HEAVY METAL WOES
Sector stymied for years by low prices and oversupply
Lonmin CEO Ben Magara discusses his tenure over the past five years.
● Some analysts say that when Ben Magara accepted the position to lead Lonmin in 2013, they thought he was brave and wished him luck as he had taken on a job that was close to impossible.
In 2013 the platinum price was $1 374.50 an ounce and Lonmin had completed two rights issues to raise capital. The first fundraising, in 2009, was to rectify a failed mechanisation project; the second, in 2012, was because of increased pressure the Marikana tragedy brought to the low platinum prices.
Little did Magara know that the next five years were going to bring added pressure to the business.
What he did know was that there was instability in the sector and it was clear that one of his mandates was to build a relationship with employees and restore stability. But six months after he joined Lonmin, a five-month strike in the platinum sector began, in January 2014.
Then, in 2015, commodity prices crashed due to a sharp drop in demand from China. Inevitably, another rights issue was needed.
In an interview with Business Times this week, Magara said the decision on a rights issue after the strike was the right one because no one had thought the strike would last that long — it had never happened before in South Africa. Asked whether he could have proceeded with the right issue sooner and if this would it have changed the outlook for the business, Magara said time had not been wasted because Lonmin could see that the numbers were not adding up to sustain the business.
“We couldn’t have done it any earlier or later — accepting that Lonmin had done it in 2009, in 2012 and now it was 2015.”
He said the whole industry kept saying that in the next two years the price would recover. But a decade later, the platinum price has dropped by 58.3% from its $2 250.50 peak in 2008.
“I don’t think we bargained for this lower-for-longer price regime,” Magara said.
At the company’s interim results presentations on Monday, Magara said that this platinum price cycle had been the longest in his 30-year career in mining.
Peter Major, an analyst at Cadiz Corporate Solutions, said platinum miners relied heavily on the platinum price to make operations viable because they had been stripped and all they had left to do was to hope and pray. They had no chance of negotiating better deals with stakeholders such as labour or Eskom because they had no cards to negotiate with, he said.
Therefore, in the past few years the restructuring and the downsizing of the workforce and assets were the only way companies could respond to the low platinum price. The platinum sector has shed about 30 000 jobs in the past decade.
Magara said he was repositioning Lonmin into an organisation that would be ready for a takeoff when the platinum price turned, but the whole industry was still waiting for that takeoff.
A weak platinum price — it is currently at $887.91 an ounce — and an oversupplied industry were two of the reasons why 60% of the industry was under water.
Magara, who has been emphasising consolidation of the industry since last year, when the company was reviewing some of its assets, said he sees more consolidation happening in the sector. The market was still oversupplied and the industry was fragmented and did not have any discipline with regards to cutting supply further.
Major concurred that platinum miners were underperforming because they were still producing too much. “There are 100 million ounces of gold produced a year. We don’t even produce six million ounces of platinum and the market is flooded.”
In Lonmin’s case, uncontrollable factors such as the platinum price, the Marikana tragedy and the five-month strike added to intense pressure on a company that was in a tight spot already.
“Lonmin [is] a one-trick pony, in one location, Marikana, and in one product, platinum,” Magara said. “It was not sustainable, especially when you go through these challenges.”
He said that in the operational review of assets done last year, of all the credible candidates for partnership, Sibanye-Stillwater was the best strategic fit.
In December, Sibanye made an offer to buy Lonmin for R5-billion, but this could be contingent on Lonmin maintaining a positive cash flow. The deal is expected to be closed by year-end.
Sibanye needs Lonmin’s downstream processing capability and with the two companies’ mines bordering each other, the deal could save the jobs of 20 000 of Lonmin’s 33 000 workers.
However, after Lonmin released its interim results on Monday, some analysts were advising Sibanye not to go through with the deal in the present circumstances. Lonmin’s liquidity is under a lot of pressure. The company reported net cash of $17-million (about R215-million) for the six months to end March, with $47-million to be realised in the second half of the year because a smelter that was put in care and maintenance was now operational again.
The business made an operating loss of $32-million compared to a $181-million loss the previous year.
Izak van Niekerk, an analyst at Mergence Investment Managers, said if Lonmin’s cash dropped below zero then Sibanye could pull out of the deal, which is still subject to Sibanye shareholder approval, as well as the go-ahead from competition authorities in the UK and South Africa.
“At the moment, our view is shareholders should rather not vote for the deal,” Van Niekerk said, adding that a no vote from shareholders would leave Sibanye with the option to buy Lonmin’s refinery operations, and if that happened Lonmin would have funds enabling it to avoid breaching its debt covenants.
He said that at current platinum-group metal prices it would probably be better for Sibanye not to do the deal and rather to acquire select assets such as the refinery.
Lonmin [is] a one-trick pony, in one location, Marikana, and in one product, platinum
Ben Magara Lonmin CEO