Under pressure Lonmin resorts to selling future growth assets
Lonmin has its back to the wall financially and is now resorting to selling future growth assets as well as looking for partners at key projects in a strategy designed to bring cash into the company and take strain off its balance sheet, instead of waiting for a more favourable platinum market.
Lonmin — one of the world’s leading sources of platinum group metals (PGMs) — reported a much improved third quarter of its financial year-end to September. It had a difficult first half and came relatively close to breaching a debt covenant.
Lonmin has already cut 6,000 jobs, reducing its workforce to about 32,000 people as it stopped and closed unprofitable old shafts to focus on its newer mines.
On Monday, it released a fresh plan to the market, showing how it would expedite two key projects that would otherwise have been delayed if it waited for improved platinum prices.
"Each of the measures announced … imply that Lonmin can continue to find incremental levers to shore up the cash balance, thus extending the window of optionality in the hope of higher future PGM prices," RMB Morgan Stanley said in a note to investors.
It said there was "a likely downside risk to this number should they not be able to find funding partners for MK2 and K4 projects, in our view".
Among the bold measures is a plan is to sell 500,000oz of spare capacity in its processing plants, including its smelter, base and precious metals refineries.
With CEO Ben Magara’s history as chairman of the Richards Bay Coal Terminal, where the port storage and loading facilities were owned by a number of companies that accessed the infrastructure on a pro rata basis, it is likely this could be the thinking in this strategy.
Mining companies that supply concentrate to the bigger companies that have the financial wherewithal to build the massively complex smelting and refining operations, generally lose about 15% of their contained metal in fees when they use those facilities.
Lonmin is offering these mining companies the opportunity to come in and buy an interest in the processing arm of its business, generating upfront cash that would allow it to fund its two key projects at the partially built K4 mine and the MK2 project at its Rowland mine.
Sibanye Gold, which has mines neighbouring those of Lonmin, could be a likely partner in such a scheme, wanting to control the flow of metal from mine to market.
Lonmin also spoke of bringing in funding partners for its K4 mine, which had achieved about 10% of its nameplate capacity before it was suspended due to funding difficulties. It would also consider funding partners for its MK2 project at Rowland.
Lonmin would consider a cash sale of its mothballed Limpopo mine and its undeveloped Akanani property, which is close to Anglo American Platinum’s enormously profitable open pit Mogalakwena mine.
In an environment in which 65% of SA’s platinum mines are unprofitable, it is questionable whether a funding partner would come from the producers. It could more likely be a user of the metal that wants to secure long-term supply in an industry in which investment in growth projects has slowed to a trickle, if not stopped altogether.
After Lonmin’s share price initially fell on the news on Monday morning, it was 1.2% higher at the close of the JSE.