Lonmin results cast doubt over deal
Far from creating confidence that SibanyeStillwater’s R5bn takeover of Lonmin is a certainty, the platinum miner’s interim results cast doubt on the deal’s success.
The rate of cash burn in Lonmin during the first six months of its financial year was a concern, raising conjecture that it would be in a net debt position by the end of its financial year in September.
The transaction needs a number of approvals, with competition and takeover authorities in SA and the UK to sign off on the deal. The shareholders of Lonmin and Sibanye also need to support the all-share offer.
The biggest uncertainty is what Sibanye’s shareholders will do when the vote is held in the second half of 2018. The deal needs approval from 51% of its investors.
Lonmin CEO Ben Magara relentlessly drove home the point that Lonmin was net cash positive for 11 successive quarters, but the market remained sceptical.
One analyst changed his mind about the chances of the deal being concluded, lowering it to 50% from 80% after he had digested Lonmin’s results.
The analyst suggested that as Lonmin would spend $10m a month up to its year-end the $17m net cash position at the interim period, combined with the $47m of metal locked up in the processing plant, would fall to just $4m.
As the costs and rand price received for the basket of platinum group metals are evenly balanced, no extra cash is coming into the company apart from $13m Lonmin hopes to scrape together during a clean-up of its smelting and refining complex.
With Sibanye’s debt exceeding R23bn and its net debt to earnings before interest, tax, depreciation and amortisation ratio at 2.5 times, the analyst questioned whether the company’s shareholders might just shy away from a company burning through $10m a month with little to show for it.
Lonmin chief financial officer Barrie van der Merwe said on Monday that the company needed R1bn a month to sustain its operations and wanted $60m in the bank at any point.
Standard Bank’s Leroy Mnguni said that, based on the bank’s platinum group metal price forecasts, Lonmin would be in a net debt position of $14m by the end of September.
“While the anticipated debt levels in isolation are not concerning, the implied $117m cash burn in 12 months should be alarming for Sibanye-Stillwater shareholders when voting for the acquisition,” he said in a note.
Lonmin has to repay a $150m loan, with lenders lifting their waiver on covenant compliance if the transaction fails to conclude — forcing Lonmin to either raise alternative sources of capital to repay its debt or sell assets, with Sibanye first in the queue.
If the deal succeeds, Lonmin still needs to repay the $150m and should ideally be cash neutral or positive at that point. The numbers underline why Magara kept stressing the need for consolidation and the Sibanye deal: Lonmin is in a corner and that transaction is its only real salvation for 20,000 employees left behind after 12,600 are retrenched in three years as old mines are shut.
An Investec analyst has estimated the replacement cost for Lonmin’s suite of assets would be R20bn. Sibanye could get the assets with the good Lonmin mines and partially built projects for R5bn in shares.
There was a whiff of desperation in the Lonmin interim results presentation on Monday when executives spun the narrative about how wonderfully adept the struggling platinum miner was in staying net cash positive.
The overriding theme of the presentation of the poor results was the absolute need for the R5bn, all-share takeover by Sibanye-Stillwater to proceed, with pressure coming from Lonmin executives on the government, its agencies, labour and communities to please stay out of the way of the transaction the company needs to save at least 20,000 of the 33,000 jobs it now has.
It was a theme that was touched on repeatedly, with chief financial officer Barrie van der Merwe’s blunt assessment that the estimated R220,000 cost a head in the three-year programme to cut 12,600 jobs was unaffordable in the prevailing market in which the group’s mines were marginal at best and cash held in the bank was not enough to sustain the company.
With a history dating back more than a century, Lonmin has its back to the wall. Without the Sibanye deal it is in trouble.
Van der Merwe suggested business rescue could be an option, while urgent asset sales of highly sought-after parts of the company would be another.
Whichever way the rest of the year unfolds for Lonmin, the world’s third-largest platinum producer will cease to exist in its current form by this time in 2019. It will be a Sibanye subsidiary (assuming that company’s shareholders decide the loss-making group is worthy of owning), or in business rescue, or a shadow of itself.
It’s an ignominious end for a once-powerful player.
There is an ominous silence from Coega, where the construction of the R11bn Beijing Automotive Industry Holding Company (BAIC) vehicle plant is taking place.
In December 2017 it was acknowledged that the plant, much of which is funded by the Industrial Development Corporation (IDC), was at least five months behind schedule. This has been mainly due to protests and stone-walling by small business interests in the city, who say they are not getting their fair share of tenders.
Calls to those who know something about the delays have yielded little information. Now, the building of the factory in the Coega special economic zone near Port Elizabeth is said to be going ahead at pace, but no proof of this has been proffered.
Minutes from a stakeholder meeting in November 2017 showed how small, medium and micro enterprises (SMMEs) were unhappy about the way tenders were issued for up to 35% of work. This had caused multimillion-rand stoppages.
It was also apparent at that time that critical funding for the BAIC SA project had not yet been released. The plant is expected to build 50,000 vehicles a year by 2022, but the planned start-up date of 2018 may prove to be a bridge too far.
The stakeholder minutes showed that a representative of the IDC was told “he must watch his moves and do the right thing”, as SMMEs threatened to shut down the site late in 2017.
If any light needs to be shone on this project, perhaps the best place to start is by reading the book How to Steal a City by Crispian Olver.