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.
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.