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Edited Transcript of SGL.J earnings conference call or presentation 29-Aug-19 2:00pm GMT

Q2 2019 Sibanye Gold Ltd Earnings Call

Johannesburg Sep 3, 2019 (Thomson StreetEvents) -- Edited Transcript of Sibanye Gold Ltd earnings conference call or presentation Thursday, August 29, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Charl A. Keyter

Sibanye Gold Limited - CFO & Executive Director

* Christopher M. Bateman

Sibanye Gold Limited - Executive VP & Head of US PGM Operations

* James R. Wellsted

Sibanye Gold Limited - Senior VP & Head of IR

* Neal John Froneman

Sibanye Gold Limited - CEO & Executive Director

* Richard A. Stewart

Sibanye Gold Limited - Executive VP & Head of Business Development

* Robert van Niekerk

Sibanye Gold Limited - Executive VP & Head of SA PGM Operations

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Conference Call Participants

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* Adrian Spencer Hammond

SBG Securities (Proprietary) Limited, Research Division - Research Analyst

* Arnold Van Graan

Nedbank Capital, Research Division - Analyst

* Brian Nunes

Gramercy Funds Management LLC - Senior VP & Research Analyst

* Christopher Nicholson

Morgan Stanley, Research Division - Research Analyst

* James Andrew Keith Bell

RBC Capital Markets, LLC, Research Division - Analyst

* Leroy Mnguni

SBG Securities (Proprietary) Limited, Research Division - Research Analyst

* Patrick Mann

BofA Merrill Lynch, Research Division - VP & Research Analyst

* Bianca Francesca Boorer;Reorg

* Felix Njini;Bloomberg

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Presentation

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Neal John Froneman, Sibanye Gold Limited - CEO & Executive Director [1]

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All right. Good morning, everybody, and especially I think it should be noted good morning, from Billings, Montana for some of us, and welcome to Sibanye-Stillwater's H1 2019 operating and financial results. You may want to know that we've obviously just completed our Board meeting process in the U.S., and I'm very pleased to say that it gives us also an opportunity to engage with all our U.S. stakeholders.

So here in the U.S., you have Charl, Chris, and myself, plus some of our directors, our incoming Chairman, Dr. Vincent Maphai and Rick Menell. In Johannesburg, we have the balance of the executive team, Robert, Shadwick, Richard, Dawid and Themba. And we will conduct this morning's proceedings first of all by going through the presentation and then opening up for questions, where we will involve the balance of the executive. Charl and I will do the majority of the presentation.

Moving to Page 2. Important to note our safe harbor statement. There are forward-looking graphs in this presentation, so please take note of the safe harbor statement.

Moving to Slide 3. In terms of the agenda, we always start our meetings with the values and safety moment. I will cover that as part of the presentation. We will then look at Lonmin, our initial observations. If we do not cover the South African PGM wage negotiations, I think there will be lots of questions, so we've included some slides on that. And then we'll get into the actual operating results for H1, going through the gold, the South African PGM operations and the U.S. PGM operations. At that point, I'll hand over to Charl, who will cover the financial results, and then there will be some brief concluding remarks.

If we can move to the next slide. And this really just sets the scene for the safety and the values moment. And to me, it's an important slide. It is the way Sibanye-Stillwater conducts its business. It is the way we think about things. And in terms of our tree, just a quick summary, our values are our roots, the people of our organization are the trunk of the tree, they give it direction and strength. We are a business, we have to be profitable, so safe, costs, volume and grade are important and then the tree flourishes and all stakeholders benefit. And if we do this really well, the tree produces fruit.

Our vision therefore is about creating

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All right. Can I just confirm, up until where did you hear me? All right. Yes, so in terms of the thinking that we had in place since 2013, I think we are well advanced and somewhat ahead of the pack. I think clearly, we recognize that shareholders are also a very, very important stakeholder and I do believe that this approach will maximize value for shareholders more so than just being focused only on shareholders.

Moving to Slide #5, this is really about our safety value and that's one of the roots of our tree. The strategic framework was presented at the previous results in February. This is a framework that was developed based on the challenges we had in 2018, and it's really here just to refresh your memories as to what we are doing regarding safety.

And it starts with values. That's a commitment to our values, creating engaged leadership, then focusing on creating an enabling environment, empowering people and creating fit-for-purpose systems. And we are very focused on making sure that all the elements of this Zero Harm strategic framework is being implemented, and it's had very, very significant and impressive results, which I'm going to get to on the next slide.

So if you can go to Slide #6 now and the heading is most appropriate, "Reestablishing and improving our leading safe production performance." We've had a very commendable recovery in group safety performance. I'm very pleased to announce the South African gold operations have been fatality free now for a year, that's 365 days, a significant industry milestone and a historical record for these operations. They have never gone this long fatality free.

More impressive, in fact, is that 7 million fatality free shifts have been worked in the gold segment. Regrettably, we've had 2 fatalities during the first half of the year in the South African PGMs segment. And obviously, this is in very stark contrast to the tragic and very unprecedented 21 fatalities that we unfortunately had in the first half of 2018. So a huge improvement and something that the Sibanye Stillwater team is very proud of.

Interesting to note, our US PGM operations have been fatality free for more than 7 years and that amounts to 2.4 million fatality-free shifts. And contrast that with the 7 million fatality-free shifts in the gold segment, so all our group safety performance indices have improved substantially year-on-year, so we're very, very pleased with that.

Just moving to the next slide, which is really a values moment. And as I said, we start all our meetings with a safety and values moment. The value that I want to focus on here is commitment and certainly, we believe we have created a track record of delivery and I'd like to go through this in a little bit of detail.

So what did we say? We said the PGM assets that we were acquiring will complement the gold portfolio and create value and sustainability, and I think we've clearly delivered on that. Our PGM assets have been a significant success story. They've provided very necessary and valuable diversification.

We said that Stillwater was a quality asset in a favorable region, offering growth and value and there was a lot of criticism of that move at that point in time. I think today it consistently generates half of the group's earnings. Production growth is currently taking place with the implementation of the Blitz and Fill the Mill project. And we've seen a 112% increase in the palladium price since we made our offer in 2016, so that one deserves a big tick.

We said at late last year that our South African gold operations needed to be restructured into a more sustainable and smaller footprint. I'm very pleased today that we can sit here and say that's complete as well.

Reestablishing our leading safety performance and breaking through the safety plateau that the South African mining industry seems to have hit was a necessary initiative and, again, I think we've achieved record safety milestones in our gold business.

The U.S. operations had a poor start in Q1, and we said we would introduce recovery plans. Those have been initiated and are effectively in place and apart from a minor reduction in guidance at Blitz, very much on track.

We said we would pursue a 4-step PGM strategy and that included the acquisition of Lonmin and despite many challenges through that process, we have successfully concluded the acquisition of Lonmin, and it's a very, very important part of our strategy.

Turning to Slide #8. This just really reinforces the value that our PGM business is now delivering. If you look at this slide, if you focus on the positive EBITDA reported for H1 2019, you can see it is as high as the highest EBITDA we got out of our gold business in H1 2016.

The negative aspects of the strike are clearly shown with the negative EBITDA from the gold division, but of course, we all know that is a once-off and that recovery process has taken place already. So this just amplifies what I said in the previous slide.

If we can go to the next slide, Slide #9, clearly, we do not sit here believing that we've arrived. This is a long journey and there are still some significant challenges. In terms of our organizational culture, we are very focused on delivering a values-based culture, which will be inculcated into all our decision-making and that is a long process and well underway.

Focusing on operational excellence, I have alluded to at previous presentations that with the acquisition of Lonmin, we would have to adjust our operating model to include a focus in the U.S., a focus on gold and a focus on the South African PGM business, and, of course, the other initiatives in the group are also headed by executive. So today, you will see in South Africa, Robert will be representing the South African PGM business, and Shadwick Bessit, the South African gold segment, with Chris here in the U.S. with me representing our U.S. operations. So we have refocused for operational excellence, and I think that delivery is clearly coming through as well.

One of the more important aspects that is a primary focus at the moment is deleveraging. We have had challenges through 2018 and the first half of 2019, which have delayed our deleveraging plans. But I think you can see that despite those challenges, we are well below our covenants of 3.5x. Current net debt-to-EBITDA adjusted -- or adjusted EBITDA is now 2.5x, which includes the Lonmin EBITDA and certainly, many of the other issues I think are well behind us now and I will try and give some indication without forecasting profits of what the next half and 18 months may look like.

Addressing our South African discount is ongoing. It is a necessary part of our business. And ensuring that the company is ready for its next phase of strategic growth was accomplished through the acquisition of SFA Oxford, which is helping us to assess the battery metal market potential. So that's a long journey and it's still ongoing.

If we can now move to the initial observations of Lonmin and if we can go to Slide 11. Let me start off by saying that I'm pleased that Lonmin has turned out to be exactly what we expected. We remain satisfied with the acquisition, and we are also clearly up to the challenge of what is required.

Lonmin is no different to what we presented to the Competition Commission and what we presented to the market. Lonmin is not a profitable organization and some very significant changes are required.

We have been able to produce some information, which is consistent with the way we report and this serves the purpose of showing you exactly where Lonmin is. If you look at the slide on -- the graph on Slide 11, there's 2 things to note. We have reported costs here, as we interpret costs. You will notice from the bars, that there is a step change in the cost profile from December -- the December quarter 2019, and that's really driven by a reduction in output. And it was always our view that Lonmin, with a restrained ability to invest capital in its business, was going to eventually get to a point where there was a lack of flexibility. So that's the one thing.

I think the second thing is a transaction that takes 18 months will result in a demoralized workforce, and those parties that objected to the process should take full accountability for the results of that. And you can, again, see that in the production output which is the dotted line, which is quite consistent now at all-time lows.

This does mean that there is a step change that is required to improve the viability of these operations. And I think the bottom line is, and it should be well noted and I'm very pleased that the appeal court noted this, as a stand-alone entity, Lonmin is not viable and that is the facts of the situation.

This is also shown in the next slide, which is Slide #12. And this shows how Lonmin's cash has been consumed, and changes from quarter-to-quarter. I'm not going to go through all the details on this slide, but it really enforces, reinforces what I said in the previous slide.

What you will see though is that in the June quarter, Lonmin has moved into a negative cash position with a net debt position. And clearly, as I've said, Lonmin as a stand-alone business would not be able to access capital at this stage and requires some very significant restructuring, which I'm going to get to now.

If we can go to the next slide, Slide #13, and this is the original announcement slide. And you will note that there's been some minor changes to incorporate, let's say, some new information. But the bottom line is that the combination with our Rustenburg business and the realization of synergies are absolutely necessary to ensure operational viability and sustainability.

We estimated, very conservatively I must say, the pretax synergies of approximately ZAR 1.5 billion annually, and we have been through the details of how that is made up in terms of overhead costs and processing synergies. We have still not been able to quantify the incremental synergies through the ability to mine through boundaries et cetera, et cetera. But this slide remains extremely valid and appropriate for what is necessary at Lonmin.

If we can go to Slide 14, and I'd like to go through this slide in a little bit more detail. A restructuring at Marikana, we will be dropping the Lonmin name to refer to the operations as the Marikana operations for now. As I've said, our initial observations are completely in line with what we expected and completely in line with the communications that we had with all stakeholders.

The urgency to ensure sustainability of the operations has, however, increased because of the drop in employee morale. And as I say, I think those people that objected and tried to delay the transaction should take full accountability for that.

To ensure sustainability, we need to do the following: Elimination of unprofitable production and there's a lot of that; rightsizing of the operations and the associated costs; implementation of sustainable business practices; realization of anticipated synergies, as I outlined in the previous slide; and then appropriate capital investment to ensure an improvement in flexibility.

We will require the support of all stakeholders and should all stakeholders choose to support this, we will be able to create superior value for all our stakeholders. So unfortunately, the bottom line is that Lonmin or the Marikana operations do require significant restructuring.

I'd like to move on to Slide 15 and I'm not going through this slide in detail. I do want to say none of the Competition Commission conditions are particularly onerous, and we will ensure that we honor and comply with what we agreed to.

I want to focus on one specific condition, which is highlighted and that is that a Section 189 process can be initiated at any time. However, conclusion of the process can only occur after 6-months period. And as you know, the transaction was completed in June and therefore, we are essentially already 3 months into this period. As soon as we have completed our assessments, we will continue engaging with stakeholders, and we will do what is necessary to rectify the current situation.

If we can go to Slide #14 -- sorry, 16, the next slide. As we have got to understand the Marikana operations and the investments made by Lonmin into its SLPs and its corporate social initiatives, it has to be well known that Lonmin has invested significantly into these programs. And I think the negative perceptions that are out there about their lack of expenditure need to be corrected, and we will address this as we proceed.

Lonmin actually did some very good work and spent a lot of money reinvesting in the community. I'm not going to go through all of the comments on this slide. I think just for the record though, we had made significant commitments as well and clearly, we'll honor those commitments and this is a very necessary part of creating sustainability for the business.

With that, I would like to move on to the South African PGM wage negotiations and if we can go to Slide #18. Again, we will use our values as the basis of engaging in terms of the platinum wage negotiations in South Africa. And I do want to focus on the last 2 bullet points under the enabling value and the safety value. But first of all, I think important to say that we always negotiate in good faith, that fair wages are always the target. And fair wages are wages that ensure sustainability and are not that dependent on commodity prices. In other words, the fact that the rand basket price has increased to where it is and profitability has increased doesn't mean that the wage increase needs to be higher.

We look forward to peaceful and constructive negotiations. In terms of accountability, I think members must be represented fairly by their organizations, and personal agendas and political agenda should not form part of that. And I think unions must be held accountable for the behavior of their members.

In terms of respect, I think safety and the rights of all those involved in this process must be respected. Acts of violence, intimidation and damage to property are totally unacceptable. And stopping the abuse of one stakeholder by another is certainly something that we will ensure.

So what is different? And I'm very pleased to say that in terms of creating an enabling environment for this to take place, what is different is that a secret ballot process has been signed into law. And that secret ballot process, in my mind, is critical to ensure that employees can express their wishes without fear and intimidation, and we will make sure that those processes are adhered to and are fair.

I think what is absolutely necessary is that the CCMA and the Registrar play their roles and make sure that unions adjust their constitutions and the CCMA has a duty and a responsibility to all of us to ensure that this aspect is clearly adhered to and the processes are fair and secret and that is going to be a significant challenge, but it's law and we will make sure it's enforced.

I think in terms of law enforcement, the SAPS need to deal with the criminal elements that ultimately arise in these type of situations, and they are responsible for community safety.

In terms of safety, the well-being and safety of our employees are key and, in fact, inter-union rivalry is probably the biggest area of confrontation in the workplace. I'm very pleased to say that compared to gold, where we had a 50-50 union representation in the beginning, in this case, 80% of employees are affiliated to AMCU, which means the issue of managing this aspect is a lot easier.

In the interests of safety, clearly, if you're in dispute with 80% of your workforce, should it come to that, in terms of closing operations and minimizing costs should be a lot easier to achieve. So this is a very, very different situation to what we had in gold. And I do believe we will be able to manage it a lot better than the challenges we had in gold.

So with that, I would like to move on to our operational results and if we can go to Slide #20. So the salient features, next slide, please. The salient features for the 6 months ended 30th of June, 2019. I think the post-strike production buildup at the South African gold operations has been safely achieved. This is a very high-risk period where in deep-level mining, stopes have been standing development and have been standing, and it's a very risky part of restarting a deep-level goldmine. So I'm very pleased to say that has been done.

The outlook for the second half of 2019 is significantly better. What was very significant in the first half was the PGM business earnings growth. The U.S. adjusted EBITDA was 36% higher at ZAR 3 billion and as I said earlier on, the recovery plans based on the poor first quarter start are well on track.

In terms of the South African PGM operations, very pleasing, adjusted EBITDA has gone up 106% to ZAR 2.1 billion and this is a steady operational performance with the synergies still resulting in lower cost structures and, of course, it's the type of result we look forward to with Lonmin.

The diversification into PGMs cushioned the strike of the -- at the South African gold operations. Unfortunately, with people coming back to work and production building up from effectively a very low level, we incurred a ZAR 2.9 billion EBITDA loss in the first half of the year. And of course, that was more than offset by the earnings from our PGM business.

The adjusted EBITDA for the half year came in at ZAR 2.1 billion and a significant increase in the second half is expected, and I'll try and outline that in some of the upcoming slides.

Net debt to adjusted EBITDA for covenant purposes is down at 2.5x, well below the 3.5x that was put in place at the beginning of the year and, of course, the deleveraging should accelerate with the changing production profiles and an improved commodity price environment.

Moving on to Slide 21, just looking at the different segments. It really needs mentioning again, although I've said it, we achieved a full year without fatalities in gold, very significant achievement and something we are all very proud and pleased about. The operations were significantly affected by the 5-month gold strike. That strike I want to say was absolutely necessary and was successfully resolved in April 2019.

The restructuring at Driefontein and Beatrix was concluded in June of 2019 and primarily focused on reducing unprofitable sections and mining areas and reducing the operating footprint.

Normalization of production is expected in Q3 2019. And certainly, at current spot prices, it's -- profitability has been restored very significantly.

If we can just move on then to the U.S. PGM operations. I'm not going to go through all the points on the right-hand side of the page. What you can see is an increasing EBITDA profile, based predominantly on stable costs and increasing basket prices. As we did at our last presentation, we've shown you what H1 would look like at current spot prices. The current basket price is substantially higher. Important to note this is a high-quality operation. Our yields are greater than 13 grams per tonne and we are currently operating at a 57% adjusted EBITDA margin, which is very pleasing.

We have adjusted the annual guidance marginally down based on some challenging ground conditions that we are experiencing in the Blitz area and for safety reasons, we are taking extra precautions to address this issue and that's affecting productivity.

Blitz is still on target for delivery as per plan and the Fill the Mill project will deliver another 45,000 ounces by 2021. So this operation has significant growth as well.

Moving on to Slide 23, the recycling operations in the U.S. Important to note now, with the furnace having come back online, we have had record throughput, and you can see that the EBITDA from recycling has almost doubled -- well, in fact, has more than doubled, it's gone up by 115%. And this little business makes a nice little profit of $21.5 million of adjusted EBITDA.

Moving on to Slide 24, the South African PGM operations. Again, I think a very nice profile in terms of increasing EBITDA, generally, driven by increasing commodity prices. We have had some complicated accounting treatment during the first half with the movement -- or the move from a purchase of concentrate agreement to a toll treatment agreement and the -- that is encapsulated in the hashed lines above the EBITDA just reflecting the deferred EBITDA from that aspect. I think what's important is looking at H1 at current spot prices, there is further upside, and we are not yet at steady state from an upside point of view.

Moving on to Slide 25, this is an attempt to try and show the potential change in what we can expect in the second half of this year and looking forward. So this is the all-in sustaining cost margin with the upside at -- under different conditions. So the bars on the left-hand side is H1 2019 actual, at actual prices, and you can see that, that amounted to ZAR 1.7 billion.

You can see H1 2019 at current spot prices, goes up by 300%, so the exact same performance at current spot prices goes up 300% to ZAR 5.3 billion. If you look at a normalized H1 at current spot prices, it goes up by a further 200% to potentially ZAR 11.2 billion.

Now what do I mean by a normalized H1? So certainly, normalized production at the South African gold operations, assuming there was no strike. That's the incorporation of the Marikana operations considering the cost synergies across the South African PGM operations, and it's full recognition of the PGM production under toll processing terms. So the deferred revenue is included in that.

You will note that there is no further suggested normalization in the U.S., so the ZAR 2.23 billion stays the same. There's significant upside in the South African PGM business with the ZAR 2.49 billion moving potentially up to ZAR 5.72 billion, and you can see that gold moves from a negative to ZAR 2.89 billion to a potential ZAR 3.22 billion. So that is the type of upside we can look forward to looking forward under current spot prices and normalized operating conditions.

Moving to Slide 26, this is a slide that reflects the geared nature of our business under different exchange rates and different movements -- and different commodity price changes. So you can see we are most sensitive to the rand-dollar exchange rate. For a 10% change in the rand-dollar exchange rate, there's a 46% change to the all-in sustaining cost margin. Platinum price has a 23% gearing, palladium price 27%, rhodium price 20% and the gold price 26%. So we are certainly very geared to these sort of changes.

At this point, I'm going to hand over to Charl, to talk us through the financial results.

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Charl A. Keyter, Sibanye Gold Limited - CFO & Executive Director [2]

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Thank you, and good morning to everybody on the call. If we start with Slide 28, the income statement for the 6 months ended 30th of June. I'd like to start with revenue. Revenue decreased marginally from ZAR 23.9 billion in half 1 2018, down to ZAR 23.5 billion in half 1 2019.

If we look at revenue from the US PGM operations, that increased by 52%. That was on the back of higher 2E basket prices, but also the significant increase that we saw in the recycling volumes that Neal discussed in the previous slides. This was, however, offset by a 28% decrease at our South African PGM operations. And again, this was due to the change in purchase of concentrate to the toll arrangement, which effectively meant that on some of the metals, we could not recognize revenue for between 3 and 5 months. But happy to say that we are in the cycle now, and that will now normalize over the remainder of the year.

Revenue from our SA gold operations, and if we exclude DRD, decreased by 53% and that was due to the 5-month strike, but the effects of this strike was about 3.5 months in this half of the year.

So I think, all things considered, considering the 28% decrease at the SA PGM operations and the 53% at the SA gold operations, I think still a significant achievement insofar as revenue.

Moving on to cost of sales before amort and depreciation, the U.S. PGM operations had an increase and again, that was on the back of the recycling volumes. We saw a decrease at the SA PGM operations due to the fact that we could not recognize the revenue. It simply means that we drop the cost associated with that revenue out to inventory as well. And the inventory has built up over this period due to the toll transition. Cost at the SA gold operations was flat and that just signals the high fixed cost associated with these operations. So cost of sales before amort and depreciation, at ZAR 20.7 billion compared to ZAR 19.7 billion. Just it's also noteworthy to say that the cost of sales also include the Marikana operations for 1 month.

If we look at net other cash costs, that includes our care and maintenance costs at our Cooke operations, Marikana operations and the Burnstone operations. And just for the record, this Marikana operations is actually the Marikana operations associated with the former Aquarius. So that was ZAR 265 million, but also included in this half was the exceptional costs that we had to incur associated with the strike and that amounted to ZAR 375 million.

The sum of all of that is the adjusted EBITDA of ZAR 2.1 billion compared to ZAR 3.9 billion in half 1 2018. The net finance expenses increased by ZAR 91 million and that was mainly due to the inclusion of the streaming transaction that was ZAR 149 million; the inclusion of DRDGOLD for a full 6 months and that was ZAR 12 million; and then the Lonmin, Marikana operations of ZAR 15 million. This was, in part, offset by a decrease in interest on borrowings in half 1 2019 and that was the result of the ZAR 395 million buyback program that we had on our bonds and our convertible bonds and that happened in September 2018.

Moving down to the gain on acquisition. We realized a gain of about ZAR 1.1 billion associated with the Lonmin acquisition, and I'll discuss that more fully on the next slide. The restructuring costs increased significantly compared to half 1 2018 and that was mainly due to the restructuring at our SA gold operations. You'll remember that we concluded the restructuring at Beatrix and at Driefontein and that was fairly well announced and those results also -- was also previously discussed.

If we look at mining and income tax, you remember that at the end of last year, we recognized a significant deferred tax debt to the income statement. Happy to say that we've now moved our point-of-sale to Pennsylvania, which has meant that we could now reverse that deferred tax credit. So the mining and income tax charge for half 1 increased by ZAR 502 million in current tax, and that was mainly on the back of the increases in taxable mining income from our U.S. and our SA PGM operations. As I said, this was offset by the deferred tax credit associated by moving our sales to a different jurisdiction. And then there was also a ZAR 1.3 billion deferred tax credit, mainly as a result of the losses suffered during the strike period. The results of all of this is that we had a loss of ZAR 181 million compared to a profit in half 1 2018 of ZAR 78 million.

If we move to the next slide. This is just a summary of the Lonmin acquisition. I don't intend to go into all the detail, but effectively, on 7 June, all of the conditions precedent were met and satisfied and Sibanye-Stillwater obtained control of Lonmin. The effective date of the implementation was 10 June, when Lonmin's shares were suspended on the London Stock Exchange and, at the same time, we issued 290 million new Sibanye-Stillwater shares in consideration for the acquisition of the Lonmin assets.

So if you then look at the consideration that was transferred, which was the shares that we issued, that was ZAR 4.3 billion. However, if you look at the fair value of the assets that we acquired, that amounted to about ZAR 5.7 billion, and you can see on the table on the right how that is made up.

The net effect of this is the gain on the acquisition, which is effectively a bargain purchase. Effectively what that means is we paid ZAR 4.3 billion for something that was worth ZAR 5.7 billion. So I think, in the end, it was a very significant transaction and a very favorable structured transaction for our Sibanye-Stillwater shareholders.

Moving on to the next slide. If we look at our net debt, our net debt reduced to ZAR 21 billion or roughly $1.5 billion. This is the lowest level reported since we acquired Stillwater. And we are very happy with the trajectory of how the net debt has reduced over time. If you look at our covenant, net debt to adjusted EBITDA, and we are well within the 3.5x covenant, which is the current high watermark in terms of our facilities; and the net debt to adjusted EBITDA is at 2.5x.

In our financial results, you will see that we show a number of 3.2x and that is simply just the sum of the 2 halves, which is half 1 2019 plus half 2 2018, where the EBITDA was ZAR 6.5 billion. However, in terms of our facilities, we have the ability to annualize the inclusion of the Marikana operations and if we annualize that, that adds a further ZAR 1.9 billion of EBITDA. So for covenant purposes, our EBITDA is at roughly ZAR 8.4 billion, which then gives us the 2.5x. As I said, that is all contained in our facility agreements, and that's in line with what we've discussed with our lenders.

During this period, we had 2 transactions, which we executed in April, slightly before the end of the strike, and that was to improve liquidity, but also to accelerate some of the deleveraging. And just to remind everybody we raised ZAR 1.7 billion through a share issue and then a similar amount, ZAR 1.7 billion, through a gold prepayment arrangement.

Importantly to note is that we closed out the Lonmin metal purchase agreement, which was with Pangaea Investment Management Limited, and that was $170 million that we settled from the cash on hand, that we acquired with the Lonmin group. So if you look at Marikana's liquidity and funding that will now be provided from, call it, the Sibanye group funding and that cost is significantly lower. So we can now extend facilities to the Marikana operations at slightly below 5% compared to the 15% that they previously paid under the metal purchase agreement. Just the cost saving on that alone annualized is about ZAR 15 million -- $15 million, apologies, which is ZAR 210 million. So you can see just by closing out that facility, we've already realized some synergies in the order of ZAR 200 million just by getting the Marikana operations to sign up under our facility agreements.

Next slide. I think with us closing out the metal purchase agreement at the Lonmin operations, liquidity is a question that people may ask. But you can see that we still have significant liquidity and sufficient liquidity. We've got available undrawn facilities of $430 million, which is ZAR 6 billion, and that will provide us sufficient liquidity.

We had elevated cash balances of ZAR 423 million, but as I said, the metal purchase agreement was closed out just after half year, and that was $170 million. We have started the refinancing of our ZAR 6 billion revolving credit facility, our rand facility. That has started and we expect to have that completed during quarter 3, 2019.

At this stage, there's been no concerns and we've engaged with our lenders, and they've been very supportive. And we expect that we will refinance that ZAR 6 billion without any material changes to the facility.

You will also notice that with our dollar facility, we have the 2 1-year extensions. Due to the uncertainty associated with the period we were under during the strikes, only 75% of our U.S. dollar RCF lenders have approved a 1-year extension, but that is still a significant vote of confidence by more than 75% of our lenders.

So in summary, sufficient liquidity available and we will be able to meet our ongoing commitments, including the Marikana operations for at least the next 12-month period.

At this stage, I'll hand back to Neal who will do the concluding remarks.

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Neal John Froneman, Sibanye Gold Limited - CEO & Executive Director [3]

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Thanks, Charl. If you can go to Slide 23, please -- sorry, 33, please. I think first up, we introduced this slide in our last reporting period, and we have updated this slide for current commodity prices and slightly refined life-of-mine models, and also, the current performance of Lonmin.

If you look at this slide, what it shows you is, first of all, it's a waterfall of the net asset value of our different businesses. First thing I always like to highlight is the importance of our U.S. business. You can see the importance of South African PGM, South African gold, you can see Lonmin is significant. Obviously, group debt needs to be deducted from the total net asset -- well, from the net asset value to give you the net asset value for Sibanye-Stillwater.

If you divide the total Sibanye-Stillwater net asset value by the number of shares in issue, you get to a net asset value per share. On the very right-hand side is the current market cap at ZAR 21 per share, which you can see is significantly less than the net asset value per share of the company. And in fact, if you look at the bottom bullet point, we're trading at a ratio of 0.36x, which is a significant discount.

Now as I said last time, we know exactly why we are trading at this discount, and we have been addressing the issues that are causing the discount. And I do think you will see from this presentation that a number of them have been positively and successfully addressed. So my view is that over the next 6 to probably 18 months, we can look forward to a very significant rerating and this discount will reduce substantially.

If you go to Slide 34, this is a slide that actually looks at those issues that we identified at the last results presentation in terms of what has been holding back our share or the value of the company as an alternative. So let's just go through this.

Clearly, a geared balance sheet and this was compounded by the safety disruptions that we had in 2018 and more recently by the strike, the gold strike in 2019. But I think, as you've seen from what I presented previously, there's very substantial upside looking forward. And as you heard from Charl, the deleveraging trajectory and the liquidity of the company are well in hand. So the risk related to this aspect is reducing very quickly and, of course, that should go a long way to uncapping the discount.

I've referred to the safety incidents in 2018. We've achieved record safety and restored our industry-leading safety performance at our gold operations, and we now need to ensure that they're sustainable. The gold strike which has had a very negative impact on our earnings was absolutely necessary to level the playing field so that we can do what we need to do at Lonmin. And I do think that, that is something that is behind us.

The Lonmin transaction was an overhang and was delayed by stakeholders with a clear hidden agenda, but that was successfully navigated and concluded. And as you heard from Charl, on a very conservative basis, accounting basis, you can already see ZAR 1 billion of negative goodwill or bargain purchase price. We will realize a lot more value from Lonmin as we create sustainability and introduce -- and intervene in terms of operating costs and so on.

Our 3-year strategic focus areas are very clear. And I'm not going to go into them. But it's about creating superior value for all our stakeholders and, in this case, we're talking about very significant value creation for our shareholders. So we are well positioned for accretive returns in the share price.

Just moving on to the last slide, our annual guidance. We -- as I mentioned a few times through the presentation, we have had a small adjustment in terms of the U.S. regions' production guidance to include 2 things: The one is the additional support that is creating some productivity problems at the moment at Blitz, and we've revised our guidance down slightly, it's still about 98% of what was previously guided. And of course, with a reducing ounce profile, your all-in sustaining costs go up as well. But as you see from the heading there, the PGM basket prices have an increasing effect also on the cost structure because of royalties and other things like that. So that's really the only adjustments.

The guidance for our South African PGM operations remains consistent. We will, in about the middle of September, have finalized our plans for Lonmin and we'll provide guidance on that at the appropriate time. And then the South African gold operations, as you've heard, the production is being restored to levels that are consistent with our plans and therefore, there's no real change in guidance for our gold business either.

So with that, we can now open the lines to questions and I will refer the question to the appropriate executive. So James, if you could ensure that the lines are now opened.

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Questions and Answers

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James R. Wellsted, Sibanye Gold Limited - Senior VP & Head of IR [1]

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Thank you. Could we take some questions from the call, please?

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Operator [2]

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The first question is from Chris Nicholson of RMB Morgan Stanley.

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Christopher Nicholson, Morgan Stanley, Research Division - Research Analyst [3]

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I have 3 questions that relate to the South African PGM operation and potential for additional CapEx. The first one is maybe if you could just take us briefly through your philosophy around incremental reinvestment, specifically, if you could, to what's maybe outside of Lonmin. Prices are higher. So should we expect some incremental CapEx to sustain the production profile there or will the priority still be de-gearing?

The second question I have is just relating to those Competition Commission requirements in respect of I think it was Rowland and the MK2 and 4B at Lonmin. Are we not quite close to the price that would have hit those projects to be reinvested in? And could I just understand whether they actually convince you now that has to be reinvested if we're going to go beyond close to those metal prices?

And then the final question is can I just ask why you haven't yet given Anglo Platinum notice on the toll material to take that through the Lonmin operation? Does that have anything to do with the ZAR 1 billion smelter or planned expansion that's required?

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Neal John Froneman, Sibanye Gold Limited - CEO & Executive Director [4]

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Thanks, Chris. I'll ask Rob to comment on the incremental investment. Rich, if you could pick up on the Competition Commission commitments around Rowland and others. I'll pick up on the Anglo Platinum aspect. So perhaps Rob, you start first. Richard, if you could go second. And then I'll deal with the Anglo Platinum notice.

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Robert van Niekerk, Sibanye Gold Limited - Executive VP & Head of SA PGM Operations [5]

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Okay. Thank you, Neal. Insofar as the incremental investment is concerned, we are reevaluating the surface potential both at Rustenburg and at the Marikana operations. Some of those, the generation 1 shafts, are actually quite close to being able to contribute positively. So as part of the review we're going through now, we are reevaluating those older shafts at Marikana as well.

There was also the question about K4 and 4Belt, if I'm not mistaken. The priority at the moment at the Marikana operations are to get them cash flow positive. So at this stage, we're not really looking at K4 project. But when we finish reviewing the existing operations, we will start to focus on reviewing those projects as well. And 4B is very definitely part of the replanning exercise we're going through at the moment.

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Richard A. Stewart, Sibanye Gold Limited - Executive VP & Head of Business Development [6]

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Thanks, Chris. With regards to your question around the Comp Com., I think 2 things. Firstly, importantly, just to place in context what the principle of that condition was. And the principle around that condition was really around us looking at opportunities where we could grow the business and therefore, offset any restructuring or job losses that came inherently where existing shafts were coming to an end of their useful lives due to reserves having run out.

The way the condition is specifically structured is that we will consider looking at projects. And you did mention some of them, 4B and MK2 Rowland are some of those projects. We're committed to looking at those. And it's not just a price trigger point. It is really around a profitability trigger point. So it's a margin that needs to be created. So there's both price and costs. In the event that the projects do make economic sense and are viable under conditions at the time, and that is also quite well defined in the conditions, then we have committed to looking at going ahead with those.

So yes, you're quite right. Prices have moved substantially. At the same time though, costs on the other side of that equation and total margin is what this is really based on. As part of the work that we are doing right now, with assessing the operations, that work will be conducted. And we'll look at it in light of that in terms of the conditions we've got.

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Operator [7]

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The next question is from Adrian Hammond of Standard Bank.

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Adrian Spencer Hammond, SBG Securities (Proprietary) Limited, Research Division - Research Analyst [8]

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Few questions for you and for members of the team. Just firstly on Lonmin and Rustenburg wage talks. What's the status of that, please? And do you have any strike plans in place? And how long do you think the balance sheet could withstand a strike at Lonmin?

And then you're obviously quite well aware that AngloGold is selling Mponeng. Is that something you would be interested in? And what's your general view on exposing yourself more to South African gold? And just for Charl. Just perhaps you could give us some color on your strategy around what you intend doing with free cash flow? Do you have a sort of target gross debt in mind? Or are you channeling that through dividends?

And then just on the -- just to understand my understanding on the mechanics of the Wheaton deal. Could you tell us what Stillwater would have generated in EBITDA ex Wheaton deal? And then on the convertible bond, what's the price at which that converts and the potential dilution? And when does that option become available?

And then for Rob. The cost at Rustenburg quarter-on-quarter increased quite materially, up 16% in rand per tonne terms, despite, I mean, producing more tonnes. So perhaps a bit of color on that, please?

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Neal John Froneman, Sibanye Gold Limited - CEO & Executive Director [9]

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Okay. Thanks, Adrian. Let me just also just finish off first with Chris' question. I think -- and it's partially an answer to some of Adrian's questions. On the incremental investment, I think, Chris, it should be noted that our primary focus is deleveraging. So as -- in addition to what Rob said, I think that we will be mindful and quite focused on first getting our debt -- our gross debt down as well. But obviously, we're not going to starve the operations of capital either. But certainly, before we start spending money on projects, we'll make sure that we're appropriately leveraged.

On the Anglo Platinum question, in terms of giving notice regarding treatment, I think right now, we would like to retain flexibility. We remain very concerned about the electricity supply situation in South Africa. And strategically, we're in no rush to provide that notice to Anglo Platinum. I think we've got a lot on our plate and we'll deal with that in due course.

In terms of Adrian's questions, let me just suggest the following, Rob. In terms of Rustenburg wage talks, there's been 4 or 5 meetings at both Rustenburg and Lonmin or at Marikana. We are clearly far apart. And I suppose we are now looking at ways of resolving the dispute.

As always, we will have very good and comprehensive strike plans. I just want to say though that our strategy regarding a strike, especially now knowing that a secret ballot is law, will be to convince our employees, based on what we did in the gold strike, that a strike will not result in a change in their demands or in us capitulating to those demands. And we will work very hard to convince our employees not to strike but to continue engaging until we find each other. We can sustain a strike for a very long time, especially with half our revenue coming from the U.S. However, I think that is a very unlikely scenario.

In terms of AngloGold, let's just say we have said we're open-minded to the opportunity. We are under NDA and it's very difficult to say much more than that. We are not panting off to more deep-level gold mines, but there are significant synergies and opportunities between Driefontein and Mponeng. Would we -- if Anglo was not running a process, would we be talking to them about the opportunity? The answer is no. We've got other things that are more important.

I'll ask Charl to comment on the debt versus dividend and the convertible; and between Charl and Chris on the Wheaton structure. In terms of the cost impacts that you're referring to, Rob, I would suggest that that's the difference between the PoC and the toll arrangement. But please, can you maybe first of all just expand on that?

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Robert van Niekerk, Sibanye Gold Limited - Executive VP & Head of SA PGM Operations [10]

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Okay, Adrian. You will see that the costs at Rustenburg have increased in percentages similar to those that you have just spotted, yet those at our Kroondal operations are flat. And the reason why we see more of an increase at Rustenburg is there's 2 costs in particular, which are increasing at a rate significantly more than inflation. And one is the cost of electricity, which is substantial in Rustenburg compared to our trackless operations and in the cost of people as well. The costs of our employees are also a lot more in percentage terms at our conventional operations compared to our trackless operations at Kroondal.

But having said that, in addition to those 2 cost drivers, the biggest influence has been the move from the purchase of concentrate agreement with Anglo Platinum to toll processing or toll treatment of the Rustenburg material.

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Neal John Froneman, Sibanye Gold Limited - CEO & Executive Director [11]

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Thanks, Rob. Charl, can you pick up the other question?

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Charl A. Keyter, Sibanye Gold Limited - CFO & Executive Director [12]

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So Adrian, yes. In terms of targeting gross debt, we are targeting a number in the order of about ZAR 15 billion. And you may ask how did we get to this number. It's simply just the back help from our covenants, which means that our EBITDA can go as low as ZAR 6 billion and we would still be comfortable within our covenants. And that is a number that we'll be targeting in the short term. But as I said, that is simply -- because we are in a cyclical environment, that is a number that we will be targeting.

I think this is also a two-pronged answer. We have said that if our net debt to EBITDA starts going below 1.5x, we would then open up the discussion with our Board to start the resumption of cash dividends. So in short, we still will have a two-pronged approach. The one will be to bring the debt, the overall debt down. But once we are comfortable with the covenants, we would definitely be considering the resumption of cash dividends.

Insofar as the Wheaton transaction is concerned, if you go to Note 14 in our results, you'll see that for this period, we recognized ZAR 213 million of deferred revenue. So that would have flown straight to the bottom line on the Stillwater EBITDA. So the EBITDA would have been roughly about ZAR 200 million more for this half year.

Your question on the convert, I don't have the numbers, the exact numbers in front of me. But when we issued the convert, the reference price was about ZAR 16 a share. So at the end of the period, if the share price is at ZAR 22, remember there was a 35% premium on it, then it will convert. But we also have a soft call option where if the share price trades at ZAR 27, we can force conversion. So that is where we are with the convert. And I hope that answers your question.

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Operator [13]

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The next question is from Patrick Mann of Bank of America Merrill Lynch.

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Patrick Mann, BofA Merrill Lynch, Research Division - VP & Research Analyst [14]

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I just had one question that hasn't been asked. The poor ground conditions at Blitz and the additional anchors and shotcreting that slowed down development and increased the unit cost, I mean, is this a permanent change to the plan? And should we expect that steady-state costs are likely to be higher than previously guided? Or is this specific to a patch of bad ground?

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Neal John Froneman, Sibanye Gold Limited - CEO & Executive Director [15]

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Patrick, I'll ask Chris to comment, but let me just give you my inputs. So we've just spent some time at Stillwater with the Board meeting process. I think it's an -- well, let me say, it's going to be an ongoing issue in that we're going to use additional support. But the productivity issues are really related getting used to that. And therefore, we will -- that's not going to be a constant negative on the results other than a little bit of increasing costs.

The actual cost increase were really just because of a slightly reduced ounce profile for this year and increased royalties. It wasn't really related to the Blitz. But Chris, if you can expand on that?

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Christopher M. Bateman, Sibanye Gold Limited - Executive VP & Head of US PGM Operations [16]

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Yes. Patrick, if you look at the strike length that we're opening up with Blitz, it's similar to the Stillwater West facilities. And we have multiple different areas at Stillwater West, all with different mining conditions. So the fact that we've got difficult ground conditions in the blocks that we're currently focused on, we can't extrapolate that out to the rest of the mine. In fact, the latest drilling that we're doing for resource definition of the 56 level, we're encountering significantly less water while -- than we have in the existing stoping blocks.

To Neal's point in terms of productivities, there's a couple of things that we're doing. We've got equipment on order to help us further mechanize the cable bolting and the application of the shotcrete. Our current practice is we don't have to do it significantly and the mine aren't as productive as they can be. So as we get later into the third quarter, fourth quarter, we would expect productivities to pick up. But this can't be extrapolated to the whole of Blitz. As you know, Blitz isn't completely drilled out. So we'll evaluate conditions as we go.

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Neal John Froneman, Sibanye Gold Limited - CEO & Executive Director [17]

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Chris, it might just be worth just reinforcing the cost guidance and the impact of the $100 in revenue.

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Christopher M. Bateman, Sibanye Gold Limited - Executive VP & Head of US PGM Operations [18]

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Yes, I mean, one thing to note, we have both revenue and some severance taxes and property taxes that flow through our all-in sustaining cost. The severance tax is a state tax. For every $100 change in price, we've got about a $7 change in the all-in sustaining cost. And as you can see from our realized price, it's significantly up from Q2 last year as well as Q1 last year. So that is part of the cost increase that we're seeing within our AISC guidance.

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Operator [19]

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The next question is Arnold Van Graan from Nedbank CIB.

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Arnold Van Graan, Nedbank Capital, Research Division - Analyst [20]

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I've got a quick question on Stillwater. So it basically relates to East Boulder. You mentioned that you planned to make up the lost production during the rest of the year. That's normally very hard to achieve. So my question is how confident are you that you will be able to actually make up that lost production?

And then my second question relates to Lonmin. You always said you basically found the asset exactly as you expected or it is as you expected. But isn't there a risk that it's actually in a worse state than you thought given the delay in the transaction? In other words, and I'm specifically referring to lack of stay-in-business capital, lack of flexibility in orders. So maybe you can just comment on that.

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Christopher M. Bateman, Sibanye Gold Limited - Executive VP & Head of US PGM Operations [21]

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Do you want me to start?

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Neal John Froneman, Sibanye Gold Limited - CEO & Executive Director [22]

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Yes, go ahead, Chris.

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Christopher M. Bateman, Sibanye Gold Limited - Executive VP & Head of US PGM Operations [23]

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Starting with East Boulder, East Boulder, we've been achieving our tonnes at East Boulder, but we have not been achieving the grade. And we have 2 distinct mining methods there. On the sill mining, we tend to get a lower grade. And we've been getting more tonnes out of the sills than the panels. The panel, we achieve a higher grade.

As we reported in quarter 1, we got into some sequencing issues on the panels, which meant that we didn't have the panel availability in order to maximize grade. We're now back up above our target panel availability. And certainly, while the last 3, 4 weeks of productivities don't make a year, we're above our targeted productivities in order to achieve our year-end guidance on the East Boulder. So with the panel availabilities we've had and the focus that we've had on those panels, we're confident that we can pull back to the guidance in the second half of -- for East Boulder.

I will note on the Stillwater West side, it is over-delivering against plan given the recovery plans that we put in the second quarter. So we've had real solid performance in Q2 out of the west side of the mine at Stillwater. We've had -- we're back in the place we want to be on the East Boulder side. And it really is the performance of the Blitz with the more challenging ground conditions. And you'll note from the results, we've actually had record performance out of the smelter in terms of throughputs of ounces, so very successful there.

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Neal John Froneman, Sibanye Gold Limited - CEO & Executive Director [24]

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Yes. Arnold, I can reinforce what Chris says. East Boulder I'm very confident will achieve its full year plan by the end of the year. So it's clawing back nicely.

Rob, will you pick up the Lonmin question?

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Robert van Niekerk, Sibanye Gold Limited - Executive VP & Head of SA PGM Operations [25]

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Okay, Arnold. We are very happy with what we have found at Lonmin with regards the condition of the infrastructure, both on surface and underground. Even though capital has been saved over the last couple of quarters, they have maintained the infrastructure in a very good and enabling condition.

Sadly though, they haven't developed the ore body the way they should have developed the ore body. So there is a lack of stoping flexibility on the generation 2 shafts. And this is something we will be addressing in our operational plans over the next year or 2.

What I've seen so far indicates that we will very definitely be able to maintain the current production levels going forward at those generation 2 shafts. And the biggest impact we're going to be making over the near term is reducing the costs and increasing the efficiency of those operations.

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Neal John Froneman, Sibanye Gold Limited - CEO & Executive Director [26]

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And Arnold, if I can just add on. I think with good leadership, the morale will improve. By being transparent and having the, let's say, operational muscle to make the changes that are required, morale will improve significantly. So none of this is a challenge that we haven't dealt with before or that concerns us. They're significant challenges, but we really believe we have the ability to make the changes and the differences that are required here.

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Operator [27]

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The next question is from Leroy Mnguni of HSBC (sic) [SBG].

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Leroy Mnguni, SBG Securities (Proprietary) Limited, Research Division - Research Analyst [28]

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My first question is on the cancellation of your toll treatment arrangement at Anglo Plat. I understand that you're saying you're considering your options and you just want to bed down the operations. Is one of the things that you are considering, perhaps, providing your spare capacity at Lonmin to some of the projects that are being developed in the country and just keeping your metal locked up with Anglo Plats for a longer period of time?

And then my second question is just on Slide 12, where you show that cash burn at Lonmin in the June quarter. It's quite a big number. Is there any sort of once-offs in there or something that stands out that would have driven that cash burn?

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Neal John Froneman, Sibanye Gold Limited - CEO & Executive Director [29]

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All right. So Leroy, the cash burn I will refer to either Robert or Charl. The -- just coming back to the cancellation of the Anglo contract. Yes, I think in addition to the comments I made around wanting to focus on the things that we need to do now and having less exposure to electricity disruptions, there are strategic benefits for keeping additional capacity available. That's not a primary driver, but that's certainly something that is being considered.

I do think that overall though for the industry, a rationalization of processing capacity could be beneficial to the entire industry in terms of getting costs down. So there are some discussions happening in that area.

Rob or Charl, who is going to pick up on the...

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Charl A. Keyter, Sibanye Gold Limited - CFO & Executive Director [30]

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I can pick it up, Neal.

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Neal John Froneman, Sibanye Gold Limited - CEO & Executive Director [31]

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Okay. Charl will pick it up then.

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Charl A. Keyter, Sibanye Gold Limited - CFO & Executive Director [32]

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So Leroy, if you look at the slide and you look specifically at those green blocks, those are the special costs or the one-off costs that we refer to. And those include some additional rehabilitation provision. There were some refinancing success fees that Lonmin incurred as well as transaction costs. Obviously, they had to pay their advisers on their side. And there are some further restructuring costs and some retention fees that was associated with management to keep them up until the end of the closing of the transaction. So those are the significant one-off costs that we've picked up.

There's also a thin red line there, which is the London office costs, which is -- we can confirm that all of that cost is -- has now exited the system and that the Lonmin offices are effectively closed now.

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Neal John Froneman, Sibanye Gold Limited - CEO & Executive Director [33]

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That's Slide 11?

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Charl A. Keyter, Sibanye Gold Limited - CFO & Executive Director [34]

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That is Slide 11, yes.

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Operator [35]

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The next question is from Brian Nunes of Gramercy.

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Brian Nunes, Gramercy Funds Management LLC - Senior VP & Research Analyst [36]

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I'll keep it brief. Just one question on the -- what is the hedging strategy in place at -- in the gold operations? I see there's some hedges. They're not too material, but given where prices are right now and looking at how you value your business on NPV looking at the spot basis and prices you use, just wanted to understand what your strategy for hedging going forward is and how that dovetails with your outlook for pricing.

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Charl A. Keyter, Sibanye Gold Limited - CFO & Executive Director [37]

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Thank you, Brian. Yes, so in terms of hedging, you're right. We've got some hedges in place at our gold operations. It's roughly about 30% of our 2019 production. And the strategy behind the hedges, you'll remember that probably in the earlier part of the year, with the gold price sitting at around ZAR 550,000 a kilo and us being in a strike period, we considered entering into some 0 cost collars just to protect the downside associated with the gold business.

But we are happy with where commodity prices are now. We believe that we should retain the flexibility and the upside to the commodity prices. So at this point in time, we will not enter into any further hedges.

So just to reaffirm that the strategy behind putting the 30% in place initially was to secure some of the profitability of some of our higher-cost operations.

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Neal John Froneman, Sibanye Gold Limited - CEO & Executive Director [38]

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Just to add on to that, Brian, we see hedging as a risk management tool, rather than speculating with it. So we -- that's not really our function. So we would prefer to be less hedged than more hedged, just as an overall group perspective.

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Operator [39]

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The next question is from James Bell of RBC Capital Markets.

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James Andrew Keith Bell, RBC Capital Markets, LLC, Research Division - Analyst [40]

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Most of my questions have been covered, but I guess I've got just one on strategy for you, Neal. I mean you talk on the one hand about addressing your South African discount. But clearly, you've just increased your South African exposure with Lonmin. You're in the room on the AngloGold assets. So I guess, I'm just wondering if you can talk a little bit more about if you think this is actually a realistic strategic goal given your large footprint there and potential growth even in the future.

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Neal John Froneman, Sibanye Gold Limited - CEO & Executive Director [41]

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Yes. Certainly, James. So I think it was a very conscious decision to move into PGMs, and 80% of the world's PGMs occur in South Africa. So the net result is, to be a large player, you have to be in South Africa. We understand the South African operating environment well, and I do think, especially taking long-term views, we are comfortable in operating smoothly in South Africa.

However, there's not a lot less -- left for us to do in South Africa, and we've signaled our intentions to complement our PGM business by growing in the battery metal space, if I can call it that. That clearly is not going to happen in South Africa or it's unlikely to happen in South Africa. And I do think, by growing a portfolio that is significantly bigger eventually than South Africa, South Africa will become a much smaller part of our overall business. That's going to require considerations as to where we listed, where those resource targets are. And of course, I think, fundamentally working with the government and the regulators in South Africa to improve, let's say, the environment in which business operates will also go a long way to reducing the South African discount.

So it's two-pronged approach. It's trying to make a difference in South Africa, but it's also about becoming a true international company that competes on the global stage at the right time as long as it's value accretive. And that will be how we eventually address our South African discount. So it's not contradictory at all, but it's much more of a process to get there.

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James Andrew Keith Bell, RBC Capital Markets, LLC, Research Division - Analyst [42]

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Okay. That makes sense. And then maybe one on the U.S. PGM recycling -- yes, sorry -- yes. No, just on the U.S. PGM recycling. In terms of the market there, can you give us some -- maybe an update on how that looks? And in terms of the current run rate you're seeing for EBITDA with the expanded furnace, do you feel like -- is that a one-off, a drawdown? Or do you feel like you're actually going to be pulling higher profitability on a go-forward basis?

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Christopher M. Bateman, Sibanye Gold Limited - Executive VP & Head of US PGM Operations [43]

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So the market we're seeing is very strong. I think the industry as a whole continues to be challenged by the diesel catalysts. So there are high-carbon catalysts that we -- we've talked about previously. We've restructured all of our contracts now to ensure that we can manage that exposure. So we continue to see strong volumes through there.

There is a small one-off part of the earnings in that when we've rebrick the furnaces, we reprocess the bricks and therefore, we unlock every furnace rebuild a portion of revenues from recovering ounces in the brick. And we allocate the ounces between mine ounces and recycled ounces based on the gold tracer, and that has had an impact in the first half of this year.

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Operator [44]

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The next question is from Felix Njini of Bloomberg.

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Felix Njini;Bloomberg, [45]

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Could you just clarify, so far as the platinum wage talks are concerned with -- you, Sibanye has raised its offer? And how do you see this dispute being resolved?

Could you also give us more color on the restructuring at Lonmin that you mentioned earlier? Does this mean going back to the initial plan to close the mines and cut more than 30,000 jobs?

And finally, could you just clarify on Mponeng? Did you say you are under a nondisclosure agreement?

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Neal John Froneman, Sibanye Gold Limited - CEO & Executive Director [46]

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Yes. So Felix, I'll ask Robert just to talk about platinum wage negotiations and what color he can add, remembering that, to some extent, that's a confidential process.

In terms of Lonmin, it was never 30,000 people that were -- well, 30,000 people are at risk if we do not address the issues that I've highlighted in this call. But again, I will allow Robert to indicate that. I don't think that we can quote a number yet, other than there needs to be restructuring, but I'll leave that to Robert.

In terms of Mponeng, yes, we are under confidentiality because we are part of that process, so we wouldn't like to -- well, we're not able to comment on that at this stage.

So Rob, will you pick up the other 2?

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Robert van Niekerk, Sibanye Gold Limited - Executive VP & Head of SA PGM Operations [47]

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No, I will. I didn't hear the question clearly on what must be clarified regarding the wage negotiations. If you can repeat that for me, please?

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Felix Njini;Bloomberg, [48]

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Yes. Rob, it is basically that when Neal earlier on said he is looking towards resolving the dispute, so I want to find out if -- does that include raising the initial wage offer, that one you made that was announced by AMCU a couple of weeks back?

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Robert van Niekerk, Sibanye Gold Limited - Executive VP & Head of SA PGM Operations [49]

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Okay. Yes, Felix, again, sorry, the line on this side isn't as clear as what I would like it to be. So let me just talk briefly around it at the moment. We are running 2 separate processes. We're running 1 process at the Rustenburg operations and another process at the Kroondal operations.

We have put a higher offer on the table -- sorry, not at the Kroondal operations, I apologize, at the Marikana operations. In Rustenburg, we have put more on the table compared to what we've put on the table at Marikana. Having said that, we do believe where we are at this stage, and forgive me, I can't elaborate as to where we are, but where we are at this stage is fair and reasonable, especially given the financial position Lonmin finds itself in or our Marikana operations finds itself in. I think we are actually getting close to where we can go. There might be a little bit left for negotiation, and we are still around the table talking to all the unions in this regard. But we are 2 months into the process now, and I think we are getting to what we will consider -- or close to what we would consider fair and reasonable. I hope that answers your question.

Insofar as how many people will possibly be affected with a restructuring at the Marikana operations are concerned. We're busy reviewing all of those operations at the moment. What I can highlight at the moment is that the older shafts, the generation 1 shafts, they are not all contributing positively to the bottom line at Marikana. So we are very definitely going to look at the viability of those operations and whether they continue or not. To the extent to which I'm not certain at this stage, we will complete that exercise within the next month or so. And then we can give better guidance insofar as that is concerned.

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Operator [50]

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Ladies and gentlemen, we need to take some questions from the webcast.

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James R. Wellsted, Sibanye Gold Limited - Senior VP & Head of IR [51]

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Thank you, operator. A lot of the questions that are on the screen that we've got from the people listening on the webcast, I think we've dealt with, so I'll selectively choose some that we haven't heard before. If anyone does have any specific questions that they want to follow up on, please feel free to call us, and we will respond immediately.

Just in terms of -- Neal and team, well done on safety performance in gold business. This is [Lebohang from Argon]. Keep it up. Can you please guide on what we think about Lonmin in the second half until the review is done in terms of units, costs and production? And then can we give more color on the ground challenges at Blitz?

I think we've covered the Blitz situation quite well. Robert, I don't know if you've got any comment on the rest of the year from Lonmin just to give some sort of guidance.

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Robert van Niekerk, Sibanye Gold Limited - Executive VP & Head of SA PGM Operations [52]

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Yes. [Lebohang], the rest of the year at the Lonmin operations are still going to be challenging. Having said that, the spot price for -- or the basket price for 4E PGMs at the moment is in excess of ZAR 20,000 per 4E ounce. That is significantly more than what we've been receiving at all of our operations to date. So I am very confident that we will probably maintain the current production level. But insofar as EBITDA is concerned, you're going to see a very significant improvement at Lonmin for the remainder of the year.

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James R. Wellsted, Sibanye Gold Limited - Senior VP & Head of IR [53]

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Thanks, Rob. Then the next question is from [Filipe Vasconcelos]. He wanted to know, Neal, from you whether -- what you thought of the South African political situation currently. Any concerns? Or do you remain optimistic?

And then second question about plans to enter EV metal sector, especially nickel and lithium.

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Neal John Froneman, Sibanye Gold Limited - CEO & Executive Director [54]

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Yes. So I'd ask Richard just maybe to comment on the work we're doing around battery metals and the process we're going to go through.

In terms of the South African political situation, it's a very tough environment at the moment. We have a good President. We have an ethical President. He's been attacked from all sides. As business, we remain constructive, but very concerned.

Some of the issues that need urgent attention are not being addressed as quickly as they should. And certainly, if we don't increase our response, as a country, we are going to be in serious trouble. Having said that, we remain constructive, and we understand what our role is as a business.

Rich, will you pick up on the EV process that we're going through?

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Richard A. Stewart, Sibanye Gold Limited - Executive VP & Head of Business Development [55]

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Sure. Thanks, Neal. I think, [Filipe], in terms of the EV process, as Neal mentioned earlier, this strategy was really driven by looking at an opportunity to complement our existing PGM business. And I think where we find ourselves at the moment is fairly comfortable with understanding where certain markets are going, in particular, the automobile market. I think the areas that we're looking to understand a little bit better is where necessarily battery technology is going, what the metals are that are going to be provided into that new technology and, ultimately, what the supply and demand fundamentals are.

So we certainly think it's an exciting area to get into. But I think what we are doing through a very systematic process is making sure we understand those markets, we understand which metals we want to target and understand where value can be derived. And once we've been through that, we will then make a decision as to how we may or may not enter this market.

I don't think this is about trying to get onto the recent rush that was the lithium wave or the cobalt wave that's happened over the last couple of years. This is certainly a very systematic approach to ensuring that this is a market we want to enter, and we can see the value for it. But certainly, at the moment, strategically, it doesn't look that way.

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James R. Wellsted, Sibanye Gold Limited - Senior VP & Head of IR [56]

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And the second one, Neal, was on your current view on the political situation in South Africa.

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Neal John Froneman, Sibanye Gold Limited - CEO & Executive Director [57]

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James, you -- I've done that, James.

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James R. Wellsted, Sibanye Gold Limited - Senior VP & Head of IR [58]

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Okay. Apologies. The next question is from Nkateko at Investec. Excluding lower production at Stillwater, what is the operating cost increase year-on-year? I think the question is more related to mining inflation. I guess part of that operating cost would also have been related to the increased palladium prices, Chris, which I think you've discussed, but maybe a comment on mining inflation in the U.S.?

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Christopher M. Bateman, Sibanye Gold Limited - Executive VP & Head of US PGM Operations [59]

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Yes, look, labor inflation, we settled union contracts in the 2% to 3% range. That continues to be where we are on labor inflation, and labor is about 60% -- 55% to 60% of the cost. We do see some other areas where we're under cost pressures. I mean if you look at our ground support, that's essentially driven by steel prices. And we've seen increases this year year-on-year in the high single digits, and that's probably to do with some of the tariffs that have been put on. But that's not a huge portion of our costs. Electricity and other big input costs, again, we're not seeing huge cost increases there. So we have a few pockets of specific cost inflation, but nothing too alarming.

I'd say the only other thing that does drive the cost profile is this transition to growth. In order to bring new people in and train them up, they're not productive from day 1, so you have a training period where you've brought resources in and you've got to get them to be productive. And if you think on the Stillwater side, we're almost doubling output. While it'll be more efficient the way we've set it up, particularly on the support side and the haulage side, there still is a transition as we ramp up there.

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James R. Wellsted, Sibanye Gold Limited - Senior VP & Head of IR [60]

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Okay. Thank you. Again from Nkateko relating to recycling volumes. The question is whether the current stronger palladium price is driving increased volumes in recycling.

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Christopher M. Bateman, Sibanye Gold Limited - Executive VP & Head of US PGM Operations [61]

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Look, we don't see a strong correlation between platinum or palladium prices in recycling volumes. What does drive recycling volumes more so is scrap steel prices. What happens is this -- the catalytic converter is taken off the vehicle as soon as it goes into the scrapyard. In times of low steel prices, those old vehicles don't even get taken to the scrapyard. If they do get to the scrapyard, whether it's a low palladium price or a high palladium price, the cat is taken off the vehicle and tends to be monetized almost immediately. And sometimes, we see short-term hoarding if people think the prices have dipped, but that tends to be over a 1- to maximum 3-month period, but not over a longer-term period. So I'd say that the palladium price isn't driving the scrappage of vehicles.

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James R. Wellsted, Sibanye Gold Limited - Senior VP & Head of IR [62]

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Thank you. And then the last question from Nkateko is a question on the life-of-mine benefits for the SA PGM operations following the acquisition of Lonmin. Does it add any life to the operations?

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Neal John Froneman, Sibanye Gold Limited - CEO & Executive Director [63]

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Who wants to pick that up?

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Richard A. Stewart, Sibanye Gold Limited - Executive VP & Head of Business Development [64]

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I can pick it up. Benefit of Lonmin to life-of-mine operations, so I think, generally speaking, looking at Rustenburg and Kroondal, as an example, Rustenburg certainly has long life at fairly steady rates. If there is any benefit on that side, it would largely be from the synergies again that get realized and therefore, dropping costs, making certain other resources or reserves profitable. But fundamentally, I don't think it has a material impact. Lonmin wouldn't have a material impact on the Rustenburg reserves as they stand right now.

I think what Lonmin does introduce to the company as a whole are a couple of very exciting growth projects, which, certainly, under the right economic conditions, is something we would look at. So a good example would be K4, which, arguably, is one of the best developed high-grade Merensky projects that still remains within the Bushveld. So it certainly gives us a growth portfolio that is not currently in our life-of-mine plans, but under the correct conditions could certainly feature.

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James R. Wellsted, Sibanye Gold Limited - Senior VP & Head of IR [65]

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Thanks, Richard. And then from René Hochreiter from NOAH. I guess, this is opposite to what we've been hearing before. Neal, do have an inclination to split the gold division from the PGM division at this stage or in the future? And do you think this might improve the rating of either one or the other in terms of reducing the SA discount that you mentioned?

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Neal John Froneman, Sibanye Gold Limited - CEO & Executive Director [66]

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Yes, René, certainly, we continuously look at strategic, let's call it, opportunities to improve value for shareholders all the time. Splitting the gold and the platinum business is certainly something that can do that. However, I would argue that under current gold prices, the gold division can add a lot of value to the portfolio.

I think in terms of our assessment of why our share has underperformed, we -- I outlined that in the presentation, and there are much more fundamental things such as the operational disruptions due to safety, the gold strike, the high leverage. Once we've addressed all of that, there might be opportunities or, let's say, marginal increases in value that you can get from strategies like that. But there is no doubt that the combination of gold and PGMs and the cost base that we are able to have in place due to large shared services across both gold and platinum is very beneficial for the group. So it's got its pros and cons, and we will keep an open mind going forward. We'll have to see how that unfolds.

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James R. Wellsted, Sibanye Gold Limited - Senior VP & Head of IR [67]

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Thanks. That's it from the webcast. Do we have any calls on the conference line?

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Operator [68]

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We have one more question on the call from Iain Wilson of Reorg.

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Bianca Francesca Boorer;Reorg, [69]

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I think this is Bianca, but I basically wanted to ask about the platinum wage negotiations. So you mentioned that the 80% of the workforce are represented by AMCU. I was wondering if there was any concerns that this would make negotiations possibly more difficult considering how the gold negotiations were sort of pushed through with the majority of being from the other unions.

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Neal John Froneman, Sibanye Gold Limited - CEO & Executive Director [70]

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Bianca, yes, it's Neal, yes. I think the more -- well, let me put it to you this way. In gold, we had a 50-50 split between NUM and AMCU. That is a very difficult situation to manage because half your workforce wants to work. And we need -- we as a company, therefore, incur those costs. And therefore, to offset those costs, we have to try, under very difficult circumstances, regroup people into teams and under intimidation, try and be productive.

In a case where you have such a large portion of your workforce align with 1 union, is actually very beneficial. It's much easier to manage that situation in that most of your employees, should they be -- should they decide to go on strike or be in dispute with the company will not be at work. And therefore, you can shut down operations, avoid confrontation and minimize costs.

So actually, the platinum situation -- the South African PGM situation is actually an easier and a more beneficial situation from a strike point of view. Obviously, we will work very hard to avoid a strike. But if there is, I would suggest that it's a better situation than what we had in gold.

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James R. Wellsted, Sibanye Gold Limited - Senior VP & Head of IR [71]

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Okay. Thank you. I think that's it from the call. So there's just one more question from the webcast from [Barry Davison]. Neal, are you satisfied that the PGM industry is committing sufficient resource to the marketing of its products, that is, enhancing the performance of existing applications and the commercial and scientific research into the development of new applications? After all, it starts and ends in the marketplace.

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Neal John Froneman, Sibanye Gold Limited - CEO & Executive Director [72]

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[Barry], good to hear from you. And I check the shareholder register all the time to make sure you haven't sold your shares, so that's nice, and I'm pleased that you're probably enjoying some profits. Richard can also comment. But in fact, Richard used your comment that you've just made now, that it all begins and ends in the marketplace, at the Board meeting here in Montana. And essentially, we think that the marketing in the industry can be done much better, the market development. As a large -- or the largest PGM producer now, we are constructively engaging and influencing what we believe is a much better direction for the industry. But is enough being done? I don't think that enough can be done. But Rich, do you want to add on to that?

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Richard A. Stewart, Sibanye Gold Limited - Executive VP & Head of Business Development [73]

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Thanks, Neal. [Barry], I think Neal's answer seemed correct and agree with his statements. I don't think enough can be done. I think PGMs are clearly a demand that is often created. There's a portion that sells itself in the market, but the rest needs to be created. And therefore, it is an investment that's strongly required.

I think the critical questions are where that investment should be going given where the current marketplaces are, where the current demand is and what the overall basket is doing. So I think, generally speaking, it's a little bit dangerous to look at market development with respect to one metal only and ignoring the rest of the basket.

And then most critically, I think it's important to ensure that where that market development is spent, that's spent efficiently. And we ensure we get best bang for our buck for wherever invested. And I think that is certainly the approach we're taking looking at both the industry-wide market development as well as certain initiatives we're undertaking ourselves. So fully agree with your comment, Barry , and more about execution and whether it's needed or not.

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James R. Wellsted, Sibanye Gold Limited - Senior VP & Head of IR [74]

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Thanks, Richard. I think it's been 2 hours since we started the presentation, so I think we'll stop the questions for now. I'll hand over you -- to you, Neal, just to conclude.

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Neal John Froneman, Sibanye Gold Limited - CEO & Executive Director [75]

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Yes. Thanks, James. And it really was a pleasure to present from Billings, Montana, and the quality of the questions we got were really good.

I'm very excited about where we find ourselves as a company. We acknowledge the challenges that are in front of us. But as I've said, we are really on the cusp of a rerating with our changing circumstances.

So thank you to all of for that took time to join us on the webcast and the conference call, and please have a safe day going forward. Thank you.