Platinum miner invests in above and underground production to increase flexibility
IT CAN BE CHALLENGING getting a consensus opinion on the prospects of Lonmin. The world’s third largest platinum producer has underperformed badly over recent years, with the only constant being its ability to be hit by bad news the moment its share price develops some positive trend. While the stock has so far fallen by about 20% this year – not unlike its peers but exacerbated by a downgrade revision of its production forecast – some analysts suggest it’s now poised to outperform the industry having done most of the hard work to cash in on the continued rise in platinum group metals (PGM) demand for the foreseeable future.
RBC Capital Markets analyst Leon Esterhuizen says: “Lonmin should be better placed than its peers to deliver production growth and costs containment and remains our preferred PGM major in a positive metal price environment.” RBC has a price target of 1800p for Lonmin, a premium of almost 30% to current price levels below 1400p.
Sharing RBC’s optimism is Investec Securities, which sees its price moving to 2204p, as well as Credit Suisse to a lesser extent, its target being 1690p/share. Yet for every bull there’s a similar bearish sentiment, with the forecasts of analysts at AlphaValue, BMO Capital Markets and SBC Securities ranging between 1500p and 1550p/share.
However, the optimists are making a good case for their stance. One of the key reasons for Lonmin’s past operation underperformance on the mining side has been its lack of underground development. Esterhuizen says a key component of its turnaround plan – apart from closing loss-making operations and lowering overheads – was to expand developments underground to increase mining flexibility. That’s seen immediately available ore reserves increase to almost 17 months from a low of less than 12 months in 2008. “One of the biggest contributors is often a lack of mining flexibility due to a lack of development. Lonmin has addressed that issue and we believe the current increased ore reserves should put Lonmin in a better position to execute on its plans,” Esterhuizen says.
Analysts at JPMorgan Cazenove also point to the fact Lonmin’s growth plans – an additional 50 000oz/year over the next four years – are credible, given it’s ramping up new shaft infrastructure and isn’t constrained by hoisting capacity. “The risk is therefore more to a cost blowout than achieving the 950 000oz target, as management can always throw more resources at any potential problem,” it says in a note.
Lonmin also seems to have found a solution to its traditional thorn in its flesh: the persistent technical problems with its main smelter that has operated without a hitch after a rebuild. “We’re six months down the line, so we’ve got through the new wear pattern,” says vice-president in charge of smelting, Frans de Beer. “Will it keep on for two years? We’ll have to wait and see, but the furnace has so far acted in the way we predicted.”
The construction of a new 10MW second smelter will give Lonmin much-needed spare capacity to back up its 20MW number one smelter. The new one is due to start production in May next year. Management will decide over the next 18 months to build a third furnace as additional backup.
But for all that to translate into a meaningful share price gain CEO Ian Farmer and his management team would have to cope with all the market conditions currently squeezing SA’s entire platinum sector. Those include the strong rand, excessive pay demands from an aggressive workforce and the impact on production from the rising number of safety stoppages. Though Lonmin’s prospects may seem good, it won’t be an easy ride.
LONMIN’S HOSSY SHAFT