How to polish a PGM miner
Analysts welcome approval for Lonmin-Sibanye-Stillwater merger, though some local communities have doubts
The merger of Lonmin and Sibanye-Stillwater cleared another major hurdle last week when it got the go-ahead from the SA Competition Tribunal.
But the deal is not yet done.
Still needed is court approval in the UK to delist Lonmin from the London Stock Exchange, as well as votes of approval from shareholders in both companies. The tribunal’s clearance comes with a number of conditions, including, notably, a moratorium on retrenching employees for six months. With wages being Lonmin’s biggest expense, holding off on job cuts — up to 13,344 — may well add downside to the acquisition of an already risky company.
The Lonmin share price has largely been tracking Sibanye’s since the merger plan was announced in December. The merger approval last week pushed Lonmin’s share price up 3.3% the next day, while Sibanye’s dropped 4.7%.
However, industry analysts say the tribunal’s decision is the best outcome for all concerned.
"From our perspective it’s the better outcome for the majority of the Lonmin workforce and for the country," says Arnold van Graan, mining analyst at Nedbank Corporate and Investment Banking.
"A lot of people will keep their jobs. Without this merger, the options on the table for Lonmin are not that great. The ultimate number of job losses could be far greater than what is proposed now."
Job cuts are, however, inevitable, he says. "Whether it happens under the Lonmin banner or the Sibanye-Stillwater banner, it unfortunately needs to happen to make the business sustainable."
But Hurbey Geldenhuys, head of research at Vunani Securities, sees a "reasonable probability" that Sibanye may not have to retrench workers — though he acknowledges this is not what the company has indicated publicly.
"When you have a proper rationalisation and combination of assets and cut out overheads and duplications, the cost savings are very significant," he says.
Potential cost savings between Lonmin and Sibanye’s operations in Rustenburg in particular would be large — R1bn in his estimation.
The merger will open up new opportunities. K3, for example, is a Lonmin shaft facing closure that could be given a new lease of life after a merger.
Geldenhuys says that when other shafts run out of reserves, employees could be moved to K4, a large mine that is in need of significant investment. Lonmin, headed by Ben Magara, has put it on ice, but it could return to production after a merger and absorb redundant workers.
Lonmin’s largest union, the Association of Mineworkers & Construction Union, says the company’s financial health has improved of late, but analysts agree that it can no longer stand alone.
"They have been in harvest mode. The cost base, without the benefits from a consolidation, was not sustainable," Geldenhuys says. Van Graan says: "Lonmin as a unit could no longer survive on its own. The market would no longer give it capital." The only "self-help" scenario would be if the platinum price shot up sharply and stayed there for a very long time, he says.
Sibanye shareholders ought to be pleased with the deal, which will give the company access to Lonmin’s treatment and smelting facilities at what is arguably the low end of the platinum cycle. It also gives Sibanye more investment opportunities, says Van Graan.
"Shareholders understand the risk. You buy the Sibanye-Stillwater shares if you are bullish on metal prices, platinum group metals in particular."
Geldenhuys says Sibanye shareholders would be "daft" not to consider the acquisition of Lonmin, which at this stage, given the share price, would cost no more than R2.5bn. "Even on a risk-adjusted basis, R2.5bn is an extremely attractive purchase price."
While the market may be happy with the tribunal outcome, those who represented local communities at the hearings are disappointed at what they see as inadequate conditions relating to community development. The nonprofit Mining Forum of SA intends to appeal the decision.
"The merging parties must know that this is not a victory for them. Lonmin will not be sold until issues of public interest are properly addressed and taken into account," it says in a statement.
Louie Mogaki, who represents another interested party, the Greater Lonmin Community, says the group will wait to see the tribunal’s reasons for its ruling before it decides whether to appeal.