Long road ahead for Lon­min, de­spite progress Although the miner seems to be re­cov­er­ing, there is still a dan­ger that it will slide back into bailout ter­ri­tory.

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

sharesin Lon­min – up about 141% this year – have a long way to go be­fore they’ve clawed back the dra­matic losses suf­fered be­tween 2014 and 2015, but the firm’s in­terim re­sults are cer­tainly a step in the right di­rec­tion.

The com­pany was cash-flow pos­i­tive af­ter cap­i­tal ex­pen­di­ture in the sec­ond quar­ter of this year (the sec­ond half of its in­terim) and posted earn­ings be­fore in­ter­est, tax­a­tion, de­pre­ci­a­tion and amor­ti­sa­tion (ebitda) of $36m against a neg­a­tive ebitda of $6m in the pre­vi­ous in­terim pe­riod. It is also meet­ing the cost-sav­ing tar­gets it promised last year.

But an­a­lysts think this is the bare min­i­mum. When Lon­min was budgeting for this year, it did so un­der the heav­ily con­strained con­di­tions of try­ing to raise $400m in a widely crit­i­cised rights is­sue, its third in re­cent years.

In­vestors who were keep­ing tabs on the mat­ter will re­mem­ber just how Lon­min’s very ex­is­tence was in doubt. With­out the rights is­sue, there was no chance of Lon­min be­ing able to resched­ule debt due in 2016 of $370m to 2020.

As it turned out, the rights is­sue – grudg­ingly, one sus­pects – passed muster at the share­hold­ers’ meet­ing, and was then 30% un­der­sub­scribed. This meant that the Pub­lic In­vest­ment Cor­po­ra­tion (PIC) was re­quired to hon­our an un­der­writ­ing guar­an­tee, which took its stake in Lon­min to 29.99%.

In­vestors will also re­call the so­cial dilemma at play in lend­ing more money to a com­pany that, were it not for the 30 000 jobs at stake, and quite vis­ceral dis­con­tent that would have been stirred at the scene of the Marikana atroc­ity, would have been head­ing for liq­ui­da­tion.

All that is his­tory. Time will tell whether Lon­min can suc­ceed and avoid an­other share­holder bailout. So far, it’s look­ing good, but an­a­lysts say the much-crit­i­cised busi­ness plan still has weak­nesses.

“We re­main con­cerned that Lon­min is caught in a vi­cious cy­cle of cap­i­tal un­der­in­vest­ment and pro­duc­tion cuts,” said Christo­pher Ni­chol­son, an an­a­lyst for RMB Mor­gan Stan­ley.

He con­tends that the cap­i­tal ex­pen­di­ture bud­get for the 2016 and 2017 fi­nan­cial years is about $70m un­der the level re­quired in or­der to sus­tain pro­duc­tion. Lon­min ac­tu­ally re­duced its capex guid­ance for 2016 to $105m from $132m.

In ad­di­tion, short-term cost per ounce re­duc­tions were “flat­tered” by pro­duc­tion har­vested from New­man and Hossy, two shafts said would be shut.

Safety stop­pages fol­low­ing two fa­tal­i­ties in the cur­rent (third) quar­ter and fur­ther de­lays to re­place­ment vol­umes pose ad­di­tional down­side risks in the sec­ond half of Lon­min’s fi­nan­cial year, which ends 30 Septem­ber, said Ni­chol­son.

The fate of plat­inum group metal (PGM) prices is an­other fac­tor over-arch­ing the share. Most an­a­lysts think the cur­rent plat­inum price can’t be sus­tained in the medium term, although the re­cent rand weak­ness against the dol­lar is help­ful to the over­all bas­ket.

RMB Mor­gan Stan­ley said Lon­min’s share price was pric­ing in a plat­inum price of be­tween $1 200 to $1 300 per ounce as­sum­ing an ex­change rate of R15.50 against the dol­lar. Plat­inum was trad­ing at $1 041/ oz at the time of writ­ing.

Based on its fore­casts for PGM prices, Gold­man Sachs thinks Lon­min will be­come a cash burner again, and may re­quire fur­ther fund­ing in the fu­ture.

“The key is­sue for the com­pany re­mains that it con­tin­ues to burn cash – on Gse (Gold­man Sachs es­ti­mates and spot PGM/R es­ti­mates) some­thing about which it can do lit­tle given that it re­quires an­other sig­nif­i­cant cap­i­tal ex­pen­di­ture and/or cost re­duc­tion,” Gold­man Sachs said.

“As such we be­lieve that the com­pany will be forced to raise funds over the medium term,” it added. Quite how the PIC and other share­hold­ers will take to such a turnout will make for in­ter­est­ing read­ing.

Gold­man Sachs thinks Lon­min will be­come a cash burner again, and may re­quire fur­ther fund­ing in the fu­ture.

Ben Ma­gara CEO of Lon­min The Marikana plat­inum mine, op­er­ated by Lon­min, in Marikana.

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