Interview: Lonmin CFO Simon Scott

SUDDENLY taking the reins of a multinational mining company is a daunting task in and of itself, never mind doing so amid the fury of strikes, riots and – worst of all – deaths. Throw in concerned shareholders, perturbed markets and heavy-handed police and you begin to have a perfect storm.

That was the situation facing Lonmin CFO Simon Scott little over a year ago when the illness of chief executive Ian Farmer saw him handed the top job, albeit on an interim basis, just as industrial action over pay and working conditions at the platinum miner’s Marikana facility in South Africa took a particularly grisly turn.

By the time the crisis was concluded, 44 people were dead, more than 70 injured and the extraction of more than 15,000 ounces of platinum had been lost after police shot strikers after reportedly being charged. Banking covenants were breached, a rights issue made and stocks dropped six days in a row to 20 August 2012.

“It was a challenging time,” says Scott with some degree of understatement, given that the company found itself at the centre of nothing less than a national crisis for South Africa. Certainly, Scott faced huge pressure to find a way to resolve the situation so Lonmin could start mining again and protect the safety and jobs of tens of thousands who had not been involved.

“A part of what I was doing was the finance role, which is where my experience lies. My interest is broader than just finance – I have a commercial interest and a small amount of common sense and I think all of that assisted in dealing with the situation,” he explains.

There is an air of composure and relief about Scott as he meets Financial Director at the company’s London office, as you might expect, considering he is now back in his preferred FD role – former-Anglo American SA CEO Ben Margara taking the chief executive post. Despite having no experience in CEO roles, or crisis management, Scott managed to stabilise the situation.

Scott studied at the University of Witwatersrand in Johannesburg before becoming a trainee at Arthur Young, which became part of EY in 1989. His career then took him to JP Morgan, where he rose through the ranks to become CFO for South Africa, before leaving in 2001 for his first foray into mining with Anglo Platinum, first as business manager, then as head of financial services. A brief spell at infrastructure business Aveng led him to the CFO role at Lonmin in 2010.

Mining operations “don’t easily turn off and turn on again”, he notes. “It’s a business in which safety is paramount, so we had to focus on safety issues and get the workforce back to work in the interests of normalising the situation as best we could after the tragedy [of the workers’ deaths].”

Back to work
Returning to work wasn’t simply a case of sending employees back to work; machinery had to be repaired and safety measures taken.

“In retrospect, nothing could have prepared us for what happened. The only way to deal with this kind of crisis is to take one day at a time and to go through all of the matters in a logical manner and keep your basis of values intact,” says Scott.

“At the same time, though, the company was in a position where the finances were paramount. There was never any danger of insolvency, but there was a liquidity crisis with the banking covenants that we had in place which we had to address very quickly.”

And he did just that, with a rights issue from shareholders and $800m (£500m) raised in new equity, which saw the then-beleaguered London-listed company through the turbulence.

Regular updates to the markets also helped smooth the process, but re-financing was paramount to return the company to stability. Having seen the company’s net debt position grow following the six weeks’ lost production, Scott managed to replace the existing bank debt with a $600m new debt facility, profit-covenant free.

Normality achieved and able to resume his FD role, Scott has found 2013 to be a comparatively calm year so far. The company’s interim report from May shows revenues to 31 March are running at $735m, compared to $751m the year before, while underlying profit has leapt from $14m to $93m.

“We reported at the half-year (Q2, 2013) that we are debt-free, but the facilities are in place,” says Scott confidently. “This year, we’ve met all the commitments that we’ve made to date. The company finds itself in a far better position than it was a year ago.”

DNA of the business
At the heart of Scott’s endeavours to get Lonmin back on its feet was a de-risking strategy to guard against the hazards related to the labour force and the capital-intensive infrastructure used in platinum mining.

“The whole [platinum mining] industry has been under pressure because of the way prices are and there’s been cost inflation in South African mining in recent years. Notwithstanding that, we have had a reasonably good performance and from a cost perspective we met our cost guidance at the half-year, we have cash in the bank, and the underlying integrity of the business is intact,” he explains.

The balance sheet, has been “largely de-risked”, leaving Lonmin in what he believes is a “far better” position for when the markets turn, with much higher platinum prices predicted over the next two to three years.

Managing risk, says Scott, is both a top-down and bottom-up process, and one integrated into the way business is conducted, rather than a separate issue.

“It [risk management] can’t be a separate process,” explains Scott. “It’s got to be part of the DNA of the business. While we do have processes that monitor and highlight the risk, we ensure that, on a day-to-day basis, those risks we’ve identified as the highest risks are mitigated in the most appropriate way.”

That approach applies to both physical risk to miners and financial risk to the company.

“People do get killed in mining,” Scott says gravely. “It’s absolutely our objective to ensure we address those issues and manage that safety risk down as far as possible. We’ve managed the company in the last year so that we’ve de-risked a lot of those areas that represented significant risks a year ago. Clearly, some of the risks – as with any risk – can’t be eradicated completely, and the labour situation and the regulatory environment around mining globally mean that some of those risks prevail, but we are as proactive as possible.”

As far as equipping his workforce is concerned, it’s a capital-intensive process for Scott, and one that requires ongoing attention.

“It’s a continual process, and the costs are significant and the margins are very tight,” says Scott. “No matter how much you finance the business through lease arrangement or debt arrangement, it always comes back to the fact that it is debt. You negotiate the most efficient level with the counterparties and you centralise that debt. Having ad-hoc lease arrangements in a business like ours would make no sense.”

After what has been a hectic year by any standard, Scott is both sanguine and philosophical.

“After the six-week strike, we’d envisaged ramping up and going underground, making safe these areas and slowly starting the production chain again,” he says. “We’ve ramped up faster than what we anticipated last year. We anticipated production would be around 10% overall this year compared to last year, and we’ve out-performed that.”

Although Scott may feel more comfortable as a CFO than CEO, he dealt with more crises in his brief stint at the helm of Lonmin than most CEOs will experience in their entire careers. Scott should look back on that period with a certain amount of pride as a job well done in the most trying of situations.

IN BLACK & WHITE

2010 – present CFO / interim CEO, Lonmin
2009 – 2010 CFO, Aveng
2005 – 2009 Head of financial services, Anglo Platinum
2001 – 2005 Business manager, Anglo Platinum
1998 – 2001 CFO for South Africa, JP Morgan
1980 – 1980 Articled clerk, Arthur Young