Lonmin is one impairment away from disaster
KPMG has warned the platinum miner’s future is in jeopardy, as it is close to breaching its debt covenant
Lonmin, the world number three platinum producer, reported a hefty interim loss that reflected a difficult operational performance and a chunky impairment that prompted KPMG to warn of material uncertainty over the company’s future.
Lonmin, which is shutting a number of old mines to focus on a handful of newer shafts, reported a $214m loss for the six months to end-March compared with a $6m loss the year before. It reported a $146m impairment, putting its debt covenants under pressure.
Lonmin warned that another impairment would be detrimental to the company.
“Adverse movements in key assumptions could result in an additional impairment which could impact the company’s compliance with the lending covenants,” it said, prompting the KPMG warning.
The caution from Lonmin indicated “the existence of a material uncertainty which may cast significant doubt on the group’s ability to continue as a going concern”, KPMG said.
The covenants governing Lonmin’s debts demand its tangible net worth does not fall below $1.1bn. At the end of March, the net worth of the group was $1.434bn after the impairment of $146m.
“Should a further impairment in the future result in the tangible net worth falling below $1.1bn, this debt covenant would be breached which could reduce the liquidity of the group,” Lonmin said. “The other debt covenants are well within thresholds and are not considered to be at risk.”
Revenue fell to $486m from $515m, because of lower production stemming from difficulties at its flagship K3 mine, which CEO Ben Magara had been successfully addressed towards the end of the reporting period, safety stoppages ordered by the Department of Mineral Resources and management, as well as shaft closures.
Lonmin maintained its full-year production forecast of between 650,000oz and 680,000oz of refined platinum, based on the late improvements at K3, but it raised its cost forecast
In a candid comment in the results, Lonmin said: “Productivity assumptions planned at time of the 2015 rights issue are proving to be challenging, which has placed upward pressure on our unit costs.
“We have therefore revised our cost guidance for the current year and have adjusted the productivity assumption in our value-in-use calculation used for impairment testing,” it said.
It raised its cost guidance for the full financial year to between R11,300 and R11,800 per platinum group metal ounce, from the original guidance of between R10,800 and R11,300, due the weak mining performance to January 31 2017.
“Although unit cost guidance has increased we remain determined to be at least cash neutral in the current environment,” Magara said.