Lonmin to sell excess capacity to raise cash

Analysts say it could risk long-term gain for short-term survival

PLATINUM miner Lonmin said it would cut costs and sell some assets, including processing capacity of up to 500 000 ounces a year, as it battles to overcome a weak market and to preserve jobs. Shares in the company had risen 1.7% by 12.20pm in response to yesterday’s announcement, although some analysts said it would be important to see the terms Lonmin is able to agree with potential buyers. So far this year, its shares have fallen more than 35%.

Platinum miners in South Africa face an array of obstacles, including very deep, narrow seams, political instability and a stubbornly low platinum price of about $950 (R12 720) an ounce.

A weakening rand has added to inflationary pressures for South African miners, which earn revenue in dollars but pay costs in rands.

Over the year to date, the rand has strengthened against the dollar, but it is expected to weaken over the next six months, a Reuters poll found last week.

Lonmin has repeatedly gone to the market to raise funds. Last month, it announced it had cut more costs and improved its mining performance in its third quarter.

Yesterday, Lonmin said it was “taking further decisive action to ensure a sustainable business in a continuing adverse macroeconomic environment”.

Following an operational review, Lonmin said it was selling excess processing capacity of up to 500 000 platinum ounces a year.

It did not specify which operators might be willing to buy the capacity, but said the step would allow other South African producers that sell concentrate to sell more highly processed platinum and command a bigger profit margin.

In addition, it is seeking to reduce annual overhead costs by a minimum of R500 million by the end of September 2018, and efforts are continuing to seek funding partners.

In particular, it needs to fund a project to extend the economic life of its Rowland shaft, preserving about 5 000 jobs, at Marikana.

Without a rebound in platinum prices, depressed by the prospect of dwindling demand from the auto sector, the risk is that only the most economically efficient platinum miners will survive, analysts say.

“We view the announcement as mixed,” Richard Hatch of RBC Capital Markets, which ranks Lonmin “underperform”, wrote in a note. “Actions to save the company are encouraging, but no terms have as yet been agreed so it is difficult to ascertain how much longer-term potential upside/ value is being given away for near-term survival.” – Reuters