Lonmin woes a mining portent
Platinum miner Lonmin’s woes are a canary in the coal mine for SA’s mining sector, although in this case it is of course a platinum mine. The industry is being squeezed on no fewer than four fronts simultaneously: low commodity prices, a rand exchange rate that is weak but not weak enough to magically make poorly performing mines profitable; a labour relations struggle and an unthinking government seemingly determined to drive the industry into the dust.
The tragedy is that Lonmin itself cannot meaningfully affect any of these pressures, although some of its travails are self-inflicted. The key item here is not, as it happens, the performance of the mines themselves. In fact, its latest set of interim financial results showed a lower rate of cash-burn at $48m, but this was boosted by one-off items and anyway, cash-burn is never good.
The big problem, however, is in the covenants governing Lonmin’s debt that demand that its tangible net worth does not fall below $1.1bn. At the end of March, the net worth of the group was $1.434bn and this was substantially lower after a $146m impairment. Lonmin reported a $214m loss for the six months to March compared with a $6m loss the year before, while revenue fell $29m to $486m. As a result, the share price has fallen to about R17. This is substantially less than the R21 a share at which the Public Investment Corporation invested to underpin the company’s latest emergency capital-raising exercise, which has left public servants holding 30% of the company. It was trading at about R200 just a few years ago.
Lonmin can and has managed the situation by reducing capex, but its room for manoeuvre is increasingly constricted and it has a narrower margin left to avoid breaching its key debt covenants.
Mining is a gambler’s game and extreme highs and lows are par for the course. Investors know this, as does the industry. But there are worrying signs that Lonmin is treading a path that other miners could well follow.
AngloGold Ashanti, just to take one example, also had a disappointing first quarter. In 2014, the company proposed a capital-raising exercise. At that point, the gold price was at $1255/oz and the company’s debt, at $3.7bn, was almost equal to its market capitalisation. The plan was scrapped and three years later, debt has been significantly reduced and labour relations have stabilised. But the gold price is languishing and production and ore grades continue to drop.
This is a moment you would expect the government and mining industry to be deep in crisis talks, trying to find ways to save the industry. Instead, there is an ominous radio silence. Mineral Resources Minister Mosebenzi Zwane has shocked the industry by saying that a new mining charter will be gazetted soon, despite the fact that the industry is strongly opposed to many of the measures set out in the drafts and considers that it has simply been ignored.
At the root of the problem is a fundamental dispute. The government has placed huge expectations on the mining industry, arguing that transformation will be a prelude to growth. The industry feels that far from assisting growth, the particular transformation measures the government is proposing will retard growth, impede investment and make real transformation more difficult. Zwane, astoundingly, claims there is no friction between himself and the industry, which is absurd since the industry has already threatened to take the new mining charter to court.
SA’s mining sector constitutes a diminishing portion of SA’s economy even though it still employs half-a-million people. For a country with an astounding mineral bounty, this constitutes a crime against citizens. The government should watch what is happening at Lonmin and worry rather than pretend all is well.
YOU WOULD EXPECT THE GOVERNMENT AND MINING INDUSTRY TO BE DEEP IN CRISIS TALKS