Hard work needs to be done at Lonmin
Lonmin is addressing the reasons for its disappointing first-quarter performance, which has spooked the market
Lonmin CEO Ben Magara has taken direct operational control to turn around the group’s alarming first-quarter production performance after the resignation of respected COO Ben Moolman on March 6.
The group’s shares fell 24% to about R13.60 in the five days after Moolman’s departure and have almost halved in the month since the first-quarter report.
Apart from the influence of a weaker platinum price, the market appeared to fear that Moolman had encountered intractable problems in turning production around.
The biggest contributor to lower December production was poor labour relations at the K3 shaft, which accounts for about a quarter of total group output.
Investec’s mining team says in a note that Moolman’s resignation will increase negative sentiment towards Lonmin and unless it is able to improve productivity it will find itself in financial and operational difficulties.
Leon Esterhuizen, precious metals analyst at Nedbank Corporate & Investment Banking (CIB), says that Lonmin’s first-quarter report shows that costs are rising and the company is burning cash. Moolman’s resignation appears to imply that production and costs are not going to meet targets.
Magara says there is no hidden bad news. Moolman’s departure was for personal reasons and he will not be replaced.
In the past few weeks Magara has engaged majority union Amcu and its leader, Joseph Mathunjwa, with the department of mineral resources, to help address the issues at K3. Magara says there are already signs of positive momentum, though more work needs to be done.
The production report for the December quarter shows production from Lonmin’s “generation two” shafts, which are its most modern, fell 5.2% compared with last year. Attendance at K3 shaft in December hit a low of 80%.
The group cut 5,433 employee and contractor jobs in its most recent financial year and redeployed 1,428. Some analysts argue it remains overstaffed, but say more retrenchments would be unacceptable to its biggest shareholder, the Public Investment Corp (PIC), which holds about 30%.
Magara says Lonmin is not overstaffed if compared with similar stand-alone mining and processing operations.
In the first quarter Lonmin’s net cash outflow was US$124m, though this was partly because of seasonal events. It raised $372m in a rights issue in December 2015, which enabled it to repay current borrowings. At the end of last year it held net cash of $49m and had total liquidity of $414m, including untapped debt facilities. It said it was looking at ways to conserve cash, including reviewing its capex plans.
Esterhuizen says management needs to persuade shareholders to support the company with a substantial injection of capital that will enable it to build the K4 shaft. If shareholders do not support it, another party, most likely Sibanye Gold, is likely to step in and make a modest offer for the shares.
Magara says another rights issue is not on the table. “We would hate to ask our shareholders to fund our customers,” he says. “Platinum group metal prices are not turning around because the industry is not cutting supply. Lonmin has cut 150,000oz of production and it has had to retrench 6,000 people.”
Yet Nedbank CIB still sees Lonmin’s shares as a “buy”. Esterhuizen says there are several reasons for this. The team has a positive outlook on platinum group metals and at its current share price Lonmin is the most highly leveraged to a price recovery in the metals. Though Lonmin is on a knife edge, it is unlikely that government will allow it to collapse.
The PIC’s purchase of additional shares in the rights issue was at R21/share (the stake the PIC held before the rights issue was at considerably higher levels), so at the current Lonmin share price level of about R13/share, the PIC will be holding out for a “white knight” bid.
Any group considering a bid for Lonmin — whose share price is trading well below the value of its smelters and refinery — would not be able to obtain the support of the PIC unless the bid gets much closer to the price the PIC paid, which could present a high-risk opportunity in Lonmin at present, Esterhuizen says.
Last week Momentum SP Reid Securities said technical chart readings suggest platinum, which had broken below 200-day and 20-day moving averages, is likely to move lower in the short term, possibly to $960/oz and then $940/oz.
Heraeus Precious Metals says the main reason for the immediate price drop is rising expectation of a US interest rate hike, which has pushed the dollar higher, though underlying automotive and jewellery demand is firm.