D-day looms this week for struggling Lonmin

THE company founded in 1909 as the London and Rhodesian Mining and Land Company and renamed Lonmin 90 years later released its annual results and final details of its $407-million (about R5.8-billion) rights issue this week.

It was a reminder of just how damaging the recent drop in commodity prices has been for mining companies, especially this platinum group metals producer.

For some context, consider that in 2008, shareholder Xstrata valued Lonmin at $10-billion when it made an offer to buy out all other shareholders.

Today, Lonmin is worth just under $90-million — less than 1% of its value seven years ago.

Further, consider that the $407-million rights issue is the third equity raising in six years.

There was a $457-million issue in 2009, at a 44% discount, followed by a refinancing package of $575-million that would push the maturity of the debt facilities by another three years to 2012.

Then came Marikana in August 2012. Three months later, another rights issue was announced, for $817-million at a 45% discount, also to try to stave off a breach of covenants and maturing debt. Speaking about the 2012 rights issue, the then chairman, Roger Phillimore, said: “This was designed . . . to help our shareholders maximise returns from the company’s excellent assets and position in the market, when it improves.”

Unfortunately, the market has not improved since 2012.

This year’s third instalment comes at a 94% discount. Can 94% even be called a discount?

The company says the funds will be used to “withstand a continuation of the weak PGM [platinum group metals] pricing environment, and as additional working capital, allowing the company to meet its obligations and commitments as they fall due”.

In plain language: “Dear shareholders. Our selling price has halved, we’ve cut the fat from costs and the wolves are at the door. Please help.”

Over and above the rights issue, the company has also dodged the bullet of maturing debt facilities of some $307-billion.

However, that refinancing package depended on a successful rights issue. The rights issue itself is now fully underwritten, albeit at a heavy cost of some $38-million in fees, according to reports.

So the suggestion that Lonmin could have shut down had it failed to raise capital is not far from the truth.

Without the capital, it would have failed to refinance the debt, hence failed to honour its commitments when they become due.

That also explains the heavy discount.

I speak to expert equity analysts and asset managers every day. For the past two weeks, I have been posing the question: “Are you following your rights on Lonmin?”

Not one has said “yes”. One even lamented: “I am not in the business of keeping Lonmin’s mines open, in the outside hope that it doesn’t run out of money before the platinum price recovers.”

However, the company has managed to get major banks to underwrite the offer. The Public Investment Corporation, which holds about 7% of the stock, has also followed its rights and even offered to sub-underwrite a “material portion” beyond its entitlement. Why? Fees and discount. By anybody’s measure, a $38-million payday is a good payday — notwithstanding the risk taken by an underwriter of a share issue.

The other reality, of course, is that by their very nature, rights offers, especially at such huge discounts, are dilutionary.

So every shareholder is faced with a tough choice at the general shareholders meeting on Thursday.

Follow your rights, inject cash into Lonmin, take advantage of the discount, keep your relative shareholding at the levels you desire and place yourself in a good position when (and if) the market recovers.

Or don’t follow your rights, but you end up owning much less than you currently do in relative terms, and you will surely miss the opportunity to cash in when the good times come back (if they do).

So over to you, Mr and Ms Shareholder. Thursday is decision day as you vote for the rights issue — and, essentially, the future of Lonmin. Good luck.

Khumalo is the chief investment officer of MSG Afrika and MD of Power 98.7. He presents “Power Business” on Power 98.7 at 5pm, Monday to Thursday