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.

Finweek English Edition - - NEWS - ed­i­to­rial@fin­week.co.za By David McKay

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.

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