Platinum miner Lonmin’s interim results on Monday will be among its most closely scrutinised as the market looks at its cash generation (if any), spending, debt levels and restructuring efforts, all of which will feed into a decision from Sibanye-Stillwater shareholders whether to proceed with a R5bn all-share bid for the company.
Analysts have mixed views about the likelihood of the success of the deal announced last December and which would essentially solve Lonmin’s problems at a stroke and make Sibanye one of the world’s top three platinum group metal suppliers. There is a long way to go before that happens, however.
Sibanye CEO Neal Froneman didn’t mince words at the company’s annual results presentation in February this year, warning Lonmin’s executives to not let the platinum miner slip into a "black hole" and to be cash positive by the time shareholders have to vote on the deal, because Sibanye’s shareholders could not be expected to take on more debt.
"We are downgrading Lonmin to a ‘sell’ due to the increasing risk that the merger with Sibanye falls apart and the subsequent difficulties it would face in securing a refinancing of its debt," said Liberum analysts Ben Davis and Richard Knights.
"At the current rate of cash burn, Lonmin will be pushed into net debt before the year end, scuppering the proposed merger before it has a chance to complete," they said.
The market appears to be factoring in bad news, with Lonmin’s shares down 43% so far this year and 60% down in the past 12 months, giving the world’s third-largest platinum miner a market capitalisation of just R2.3bn.
Sibanye’s shares, which are driven by different concerns, primarily the enormous debt on its balance sheet incurred in the $2.2bn cash purchase of US-based palladium and platinum miner Stillwater Mining, has fallen 42% so far this year.
"As to whether the acquisition by Sibanye goes ahead, we will have to see just how bad these second-quarter numbers prove to be. Sibanye will also have struggled during the period, which I would have previously said would probably have made them less inclined to accept underperformance at Lonmin. On the other hand, the rand has recently started to weaken, and if the weakening accelerates significantly, this could have a positive effect," said Yuen Low, an analyst at Shore Capital in the UK.
Leon Esterhuizen, a mining analyst at Nedbank, said the deal had to go ahead, with the Public Investment Corporation a 29% Lonmin shareholder not wanting to be saddled with a failing company and an uncertain future for 33,000 employees in a highly volatile part of the economy. There were likely to be political ramifications for Sibanye if it ditched the deal, he said.
The PIC, which invests government employees’ pension money, is a 0.6% shareholder in Sibanye – along with the Government Employee Pension Fund with a 19% stake — and it’s unthinkable they would vote against the transaction because there are so few options left to Lonmin.
Ben Magara, Lonmin’s CEO, has said that there was practically no chance of shareholders again bailing the company out of a predicament aggravated by low and stagnant prices for platinum and the basket of platinum group metals it produces.
The only real option is the sale of core assets desired by others in the industry. Assuming the deal with Sibanye fails, the company has the right to buy certain assets from Lonmin. The most obvious and most attractive is the smelting and refining complex that makes Lonmin just one of three mine-to-market platinum miners in SA. Sibanye’s underlying drive in the deal is to acquire this complex, freeing it from concentrate-supply deals with Anglo American Platinum.
Northam Platinum has also been kicking the tyres of Lonmin assets and its interests were overtaken by Sibanye’s surprise bid for the company, which even Froneman concedes was two or three years before it would ideally like to launch a play for Lonmin.