Market wants Lonmin out
Despite its recent rights offer, no one aside from government is particularly interested in keeping Lonmin in the market. The embattled miner is producing loss-making ounces the sector doesn’t need.
there’s no doubt that government’s support of Lonmin’s rights offer was heavily motivated by the dire social and political consequences of putting some 35 000 jobs at risk were the platinum miner to enter business rescue proceedings.
Lonmin’s premises in the North West province are, after all, the site of the Marikana atrocity. Idling a portion of the community will be match to tinder, not to mention the additional 200 000 lives Lonmin CEO, Ben Magara, believes will be affected were his company to cease operations.
The platinum market, however, has taken a negative view of government intervention and Lonmin’s self-help measures, as evidenced by liquidations in platinum and palladium exchange-traded funds (ETFs) of some 397 000 ounces and 572 000 ounces respectively between 9 November – the day of Lonmin’s rights offer announcement – and 12 November. (Shareholders were set to vote on the rights issue on 19 November, after finweek went to print.) These sales of securities, which represent actual metal holdings, are equal to 14% and 18% of total ETF holdings in each metal.
It’s also worth remembering that investors flocked to ETFs because it was a way of tapping into the long-term fundamentals of the platinum group metal (PGM) market while avoiding the short-term fortunes of the companies mining them.
“We believe many holders of the metal had expected a rational market reaction where the uneconomic ounces of Lonmin would be forcibly removed from the market through bankruptcy or market pressures,” Andrew Byrne, an analyst for Barclays Capital, wrote in a 12 November report.
“We suspect the potential that this may not happen due to either shareholder support or government intervention (either directly or indirectly) has led many investors to conclude that the risk/reward of owning PGM ETFs is negatively skewed and force acted as a catalyst to sell,” he said.
Byrne’s point is that keeping Lonmin platinum production in the market is harming the rest of the PGM sector and, perversely, Lonmin itself. Something has to give, he argued.
“On spot prices, we forecast Lonmin to generate $331m [R4.7bn] in negative free cash flow through to 2018 if they hit all of their cost targets as per their guidance.
“Ultimately, this is the crux of the matter – Lonmin and Western limb peers are producing loss-making ounces that the world does not need and is compounding an oversupply position. This is coming at the expense of shareholder value.” Said Gerard Engelbrecht, an analyst for Macquarie Research: “If metal prices do not improve in the immediate future, the value is significantly compromised and investors will not realise value from holding the shares and participating in the rights issue.”
Investec Securities analysts said in a note to its clients: “We note that since the news of Lonmin’s rights issue and its underwriting, support for the metal complex has deteriorated rapidly, exacerbated by the broader negative news flow in the commodity space.”
“On spot prices, we forecast Lonmin to generate $331M [R4.7bn] in negative free cash flow through to 2018 if they hit all of their cost targets as per their guidance.” The platinum market has taken a negative view of government intervention and Lonmin’s selfhelp measures.