Hel­ter-smelter

Plat­inum miner in­vests in above and un­der­ground pro­duc­tion to in­crease flex­i­bil­ity

Finweek English Edition - - COMPANIES & MARKETS - AN­DRÉ JANSE VAN VU­UREN an­drej@min­ingmx.com

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

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