Lonmin heads for end of its road to ruin
Sibanye expected to complete purchase at the end of this year
The fundamental wrong was that it was controlled from London
● The final nails are expected to be hammered into the coffin of 106-year-old platinum miner Lonmin this year.
The London-listed miner founded by one of the UK’s more colourful businessmen of the 20th century, Tiny Rowland, has spent the past decade battling wars it seemingly couldn’t win, hamstrung by a platinum price that’s still more than 55% off its 2008 high.
Later this year, Neal Froneman’s Sibanye-Stillwater is expected to complete a purchase of the miner that at one time was part of a conglomerate that owned British newspapers and hotels.
While some mark Lonmin’s end with a failed mechanisation plan undertaken by former American CEO Brad Mills in 2004, others point to its London domicile as its biggest mistake.
An industry commentator, who did not want to be named, said: “You can spend lots of years trying to talk about the mining technique, but the fundamental wrong was that it was controlled from London — the bunch of British businessmen who thought they knew better than South Africans.”
He added that because of this, when the company split in 1999 to create Lonrho, to house the mining assets, and Lonrho Africa, which held non-mining assets, it had not developed any good relationships on the ground in South Africa, where its operations were.
Lonrho was renamed Lonmin a year later. Critics say poor communication with the British-based company played a part in the Marikana massacre in 2012.
When Mills became CEO in 2004, industry pundits say he was convinced of higher labour costs in the future and became a huge supporter of mechanisation.
But in 2008 the company ran into operational difficulties due to the narrow and deep ore body. Lonmin reached sterility and could not mechanise further.
“When Mills came in, a lot of senior executives left,” the industry commentator said.
Mills ended up with a half-mechanised and half-conventional mine, which had weakened the company in recent years, he said.
Attempts by Business Times to get hold of Mills, who resigned as CEO in 2008, were unsuccessful.
While the tenure of Mills and its London base have been held up as the biggest impediments to Lonmin, Leon Esterhuizen, a Nedbank analyst, said reversing the mechanisation that had begun under the American CEO had “mortally wounded” the miner.
He said mechanisation should have been kept where it worked, especially given the money spent on it, estimated at R1-billion, with another billion spent to reverse it.
“The board is to blame for handling that decision the way they did, but it’s easy to look back [and criticise].”
During Mills’s four-year term, inspired by the commodity super-cycle, Lonmin’s shares gained 255%. Since his departure, the stock has plunged nearly 100%.
Looking at some top-performing mechanised platinum miners today, such as Northam’s Booysendal mine, Esterhuizen said that’s what Mills idea had been. When the company let go of Mills the new CEO knew that his job was definitely not to further develop mechanisation.
Ian Farmer spent his four-year tenure as CEO between 2008 and 2012 reversing the failed mechanisation.
But by the time it was completed, Lonmin was in financial and operational trouble and another rights issue to raise more capital was needed.
After three rights issues in eight years Lonmin was criticised for raising too little money, and for leaving its fate up to the platinum price, which never fully recovered from its fall.
It was further damaged by the Marikana tragedy that left 34 mineworkers dead in 2012, and a five-month labour strike two years later, under a new management led by CEO Ben Magara.
“You’re stuck with a management team that was too optimistic about the future of the metal price. That was the core reason why everything else after that failed. A rights issue raising a small amount of money once is fine, but if you do it three times, clearly there is a problem,” Esterhuizen said.
With the platinum price at $1 014 an ounce, the company’s share price at R14.53 and with only $447-million liquidity, it’s not surprising that the events last year have led to the point where the shareholders are unlikely to decline Sibanye-Stillwater’s $385million acquisition proposal.
Last year the company came close to breaching its debt covenants and as the market anticipated a fourth rights issue, Magara put some assets up for sale.
On Thursday, Lonmin said its $1.1-million covenant would be breached but the group said it had negotiated a suspension of its debt covenant until February 2019 resulting in the agreement no longer a concern for the group. The covenant will be taken on by Sibanye unless the deal collapses.
To add to its troubles, when Lonmin postponed its 2017 annual results due to an operational review that resulted in not preparing audited full-year results on time, the market smelt a rat.
Rene Carlo Hochreiter, an analyst at Noah Capital Markets, said because Lonmin had renegotiated its debt facilities it was currently in a good place and the annual results would probably reflect that, “otherwise Froneman wouldn’t have put an offer on the table”.
Lonmin will release its long-awaited annual results tomorrow.
Froneman said waiting longer would have been better given their debt, but they needed to act fast.