Rights is­sue not a panacea for Lon­min’s woes

In the face of de­pressed prices and sig­nif­i­cant over­sup­ply, the plat­inum group me­tal (PGM) sec­tor is go­ing through a dark pe­riod. Lon­min plans to re­struc­ture its debt and is ask­ing share­hold­ers for a $400m bailout, but will this be enough to save the stru

Finweek English Edition - - THE WEEK IN THE NEWS - Ed­i­to­rial@fin­week.co.za

even if Lon­min gets share­holder ap­proval for its $400m rights is­sue on 9 Novem­ber, an­a­lysts be­lieve the UK plat­inum com­pany is not out of the woods, es­pe­cially if PGM prices don’t re­vive over the next two to three years. Lon­min an­nounced on 21 Oc­to­ber that it in­tended to is­sue shares which, if suc­cess­fully achieved, would open the door to a $370m re­fi­nanc­ing of debt by banks – just enough to keep the com­pany afloat while it set about cut­ting pro­duc­tion to about 700 000 plat­inum ounces (oz) and re­duc­ing staff by 6 000 (also see page 30).

This an­nounce­ment was fol­lowed up by a pro­duc­tion up­date on 2 Novem­ber in which Lon­min said it would im­pair its as­sets by up to $2.05bn. This is a move that, ac­cord­ing to CIBC Cap­i­tal Mar­kets an­a­lyst, Leon Ester­huizen, is an in­di­ca­tion that the rights is­sue is al­ready “in the bag”.

“I have a hunch this could be­come PIC Plats shortly,” says Ester­huizen, re­fer­ring to the pos­si­bil­ity the state-owned Pub­lic In­vest­ment Cor­po­ra­tion, cur­rently a 9% share­holder in Lon­min, would un­der­write a good part of the rights is­sue.

One of the ques­tions be­ing thrown up by Lon­min’s im­pair­ment, how­ever, is whether there are more write-downs to come from the South African plat­inum sec­tor.

One mar­ket com­men­ta­tor says that as of end June (by which time many com­pa­nies had re­ported in­terim or full-year fig­ures), only An­glo Amer­i­can Plat­inum had a mar­ket value above the book-value of its as­sets. “Yet there were no write-downs de­spite there be­ing an in­di­ca­tor of im­pair­ments,” he adds.

The mar­ket com­men­ta­tor be­lieves plat­inum min­ers had re­tained a be­lief that PGM prices would im­prove over the re­main­der of the year, even if only in rand­de­nom­i­nated terms. “If you add back an­other $200/oz to the plat­inum price, then maybe no write-downs would be re­quired.”

The PGM mar­ket in dol­lar terms con­tin­ues to in­di­cate, how­ever, that there’s sig­nif­i­cant over­sup­ply.

An­drew Byrne, an an­a­lyst at Bar­clays Cap­i­tal, says the an­nounce­ment by Lon­min of a 50% plus write-down of its as­sets was “a ma­jor step in ad­dress­ing the un­der­ly­ing is­sues, and hope­fully will spur peers into mak­ing sim­i­lar an­nounce­ments through 2016 in or­der to al­low an im­prove­ment as­sump­tion en­vi­ron­ment for de­ci­sion-mak­ing over the next decade”.

“Yes, there’s much more to come from the rest still,” says Ester­huizen of the like­li­hood of more write-downs. Com­ment­ing specif­i­cally on Lon­min, he added: “They have clearly ad­justed to much more re­al­is­tic prices, but their prices are still well above spot.”

An­a­lysts think that man­age­ment of plat­inumpro­duc­ing com­pa­nies in par­tic­u­lar have been too op­ti­mistic about the re­cov­ery of the PGM mar­ket with Bar­clays fore­cast­ing a sur­plus in the mar­ket through to 2020.

So with its write-down out of the way, and with a rights is­sue most likely to be un­der con­trol, what does the fu­ture hold for Lon­min?

“I would hope man­age­ment de­lin­eates a long-term – be­yond three years – busi­ness pro­file since most of the re­main­ing eq­uity value in Lon­min would be based on long-term PGM prices, not to­day’s,” com­ments Marc El­liott, an an­a­lyst for In­vestec Se­cu­ri­ties.

Ac­cord­ing to Byrne, Lon­min stands at the cen­tre of a de­bate that runs to the heart of the en­tire SA PGM sec­tor: es­sen­tially, whether the sec­tor is “in­vestible” or if, in fact, some par­tic­i­pants in the sec­tor such as Lon­min, should be al­lowed to fail in or­der to re­vive the for­tunes of the sur­vivors.

“De­spite an­nounc­ing ma­jor cost-cut­ting and ore re­serve har­vest­ing plans, and capex de­fer­rals, we cal­cu­late that with­out in­creases to the ZAR [rand] PGM bas­ket, Lon­min will gen­er­ate $231m of neg­a­tive free cash flow over the next three years in a ‘best-case sce­nario’,” says Byrne. “More re­al­is­ti­cally, we ex­pect the com­pany to con­sume $575m and need to raise fur­ther cap­i­tal in 2018 in or­der to re­main sol­vent.”

It’s a view that has the sup­port of Ester­huizen.

“Un­less the me­tal price picks up a lot from here – and that has to hap­pen within the next three years – Lon­min is back in the hole with a much big­ger prob­lem,” he says. “The rights is­sue only keeps the lights on and man­age­ment paid. There are very clear and deeply neg­a­tive re­turns on this cap­i­tal.”

Lon­min stands at the cen­tre of a de­bate that runs to the heart of the en­tire SA PGM sec­tor: es­sen­tially, whether the sec­tor is “in­vestible”...

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