Economic performance

Approach and structure

Based on market capitalisation, Northam is considered to be a mid-tier PGM company. However, unlike many of its peers and smaller producers, Northam is unique in that it has full ownership of its production stream, from mining to processing to marketing.

At Zondereinde, Northam's smelter complex produces final precious metal concentrate which is processed in terms of a long-term toll-refining contract with Heraeus GmbH (Heraeus). The precious metals emanating from the Heraeus refinery are shipped to Northam's customers in Europe, Japan and North America. The by-product base metals, copper and nickel sulphate, are extracted at the on-site base metals removal plant and are sold in the domestic market.

Performance F2012

The company's performance in terms of economic contributions is dealt with comprehensively in Northam's integrated annual report for F2012.

The key features are listed below.

• 28 production days (870kg) were lost at Zondereinde owing to safety stoppage interventions by the DMR. This translated into revenue losses of approximately R300 million.
• A run-out at the Zondereinde smelter resulted in the planned rebuild of the furnace being rescheduled to an earlier date. The cost of the rebuild is estimated at R41.5 million.
• Northam continued to invest in capital expenditure at both Zondereinde (R328.3 million) and Booysendal (R1.7 billion).
• Metals in concentrate produced by Zondereinde were 15.4% higher than in F2011.
• The average rand price received for Northam's PGM basket was 3.5% higher at R335 325/kg; while operating costs increased by 1.4% to R311 645/kg.
• No significant financial assistance received from government.

Value added statement

	2012		2011
	%	R000	%	R000
Sales revenue		3 684 000		3 571 048
Less: Purchase of goods and services in order to operate mine and produce refined metals		(1 910 986)		(1 984 975)
Value added by operations	94.4	1 773 014	91.6	1 586 073
Add: Share of earnings from associate	0.4	6 734	0.4	7 248
Investment income	2.9	53 951	4.9	85 520
Sundry expenditure/income	2.3	43 343	3.1	53 148
Total value added	100.0	1 877 042	100.0	1 731 989
Value distributed
Employees	56.2	1 055 805	51.1	883 444
Salaries and wages	56.4	1 057 780	49.9	863 719
Contributions to retirement benefit funds	4.5	84 212	4.3	74 096
Contributions to health funds	3.0	55 627	3.2	54 606
Pay-as-you-earn deducted	(7.6)	(141 814)	(6.3)	(108 977)
Government	17.2	322 617	19.8	342 972
Mining and non-mining tax including capital gains tax	5.9	110 767	8.3	143 048
Deferred tax	1.5	27 482	1.7	29 933
State’s share of profits	–	–	–	–
Secondary tax on companies	0.2	3 824	0.5	9 020
Royalties	2.1	38 730	3.0	51 994
Pay-as-you-earn deducted from employees	7.6	141 814	6.3	108 977
Providers of capital
Dividends	3.1	57 364	5.2	90 202
Broader community
Corporate social investment	0.1	2 782	0.2	4 116
Total value distributed	76.6	1 438 568	76.3	1 320 734
Retained by company	23.4	438 474	23.7	411 255
Depreciation	10.1	190 287	8.4	147 838
Decommissioning provision to meet statutory obligations	0.3	4 907	0.3	(4 110)
Retained income	13.0	243 280	15.0	259 007
	100.0	1 877 042	100.0	1 731 989

Direct and indirect economic impacts

• R10.8 million contributed toward the Toro Employee Empowerment Trust.
• Continued engagement of 6 916 permanent and 4 757 contractor employees at both Booysendal and Zondereinde.
• Dividends of R57.4 million were paid to shareholders (F2011: R90 million).
• Taxes paid to national, provincial and local government amounted to R322.6 million (F2011: R343 million).
• 140 housing units were sold to employees in terms of the affordable home ownership scheme. This brings the total to 240 houses. Township and land development amounted to R6.5 million (F2011: R8.8 million).
• Expenditure on social investment and local economic development declined to R2.8 million.

Black economic empowerment

Over the past year the company's black empowerment status was compromised when the BEE shareholders were required, by their lending institutions, to address certain breaches of covenants contained in the financing agreements concluded for the purposes of initially acquiring their Northam shares. The lending banks have since exercised claims over these pledged shares and have indicated that they have disposed of a number of shares to restore the debt cover ratios of Afripalm and Mvela Holdings.

Northam's empowerment holdings have dropped to below the 26% level required by the MPRDA. In mitigation of this risk, the board has proposed that Northam develop a scheme to increase its BEE shareholding percentage to the level required by the Mining Charter in 2014, and has furthermore established the following key principles around which the BEE Transaction should be structured:

• The BEE Transaction should ensure compliance by Northam and the relevant participants with the provisions and principles of the Mining Charter and the requirements of the Mineral and Petroleum Resources Development Act (MPRDA).
• The BEE Transaction should be sustainable and be beneficial for all stakeholders, including existing shareholders.
• The BEE Transaction should ensure that Northam's BEE shareholding is secured at the requisite level for an extended period so as not to threaten its BEE status in the future.
• The cost of the BEE Transaction to Shareholders should be minimised.
• Participation in the BEE Transaction should be as broad-based as possible.
• Northam's HDSA employees should also participate in the proposed BEE Transaction scheme.

With the above principles in mind, and subject to approval by the DMR, Northam proposes to proceed with the creation of one or more empowerment trusts, the beneficiaries of which are expected to comprise Northam's employees, relevant communities and other broad based BEE entities.

Empowering local communities through procurement

Northam's procurement policy gives BEE suppliers preferred status, provided they are commercially competitive. Both Booysendal and Zondereinde mines have well-developed systems in place to monitor and promote expenditure with these identified suppliers.

In F2012 total procurement spend at Northam (both Zondereinde and Booysendal) amounted to R3.6 billion (F2011: R2.4 billion). The BEE component of this amounted to R2.3 million (F2011: R1.6 billion) or 66% of the total.

In line with the requirements of the Mining Charter, Northam reports BEE/HDSA expenditure at 26.5% (F2011: 18.4%) for capital goods, 32.0% (F2011: 35.6%) for consumables/custom purchases and 7.5% (F2011: 10.7%) for services.

Beneficiation

Northam's commitment to local beneficiation is demonstrated in the role it has played in facilitating the development of Heraeus' PGM refinery facility refining by in Port Elizabeth.

As part of the process, Northam continues to supply a percentage of its metal to Heraeus locally for industrial use. Both Northam and Heraeus have expressed their commitment to building local intellectual capital and to this end, these entities continue to engage with a number of scientific, research and educational institutions.

Local economic development and transformation

At the Zondereinde division the Life Centre Project (a community skills-training project started by the mine in 2004) is being realigned to meet the Mining Charter's local economic development criteria. The emphasis in this realignment is to create a business support hub which can exist independently from the Zondereinde mine and to be managed by a section 21 company.

In addition a number of options are being considered in partnership with the local authorities in support of poverty alleviation, infrastructure and other local economic development. An important consideration in this regard is to avoid mere survivalist businesses but to focus on portable skills, supported by accredited training initiatives.

Breakdown of expenditure – F2012

	Capital	Services	Consumables	Custom purchases and toll smelting	Total	% spend
	Capital	Services & contractors	Consumables	Custom purchases and toll smelting	Including custom purchases and toll smelting	Percentage including custom purchases
Discetionary spend
HDSA owned (BEE equity >50%)	307 125 840	42 172 069	45 319 390	–	394 617 299	11.1
HDSA empowered (BEE equity 25.1% to 50%)	600 844 288	148 253 242	253 932 755	813 619 637	1 816 649 922	51.1
HDSA influenced (BEE equity 5.0% to 25%)	–	56 345 629	–	–	56 345 629	1.6
Multi national enterprises	36 278 362	18 110 297	24 098 790	–	78 487 450	2.2
Measured HDSA spend	944 248 490	264 881 237	323 350 936	813 619 637	2 346 100 301	66.0
Without HDSA	694 950 679	137 913 587	378 472 006	–	1 211 336 272	34.0
Total discretionary spend	1 639 199 170	402 794 825	701 822 942	813 619 637	3 557 436 573	100.0
Non-discretionary spend
– Electricity		292 230 745.59			292 230 746
– Water		14 113 910.13			14 113 910
– Municipal Services		1 589 110.25			1 589 110
– Royalties		5 224 846.00			5 224 846
Total non-discetionary spend		313 586.97			3 131 586.97
Total expenditure	1 639 199 170	715 953 437	701 822 942	813 619 637	3 870 595 185
Percentage HDSA spend	26.5%	7.5%	32.0%		66.0%