how they may
develop in the future is crucial to value maximisation and strategic long term planning.

Key elements of the analysis are indicated in Figure 11.6.4. Both pricing and offering
have been consistent between industry players during the past few years of rapid growth.
Cost position for all players is becoming more important, even though metal prices are
presently outpacing costs. The economic profitability measure allows differences in
earnings from differences in metal baskets, differences in capital expenditure and cost
differentials to be crystallised and understood in depth.

Importantly having more volume in the market than other players is a comparative
advantage, indicating access to mineral resources, and not a dynamic competitive
advantage, that usually arises from knowledge application.

1 2 3 4 5 6 7 8

Strategic
Market Market Competitor Strategic New
Financial Competitive Issues &
Segment- Attractive- Business Position & Markets
Assessment Position Opportu-
ation ness Models Valuation Assessment
nities

• Define EP by: Current & Current & • Participation • DCF Value of • Most • Participation
business • Product- Future: Future: Strategy Business Attractive issues
boundaries market • Economic • Market Size Segments
Cost Position • Competitive • Performance • Competitive
• Define • Facility • Market Strategy Gap to • Entry issues
customer • Pricing Profitability Double Value Options
& product • Channel Position
segments
• Customer • Offering
Position
• Geography
• Core
Competencies

• Strategic
Assets

Figure 11.6.4 Key elements of market intelligence analysis

The final activity in the market intelligence collation utilises information on market
segmentation and competitive positioning to identify potential opportunities and issues for
the organisation. This is where full agreement on the facts that drive decision making,
becomes useful. Establishing executive agreement on the market analysis and
competitive positioning allows rapid consensus on strategic issues and opportunities.
Having an agreed market intelligence view to drive strategic decision making has intrinsic
value in that it aligns everyone’s view by contextualising the industry and the role of the
business within the greater system.
 146

Business model alternatives

The second phase in the VBM process involves identification of business alternatives,
both at the strategic level and the operational level, evaluation of the alternatives and
decision making on the maximum value alternative for the organisation. Maximum value
is defined as the model that will maximise business value on an economic profit basis.
Finally, extended growth options are defined based on the preceding analysis.

This is a challenging part of the VBM process as it requires application of business

acumen and wisdom to the accumulated market intelligence, to develop business
alternatives. No simple formula can assist in identifying business alternatives. However,
economic profitability measures are used to evaluate, rank and prioritise the business
model alternatives that are developed.

Identification and evaluation of alternatives is important because:

• The process leads the executive towards making real choices and trade-offs for
what they will and will not do;
• It encourages consideration of more radical changes as well as improvements to
existing business strategy (both ‘in the box’ and ‘outside the box’ thinking);
• It helps to clarify where and why company profitability differs from company to
company; and
• It challenges ‘conventional wisdom’ and ‘organisational inertia’ which could
otherwise maintain the status quo or retain existing business models.

Combining metal demand forecasts, segment profitability and competitive positioning

across a diverse range of mineral assets and potential projects creates many possible
business alternatives. Using scenario planning or world view tools, the business
alternatives can meaningfully be grouped and analysed for robustness under changing
circumstances (Smith et al, 2008).

As indicated in Figure 11.6.5 a business’s strategic position and value creation potential
is driven by the business model choices that it makes, viz. where does it compete, how
does it compete and how is it organised to achieve these objectives?
 147

Which products?
• The choice of how to define segments and
Which customers? product categories that represent the potential
Participation Where we market segments for the business, and
Strategy compete
• The choice of which segments to target, and not
Which channels?
target

Which geographies?
Integrated
Business
Model • The choice of where and how, if at all, to
What offering strategy? distinguish our offering from the competition

Competitive How we • The choice of the cost and asset configuration

What operating strategy? necessary to deliver the chosen offer strategy
Strategy compete

What pricing • The choice of the price position to take relative to

strategy? competitors to exploit differences in offer position

How we What org model?

• The choice on how to organise and reward to
Organisation create and
execute
optimise the delivery of the chosen business
Model
strategy What incentives? strategy

Figure 11.6.5 Business model – strategic positioning

Within this context, maximising value is a higher standard than creating value and
requires the constant search for higher value options which links into the need for cyclical
strategic long term planning procedures that incorporate real option analysis of the ‘way
forward’.

Implementation commitments
VBM provides the basis for decision making that can lead to enhanced value creation
however this is dependent on effective commitment and implementation plans. Common
wisdom holds that companies that make explicit commitments to value improvement
targets are as likely to be more effective in implementation.

Implementing VBM requires the training of senior management in the system philosophy,
principles and logic of critical metrics. Managers are expected to commit to the VBM
philosophy at all levels of the organisation. Simply adopting economic profit, as embodied
in the VBM framework as a value measure, will not result in value creation. Plans need to
be executed and individuals held to account for success and failure.

11.6.3 Contribution to the Conceptual Framework

The logic inherent in value based management (VBM) is not new to business or the
mining industry and has been practised in a variety of forms for several years.
 148

Essentially value based management:

• Provides a set of metrics and a logic framework for value and prioritisation
discussions;
• Ensures alignment of objectives, establishes a common language, standards,
and processes to align decisions and actions;
• Provides a common approach to setting goals, identifying issues and
opportunities, making decisions, allocating resources and taking action; and
• Creates a common set of tools and approaches to understand sources and
drivers of value, prioritise issues and evaluate options.

What is different however is the adoption of the logic and its application to the strategic
long term planning framework. The key question that VBM answers in this process is:
What is profitable growth, now and in a possible future world view and which of the
options should be prioritised?

11.7 Long term planning processes and techniques

This section describes the tools and processes that are applied in the development of a
business plan within the strategic long term planning framework. Consideration is given to
aspects of long term planning procedures specifically the planning cycle, mine extraction
strategies, mining right plans, and the long term plan.

11.7.1 The business plan process

Cyclical development and re-evaluation of planning outputs is necessary to assess
impacts of external factors, specifically the impact of changes to the long term planning
parameters on the long term plan, at an operation and group or portfolio level.

Owing to the annual nature of financial reporting, an annual business planning (BP) cycle
has been developed, with the following objectives:

• To enable integration between Corporate and Operations, both mines and

process operations, and between MRM / Finance / Business Development /
Projects;
• To improve the quality of product in long and short term planning by better
balance of effort between the two;
• To create a planning process that is routine but sufficiently adaptable, and which
allows for planning flexibility;
 149

• To facilitate communication between stakeholders (Corporate, Operations,

Services, Projects);
• To define the process, its components and inter-dependencies;
• To produce a defined product which is aligned to expectations; and
• To define clear accountability, roles and responsibilities.

The approach is structured around five broad principles.

Philosophy (the underlying rationale)
Key elements are:
• Business planning is done to produce a plan which optimally exploits the
company’s mineral resources. The plan must have integrity, mirror the company’s
intent, and be used at the highest level of strategic decision making; and
• Time spent by the executive on business planning should be minimised but the
quality of input must be maximised.

Programme (when the work gets done)

Core principles are:
• The work programme should be simple, repetitive, integrated and take
cognisance of other events in the company’s calendar;
• Be primarily driven by five engagements with the executive (see Table 11.7.1);
and
• Match budget requirements and timelines (internal and shareholders).

Process (what gets done)

Requirements are:
• The technical work to be done within each discipline must be mapped out with
interdependencies defined and understood; and
• Performed in accordance with the standards laid down by the discipline heads
(the technical scope of work documents).

Product (the output)

Included are:
• Deliverables clearly defined:
– A budget (typically two to three year period);
– The business plan itself;
– A valuation of the company’s mineral assets (inclusive of projects); and
– The published mineral reserve and resource.
• Inputs clearly defined:
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– Preliminary life of mine (LoM) production profile;

– The planning brief and top down goals; and
– Technical scope of work documents.
• Output per operation:
– Technical support documents;
– Budget book – three year period by month;
– Business plan book – budget period plus life of mine (annually); and
– The physical LoM plan.
• Divisional business plan, budget summaries and presentation; and
• The company’s business plan document and presentation.

People (who does what)

Requirements are:
• Requisite skills and competence must be entrenched; and
• Clear roles, responsibilities and accountabilities must be defined and accepted.

Overall the approach is intended to establish a systematic sequence around:

• Planning the work;
• Executing the work;
• Technically reviewing the work (single discipline reviews – SDR);
• Reviewing the product (multi discipline reviews – MDR); and
• Presenting the outcomes to the executive for approval before execution.

Through this approach the participants in the process should then know:

• Why this particular approach is used;

• How the work gets done and how all the parts fit together;
• When the work gets done (including reviews and presentations);
• Who does the work and who reviews the outcomes; and
• What the format of the work is; as a product and for presentation.

The overall structure of the annual business planning programme is predicated on five
engagements, aligned in four quarters, with the executive to ensure alignment and
effective engagement / information dissemination.

First quarter (Q1) – An executive directive is issued on strategic intent and constraints,
following an annual strategic planning workshop in February. This is followed by feedback
 151

of the mine extraction strategy options at the end of March in the ‘Theme and Emphasis’
workshop.

Second quarter (Q2) – Presentation of ‘Tons and Ounces’ to executive at the end of
June. This is a presentation of a production profile, with indicative capital requirements,
that meets the strategic intent provided in February and agreed to in March.

Third quarter (Q3) – Budget preparation and approval for a three year window. Detailed
production, operating and capital cost estimates.

Fourth quarter (Q4) – Finalisation and presentation of the business plan encompassing
the budget and long term plan.

The overall approach is indicated in Table 11.7.1 with the link between the
interdependent, tactical and strategic, planning elements created through consideration of
planning requirements over different time horizons.
 PERIOD QTR 1 QTR 2 QTR 3 QTR 4

PHASE 1 PHASE 2 PHASE 3 PHASE 4

BUSINESS PLANNING PHASE
BUSINESS PLAN PREPARATION 3 YR PRODUCTION PLAN 3 YR BUDGET &
SCENARIO PLANNING LOM PRODUCTION PLAN BUSINESS PLAN FINANCIALS
RESOURCES & RESERVES

Resource & Reserve – Model Distribution Top Dow n Goals – Tonnes & Ounces 3 Year Budget – Financials LOM – Financials
Planning Brief Labour Opex
EXECUTIVE STRATEGY SESSION 36 month Production Schedule Opex Capex
Scenarios and Options and Plan Capex - Projects Projects
Project Ranking and BP Status Equipping Schedule Capex - SIB BP Executive Summary
Business Plan Architecture IMA (immediately available Reserves) Project Financials & Valuations
Executive Guidance IMS (immediately stopeable Reserves)
Business Development Input & GA's Finalise MINE Bus. Plan Documents
PRELIM LOM PROFILES (t & oz)
Technical Scope of Work Documents Finalise COMPANY Bus. Plan Document
MAIN ACTIVITIES & LOM Scheduling -
PRODUCTS Plan Inputs -
L1, L2, L3
Geology – structure, facies, grade model Resources & Reserves into Database
Mine Design – macro, micro LOM PLAN

Rock Engineering – design elements Reserve Compilation Finalise next year Planning Programme
Ventilation – design elements
Process – capacities & constraints PROJECT Steering Committee Review s
Pre-Feas & Feasibility Studies
152

Investor & Competitor Analysis

SDR = discipline head SDR's SDR's SDR's

Table 11.7.1 Business planning calendar – summary

(before the planning starts) (of the 3 year plan) (of the 3 year plan financials) (of the long term plan)
Geology, Planning, Mine Design, Rock 3 Year Scheduling Finance, H/R, Labour, Opex, Capex Labour, Opex, Capex
Engineering, Ventilation, infrastructure, Equipping LOM Scheduling Executive Summary
Capacities & Constraints Resources & Reserves

DISCIPLINE REVIEWS
MDR = mining management committee MDR's MDR's MDR's
Scenarios, Options, Business Planning 3 Year Plan Budgets: BFEs and Graphs Business Plan
Architecture, Planning Brief, BMEs & Graphs LOM Incl Projects : Profiles, BMEs, Graphs Project Valuation
Preliminary LOM Profiles Check & Re-issue LOM Brief Project : Budget Capex Executive Summary
Resources & Reserves

Execeutive debrief to MRM - (post strategy) Exec Heads Review Exec Heads Review Exec Heads Review
Executive Heads Review 3 Year Production Plan 3 Year Budgets Incl Projects Business Plan & Reserves
Options, Preliminary LOM Profiles, & Brief Check & Re-issue LOM Brief
EXECUTIVE REVIEWS
& PRESENTATIONS TONNES & OUNCES DAY
THEME & EMPHASIS DAY BUSINESS PLAN DAY
3 Year Production Plans BUDGET DAY
TDG's and sign off on 'Desired Plan'
and Check LOM Profile
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Within this context it is necessary that each operation develops and articulates a mine
extraction strategy (MES), from which a mining right plan (MRP) can be developed and
the budget and long term plan (LTP) extracted, to form the overall business plan (BP).
Each step in the process is a path along a decision tree with choices being identified,
rationalised, motivated and implemented.

The long term plan then informs all other disciplines within the business as to supporting
requirements to create the business plan. For example the LTP will inform the
concentrator and processing strategies to ensure alignment with overall group strategic
objectives. Similarly in the human resource area it would provide the basis for staffing,
skills development and housing requirements.

The overall relationship between these elements is indicated in Figure 11.7.1

MINE
MINERAL ASSET
EXTRACTION
STRATEGY CHARACTERISTICS MINERAL ASSET
PORTFOLIO
DETERMINE:
Optimal scale, mining layouts
Production mix, Identify constraints

TOP DOWN GOALS COMPANY STRATEGIC INTENT

BUSINESS PLAN
3 year BUDGET plan LONG TERM PLAN
MINING RIGHT
PLAN PRODUCTION
PRODUCTION PLAN
PLAN

Option CONC. CONC.

PROCESS PROCESS
Analysis & PLAN PLAN
PLAN PLAN GROUP VALUE
Selection LTP 2006 Production Pr ofile - Tons Milled
Level 1, 2a, 2b, 2c, 3
LTP 2006 Produ ction Profile - Tons Mil led
Level 1, 2a, 2b, 2c, 3 OPTIMISATION
100,000 100, 000
AP Al l G rou p L3 A P A ll Gr oup L3
90,000 90, 000

80,000 AP Al l G rou p L2 c 80, 000 A P A ll Gr oup L2c

70,000 70, 000

AP Al l G rou p L2 b A P A ll Gr oup L2b
B O S C H F O N TE IN
Tons (000's)

N O T C U R R E N TL Y
60, 000
T o ns ( 000's)

L E VE L 1 V IA B L E B E LO W F A UL T
60,000
L E VE L 2
50,000 AP Al l G rou p L2 a 50, 000 A P A ll Gr oup L2a
T O W N L A N DS
L EV EL 3
T O W N L A N DS
L E VE L 40,000 40, 000
2 F R AN K
AP Al l G rou p L1 A P A ll Gr oup L1
LE VE L
1
P A AR DE K R AA L

L E VE L 1
L E VE L
3
F R AN K

FRA N K

L E VE L
L E VE L
3

L E VE L
3
T UR F F O N TE I N

LE VE L
3
L E VE L 3

B L E SK O P
30,000

20,000

10,000

0
RS WL TR L1

Bud get
30, 000

20, 000

10, 000

0
R S WLT R L1

B udget
Value optimisation
Scenario ranking
TU R F F O N T E I N
1
LE VE L 2
06

08

10

12

14

16

18

20

22

24

26

28

30

32

34

36

38

40

W A TE R VA L
06

08

10

12

14

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18

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24

26

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32

34

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40

L E VE L 2
20

20

20

20

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POOL
BL B R AK S PR UI T
W AT E R V AL A ND
S HA R E LE VE L 1 L EV EL 1
LE VE L 1

P O O L AN D
S HA R E

Contingency plan
Marketing HR Engineering Portfolio structure

This is a: CED Finance Projects

physical depletion plan Optimised MRP option
It covers the entire right area Lvl 1,1e, 2a, 2b, 2c, 3 plans
Multiple options are identified, Defines project pipeline
ranked and prioritised Lvl 1,1e, possibly 2a components
Detailed labour plan 2 x 30 year periods
Constraints are applied LTP finacials
Preferred option selected for BP Defined project capex, SIB capital, opex
BASIS OF GROUP PLANNING

Figure 11.7.1 MES to MRP to LTP linkages in the business plan

The mine extraction strategy (MES) is informed by the characteristics of the mineral asset
itself, whilst company strategic intent informs the top down goals. Both the MES and the
 154

top down goals, inform development of the mining right plan (MRP). The MRP in turn
impacts the composition of the budget and long term plan, which comprise the business
plan (at an operation level and in a group consolidated form) which in turn influences
optimisation of the mineral asset portfolio.

The business plan covers the life of the operation or the first 60 years (two periods of 30
years to align with the MPRDA) whichever comes first. It comprises a combination of
investment centres at different levels of confidence of estimate, viz. level 1, 1e, 2a, 2b, 2c
and 3 (see Section 11.7.4). The business plan forms the basis of the production and cost
(opex and capex) forecasting for the group and is used for capital prioritisation and value
optimisation.

11.7.2 Mine extraction strategy

The mineral resource held under a mining right is the fundamental asset from which value
is derived by a mining company. In order to optimise economic return (viz. to maximise
net present value), clarity is required on:

• How the entire mineral resource associated with the mining right area is to be
exploited (this is a legal requirement);
• Over what time period; and
• At what cost (capital and operating).

The mine extraction strategy sets the context in which all other strategic long term
planning is done. Key issues that must be addressed are:

• Optimal scale of operations;

• The associated tonnage source split, e.g. Merensky / UG2;
• Technology selection and associated mining layouts;
• Identification of critical constraints, e.g. water supply, tailings disposal;
• The influence of existing asset base, e.g. timing to optimal rate and split; and
• Identification of consequences for process capacity / or other critical interfaces,
e.g. human resources and infrastructure.

It is important to note that the mine extraction strategy is not the plan but a clear,
motivated statement of the basic rules that will guide development of the mining right plan
and the subsequent long term plan upon which investment decisions will be made.
 155

The mine extraction strategy thus informs the nature of the mining right plan specifically:
optimal scale, associated MER / UG2 ratio, basic infrastructure options and critical
constraints. The MES is an unconstrained view of the ultimate potential of the mineral
asset.

Studies conducted in developing the mine extraction strategy will be a combination of

existing operations plans at level 1 (i.e. the base scenario from which the operation would
evolve), existing project evaluations at study levels of 2a (feasibility), 2b (pre-feasibility)
and 2c (conceptual), with the remainder of the mining right area being considered at
level 3 (scoping study).

Mine scale optimisation profile

Critically, the optimal rate of extraction of a mining right area must be defined, as a key
strategic planning input, before these issues can be rationalised. Essentially this is a
physical, geometric issue defined by the mineral resource characteristics and the
technology selected for extraction. This is, however, not a trivial process owing to
interdependencies, the effect of existing infrastructure and the need to concurrently
sustain output according to an approved budget in a safe, cost effective and competitive
manner.

This optimal rate of extraction is identified from a mine scale optimisation profile (NPV
versus production level) developed by considering, from the existing infrastructure base,
the following:

• An unconstrained Merensky profile – viz. if a decision was taken to mine only

Merensky what would be the mine production, capex, opex profile;
• An unconstrained UG2 profile – viz. if a decision was taken to mine only UG2
chromitite what would be the mine production, capex, opex profile; and
• A mixed MER / UG2 unconstrained profile, where MER and UG2 are mixed to get
volume synergies or to phase in marginal projects on the basis of stronger initial
projects or infrastructure establishment.

Note: In this context, unconstrained means that no capital constraint is applied.

It is important that extraction be considered in logical building blocks based on

standardised outputs, efficiencies and costs (capex, opex) as defined by mining
engineering requirements. Any logical dependencies, e.g. sequencing of extraction, must
be honoured and the plans must be feasible. Ranking of the logical building blocks should
be based on mining unit value (contribution before consideration of concentrating and
 156

indirect costs) to ascertain the core value potential of a logical building block before
addition of concentrator capex.

The three profiles (Merensky, UG2 and mixed) are assessed at three revenue scenarios
based on world views, typically: approved, optimistic and conservative long term
macroeconomic and planning parameters (known generally as global assumptions) to
identify the range of the scale of operations. This approach, which provides scale, mix
and value combinations is represented schematically in Figure 11.7.2.

This optimal production range is core to the mine extraction strategy and should drive the
resultant mining production profile depicted in the long term plan and the consequent
concentrator and downstream processing strategy.

Combined UG-2
& MER
NPV

only MER

only UG-2

870ktpm 910ktpm

PRODUCTION
RANGE FOR OPTIMAL
RATE
SCALE OF OPERATIONS
“Planning” GA’s

e.g. 400 UG2 / 470 MER e.g. 700 UG2 / 400 MER

World View 1
“Optimistic” GA’S

World View 2
NPV

“Planning” GA’S

World View 3
“Pessimistic” GA’S

870ktpm 1100ktpm
PRODUCTION RATE
RANGE FOR OPTIMAL
SCALE OF OPERATIONS
Three world views

Figure 11.7.2 Mine scale optimisation profile – schematic

 157

Production mix: UG2 to Merensky ratio

In order to maximise value generation from the mineral resource over the initial 30 year
and subsequent 30 year renewal periods granted in terms of the MPRDA, co-extraction of
multiple reef horizons may be necessary (e.g. Merensky and UG2). Co-extraction must
be driven by two factors:

• Extraction of the higher value (NPV) horizon first; and

• Concurrent completion of extraction of both horizons on or before the expiry of
the two 30 year periods if possible.

These factors imply an approach based on:

• Maximising the higher value horizon, for any given infrastructure, whilst co-
extracting (on an incremental basis) the second horizon so as to ensure volume /
scale benefits; and
• Adjusting extraction rates to achieve concurrent termination dates to avoid
sterilisation of mineral resources at the end of the life of the operation.

The starting point for this process is the existing infrastructure base, which because of the
history of initial Merensky mining, may dictate a short term bias towards UG2 projects,
until such time as the optimal mine scale profile and value mix is achieved. The MRP /
LTP should indicate the planned trajectory, in terms of the mine extraction strategy, to
achieve the optimal scale of operations and production mix characteristic of the mining
right area.

The influence of metals prices and foreign exchange rates on the strategy
The tenor of macroeconomic and planning parameters or global assumptions applied to
the valuation of options will impact decisions on overall viability, and critically, selection of
the primary extraction horizon.

The global assumptions applied in the LTP process are smoothed and stabilised in an
attempt to avoid overly pessimistic or optimistic long term views. This approach should
ensure that valid long term investment decisions are not delayed or curtailed because of
short term market aberrations.

Additional metal pricing scenarios are developed that cover an upside (optimistic) and
downside (conservative) perspective linked to world views or scenarios and are readily
applied in the customised software used for financial modelling (Hyperion Strategic
Finance - HSF).
 158

It is still however critical to understand the sensitivity of any production mix strategy to
changes in metal prices / foreign exchange rates. This is determined by conducting a
transition analysis for a range of platinum and palladium prices.

Figure 11.7.3 represents a typical transition surface analysis in which the price
combinations of Pt and Pd can be identified at which Merensky extraction is superior to
UG2 (black positive numbers) and UG2 extraction is superior to Merensky (red negative
numbers). Marginal areas (green and brown cells) and non-viable price combinations i.e.
both Merensky and UG2 negative (red cells) are also identified.

Cash flow before tax based on total cost ($/m2): Merensky advantage over UG2
Pt
$/oz
1500 70 68 67 66 64 63 61 60 59 57 56 54 53 52 50 49 47 46 45
1450 67 66 64 63 61 60 59 57 56 54 53 52 50 49 47 46 45 43 42
1400 64 63 62 60 59 57 56 55 53 52 50 49 48 46 45 43 42 41 39
1350 62 60 59 57 56 55 53 52 50 49 48 46 45 43 42 41 39 38 36
1300 59 57 56 55 53 52 50 49 48 46 45 43 42 41 39 38 36 35 34
1250 56 55 53 52 51 49 48 46 45 43 42 41 39 38 36 35 34 32 31
1200 53 52 51 49 48 46 45 44 42 41 39 38 37 35 34 32 31 30 28
1150 51 49 48 46 45 44 42 41 39 38 37 35 34 32 31 30 28 27 25
1100 48 46 45 44 42 41 39 38 37 35 34 32 31 30 28 27 25 24 23
1050 45 44 42 41 40 38 37 35 34 33 31 30 28 27 26 24 23 21 20
1000 42 41 40 38 37 35 34 33 31 30 28 27 26 24 23 21 20 19 17
950 40 38 37 35 34 33 31 30 28 27 26 24 23 21 20 19 17 16 14
900 37 36 34 33 31 30 28 27 26 24 23 21 20 19 17 16 14 13 12
850 34 33 31 30 29 27 26 24 23 22 20 19 17 16 15 13 12 10 9
800 31 30 29 27 26 24 23 22 20 19 17 16 15 13 12 10 9 8 6
750 29 27 26 24 23 22 20 19 17 16 15 13 12 10 9 8 6 5 3
700 26 25 23 22 20 19 18 16 15 13 12 11 9 8 6 5 3 2 1
650 23 22 20 19 18 16 15 13 12 11 9 8 6 5 4 2 1 (1) (2)
600 20 19 18 16 15 13 12 11 9 8 6 5 4 2 1 (1) (2) (3) (5)
550 UG2 -ve 16 15 13 12 11 9 8 6 5 4 2 1 (1) (2) (3) (5) (6) (8)
500 Both -ve UG2 -ve UG2 -ve 11 9 8 7 5 4 2 1 (0) (2) (3) (5) (6) (7) (9) (10)
450 Both -ve Both -ve Both -ve UG2 -ve 7 5 4 2 1 (0) (2) (3) (5) (6) (7) (9) (10) (12) (13)
400 Both -ve Both -ve Both -ve Both -ve Both -ve Both -ve 1 (0) (2) (3) (5) (6) (7) (9) (10) (12) (13) (14) (16)
350 Both -ve Both -ve Both -ve Both -ve Both -ve Both -ve Both -ve Both -ve (5) (6) (7) (9) (10) (12) (13) (14) (16) (17) (19)
300 Both -ve Both -ve Both -ve Both -ve Both -ve Both -ve Both -ve Both -ve Both -ve M -ve M -ve (11) (13) (14) (16) (17) (18) (20) (21)
250 Both -ve Both -ve Both -ve Both -ve Both -ve Both -ve Both -ve Both -ve Both -ve Both -ve Both -ve M -ve M -ve (17) (18) (20) (21) (23) (24)
200 Both -ve Both -ve Both -ve Both -ve Both -ve Both -ve Both -ve Both -ve Both -ve Both -ve Both -ve Both -ve Both -ve M -ve M -ve (23) (24) (25) (27)
150 Both -ve Both -ve Both -ve Both -ve Both -ve Both -ve Both -ve Both -ve Both -ve Both -ve Both -ve Both -ve Both -ve Both -ve M -ve M-ve M -ve M -ve (30)
100 Both -ve Both -ve Both -ve Both -ve Both -ve Both -ve Both -ve Both -ve Both -ve Both -ve Both -ve Both -ve Both -ve Both -ve Both -ve Both -ve M -ve M -ve M -ve
100 150 200 250 300 350 400 450 500 550 600 650 700 750 800 850 900 950 1000
Pd $/oz

Figure 11.7.3 Merensky / UG2 transition surface analysis

The transition surface analysis estimates the cash flow before tax, associated with
revenue and cost structures attributable to a particular area (such as a mine or a shaft)
for the Merensky and UG2 horizons. Plotting of the long term Pt and Pd price forecasts
on the diagram then allows assessment of the potential risk associated with the selected
extraction mix strategy. If a long term price forecast plots close to or on the transition
surface between Merensky and UG2, it indicates the need to plan infrastructure and
production capacity that can readily shift from one horizon to the other (as the primary
extraction horizon) in the event of a sustained move in metal pricing.
 159

Essentially, if a shaft is designed and defined as a Merensky shaft with no access to or

flexibility for UG2 production and the long term price forecasts plot on or near the
MER/UG2 transition surface, then the design is fundamentally flawed.

11.7.3 Mining right plan (MRP)

This is a physical depletion plan that covers the area over which mining rights have been
granted in terms of the MPRDA. As such it is not time limited and has a life, which is a
result of the optimal scale of operations as identified in the mine extraction strategy.

The MRP is driven by the mine extraction strategy (scale of operations, layouts, existing
asset base, Merensky / UG2 split, constraints). It is not necessary that the MRP be
economically viable but rather that the full extent of the mining right area be planned in a
technically defensible manner at estimates that are current for capex, opex and the global
assumptions. Several options (normally extraction sequencing) should be developed in
order to identify an optimised plan (maximised NPV) plan.

The planning horizon of the MRP must cover the entire mining right area – viz. it is not
time constrained but area constrained. A comprehensively scheduled mining right plan
(MRP) will result in a view of the mineral resource potential and the mining and
concentrating capacity and cash flow required to achieve it.

The MRP forms the basis of annual reporting and updating of the mine works programme
as required by the Minerals and Petroleum Resources Development Act. The MRP is
reviewed and updated annually as part of the long term planning process.

Key elements to the basic methodology are:

• Freeze and review geology, structure and mineral resource models;

• Define a mining engineering design template (e.g. stope back length,
replacement rates);
• Apply mining templates to the mineral resource to logically segment the
properties into mining units;
• Determine mineral reserves and depletion schedules using Datamine, CADSmine
and APMOT;
• Determine mining capital cost and operating costs;
• Determine mining unit values (NPV of each mining unit exclusive of off-mine
costs);
 160

• Develop a depletion logic based on mining unit value ranking, e.g. highest value
units first to carry initial capex cost of infrastructure and concentrators followed by
lower value areas on an incremental basis;
• Determine the subsequent concentrator and infrastructure logic (including capex
and opex);
• Identify critical constraints (e.g. water supply, electric power distribution, road
access, etc.); and
• Conduct HSF valuations.

It is important to note that the logic applied in the MRP methodology is consistent with
what is required to determine optimal scale of operations and the associated extraction
mix. This is an iterative process. Similarly estimates will be a mix of confidence levels (1,
1e, 2a, 2b, 2c, 3) depending of the nature of the operation and/or project area.

Mining unit design logic

A consistent logical approach is required for the definition and use of mining units in the
development of the MRP and MES:

• Mining units need to compare on a like for like basis – viz. the design
assumptions should be consistent for blocks of ground with similar physical
characteristics;
• Standardisation of mining units is essential – viz. use of a mining engineering
design template;
• Realism is critical;
• Production build-up rates must be realistic and achievable;
• Head grades must be realisable;
• Mining efficiencies and concentrator recoveries should be attainable;
• Conservative operating costs (benchmarked) are important;
• Labour complements should be standardised for the applicable mine design;
• Realistic capital estimates must be made; and
• Design for value by:
o Application of tried and tested fit for purpose access and mining
methods;
o Delaying capital expenditure until absolutely necessary;
o Establishing potential value for each mining unit independently;
o Establishing the likely synergies for combinations of units; and
o Establishing the logical depletion order of units to minimise infrastructural
requirements.
 161

11.7.4 Long term plan (LTP)

The LTP is a plan (and associated economic analysis) indicating the optimised extraction
option selected from the MRP. Cash flow estimates from the LTP are used to forecast
estimates of value for a project, a mine and the group. The LTP is constructed from HSF
investment centre (IC) models representing logical mining units (by reef type) and project
area.

Planning – investment centre confidence levels

The structure and logic of the investment centre building blocks in both the mining right
plan and the long term plan (leading to the business plan) are schematically illustrated in
Figure 11.7.4.

6000

5000 Level 3
(scoping)
Level 2c
4000 (conceptual)
Tons per annum (000's)

Level 2b
(pre-feasibility)
3000
Level 2a
(feasibility studies)
2000

Level 1e
1000
(projects in execution)
Level 1
(current ops)
0

Figure 11.7.4 Schematic mining right plan showing investment centre estimate
confidence levels.

The MRP and LTP leading to the business plan comprise of a number of investment
centre models representing planning at varying levels of estimate confidence. Logically
as study work is completed, investment centres progress from the lowest levels of
confidence estimate through to execution.

Level 1 plans are effectively current operations (level 1) and approved projects in
implementation/execution phase (level 1e) that have necessary project capital
expenditure authorised and thus only require stay in business capital expenditure for the
balance of planned life. The categories of stay in business capital expenditure are
indicated in Figure 11.7.5.
 162

Level 2 plans are effectively proposed capital investments or projects and are divided into
three sub-categories (a, b & c), which are related to the confidence stage at which the
respective proposed capital investment or project was last reviewed. These sub-
categories are governed by a stage-gate review and approval process and comprise:

• Level 2a (Feasibility study@ +/- 10% estimate confidence);

• Level 2b (Pre-feasibility study @ +/- 15% estimate confidence); and
• Level 2c (Conceptual study @ +/- 25% estimate confidence).

Capital expenditure would be directly attributable to the proposed capital investment

category (see Figure 11.7.5) and would be classified either as being an expansion or
replacement project.

Level 3 plans effectively cover the remaining extent of potentially exploitable resource
within the area covered by the current mining authorisation. The level 3 plans are at best,
scoping studies and generally not subjected to a rigorous stage-gate review process);

Capital expenditure by definition would follow the classification methodology as applied to

the level 2 models, with a very low confidence being attached to the capital estimates not
better than +/- 30%).

Two sub- categories exist in level 3; 3a and 3b:

• Level 3a (Scoping study @ +/- 30% estimate confidence); and
• Level 3b (Scoping study @ > 30% estimate confidence based on pre resource
material, ‘blue sky’ opportunities).

Despite the best efforts to plan and find viable means of extraction, an investment centre
(project) may not form part of the business plan for two reasons: economics or
insufficiency of engineering work. This gives rise to two other categories:
• Not in business plan - NIB (eng) – these are uneconomic investment centres
which may have been subject to extensive study work through to pre-feasibility
level but are uneconomic for current long term planning parameters; and
• Not in business plan - NIB (nw) – these are investment centres which have not
had any study work done on them to date or where exploitation is planned well in
the future (>30years).

The nature and relationship of these investment centre, confidence estimate, categories
are further expanded in Table 11.7.2.
Level Sub Level Plan description Project Engineering Resource Scheduling In Reserve

1 Optimised base plan excluding Board approved projects in execution N/A Measured and Indicated CADS Mine Yes
1
Mostly Measured and
1e Fully optimised plan including current Board approved projects. N/A CADS Mine Yes
Indicated, some Inferred
Measured to Inferred.
As above including projects that have a completed pre-feasibility study and Completed pre-feasibility study
2a Inferred not greater than CADS Mine Yes
currently have a feasibility study in progress Feasibility study in progress
30%
Measured to Inferred.
2 As above including projects that have a completed conceptual study and Completed conceptual study by
2b Inferred not greater than CADS Mine
currently have a pre-feasibility study in progress Pre-feasibility study in progress exception
50%
163

Measured to Inferred.
As above including projects that have a completed scoping study and Completed scoping study
2c Inferred not greater than APMOT No
currently have a conceptual study in progress Conceptual study in progress
50%
Measured to Inferred
3a Project at a scoping level Scoping study APMOT No
Inferred up to 100%
3
Pre resource
3b Project at a scoping level Scoping study APMOT No
Blue sky tangible (BST)
Table 11.7.2 Long term plan – planning level estimate confidence

Scoping, conceptual, Dependent on

NIB (eng) Project has been engineered, but does not make it on economic grounds Measured to Inferred history of study No
pre-feasibility, feasibility
NIB
NIB (NW) No work has been done None Measured to BST None No
 164

11.7.5 Capital expenditure categories

Capital expenditure is broadly divided into two categories:

• Project capital (expansion or replacement); and

• Stay in business capital (with sub-categories).

The purposes of this classification is to provide a more meaningful distinction between

capital expenditure which is once off, and serves to expand or maintain total business
capacity through the exploitation of new sites or near-mine sites, that is project capital,
and capital which is expended in the maintenance of existing productive capacity (stay in
business capital).

Figure 11.7.5 below outlines the capital categories that are used for valuation modelling
of current operations and capital investment decisions.

Projects Stay in Business Capital Categories

Expansion Replacement Replacement of Business Risk Ore Reserve Shared

(Proj E) (Proj R) Equipment Improvement Development Infrastructure
Production Maintain (RE) (BI) (ORE) (SI)
Increases Production
Capacity Capacity
Legislation (RL)
Business (RB)
Safety (RS)

Expansion
Ongoing Capital
Capital

Figure 11.7.5 Capital categories – project and stay in business

Project capital - expansion (Project E)

Expansion capital is applied to increase the overall production capacity of a particular
operating unit. It also includes any concentrating, processing and refining facilities
required to treat the additional capacity.

Project capital - replacement (Project R)

Replacement capital is applied to maintain the overall production capacity of a particular
operating unit. A new project within a mining right area may be implemented to replace
existing production capacity elsewhere within the operating unit.
 165

Stay in business (SIB) capital

SIB capital is applicable for all capital equipment replacement, business improvement,
risk mitigation, ore reserve development and shared infrastructure initiatives after the
initial project execution. Generally this will include all capital installations beyond the initial
capital footprint. Stay in business capital comprises seven main types:

• SIB replacement (SIB RE) capital

This category is applicable to capital equipment replacement. SIB RE is based on
project throughput and / or equipment utilisation and covers the systematic
replacement of capital assets utilised in the production process.

• SIB business improvement (SIB BI) capital

SIB BI is the capital associated with an initiative which will enhance the business
(i.e. improve the return on investment) during the life of mine / plant. A SIB BI
project is motivated during the course of a reserve being mined or during the life
of a plant as the potential business improvement opportunity is identified.

• SIB risk (SIB RS, RL, RB) capital

SIB risk covers projects necessary to mitigate or address risks associated with:
o Safety (SIB RS);
o Legislative (SIB RL); and
o Business risk (SIB RB).
The above risks arise during the mining of a reserve or operation of a plant.

• SIB ore reserve development (SIB ORE) capital

SIB ore reserve development typically applies to situations where ground
conditions necessitate opening up of a further ore reserve buffer to balance those
lost (in order to maintain steady state production) which would include the costs
incurred through transition zones, i.e. through major pothole areas, etc. This
category should not be confused with situations where business takes a decision
to:
o Increase the capital footprint;
o Change the method of mining thereby necessitating capital for equipping
e.g. from trackless to conventional; or
o Include either Merensky or UG2 where the original footprint did not allow
for this.
Any of the above should be captured as a change of scope to the initial
expansion / replacement project.
 166

• SIB shared infrastructure (SIB SI) capital

This category includes all SIB projects which are not directly attributable to a
particular project / production unit. Projects in this category typically service
several projects / production units in an investment centre, shaft, mine or plant.
SIB SI may be considered as a portfolio of projects, the capital costs of which are
borne by the production units served by those projects. As such the SIB capital
for these projects is allocated on a tonnage basis attributable to the respective
investment centre, shaft, mine or plant. To improve resolution, projects in this
category should ideally be tied to the particular investment centre, failing that to
the shaft, and failing that to the mine or plant.

Stay in business capital categories (RE, BI, RS, RL, RB, ORE, SI) and project
replacement capital (Project R) can be categorised as ongoing capital for reporting
purposes if necessary. Project expansion (Project E) can be is categorised as expansion
capital for reporting purposes if necessary.

11.7.6 Mineral resource and reserve linkages

The long term planning process does, by virtue of the structured linkage between
planning, economic viability and business strategic alignment, facilitate definition of
mineral resources and reserves.

The relationship between mineral resources and reserves, as defined in the South African
code for the reporting of exploration results, mineral resources and mineral reserves
(SAMREC, 2009) is indicated in Figure 11.7.6.

“A mineral resource is defined as being a concentration or occurrence of material of

economic interest in or on the earth’s crust in such form, quality and quantity that there
are reasonable and realistic prospects for eventual economic extraction. The location,
quantity, grade, continuity and other geological characteristics of a mineral resource are
known, or estimated from specific geological evidence, sampling and knowledge
interpreted from an appropriately constrained and portrayed geological model. Mineral
resources are subdivided, and must be so reported, in order of increasing confidence in
respect of geoscientific evidence, into inferred, indicated or measured categories”
(SAMREC, 2009, p.12).

Whilst “mineral reserve is considered as the economically mineable material derived from
a measured or indicated mineral resource or both. It includes diluting and contaminating
materials and allows for losses that are expected to occur when the material is mined.
 167

Appropriate assessments to a minimum of a pre-feasibility study for a project and a life of

mine plan for an operation must have been completed, including consideration of, and
modification by, realistically assumed mining, metallurgical, economic, marketing, legal,
environmental, social and governmental factors (the modifying factors). Such modifying
factors must be disclosed” (SAMREC, 2009, p.17).

EXPLORATION
RESULTS

MINERAL MINERAL
RESOURCES RESERVES

Reported as in-situ
Reported as mineable
Increasing level of mineralisation
production estimates
geoscientific estimates
knowledge
and INFERRED
confidence

INDICATED PROBABLE

MEASURED PROVED

Consideration of mining, metallurgical, economic, marketing,

legal, environmental, social and governmental factors
(the ‘modifying’ factors)

Figure 11.7.6 Relationship between exploration results, mineral resources and mineral
reserves (after SAMREC, 2009).

Figure 11.7.6 sets out the SAMREC framework for classifying tonnage and grade
estimates so as to reflect different levels of geoscientific confidence and different degrees
of technical and economic evaluation.

Mineral resources can be estimated on the basis of geoscientific information with some
input from other relevant disciplines and are reported as in situ mineralisation estimates.

To establish mineral reserves, which are modified indicated and measured mineral
resources (shown within the dashed outline in Figure 11.7.6), requires consideration of
the modifying factors affecting extraction. Measured mineral resources may convert to
either proved mineral reserves or probable mineral reserves if there are uncertainties
associated with the modifying factors taken into account in the conversion from mineral
resources to mineral reserves. The broken arrow in Figure 11.7.6 demonstrates this
relationship. Although the trend of the broken arrow includes a vertical component, it
 168

does not, in this instance, imply a reduction in the level of geoscientific knowledge or
confidence.

The term modifying factors is defined to include mining, metallurgical, economic,

marketing, legal, environmental, social and governmental considerations that would
impinge on the decision to exploit the mineral resource.

The mining right plan, following definition of design and planning criteria during the mining
extraction strategy definition, identifies what is technically feasible for a mining right area.
This is a necessary requirement to maintain tenure of mineral rights.

The business plan, comprising a budget and long term plan, defines what is economically
feasible within business and market constraints. Thus inclusion into the business plan
automatically encompasses all elements of the modifying factors necessary for definition
of the mineral reserve.

Mineral resources contained in the level 1 (existing operations not requiring project
capital) and level 1e (approved capital projects in execution) scheduled areas, which form
the base plan of the operation, should move automatically to mineral reserves (if they are
at measured or indicated level of estimate confidence).

However, despite the SAMREC guidance that projects which are at a minimum of a pre-
feasibility study level and are included in the life of mine plan, can be included in mineral
reserves, a view must be taken on the likelihood of capital funding to extraction. Not all
pre-feasibility studies advance to feasibility study, however most feasibility studies will
advance to execution as they are aligned with company strategic intent and generally
would only have been allowed to progress to feasibility study level if there was intent to
fund the execution.

On this basis measured and indicated mineral resources which are scheduled for
extraction and are included in the business plan at level 2a (projects in feasibility study)
should be included in the mineral reserves of the operation.

The business plan thus readily defines mineral resources that would form part of the
mineral reserves through consideration of mineral resources at levels 1, 1e and 2a which
are scheduled for extraction. Mineral resources not converted to mineral reserves would
then form part of the exclusive resource.
 169

These concepts are represented schematically in Figure 11.7.7 whilst the relationship of
mineral resources to mineral reserves in the project study pipeline is represented in
Figure 11.7.8

Mineral Inventory
Comment
less than cut-off grade
or
minus Residual Inventory no reasonable prospects of eventual economic
extraction (e.g. geothermal gradient)

Inclusive
=
Mineral Resource
Techno-economic s
Investment Centres not in NIB (eng) = further study work required
minus or
Business Plan
NIB (NW) = not evaluated yet

Business Plan
=
(levels 1 to 3 inclusive)
opportunity to upgrade:
Inferred Mineral Resources From inferred to indicated ( req. additional data)
minus &
& levels 2b, 2c, 3
through study work (L3 to L2c to L2b)
Mineral Reserve
= (levels 1, 1e, 2a inclusive)

Note: Inclusive Mineral Resource less Mineral Reserve = Exclusive Mineral Resource

Figure 11.7.7 Schematic relationship of mineral resources and reserves in the business
plan context

Resource Reserve
Identification
Opportunity

Project
Scoping Conceptual Pre-Feasibility Feasibility Project Project
Ramp-up/
Study Study Study Study Implementation Close-out
Handover

Level 3 Level 2c Level 2b Level 2a Level 1e Level 1e Level 1

Figure 11.7.8 Resource to reserve – project pipeline perspective

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11.7.7 Mining right plan to business plan

The mining right plan (MRP) represents the broader opportunity that is available to the
holder of the mining right (the mineral asset). The business plan is that portion, inside the
MRP envelope, which is aligned with strategic intent and provides the greatest value. The
business plan is used to forecast stakeholder returns, develop proforma financial
statements and estimate net cash flows / funding requirements.

Several production and metal price / foreign exchange scenarios, aligned with the world
views or scenarios, can be developed for the business plan, with the approved scenario
providing the basis for the budget.

Budget
The budget is derived from the first three years of the business plan. The budget
encompasses investment centres at level 1 (existing operations not requiring further
project capital investment), level 1e (capital projects in execution) and level 2a (feasibility
studies) that are forecast to commence execution within the three year budget period.

The budget is developed (updated) annually, based on a 24 month rolling production plan
and cost estimate. The three years of the budget are estimated on a monthly basis. The
budget is the prime operational management control tool used across the operations.

The relationship between the MRP, budget and business plan

The business plan establishes the optimal extraction sequence for the mining right area,
based on a set of prevailing macroeconomic and planning assumptions – it is a full
economic and technical plan that indicates the optimised extraction sequence selected
from the mining right plan, which is itself aligned to the mining extraction strategy. The
core relationship between the portfolio of investment centres in the mining right plan and
the business plan are indicated in Figure 11.7.9.
 171

MINING RIGHT PLAN BUSINESS PLAN

Level 1 Level 1
Current operations Current operations

VALUE OPTIMISATION
Projects in execution Projects in execution
Base
Level 2a
Feasibility studies ±10%
Immediate project portfolio
Level 2b
(confidence and
Pre-feasibility studies ±15% value ranked) Business
Plan
Level 2c
Conceptual studies ± 25%

Growth options
(confidence
Level 3
and value ranked)
Scoping > 30% Growth
options

Figure 11.7.9 Relationship of mining right plan to business plan

The mining right plan represents the potential of the mining right area and as such is a
portfolio of production plans that defines a possible project pipeline. Following value
based optimisation the MRP portfolio of investment centres is prioritised into three plans:

The base plan is the level 1 plan (inclusive of projects in execution) plus any necessary
investment to secure mineral right tenure. This is a core plan that indicates what the
potential of the company is without any major expansion or replacement projects. It
defines a minimum life and return for stakeholders assuming no further investment in
major expansion or replacement projects.

The business plan is the plan upon which the budget has been defined. It reflects the
base plan plus selected projects out of the unapproved study phase (level 2a, 2b and 2c)
categories that meet the required investment returns, strategic objectives and are within
the capital funding capacity of the company.

The growth plan comprises both the base and business plan plus selected projects that
are aligned with the company strategy but are not currently fundable or require significant
further technical work before approval can be granted. Projects in the growth plan subset
are predominately scoping studies (level 3 plans). Projects can move from the growth
plan to the business plan following the necessary technical and financial approvals
subject to availability of capital. The growth plan fundamentally indicates the full potential
 172

of a mining right area and, when aggregated across a mineral asset portfolio, the full
potential of the company assuming no technical or financial constraints.

11.7.8 Corporate governance

Good corporate governance is achieved primarily through data validation and process
auditing techniques, coupled with business continuity risk assessment. Validation and
auditing of the various components of the business plan meet the following requirements:

• Good business practice – the application of due diligence and corporate

governance;
• Group consistency – a requirement of the Turnbull report (1999);
• Mitigation of risk – review of issues may pre-empt negative occurrences;
• Quality assurance;
• Identification of skills shortage and training requirements; and
• Skills development function.

Another key component in validation is the single point of accountability for data integrity,
control and reporting. The entire process is structured to pass on only validated
authorised data from one component of the planning sequence to the next.

Auditing of the business planning process is effected through both a single discipline
review aimed at testing the individual disciplines and the processes through which
planning data is determined and reported. This is followed subsequently with a multi-
disciplined review of the consolidated business plan. The multi-discipline review is aimed
primarily at assessing the technical content, achievability, practicality, continuity, cross-
discipline and cross-functional integrity, and ownership of the plan.

A qualitative risk assessment to record the issues of threat to achieving the business plan
is carried out in conjunction with the multi-discipline reviews. Additional issues highlighted
by the array of disciplines represented in this forum are added to the issues collected
from other risk assessments and consolidated in a central risk database used for Turnbull
reporting (1999).

11.7.9 Contribution to the Conceptual Framework

The overall objective of the long term planning processes is:

• To create alignment of activities to a common company planning calendar;

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• To ensure utilisation of common logic and tools to facilitate comparison between

operations and options; and
• To generate a common business plan that drives execution of the company
strategy

The business planning activity creates a central process around which the business
organises planning activities to meet the needs of the executive and the Board. It creates
an annual rhythm to activities, so that all parties are aware, through the ‘five Ps’
(Philosophy, Programme, Process, Product, and People) of what must be done, by who,
by when and to what standard to meet the company planning needs.

Definition of the long term plan for a mining right and, ultimately the business plan, as the
consolidated, optimised view of the mineral asset portfolio, is dependent on following a
sequence of activities (see Figure 11.7.1). Specifically this includes defining the mine
extraction strategy (essentially defining the unconstrained potential of the mineral asset),
applying a set of constraints (the ‘top down goals’) that reflect the strategic intent of the
company, developing a mining right plan based on these constraints, and then optimising
the mining right plan for the short term (the budget period – three years) and for the long
term (the long term plan – year four and beyond). At a company level, the consolidated
mining right long term plans are further optimised based on VBM principles. The
discipline of this approach allows for effective comparison across mining right areas and
company level optimisation as necessary.

The introduction of investment centres (IC) as the minimum scale entity for investment
decisions ensures that resources are effectively deployed during the planning process.
Classification of ICs by confidence of estimate (levels 1, 1e, 2a, 2b, 2c, 3, NIB) further
allows effective comparison across operations / assets, and facilitates understanding of
life of operation without further investment (the level 1e plan) and mineral resource to
reserve conversion (the level 2a plan).

The relationship between the mining right plan and the business plan (see Figure 11.7.9)
facilitates understanding between what has been included in the business plan, in its
constrained form, versus what potential still exists in the remaining IC portfolio held in the
growth options.

The long term plan further provides the basis for resource planning of supporting
capability (process, engineering, projects, infrastructure, corporate affairs, finance,
marketing and human resources) into the business plan.
 174

11.8 Contingency planning

11.8.1 Introduction
Contingency planning identifies a controlled trajectory toward reduced or increased
output relative to that originally planned in the long term plan and the business plan.
Changes in output are likely to be necessitated through radical market shifts, i.e. a shift to
a different world view ahead of the expected timeline. Typically downside shifts are rapid
and brought about by crisis whilst upside shifts tend to be more gradual as markets tend
to expand at a sustainable growth rate driven by capital cost and availability. Emphasis in
this work is placed on the downside scenario which has been termed ‘Plan B’, although
the logic is equally applicable to an upside scenario.

11.8.2 ‘Plan B’
‘Plan B’ actions are a sequence of logical steps to move toward a lower future output
profile from both current operations and future investments. These are evaluated by
investment centre and downscaling options may include close, delay or mothball.

Three primary factors are used to drive the prioritisation of potential ‘Plan B’ actions:

• The market price for platinum (and the associated full basket of metal prices) at
which each investment centre becomes NPV break-even;
• The working cost to revenue ratio for each investment centre as a measure of
cost efficiency. This measure ensures that differences in the basket of metals by
investment centre are considered; and
• The potential mine output over the following five years.

In addition, a number of further factors are used to help identify ‘Plan B’ options:

• Dependencies between investment centres and any shared capital expenditure;

• Strategic factors including potential impacts on mining rights or ability to meet
BEE requirements;
• Investments required to ensure that future mine economics are sustainable;
• The ability to effectively mothball investment centres and restart operations
should market outlook improve; and
• The potential to reduce fixed cost and the overall impact on the financials.

The development of these priorities requires input from multiple parties including the
operations, projects, processing and planning.
 175

Annually a ‘Plan B’ is developed as part of the long term planning process.

The key steps in developing ‘Plan B’:

1) Planning issues ‘Plan B’ procedures / guidelines, as part of the LTP, to the

operations in January each year.
2) Operations (mine and projects) assess, on local basis, the optimal downscaling
sequence of investment centres. These are submitted to the Strategic Long Term
Planning department as a list with indication of dependencies and clear
explanation of rationale. The relevant financial / project managers prepare a
forecast of the expected financial impact of each closure/delay. Both must be
submitted at the multidiscipline review.
3) Planning aggregates the LTP submissions and performs the analysis required to
rank the investment centres on a matrix. Components of this calculation include,
break-even price, working cost to revenue ratio, expected short term (five year)
average mine output, year of first production and significant capital expenditure
outlays for any project not producing ounces in the following five years. The
analysis is completed together with the first consolidation of LTP submissions
(interim LTP).
4) Downscaling options are identified by Planning and then revised and agreed with
the head of mineral resource management. This identification is on the basis of
operational sequencing submissions, discussed in the second point above, in
conjunction with SLTPs matrix analysis.
5) Once ‘Plan B’ actions are identified Planning collates the financial impact analysis
provided by the mines. Concurrently processing capacity requirements under a
‘Plan B’ scenario are reviewed and the impact on operating costs and capital
expenditure assessed.

11.8.3 Operational ‘Plan B’ submissions

Deliverable
The operations (mines and projects) are responsible for submitting their downscaling
sequence. This is a list proposing the order of investment centre downscaling priorities
within a mine or project (whether to close, delay or mothball). This list needs to indicate
the rationale and the dependencies between investment centres. Furthermore, the
operations are responsible for providing a high level analysis of the financial impact of the
downscaling options.
 176

Key considerations
The rational required is a clear explanation of the reasons for the particular sequence
submitted. This considers financial performance, including cost efficiency and NPV,
remaining life of mine output, strategic importance (retention of mineral rights, necessity
of Merensky proportion), restart flexibility and dependencies with other projects.

Dependencies between investment centres assess the reliance of one investment centre
upon the other. This can be of an operational nature; the completion or existence of one
investment centre may be required for the existence of another, such as a level 1 project
in execution needing to exist for the development of a dependent level 2a project on the
same shaft. Dependencies can also be of a cost nature, where the overhead cost
sharing of one investment centre with another is crucial to the financial viability of both.
The notion of dependencies is expected to lead to some downscaling options being
looked at in groups, such that it may only make sense to downscale a group of
investment centres together and the corresponding impact in ounces is the sum of these
investment centres ounces. Conversely, some investment centres are largely stand
alone on an operational and financial basis and so have no dependency worth noting.
This should also be indicated.

The financial impact analysis conducted by operations needs to consider the capital
expenditure, on-mine cost and one-off cost implications of downscaling each investment
centre. The on-mine cost implications should reflect both the direct and indirect impact
on cost. This financial assessment is provided for each year of the investment centres’
lives. Importantly, this analysis needs to be performed only to a level 3 degree of
estimate confidence (±30%).

Matrix analysis
Using LTP submissions it is possible to lay out, on a matrix, all the investment centres or
investment centre groupings under consideration. This matrix visually represents their
financial standing and timing.

On the x-axis is the break-even platinum price, on the y-axis is working cost/revenue, the
bubble size is determined by the platinum production output and the year of first output is
represented by the colour of the bubble. Lines depicting the long term price forecast and
group average cost/revenue are used to divide the diagram into four quadrants. An
example matrix is indicated as Figure 11.8.1.
 Working cost/revenue (LoM, discounted) LTP Pt price Current Pt
assumption price R8400 Start year
100% UNKI MSZ L1 AP On Mine Cons
RS Frank UG2 US MER Spud L1
2006
LPM MER US MER Richard L1
ELP UG2 L3 OFF MINE & Mer (L1, L2c)
Vert # L1 2007
RS Waterval
UG2 (L1 & L2c) 2008
RS Brakspruit UG2 & Mer (L1)
RS UG2 Brakspruit L3
RS Bleskop UG2 (L1, L2a) 2009
RS Paardekraal UG2 & Mer (L1, L2a)
Contingency
MPM UG2 STH1 P1 L1 LPM MER UM2 L1 2010+
US UG2 5S L3
Plan actions
BR MER BOS NTH L1
BR MER BOS STH L1 MPM UG2 NTH1 P1 L1
CapEx only
80 US MER 5S L3 US MER Megaslump L3
AS MER 2# L1 US UG2 3N P2 L2a
US UG2 Richard P1 L1
PLA SS L1
US UG2 3S, 4B, 4S
LPM UG2 Vert # L2b
RS Boschfontein UG2 & Mer (L1, L2c) DB Der Brochen MER
US UG2 3N P1 L1 MPM UG2 L2b Cons
MPM UG2 Onverwacht L1 AS UG2 16W L1 LPM L1 RS Townlands UG2 & Mer (L1, L2c)
(Brak, MPH)
Group average
177

MPM UG2 Mid Shaft L1 US UG2 Spud STH L3 RS Turffontein UG2 & Mer (L1, L2c)
TPM L2b Cons Booysendal UG2
US UG2 Spud P1 L1 AS UG2 AS UG2 PLA PPRN L1

Figure 11.8.1 Example ‘Plan B’ prioritisation matrix

WU L1 43E L1 AS UG2
60 2# L2b AS UG2
GPM L2b Cons
MOT Mototolo UG2 L1 62E F L2b Required to preserve
AS MER CENT L1 US UG2
US Dev Reef L1 AS MER WU L1 RS Turk UG2 AS UG2 50E F L2b mineral rights
Spud P1 L2a
& Mer (L2c) AS UG2
AS UG2 CENT L1 AS MER WL L1 44E SI L2b 1 million
PLA ZS L1
US Slag L1 AS UG2 44E F L1 BRPM MER STYL L2b P1 Pt oz pa
Required to sustain
(Avg,
AS UG2 WL L1 AS MER 4# P1 L2b long term economics
07-11)

40
2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 10,000

Pt price for NPV breakeven

 178

From a financial perspective, the top right quadrant is the least attractive, bottom right
second least attractive, followed by top left and lastly bottom left, the most attractive.

The matrix further allows investment centres to be grouped into distinct categories
according to strategic and other considerations. In the example case above, the grey
oval contains investment centres in the Eastern Limb, which although unattractive, are
necessary for maintaining mineral rights and the olive oval contains those necessary to
sustain future economics of the company. This leaves the investment centres in yellow,
which are considered in ‘Plan B’.

Inclusion of investment centres

To focus the analysis on relevant investment centres their inclusion in the analysis is
dependent on three specific criteria:

• Investment centres must be under direct management. Joint venture operations,

where the opportunity to influence production is more limited, are excluded from
the review.
• Investment centres must be expected to produce platinum over the following five
years or require material capital expenditure over those five years.
• Investment centres which have material operational or financial dependencies (as
indicated in the operational submissions) must be aggregated into one
investment centre, with a recalculation of the metrics as specified in the following
sections.

Break-even price metric

The break-even price metric calculates the basket PGM price required for the investment
centre NPV to equal zero. This measure indicates the financial sensitivity of investment
centres to movements in the basket price.

The calculation of break-even price in Hyperion Strategic Finance (HSF) has three steps:

• Investment centre break-even price is calculated in HSF on an investment centre

by investment centre basis. The exchange rate input is flexed, using a goal seek
function so that the investment centre NPV equals zero. This implies that the
relative ratios of PGM prices remains constant and the price of platinum can be
used as a proxy for the basket price. This is done for all investment centres being
considered in the LTP.
• Capital expenditure that is not specific to an investment centre is allocated, on a
usage basis, to calculate the true break-even point.
 179

• The capital expenditure allocation and investment centre break-even price are
added together to calculate the overall break-even price for the Investment
centre.

Break-even prices on investment centres that require aggregation for dependencies can
be calculated as the weighted average of break-even prices of each of the dependent
investment centres (weighted on life of mine platinum ounces).

Working cost/revenue metric

Working cost divided by revenue provides a metric for the cost efficiency of investment
centres. This is a more accurate measure of efficiency than cost per platinum ounce
because it accounts for the varied PGM and base metal content produced by different
mines and investment centres. Working cost is used to ensure inclusion of not only on-
mine costs but also off-mine costs incurred in the production.

The calculation uses the life of mine working cost over the life of mine revenue,
discounted at current weighted average cost of capital, to get an overall understanding of
mine efficiency. The discounting is done to account for the time value of money.
Investment centres that require aggregation for dependencies are treated as one
investment centre, where the discounted life of mine working costs are summed as are
the discounted life of mine revenues.

Average platinum ounce output metric

Average platinum ounce output provides a metric for the impact on short term ounces
delivered to the market. This is a critical metric given that one of the key aims of ‘Plan B’
is to reduce the number of ounces into the market. The time period selected for this
metric is the following five years. This is calculated as an average output per year over
the following five years to give an understanding of the potential annual reduction in short
term output.

For investment centres that are included because of material capital investment in the
following five years (even though they have no output), the average ounce output for the
following five year period should be used.

Start year metric

The year of first platinum ounce output is material for determining the immediacy of
down-scaling a particular option. The matrix bubbles should be coloured by year of first
platinum ounce output.
 180

Aggregated dependent investment centres are dated from the first year of platinum
output.

For the investment centres that represent material capital expenditure investment in the
first five years without any platinum output, the same colours should be used for start
years, only with a different pattern. The start year in this case is determined by year of
first capital expenditure.

Deliverable
A set of prioritised actions is identified using the operational inputs and planning analysis.
The number of actions chosen depends on the total ounce reduction required. The
financial impact of these actions, in terms of working cost and capital expenditure
savings, and in terms of potential impact on processing and central services is estimated
on the basis of operational submissions and needs to be consistent with LTP data.

A first view needs to be developed using the above process as an input into the scenario
planning and strategic review cycle. This preliminary view provides an opportunity for
thorough scrutiny of options and is potentially useful information in considering the
revised business plan and growth plan scenarios.

Identification
In terms of the identification process, the following steps are applicable:

• Identify particular groupings of investment centres that will not be considered in

the prioritisation, such as those excluded on strategic grounds.
• Having reduced the group to a subset, the remaining investment centres can be
prioritised on the basis of financial attractiveness, eliminating those in the furthest
top right position on the matrix and then moving down and left.
• Where the trade-off is marginal, second order considerations, such as restart
flexibility should be used.

Ounce impact
The ounce impact of this prioritisation is calculated as the five year average annual ounce
reduction and can be displayed as per Figure 11.8.2.

Currently the downscaling options fall into three tiers:

1) Investment centres currently producing platinum ounces which are marginal;

 181

2) Investment centres which could be delayed to slow growth and postpone capital
expenditure; and
3) Investment centres producing platinum ounces which are less marginal but could
deliver larger reductions in output.

Pt koz

3 750
Average im pact
2007-2011

3 557

3 500 -36

-59
-42 -5 -8 -2 -3
-36
-57
3 250
3 210
-98

3 000
2008 Close Delay Mine L Delay Mine E Delay Mothball
Target Mine Q UG2 Vert Mer Mega Mine D Shaft Z
Pt oz # L2b Slump UG2 44E UG2
& 50E
Close Close Delay Delay Mine D Mothball 2008
Shaft A Shaft C Mine D UG2 3N P2 Shaft S Plan B
UG2 62E Pt oz

Figure 11.8.2 Example – impact of ‘Plan B’ on platinum output

11.8.4 Financial impact analysis

A consolidated view of the financial impact of ‘Plan B’ should be developed.

Four key components need to be assessed:

• Impact on mine, project and processing capital expenditure, calculated as the

sum of capital expenditure reductions, both stay-in-business and expansion, as a
result of ‘Plan B’. For processing, the reduction in throughput is compared to
capacity replacement profiles for concentrating, smelting, base metal refining and
precious metal refining. The elimination of expansion requirements is seen as a
capital saving. The delay of expansion requirements is calculated as the
difference in NPV of the investments.

• Impact on on-mine operating costs; the operational submissions of on-mine costs

for the identified ‘Plan B’ actions are aggregated to calculate the on-mine impact.
The downscale options are then removed from total mine or project costs to
report the revised cost per platinum ounce under ‘Plan B’.
 182

• Impact on processing costs; the reduction in processing costs are provided by the
processing directorate and are used to report the revised processing cost per
platinum ounce under ‘Plan B’.

• One-off cost of implementing ‘Plan B’, is calculated by aggregating operational

and processing submissions of one-off costs.

The financial implications are presented as the reduction on capital expenditure and the
impact on cost per ounce for affected mines. A sample diagram of this is presented in
Figure 11.8.3.

The impact on processing is also evaluated in terms of impact on capital expenditure

NPV for smelters, base metal refinery and precious metal refinery and to processing cost
per platinum ounce.

Cost/platinum ounce Capital expenditure savings

On-minecost/ Pt oz Capital expendituresaving

(2008, Rand, met & conc) net of closure cost (Rm)

8 000 1 250

1 028
1 000 Mine D
6 000 Mine Z
Mine A
750
Mine P
Closure cost
4 000 500

293
252
250
114
2 000
L2a
Plan B 0
Target -70
(budget)
0 -250
Mine A Mine P Mine D 2007 2008 2009 2010 2011
Mine L Mine Z

Figure 11.8.3 Example – financial impact of ‘Plan B’ on operations

Consolidation and final draft

‘Plan B’ actions and implications are consolidated by the end of the business planning
process by the planning department. These are summarised in a written format and
incorporated in the strategy review document, as a potential scenario alongside business
plan and growth options. The strategy review document is then submitted to the
executive committee and the Board of Directors for approval.
 183

11.8.5 Contribution to the Conceptual Framework

Contingency planning is the preparation for an unexpected, rapid shift in industry
dynamic. Despite development of world views or scenarios, the rate of change between
anticipated world views is difficult to anticipate and usually rapid.

Generation of contingency plans allows a rational, controlled shift between one operating
state and the next based on earlier analysis. It is a means of reducing the scale of crisis
through anticipation and prior sensitisation.

Contingency planning recreates the link between the business plan (part C) and the world
views (part B) by creating an iterative loop based on a different set of global assumptions.
This process is real option valuation and drives re-optimisation of the long term plan and
the mineral asset portfolio composition in light of a possible alternative world view.

11.9 Valuation logic

Evaluation of overall business performance is typically considered in terms of a range of

parameters that seek to answer a basic shareholder question: What return am I getting
on my investment?, which will then inform the decision to continue or to disinvest.
Typically, consideration is given to return on equity (before and after tax) or earnings per
share (after tax) these are in turn impacted by capital gearing (debt/equity ratio).

In essence a business needs to be financially viable, viz. make a profit in the long term
but remain solvent in the short term by generating a positive cash flow. Within this context
decisions are therefore made on long (and short) term investments and how cash can be
raised to finance these investments.

In order to effectively assess overall business performance it is necessary to include all

past cash flows in the business; the business performance evaluation should include all
‘sunk’ or ‘historic’ cash flows (including revenues, capital expenditure and costs).

11.9.1 Capital investment decisions

Conversely, the capital investment decision is only concerned with the question: What
value will this capital investment add to the business?, which will then inform the decision
to make or not to make the investment.

In this capital investment decision, ‘sunk’ cash flows should be excluded, as they have no
bearing on the future viability of the investment. ‘Sunk’ cash flows by definition are costs
 184

and revenues that have already been incurred and thus cannot be changed by the
decision to accept or reject a project.

11.9.2 Discounted cash flow valuation

The generally accepted method of appraising capital investments, when sufficient data is
available, is through the use of discounted cash flow (DCF) valuation. A variety of DCF
techniques exist, however use is generally made of net present value (NPV) and internal
rate of return (IRR) and economic profit (EP). DCF analysis requires consideration of the
relevant cash flows that come about as a direct consequence of a proposed capital
investment.

The discounted cash flow analysis method of evaluation is a forward looking methodology
which requires that forecasts be made with respect to technical and economic conditions
which are likely to prevail in the future. All predications of the future are inherently
uncertain but the level of uncertainty will be materially reduced if adequate data is
available from which to predict the future rates of production, costs (operating and capital)
and commodity prices associated with exploitation of the mineral resource to the end of
its estimated economically useful life.

The best application of discounted cash flow analysis results from the valuation of an
existing mining operation where the mineral reserve has been well defined and extraction
has been scheduled over life of mine. From a cost basis, there should be established
capital infrastructure accompanied by stable cash costs. For the most part, strategic life
of mine plans, for mature operations, are generally undertaken in this guise.

At the next level, discounted cash flow analysis can be used to assess the economic
viability of a proposed project based on a reserve estimate, a comprehensive engineering
study, detailed estimates of capital investment requirements and rational projections of
operating costs and revenues. Since discounted cash flow analysis can be applied to
assess the value associated with differing levels of expansion, increases in operating life
and changes in mineral resource, it remains the preferred method for valuing various
options available to the business. Ultimately, as long as a mineral resource has been
identified and it is possible to make a reasoned estimation of production rate, associated
costs and revenues, discounted cash flow analysis can be applied. However, cost
determination in this instance may be problematic and it is recommended that project
costs be estimated based on first principles rather than on an average unit cost (R/t).

Value accretion from individual projects should, however, always be considered in the
context of the largest logical decision making unit e.g. a mining complex rather than a
 185

single shaft in order to accommodate interdependencies. A project may not necessarily

have a positive NPV when evaluated on a standalone basis, however value may be
derived from the benefit this project affords the rest of the complex through the sharing of
infrastructure and hence the dilution of fixed costs (Ballington et al, 2005). Therefore it is
pertinent to always evaluate projects on the basis of incremental benefit to an operation
and not solely on the project cash flow.

The generally accepted methods of appraising capital investments, when sufficient data
is available (pre-feasibility through to operational expansion), are those that incorporate
annual cash flow projections and recognise the time value of money, particularly net
present value (NPV) and internal rate of return (IRR). Within this context NPV is initially
applied to capital investment decisions with later application as a guiding principle
throughout the mine planning process as the principal determinant of value assessment.
The realisation that planning options that demonstrate increments in value have the
potential to create value for the business and are generally cumulative, has rapidly lead
to the concept of value maximisation or optimisation of strategic mine plans, with the term
optimisation largely coming to mean maximisation of plan NPV in the minerals industry
(Ballington and Smith, 2002).

Discounted cash flow analysis provides a means of relating the magnitude of all expected
future cash flows to the magnitude of the initial cash investment required to purchase the
asset and develop it for commercial purposes. The objective of discounted cash flow
analysis is to determine:

• The net present value (NPV) of a stream of expected future cash flows; and
• The rate of return (IRR) which the expected future cash flows will yield on the
original cash investment.

It is important to note that NPV and IRR are interrelated, with the IRR being the rate at
which the NPV of the capital investment is zero. IRR has a critical limitation in that it can
only be reliably calculated for a conventional investment cash flow, viz. investment
outflow/s followed by returns. Non-conventional cash flows result in multiple IRRs, which
are misleading.

An investment is considered to add value when NPV > 0 and IRR is greater than the
company specific investment hurdle or discount rate. Larger NPV and IRR values indicate
better returns and inherently lower risk. NPV and IRR should be considered in concert
rather than independently. Hurdle rates are determined by considering a variety of risks –
 186

operational, project and country in addition to the weighted average cost of capital, and
will change dependent on the scenario or world view context that is applied.

Mineral resources are a finite, non-renewable resource. The optimum exploitation

strategy therefore needs to be dynamic due to the continual changing of commodity
prices, rate of extraction and life of mine over time.

The seemingly competing objectives of maximising profit and maximising extraction are
constrained by the spatial characteristics of the orebody and extraction technology.
Trade-off studies to evaluate the scale of operation will tend to focus on maximising the
production rate that can be sustained by the orebody geometry. The use of discounted
cash flow analysis allows for the impact of varying price regimes over time and at real
discount rates of 8% - 15% ensures that the value created beyond 30 years into the
future has little impact on the overall value construct.

The economic life of mine for a mineral resource is thus a key decision variable which is
largely driven by the rate of extraction, with the optimum strategy encompassing the
entire resource. The optimal strategy should be focused on exploitation of the entire
resource so as to maximise the present value – the challenge is however to find the
optimal trajectory which achieves the maximum as conditions vary over the life. In other
words, maximising value over time requires the optimisation of each subsequent
extraction step in an environment with continual changes in market perspectives and
operating conditions.

Despite criticism, the use of DCF analysis is likely to persist in the minerals industry in the
foreseeable future. From a strategic planning perspective, the absolute value of net
present value should not be considered as the final investment decision criterion but
rather as a key indicator to be assessed in conjunction with other factors. Further, the
relative value of differing scenarios is more informative than the absolute value of each
scenario.

Relevant cash flows

DCF analysis requires consideration of relevant cash flows – cash flows that come about
as a direct consequence of the proposed capital investment. These are indicated in
Table 11.9.1.
 187

Table 11.9.1 DCF – components of relevant cash flow

EXCLUDE INCLUDE

• Sunk or historic costs • Revenue

• Financing costs • Cash operating cost (direct,
• Investment income indirect)
• Stay-in-business capital
• Initial project capital (expansion or
replacement)
• Working capital changes
• Taxation
• Secondary tax on companies
• Royalties

Money terms
Considerable confusion arises regarding money terms. It is however a simple case of
adjusting for the effect of inflation. A nominal money term figure contains an inflation
component whereas a real money term figure does not.

The following is a broad guide to terminology that is used:

• Nominal terms:
o includes the effect of inflation;
o “money of the day”;
o “escalated”; and
o “current”.
Budgets are usually reflected in nominal terms.

• Real terms:
o excludes the effect of inflation;
o “money today”;
o “de-escalated”; and
o “constant”.
The long term plan (LTP) is reflected in real terms.

It is important that cash flows are initially calculated in nominal terms, so that taxation can
be computed and included, prior to de-escalating to real terms for discounting to present
values.

This is achieved, in the modelling environment, by inputting values in real money terms
(regardless of when in the future the income or expense is to occur) and allowing
 188

automatic escalation (different rates for revenue, cost and capital) to nominal terms. The
calculated nominal cash flows can then be de-escalated back to real terms, and finally
discounted allowing for a calculation of NPV at an appropriate real discount rate.

Discount rate
The discount rate or hurdle rate or cost of capital is the rate used to calculate the present
value of future cash flows. A tiered series of discount rates, depending on the risk
associated with the proposed project, can be applied to cash flows in real money terms in
order to determine the real NPV.
Typically the rates would comprise:
• A base rate (typically weighted average cost of capital) or operational or stay-in-
business risk;
• Plus a country risk rate;
• Plus either:
o A 1 % brownfield project risk rate, or
o A 2 % greenfield project risk rate.

A real discount rate is used because:

• Most investment evaluation assumptions will be developed initially in real terms;
and
• By applying a real discount rate to real cash flows, the risk inherent in nominal
term valuations (i.e. the mismatch between the inflation rate assumed in the
derivation of the discount rate and the inflation rate assumed in the cash flow
projections) is avoided.

The recommended hurdle rate should be used to discount real cash flow estimates net of
full corporate tax, which must be unbiased, i.e. have equally-weighted upside as well as
downside. These discount rates should be assumed to include the tax benefits of debt
financing and these should not be calculated separately.

Long term economic and planning parameters (global assumptions)

Long term economic and planning parameters encompassing assumptions on exchange
rates, metal prices, inflation, capex and opex (on and off mine costs) escalators, process
division assumptions, etc. are provided by Planning, updated and released quarterly.
These are termed the global assumptions. No variation from the approved issue of global
assumptions is permitted.

The global assumptions provide a generic view for a company on the different capital and
operating cost escalator forecasts. The need may arise on a specific project base to
 189

modify the escalators used in the investment modelling valuation, possibly for example
due to an abnormally high percentage of the capital cost of a project being influenced by
exchange rates, e.g. steel, tyres, etc. This issue should be discussed and agreed upon by
the project manager and project team, in consultation with Planning before changes are
implemented. Occasionally, when third parties are involved (such as joint venture (JV)
negotiations) a consensus global assumptions model is formed between the parties for
the specific use by the JV in determining the value of the capital investment.

Long term planning level categories

The structuring of a mining right plan (MRP) and business plan can be illustrated in the
conceptual diagram (Figure 11.9.1) below, reflecting the production profile of an
operation, together with its associated project pipeline.

45

40

35

30
Platinum (koz)

25

20

15

10

2003 2005 2007 2009 2011 2013 2015 2017 2019 2021

Level 1 Level 1 projects in execution (1e) Level 2a Level 2b Level 2c Level 3

Figure 11.9.1 Relationship of long term planning level categories for an operation

The MRP for an operation consists of a number of investment centre models that
comprise varying levels of confidence as indicated in Section 11.7.
 190

Project pipeline process

The development of an identified opportunity through the various project phases and
review stage-gates into an approved capital investment is illustrated in the schematic
Figure 11.9.2 reflecting the project pipeline process.
Identification
Opportunity

Scoping Conceptual Pre- Feasibility Project Project Project

Study Study feasibility Study Impleme - Ramp -up / Close-out
Study nation Handover

Level 3 Level 2c Level 2b Level 2a Level 1e Level 1e Level 1

Initiating Planning Executing & Controlling Closing

Projects / ideas / requests The projects then enter the After the investment
Investment The project is
for the Group need to be formal planning and Decision the
decision the project
project is
is formally closed-out
-out
generated at the beginning evaluation process within implemented and with a number of
of the project
of the project
and and the Directorate of monitored for cost, time reviews; including
capital management Engineering and Projects. and quality against an technical and
process, so that they can approved budget. financial close-outs
The project evaluation
be filtered into the formal process hones the project followed by a post
Post-
The investment case
project pipeline. through a series of study Implementation
implementation
(NPV) of the project is
levels (levels 2c, 2b, 2a). Report.
report.
Only those ideas generated also monitored to
that make the prescribed ensure continued
hurdle rate or fit other viability of the business
strategic Group goals / case of the project.
aims will progress from
opportunities to become
Scoping studies
scoping Studies (level
(level33
plans).
= Term sheet approval = Formal stage
- gate = Investment proposal decision

Figure 11.9.2 Project pipeline process

Capital investment categories

Capital investments (see in Section 11.7) are broadly divided into categories of Projects
(or proposed capital investments) and Stay in Business. The purpose of this classification
is to provide a more meaningful distinction between capital expenditure which is in the
normal run of business (typically relating to existing assets and likely to be relatively
stable from year to year), and significant projects which are one off, and serve to expand
or maintain total business capacity through the exploitation of new sites or near-mine
sites.

Projects (or proposed capital investments)

The following categories apply:
• Expansionary projects: no minimum value of project is set, but expansionary
projects will in practice involve only material increases in production rather than
small-scale capacity creep.

• Replacement projects: their primary objective is to replace capacity lost due to

the decommissioning or working out of an existing production unit, thereby
 191

maintaining the overall level of capacity. Replacement projects will typically

involve a collection of assets that together represent a discrete new income
generating unit, although the new unit may share certain infrastructure with
existing production units. Replacement projects would therefore not include
replacement of individual assets such as haul trucks, loaders, or capitalised
rebuilds of existing equipment, which should be included in the stay in business
capital category.

Stay-in-Business (SIB)
This comprises capital expenditure undertaken in order to maintain the life of existing
assets without materially increasing capacity and includes:
• Replacement or capitalised rebuild of individual assets such as vehicles,
machinery, plant, etc.
• Ore reserve development; and
• Capital expenditure undertaken primarily for non-financial reasons, such as
safety, health and environment capital expenditure.

On-mine cash operating cost categories

Figure 11.9.3 below illustrates how the various components of on-mine cash operating
costs are related.

Total
operating Total cash operating costs On-mine cash operating costs
costs

components Attributable
components components are components
comprise of: comprise of: comprise of:
are: are: attributable comprise of
either: both:

Directly Fixed
Shafthead Direct
Labour Labour Apportioned Variable
Directly Fixed
On-mine Concentrator Direct
Stores Stores Apportioned Variable
Central Directly Fixed
Indirect
Contractors Contractors Services Apportioned Variable
Smelting
Utilities Utilities BM Refining
Off-mine PM Refining
Sundries Sundries
Other

Amortisation

Figure 11.9.3 Components of on-mine cash operating costs

 192

Shaft head costs

Shaft head costs are cash operating costs that are attributable to the mining activity
portion of the on-mine cash operating cost.

They may be:

• A single direct cost such as a stoping or development cost associated with a half
level; or
• They may be mining overhead costs, shaft overhead costs and shared mining
costs that may need to be apportioned on a tonnage allocation basis.

They are generally composed of fixed and variable cash operating cost components and
should reflect step changes to the fixed/variable ratio when necessary.

Concentrator costs
Concentrator costs are cash operating costs that are attributable to the concentrating
activity portion of the on-mine cash operating cost, and may be attributed on a tonnage
allocation basis if the concentrator serves more than one shaft.

As with shaft head costs, concentrator costs may be:

• A single direct cost such as a steel ball load cost associated with a plant; or
• They may be shared concentrator costs that may need to be apportioned on a
form of tonnage allocation basis.

They are generally composed of fixed and variable cash operating cost components and
reflect step changes to the fixed/variable ratio when necessary.

Central services costs (indirect costs)

Central services costs are cash operating costs that are indirect costs attributable to the
on-mine cash operating cost. They are therefore attributed on a form of absolute Rand
allocation basis after the combined annual Rand amount of shaft head and concentrator
costs for the total mine complex has been established. They are often determined at both
a local and group level.

They are generally composed of fixed and variable cash operating cost components and
should reflect step changes to the fixed/variable ratio when necessary.
 193

The effect of multiple proposed capital investments

At an operating unit if there are multiple simultaneously proposed capital investments
(projects) that form part of the project pipeline (study levels: feasibility (2a), pre-feasibility
(2b), conceptual (2c)) as outlined in the approved mine extraction strategy and
associated LTP; and these are reasonably likely to be approved by the prerequisite
boards and technical committees then both the concentrator (tonnage allocation basis)
and central services (absolute Rand allocation basis) costs that have been calculated for
the complete operating unit assuming that all of these projects proceed; should then be
allocated (on the appropriate basis) back to each ‘base case plus optimised investment
model’ for each of the proposed capital investments.

11.9.3 Capital investment decision – modelling philosophy

Capital investment decisions should be conducted on an incremental cash flow, stand-
alone basis, with the assumption that all available profits are paid out, viz. only the cash
flows attributable to the proposed capital investment are therefore considered. This is
readily achieved on greenfield projects but extremely difficult in brownfield investments,
as it is often not possible to effectively separate the incremental cash flows. Joint
ventures (JV) would, from a valuation modelling and data integrity point of view, be
handled as per any other proposed capital investment.

A further complication is the use or exclusion of the tax base available from the cash
flows from the existing operations. Mining companies are entitled, in terms of current tax
legislation, to redeem capital expenditure in the year that it occurs. In the event that profit
is inadequate to redeem the capital expenditure, the unredeemed portion is carried
forward to the following year. The tax shield derives from unredeemed capital expenditure
or an assessed loss, which may have accumulated in the tax entity. Use of a tax shield
effectively increases the cash flow as tax is not paid until all unredeemed capital
expenditure and assessed losses have been offset against taxable income.

Owing to varying operational structures, relative to tax entities, it cannot be automatically

assumed that all projects will receive the benefit of a tax shield. Valuation of an
investment decision must therefore be considered with and without the benefit of a tax
shield.

Owing to the process of approval of interim votes (IV) and conditional interim votes (CIV)
it is necessary that model timelines and assessments be consistently based on project
phases as indicated in the investment proposal. It may therefore be necessary to include
a cash flow adjustment in the first year of the models for cash flows (revenues (+ve) and
capital expenditure and costs (-ve)) that have resulted from interim votes or conditional
 194

interim votes to facilitate comparison. These manual adjustments must be money term
corrected (e.g. adjusted by inflation to the correct year), and discount/hurdle rate
corrected to the relevant input year for HSF (e.g. adjusted by the Anglo Platinum cost of
capital).

Figure 11.9.4 indicates the relationship of the capital investment decision and business
performance models.

BUSINESS
CAPITAL INVESTMENT DECISION
PERFORMANCE

MODEL A MODEL B MODEL C MODEL D MODEL E

STAND ALONE SUNK CASH FLOW
BASE CASE DIFFERENTIAL INCREMENTAL
PLUS THE BASE CASE INCREMENTAL MODEL FOR THE
CASH FLOW ENTIRE PROJECT
PROJECT CASH FLOW WITH
These are the
INDEPENDENT This model includes the
This model
should include - cash flows that
will continue = This model is the
mathematical
TAX
CALCULATION
sunk capital and all other
associated cash flows of
the Base Case regardless of difference
the entire project
cash flows the project between Model B
Plus all under and Model A This model is the
INCREMENTAL consideration same as Model C
CASH FLOWS except that the tax
is recalculated

This model
eliminates the tax
This model includes
base associated
all the historical
with Model B . This
cash flows of the
model only uses the
project. This
Model C is a calculated model because of the difficulty of identifying and tax shield
facilitates the
separating the project specific cash flows due to the complexity of cost associated with the
review of the
structures, infrastructure utilisation, mine planning and resultant direct project cash
project in its
opportunity costs. flows. This allows
entirety.
This model allows the project capital to be deducted from the tax base of the project to be
the entity. ranked against
other projects
competing for
capital and the
entity tax base

Figure 11.9.4 Relationship of capital investment decision models

On this basis the following philosophy should be applied in modelling the capital
investment decision using DCF, for greenfield and brownfield projects:

Greenfield projects
• Stand-alone cash flows; and
• Exclude tax shield benefit – model as stand-alone entity with no company tax
shield benefit from other entities.

Special consideration of taxation aspects (e.g. ring fencing) will be necessary for
greenfield projects being developed in conjunction with third parties e.g. JVs, pooling and
sharing agreements, etc. Tax structuring should be optimised in all cases but not used to
 195

justify an investment. Referring to Figure 11.9.4, a greenfield project would be

represented by Model A, as Model B would not exist.

Brownfield projects
Owing to the complexity and inter-relationship of cost components it is necessary to
develop a range of models to identify the incremental cash flows, and associated value,
arising from the proposed capital investment. These models are the base case, base
case plus optimised investment and the incremental model.

Base case model

This model represents the latest state of the operating business within the mining right
boundary area as defined in the MRP, which has in turn been derived from the approved
mine extraction strategy (MES) and reflected in the business plan at level 1. This model
should:
• Have all the costs that are generated as a result of the operating business
allocated on a full absorption costing basis between the cost generating units
(e.g. shafts, concentrators, etc.) either directly or indirectly on some form of
allocation basis for the operation as a whole;
• Include the necessary royalty payments (which may vary between farms and
beneficiaries) and secondary tax on companies (STC);
• Include levels of stay in business capital expenditure necessary to maintain
operations prior to closure;
• Have the fixed/variable cash operating cost structure constructed from first
principles (or a zero based cost), with reference to a relevant benchmark and
constructed in conjunction with a back analysis of existing and/or similar
operation management accounting data if applicable;
• Have the cash operating cost structure (for shaft head, concentrator and central
services costs) reflect an increase in unit cash operating costs as a result of
declining production associated with no further capital investment, i.e. step
changes to the fixed/variable ratio in the latter years of production;
• At the appropriate time when cash flows from the operating business are
negative on a continuous basis (i.e. uneconomic), have the reduced production
curtailed, i.e. production tail management; and
• Include closure costs associated with the potential closure of the operation
should no further investment occur.

The base case model should reflect, as realistically as possible, the position that the
operating business is in prior to the proposed capital investment, and is represented by
Model B in Figure 11.9.4.
 196

Base case plus optimised investment model

This model represents the state of the operating business including the proposed capital
investment within the mine lease boundary area as defined in the MRP, which has in turn
been derived from the approved mine extraction strategy (MES). This model should:

• As a result of the proposed capital investment generate a new production and

cost profile for the operation as a whole, which aligns with and is outlined in the
approved mine extraction strategy (MES);
• Include the necessary royalty payments (which may vary between farms and
beneficiaries) and secondary tax on companies;
• Include levels of stay in business capital expenditure necessary to maintain
operations prior to closure following the proposed capital investment;
• Have the fixed/variable cash operating cost structure constructed from first
principles (or a zero based cost), with reference to a relevant benchmark and
constructed in conjunction with a back analysis of existing and/or similar
operation management accounting data if applicable;
• Have the cash operating cost structure (for shaft head, concentrator and central
services costs) reflect anticipated changes in unit cash operating costs as a result
of sustaining or increasing production, followed by a subsequent increase in unit
cash operating costs as a result of declining production associated with no further
capital investment, i.e. step changes to the fixed/variable ratio in the latter years
of production;
• At the appropriate time when cash flows from the operating business and
proposed capital investment are negative on a continuous basis (i.e.
uneconomic), have the reduced production be curtailed; and
• Include closure costs associated with the potential closure of the operation
following the proposed capital investment.

The base case plus optimised investment model attempts to represent the position that
the operation will be in as a result of the proposed capital investment and is represented
by Model A in Figure 11.9.4.

The accuracy of this representation will be a function of the level of confidence of the
estimate associated with the proposed capital investment (or project) in terms of the
amount of unapproved capital expenditure that may be required and the technical
accuracy of the data available.
 197

Incremental model
This model is the difference between the base case plus optimised investment model and
the base case model. It can be obtained through consolidation in HSF.

It is therefore the incremental costs that are generated by the proposed capital
investment over and above those that existed in the base case (i.e. if the mine central
services costs in the base case model were R100 million, and with a proposed capital
investment the central services costs for the operation increase to R120 million, then the
proposed capital investment is liable for the incremental increase of R20 million).

Two variants must be developed and these models allow identification of direct value
arising from the proposed capital investment and the extent of the use of the tax shield in
the overall creation of value.

• Differential incremental – inclusive of the entity available tax base

o This is the model that results from a normal consolidation, and is
represented by Model C in Figure 11.9.4.
o It is a differential model and does not recalculate tax. It calculates the
differences in the free cash flows.
o This model is used if Model A and Model B have a tax base and there
are no other capital investments competing for that tax base.
• Stand-alone incremental – exclusive of the entity available tax base
o This model utilises the tax shield associated with the proposed capital
investment, and is represented by Model D in Figure 11.9.4.
o It does not receive any tax benefit by deducting the proposed capital
investment from cash flows associated with existing operations.
o It takes the differential cash flows on profit before tax and recalculates
the tax and STC on these cash flows (it taxes the cash flows as an entity
on their own).
o It is used where the quantum of the available tax base is uncertain (either
due to the uncertainty of the taxable income at the level of the taxed
entity or the competition of other proposed capital investments).
o This model also allows for comparison and ranking of investment options
across the company / organisation.

11.9.4 Business performance – modelling philosophy

Outside of the capital investment decision is the need to assess aspects of overall
business performance. This can be undertaken in two ways.
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Sunk cash flow model

A further model can be constructed, which represents the net position of the full
investment in the project or business entity to date. This model is effectively the base
case plus optimised investment model with an adjustment for sunk cash flows (revenues
(+ve) and capital expenditure and costs (-ve)) prior to the proposed capital investment,
and is represented by Model E in Figure 11.9.4. This model should:

• Include, money term corrected, cash flows attributable to the investment (e.g. all
sunk costs should be adjusted and re-expressed in real money terms that match
the input money terms of the valuation model), relating to:
o Revenue (actual business attributable not transfer pricing);
o Cash operating cost; and
o Capital expenditure.

Project value tracking analysis

Once the capital investment decision has been made the business investment
performance tracking and monitoring of the approved investment proposal is of crucial
importance for company management, as periodic reviews will allow pro-active rather
than re-active steps to be taken to address any deviation from the expected business
case. This is effectively the systematic tracking (variance analysis) of the business case
value of a project between two points:

• Generally the original view baseline model forecasts for the project undertaken at
the point of the capital investment decision; and
• The present perspective for the project, which encompasses the actuals achieved
to date and the latest future view forecasts for the project.

Project value tracking (PVT) analysis takes the form of a waterfall chart, which illustrates
the relative importance of various external (environmental variables) and internal
(management levers) factors that have caused the NPV to change since the original view
baseline model.

Comment
The complexity and nuances of individual capital investment decision valuations need to
be considered and approaches developed that are consistent with the overall philosophy.
Consistency of approach improves communication with decision making entities. Any
variation from the overall approach therefore needs to be identified, rationalised and
agreed to prior to presentation to decision makers.
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In order to assure consistency of modelling computation and provide an effective audit

trail, the valuation of strategic long term planning scenarios is conducted, on a discounted
cash flow (DCF) basis, using a specific software application – Oracle Hyperion Strategic
Finance (HSF). HSF is used to perform valuations and assess capital investment
decisions, and to run, consolidate and produce the organisation’s long term plan (LTP).
See Marsh et al. (2005).

The application has been highly customised to meet company requirements through
which formatted technical input data (tons milled, head grade, plant recoveries, operating
expenditure (opex) and capital expenditure (capex)) is coupled with a set of long term
macroeconomic and planning parameters (Rand-US dollar exchange rate, consumer
price index percentages, opex and capex escalation percentages, metal prices and
process division assumptions) to perform a DCF analysis on a series of calculated annual
cash flows. The modelling starts at an investment centre (IC) level, i.e. reef type per shaft
and is consolidated at shaft, mine and group level as required (Marsh et al, 2005).

11.9.5 Real options – logic and application

Mineral asset investment opportunities invariably have managerial flexibilities (real
options) embedded into current and future project portfolios. The greater the managerial
flexibility, the greater is the value of the investment opportunity, in a changing business
environment.

The cyclical, mineral asset characteristic based, market aligned, business need driven,
process of strategic long term planning creates opportunity to exercise managerial
flexibility at regular intervals in response to changing market and economic conditions –
the essence of real option valuation logic.

In the mineral industry the key choices that can be made in terms of mineral asset
utilisation, relate to decisions around:

• Maintaining current output by reinvestment into existing production sources and

facilities: Assuming dynamic grade optimisation, this implies a need for
continuous technology and cost improvement to avoid progressive movement up
the cost curve.
• Expanding output from existing production sources and facilities: This approach
will result in a shortened life of mine but allows volume based optimisation.
• Development of new production sources and facilities: This assumes that there
are alternate or unutilised opportunities within the mineral asset portfolio that can
be utilised.
 200

• Temporary suspension of some or all options (mothballing of facilities): This

entails progressive removal of less attractive production entities or slowing down
of projects in execution.
• Reopening suspended production sources: This implies the resumption of
previously suspended operations – either in their previous form or with the
adoption of new working practices and/ or technologies.
• Abandonment of production sources (disposal): The mineral asset portfolio is
reduced based on existing or anticipated performance.

For most capital investments in the minerals industry, timing of action is the primary
option that can be considered. This is especially the case with large sunk cost
investments such as shaft infrastructure.

The progressive development of a mineral asset from acquisition of a prospecting

licence, exploration activities through to final project development and production can be
viewed as a series of sequential or compound options. The acquisition of a mining right
gives the option to establish a prospecting right; investment in exploration creates an
option to exploit the mineral asset; investment in project studies creates an option to
move from one level of study estimate to the next and ultimately to project execution;
project execution creates options to accelerate / slow down execution rate; and finally
creates choices on expansion / contraction / mothballing / disposal.

Within this overall project evaluation and implementation process, uncertainty creates the
option for managerial action. Broadly two types of uncertainty exist; economic and
technical.

Economic uncertainty is related to global economic movements (metal prices, exchange

rates, escalation rates), is exogenous to the project and impacts the revenue component
of the investment decision. This uncertainty can be resolved by waiting or delaying
investment. However owing to the long lead time of the majority of mining projects and
cyclicality of minerals and metals markets, mistiming of production is likely. Economic
uncertainty impacts the industry equally, rather than specifically. In the strategic long term
planning framework, economic uncertainty is encompassed in the development of
scenarios or world views.

Conversely technical uncertainty is specific to the mineral asset being exploited, mining
layout and design (technology) selection, scale of operation, operating philosophy and
the resulting operating costs. Technical uncertainty is resolved through incremental or
sequential investment in the mineral asset (exploration, project studies, trial mining, etc.).
 201

This process creates real options to be considered within a world view that characterises
the economic uncertainty. In the strategic long term planning framework, technical
uncertainty is addressed through the planning process, investment centre estimate levels
and cyclical optimisation based on exploitation of the remaining mineral resource (the
exclusive mineral resource).

Note: Both economic and technical uncertainty change over time, and their effects on
DCF valuation are addressed in the project value tracking (PVT) logic articulated in
Section 11.10.

Financial option tools - challenges

There are a number of technical difficulties in broadly applying standard financial option
valuation tools like Black-Scholes-Merton to real options; one of the key challenges being
to establish a figure for volatility for which there is often no historical data (Samis et al,
2003).

To determine a project’s volatility a financial model must be developed using the most
likely values for all factors that drive revenue and cost. These are then used to calculate
the expected total costs and revenues for the DCF component of value. Then for each
factor it is necessary to develop a range of possible values. These ranges are used in a
stochastic simulation to extract the mean and standard deviation of revenues, costs and
profits. The standard deviations are then used in the calculation of an adjusted volatility
which is used in the option valuation. This process is fraught with challenges in that, if the
original estimates are incorrect (due to inherent uncertainty) and / or the discount rate is
wrong then the volatility is incorrect and the process is flawed.

Pragmatically the more uncertain a project is the higher the probability that the option
analysis, regardless of method, is incorrect. What is more relevant is establishing relative
value of projects within a portfolio, under a given set of assumptions regarding a future
world view / scenario. This then allows efforts to be focused, and results in the
progressive selection and inclusion into the business plan of better projects (value
optimisation). This reduces overall portfolio risk and results in refinement of the mineral
asset portfolio.

Total value; option and DCF value in the SLTP framework

Real options and discounted cash flow valuation methods are not mutually exclusive but
complementary. The DCF valuation provides a base estimate of value under an assumed
risk adjusted discount rate that accounts for negative uncertainty whilst the option
valuation can add the impact of positive uncertainty. Accepting the concept that a project
 202

value has both a DCF and option component it is evident that the contribution of each
component will vary according to the uncertainty. In the early stages of project
development the value of the DCF component will be relatively low because of the need
to have a high discount rate to adjust for the uncertain nature of future cash flows whilst
the option component will be high owing to the same uncertainty. This is represented
schematically in Figure 11.9.5.

TOTAL Option Value portion

PROJECT
VALUE

DCF Value portion

Minimum
acceptable return

High Low
UNCERTAINTY
(economic & technical)

Figure 11.9.5 Schematic – components of total project value – DCF and real option

The caveat is however that all potential investments included in a project portfolio should
have an acceptable minimum rate of return based on the worst case economic
uncertainty encompassed in the prevailing downside world view / scenario, viz. they
should still have a reasonable prospect of providing a return in excess of the initial cost of
capital for a given worst case world view / scenario.

The easy inclusion / exclusion decisions lie around projects that have a high total value
largely made up of a DCF valuation and those with low total value, that are well below a
minimum acceptable DCF return and have little option value. However the challenge lies
with projects that have a high option value, with a DCF valuation marginally below an
acceptable minimum return.

The structure and process of the strategic long term planning framework provides for this
in that these projects are not included in the business plan profile (i.e. they will fall into the
NIB – (eng) and NIB – (nw) investment centre categories) and are reassessed on an
annual basis (or following an unexpected, material shift in market or technology
conditions) until they earn a right of way under a forecast world view / scenario.
 203

The concept of real options and inclusion into long term planning processes has, in the
past, been clouded by attempting to utilise financial instruments designed for markets in
mineral resource investment decision making. People generally understand the concept
of a real option as it is used for many daily decisions. However the challenge has been to
integrate it into routine mine planning decision making.

11.9.6 Enterprise / portfolio value optimisation

Business strategy defines the context in which the mineral assets are to be exploited.
Strategic objectives relating to market capacity (the ability to absorb output, ultimately
leading to market share), operating cost curve positioning and targeted return on
investment (leading to capital availability), coupled with the nature of the mineral assets in
the portfolio, shape the potential overall exploitation trajectory.

For a multi, mineral asset holding organisation, i.e. one with multiple possible sources of
metal production, it is highly unlikely that the business strategy will allow unbridled
expansion. Typically this constraint manifests as capital availability (based on sustainable
growth and necessary return on capital) and the inability of the market to absorb
increased production volumes without significant reductions in metal prices. Within this
context the business plan portfolio, thus comprises those investment centres which meet
a value maximisation objective within the strategic constraints.

Typically the business plan would thus comprise a collation of investment centres that:

• Generate a production profile that provides metal to market at a rate that matches
the most likely macro-economic world view (scenario);
• Give an acceptable return on investment (meet a prescribed hurdle rate) for a
defined balance sheet structure (debt levels); and
• Ensure security of mineral right tenure through progressive utilisation of mining
rights (“use it or lose it”).

Within this framework individual projects (expansion or replacement) will compete for
funding based on criteria of:
• Return on investment;
• Timing of metal to market;
• Future operating cost positioning relative to the competitors; and
• Sequencing or ability to unlock future higher value options.

Critical to this overall approach is understanding where the greatest opportunity and
flexibility exists, within the value chain, to optimise overall business value. This concept is
 204

represented in Figure 11.9.6 which represents the value chain for an integrated PGM
producer. As metal moves from mining operations to refined metal, fewer options exist to
significantly influence the value of production.

Multiple potential sources of production exist at mining right level. This choice is created
by having options as to which reef(s) to exploit, from where (geozones) in the mineral
asset portfolio. On this basis it is possible to flex PGM product mix (e.g. Pt to Pd ratio) to
meet anticipated market demand, operating cost profile and mining capital investment
requirement.

At the concentrating stage opportunity exists to process ore separately by reef type or in
mixed feed concentrators; with each option having specific characteristics in terms of
recovery efficiency, and operating and capital cost effectiveness. However the extent of
the choice is inevitably reduced as, typically, multiple mining production sources are
usually fed to single concentrators to achieve scale benefits and to minimise
environmental permitting requirements.

Further flexibility may exist, at the smelting stage, if multiple furnaces with differing
operational characteristics (recovery efficiency and operating cost) and positional
efficiencies (concentrate transport costs) exist. However this flexibility, and that of the
further elements of base metal and precious metal recovery stages, is limited.

EXPLORATION

MINING MAGNETIC BASE PRECIOUS

SMELTERS/
RIGHT CONCENTRATOR CONCENTRATOR METAL METAL
CONVERTER
AREA PLANT REFINERY REFINERY

n = 18 n = 15 n= 3 n= 1 n= 1 n= 1
237 sources 3 feed options 3 options
3 reef types
5 geozones

OPTIONS TO IMPROVE VALUE -

DISPOSAL /
CLOSURE

Figure 11.9.6 Typical integrated PGM producer value chain (n = number of units)
 205

Enterprise optimisation
Optimisation techniques can be used to enhance the value of the business by maximising
value associated with the flow of metal through the different elements of the value chain.
The key challenge is to simultaneously optimise elements of the value chain rather than
to optimise component parts in isolation from the remainder of the elements.

Enterprise optimisation is therefore based on building an integrated geological, mining,

processing and market model which allows optimisation of variables along the value
chain. This allows development of strategic long term plans that are optimised on a value
chain basis using mineral asset portfolios coupled with existing and planned infrastructure
(mining, process and transportation).

PGM production from multiple mineral assets is particularly suited to enterprise

optimisation logic because of multiple reef sources, variable mining methods (open pit,
mechanised, conventional, hybrid), variable PGM and base metal mineralogy, variable
concentrating options, smelting and refining capacities across multiple units and differing
power and transport requirements.

Enterprise optimisation is thus the process whereby all the elements of the value chain
are examined and optimised simultaneously, to allow decisions on:

• Mining schedules – where and at what rate to mine (pit and/or underground);
• Cut-off grade and blending – what to discard, stockpile or process;
• Processing path and/or plant operating strategy;
• Processing capacity requirements;
• Logistics configuration;
• Capital sizing of all steps in the value chain; and
• Product specification, mix and timing.

The result is a long term plan with significantly improved cash flow profile, reducing risk
and creating value options that can be varied according to the anticipated scenario /
world view. Additional opportunities thus exist to model potential future scenarios and
identify how to capitalise on potential opportunities and / or mitigate threats. Development
of in house enterprise or group value optimisation tools / expertise, or the contracting out
of this work to external entities is an integral part of value based management.
 206

Project ranking and prioritisation logic

Despite categorising projects that form the mine extraction strategy and mining right plan
on the basis of engineering confidence of estimate (levels 2a, 2b, 2c and 3), it is still
necessary to prioritise projects on the basis of value add to the overall business plan.

The primary measure of value, in the overall strategic long term planning process is that
of net present value (NPV) coupled with internal rate of return (IRR) relative to an agreed
minimum rate of return (an investment hurdle rate, either weighted average cost of capital
or a risk adjusted discount rate). This is done on an incremental basis for each project.

However given that the business plan is a combination of a short term budget period plus
a long term plan it is necessary to bring into consideration the effect of short term cash
flow. The long term objective of the organisation is to maximise value but this has to be
tempered with the need for balance sheet management and near term cash flows.

However, owing to the sequential nature of mining as depth increases across a strike
constrained mining right area, an additional element of spatial location and project
dependency on prior extraction of an up-dip investment centre (IC) must be
acknowledged, i.e. the value of investment centre D may be contingent on extraction of a
prior up-dip block of ground contained in investment centre C. Dependency of projects
must be acknowledged, if it is relevant, when prioritising investment centres.

On this basis investment centres (at level 1, 1e, 2a, 2b, 2c and 3) in the strategic long
term planning production profile are ranked on three criteria in combination
(Table 11.9.2):

• Net present value at the agreed discount rate (NPV) over the life of the IC /
project;
• Operating profit (OP), viz. revenue minus working cost, over the three year
budget period as a measure of contribution to near term cash flow before capital
and taxation; and
• Net cash flow after tax (CF), over the three year budget period, as a measure of
contribution after taxation and capital expenditure offsets.
 207

Table 11.9.2 Investment centre prioritisation based on NPV and budget period cash flow

CAT. NPV(%) Operating Profit Cash Flow Comment

(life) (3 yr budget) (3 yr budget)
A +ve +ve +ve Rank on NPV
B +ve +ve -ve High impact projects
+ve -ve -ve Longer lead time to production
C
-ve +ve +ve Future capex required (>3yr)
D -ve +ve -ve Future capex required (>3yr)
E -ve -ve -ve Re-assess & re-engineer

The relationship of this prioritisation relative to production can be represented visually as

per Figure 11.9.7. This process allows rapid assessment of what proportion of planned
output is associated with which ranking category, relative to any production constraint,
facilitating further action. This profile can be constructed for any world view or scenario
and any fall-back positions defined by contingency planning.
 Q4 GAs Pt Price US$ R/$ Pt Price R Basket Price R/Pt Oz
2009 875 8.62 7 545 11 712
BP XX Refined Pt Ounces 2010 856 8.80 7 530 11 727

prioritisation
2011 967 8.84 8 545 13 965
2008 Terms
2,0 Moz Category E
3 Year Opex = R21.1bn
3 Year Capex = R3.7bn
3 Year avg Pt oz = 240k ~1 700 koz
1,75 Moz
Category D
3 Year Opex = R5.2bn
3 Year Capex = R0.8bn
1,5 Moz 3 Year avg Pt oz = 30k

~1 400 koz
1,25 Moz
Category B E
Category C
3 Year Opex = R35.6bn D
3 Year Opex = R3.5bn
3 Year Capex = R18.1bn
208

1,0 Moz 3 Year Capex = R0.4bn C

3 Year avg Pt oz = 440k

Pt Ozs
3 Year avg Pt oz = 65k
B
A
0,75 Moz ~650 koz

3 Year
Cat NPV 11 CF OP Exceptions
0,5 Moz A +ve +ve +ve
B +ve -ve +ve Major Projects/ Strategic Impact
C +ve -ve -ve Dependency On Other IC
Category A -ve +ve +ve
0,25Moz 3 Year Opex = R35.2bn D -ve -ve +ve
3 Year Capex = R4.4bn E -ve -ve -ve
3 Year avg Pt oz = 650k

-
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Figure 11.9.7 Diagrammatic relationship between production level and investment centre
 209

11.9.7 Contribution to the Conceptual Framework

The objective of this section is to clarify and define the preferred approach to valuation
modelling of capital investment decisions and provide a basis for consistent valuation
modelling practice in the strategic long term planning process. Critical elements and
contributions are:

• Discounted cash flow (DCF) methodology is applied with emphasis on net

present value (NPV) and internal rate of return (IRR).
• Distinction is made between the capital investment decision in which
consideration of historic / sunk cash flows is excluded, as it has no bearing on
the future viability of the investment, and assessment of overall business
performance where it is necessary to include all prior cash flows. viz. the
business performance evaluation should include all sunk or historic cash flows
(including revenues and spent capital expenditure and costs).
• Determination of project value (NPV) is based on the philosophy of a differential
value obtained from the difference between the base plan (level 1 plan i.e. the
agreed and financed production, cost and capital profile associated with all
investment centres at level 1e and 1 with an economic tail management applied)
and the level 1 plan plus the project (with its associated combined production,
cost and capital profile plus economic tail management) i.e. mine plus project
less mine without project.
• Valuations are conducted with and without tax shield benefits. Excluding tax
shield benefits (stand alone assessment) allows ranking of projects whilst
inclusion of tax shield benefits indicates the likely return from the project once
included into the overall business plan portfolio.
• Real option valuation logic is included into the strategic long term planning
process through:
o Defining world views / scenarios to allow numbers to be associated with
uncertainty (economic uncertainty);
o Investment centre categorisation by confidence of estimate (technical
uncertainty);
o Defining minimum DCF investment criteria (e.g. cost of capital and risk
adjusted discount rates) to allow inclusion in the plan;
o Having a defined contingency plan that highlights the relative priority of
options (maintain, expand, close, dispose) available for consideration;
o Cyclically evaluating all options within a mining right area (the mine
extraction strategy) with the intention of the best option, that meets a
strategic intent (the business plan constraints) being selected; and
 210

o Continuous transparency within the mining right plan portfolio of

investment centres.

• Enterprise optimisation provides an opportunity to further enhance value

generation and real option assessment. Techniques and tools are available (via
external consultants) for open pit operations. An internal prototype narrow tabular
model using genetic algorithms has been developed and is currently under trial.

• Project ranking and prioritisation methodology can be relatively simplistic and

based on NPV, short term cash flow and inter-investment centre (spatial)
dependencies after any strategic consideration (e.g. mineral right tenure
requirements).

11.10 Project value tracking (PVT)

This work was first published by Pearson-Taylor and Smith in 2006 at the Second
International Seminar on Strategic versus Tactical Approaches in Mining, in Perth,
Australia. Subsequent to this further refinements were made and the concept and tools
referred to in different SAIMM publications (Smith et al, 2006a, Smith et al, 2006b, Smith
et al, 2007).

11.10.1 Introduction
The implementation of a given strategic long term plan is subject to adjustment according
to short term changes in market demand and general economic circumstances. The
ability to effectively adjust to changing circumstances is a function of the nature / diversity
of the mineral asset portfolio, in particular the number, variety and output capacity of
existing production sites and potential projects available and information for decision
making.

The systematic and periodic tracking of the business case value of an operation or a
project is a critical tool in allowing continuous portfolio optimisation and managing capital
allocation for the exploitation of mineral assets.

Project value tracking (PVT) analysis takes the form of a waterfall chart, which illustrates
the relative importance of various external (environmental variables) and internal
(management levers) factors that have caused the NPV to change since the original view
baseline model. A typical waterfall chart output as generated in the analysis is indicated
in Figure 11.10.1.
 Project value comparison between Original View and Present Perspective (Project xxx)

Comparison of original view with present perspective (includes h

historic
istoric
cash
cash
flows)
flows) Excludes historic cash flows
Original View External Factors - environmental variables Internal Factors - management levers Future View
1 500
Example of average Rand -US$ exchange Present perspective of the value of the project,
rate being stronger than originally forecast comprising actuals to date and the future view
1 000 477 873 876

1 202 48 0 476 500

500 396 -376
-400

0 230
441 34 -130
--500 Original view re -
-9 Historic
1 657
expressed in current 580 cash flow
money terms -171 -641
--1 000

NPV (Rm)
-426
-157 Future view only of the
--1 500 value of the project

Example of the effect of higher Reduced average grade Example of the

--2 000 and lower (Pd) than originally compared to original IP project being Example of project being a
211

forecast real long term metal forecast to come JV, hence there is an
--3 184
--2 500 prices on the value of the project in under budget apportionment of value

--3 000
Other factors

Platinum price
Palladium price
JV partners share

Base metal prices

R/$ exchange rate

Historic cash flows

Process division ops

Anglo Platinum share

Rhodium & Gold prices

Other economic factors

Money terms adjustment

Mining ops (scale, timing)
PRESENT PERSPECTIVE

On-mine cash operating costs

Figure 11.10.1 Project Value Tracking (PVT) – typical waterfall chart output
Capital costs (stay in business)

Capital costs (initial for projects)

ORIGINAL (Money Terms 2002)

ORIGINAL (Money Terms 2008)
Ore reserve (headgrade, prill split)
FUTURE VIEW (Money Terms 2008)

Concentrator ops (recovery, mass pull)

NET IMPACT EXTERNAL FACTORS

Factors progress from least controllable to those under

most control of the project team
 212

Conducting modelling on an incremental stand-alone basis, a project once approved has

associated with it, an original view of how that investment proposal of the project is
expected to perform over time. At regular intervals it is therefore possible to compare the
present perspective of the project against this original view over the same timeline. The
term present perspective refers to what has occurred up to the present time and the view
of the future at that time.

11.10.2 Project value tracking – the HSF solution

Traditional waterfall charts are spreadsheet based, however with the increased size of
project portfolio associated with a large mineral asset base it is necessary to move to a
system that can handle larger data volume and provides an effective audit trail and
consolidation function. On this basis the PVT logic has been converted into an HSF
application which utilises existing investment centres and other LTP data sources.

The objectives of being able to compile a waterfall chart in HSF were:

• To produce an incremental variance (or waterfall) NPV analysis between the two
points (illustrated as black bars in Figure 11.10.1) of the present perspective of a
project and the original view over the same project life timeline;
• To utilise existing Anglo Platinum HSF template models in a seamless and easy-
to-use system that produces a waterfall chart analysis automatically; and
• To replace a manual process of incrementally moving groups of data from one
model to the other and documenting the NPV change and then displaying this
information in an external EXCEL waterfall chart.

Waterfall chart methodology using HSF

The waterfall chart solution uses existing HSF model templates and is schematically
illustrated in Figure 11.10.2.

Year 02 03 04 05 06 07 08 10 20 30

Original view

Present perspective
Actuals to date
Future view

Figure 11.10.2 PVT – HSF model methodology

 213

The waterfall chart comparison is conducted as follows:

A comparison is made up of three underlying HSF IC models:
• The original view of the project model;
• The actuals to date for the project model; and
• The future view of the project model.

The money terms of the underlying models are as follows:

• The original view model is in original real money terms;
• The actuals to date model is in nominal money terms; and
• The future view model is in current real money terms.

These models then have their data entered into two separate scenarios in the HSF
waterfall model, which has been custom-made for the purpose.

Using the consolidator function in this model:

• The original view model data is entered into one scenario, named original view
(green rectangular block) in Figure 11.10.2;
• The actuals to date, and the future view models are combined and entered into
the other scenario, named present perspective (blue trapezoidal block) in
Figure 11.10.2; and
• The present perspective data is restated back to the same money terms as the
data of the original view model so that a comparison in the same money terms is
possible. This is achieved by utilising a money terms converter sub-program
within the waterfall.

The waterfall model then iterates the changes between the two scenarios in the steps
outlined in Figure 11.10.3 using HSF’s combined scenarios feature in original real money
terms. This is done for each series of data in the present perspective that represents a
factor/bar on the waterfall chart. Each is inserted one by one into the original view model
overwriting the original forecast assumptions; with the model being calculated at each
step to understand the effect on the NPV of the project.

The model then re-expresses the incremental NPVs for each step in current real money
terms and produces a customised waterfall chart, where green bars highlight a positive
impact on NPV and red bars illustrate a negative impact.

The waterfall chart therefore shows the effect of:

• The re-expression of the original view of the project into current real money
terms;
 214

• The iterated NPV steps to arrive at the present perspective of the project in
current real money terms; and
• The effect of including and excluding historical cash flows on the value of the
project, i.e. a comparison of project value between the present perspective and
the future view, both in current real money terms.

Run Cons
Macro program that drives the process

Consolidators and Money Terms Converter (MTC) program Input Output

Actuals totodate
date +
+ future
future view Restarts
Restarts
Actuals view
Compares
Compares comparison
comparison
(restated)
(restated) original view
original view in current
in current
Original real with present
with present real money
real money
Actuals totodate
Actuals date +
+ future
future view
view money terms perspective terms
perspective terms
(bolted together)
(bolted together)
)
Original→05
Original→07 06→End
08→End (MTC In original
In original And
And
Original view
Original view Actual nominal Current real real money
real money produces
produces
money terms money terms terms
terms waterfall
waterfall
chart
chart
Original real
Money terms

Present perspective
Original view
Comprising of:
Actuals to date and future view

Actuals to date
Original view Future view
05
Original – 07
Original
original real
real Current real
Actual nominal
money terms money terms
money terms

Figure 11.10.3 Schematic representation of the waterfall chart methodology in HSF

The general principal applied for presentation purposes is that original view baseline
model NPV is adjusted and re-expressed in the same terms as the current money terms
of the present perspective of the operation or project, i.e. in 2008, a project which was
approved in 2002 would have its NPV re-expressed by the nominal weighted average
cost of capital (WACC%) to 2008 money terms so that it could be compared to the
present perspective of the project.

The baseline against which the NPV is tracked is:

• Operations - the last signed-off long term plan (LTP) over the operation’s mining
right area;
• Approved projects - the original investment proposal (IP) or latest signed-off
change of scope; and
• Unapproved projects - the last signed-off stage-gate study work, feasibility
(level 2a), pre-feasibility (level 2b), and conceptual (level 2c) used to obtain
funding for the project.
 215

Then adjustments are made, first to those factors beyond the control of the operation or
project team (external factors – environmental variables), and then to those factors within
the control of the team (internal factors – management levers). Within these broad
divisions, the degree to which the factor can be influenced should decide the order in
which the waterfall chart is constructed.

The ownership structure of the project (e.g. joint venture (JV) involvement) or any other
value issue that needs emphasis is addressed as the final item on the waterfall chart. The
order in which the changes are made at present within Anglo Platinum is summarised in
Table 11.10.1 below:

Table 11.10.1 Project value tracking analysis – description of waterfall chart components

Step Description Comment

Original view (in original money terms)
Original investment proposal or latest
0 Original money terms & discount date
change of scope
Escalation by CPIX% and appropriate
0 Money terms adjustment mid-year discount rate for the project
to current money terms
Re-expressed investment proposal or Current money terms & discount rate
0
latest change of scope of present perspective of the model
Original view (in current money terms)
Step Description Comment
External factors
1 Rand-US dollar exchange rate Rand-US$
2 Platinum price Pt (US$/oz)
3 Palladium price Pd (US$/oz)
4 Rhodium, other PGMs & gold prices Rh, Ir, Ru & Au prices (US$/oz)
5 Base metal prices Ni, Cu & Co prices (US$/lb)
Royalties, working capital,
commissions & discounts, taxation &
6 Other economic factors capitalised interest effects, % sold of
production, carbon emission cost
effect
 216

Off-mine cash costs – smelting, BMR

& PMR refining & transporting costs,
7 Process operations process recoveries & pipelines, cost
of third party concentrate purchase (if
applicable)
Net impact of external factors only
Step Description Comment
Internal factors
8 Ore reserve Headgrade & metal ratio split
9 Mining operation Ore tons milled throughput & timing
10 Concentrator operation Concentrator recoveries & mass pull
On-mine cash costs – shafthead,
concentrator & indirect, each broken
11 On-mine cash operating costs
up into labour, stores, contractors,
utilities & sundries
Initial capex for major projects (if
12 Initial capital expenditure
applicable)
13 Stay in business capex Stay in business capex
Any other changes not covered (if
14 Other factors
applicable)
Present perspective - net impact of all factors (in current money terms)
Step Description Comment
Future view (in current money terms)
Removal of historic cash flow leaves
15 Exclusion of historic cash flow
current forward looking cash flow only
Aligns operation or project with LTP
16 Future view and reflects future view on a forward
looking basis in current money terms

Other value issues

JV impact on value to partner (if
17 Partner’s share
applicable)
JV impact on value to Anglo Platinum
17 Anglo Platinum share
(if applicable)
 217

Procedure for restating the original view baseline model (reference to Figure 11.10.1)
Original view baseline model
The original investment proposal (or
other published document chosen as
the baseline, such as a change of
scope) will have its value expressed in
the original money terms and discount
date (year) that were applicable at the
time of approval or sign-off. The initial
step is to restate this model value in the same current money terms as the present
perspective model. This is achieved by escalating the original view baseline model NPV
by the nominal WACC% to reflect the change in the time value of the NPV, which is
compounded annually and equivalent to:

n
((actual CPIX%) x (required company discount rate)) years

Current valuation models use varying discount rates depending on the type of operation
or project. Once the original view baseline model has been re-expressed in the same
current money terms and to the same discount rate as the present perspective model, the
process of changing the external and internal factors by incremental steps can proceed
[step 0].

External factors
Rand-US dollar exchange rate: The
first GA to change is the Rand-US
dollar exchange rate [step 1].

Platinum group metal (PGM) prices:

Second, PGM prices are brought into
line with current GAs. This should be
done in three steps: individually for
platinum, then palladium, then subsequently for rhodium, other PGMs (iridium and
ruthenium) and gold [steps 2,3,4].

Base metal (BM) prices: BM prices (nickel, copper and cobalt) are dealt with in the same
way, as a single step [step 5].

Other economic factors: Other economic factors are dealt with as one step. It comprises:
royalties, changes in working capital, changes in commissions and discounts, taxation
 218

and capitalised interest effects, percentage of produced metal sold, and carbon emission
cost effect [step 6].

Process division operations: Although not strictly an external factor, off-mine elements
such as: smelting, base metal refinery (BMR) and precious metal refinery (PMR), and ore
and concentrate transport costs, together with smelting and refinery recoveries and
pipelines, cost of third party concentrate purchase (if applicable) are assumed to be
largely beyond the control of the operational or project team. Therefore, they can usefully
be illustrated at this point. All off-mine factors are changed as a single step [step 7].

Once this adjustment is complete, the waterfall model comparison should fully reflect
present perspective GAs and off-mine elements. The NPV of the project at this stage
therefore reflects the impact of all of the external factors.

Internal factors
Internal (management levers) specific
factors are now considered, they are
defined as the on-mine elements
contained in the company’s HSF
modelling input sheets. The order of
substitution of the factors would be as
follows:
Ore reserve: This factor reflects any
differences between PGM and BM
head grades (quality of the ore reserve). Prill split changes should also be considered at
this point due to PGMs poly-metallic nature [step 8].

Mining operation: The mining production (quantity produced from the ore reserve) step
may be incorporated in two stages in order to identify any timing delay effects, and/or
change of scale of operational output in terms of tonnage, for example, changes in a
project from 250 kt per month in the original view model to the present perspective of
300 kt per month, with a two year delay to first production [step 9].

Concentrator operation: Any concentrator recovery and mass pull changes, noting that
there might be differences between the PGMs and BMs, are then considered [step 10].

On-mine cash operating costs: On-mine cash operating costs, which are divided up into:
shafthead, concentrator and central services (or indirect) costs are examined next
[step 11].
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Capital costs: Two types of capital expenditure are applied; initial capex for major projects
and stay in business (or ongoing) capex, which is applicable to both existing operations
and proposed major projects. See Figure 11.10.1.

This section may therefore be made up of two steps:

• Initial capex will only be applicable if a major project (either approved or in a
study phase) is being examined and compared. The two categories of major
project are expansion or replacement. An existing (level 1) operation will not have
any initial project capex associated with it [step 12].
• Stay in business capital will be applicable to both a major project (either approved
or in a study phase) and an existing (level 1) operation. It is the capital
expenditure required to maintain the life of existing assets without materially
increasing capacity. The categories of stay in business capital expenditure are:
replacement of specific equipment, business improvements, risk (safety,
legislative, and business), ore reserve development and shared infrastructure
(specific to area within an operation, operation wide and external to operations)
[step 13].

Other factors: If in a particular instance a change has occurred that is not covered by any
of the above categories, then it should be evaluated under the other factors category. An
explanatory note should be included to describe the change [step 14].

Once this adjustment has been made the cumulative NPV result of all of these
incremental steps gives the total NPV variance (either positively or negatively) from the
original view baseline model to the present perspective model, both being in current real
money terms and including all historical cash flows, enabling a valid business investment
performance comparison against that of the original investment decision to be made.

Future view
Exclusion of historic cash flows:
Eliminating historical cash flows,
which include sunk capital
expenditure, operating costs and any
revenues derived from historical
production, plus tax effects (if
applicable), will leave only the current
forward looking cash flow of the
project [step 15].
 220

Future view: After the historic cash flows have been excluded, the end point will now be
aligned with the latest forward looking version in the group’s LTP, and reflect the future
view model’s NPV of the operation or project [step 16].

Other value issues: One or more additional bars may be needed to illustrate the
ownership structure of the project, e.g. if it is associated with a JV (partner’s share and
Anglo Platinum’s share of value of the JV) or any other value issue that needs to be
emphasised [step 17].

11.10.3 Contribution to the Conceptual Framework

The ability to develop a continuous feedback loop of business investment performance
relative to original investment criteria (technical, capital and otherwise) is essential if
investment decision making and value maximisation is to be continuously improved.
Value tracking of capital investment decisions is thus critical for mineral asset value
optimisation and capital prioritisation in large multi investment organisations.

Project value tracking should be incorporated into governance reporting cycles (typically
quarterly) using existing systems and applications. This is achieved through the use of
common HSF investment centre models, as developed and applied in the overall short
and long term planning process. Valuation and tracking of projects is thus aligned with
the overall business planning process.

11.11 Supporting capability

The ability of a mining company to effectively execute an integrated business plan is

dependent on alignment of activities of all participants in the company value chain. One
of the objectives of the strategic long term planning process is to create alignment of
activities. This section highlights critical supporting capabilities to create an integrated
aligned business plan.

11.11.1 Introduction
The business execution activities of an integrated PGM mining company can be broadly
sub-divided along the value chain into two groupings – operating and support. The
operating activities are mining and process, underpinned by project and engineering
execution. These core operating activities are in turn provided support services by the
functions of human resources, operational engineering, marketing, finance and corporate
affairs. This is schematically represented in Figure 11.11.1.
 221

As indicated in Chapter 7 (Platinum value chain), core optimisation of production in

response to anticipated market and stakeholder demand occurs, for a multi mining right
entity, within the mining activity. The related operating activities of process and projects
are structured and optimised to match the anticipated strategic long term plan (SLTP)
production profile. Process capacity is designed and implemented in anticipation of the
aligned mining production profile developed in the SLTP. Projects necessary to the SLTP
are then optimised, engineered and executed according to the SLTP timing requirements.

VALUE CHAIN Exploration Mining Concentration Smelting Refining

MINING PROCESSING
OPERATING
PROJECTS

HUMAN RESOURCES

ENGINEERING

SUPPORT MARKETING

FINANCE

CORPORATE AFFAIRS

Figure 11.11.1 Alignment of operating and support activities to the value chain

Similarly the support functions of human resources, finance, engineering, marketing and
corporate affairs create capacity and capability to allow effective execution of the SLTP.

11.11.2 Process
Alignment of the process value chain activity is primarily capacity driven. Consideration is
given to installed capacity for each of the key process elements e.g. concentrators,
smelters, converter, magnetic concentrate, base metal refinery and precious metal
refinery. A typical capacity versus planned throughput chart is indicated in Figure 11.11.2.
 222

450
Capacity Capacity
Furnace Matte (tpa) 400 Expansion 1 Expansion 2
350

300

250

200
Business plan Installed
150 profile capacity
100

50
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Figure 11.11.2 Typical capacity planning profile for process element

Based on this type of data, opportunities for scale and timing optimisation are explored to
ensure timing and capital efficiency. Capacity decisions defined during this process then
influence parameters applied in the global assumptions where relevant. Decisions on
installed capacity associated with the final business plan then influence staffing
structures, operating cost and capital (project and SIB) requirements.

11.11.3 Projects
The project portfolio for the company is defined by the project content of the business
plan. Each mineral asset has, by virtue of its long term plan, a sequence of projects
which require execution, on a timeline, to deliver on the plan. The aggregated project
requirements across the company provide the projects portfolio.

Necessary capacity, capability and infrastructure can then be created to execute the
project portfolio as per the business plan timelines. Opportunities may exist to smooth
capacity requirements through outsourcing dependent on the overall business model
applied. Staffing and operating cost is determined by the capacity required to execute the
project portfolio whilst overall project capital is defined by the project portfolio in the
business plan.

11.11.4 Engineering and infrastructure

Engineering activities are primarily focused on maintenance of the existing asset base
and establishment of necessary infrastructure to match SLTP requirements.
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Maintenance of the existing asset base

These are the routine engineering activities required to maintain existing infrastructure.

Establishment of SLTP aligned infrastructure

Critical infrastructure in the areas of electricity supply and distribution, water supply and
distribution, and transportation systems is necessary to allow execution of the SLTP. This
infrastructure has long lead times and requires engagement with governmental structures
and communities for approval and execution.

Electricity supply requirements are estimated from the business plan profiles based on
project requirements plus anticipated process power draws. An interactive long term
consumption estimation model should be constructed to forecast average power and
peak power requirements based on production profiles. An integrated power supply and
distribution strategy can then be developed that integrates anticipated Eskom power
supply profiles with anticipated energy savings, self generation requirements and any
shortfalls to be supplied from independent power producers.

Water is fundamental to the business of mining. Development of a SLTP aligned strategy

for the use and discharge of water that caters for various medium and long term
scenarios / world views is therefore critical. A water strategy plan that considers existing
supply, potential storage facilities and inter-basin water movement should be developed.
This plan should indicate anticipated shortfalls / excesses in supply at various stages in
the business plan and contingency plans for alternate supplies, e.g. use of municipal grey
water. Maintaining a close relationship with Government in the development of the
medium to long-term water strategies to avoid competition for water resources is crucial.
The overall water strategy should be fully integrated with provincial and municipal
development plans.

Key principles are to:

• Manage water consumption to as low a level as possible;
• Guarantee water availability;
• Limit negative impacts on water sources; and
• Ensure that mining related consumption does not adversely impact the availability
of water to other users.

The concept of the true value of water that takes into account the other costs of using
water, such as social and ecosystem implications is central to this approach.
 224

Similarly an integrated transportation infrastructure plan that aligns with the SLTP is
necessary. Maintaining a close relationship with Government in the development and
integration of the medium to long-term transportation strategies is crucial as substantial
portions of transport infrastructure can be dual use and are often in public space.

Typically the transportation plan would encompass elements of:

• Ore transportation from mines to concentrator facilities (road / rail);

• Concentrate movement between concentrators and centralised smelter facilities
(road / rail / pipeline);
• People movement to and from operations – usually road; and
• PGM precious metal transportation from refinery to airport.

Similar principles, to those applied to water, are utilised for transportation to minimise
negative public impact.

11.11.5 Human resources

Outside of basic human resource strategy encompassing employee relations, industrial
relations, HR skills and competencies, culture and values, the core consideration that is
driven by the business plan is that of alignment of capacity and capability. Specific
attention should be given to:

• Overall staffing levels and required skills by activity by operation;

• Longer term skills development;
• Housing requirements;
• Training requirements;
• Transformation; and
• Incentive schemes.

These aligned requirements then define the necessary operating cost structures and
capital requirements to effectively execute the business plan.

11.11.6 Corporate affairs

Corporate affairs largely manifests in the realm of sustainable development. The Mineral
and Petroleum Resources Development Act (MPRDA), under which mines are governed,
fully embraces the concept of sustainable development in Section 37, which refers to the
National Environmental Management Act’s definition of sustainable development as “the
integration of social, economic and environmental factors into planning, implementation
 225

and decision-making so as to ensure that development serves present and future

generations”.

The MPRDA requires all mining operations to have social and labour plans and
environmental management programmes in place, and to comply with, and publicly report
on, progress towards meeting the requirements of the Mining Charter. The strategic long
term plan provides the basis on which social and labour plans and environmental
management programmes are structured to ensure alignment with overall business
objectives.

11.11.7 Marketing
The interaction between the SLTP and marketing comprises two phases; the supply /
demand dynamic and forecast market excesses / shortfalls that provide the initial input
into the business strategic intent, and the alignment of sales contracts, by metal, based
on the business plan that arises from the SLTP.

Industry and competitor analysis

An annual industry and competitor analysis is necessary to fully understand the market
dynamic and likely supply / demand / pricing scenarios. These inputs are integral to the
value based management approach (Section 11.6) and definition of metal pricing in the
world view or scenario development that defines the global assumptions (Section 11.5).

Sales contracts
PGMs are primarily sold through contractual agreements with the primary consumers or
fabricators (Section 7.4), with limited metal volumes moving through the open markets.
The structure of these contracts (volume, price, delivery, form) is influenced by the
forecast availability of metal arising from the business plan as developed through the
SLTP.

11.11.8 Finance
Outside of the routine management accounting and corporate finance functions, finance
activities are fundamentally focused on cash flow and balance sheet management for the
SLTP. Mining projects are invariably long lead time, high capital requirement entities
requiring cash flow management over extended periods. The ability to generate pro forma
annual financial statements from the HSF models of the business plan arising from the
SLTP, over a range of time periods for a range of scenarios, facilitates cash flow and
balance sheet management.
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11.11.9 Contribution to the Conceptual Framework

The ability of a mining company to effectively execute an integrated business plan is
dependent on alignment of activities of all participants in the company value chain. One
of the key objectives of the strategic long term planning framework is to create alignment
of activities across functional groupings and along the company value chain.

The long term plan thus provides the basis for resource planning of all support
capabilities (process, engineering, projects, infrastructure, human resources, finance,
marketing, and corporate affairs). Supporting capability plans are aligned with the
business plan requirements and resourced to ensure timely delivery of capacity and
capability as necessary.
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12 CONCLUDING CHAPTER

12.1 The Challenge

The challenge facing a mining company in South Africa, with multiple mining rights to
PGM mineral resources of differing characteristics is to how to create sustainable value
whilst operating within mandated strategic bounds, identified constraints, and variable
market and economic conditions.

This challenge translates into the research question that this work addresses:

How does a company with rights to exploit multiple platinum group metal mineral
resources of differing characteristics (e.g. location, grade, metal factor,
exploitation method, metallurgical characteristics, physical location, socio-
economic setting), select and implement a strategically aligned project portfolio
that enables optimal mineral resource exploitation whilst operating within
mandated strategic bounds, identified constraints, and variable market and
economic conditions?

For a mining company to create sustainable value from mineral assets, it is necessary to:

• Optimise the composition of the mineral asset portfolio to align with strategic and
business objectives;
• Create and operate long term assets within an anticipated long term business
environment; and
• Create and retain flexibility of short term tactical response that allows effective
response to short term shifts in the business environment.

To achieve this, it is necessary to:

• Allow the fixed physical nature of the mineral asset(s) to drive definition of the
optimal (lowest capital cost, lowest operating cost, highest efficiency, maximised
cash flow) technical solution to mining and concentrating activities;
• Define and apply different business environment perspectives, world views or
scenarios, to determine possible economic viability under the different
perspectives, i.e. define the value proposition under different scenarios – what
are the options?
• Develop and resource a portfolio of production entities from the mineral asset
portfolio that creates flexibility to near and longer term business environment
 228

shifts, i.e. a production mix that allows variation of output (metals, operating cost,
capital intensity) to respond to market demand and pricing.

These activities require a structured, integrated approach across all elements of the
business value chain from exploration through to product sales. Typically, however,
organisational structures and operating philosophies create discipline specific groupings
(“silos”) across the organisation which work against alignment of purpose and integrated
outcomes in the long term planning and exploitation of mineral assets.

The solution lies in systematic application of a series of tools and techniques, within a
conceptual framework or philosophy, that aligns decisions and actions across the
company, using a common language, standards, systems and processes, and defines
the concept of strategic long term planning - the definition of which is the intent of this
work.

12.2 The conceptual framework

The inter relationship and nature of the strategic long term planning framework that
enables this process is schematically represented in Figure 3.1,(repeated overleaf)
should be read from the bottom of the diagram, as follows:

• The global and national business environments, in conjunction with the

characteristics of the market for platinum group metals create the context in
which world views or scenarios are developed. This is part A of the diagram.

• World views or scenarios (part B of the diagram) are constructed and used to
develop long term planning parameters called global assumptions or GAs that
represent the relevant underlying assumptions for each scenario, e.g. metal
prices, exchange rates, escalation, etc. These planning parameters inform the
financial analysis and optimisation of the business plan, and create the link
between mineral asset portfolio utilisation and the market.

• The annual cyclical business planning process, as represented in part C of the

diagram, is then executed using the planning parameters or GAs associated with
the preferred or most likely scenario. The composition of the mineral asset
portfolio is reviewed relative to the most likely scenario, the current state of
execution of projects and company strategic intent. The physical characteristics
of the individual mineral assets within the portfolio determine the development of
a mine extraction strategy, the mining right plan, the budget and long term plan
 229

per asset and collectively for a multi-asset

multi asset business. Concurrently value is
optimised through application of value based management principles during the
development
opment of the strategic long term plan – at mineral asset level and company
level for a multi-asset
multi organisation.
 230

• The business plan, which is the output of the strategic long term planning
process, is then reassessed for a possible shift to the next most likely world view.
Real options arising from evolving alternate trajectories are evaluated and a
contingency plan is developed, based on planning parameters associated with
the alternate scenario. This is the link from part C of the diagram back to part B.

The business plan then forms the basis upon which the organisation is structured
and resourced. Supporting, aligned execution plans are developed for the
necessary supporting activities in finance, human resources, projects,
engineering and infrastructure, and sustainable development. All of which takes
place in an annual planning cycle.

12.3 The operating context

The global and national business environments, in conjunction with the characteristics of
the market for platinum group metals (part A of the diagram) create the context in which a
PGM company operates.

Key elements of this context are:

• Characteristics of the PGM mineral resource;

• Platinum value chain;
• Characteristics of the PGM market;
• Global business environment; and
• National business environment.

Each of these contextual elements contributes to, and influences, the world views or
scenarios that create the context in which business planning takes place.

The PGM mineral resource

The ability to respond to variable PGM demand over long periods and create strategic
planning flexibility, is dependent on being able to source production of PGMs from
mineral assets with different metal ratio characteristics. Variability of metal content by
geographical region is thus a strategic planning element that allows production portfolio
development and creates flexibility to meet varying PGM demand over time.

Similarly, reef mix (UG2, Merensky, Platreef, MSZ) will impact saleable metal ratios and
cost of production. The cost of production, in the Bushveld Complex, despite normal
 231

increases with depth and distance from infrastructure, has step change at ~750m below
surface owing to the need to introduce refrigeration and cooling.

Holding mineral assets outside of the Bushveld Complex, creates longer term strategic
flexibility, owing to the marked differences in Pt/Pd ratios, and will be beneficial in
reducing overall long term mineral asset portfolio risk.

The platinum value chain

The PGM value chain is highly concentrated with five integrated suppliers (mining
companies) providing most of the global supply of refined PGMs to a limited number of
key intermediaries who service a broad spectrum of end users. Significant
interdependency exists between industry participants, with the security of supply key for
sustainable industry development.

The major industry producers tend to be integrated along the value chain and as such
have considerable assets in the mining and processing value chain elements. This is a
barrier to entry to new participants.

Owing to the nature of the mineral resource, underground mining of hard rock, narrow
tabular, deposits predominates. This drives high capital intensity for access infrastructure
development and long lead times to production.

Within the value chain the greatest opportunity to vary production of metals and the metal
mix lies in the mining activity, owing to the greater number of sources of metal.

The bulk (~70%) of operating profit arises from mining and processing activities rather
than from application and retail.

The understanding of the value chain and the relative contribution of each element and
the participants is an integral part of value based management, the principle of which
underpins value optimisation in the strategic long term planning framework .

The PGM market

The PGM industry is market driven and understanding the nature of demand is crucial to
success. The demand for PGMs can be broadly characterised into two groupings; derived
demand and created demand, the combination of which creates flexibility and sustains
price over periods of economic volatility.
 232

Current PGM industry revenues are concentrated in two end-use segments: automotive
emission control and jewellery. The automotive segment accounts for about 60% of
current market revenues and jewellery about 10%. Jewellery, as derived demand, acts as
a counter-cyclical shock absorber when the supply/demand balance shifts.

The industrial demand segment demonstrates the versatility of PGMs and has achieved
high growth rates from a low base. Fuel cells and emission control in the stationary fossil-
fuel burning sector are potentially large opportunities for PGMs that are, as yet,
unrealised.

Aspects that are likely to negatively impact PGM demand growth in the near and
medium-term are:

• Record PGM price levels have increased thrifting (catalyst loading reduction)
efforts and substitution of platinum by palladium in automotive segment, as well
as slowed down PGM jewellery market penetration.
• Growth in recycling is accelerating due to current high PGM prices.
• Record fuel prices are driving shift to more fuel efficient vehicles including smaller
and/or hybrid vehicles which (depending on engine system design) may require
lower PGM loadings.

However, medium- and long-term growth opportunities could expand the PGM market but
will depend upon market development, new legislation and sponsorship of governments.

Growth potential in the BRIC economies’ jewellery sector remains an opportunity; market
penetration is low and markets could grow with increasing consumer income and
spending but this would require sustained market development. Broadening the scope of
vehicle emissions legislation to include new pollutants and other vehicle types (e.g.
buses, freight trucks) will expand PGM auto catalyst demand. Similarly energy
diversification and independence, and regional environmental pressures are accelerating
the shift toward alternative fuels and zero-emissions vehicles. PGM solutions (e.g. fuel
cells) could lead to higher demand, but competing technologies include battery electric
vehicles which are not expected to use PGMs.

Increased cost of energy and societal change are making PGM-based fuel cell
technologies attractive in new industry sectors such as electricity generation, aviation
(auxiliary power), portable power units(e.g. substitute for batteries in laptops, cell phones)
and marine applications.
 233

Within the Strategic Long Term Planning Framework the key tools to facilitate market
understanding and intelligence are:

• The Porter “five forces” analysis;

• Market information in the form of a ‘fact base’;
• An annual industry and competitor analysis; and
• Industry cost curve analysis.

Understanding of the market and the environment in which it functions (part A of

Figure 3.1) informs the building of world views or scenarios and the associated global
assumptions that are used to develop and optimise the investment centres that comprise
the business plan.

The global business environment

Within the PGM industry the global business environment has greatest impact on
strategic long term planning in the areas of:

• Emission standards: legislated emission standards underpin the demand for

PGMs primarily for autocatalysis.
• Technology: changes in transportation technology will ultimately impact demand
for PGMs as the world moves away from fossil fuel dependent internal
combustion engines to zero emission technology.
• Global economy: demand for PGMs is inextricably linked to global economic
activity.

Emissions legislation has been the key driver of PGM demand since the mid 1990’s.
Increasingly strict legislation for vehicle emissions drives and supports PGM consumption
for emissions control. However, the positive impact of emissions legislation on PGM
autocatalyst demand may now diminish with modest or no further impact from enacted
legislation on ~80% of global production.

Increased fuel cost and growing environmental consciousness is accelerating a move

towards zero emissions objectives. Despite early challenges to the achievement of zero
emissions, adoption of new technology will have an impact on PGM demand. Under
these circumstances there would be downward pressure on PGM demand due to limited
scope for tightening of emission standards and smaller vehicles unless there was
widespread adoption of fuel cell based energy solutions.
 234

Beyond the 25 year window it is inevitable that the next generation zero emission
technologies will gain significant market share as infrastructure development matches
needs. Autocatalysis would be limited to specific approved applications with an upside
potential for the widespread adoption of fuel cells as a primary energy source.

Global economic activity is the driver of consumption of product from the minerals and
metal industry. Changes in economic activity have a direct and immediate impact on the
industry as they impact demand and ultimately pricing. Anticipating possible scenarios is
thus crucial.

The critical aspects of the global business environment must be incorporated into the
strategic planning framework in order to align long term investment with probable market
demand scenarios. This is done through integration of world views that adequately
encapsulate the key global dimensions, into the planning process.

The national business environment

The national business environment is dominated by a legislative environment which has
been created to move South African from a racially biased society to a true, majority
based, democracy.

The legislative environment is a key enabler of mining and business activities. Acquisition
and effective exploitation of mineral assets is predicated on a well defined and effective
system of legal tenure that will allow investment in long life assets.

The exploration for and subsequent exploitation of minerals in South Africa is subject to a
wide range of legislation and regulation however mineral asset acquisition and
exploitation is primarily governed by the Minerals and Petroleum Resources Development
Act and associated regulation. The social licence to operate is further impacted by the
Mining Charter.

Understanding and operating within the context of the legislation applicable to the
minerals industry is thus a requisite for effective business functioning and strategic long
term planning.

12.4 Strategic long term planning

The link between the operating context and the planning of exploitation of the mineral
asset is that of world views or scenarios (part B of the diagram). These are constructed
and used to develop long term planning parameters called global assumptions or GAs
 235

that represent the relevant underlying assumptions for each scenario, e.g. metal prices,
exchange rates, escalation, etc. These planning parameters inform the financial analysis
and optimisation of the strategic long term plan and the business plan.

The annual cyclical business planning process, as represented in part C of the diagram,
is then executed using the planning parameters or GAs associated with the preferred or
most likely scenario. The composition of the mineral asset portfolio is reviewed relative to
the most likely scenario, the current state of execution of projects and company strategic
intent. The physical characteristics of the individual mineral assets within the portfolio
determine the development of a mine extraction strategy, the mining right plan, the
budget and long term plan per asset and collectively for a multi-asset business.
Concurrently value is optimised through application of value based management
principles during the development of the strategic long term plan – at mineral asset level
and company level for a multi-asset organisation.

The business plan, which is the output of the strategic long term planning process, is then
reassessed for a possible shift to the next most likely world view. Real options arising
from evolving alternate trajectories are evaluated and a contingency plan is developed,
based on planning parameters associated with the alternate scenario. This is the link
from part C of the diagram back to part B.

The business plan then forms the basis upon which the organisation is structured and
resourced. Supporting, aligned execution plans are developed for the necessary
supporting activities in finance, human resources, projects, engineering and
infrastructure, and sustainable development. All of which takes place in an annual
planning cycle.

Execution of this process, in a planning cycle, requires attention to:

• Business strategy definition;

• Scenario planning (world views);
• Definition of long term planning parameters (global assumptions);
• Business value optimisation (value based management for identification and
choice of business model options);
• Long term planning procedures (planning cycle, mine extraction strategies,
mining right plans, long term plans);
• Capital investment prioritisation, real option analysis and project value tracking;
• Definition of the long term plan and business plan;
 236

• Definition of upside or downside responses (contingency plan); and

• Execution plans for supporting capability:
o Project portfolio execution;
o Metallurgical process capacity (smelting, refining ,effluent);
o Infrastructure (water, electricity, roads, rail, housing);
o People (skills, motivation, organisational culture); and
o Community (stakeholder alignment and participation).

These activities are not necessarily sequential, as feedback loops occur between
different activities at different points in the planning cycle.

Business strategy definition

No material change is required in the normal, accepted processes and techniques of
business strategy definition. However the SLTP framework provides critical input into the
initial stages of information gathering (via the world views or scenario process) and in the
identification of critical issues/ options facing the business (via the real option analysis
process).

Scenario planning (world views)

The scenarios or world views that are developed as part of the strategic long term
planning process are integral to the optimisation of the mineral asset portfolio, inform the
development of long term planning parameters (the global assumptions) and impact
strongly on contingency planning and real options assessment. Critically, the world views
or scenarios create the link between the market, the global and national business
environments and the utilisation of the mineral asset portfolio.

Dependent on the number of scenarios developed (typically three, maximum four)

alternate business options can then be developed with identification of suitable
trajectories between scenarios, dependent on changing circumstances or progression
between scenarios over time.

The critical difference in approach is rational movement towards an identified and agreed
world view (previously introduced through the scenario development process), rather than
an ad-hoc crisis driven response. The organisation knows what trajectory to follow as the
contingency positions have been previously defined.

Long term planning parameters (global assumptions)

The global assumptions are a set of long term planning and economic parameters that
best encapsulate the external drivers of value associated with a scenario or world view to
 237

be applied in business planning. The aggregated parameters provide a descriptor of a

current and future world view and transition between the two.

Crucially the global assumptions provide the link between the agreed world views or
scenarios and the associated economic parameters for business planning purposes.

The global assumptions create discipline and uniformity of assumptions, as they are the
only economic planning parameters permitted to be applied across the organisation for
planning and valuation purposes. This facilitates comparison and ranking of options.

Business value optimisation (value based management)

The logic inherent in value based management (VBM) is not new to business or the
mining industry and has been practised in a variety of forms for several years.

Value based management as a process, within the strategic long term planning
framework:

• Provides a set of metrics and a logic framework for value and prioritisation
discussions;
• Ensures alignment of objectives, establishes a common language, standards,
and processes to align decisions and actions;
• Provides a common approach to setting goals, identifying issues and
opportunities, making decisions, allocating resources and taking action; and
• Creates a common set of tools and approaches to understand sources and
drivers of value, to prioritise issues and evaluate options.

What is different however is the adoption of the logic and its application to the strategic
long term planning framework. The key question that VBM answers in this process is:
What is profitable growth, now and in a possible future world view and which of the
options should be prioritised?

Long term planning process and procedures

The overall objectives of the long term planning process are to create alignment of
activities to a common company planning calendar; to ensure utilisation of common logic
and tools that allow comparison between operations and options; to generate a common
business plan that drives execution of the company strategy.

The business planning activity creates a central process around which the business
organises planning activities to meet the needs of the Executive and the Board. It creates
 238

an annual rhythm to activities, so that all parties are aware, through the ‘five Ps’ of the
planning process (Philosophy, Programme, Process, Product, and People) as to what
must be done, by whom, by when and to what standard to meet the company planning
needs. Alignment with support activities is ensured through use of the long term plan as
the base plan for resourcing, capability and infrastructure establishment.

The long term planning process ensures optimisation at mining right area level, with
strategically aligned constraints, before consolidation and optimisation at a mineral asset
portfolio (company) level.

Contingency planning
Contingency planning is the preparation for an unexpected, rapid shift in industry
dynamic. Despite development of world views or scenarios, the rate of change between
anticipated world views is difficult to anticipate.

Generation of contingency plans (‘Plan B’) allows a rational, controlled shift between one
operating state and the next based on earlier analysis. It is a means of reducing the scale
of crisis through anticipation and prior sensitisation.

Contingency planning recreates the link between the business plan (part C of Figure 3.1)
and the world views (part B of Figure 3.1) by creating an iterative loop based on a
different set of global assumptions. This process is real option valuation and drives re-
optimisation of the long term plan and the mineral asset portfolio composition in light of a
possible alternative world view.

Valuation logic
Definition of a common approach to valuation modelling of capital investment decisions
within the strategic long term planning framework is crucial and provides a basis for
consistent valuation modelling practice. Discounted cash flow (DCF) methodology is
applied with emphasis on net present value (NPV) and internal rate of return (IRR).

Distinction is made between the capital investment decision from which consideration of
historic / sunk cash flows is excluded, as it has no bearing on the future viability of the
investment, and assessment of overall business performance where it is necessary to
include all past cash flows.

Determination of project value (NPV) is based on the philosophy of a differential value

obtained from the difference between the base plan at level 1e (the agreed and financed
production, cost and capital profile associated with all investment centres at level 1e
 239

and 1 with economic tail management applied) and the base plan plus the project (with its
associated combined production, cost and capital profile plus economic tail
management), i.e. mine plus project less mine without project.

Valuations are conducted with and without tax shield benefits. Excluding tax shield
benefits (stand alone assessment) allows ranking of projects whilst inclusion of tax shield
benefits indicates the likely return from the project once included into the overall business
plan portfolio.

Inclusion of real option logic into the strategic long term planning process is achieved
through:

• Defining world views / scenarios to quantify uncertainty (economic uncertainty);

• Investment centre categorisation by confidence of estimate (technical
uncertainty);
• Defining minimum DCF investment criteria (e.g. cost of capital and risk adjusted
discount rates) to allow inclusion in the plan;
• Having a defined contingency plan that highlights the relative priority of options
(maintain, expand, close, dispose) available for consideration;
• Cyclically evaluating all options within a mining right area (the mine extraction
strategy) with the intention that the best option, the option that meets a strategic
intent (the business plan constraints) be selected; and
• Continuous transparency within the mining right plan portfolio of investment
centres.

Project ranking and prioritisation can be relatively simplistic and based on NPV, short
term cash flow and inter-investment centre (spatial) dependencies after any strategic
consideration (e.g. mineral right tenure requirements).

Project value tracking

The ability to develop a continuous feedback loop of business investment performance
relative to original investment criteria (technical, capital and otherwise) is essential if
investment decision making and value maximisation is to be continuously improved.
Value tracking of capital investment decisions is thus critical for mineral asset value
optimisation and capital prioritisation in large multi investment organisations.

The use of common HSF investment centre models, as developed and applied in the
overall short and long term planning process allows integration into existing reporting
 240

and governance cycles, and ensures alignment with the overall business planning
process.

Execution plans for supporting capability

The ability of a mining company to effectively execute an integrated business plan is
dependent on alignment of activities of all participants in the company value chain
(Mining, Process, Projects and Engineering, Human Resources, Marketing, Corporate
Affairs and Finance).

One of the key objectives of the strategic long term planning framework is to create
alignment of activities across functional groupings and along the company value chain.
This is facilitated by the integrated process and dependencies created between the
business plan and resourcing of the various support functions.

12.5 Application - Anglo Platinum Limited

The example application (see Appendix A) includes the development and implementation
of the strategic long term planning framework at Anglo Platinum Limited over the period
2004 to 2009. This is the period during which the conceptual framework, as developed by
the author, was implemented for strategic long term mine planning across the company.

During this period significant shifts occurred in market supply and demand, there was a
major global financial crisis and three changes in executive management at the company.
Despite these changes, the common thread of continuity has been the strategic long term
planning process. Anglo Platinum has adjusted and adapted as necessary and retained
its position as the premier producer of platinum globally.

Anglo Platinum Limited is the world’s leading primary producer of platinum group metals
(PGMs) and accounts for about 40% of the world supply of newly mined platinum and
more than half of South African supply to the world market (~70%).

The application study considers three periods:

• 2000 to 2003: this creates a context for Anglo Platinum prior to development and
application of the conceptual framework;
• 2004 to 2007: implementation of the framework; and
• 2008 and beyond: commentary relating to changes subsequent to the global
economic readjustment.
 241

2000 to 2003 – Context

This period is characterised by a strong strategic vision and aggressive growth plan into
an expanding market, ambitions that were tempered by a radical shift in global economics
following the ‘9 –11’ event in the USA during 2001.

Good progress was made in addressing mineral right tenure risks associated with
pending changes in mining right legislation and BEE charters.

The necessary processing infrastructure to meet expansion goals was established (e.g.
new smelter at Polokwane) however a cohesive and continuous link between strategic
ambition and the ability to deliver the necessary outputs from the mineral assets was not
evident.

A review by the major shareholder, Anglo American, in 2003, of ability to deliver against
stated intent, in the light of changing global economic conditions, highlighted shortfalls in
planning processes. Questions were raised regarding the achievability of the ambitious
expansion programmes and several projects began to slide on delivery despite
announcements of slowing down of projects in light of the economic conditions.

2004 to 2007 – Implementation of the SLTP framework

During this period of change at the company many of the tools and techniques described
in Chapter 11 were developed, refined and implemented as strategic long term planning
at Anglo Platinum.

There was no material change in overall business strategy but what was evident was
increased integration of activities across the company value chain by virtue of the SLTP
activities. This is clearly demonstrated in confidential company strategy documentation.

Value based management was adopted as a key principle for business decisions with
companywide training occurring. This has persisted through to current (2010) asset
optimisation initiatives.

Regular (quarterly) development and distribution of long term planning parameters in the
form of the global assumptions has become standard company practice.

Scenario planning to establish alternate world views or scenarios was implemented with
alternate scenarios being manifest in the global assumptions.
 242

The long term planning process and programme has been fully implemented since 2004
with a range of enhancements occurring over time. Company policy and procedures have
been established and implemented that embody the key elements of the strategic long
term planning framework.

Policy and procedure has been defined and implemented on capital investment
prioritisation, the use of real option logic and project value tracking. The project value
tracking process and logic provides the basis for reporting of capital projects to the Board.

Development of contingency plan (‘Plan B’) options for each operation and the company
as a whole was practised with practical application during 2008.

Execution plans for supporting capability that align with the business plan are well
established. Separate water, electricity and road infrastructure strategies and execution
plans that integrate with the SLTP outputs are routinely developed. Human resource
planning became fully aligned with the business plan during this period.

2008 and beyond

The process that occurred during and subsequent to the global financial crisis and in
2008, 2009 and 2010 is vindication of the soundness of the strategic long term planning
framework, systems and processes.

Anglo Platinum, following record performance in the first half of 2008, reassessed the
existing 2009 business plan, during the third quarter of 2008, and implemented a SLTP
based contingency plan that has allowed continued operations during the global financial
crisis and subsequent recovery period.

During this period of global economic crisis, subsequent readjustment and reduced
demand, Anglo Platinum has:

• Stabilised production outputs, for the short term (2009 / 2010 / 2011), at the
same level as that of 2008 to match anticipated market demand;
• Slowed down execution of capital projects to limit capital expenditure and
manage available cash resources;
• Focused on managing costs and improving productivity so as to reduce
operating costs and improve overall positioning on the cost curve; and
• Reduced staffing levels through a reduction in contract employees and re-skilling
of full-time employees into critical positions.
 243

The strategic long term planning framework logic was utilised to:

• Understand the market – reviewing likely scenarios indicated the probability of a

move towards reduced metal demand at a lower price, as anticipated in the 2007
scenario exercise;
• Develop long term planning parameters aligned with probable world views –
primarily metal prices, exchange rates, escalation rates, capital availability;
• Apply value based management logic to ascertain the least value destructive
options in a decreased demand environment;
• Develop and evaluate contingency plan options in line with the overall VBM
approach; and
• Refine, evaluate and execute the agreed plan of action at two levels:
o Tactical – immediate contingency response using current SLTP data; and
o Strategic – refinement of the 2009 and 2010 business plan strategic
directives to accommodate different world views.

The immediate tactical response was primarily directed at cash flow management and
comprised:

• Reassessment and reduction of capital expenditure on expansion projects: All

projects in study or execution were reviewed and assessments made of options
to slow down or stop execution. Adjusted production and capital profiles were
processed through the current HSF models and revised estimates of NPV and
cash flow determined. This allowed re-ranking and prioritisation.
• Low cash generative, high break-even cost investment centres (wrong end of the
cost curve) were identified and reviewed. Based on this three shaft systems at
the Rustenburg mines were placed on care and maintenance following an
engagement process with organised labour.
• All contract activities (i.e. non-permanent employees executing non-core
activities) were reviewed and aligned with the revised production profile.
Concurrently the viability of these contracts over a protracted period of market
contraction was reviewed and, where relevant, notice given.

The strategic response was to:

• Redefine an acceptable level of debt during a period of reduced market demand

and metal price coupled with a shortage of financing facilities. This translated into
 244

a capital constraint, based on a forecast of flat production from 2008 to 2012,

applied during subsequent business planning processes.
• Fully review the operating structure of the organisation during 2009 and
restructure based on an operating matrix between the centre and the operations.
This resulted in a need to reduce staff at the centre and operations in line with a
defined staffing structure and productivity levels. This was in due course
executed through a voluntary separation process and / or retraining into roles
created by the re-adoption of specific contractor activities.
• Reassessment, during the subsequent business planning process, of shafts
placed on care and maintenance as an immediate tactical response, using an
approach of fix, close or sell.

On the basis of both the tactical and strategic responses, the business plan for 2009 was
modified and the business plan for 2010 (developed during 2009 for 2010) was
developed taking cognisance of:

• A balance sheet (debt) requirement that translated into a capital expenditure

constraint;
• A market driven production constraint to hold production at 2008 levels but from
the highest margin sources;
• A working cost objective to maintain working cost flat at 2008 levels for three
years through labour productivity improvements and asset optimisation initiatives;
and
• Optimisation of installed capacity in all elements of the value chain but
specifically process operations.
 245

12.6 Conclusion

The strategic long term planning conceptual framework is a logic construct that translates
into a defined outcome – the business plan, through a series of repeated actions, using a
standardised set of tools and techniques. It creates discipline and structure to allow
shared understanding of the opportunities and challenges facing a mining and metals
company. In essence it is a ‘way of doing things’ - the framework provides the basis for
effective management of a large, diverse, complex, mineral asset portfolio whilst creating
shared understanding and a common language.

There are no complex equations or processes but a coherent, logical process that
integrates various elements, using tools and techniques that are known, or intuitively
understood, by most participants – scenarios, discounted cash flow analysis, value based
management, project value tracking logic, ranking and prioritisation, option identification
and analysis to create order and logic.

It is a logic construct and process that:

• Enables integration between Corporate and Operations, both mines and process
operations, and between MRM / Finance / Business Development / Projects;
• Creates a planning process that is routine but sufficiently adaptable, and which
allows for planning flexibility;
• Improves the quality of product in long and short term planning by better balance
of effort between the two;
• Facilitates communication between stakeholders (Corporate, Operations,
Services, Projects);
• Defines the process, its components and inter-dependencies;
• Produces a defined product which is aligned to expectations and allows effective
decision making;
• Defines accountability, roles and responsibilities; and
• Ensures delivery of a value optimised, strategically aligned, production profile
from the business mineral asset portfolio.
 246

13 LIMITATIONS OF RESEARCH

The intent of this research work was to develop a conceptual framework for the Strategic
Long Term Planning of South African PGM operations. The work has been focused on
developing a framework for application by holders of multiple mining rights, that will allow
effective mineral asset portfolio utilisation in the short and long term.

No formal consideration has been given to the applicability of this framework to other
mineral and metal commodities however the principles of the SLTP framework are
generic and are broadly applicable across the minerals industry.

The work has been developed and implemented at Anglo Platinum Limited but has not
been formally implemented, in its entirety at another mining company. Selected portions
of the framework and processes, tools and techniques, have however been adopted by
other Anglo American business units and some industry participants.

Opportunity does exist to increase the level of automation of systems associated with the
SLTP framework specifically in areas of simulation (e.g. production profiles under
different world views) and generation of forecast and actual benchmark data on a short
term basis for operational control purposes.

Similarly further work is required (beyond the current prototype) on developing and
testing enterprise level optimisation solutions for underground mining operations.
 247

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 258

APPENDIX A - EXAMPLE APPLICATION: ANGLO PLATINUM LTD

A.1 Introduction

The example application utilised is that of Anglo Platinum Limited during the period 2004
to 2009. This period is utilised as this is the period during which the conceptual
framework, as developed by the author, was implemented for strategic long term mine
planning across the company.

Despite the use of historic data, public domain data and limited confidential company
documentation, it has been necessary to restrict some information to ensure requisite
company confidentiality. Every effort has been made to ensure that this constraint does
not impact on the demonstration of the application of the strategic long term planning
conceptual framework to a large, multi mineral asset, PGM mining company. Company
communications, for the period 2004 to 2007 in particular, have been included in extract
to illustrate the process.

Anglo Platinum Limited is the world’s leading primary producer of platinum group metals
(PGMs) and accounts for about 40% of the world supply of newly mined platinum and
more than half of the South African supply to the world market (~70%). The company is
listed on the JSE Limited. At 31 December 2009 the company had 236 840 231 issued
ordinary shares (90.3% resident shareholders, 9.7% non-residents). The controlling
shareholding (79.7%) is held by Anglo South Africa Capital (Proprietary) Limited.

Anglo American Platinum Corporation Limited (Amplats) was formed in September 1997
as the holding company and sole listed entity for the restructured group of companies that
resulted from the unbundling of Johannesburg Consolidated Investments (JCI) and as a
result acquired ownership and control of Rustenburg Platinum Mines (Amandelbult, Union
and Rustenburg sections), Potgietersrus Platinum and ATOK mines as they were known
at the time. This consolidation resulted in a mineral asset portfolio encompassing
properties across the Bushveld Complex, Zimbabwe and internationally. In October
2000, the company name changed to Anglo Platinum Limited (Anglo Platinum).

During the period 2000 to 2008 considerable rationalisation of mineral assets resulted
from changes in South African mineral legislation; primarily the Mineral and Petroleum
Resources Development Act and the Mining Charter. Details are reflected in subsequent
sections.
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During 2009, Anglo Platinum Limited’s mining operations were restructured, with the
former Rustenburg Section being split into five mines; Bathopele, Khomanani,
Thembelani, Khuseleka and Siphumelele, whilst the former Amandelbult Section was split
into the Tumela and Dishaba mines. The Union Mine, Mogalakwena Mine (formerly
Potgietersrus Platinum Mine) and Twickenham Mine remained unchanged.

The group has a number of joint ventures encompassing:

• Bokoni mine – On 30 June 2009 Anglo Platinum sold and transferred control to
Anooraq Resources (Anooraq) of an effective 51% of the formerly wholly owned
Lebowa Platinum Mine (Lebowa) and an additional 1% of the Ga-Phasha,
Boikgantsho and Kwanda joint-venture projects to form the Bokoni Mine.
• ARM Mining Consortium Limited, a historically disadvantaged South African
(HDSA) consortium, operates the Modikwa Platinum Mine.
• Royal Bafokeng Resources, an HDSA partner, operates the combined Bafokeng-
Rasimone Platinum Mine (BRPM) and Styldrift properties (now Royal Bafokeng
Platinum).
• The Bakgatla-Ba-Kgafela traditional community, hold a 15% share in Union Mine.
• Eastern Platinum Limited (subsidiary of Lonmin Plc) and its HDSA partner, the
Bapo-Ba-Mogale traditional community, and Mvelaphanda Resources operate
the Pandora Joint Venture.
• Xstrata Kagiso Platinum Partnership operates the Mototolo Mine.

Anglo Platinum also has pooling and sharing-arrangements with Aquarius Platinum
(South Africa), covering the shallow reserves of their Kroondal and Marikana Mines that
are contiguous with Anglo Platinum’s Rustenburg mines.

The group’s smelting and refining operations are wholly owned through Rustenburg
Platinum Mines Limited and are situated in South Africa. These operations treat
concentrates not only from the group’s wholly owned operations, but also from its joint
ventures and from third parties.

Elsewhere in the world, the group is developing the Unki Platinum Mine in Zimbabwe and
is actively exploring in Brazil. It has exploration partners in Canada, Russia and China.

The company strategy is to create maximum value through:

• Understanding and developing the market for PGMs;
• Growing the company to expand into those opportunities; and
• Conducting business safely, cost effectively and competitively.
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Three periods are considered, with comment on the evolution and application of the
Strategic Long Term Planning Conceptual Framework:

• 2000 to 2003: This creates a context for Anglo Platinum prior to development and
application of the conceptual framework;
• 2004 to 2007: Implementation of the framework; and
• 2008 and beyond: Commentary relating to changes to the company subsequent
to the global economic readjustment.

A.2 2000 to 2003

A.2.1 Business strategy

The period from 2000 through to 2003 coincided with a buoyant period for the platinum
industry, including Anglo Platinum with steady growth in output and metal prices. It was
during this period that company strategy, and the key dimension of being a market driven
organisation, was clearly articulated.

An aggressive expansion programme, predicated on rapid growth in PGM demand driven

by autocatalysis requirements, was developed to underpin the company vision and
strategy at the time.
The strategy being:

• To grow the market for platinum group metals;

• To expand into that growth; and
• To optimise value in current operations.

In the chairman’s statement for 1999 (Anglo Platinum, 1999), shareholders were informed
that, owing to the projected growth in demand for platinum and the prospect of
diminishing supplies of Russian metal, the group was expanding its operations with a
view to achieving a productive capacity of 2.65 Moz by 2003. The increase in production
would come, in part from previously announced projects; the Bafokeng-Rasimone
Platinum Mine (now Royal Bafokeng Platinum), the Middelpunt UG2 project at Atok (now
Bokoni Platinum Mine), and the expansion of capacity at Potgietersrust Platinum Mine
(now Mogalakwena Mine). The balance would come from expansion at existing mines
and from new projects, including the then recently announced Maandagshoek project
(now Modikwa Platinum Mine).

In May 2000, the group announced that its ongoing assessment of supply and demand
fundamentals for platinum indicated more favourable medium-term prospects for
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jewellery, industrial and autocatalyst demand than had been previously forecast and that,
accordingly, the Board had decided to increase group production forecast from the 1999
level of some 2 Moz pa of platinum to 3.5 Moz pa by the end of 2006. The additional
metal would be sourced from a number of new mines as well as from the expansion of
existing mines in South Africa. Anglo Platinum had already informed shareholders that a
new mine, Maandagshoek (now Modikwa), producing 162 koz and costing R1.35 billion in
2000 money terms, would come into operation by 2002. Further mines and expansions
would be announced as and when they were approved by the Board. The capital
expenditure required for the expansion of mining and processing capacity was estimated
at R12.60 billion in 2000 money terms, which would be funded from operating cash flows
and borrowings. It was further stated that the expansion programme would result in the
creation of some 13 000 new jobs and that the considerable investment, together with the
significant foreign exchange earnings from the sale of the additional production, would
favourably impact on the South African economy to the benefit of all stakeholders (Anglo
Platinum, 2000).

Mining authorisation for the Maandagshoek (now Modikwa) south shaft area was
received on 6 November 2000 and the first blast was carried out on 9 November 2000.
Authorisation for the north shaft was granted in February 2001. Shareholders were
informed on 17 August 2000 of a joint venture between Aquarius Platinum (Aquarius),
Kroondal Platinum Mines (KPM) and Rustenburg Platinum Mines (Rustenburg) for the
expansion of KPM’s capacity from some 100 koz to some 300 koz of platinum per
annum, in which KPM and Rustenburg were to share on a 50:50 basis. During the latter
half of 2000, Anglo Platinum announced expansion projects to increase the output of
Rustenburg and Union Sections by 395 koz and 94 koz of platinum per annum at capital
costs of, respectively, R1.3 billion and R423 million in 2000 money terms. Both projects
were scheduled for completion in 2002. The mining projects announced would, on
completion, augment the group’s production by approximately 1 Moz of platinum per
annum (Anglo Platinum, 2000).

Furthermore it was announced on 8 February 2001 that a new smelter complex was to be
constructed at Pietersburg (now Polokwane). The complex, which was scheduled for
completion in 2002,was estimated to cost R1.31 billion in July 2001 money terms and had
a planned capacity of 650 000 t of concentrate per annum. Granulated furnace matte
produced at the complex would be transported to Rustenburg for refining (Anglo
Platinum, 2001).

Simultaneously a range of international exploration projects were in execution in Canada

and Russia.
 262

Concurrently with the aggressive production expansion, significant effort was made to
secure mineral right tenure in anticipation of the pending changes in legislation. During
December 2000 Anglo Platinum entered into an agreement with the Minister of Minerals
and Energy in terms of which Anglo Platinum was granted mineral leases (for 25 years,
renewable for a further 25 years) over those farms the group intended mining on the
eastern limb of the Bushveld Complex. At the same time Anglo Platinum’s mineral rights
to certain other farms on the eastern limb, which were held in terms of a joint venture
agreement with the former Lebowa State and which Anglo Platinum did not presently
intend to mine, were relinquished. The agreement secured for Anglo Platinum, on the
eastern limb, those mineral resources required for its production and expansion
programmes for the foreseeable future (Anglo Platinum, 2000).

The participation of Black empowerment interests in the platinum industry took tangible
form towards the close of August 2000 when Mvelaphanda Platinum (Pty) Ltd (Mvela)
acquired a 22.5% in Northam Platinum Limited (Northam). This empowerment transaction
was facilitated by Anglo American and the Rembrandt Group. Both Anglo Platinum and
Mvela each held 22.5% of Northam’s equity (Anglo Platinum, 2000).

Negotiations continued with African Rainbow Minerals (ARM) regarding the

Maandagshoek project (now Modikwa) whereby ARM, as the leader of an empowerment
consortium, could become a 50% joint venture partner in the project.

During 2001, Anglo Platinum spent R251 million on jewellery promotion and R812 million
in commissions and discounts to those users who funded research and development into
new applications. This followed a strategic statement that in-situ PGM resources far
exceeded demand for these metals and additional PGM demand must be created to give
value to these resources (Anglo Platinum, 2001), a clear indication that the Anglo
Platinum strategy was being strongly driven by market considerations.

Following a range of scenario studies underlying market assumptions were analysed in

the light of a possible recession and, later in 2001, in light of the September 11 attacks in
the USA and the ensuing US actions in Afghanistan. It was concluded that, even in the
worst case, demand available for Anglo Platinum production by 2006 would remain at
3.5 Moz of platinum (Anglo Platinum, 2001). Under this downside scenario further
expansion post 2006 would be limited, although under the best estimate scenario,
expansion would continue to be pursued. It is important to note that, in all scenarios
examined, it was assumed that competitors would continue with their announced
expansions.
 263

The overall strategic context during 2000 to mid 2003 is encapsulated in the following
extract from the 2001 Annual Report.

“The Board is pleased to confirm that its growth strategy, first announced in 2000,
remains in place. However, it is emphasised that Anglo Platinum is not a swing producer.
The Group will do all that it can to use its superior market intelligence to anticipate and
then meet future PGM demand, without causing unnecessary instability or volatility by
underestimating customers' requirements. Conversely, should markets reach an
oversupply situation; Anglo Platinum will not throttle back its expansions for as long as
there are more expensive producing rivals on the supply side. To do so would, firstly, be
uncompetitive and detrimental to consumers and, secondly, provide a price umbrella to
operations that are too costly to deserve to survive. While short-term volatility can result
in temporary surpluses and deficits of PGM production, Anglo Platinum is driven by the
long-term needs of PGM consumers. Its planning horizon can be several business cycles
hence as it decides to build projects that will secure a production base well into the future.
Anglo Platinum will expand its production through the establishment of both brown fields
and green fields mining operations over unexploited reserves along the Bushveld
Complex. In addition, it will construct new smelting and refining capacity in South Africa
for the increased arisings of concentrates. Anglo Platinum will also raise efficiencies at
existing operations by developing its human resource and mechanising its mining
methods; these and other interventions will help improve safety performance. The skills
and technologies needed for expansion will be acquired through a combination of
aggressive recruitment, intensive training and development programmes, employment
equity and supplier partnerships. The strategy also includes a plan to extend Anglo
Platinum's industry leadership in respect of environmental care via the ACP and other
projects” (Anglo Platinum, 2001, pp.10-11).

During the latter part of 2003, in light of an anticipated change in macro economic
conditions, a full review of operations was conducted. Subsequent to this a revised
expansion programme was announced based on a stronger than anticipated Rand and
lower metal basket price in 2003 compared to 2002.

The review did not alter the view of the robustness of current and future demand for
platinum and the need to retain the long-term strategy to grow the markets for PGM
products, expand production to meet increased demand and optimise current operations.
However it highlighted the combined impact of South African producer price inflation of
26% over the previous three years, an overall 14% decline in the US dollar basket price
 264

despite a 9% recovery over 2003, and the 50% appreciation in the value of the Rand from
its low of almost R13 to the US dollar in December 2001.

The planned rate of implementation of some of the group’s expansion projects was
slowed down by between one and three years, in particular Twickenham, Der Brochen,
the second phase of the western limb tailings retreatment project, and the Pandora
project, to continue expanding treatment, smelting and refining projects to meet the
requirements of the build-up in the mining profile and to rationalise existing operations to
protect operating margins.

It was, however, still announced that 2.9 Moz of refined platinum would be produced in
2006; effectively an average annual compound rate of growth of 8%.

Overall performance of key parameters, during the 2000 – 2003 period, is indicated in
Table A.2.1.

During the period 2000 to 2003:

• Platinum production increased by ~23% in line with the strategic intent to expand
into the growing market.
• Similarly PGM production increased by ~28%.
• However there were significant declines in profit margin, EBITDA (earnings
before interest, tax and depreciation allowance), ROE (return on equity) and
ROCE (return on capital employed ) as a result of a drop in net sales revenue per
ounce in 2003 and as a result of increased capital investment to fund the
expansion (from R1.9bn to R7.4bn).
 265

Table A.2.1 Anglo Platinum – summary statistics: 2000 to 2003 (Annual Report, 2003)

REFINED PRODUCTION 2003 2002 2001 2000

Platinum koz 2 307.8 2 251.1 2 109.2 1 871.7
Palladium koz 1 190.9 1 115.3 1 049.0 946.6
Rhodium koz 232.5 211.7 200.4 165.1
Gold koz 116.1 107.1 102.2 97.9
PGMs koz 4 161.5 3 947.6 3 673.6 3 255.4
Nickel 000 t 22.1 19.4 19.5 19.2
Copper 000 t 12.9 10.5 10.8 10.8
MARKET
Average market price Pt R/oz 5 140 5 567 4 531 3 804
Net sales revenue R/oz Pt sold 7 017 8 690 8 654 8 287
FINANCIAL INDICATORS
Capital expenditure R millions 7 423.6 5 994.1 3 586.1 1 919.7
Gross profit margin % 23.7 46.5 51.4 54.7
EBITDA R millions 4 578.5 9 376.1 12 507.4 9 298.0
ROE % 16.3 45.0 66.2 73.2
ROCE % 10.5 43.1 64.0 59.0

A.2.2 Comment
This period is characterised by a strong strategic vision and aggressive growth plan into
an expanding market, ambitions that were tempered by a radical shift in global economics
following the ‘9-11’ event in the USA during 2001. Good progress was made in
addressing mineral right tenure risks associated with pending changes in mining right
legislation and BEE charters.

The necessary processing infrastructure to meet expansion goals was established (e.g.
new smelter at Polokwane) however a cohesive and continuous link between strategic
ambition and the ability to deliver the necessary outputs from the mineral assets was not
evident. The review in 2003, of ability to deliver against stated intent, in the light of
changing global economic conditions, highlighted shortfalls in planning processes.
Questions were raised regarding the achievability of the ambitious expansion
programmes and several projects began to slide on delivery despite announcements of a
slowing down of projects in light of the economic conditions.

A.3 2004 to 2007

The objective of this section is to briefly describe outputs that have resulted from the
application of the strategic long term planning framework, as developed by the author, at
Anglo Platinum over the period 2004 to 2007. During this period many of the tools and
 266

techniques described in Chapter 11 were developed, refined and implemented as

strategic long term planning at Anglo Platinum.

Key elements that are covered are:

• Business strategy definition;
• Business value optimisation (value based management for identification and
choice of business model options);
• Scenario planning (world views);
• Definition of long term planning parameters (global assumptions);
• Long term planning procedures (planning cycle, mine extraction strategies,
mining right plans, long term plans);
• Capital investment prioritisation, real option analysis and project value tracking;
• Definition of the long term plan and business plan;
• Definition of upside or downside responses (contingency plan);
• Execution plans for supporting capability; and
o Project portfolio execution;
o Metallurgical process capacity (smelting, refining ,effluent);
o Infrastructure (water, electricity, roads, rail, housing);
o People (skills, motivation, organisational culture); and
o Community (stakeholder alignment and participation).

A.3.1 Introduction
In late 2003, Anglo Platinum and its major shareholder Anglo American plc, conducted an
operational review of the company which highlighted the need to move to a centralised
and standardised way of conducting business and running operations. Subsequently
during 2004, restructuring of corporate and technical support staff was implemented. The
objective of the restructuring process, in the technical arena, being to streamline decision
making from the corporate head office, provide a central knowledge pool of how various
technical functions should be undertaken in the group and assess the competence and
capacity of the operational technical support staff.

A critical outcome of this process was the centralising of planning into a strategic long
term planning department with the objective of ensuring effective engagement with the
operations in terms of strategic long term planning, and the executive committee (EXCO)
in terms of strategic alignment, scenario development and evaluation, and capital
investment prioritisation.
 267

This restructuring coupled with the progressive implementation of the strategic long term
planning conceptual framework, as developed by the author who was recruited for this
purpose at this time, resulted in the structured development of a series of integrated
(across discipline and time) strategic plans.

A.3.2 Business strategy and market conditions

Overall company strategy remained fundamentally consistent with that established in
2000, to develop the market for platinum group metals, to expand production into that
opportunity and to conduct business cost-effectively and competitively.

During the period 2004 to 2007 the PGM market was characterised by a period of
sustained growth in gross PGM demand (15.2% or annualised 3.6%), which supported a
strategic intent of continued growth into an expanding market. Emphasis was placed on
creating a project portfolio that provided a compound annual growth rate (CAGR) of
around 3% to 5% per annum to maintain, or marginally expand, market share.

However, net metal demand (after recycling) only increased from 6.53 Moz Pt per annum
(recycle 645 koz) in 2003 to 6.68 Moz Pt per annum (recycle 1.59 Moz) in 2007; a net
demand growth of 2.3% (CAGR 0.6%), despite the gross demand growth of 15.2%. The
reduced net demand resulting from increased recycling volumes associated with
increased metal prices and more autocatalysts becoming available for recycling.

During the same period Anglo Platinum expanded production from 2.31 Moz to 2.47 Moz,
a CAGR of ~1.8%, missing the strategic growth objective of ~3%. However compounded
growth in overall industry supply during the same period was ~1.6%, resulting in Anglo
Platinum increasing its market share, of net demand, from ~35% to ~37%.

Progressive record increases in PGM prices coupled with depreciation of the Rand
against the US$ created record Rand basket prices (e.g. from R7 649/Pt oz in 2004 to
R18 167/Pt oz in 2007). However these price levels fuelled significant escalations in both
working cost and capital cost inputs, as competition for scarce resources (skills,
equipment and raw materials) developed and pushed out project delivery time lines.

Formal industry and competitor analysis was established with the development of an
industry fact base, annual industry and competitor analysis documentation, financial
models for major industry participants, Porter’s “five forces” analysis and cost curve
analysis.
 268

Increased effort was directed towards resolving uncertainty of mineral rights tenure
arising from the implementation of the Mineral and Petroleum Resources Development
Act and the Mining Charter. This resulted in the disposal of mineral assets in relation to
the Bokoni (formerly Lebowa Platinum Mine) and Booysendal transactions.

Anglo Platinum appointed a new CEO in 2003 and further changes in executive
management and Board structure resulted following changes in the Anglo American
(controlling shareholder) Board in 2007.

A.3.3 Value based management

During 2007, following the appointment of a new Anglo American Group CEO (Mrs CB
Carroll), Bain and Company was commissioned to conduct a review of operational
practices and establish consistent Anglo group-wide practices in strategic planning.

The principle of value optimisation as the key driver of the portfolio composition in the
strategic long term planning process at Anglo Platinum was acknowledged and included
in an Anglo American group-wide value based management (VBM) initiative.

This process led to development of training materials and a progressive implementation

of VBM as the key driver of business optimisation during the second half of 2007. Senior
staff, across Anglo Platinum, were trained by in-house trainers (including the author) in
the principles and application of VBM.

A.3.4 Scenario / world view development

Scenario development for SLTP, outside of the processes conducted during Board
strategy breakaways, was introduced in 2007. Implementation was originally delayed to
allow the primary focus to be placed on establishing planning systems, programmes and
processes on operations and formalising the development and issue of long term
planning parameters (see subsequent sections) during 2004-2006.

The process and outputs of the 2007 scenario development workshop are provided as
example. The process followed mirrors that indicated in Section 11.4.

The strategic conversations during the session attempted to address the following
fundamental questions about the future of the PGM industry:

• What will be the needs, choices and possibilities that will shape the global ‘platinum
system’?
• How will the ‘platinum system’ look in next three years, 15 years and beyond?
 269

• What roles will competitors, government, society, employees and other stakeholders
and the different components of our organisation play in shaping this system?

The core dimensions that were developed and used to define and describe the scenarios
were global economic growth and PGM dependency.

Global economic growth: One of the greatest challenges for the PGM industry is to
ensure that business models are sustainable across all potential future cycles of global
economic growth. There are strong assumptions that the global economy will continue to
grow on the back of Asian growth lead by China and India, and contributed to by Brazil
and Russia, and that the US and EU, which are critical players will continue along a
positive path. If these assumptions were to play out radically differently, the implications
for the platinum system could be devastating.

Key global economic issues identified included:

• Globalisation;

• Political stability;

• Dominance by China, India;

• Impact of the US on the global economy; and

• World currency.

PGM dependency: The future of the platinum system by the year 2022 will be robustly
determined by PGM demand, which is a key primary driver. This well-debated driver
represents a strong global assumption and offers both a challenge and an opportunity for
the future of the platinum system. As part of the global energy demand scenario, the
utilisation of PGMs could face a slump if new, emerging, innovative and renewable
technologies were to be cheaper and manufactured away from traditional platinum based
components. In other words the platinum system might face enormous problems, if not
extinction, with the emergence of disruptive technologies. Yet there are also tremendous
opportunities if the platinum system can adapt to new technology requirements in an
alternative energy application or to environmental legislations for greater economic
efficiency in the future global carbon market. The scenarios indicate that technology and
global environment legislation could be both a threat and an opportunity.

Key PGM demand issues identified included:

• Energy sources / security;

 270

• Energy technology;

• PGM applications;

• Transport choices;

• Environmental concerns;

• R&D; and

• Rate of the change: technological, environmental, etc.

The relationship of these two variables in four world views is summarised in Figure A.3.1

Global Economic Growth

Hi
Low PGM demand amidst high High PGM demand combined with high
global economic growth global economic growth
• sustained and super performance of the Chinese and • sustained GDP growth of the BRIC countries
Indian economies • massive demand for PGM products in the Chinese
• transformed transportation and energy markets market
• transformed transportation and energy markets, • a new Sinocentric business culture
exclusive of PGM • Pt deficit
• input resources scarce with associated high • high input costs due to high world economic growth
operating costs
• Pt surplus PGM dependency
Low High

Low PGM demand amidst low High PGM demand coupled with low
global economic growth global economic growth

• high input costs driven by series of environmental • stricter global environmental legislation
crises • slowdown of the Chinese economy and the USA in a
• global markets deteriorate protracted recession
• misalignment due to surplus supply and low demand • strong growth for SA producers due to sustained
worldwide demand for energy applications and autocats
• tense relationship between state and industry • Pt deficit due to general supply constraints

Low

Figure A.3.1 PGM industry – possible world views – 2007

The relationship between these scenarios and the underlying detailed economic
parameters that will affect the determination of the global assumptions, as in
Figure A.3.1, is shown in Table A.3.1.
 271

Table A.3.1 Scenario factors – descriptions

Low PGM High PGM Low PGM High PGM

demand demand demand demand
Low economic Low economic High economic High economic
growth growth growth growth

Global Global markets Global slowdown High perceived Continued strong

Economic deteriorate global growth growth in the
Growth Strong growth spurred by China commodity
for Anglo and India market on the
Platinum back of China’s
economic
strength
unleashes frenzy
of global
mergers and
acquisitions in
mining industry

Supply: Low PGM Strong demand Insatiable global Demand side

Demand demand growth for energy demand spurred by
Balance misaligned to platinum globally drives the sustained global
surplus supply followed by a successful search growth and rapid
measured supply for alternate fuel penetration of
side and higher technologies, not Pt-based fuel cell
profits for Anglo requiring Pt technology
Platinum,
resulting in a Low demand for Huge growth in
deficit supply Pt PGM drives a market for
system surplus supply jewellery and
situation aesthetic
industries where
dental alloy
health plans are
linked to China’s
demand
Looming
challenge of
keeping up with
enormous
demand levels
resulting in a
supply deficit
scenario

Supply / Access No supply No supply or Supply

Access constrained by constraints, and access exhaustion
resource access unlikely constraints imminent
nationalisation to be hampered
by countries
facing economic
hard times,
although
community
issues could
constrain access
 272

Low PGM High PGM Low PGM High PGM

demand demand demand demand
Low economic Low economic High economic High economic
growth growth growth growth

Competitive High operation Favourable and Global platinum New Asian

positions costs driven by dominant global system under executive
environmental position strain as new governance
crises, including niche markets dominates in the
mine safety, New growth emerge out of global platinum
force producers markets for disruptive system with
to close most platinum in technologies new Chinese
marginal mines hydrogen value-based
economy (fuel PGM and autocats management
Anglo Platinum cell components) industry and its style
loses market and steady derivative niche
share and profit demand in industries Strong focus on
dwindles transport (for struggle to the Eastern
autocats) maintain customer base
Business dominant and mainly the
environment Low economic position. Chinese
characterised by growth results in consumer
high taxes, low input costs PGM prices
resource given surplus plummet Ongoing
nationalisation supply in input economic growth
and centrally resources Ongoing results in
controlled economic growth increased
suppliers. results in operating costs
increased
operating costs

Society, Significant Reasonably good Platinum system South African

governance & changes in social relations as and Anglo and the Chinese
stakeholder behaviour and industry enjoys Platinum attempt governments
relations new sustainable a strong position to focus on value support
innovations in in an otherwise chain heavy downstream
technology weak economic mechanisation beneficiation
toward the use of climate and safety with a targets set for
PGM socially the PGM industry
However responsible in South Africa
Governments industry platinum provider
nationalise increasingly mentality Large migration
strategic coming under of Chinese skills
resources, pressure to Affluent and around the
expropriate contribute to ecologically world, into South
mineral rights addressing social conscious public Africa and
and seize disparities drive demand for wherever
platinum mining worldwide cleaner fuel necessary
operations during technology, away
state of from PGMs Uplifting social
emergency. effects on the
South African
Massive lay offs, GDP and all
high educational
unemployment, levels
social unrest and
crime
 273

Low PGM High PGM Low PGM High PGM

demand demand demand demand
Low economic Low economic High economic High economic
growth growth growth growth

Technology Adoption of No substitute for Emerging new Chinese

divergent catalytic and innovative stakeholders
technologies and converters technologies fund alternative
heavy usage of (alternative fuel energy
traditional Wide adoption technologies that technologies,
technologies of fuel cell are non-carbon particularly Pt-
technology based, but no based fuel cells
Uneven use of utilising platinum PGM component
innovative components requirements) Consolidated
technologies create a R&D generates
among nations Even if other major
energy disruption in
and companies to platinum demand technological
assert their technologies breakthrough in
competitive emerge that are fuel cell
market position not PGM technology and
dependent, the rapid growth
Anglo Platinum in demand for
will have platinum
capitalised upon associated with a
a significant hydrogen
stage of fuel cell economy
dominance.

Environment Fragmented Global Environmental Limited

global environmental pressure groups environmental
environmental compliance gain significant risks with
legislation and creates new global political emerging
free-for-all sources of leverage in innovative fuel
environmental opportunities international cell technologies
pollution across that favour politics and
the globe demand for business Clean
platinum development
Global warming Emergence of a mechanism
takes place at an substantial applies to all
alarming rate support from an new PGM based
increasingly technologies
Disregard for affluent and
sustainable environmentally
management of sustainable
the environment, literate and
the global highly social
emission trading conscious public
scheme and the
abuse of the
carbon market
system
Pollution levels
critically high
Natural resources
– particularly oil
and water –
scarce or
vulnerable
Global warming
effects have
significantly
increased natural
disasters, and
disrupted
infrastructure
and logistics
 274

A.3.5 Long term planning parameters (global assumptions)

The methodology for determination of the long term planning parameters (global
assumptions) has been defined in Section 11.5. Global assumptions have been fully
adopted and utilised as an integral part of business planning. They have been determined
and issued quarterly, in support of the SLTP process since 2005. The global assumptions
are issued in two forms – as a HSF (Hyperion Strategic Finance – the customised
software used for financial modelling) template for automatic integration with investment
centre models and further consolidations, and in an excel spreadsheet format.

Owing to the sensitivity of the data contained in the global assumptions it is not possible
to reproduce specific data, but the overall format of information contained is indicated in
Table A.3.2. Note that the global assumptions are defined by production profile, scenario
and by quarter; in this example base, scenario 2 and first quarter (Q1).
 275

Table A.3.2 Global assumptions – data layout

 276

A.3.6 Long term planning procedures

Between 2004 and 2007 extensive work was done to develop and systemise the logic,
philosophy, tools and techniques of the strategic long term planning framework. This
process involved the writing of policies and procedures for the group, relating to strategic
planning, progressive on-mine training and alignment processes coupled with the annual
delivery of a strategic business plan. During this period nomenclature of the outputs and
processes changed, following shifts in the composition of the Executive and adoption of
preferred terminology. For example the overall process of developing a strategic long
term plan was progressively called strategic planning, long term planning, strategic
business planning and currently business planning. However the overall philosophy and
approach remained consistent.

Emphasis was placed on:

• Entrenching a single, integrated, cross discipline, planning calendar;

• Developing the rules of the game by defining and documenting procedures;
• Establishing the logic and discipline of single discipline reviews (SDRs) of
planning inputs to the SLTP and multidiscipline reviews (MDRs) of the planning
outputs;
• Developing and defining the tools and techniques to be utilised. This
encompassed planning systems (CADSmine, APMOT), data reporting systems
(MRM systems, the LTP applications, etc.), DCF valuation tools (development of
customised HSF templates, worksheets, investment centres logic and structure,
multi reef and joint venture consolidation logic, global assumptions and
prioritisation logic);
• Training – across the developing tools and techniques and provision of annual
templates and information resource packs;
• Developing and defining reporting and presentation templates to allow effective
comparison between operations during reviews; and
• Ensuring alignment of executive reporting and analysis requirements with the
detailed analysis required by investment centre, by reef and by mining right area.

The approach was iterative and based on an annual cycle whereby changes in
methodology, tool or technique were developed and then frozen for implementation
across one planning cycle. A typical example of this is the annual update of the HSF
templates and SLTP presentation templates.

An overview of some of the many procedures developed and applied across the company
follows:
 277

• Valuation Modelling of Capital Investment Decisions

The objectives of this procedure are to clarify and define the preferred approach
to on-mine valuation modelling for capital investment decisions and to provide a
basis for consistent on-mine valuation modelling practice.

• Long Term Planning Process

The purpose of this procedure is to systemise the planning process and content
of the long term plan (LTP) in terms of specific documents and data required
during the long term planning cycle.

• Development of a Mine Extraction Strategy over a Mining Right Area and the
Translation into a Long Term Plan
The objective of this procedure is to provide a practical guide to discipline heads
and technical and operational managers for the establishment of a mine
extraction strategy over a mining right area granted in terms of the Minerals and
Petroleum Resources Development Act, and its subsequent translation into a
long term plan. This procedure is to be used by persons involved in mine and
process planning, project evaluation and the development of investment
proposals within Anglo Platinum.

• Definition of Long Term Economic and Planning Parameters - Global

Assumptions
This procedure serves to achieve the policy of generating and assembling a set
of approved planning parameters (also known as global assumptions) for
application in all group valuation studies and for distribution to authorised
personnel within the group.

• Valuation Modelling Joint Ventures

This procedure is aimed at assisting planning analysts with the construction of
Anglo Platinum joint venture model structures (in HSF), in particular with the
consolidation of the Anglo Platinum portion of the operations and the value
derived from these operations when operated under a JV agreement.

• Formulation of the ‘Plan B’ Scenario Procedure

The objectives of this procedure are to define the logic and methodology to
develop a view on potential downscaling actions to be adopted should supply-
demand not evolve as expected, with the prospect of long term prices falling
below long term forecasts; and to assess the likely financial implications of a
downside scenario in the context of anticipated investment decisions.
 278

• Monthly Planning at Underground Mines

The aim of this procedure is to ensure that there is a proper focus on providing
rigorous, bottom-up production plans; to ensure that planning is carried out by the
correct personnel on the mine; to ensure that monthly plans are in line with the
budget and to ensure that where there is a deviation from the budget corrective
action is implemented to rectify the deviation.
• Group Guideline Strategy and Planning Project Value Tracking
The objective of this guideline is to clarify and define the project value tracking
(PVT) process, along with the roles and responsibilities of relevant stakeholders,
in order to meet management and Board reporting requirements.
• Major Projects Operating Cost Estimation Guideline
The aim of this standard document is to provide guidance on the method to be
used in calculating, estimating and forecasting cash operating costs or
expenditures (OPEX) for projects.
• LTP: Multi Disciplinary Audit Procedure
The aim of this procedure is to ensure the application of an Anglo Platinum
approved corporate governance audit of the annual long term planning process
and the respective outcomes. The intent of the audit is to foster an attitude of due
diligence while ensuring guidance from the respective technical expertise
available.
• Valuation Modelling of Capital Investment Decisions - Inclusion of Royalties
The objectives of this guideline are to clarify and define the preferred approach to
on-mine valuation modelling for capital investment decisions with respect to the
Minerals and Petroleum Resources Royalty Bill, and to provide a basis for
consistent valuation modelling practice.
• Valuation Modelling On-Mine Cash Operating Cost Allocation and Application
The aim and the objectives of this procedure are threefold: to clarify and define
the preferred approach to on-mine cash operating cost (working cost) allocation
philosophy; to provide a basis for the consistent application of on-mine cash
operating costs in valuation modelling of capital investment decisions (projects);
and to define accountability for on-mine cash operating cost estimates within the
business reporting process and within the capital investment valuation process.
• LTP: Business Risk Assessment Procedure
The purpose of this procedure is to provide a methodology for risk assessment of
the long term plan (LTP) at each operation or green field project as part of the
annual long term planning process and deliverables.
 279

• Mineral Resource to Ore Reserve Conversion

This procedure assists surveyors, geologists, mining engineers and mine
planners (SAMREC Competent Persons) in converting mineral resources into ore
reserves.

In addition to company based initiatives, a range of descriptive papers, on the Strategic

Long Term Planning Framework and the tools / techniques developed by the author and
members of the SLTP department, contributed to a range of industry conferences. Core
contributions are indicated in a list of publications resulting from this work in Chapter 2.

Following publication and presentation it is gratifying to note that many of the elements
and terminology of the Strategic Long Term Planning Framework are being adopted by a
range of industry practitioners. The tools and techniques have been widely adopted
across the Anglo American operating units following transfer of expertise and tools.
Similarly competing PGM producers have adopted much of the terminology and practice
following movement of staff.

A.3.7 Definition of the long term plan and business plan

Owing to the sensitivity of content, it is not possible to specifically demonstrate an
example of the company long term and business plan. However the contents pages from
the 2006 and 2007 strategic long term plans are indicated in Tables A.3.3 and A.3.4.
Typically the content of the plan is articulated in a strategic long term plan document with
a number of detailed supporting appendices.

The critical content of the documents is communicated through an executive summary

presentation. Typically the content of this presentation covers:

• Review of strategic priorities and alignment;

• Safety – strategy, performance, actions and alignment;
• Market – supply / demand forecasts;
• Production profiles;
• Capacity to deliver; and
• Financial review.

Example charts reflecting typical content are shown in Figures A.3.2 to A.3.5.
 280

Table A.3.3 Example content page – SLTP documentation 2006

1. Strategic context 2
1.1 Company overview 2
1.2 Mission, vision and strategy 3
1.3 Anglo Platinum SWOT 3
2. Demand and supply 6
2.1 Platinum 6
2.2 Palladium 17
2.3 Rhodium 20
3. Production profiles 22
3.1 Overview 22
3.2 Target profile 23
3.3 Growth profile 24
4. Mineral rights conversion process 27
4.1 Introduction 27
4.2 Mineral rights conversion 27
4.3 HDSA calculation methodology 28
4.4 Achievement of HDSA participation 31
4.5 Project Damascus 32
4.6 Summary 33
5. Processing 34
5.1 Growth challenge 34
5.2 Operational excellence 37
5.3 Recycling and alternate sources opportunity 37
6. Capacity to deliver 38
6.1 Capital project management 38
6.2 Operational labour 44
6.3 Housing and bulk services 50
6.4 Water 52
6.5 Electricity 57
6.6 Securing government permits 61
7. Operational and safety performance 67
7.1 Overview of operational and safety performance year to date 67
7.2 Safety performance review 67
7.3 Progress of turnaround mines (Rustenburg and Amandelbult) 71
8. Government relations management 76
8.1 Current state of government relations 76
8.2 Approach to government relations management 76
9. Financial impact 79
9.1 Cash flow and net cash/(debt) position 79
9.2 Earnings impact 82
9.3 Return on capital employed 83
9.4 Financing structures 84
9.5 Annexures 87
APPENDICES
A Platinum jewellery demand review
B Overview of operations
C Mining and processing projects
D Schedule of operations and projects
E Maps of Anglo Platinum and competitor operations
 281

Table A.3.4 Example content page – SLTP documentation 2007

1. Introduction Page

1.1. Purpose of this document 4

1.2. Executive summary 4

2. Strategic context

2.1. Mission, vision and strategy 13

2.2. Strategic position 13

2.3. SWOT analysis 16

3. Earning the right to mine

3.1. Safety performance 17

3.2. Operational performance and benchmarking 22

3.2.1. Mining operations 23

3.2.2. Processing 27

4. Sustaining the right to mine

4.1. Mineral rights conversion process 31

4.2. Government relations 34

4.3. Community engagement 37

5. Making the case for growth

5.1. Summary and implications 40

5.2. Market environment 46

5.3. Economics of the 2008 Target Profile 55

5.3.1. Mining 55

5.3.2. Shared infrastructure 57

5.3.3. Processing 57

5.4. Impact of key economic risks on expansion strategy 61

5.5. Capacity to deliver 62

5.5.1. Labour 62

5.5.2. Capital projects, infrastructure, permits and licences 66

 282

Growth profile
Refined Pt ounces ('000s) Includes:
• Target profile projects
6,000 2007 • Expansion projects for Eastern Limb
operations
Production profiles • Deep shaft at xxx (Merensky & UG2 co-
extraction)
5,000

4,000 Growth

3,000
Target profile Target
Includes:
2,000 • Approved Level 1 plans and projects in execution
• Early mining initiatives to establish footprint on
Eastern Limb to secure mineral right tenure
1,000 • New projects to protect the long term viability of
existing operations
• Replacement projects to sustain current unit costs
0
2006 2010 2015 2020 2025 2030 2035 2040

Figure A.3.2 Example – summary SLTP production profiles

Decision timing
- 2010+
- 2009
Pt Ozs - 2008
'000s - 2007

- 2006
5,000
- Decisions
already taken
2009

4,000 2007 Growth

2010+

3,000 2009
2008 Target
2010+
2007
2,000
Decisions 2006
already
1,000 taken

0
2006 2010 2015 2020 2025 2030 2035 2040

Figure A.3.3 Example – decision timing relating to SLTP profiles

 283

R4B
1.5 3.6
Process capacity investment:
3 Target scenario

1.5
2

1
0.6

0
Smelters BMR PMR Total
Install new Expand De-
slag cleaning electrowinning bottlenecking
furnace at technology processes in
xxx adding facility to current PMR to
xxx ktpa xx ktpa enable xx M Pt
capacity oz pa capacity

Figure A.3.4 Example – process capacity investment alignment

Total CapEx Requirements (Real 2007)

R Billion

5 Year Total CapEx Requirements

(2007-2011)

Base Rxx.x B

Target Rxx.x B

Growth Rxx.x B

0
2006 2010 2015 2020 2025 2030 2035 2040

Figure A.3.5 Example – SLTP capital requirement by profile

 284

A.3.8 Capital investment prioritisation and project value tracking

The techniques described in Section 11.9 are applied by mining right area, covering all
components in the mineral asset portfolio. The outcomes of the mine by mine ranking,
based on the VBM philosophy modified by any necessary strategic imperatives (e.g.
mineral right tenure), and the group ranking are represented, initially as a company
portfolio as indicated earlier and then on a mine by mine basis. Figure A.3.6 indicates, for
a mine, ranked investment centres grouped by possible production profile: base profile
(level 1 plus projects in execution), a target / business plan profile (base plus projects to
achieve desired market objective within a capital investment constraint) and an
unconstrained or growth profile.

xx MERDeepShaft L3
Pt Ozs '000s Mine ABC xx UG2 DeepShaft L3

x00 Refined Pt Ozs xx MER7S L3

Key Decisions: xx MER Pothole L3
rd
Shaft extension 23 Jan 2007
Decline South 28th Feb 2007 xx MER STH L3
Decline Upper North 5th Mar 2007 xx UG2 7S L3
x00 xx UG2 P2 L3
xx UG2 STH L3
xx UG2 ANP2 L2a
x00 xx UG2 B P2 L2a
MER Deep Shaft xx UG2 4A P2 L2a
Decision
2010 xx UG2 S P1 L2a
x00 xx Dev ReefL1
Growth
xx MERR L1

UG2 Deep Shaft xx MERS L1

x00 Decision xx SlagL1
2010 xx TailsL1

Target xx UG2 1N P1 L1
0 Base xx UG2 1S P1 L1
2006 2010 2015 2020 2025 2030 2035 2040 xx UG2 8B P1 L1
xx UG2 9S P1 L1
xx UG2 Cent L1

Note: Thick lines depict Base, Target and Growth xx UG2 R P1 L1

Figure A.3.6 Example – Ranked and grouped mine production profile

A brief description of each investment centre and associated project work is provided
(The extracts cited here have been taken from the 2008 strategic long term planning
documentation). For example, the then Waterval phase 2 decline project in the
Rustenburg area, and the Polokwane smelter, extracts below:
 285

RPM WATERVAL PHASE 2 DEEPENING PROJECT

• Date announced 2005

• Ownership 100% Anglo Platinum
• Average grade 3.08 g/t 4E
• Steady-state Pt oz 74 000 p.a.

Waterval Mine Phase 2 Deepening is the extension of the Rustenburg UG2 Phase 1
Expansion project and was initiated in January 2003. The final Feasibility Study for the
completion of the infrastructure to the end of Phase 2 was approved during May 2005,
together with a change from a “pure” Room and Pillar mining method into a Room and
Pillar with T-cut operation. This increased the grade delivered to the concentrator from
2.86 g/t to 3.05 g/t. Work is well advanced on this project with the “5 barrel” cluster system
as well as the associated in-pit mining having been completed to the end of Phase 2.

POLOKWANE SMELTER

• Date announced December 2000

• Ownership 100% Anglo Platinum
• Production commences 2003
• Full production by 2003 (capacity available)
• Full project CapEx R1,45bn (2004 money terms)

Ramp-up to full smelting capacity of 68MW, after replacing the furnace roof and re-
commissioning with the redesigned split coolers was achieved in February 2006. The
concentrate stockpile associated with the non-availability of the Polokwane Smelter from
September 2005 is being processed and should be treated by the 2nd or 3rd quarter of 2006.
Two cooler inspections were held in March and May 2006. The copper coolers evidenced a
wear pattern similar to that seen to date. Of the test coolers installed, the graphite lined
copper shows promise. A full replacement of the upper coolers to lined graphite coolers is
planned for July 2006. Due to the new cooler design configuration, and the planned
inspection and change out methodology, de-rating the furnace to 45MW is not indicated at
this time, as this would constrain the group smelting capacity, and is not in itself a solution to
the corrosion mechanism. The second phase (extended annually) of the slag storage pad has
been approved with construction scheduled to take place in the winter months.

The production profiles, at group and mining right area level are fully supported with
detailed investment centre schedules, by mining right area, for a 30 year period, with
supporting process capacity and infrastructure requirements, covering:

• Metal production;
• Capital investment requirements; and
• Financials (cash flow, NPV, IRR, cash margin, break even, pro forma annual
financial statements at group level).
 286

Detailed information by investment centre, by reef type can be further extracted from the
HSF models as required.

Given that project value tracking, as described in Section 11.10 is routinely conducted in
alignment with Board project reporting requirements, typically six monthly, PVT reporting
is typically not included with the SLTP documentation but made available as supporting
documentation as required.

A.3.9 Definition of upside or downside responses (contingency plan)

The extracts cited here have been taken from the 2008 strategic long term planning
documentation. The key requirement identified through the SLTP process was the need
for a market contraction or downside response. Sensitive information has been deleted
where necessary but the extract still provides demonstration of the application of the
technique.

EXECUTIVE SUMMARY
The Strategy Review and Long Term Plan 2008 (LTP08) laid out a growth scenario for
Anglo Platinum called the LTP08 Target profile. This profile was accepted as the basis on
which to make investment decisions over the next 12 months. With a reasonable degree of
certainty, Anglo Platinum believes the market for Platinum will be able to accommodate the
additional growth implied by the LTP08 Target profile. However, the LTP08 Target scenario
is not without risk. A supply surplus (approximately xxx koz Pt or x% of global Platinum
demand in 2008) could be generated under the LTP08 Target profile and the projected
global market demand growth and third party supply assumptions. As a result, Anglo
Platinum requires a set of “Plan B” actions to be adopted should supply/demand not evolve
as expected with the prospect of long term prices falling below long-term forecasts.

Twenty “Plan B” actions have been identified based on an assessment of project NPV,
operating cost efficiency, ounce profile and other factors (e.g. strategic importance, ability to
“turn on/off” etc.). The overall impact of this downscaling enables a substantial reduction in
capital as stay in business capex is avoided and both expansion and replacement capex
delayed. Moreover, there may be opportunities to better configure processing capacity given
a reduction in ounce profile.

CONTEXT: THE NEED FOR PLAN B

The Strategy Review and Long Term Plan 2008 laid out the growth imperative for Anglo
Platinum. Growth is an imperative for three key reasons:

• “Use it or lose it” legislation creates a requirement to establish a greater footprint in the
Eastern Limb in order to secure mineral rights
• Next generation deeper vertical shafts are required on the Western Limb in Rustenburg,
BRPM, Union and Amandelbult to prevent mine economics deteriorating as the proportion
of the more valuable Merensky ore drops. The investment case to develop these shafts
deteriorates rapidly over time due to mining lease area boundary issues
• Further replacement projects and/or mine restructuring are required to avoid excessive
increases, over time, in unit costs in existing operations.
 287

The production profile that was developed, the LTP08 Target profile, reflects these growth
imperatives and the current market environment (see Figure 1). The LTP08 Target profile
delivers x.x% CAGR to 2017, peaking at x.x Moz in 2015.

Excluded from this profile are some of the requirements to further secure mineral rights and
sustain long term growth in line with current global platinum demand growth at x.x% CAGR
to 2016. However these additional projects, which lie outside of the LTP08 Target profile
(primarily larger mining operations on the Eastern Limb and some of the next generation
deeper vertical shafts on the Western Limb), are less certain, with many of them currently
being “out of the money”, and further work (particularly on the Eastern Limb strategy,
which is in progress) being required to allow them to move forward.

There would also be a concomitant impact on the Process directorate, which would require
further capital investment in order to cater for the increased capacity requirements of these
additional projects currently outside of the LTP08 Target profile.
Figure 1 – Production profile

CAGR
M6 oz
(07-17)
Refined Pt

Greenfield
projects 4.8%

4
Brownfield
projects

2
Projects in
execution

0
2007 2009 2011 2013 2015 2017

Three supply demand scenarios were developed based on the LTP08 Target profile (see
Figure 2 – note: not included). Assuming Johnson Matthey forecasts of supply and demand,
with a reasonable degree of certainty, Anglo Platinum believes the market for Platinum after
a period of sustained supply deficit (1999-2005) should come into balance and could
potentially move into surplus in the short-term. However, this surplus will only materialise if
Anglo Platinum and third parties achieve forecasted levels of production in what is currently
a challenging environment for delivery in South Africa. In the medium-term (by 2013), the
market is expected to return to balance/deficit with strong demand offsetting increased
supply from new projects. Therefore it is felt that the global Platinum market will be able to
accommodate the additional growth implied by the LTP08 Target profile.

However, the LTP08 Target scenario is not without risk. A substantial supply surplus
(approximately xxx koz Pt or x% of global Platinum demand in 2008) would be generated
under the LTP08 Target profile (see Figure 2 – note: not included).
 288

As a result, Anglo Platinum requires a set of “Plan B” actions (project curtailments, shaft
care and maintenance options, and investment delays) to be adopted should supply-demand
not evolve as expected with the prospect of long term prices falling below long-term
forecasts. Anglo Platinum has sought to identify “Plan B” actions that would balance supply
and demand under the current forecast market scenario.

DEVELOPMENT OF “PLAN B” ACTIONS

“Plan B” actions have been developed by determining the logical steps to move toward a
lower future output profile from both current operations and future investments. Joint
Venture operations, not operated by Anglo Platinum, where the opportunity to influence
production is more limited, have been excluded from the review.

Options have been analysed based on the LTP08 completed in June 2007.
There are three primary factors used to drive the prioritisation of potential “Plan B” actions:

1. The market price for platinum (and the associated full basket of metal prices) at which
each investment centre becomes NPV breakeven
2. The working cost to revenue ratio for each investment centre as a measure of cost
efficiency. This measure ensures differences in the basket of metals by investment centre are
considered
3. The potential mine output over the next five years

In addition, a number of further factors have been used to help identify “Plan B” options:

• Strategic factors including potential impacts on mining rights or ability to meet BEE
requirements
• Investments required to ensure future mine economics are sustainable
• The ability to effectively mothball Investment centres and restart operations should market
outlook improve
• Dependencies between Investment centres and any shared capital expenditure
• The potential to reduce fixed cost and the overall impact on the financials

This process identified a series of projects that, while currently unattractive from an NPV
perspective, would be required to sustain mineral rights and have therefore not been
considered as “Plan B” options.
These are primarily early projects on the Eastern Limb, including projects at xxxxx (at
120 ktpm), xxxxxxx (at 240 ktpm) and xxxxxx (at 250 ktpm). Separately, Anglo Platinum is
refining its Eastern Limb strategy with the objective of enhancing the economics of these
assets. The xxxx Joint Venture has been excluded from the LTP08 Target profile and was
therefore also not considered as a “Plan B” option.

In addition, a number of next generation deeper vertical shaft projects required to ensure the
future sustainability of current operations primarily on the Western Limb were excluded as
“Plan B” options, even though these projects are currently yielding unfavourable returns.

Both Rustenburg xxxx and Union xxxx shafts have been excluded from the LTP08 Target
profile (even though this severely shortens current steady state production output from these
operations to no more than a decade into the future) as considerably more project study
analysis needs to be completed in order to get these projects to the required levels of
confidence. These were therefore also not considered as “Plan B” options.
 289

The three primary factors driving prioritisation are laid out on a matrix (see Figure 3), with
the Platinum basket price for NPV breakeven on the x-axis, the working cost/revenue on
the y-axis and the average Platinum ounce output over the next five years as the size of the
bubble.

Figure 3 Method for prioritisation of projects

Long Term Price Long Term Start year

Working cost/revenue (LoM, discounted) Assumption Consensus Price 2007
R6800 R7600 US UG2 Central L1
2008
110% 2009
RUS UG2 RUS UG2 US UG2 3N P2 L3
ELP UG2 US Development RUS UG2
UNKI MSZ L1 Off Mine Bosch L1 Brak L1 2010
100 L3 OFF MINE
RUS UG2
Reef L1
KPM UG2
Bles L2a
BRPM MER BOS BRPM MER BOS
NTH L1 P2 100% Frank L1 K2 L3 AP NTH L3 P3 100% TPM UG2
2011+
GPM UG2
90 KPM UG2 K1 L1
AP Metal 100% KPM UG2
US UG2
US UG2 4S Pie
Metal 100%
Pasch Conc
MDC East L1
CapEx only
US UG2 5S L3 Revenue 100%
RUS UG2 Water L1e Ph3 K2 L1 AP Richard BRPM UG2 STYL
80 RUS UG2 Paar L1
Metal 100% P1 L1 RUS UG2
Town L1e
RUS UG2
Water L2c Ph4
GPM UG2
L3 P1 100%

MPM UG2 STH1 L1 RUS UG2 Bles L1 Klip Conc

RUS UG2 Town L1 AS UG2 RUS UG2 Paar L2c 21-27 Revenu 100%
70 43E L1 MPM UG2 STH1 DB MER Rich
AS MER WU L1 P2 L2b
US MER 5S L3 TPM UG2 Hack Early L2b Group
MPM UG2 Onverwacht L1 LPM UG2 RUS UG2 Paar
Conc Revenue Average
60 PPL PLA SS L1
Mot UG2 Lebowa# P1 L1
RUS MER
TPM UG2 Twick
Conc Revenue
Brak L2b
PPM UG2 Shall
L2c 29-42
Town L1e L2b Cons
RUS UG2 BRPM UG2 BOS STH
Mot UG2 AS UG2
50 Borwa# P1 L1
Water
L1 Ph2
RUS MER
Paar L1e
L2b P1 100% 4# P1 L2b
PPL PLA ZS L1 BRPM MER
AS UG2 BRPM MER LPM UG2
PPL PLA PPRN L1 STYL L2a
40 AS MER WL L1 AS MER
CENT L1
62E F L1e BOS NTH
HYB L2B 100% AS MER
MPH P3 L2a P1 100%
AS UG2 44E F L1
BRPM MER BOS AS UG2 4# P1 L2b
AS MER 2# L1
30 NTH L1 P1 100% 44ESI L1e

BRPM MER BOS AS UG2 BRPM MER

STH L1 P1 100% 50E F L1e BOS STH L1
1,000,000
20 P2 100%
Pt oz pa
(Avg.
10 08-12)

0
3,000 4,000 5,000 6,000 7,000 8,000 9,000 10,000 15,000

Pt price for NPV breakeven (R)

The “Plan B” options fall into four broad tiers (see Figure 4):

• Investment centres presently producing Pt ozs which are currently marginal performers
• Investment centres of project pipeline which could be delayed to slow growth and
postpone capex
• Investment centres of approved projects presently in execution which could be delayed to
slow growth and postpone capex
• Investment centres which could deliver material reductions in output
 290

Investment Centres

Execution of all twenty “Plan B” actions would almost deliver the required reduction in
platinum ounces to balance the projected global market supply demand profile (see Figure 5
– note – not included). In practice, Anglo Platinum would execute only the number of
actions required to respond to changing market conditions and these would be tempered by
the amount of capital sunk at the time.

If further reductions in production output were required then Anglo Platinum could look at
entering negotiations with Joint Venture partners or alternatively select projects or current
operations that have a Breakeven Platinum Price below the long term price assumption.

The implications of individual “Plan B” actions have been assessed to determine the overall
material impact of the downscaling of mines and delaying of projects, thereby resulting in a
substantial reduction in capex, as stay in business capex is avoided and both expansion and
replacement capex delayed (see Figure 6).
 291

WAY FORWARD
Anglo Platinum will communicate the details of these “Plan B” actions to the relevant
stakeholders, and where necessary update the actions to be inclusive of the Budget numbers
and incorporate any implications for processing strategy. Going forward, the “Plan B”
methodology will be routinely integrated into the annual SLTP process.

A.3.10 Execution plans for supporting capability

Critical consideration is given to the supporting capability and capacity to deliver against
the strategic long term plan. This work is undertaken by multidisciplinary teams across
each of the executive areas of accountability. Based on agreed production profiles each
discipline develops a supporting plan to facilitate execution of the SLTP. In essence each
of these plans is the tactical plan of the respective disciplines to execute the strategic
intent encapsulated in the SLTP.

An edited extract from the executive summary of a SLTP from the period 2004 to 2007 is
provided.

CAPACITY TO DELIVER
Practical constraints
Operational performance is improving (see Volume 2, Chapter 7 – note: not included) and
Anglo Platinum is increasingly confident in its ability to deliver value from growth. The
capacity to deliver production profiles from a practical basis has also been assessed on six
key dimensions:

1. Can Anglo Platinum deliver the capital projects on time?

2. Can the required operational labour be recruited, trained and retained consistent
with project timelines?
3. Can housing and bulk services requirements be met?
 292

4. Is there sufficient water?

5. Are there any power constraints?
6. Will Government grant the necessary licences and permits in time?

Overall, assuming actions are taken quickly in a number of areas, constraints should be
manageable, albeit recognising there is likely to be some project slippage against current
project timescales and additional cost may be required to remove constraints.

Capital projects management: The key constraints from a capital projects management
perspective are likely to be around internal resource capacity (mining engineering, project
management, engineering, environmental, process engineering) and vertical and decline shaft
sinking capacity. Anglo Platinum expects overall capital project management workload to
increase by ~10% under the Target scenario and ~30% under Growth with a corresponding
increase in resource requirements. Recruiting and retaining these additional resources should
be achievable recognising that there will be a productivity impact as new people are
integrated and trained and there is also likely to be a cost impact as the market, both in South
Africa and globally, for these types of resources is tight and compensation packages required
to attract the right people will rise accordingly. An assessment of the supply of vertical shaft
sinking capacity in South Africa versus industry requirements over the next ten years
suggests the next five years will be particularly tight. Anglo Platinum should be able to gain
access to the required resources but this will require providing suppliers with advance notice
of requirements and negotiation of preferred supplier agreements which should be
completed in Q3 of this year. Decline sinking capacity is also constrained and actions will be
pursued to support development of this capacity both internally (CDS) and with its suppliers.
There are fewer constraints in terms of Engineering, Procurement and Construction
Management (EPCM) capacity and capital procurement, although supply of ultra-large Off-
the-Road (OTR) tyres will be tight until 2008 (see Volume 2, Section 6.1 – note: not
included).

Operational labour: Western Limb labour requirements are driven by attrition rates as there
is limited overall growth of operations. There is a requirement to de-bottleneck the
Rustenburg Mining Development Centre facility given current capacity constraints. Eastern
Limb requirements under the Target profile are relatively modest given the early mining
nature of operations. Under the Growth profile, there is a substantial increase in labour
requirement from 2013 with ~9 000 new hires required in 2015 alone. To meet this
requirement, the decision has been taken to expand the underground training centre at the
Hackney shaft at Twickenham mine and expand the Randfontein Engineering Skills Training
Centre. D Grade management is biggest risk with an annual average of 100+ competent
managers required to be deployed between 2007 and 2015. A three tiered approach is
required: 1) External recruitment; 2) Promote from within; 3) Young Professionals. Plans are
also in place to ensure new mining operations are not wholly reliant on novice workforces
(see Volume 2, Section 6.2 – note: not included).

Housing and municipal services provision: The biggest housing requirements are in the
Eastern Limb. Again, requirements for the Target profile are modest. However,
approximately 2 000 houses for C3-E4 Grade employees are required to meet demand for
new artisans, supervisors and managers by 2012 under the Growth scenario. The focus for
development is in five nodal development centres (Burgersfort, Thabazimbi, Lydenburg,
Rustenburg and Polokwane). Making houses available should be achievable. The biggest
constraint is procurement of land, particularly in Burgersfort, and current plans are to invest
Rxxx M on land procurement in 2006. There are also requirements for social housing in line
with the Mining Charter and this will be provided through Sunflower Housing Company (see
Volume 2, Section 6.3 – note: not included).
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Water: On the Western Limb, water becomes a constraint for Rustenburg operations around
2012 given increases in residential requirements. Current Department of Water Affairs plans
are to build a pipeline from Hartebeespoort Dam to meet requirements and Anglo Platinum
actions are, and will continue to be, to convert to the use of effluent water at Rustenburg and
BRPM. Union requirements will be met by transferring surplus water from Amandelbult or
from the Vaalkop Dam. Water becomes a constraint on the Eastern Limb under the Growth
profile if the De Hoop dam is delayed by more than 4 years. The current plans are being
challenged by SANParks and 4 NGOs given perceived impact on the Kruger Park. Anglo
Platinum has the option to develop the Richmond Dam to mitigate against this delay
incurring Rxxx M of Capex. The decision does not need to be taken until October 2006 and
by that time, there should be a better view on the likelihood of De Hoop being delayed as
initial hearings are scheduled for July (see Volume 2, Section 6.4 – note: not included).

Electricity: Distribution and transmission of power are not constraints given recent
additions to capacity and comparatively short planning and implementation horizons (12-24
months). However, at power generation level, the national capacity is very tight and will
remain so for at least next 5 years, especially during peak times (morning/evening in winter
months). Given this, there are likely to be load shedding requirements of Anglo Platinum
impacting productivity. However, the requirements of Anglo Platinum are likely to be the
same whether Anglo Platinum expands or not, as expansion will have an insignificant impact
on national requirements. There is therefore no rationale to delay projects but potential
productivity impacts of load shedding are being factored into plans (see Volume 2, Section
6.5 – note: not included).

Government permits: Anglo Platinum is making progress in its applications and approvals
of licences and permits to undertake mining operations under both Target and Growth
scenarios (Surface Leases, Restitution Claims, WULA/Water Contracts, Land Proclamation
and Service Agreements). However, it should be recognised that there are large numbers of
applications pending, constrained by Government capacity, and a number of contested
restitution claims for individual farms at Pandora, Modikwa and Der Brochen. Anglo
Platinum will be supporting Government as best it can to process applications. Any delays in
obtaining licences and permits, which are probable, could lead to delays in project
implementation, increase the risk to Anglo Platinum if decisions were taken to proceed
without necessary approvals and could drive incremental cost to settle disputes. There is a
clear imperative to manage government relations at a strategic level (see Volume 2, Section
6.6 and Chapter 8 – note: not included).

In summary, the biggest potential constraints/risks are:

• Internal skilled resources (esp. Mining, engineering and operations D Grade

employees)
• Vertical and decline shaft sinking capacity over the next 4 years
• Ability to hire and train appropriately skilled workforce on the Eastern Limb
• Access to water in the Eastern Limb should the De Hoop dam be delayed
• Government delays in granting required approvals

None of these constraints should be deal breakers but they do imply potential delays,
increased cost and risk.
 294

A.3.11 Comment
The development and refinement of the strategic long term planning framework between
2004 and 2007 coincided with stabilisation in the platinum market which benefited from a
period of sustained growth in demand of ~3.6% per year. Following definition of the
broad framework, effort was directed at establishing common processes and systems
across multiple operations.

The core manifestation of strategic long term planning was the annual strategy report.
These annual Board documents were developed and enhanced year on year as the
SLTP process matured along with a deeper understanding of the overall philosophy. Key
to this evolution was an increased understanding of how the market characteristics
influenced metal demand and price. This thinking translated into improved scenario or
world view development and application in the global assumption parameters.

Within the overall value chain close integration occurred between mining, processing and
projects, and engineering and infrastructure activities in development of the business
plan. Areas for improved integration were in human resource planning (specifically the
timing and availability of critical skills) and community engagement and development.
Significant conflict was developing between local communities and operations, despite
material corporate social responsibility investment. Concurrently poor safety
performance, resulting in safety stoppages that had not been included in the original
planning, was impacting on delivery.

Despite a radical change in senior management and Board structure in mid 2007, the
strategic long term planning framework was retained as the core strategic planning
process.
 295

A.4 2008 and beyond

The objective of this section is to demonstrate how Anglo Platinum responded, in the
context of the Strategic Long Term Planning Framework, to the global financial crisis of
2008. Unfortunately owing to the sensitivity of company strategy following the global
financial crisis it is not possible to provide any detailed information or extracts from
planning documentation.

A.4.1 Background
The global financial crisis in 2008 has had a lasting impact on the structure and nature of
the global financial industry. The resultant shortage of capital for investment in the mining
industry has fundamentally reshaped the strategic plans of many mining and metals
companies.

The year 2008 was a year of two parts with the strong demand and record prices of the
first half rapidly falling as the global economic crisis took hold in the last quarter and
commodity prices went into freefall. The overall tactical response by most companies
was to reduce capital and operating expenditures and manage production levels to match
market requirements.

The first quarter of 2009 saw significant announcements on mine closures, production
cuts or moves to place mines on care and maintenance, coupled with extensive capital
deferment and planned redundancies.

The key learning out of this process has been that:

• Increased volatility (metal demand and price) is likely during the recovery period;
• It is important to preserve cash, yet at the same time not stifle the recovery by not
investing in future production capacity;
• Increased flexibility is crucial – strategic and tactical, to manage the risk
associated with increased volatility;
• Resilience needs to be built into the organisation through positioning of
operations at the lower end of the cost curve;
• Social and environmental pressures are likely to increase as a result of the
changed perception of risk by society and communities; and
• Organisational flexibility is likely to result from changes in how investment
decisions are made, how the business is structured, cost positioning and through
improved understanding of the market.
 296

A.4.2 The PGM market (extracts from Annual Report, 2009)

“During 2008 strong autocatalyst and investment demand, primarily from the newly
introduced exchange traded funds (ETFs), led platinum to the record level of $2 276 per
ounce in March 2008. The high metal prices in the first half of the year also resulted in
intensified efforts to thrift platinum group metals (PGMs) from catalyst systems and to
substitute cheaper palladium for platinum. Palladium benefited from its high price
differential with platinum and from developments in technology, thereby increasing its
share in the diesel market. In the second half of the year, the global economic down turn
reduced credit availability for vehicle purchases. Metal purchases by platinum jewellery
manufacturers declined materially as a result of the high prices and there was a
corresponding increase in the use of recycled jewellery metal. Investment and
speculative interest declined rapidly in mid-2008, with a substantial sell-off in physical
platinum (coins and bars) in Japan, large disinvestment in platinum ETF units in Europe
and reductions in net long positions on the New York Mercantile Exchange and the Tokyo
Commodity Exchange. This sell-off and reduction in net long positions led the rapid price
decline in platinum, to well below $1 000 per ounce by October 2008.

The unprecedented volatility in platinum demand and price experienced in 2008 was
followed by a period of consolidation in 2009. The inherent strength in the structure of the
platinum business saw the platinum market return to balance during 2009, as jewellery
and investment demand increased, reacting to lower price levels in the first half of the
year and as investor sentiment improved. These increases offset depressed demand for
metal for use in autocatalysts because of reduced vehicle production and lower demand
from the industrial sector.”

A.4.3 The Anglo Platinum response to the global financial crisis

Anglo Platinum’s record financial performance in 2008, for the third consecutive year,
was chiefly the result of exceptionally high platinum group metal prices in the first half of
the year. The global economic crisis followed a period of high demand and had a major
impact on the platinum business. At the beginning of the year, the price of platinum rose
to US$2 276 per ounce; within six months, it had dropped to below US$800 per ounce.

Financial performance for 2009 was disappointing compared with that of 2008. This was
the result primarily of significantly lower prices for platinum group metals throughout most
of the year as overall production, at 2.45 Moz of refined platinum, was essentially the
same as 2008.
 297

During this period of global economic crisis, subsequent readjustment and reduced
demand, Anglo Platinum:

• Stabilised production outputs, for the short term (2009 / 2010 / 2011), at the
same level as that of 2008;
• Slowed down execution of capital projects to limit capital expenditure;
• Focused on managing costs and improving productivity so as to reduce
operating costs and improve overall positioning on the cost curve; and
• Reduced staffing levels through a reduction in contract employees and re-skilling
of full-time employees into critical positions.

A.4.4 Strategic long term planning – flexibility of response

During the second quarter of 2008, despite benefits resulting from increased PGM prices,
considerable concern was developing regarding the sustainability of metal price levels.

The strategic long term planning framework logic was utilised to:

• Understand the market – a review of likely scenarios indicated the probability of a

move towards reduced metal demand at a lower price, as anticipated in the 2007
scenario exercise;
• Develop long term planning parameters aligned with probable world views –
primarily metal prices, exchange rates, escalation rates and capital availability;
• Apply value based management logic to ascertain the least value destructive
options in a decreased demand environment;
• Develop and evaluate contingency plan options in line with the overall VBM
approach; and
• Refine, evaluate and execute the agreed plan of action at two levels:
o Tactical – immediate contingency response using current SLTP data; and
o Strategic – refinement of the 2009 and 2010 business plan strategic
directives to accommodate different world views.

Tactical response
The immediate tactical response was primarily directed at cash flow management and
comprised:

• Reassessment and reduction of capital expenditure on expansion projects: All

projects in study or execution were reviewed and options to slow down or stop
execution were assessed. Adjusted production and capital profiles were
 298

processed through the current HSF models and revised estimates of NPV and
cash flow determined. This allowed re-ranking and prioritisation.
• Low cash generative, high break-even cost investment centres (wrong end of the
cost curve) were identified and reviewed. Based on this three shaft systems at
the Rustenburg mines were placed on care and maintenance following an
engagement process with organised labour.
• All contract activities (i.e. non-permanent employees executing non-core
activities) were reviewed and aligned with the revised production profile.
Concurrently the viability of these contracts over a protracted period of market
contraction was reviewed and, where relevant, notice was given.

Strategic response
The strategic response was to:

• Redefine an acceptable level of debt during a period of reduced market demand

and metal price coupled with a shortage of financing facilities. This translated into
a capital constraint, based on a forecast of flat production from 2008 to 2012,
applied during subsequent business planning processes.
• Review the operating structure of the organisation during 2009 and restructure
based on an operating matrix between the centre and the operations. This
resulted in a need to reduce staff at the centre and operations in line with a
defined staffing structure and productivity levels. This was in due course
executed through a voluntary separation process and / or retraining into roles
created by the re-adoption of specific contractor activities.
• Reassess, during the subsequent business planning process, shafts placed on
care and maintenance as an immediate tactical response, using an approach of
fix, close, or sell.

On the basis of both the tactical and strategic responses, the business plan for 2009 was
modified and the business plan for 2010 (developed during 2009 for 2010) was
developed taking cognisance of:

• A balance sheet (debt) requirement that translated into a capital expenditure

constraint;
• A market driven production constraint to hold production at 2008 levels but from
the highest margin sources;
 299

• A working cost directive to maintain working cost flat at 2008 levels for three
years through labour productivity improvements and asset optimisation initiatives;
and
• Optimisation of installed capacity in all elements of the value chain but
specifically process operations

A.4.5 2009 – readjustment to the changed market conditions

During 2009 Anglo Platinum experienced challenging market conditions. However this
period of global readjustment was used as an opportunity to reconfigure the operating
cost base, improve productivity and take a significant step forward in safety improvement.
Financial results were significantly below those of previous years, however operating
performance improved and production and sales increased marginally whilst keeping unit
costs essentially flat. As a result productivity improved significantly compared with that in
2008.

During the year a more efficient matrix, management structure was implemented and the
mines restructured into smaller, more manageable units. The total labour force was
reduced, mainly through a reduction in contractors, whilst advancing a values-based
company culture programme and improved relationships with external stakeholders.

Restructuring
A major restructuring of mining operations, announced early in 2009, was completed by
year end. Rustenburg and Amandelbult were split into more efficient stand-alone units, of
five (Bathopele, Thembelani, Khuseleka, Khomanani, Siphumelele) and two (Tumela,
Dishaba) mines respectively.

The new structure was designed to create a sustainable reduction in unit costs and to
maximise value from assets. Head and regional office complement was reduced by 724
people in 2009, bringing the total reduction to 1 150 since July 2008. Overall labour
complement was reduced by 15 752 people during the year or by 18 786 from October
2008. In spite of the significant reduction in employees and the associated challenges,
there was not any industrial action and no forced retrenchments. This is only possible
when there are sound and robust relations with employees, partners and the unions.

Concurrent with the restructuring, three high-cost shafts were placed onto care and
maintenance to optimise overall cost per ounce produced.
 300

The logic applied in this process comprised:

• Maximisation of output from existing infrastructure including approved projects

(where the mineral asset supports this);
• Minimisation of cash working costs to improve relative position on the industry
cost and margin curve;
• Stopping production from the least viable mining units and placing them on care
and maintenance subject to further assessment on a fix, close or sell rationale;
• Minimisation of short term capital investment into infrastructure;
• Delaying of replacement ounces capital investment (new shafts) without
compromising optimal output levels (scale effect); and
• Organisational restructuring (concentration of activities plus organisational
design) to improve labour efficiency and asset utilisation against industry
benchmarks.

Operating costs
Unit cost of production remained essentially flat in 2009 relative to 2008 at R11 236 per
equivalent refined platinum ounce. Labour productivity levels increased by 13%,
2
compared with 2008, to 6.33 stoping m per total operating employee per month.

Cost management is being institutionalised with the intent to keep unit costs flat during
2010 and 2011. These real cost improvements will be delivered through improved
productivity, value engineering and effective cost management, focusing on supply chain
escalation management, the elimination of wastage and reducing allocated costs.

Capital expenditure
Capital expenditure for 2009 included R6 billion spent on projects and R3.7 billion on
stay-in-business capital (SIB). A number of projects have been delayed to optimise
capital spend rate, the most significant being:

• Amandelbult no. 4 shaft (now Tumela 4 shaft); and

• Twickenham Platinum Mine.

Black Economic Empowerment

During 2009 Anglo Platinum successfully completed three black economic empowerment
transactions with Mvelaphanda Resources Limited, Anooraq Resources Limited and
Royal Bafokeng Resources (Proprietary) Limited.
 301

Organisational culture transformation

In July 2008 the leadership team of Anglo Platinum, comprising management and unions,
studied the corporate culture and identified a number of areas for improvement to meet
the challenges facing the organisation. A values programme was launched to encompass
every human interaction within Anglo Platinum, and with their stakeholders. A leadership
academy was established to more efficiently fast-track the skills transfer necessary for
frontline supervisors and middle management. The academy is supported by a personal
change workshop programme that aids the creation of a culture in Anglo Platinum
appropriate for success in a modern South Africa.

Outlook
Notwithstanding the current uncertainty in the global resources and platinum sectors, the
long term strategy, remains sound:

• To develop the market for platinum group metals;

• To expand production into that opportunity; and
• To conduct business safely, cost-effectively and competitively.

Despite the profoundly negative impact of the global economic downturn on the platinum
industry in the short term, managing the business with regard to long-term demand
expectations remains critical. Platinum remains a strategic industrial and premier
jewellery metal and the long-term fundamentals of the platinum industry remain sound.

Based on a sound strategic planning process, Anglo Platinum will continue to respond to
the challenges that face the platinum industry. Planned levels of platinum production can
be appropriately adjusted should economic conditions affecting net platinum demand
change. Production levels continue to be monitored against global economic
developments and adjusted as necessary. The combination of the reduction in capital
expenditure and of cost-reduction initiatives was expected to reduce the rate of increase
in net debt during 2009 and 2010 and improve overall balance sheet strength.

A.4.6 Comment
The process that occurred during and subsequent to the global financial crisis and in
2008, 2009 and 2010 is vindication of the soundness of the Strategic Long Term Planning
Framework, systems and processes.
 302

The key components of the framework, as described in Section 11, were applied to carry
the company successfully through the worst economic crisis since the Great Depression,
viz:

• The global and local context, markets and value based management analysis
informed the development of world views which provided the context for the
analysis of the long term planning process.
• The output of the long term planning process was then assessed in the context of
the most likely world view and a contingency plan defined for any shift to the next
most likely world view.
• The business resourced itself to execute the agreed long term plan in the context
of a business plan (projects, metallurgy, infrastructure, people, and community).
• Annual reassessment of the mineral asset portfolio is based on the current state
of execution of projects and real options arising from evolving alternate
trajectories.

A.5 Concluding comment

This appendix demonstrates, through selected examples, the utilisation of the strategic
long term planning framework at a large, integrated, multi mineral asset mining company.
The simplest, complete demonstration of the application would be to provide copies of the
annual strategic long term planning documentation. However owing to confidentiality
restrictions associated with a publically listed company, this is not possible and extracts
have been utilised where possible.

The efficacy of the philosophy and the processes, tools and systems developed to
implement the framework have been demonstrated by continued application and
refinement through the period 2004 to present. During this period significant shifts
occurred in market supply and demand, there was a major global financial crisis and
three changes in executive management at the company. Despite these changes, the
common thread of continuity has been the strategic long term planning process. Anglo
Platinum Limited has adjusted and adapted as necessary and retained its position as the
premier producer of platinum globally.