Can the PIC say no to Lonmin?
For all the talk of the state wanting to take over mines, it might find itself saddled with a struggling operation
If the state does ever opt to own South Africa’s mines, it may have to start with Lonmin. It’s already the largest shareholder in the embattled platinum producer through a 30% stake held by the Public Investment Corporation (PIC).
With speculation rife that Lonmin may have no choice but to undertake another rights issue to raise money, investment analysts have not ruled out the possibility that the PIC could be called upon to rescue the company again.
Lonmin’s 2015 bid to raise cash, underwritten by the PIC, was undersubscribed, which saw the PIC taking up the unsold shares.
Under company law, if an entity acquires a number of shares in a JSE-listed firm that pushes it over a threshold of 35%, that person or company has to make an offer to buy out the remaining shareholders.
The 2015 rights issue has tided Lonmin over while it restructured extensively and cut jobs to keep afloat during a downturn in commodity prices.
In January, a disappointing production update revealed that Lonmin is burning through the cash as the cost to mine platinum continues to outstrip the metal’s price. Productivity declines have been compounded by high levels of worker absenteeism.
To add to its woes, violent protests by community members demanding jobs brought some of its operations to a halt this week, resulting in a R40-million loss in output, Bloomberg reported.
Lonmin declined to respond to questions because it is releasing its interim results on Monday.
These issues come at a time when the government and the ruling party are pushing for radical economic transformation and amid renewed demands to nationalise the country’s mines, most notably by Chris Malikane, Finance Minister Malusi Gigaba’s new adviser.
“Their [Lonmin’s] previous rights issue just gave them time,” said Wayne McCurrie, a senior portfolio manager of Ashburton Investments.
Unless the platinum price rises to between $1 100 and $1 200 an ounce, “it is just a question of time before they need another rights issue”, he said.
By Wednesday this week, the platinum price was hovering at just over $905 an ounce; the rand price was at about R12 225.
This is just shy of the R12 296 unit production cost that Lonmin spent to mine platinum group metals (PGM) in the first quarter. But it is well above Lonmin’s goal of achieving costs of between R10800 and R11 300 a PGM ounce for this year.
At these prices, all local platinum producers are losing money, it is just a question of how much, McCurrie said.
Lonmin has to mine deeper than the other mines for lower grades of platinum and it is the most marginal of the platinum mining companies, he added.
Lonmin employs more than 25 000 permanent workers and almost 7 500 contractors.
Given the history of the area and the 2012 Marikana tragedy, it is unlikely that the PIC and the government will let Lonmin fold because of the potential political fallout, McCurrie said.
If other shareholders balk at another rights offer, the PIC would probably underwrite it and could become the majority shareholder — resulting in a state-owned mining company running at a loss, he said.
Duma Gqubule, the founder of the Centre for Economic Development and Transformation, said the PIC might not want outright ownership of Lonmin but it might well end up with it. To protect jobs, the PIC “would likely have to dip into their pockets” until the platinum price recovered, he said.
If Lonmin is in trouble, it is only a matter of time before the other platinum producers are in trouble, and the government should be thinking about ways to protect a strategic industry, he said. other mines operate in cannot be ignored. Besides risks to the demand for commodities such as questions about China’s growth, local mines face a host of local problems, including regulatory uncertainty because of delays in finalising the Mining Charter and proposed amendments to the Minerals and Petroleum Resources Development Act.
This is exacerbated by tensions between the industry and the department of mineral resources over the disproportionate enforcement of regulations, for example, the implementation of mine stoppages under section 54 of the Mine Health and Safety Act. Stoppages are estimated to have cost the industry R4.5-billion in 2015.
Last year, companies such as AngloGold challenged the department in court over the inappropriate use of section 54 stoppages and won.
Lonmin’s majority union, the Association of Mineworkers and Construction Union, has also raised concerns about the broader political climate affecting the company.
The union held a meeting with members in February at which productivity and absenteeism were addressed, said Amcu treasurer Jimmy Gama. He believes these have improved.
A major challenge is “instability in terms of how the government runs the administration”, Gama said. “When investors have no certainty over how the country runs, it has the potential to affect our resources as well.”
The recent Cabinet reshuffle, and the appointment of a new finance minister in particular, whose ability to run the department is unknown, affects the economy and the currency, which has serious implications for commodities, he said.
Despite concerns, Lonmin’s worth is viewed as greatly undervalued. Nedbank Corporate Investment Banking, in a research note released in February, said Lonmin has “within its assets and its people the ability to change the story — from survival to a real investable future. Do another equity issue, do it now and do it with conviction,” it added in the note.
The company’s smelting and refinery assets were worth more than its market cap at the time but additional money “could turn the base into a story of low-cost production that can expand, even in bad times”.
Concerns over Lonmin’s liquidity may be overplayed, according to recent research note by UBS. It estimates the company has sufficient cash for the next 36 months, unless the platinum price drops further or its lenders withdraw their facilities.
The PIC said it hasn’t been approached to participate in another rights issue and doesn’t want to speculate about what its reaction would be if it was asked. It emphasised that its investment decisions are guided by its client investment mandates and are done for their benefit.