Is Lon­min re­ally turn­ing the cor­ner?

The em­bat­tled miner’s CEO, Ben Ma­gara, thinks bet­ter days may lie ahead for the plat­inum pro­ducer, but an­a­lysts re­main con­cerned about cash flow.

Finweek English Edition - - THE WEEK - By David McKay edi­to­rial@fin­

CEO of Lon­min

an­a­lysts re­mained as scep­ti­cal of Lon­min as ever judg­ing by their com­ments fol­low­ing the plat­inum pro­ducer’s half-year fig­ures ear­lier in May in which cash in hand fell to $75m from $114m in the six months of the prior year. There’s even spec­u­la­tion about town that Sibanye Gold will swoop in for the com­pany when the cash runs out and Lon­min asks the mar­ket for more funds. Lon­min re­quired a $407m re­cap­i­tal­i­sa­tion by means of a rights is­sue at the end of 2015.

It said ear­lier in May it still had a net worth some $340m above the $1.4bn re­quired as a key debt covenant with len­ders, but a ma­jor hic­cough ei­ther to pro­duc­tion or plat­inum group metal (PGM) prices could make for share­holder dis­com­fort. It’s worth re­mark­ing that gov­ern­ment pen­sions are ex­posed to Lon­min: the Pub­lic In­vest­ment Cor­po­ra­tion (PIC) is one of Lon­min’s largest in­vestors.

Lon­min CEO Ben Ma­gara, how­ever, is keep­ing his chin up. There was enough ev­i­dence in March – when the com­pany was at [cash] break-even – to suggest that bet­ter days lie ahead, Ma­gara told fin­week. “It gives us con­fi­dence that if we all pull to­gether, we can at least be cash neu­tral. And we’ve seen an im­prove­ment in the pal­la­dium price, while the lows in plat­inum could be the mar­ket bot­tom­ing, al­though I’d never jump to con­clu­sions about that,” he said.

“Rhodium has been rea­son­able for us and we ben­e­fit from the higher chrome price, so we think we can achieve [cash] break-even at least,” he said. Asked if April and May were sim­i­larly break-even, Ma­gara was elu­sive. “It is your in­fer­ence, but it may not be a bad one,” he said.

“I think it should also be high­lighted that our cash of $75m is bet­ter than the net cash of $69m as of the close of the rights is­sue [in late 2015], whilst our ac­cess to liq­uid­ity is now at $447m com­pared to $422m post the rights is­sue,” he said. “So Lon­min is slightly bet­ter off than two years ago and we have de­ferred $1.6bn in cap­i­tal ex­pen­di­ture and have our bulk tail­ings project com­ing through in 2018, which will pro­duce our cheapest ounces of plat­inum.” An­a­lysts, though, con­tinue to worry. “Post Lon­min’s [first half] re­sults, we con­tinue to be­lieve that it re­mains the global mar­ginal cost pro­ducer of plat­inum,” said Gold­man Sachs in a re­port. “As such, with­out the mar­ket for PGMs mov­ing into deficit, we ex­pect that Lon­min will con­tinue to burn cash.

“The re­cur­ring is­sue is any ac­tions by Lon­min to lower its unit cost will act to lower the price un­less it can move the Marikana com­plex to a lower unit cost than Im­pala’s Rusten­burg lease area,” it said.

As a mat­ter of fact, Lon­min’s costs are in­creas­ing to be­tween R11 300 and R11 800 per ounce com­pared to the orig­i­nal es­ti­mate for the year of R10 800 to R11 300/oz. This is the con­se­quence of lower-than-es­ti­mated pro­duc­tion in the first six months of the year.

Ma­gara has kept pro­duc­tion guid­ance un­changed at be­tween 650 000oz to 680 000oz, but the group is fac­ing con­tin­u­ing dis­rup­tion at two of its shafts, which have been af­fected by protest ac­tion by mem­bers of the Bapo ba Mo­gale com­mu­nity.

The protests are re­lated to de­mands for jobs and are al­most cer­tainly in­flu­enced by Lon­min’s re­struc­tur­ing last year in which some 6 000 jobs were af­fected – about 15% of its work­force. If ever the im­por­tance of a suc­cess­ful Lon­min to main­tain­ing so­cial co­he­sion in Rusten­burg were demon­strated, this would be it. The com­pany still em­ploys some 25 000 peo­ple in the area, so the stakes for SA Inc. are high.

Asked if there was any risk of the Bapo ba Mo­gale protests spread­ing into some­thing more seis­mic, Ma­gara said it was un­likely, al­though he’s watch­ful. “It is not a sin­gle, ho­moge­nous com­mu­nity [that lives near the mine] and we think this is an iso­lated event,” he stated.

None­the­less, Lon­min is los­ing pro­duc­tion. At last reck­on­ing, some R50m in rev­enue had been lost as a re­sult of the E2 and E3 shafts be­ing dis­rupted by protests, some of them vi­o­lent, and in­volv­ing em­ployee in­tim­i­da­tion. “Those two shafts – E2 and E3 – com­prise only about 3% of our to­tal pro­duc­tion, but any pro­duc­tion is help­ful. Even 1% of pro­duc­tion mat­ters right now,” said Ma­gara.

Ben Ma­gara

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