Future still uncertain for Lonmin as it awaits half-year results that will determine if Sibanye deal survives

● There is no time for rest for the beleaguered Lonmin, which needs to set itself up for a takeover before the bid expires by February next year.

Challenged by a strong rand and weak platinum prices the company’s half-year results tomorrow will have to show that although it might be under pressure, it can weather the storm.

The proposal of the R5-billion acquisition by Sibanye, which came with a condition that the miner should remain cash-neutral, may seem easy for some. But Lonmin has continued to suffer under a share price which has never recovered from its 98% drop five years ago. In the same period the platinum mining index has declined by 74%.

After coming close to defaulting on its debt covenants last year at least the miner was given some breathing space from creditors until next year.

However, the fact that Sibanye has a net debt of of R23-billion compared to its market cap of R20-billion and cannot afford to take up more, doesn’t support Lonmin’s case after Sibanye had added pressure on Lonmin to ensure a cash-neutral balance sheet.

While some analysts have some hope that Lonmin can make it through the year without being cash negative, others are sceptical because Sibanye will also be struggling to make margins against a background of gold price volatility and rand strength, which will continue to squeeze profits from the miner.

Although the deal will be funded with a share option instead of cash, taking on Lonmin’s debt is not an option for Sibanye as it would rather buy pieces of Lonmin instead of the whole business if the deal does not go through.

This would leave Lonmin with no choice but to break up the rest and sell it as single assets to other bidders.

Seten Naidoo, analyst at Capricorn Fund Managers, said everyone will be watching Lonmin’s net cash numbers tomorrow. However, he said, according to his understanding, maintaining cash neutrality was a suggestion and not necessarily a condition for the sale.

He said if the company failed to be cashpositive, Sibanye would probably have to again pass the proposal to shareholders for approval.

“At this basket price they are still struggling. This basket price is not conducive for them to make money,” Naidoo said.

Sibonginkosi Nyanga, analyst at Momentum Securities, said what would also be interesting to watch was how much Lonmin’s rationalisation programme had yielded for the business.

The programme was started by the company last year to group Lonmin’s assets into generation one and generation two shafts.

The generation one shafts are those that could no longer be run profitably and had to be shut down while the generation two shafts are the crown jewels in the mine’s production and profit projections for the future.

These star performing shafts include Rowland, Saffy and K3.

Lonmin closed down and placed some of the generation one shafts on care and maintenance and what remained were three shafts — W1, E1 and Hossy Shaft — which yielded a small amount of profitable ounces of platinum group metals by year end and the first quarter.

However, it will be interesting to see whether these shafts have continued to perform and would therefore not require a shutdown and loss of jobs.

Lonmin had said that as with shaft 4B, the generation one shafts would continue to be reviewed based on its production merits.

Nyanga said Sibanye was the only exit strategy Lonmin was left with so everyone will be carefully watching the company’s cash flow in this period.

At this basket price they are still struggling. This basket price is not conducive for them to make money Seten Naidoo Capricorn Fund Managers analyst