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Lonmin

Summary of Proposed Investment

This Summary of Proposed Investment is prepared and distributed to the public in advance of the IFC Board of Directors’ consideration of the proposed transaction. Its purpose is to enhance the transparency of IFC’s activities, and this document should not be construed as presuming the outcome of the Board decision. Board dates are estimates only.

Project number

24803

Company name

Lonmin

Country

South Africa

Sector1

All Other Metal (Including Tin, Tantalum, Tungsten, etc.)

Environmental category

Department

Reg Ind, Infra & Nat Res, CAF/CLA

Status

Active

Date SPI disclosed	October 12, 2006
Projected board date	December 14, 2006
Previous Events	Invested: April 11, 2007 Signed: March 13, 2007 Approved: December 19, 2006

View Environmental & Social Review Summary (ESRS), click here
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Overview

Sponsor/Cost/Location

Development Impact

Contacts

Attachments

Project description

The project is a multi-year expansion program of the operations of Lonmin Plc, the world’s third largest platinum producer. The project consists of:

- the development, expansion, and mechanization of Lonmin’s South African mines; and
- the development of a comprehensive, large-scale community and local economic development program (LEDP).

The financing will consist of a standby 10 year A loan of $100 million and an equity investment of $15-50 million.

Project sponsor and major shareholders of project company

The project sponsor is Lonmin Plc, a publicly traded, London Stock Exchange listed company. Lonmin Plc has its origins in Lonrho, founded in 1909, which had extensive mining and other diverse operations across Africa. In recent years, these other businesses have been disposed of and the company has focused on Platinum Group Metals (PGMs). Its shares are widely held and its shareholders include a number of institutions. Shareholders currently holding 5% or more are: Prudential PLC, Threadneedle Associates, NWQ Investment, The Capital Group and Zurich Financial.

Total project cost and amount and nature of IFC's investment

The total project cost is estimated at $1.3 billion. IFC’s proposed investment will be comprised of $100 million of senior debt which will be activated through a standby facility and an initial equity investment of $15 million with an option for the IFC to invest up to $35 million of additional equity within one year of signing. Upon activation, the senior debt will carry a tenor of 10 years and a grace period of up to seven years. The company plans to meet the remainder of its funding requirements through internal cash generation and debt from other commercial banks. The new financing will help to fund the company’s expansion and community development plans.

IFC investment as approved by Board

150 million (USD)

Product Line	IFC Investment (million USD)
Risk Management
Guarantee
Loan	100
Equity	50

* These investment figures are indicative

Location of project and description of site

The centre of Lonmin’s operations is in the Marikana area, east of Rustenburg in South Africa’s North West Province. There are two interlinked operations (Western Platinum Ltd and Eastern Platinum Ltd), which include 13 major shafts, eight concentrators plus a smelter and Base Metals Refinery (BMR). Development of these mines started in 1971. In 2005, Lonmin acquired the much smaller Messina Platinum Mines Ltd Limpopo mine which is located about 300 km north of Johannesburg in the Limpopo Province. Lonmin also operate a Precious Metals Refinery (PMR) at Brakpan in the East Rand area.

Anticipated development impact of the project

- The Mining Industry in South Africa

In 2005 the mining industry generated 7% of South Africa’s GDP. The importance of the industry to overall GDP has decreased slightly over the last 3 years, largely due to the growth in the secondary and tertiary sectors and contraction in the gold-mining industry. However, if the gross value-added contribution of processed minerals (presently included in the manufacturing sector’s figures) were added to mining, along the extensive economic linkages with other sectors, the impact on national accounts would be significantly higher.

During 2004, the mining industry employed 2.9% of South Africa’s economically active population. As the majority of South Africa’s mining operations are based in the rural areas of the country, the mining industry has spawned an extensive and efficient physical infrastructure and has contributed greatly to the establishment of secondary industries. Recent legislation has tried to deepen the positive impacts of the mining industry on local communities and the national economy.

The South African Mineral Resource and Petroleum Bill was legislated in 2004 with the following objectives:

- to transfer custody of mineral rights from private holders to the Government;
- to implement mining license reforms; and
- to develop social empowerment through changes in ownership of mining companies; and other measures.

As in other sectors, the legislation was aimed primarily at increasing participation of previously disadvantaged groups in the mining industry, both as shareholders and suppliers. This led to the creation of Black Economic Empowerment entities (BEEs), which are majority owned and managed by historically disadvantaged South Africans (HDSAs). The key element of this new charter was the requirement (beginning in 2004) for mining companies to sell 15% over 5 years to be further increased to 26% over 10 years to BEEs. In order to receive “new order” mining rights which reflect the company’s compliance with the new legislation, all mining companies are expected to have met the 15% ownership requirement and completed a detailed Social and Labour Plan (among other requirements) by 2009. Lonmin’s BEE partner is Incwala, which holds an 18% share in Lonmin’s two main South African subsidiaries. Lonmin, in turn, holds a 23% stake in Incwala. Lonmin is on track to achieve the 26% BEE ownership goal by 2014.

Lonmin was recently notified of the successful conversion of their old order mining rights to new order mining rights for its Marikana operations. Lonmin is the first major platinum company in South Africa to receive the new order mining licenses. The Company will work with the Department of Mines and Energy to set a timetable for the fulfillment of the undertakings in the Social and Labour Plan portion of their conversion application. Meeting these objectives will ensure that they are in compliance with the South Africa Mining Charter.

The project is expected to have the following development impacts through its positive impact on the sector in South Africa:

- Expansion of an internationally competitive mining operation:

Lonmin’s activities generate significant benefits to South Africa in terms of employment, linkages with suppliers and taxes and revenues paid to national government and royalties paid to local communities. In the latest fiscal year, for example, the company employed 25,000 people in South Africa, paid $313m in salaries and benefits, paid $80m to government and spent $361m for materials and services, with 37% of total procurement spend going to HDSA suppliers. Additionally, Lonmin pays royalties to the Bapo Ba Mogale tribe in the Marikana area as well as Traditional Authorities in Limpopo. The major part of its output of over 900,000 oz platinum was exported. It is expected that all of these benefits will increase as a result of the expansion program.

In addition, the government will receive indirectly payroll tax payments made by employees of Lonmin. Lonmin will disclose all material tax and royalty payments in its annual report and accounts as required by statutory reporting authorities.

- An Extensive Community and Local Economic Development Program:

A major component of Lonmin’s future plans is its community development activities. Lonmin currently has a robust community development framework in place comprising a newly invigorated development trust and a social and community based function within their corporate structure. Community development is a core component of Lonmin’s charter and corporate strategy. Lonmin hopes to grow these programs beyond their current capacity and will supplement their in-house expertise with IFC’s expertise in design and implementation. This project component is expected to have measurable positive impacts in the areas of HIV/AIDs prevention, Municipal Development, Gender equality and Local Economic Development (See also discussion of IFC Contribution).

- Skills Development:

Lonmin’s skills development and worker training is an integral part of its planned expansion program and Local Economic Development Program (LEDP) that will encourage and facilitate the greater engagement of local businesses and will address the skills shortage in South Africa’s labour force through increased functional and leadership training. The expansion project will result in enhanced mechanical and other skills and capability. The LEDP will impart business skills and education to the greater community and facilitate greater small and medium size business commercial engagement with Lonmin and others.

The key development indicators that are proposed to be monitored during the life of the IFC investment are:

- annual production of PGM ounces;
- Lonmin’s financial performance;
- successful implementation of community development programs based on objective measures of success (that will be developed with the company); and
- fiscal payments accruing to the both the Federal and Municipal governments.

Governance risks assessment

- Governance Context

South Africa’s first multi-racial democratic elections were held in 1994, shortly after the collapse of apartheid. Since that time, South Africa has worked to build a robust democratic government focused on transparency and inclusion. It has a strong civil society. It is perceived as one of the most transparent and progressive African countries and is ranked second among African countries on Transparency International’s Corruption Perception Index (CPI). South Africa has experienced an impressive acceleration of economic growth recently. Strong macroeconomic policy fundamentals supported by favorable export prices have underpinned good macro performance. A conservative fiscal policy and a credible, mature inflation targeting framework resulted in low inflation and interest rates, fueling domestic demand. South African growth accelerated in 2005 to 4.9%, its highest growth in 21 years, from 4.5% a year earlier, and about 3% in the 1990s.

South Africa continues to face major social challenges of unemployment, poverty, and problems with service delivery at the local level. Key challenges are:

- reducing unemployment and expanding opportunities for SMEs;
- fighting HIV/AIDS;
- improving the effectiveness of social transfers;
- closing the skills gap;
- strengthening capacity for service delivery at the local level;
- accelerating land reform; and
- monitoring and evaluation.

On balance given the variety of development benefits expected to be delivered by the project and South Africa’s governance context, as evidenced by its recent record as well as a by a variety of strong governance indicators such as those of the World Bank Institute, IFC believes that this is a project it should support.

IFC's expected development contribution

IFC has a strong role to play in assisting Lonmin in the expansion of its operations in a sustainable way that generates real benefits to its local communities and workforce. IFC’s commitment to Lonmin’s long term success, through its proposed provision of its standby facility and equity financing, will provide a sound basis for a partnership. IFC, through its international perspective and expertise, will help Lonmin in four key areas:

- business linkages that will aim to increase the company’s engagement with small local businesses;
- HIV/AIDS management where IFC will bring its wide experience of assisting corporations in the mining sector and elsewhere;
- integrating women into the workforce so as to ensure a broader and more equitable participation in Lonmin’s success; and
- its international expertise in local revenue management and capacity building to assist with tribal / municipal revenue management.

IFC PEP-Africa (Private Enterprise Partnership) Technical Assistance teams have completed a scoping exercise involving Lonmin, the local municipality, the principal traditional authority and other key stakeholders, and will work extensively with the company and its key local stakeholders to design and implement a comprehensive set of programs that can be a model for the South African mining industry).

- Business Linkages - Local Supplier Development/Demonstration Effect:

Under the objectives of the mining charter Lonmin is obliged to increase its Black Economic Empowerment procurement. At the same time Lonmin faces increasing expectations for job opportunities in its supply chain from the local communities. Responding to these pressures, Lonmin has undertaken significant efforts to engage in a comprehensive re-design of its supply-chain and is on an advanced path to implement a comprehensive and sustainable BEE supplier development program. IFC will bring its broad based international experience of supply chain and SME development to assist Lonmin’s efforts in this respect.

- Gender Mainstreaming:

In line with the requirements of the South African Mining Charter, Lonmin has a target of employing a 10% female work force by 2009. The current female workforce stands at 3.9% and Lonmin is committed to incremental increases in order to reach 10% by 2009. The development impact of the sustainable employment of women is considerable since 55% of Lonmin’s immediate community is female and poor. Providing stable income to women will have a significant multiplier effect on the well-being of families.

The Gender Entrepreneurship Markets (GEM) unit will also liaise with the other Technical Assistance units of the IFC to identify the impact of gender mainstreaming on their respective areas of activity.

- HIV/AIDS Risk Mitigation:

In a prevalence survey commissioned by Lonmin in 2003, it was estimated that approximately 25% of all permanent employees were HIV positive. AIDS is the largest cause of death at Lonmin with 126 deaths last year due to AIDS-related illnesses. Absenteeism due to HIV/AIDS complications is also suspected to be a significant issue, although the company does not currently have good data on these issues.

IFC Against AIDS proposes to assist Lonmin in the design and implementation of a holistic HIV/AIDS program both in the workplace and surrounding communities. The focus will be primarily on prevention interventions with an advisory role on how to improve the existing medical approach.

- Local Revenue Management:

There are currently three major stakeholders in the area around Lonmin’s operations that are charged with community development and that will receive revenues from Lonmin’s operations: the Bapo Ba Mogale community, the Madibeng Municipality, and Lonmin Plc. Each of these stakeholders has its own revenue stream and priorities. IFC will work with all stakeholders to develop a community led plan that develops capacity of the stakeholders to manage and account for revenues that they receive, enhances cooperation in the region, and assists the communities in creating the mechanisms that will allow them to successfully design, develop and implement successful community projects.

Environmental and social issues - Category A

The main driver for IFC involvement is an integrated TA package and supporting commercial investment in the form of corporate financing. Environmental, Health & Safety and Community issues, both positive and negative, have been assessed for the existing operations together with issues associated with Lonmin’s future operations. IFC’s commercial investment will be used for the development and expansion of the current Lonmin operations. This investment is expected to have beneficial results for the workforce and surrounding communities. However, the diverse and extensive nature of the investment program means that there are potential significant impacts.

Management of all these issues by Lonmin has been assessed as consistent with international good practice. In this context, IFC’s due diligence concluded that the community has been benefiting from the mining operations and that relationships are improving. Considerable material has already been publicly disclosed (see links within the Environmental and Social Review Summary) but in any large mining project such as this there are still inherent risks associated with many facets of the operation and for these reasons it is considered that 60 days consultation would be beneficial in further strengthening relationships.

The key environmental, social and occupational health & safety and community aspects and issues associated with this project are described in the ESRS. Application of IFC’s Environmental & Social Review Procedure to this suite of aspects and issues has resulted in this project being classified as Category A.

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