Sibanye takeover is do-or-die for Lonmin
The conclusion of the Sibanye deal also meant the merged entity would be able to afford retrenchments
Lonmin’s management stands to lose control of the company to administrators if a proposed R5bn takeover by Sibanye-Stillwater fails.
Lonmin, which can trace its roots back to 1909, is operating on a knife’s edge. Its mines are barely making money and the company is engaged in a three-year programme to cut 12,600 of its 33,000 employees.
“Lonmin’s continuation as a going concern depends on completion of the deal,” Barclays analysts said in a note.
The only thing preventing an immediate repayment of a $150m loan, depleting the company’s $167m of gross cash, was the Sibanye deal, Lonmin chief financial officer Barrie van der Merwe said on Monday.
Lonmin needed R1bn a month to run the business and wanted at least $60m in its accounts, he said.
“It’s very likely that if we have to repay the term loan there won’t be enough to run the business. At that point the board, as a responsible board, would likely look at mechanisms to protect the company and that means business rescue,” Van der Merwe said. “That would be the start of moving well beyond the 12,600,” he said.
Lonmin executives were talking to the government, its agencies, communities and labour about the necessity to expedite the Sibanye transaction because it was unable to fund the retrenchment exercise from its stretched balance sheet given a weak and volatile platinum group metals (PGM) rand price, said CEO Ben Magara.
Analysts had mixed views on whether Sibanye’s bid for the whole of Lonmin would pass muster when the gold and platinum miner’s shareholders decide on the transaction later in the year, with Lonmin’s debt a major source of concern.
The numbers presented in Lonmin’s interim results did little to convince the market the deal was a certainty. While Lonmin had enough cash to repay a $150m loan, it would have little left for the running costs let alone investments like an extension of its Rowland shaft.
“If Lonmin fails to maintain a net cash position [after repaying the $150m term loan], we see risk to the deal with Sibanye and thus to the covenant waiver of debt facilities. With lower PGM prices and a strong rand, the risk that Lonmin retains a net cash position increases,” Citi analyst Johann Steyn said in a note.
Lonmin posted a $32m interim operating loss compared to a $181m loss a year earlier, which included an impairment of $146m. Operating costs during the period were $100m higher than before. It reported an after-tax loss of $67m against a $214m loss previously.
One market source said the $150m debt in Lonmin was a fraction of the more than R23bn of debt in Sibanye and should not be seen as a factor when it came to the Sibanye vote.
Lonmin is under a waiver until February 2019 from its lenders pending the outcome of the Sibanye deal. It breached the $1.1bn tangible net worth covenant, with the value of the company falling to $631m at the end of March. If the deal fails the lenders can demand the $150m.
Sibanye has an option to buy an asset from Lonmin — most likely the smelting and refining business — if the deal fails, or Lonmin could bring in third parties to bid for assets to avoid going into business rescue.
Northam Platinum was one of the companies interested in Lonmin’s proposed asset sales ahead of the Sibanye bid in December 2017.
The R5bn bid will not only bring Sibanye mines and half-built projects, but concentrators and the vital smelting and refining complex that will unshackle it from concentrate supply agreements with Anglo American Platinum and give it the mine-to-market capability the company desperately wants.
The replacement value of all these assets would run into tens of billions of rand.
Magara said the company’s net cash balance of $17m against the $63m balance at the financial year end last September and $47m worth of metal locked up in the processing pipeline would be released in the second half of the year. There was a further $13m Lonmin would extract from a clean-up of the smelting and refining plants, while Lonmin retained a full-year platinum sales guidance of up to 680,000oz despite a tough start to the year.
Lonmin budgeted for an average retrenchment cost of R220,000 per head and it could not afford it, Van der Merwe said. The conclusion of the Sibanye deal meant the merged entity would be able to afford the retrenchment process.