Lonmin's warning on key debt covenant hits shares
The warning prompts KPMG to flag a 'material uncertainty' over the platinum miner's 'ability to continue as a going concern'
Lonmin’s share price plummeted nearly 12% to close at R17.91 after it warned on Monday of a narrow margin it had left to avoid breaching one of its key debt covenants.
The world’s third-largest platinum miner incurred a $146m impairment in a difficult first half of its financial year.
The warning on its tangible net-value covenant prompted KPMG to flag a "material uncertainty" over Lonmin’s "ability to continue as a going concern" if it recorded another sizable impairment.
The covenants governing Lonmin’s debt 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 $146m impairment.
"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.
Analysts flagged the potential breach of the covenant as a concern, as well as the losses incurred in the first half of the year in which refined platinum sales fell 15% to 307,000oz because of production setbacks at its main K3 mine and phasing out of production from old, high-cost shafts.
"In our view, the most pressing balance-sheet risk is presented by Lonmin’s debt covenant for tangible net worth to be more than $1.1bn.… A 5% reduction in future PGM prices versus management’s assumptions would impact carrying values by $407m," JP Morgan Cazenove analysts said in a note on Monday.
Lonmin, which is in the process of shutting a number of old mines to focus on a handful of newer shafts, reported a $214m loss for the six months to March compared with a $6m loss the year before, while revenue fell $29m to $486m.
CEO Ben Magara and chief financial officer Barrie van der Merwe both played down the risk to its debt covenants, pointing to the vastly improved operating performance at its flagship K3 mine in recent months after wholesale management changes, improved union relations and better cash flows at spot prices.
"If we get more impairments then we will get closer to that covenant. If we get to a position where a breach would occur … it would be quite a technical thing that the bankers and accountants work through," Van der Merwe said.
"We are working closely and on a proactive basis. We’ve been sharing our production reports and cash forecasts on a monthly basis with them. As we stand we are pretty much at a breakeven position.… Overall, the business is in reasonable shape."
Lonmin said it had lowered its capital expenditure for the full year by about R300m to about R1.5bn from an earlier R1.8bn target.
"We believe that it is only a matter of time before these capex cutbacks will start to hamper production and given the precarious balance sheet position [in particular with regard to the debt covenants] lower output will likely put even more pressure on staying cash neutral," said Nedbank analysts Arnold van Graan and Leon Esterhuizen.