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
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”...