Significant challenges lie ahead for new Lonmin CEO

Platinum producer faces higher wages, electricity costs and employee upliftment commitments, writes Paul Burkhardt

BEN Magara will lead Lonmin in an effort to restore output at the world’s third-largest platinum producer and repair its reputation following a six-week strike at the company’s main mine led to at least 44 deaths.

He may be forced to close shafts and cut staff. Mr Magara, whose appointment was announced on Tuesday, takes the helm on July 1 as Lonmin grapples with higher wages, inflationbusting power costs and social spending commitments.

Platinum producers in SA are taking steps to boost earnings after pay strikes last year cut output and raised costs. At stake for Lonmin is its recovery from a $698m annual loss, which led it to cut expansion plans and renegotiate debts as stagnating prices capped profit from the Marikana mine, which accounts for 96% of Lonmin’s output.

“Even with a new CEO in place, the challenges are significant,” Liberum Capital analyst Ben Davis said. “Coupled with Lonmin’s lack of operational diversification — one major asset at Marikana — Lonmin is most likely to underperform in the coming months.”

Mr Magara is currently head of engineering and capital projects at Anglo American Platinum (Amplats). Amplats has proposed to cut 400,000oz of annual production, or 7% of global volumes, to help return to profitability. That may lead to 14,000 job cuts.

The walkout in August last year at Marikana, 170km northwest of Johannesburg, resulted in the loss of about 110,000oz, of platinum production. As tensions rose, police killed 34 protesters in one day in the worst mine violence since apartheid ended. The same day, then-CEO Ian Farmer was admitted to hospital with an illness. Mr Farmer quit in December last year.

Lonmin, which in February said it would cut about 150 management positions, could shut its Westerns 1 and Easterns 1 assets, or put its Hossy and Saffy shafts on hold, Mr Davis said.

“I’m on the no-hope side of things,” he said. Lonmin may prefer to focus on reducing overhead costs as it lacks Amplats’ size to cut output without it being “keenly felt”, he said.

In December, the company raised $792m selling stock to existing shareholders, using the proceeds to meet pledges to creditors as it resumed operations. Its share price has plunged 48% in 12 months, while the price of the metal has dropped 4.6%.

In an effort to reduce labour conflicts, Lonmin is working to improve housing, employee relations and black-ownership structures. The number of peo- ple living in unheated hostel blocks, built almost 30 years ago, has dropped by about 80% to less than 3,000 as workers use their living allowance to stay offsite, said Lonmin’s executive vicepresident of processing and sus- tainability, Natascha Viljoen.

Lonmin expects to produce 660,000oz of platinum in the year through September and spend about $175m, the miner said in January.

“The company is doing the right things but we believe the stock is trading at a level reflecting a more dramatic increase in production than the company is guiding to,” Sachs Group Incorporated analyst Eugene King said in March. He kept a “sell” rating, and estimated the stock at 280p in a year.

Mr Magara will replace Simon Scott, who became acting CEO during the August violence at Marikana, which was broadcast around the world.

“It was very traumatic, obviously, what you saw on television,” said Mark Munroe, executive vice-president of mining. “Since then we have to look at ourselves, where we’re going, who we are, and what we stand for,” he said.

“They still know how to run leaner and meaner,” according to Cadiz Corporate Solutions head of mining Peter Major, who said the miner’s community spending is adequate. “Lonmin has a history of being the most effective platinum producer,” he said in an interview last month.

Lonmin, which has 27,800 full-time employees and several thousand contractors, ranks ninth among miners in SA in community spending as a proportion of revenue, according to data compiled by Bloomberg. It spent the equivalent of 0.3% of revenue on upliftment projects according to its most recent annual report, matching the industry average.

The company said in January that financial first-quarter platinum sales rose 17% from a year earlier to 108,342oz after production ramped up following the labour unrest.

Total platinum group metal sales were down 3.7%.

Lonmin “is concentrating on quality, not quantity”, said Standard Bank securities unit analyst Justin Froneman, who recommends buying the stock.

“If they can maintain their current forecast and keep up current run rate, there’s a chance that they may go ahead of that forecast,” he said. Bloomberg