South African platinum miner Lonmin is a contrarian play that certainly isn't for the faint-hearted. There are some very clear risks. You'll be buying into a FTSE 250 miner whose performance is being undermined by labour disruptions, and whose output is now attracting prices only slightly in advance of their three-year low. However, you will also be gaining exposure to a miner whose shares have been marked down so heavily that it trades 20 per cent adrift of its book value, which compares with rivals such as Impala trading on a 30 per cent premium, and the shares offer 50 per cent upside if they can re-rate to match their two-year average enterprise-value-to-forecast-cash-profit ratio of 11.9 times compared with 7.9 times now. And you would also be getting in at a time when signs of a supply shortage are developing in the market for its principal product.
- Sound financial position
- Platinum shortages worsening
- Good operational progress
- Auto demand rising
- Prolonged industrial strife
- Risk of downward earnings revisions
In July 2012, we advised offloading shares in Lonmin (LMI) when they were changing hands at 701p. At the time, we cited a weakening price environment for platinum group metals (PGM) and rising operating costs, but with the benefit of hindsight we might well have added 'deadly labour dispute' to our list of bear points. One month after our sell advice, dozens of mine workers were killed by South African security forces at Lonmin's Marikana mine following a series of wildcat strikes. These issues have not resolved and the company and the striking AMCU is currently six weeks into a fresh labour dispute. But for those willing to hold their nose, there's value on offer.
While this tip is something of a wild card given Lonmin's recent past, it is not the only miner to have suffered. Both Impala Platinum and Amplats have fallen foul of the AMCU in wage negotiations, and the subsequent walkout is affecting more than 40 per cent of global output of PGM. This will only exacerbate an existing supply shortfall brought about by Anglo restructuring its deep underground operations in Rustenberg.
Admittedly, PGM prices had drifted through the latter part of last year, even as the market clicked into deficit. However, while this was partly in response to weaker gold values, the main determinant was the high level of industrial inventories. As we move into 2014, with demand for PGM from the automotive industry on the rise, stockpiles should be under increased pressure. In January, Amplats (the world's largest producer) stated that it was then able to fulfil customers' orders for just six to eight weeks.
For Lonmin, the latest industrial stoppage has taken the gloss off a reasonably strong operational performance - certainly from a PGM processing standpoint. At the 2013 year-end, it had produced 751,000 ounces of platinum, which beat initial company guidance of over 700,000 ounces and represented a 10.5 per cent increase year on year. Increased mining volumes and improved metal recoveries meant cash costs rose just 3.8 per cent year on year. PGM prices were essentially flat year-on-year, but increased 17 per cent in rand terms as the domestic currency weakened.
| LONMIN (LMI) | ||||
|---|---|---|---|---|
| ORD PRICE: | 300p | MARKET VALUE: | £1.7bn | |
| TOUCH: | 299-301p | 12-MONTHHIGH: | 360p | LOW: 250p |
| FWD DIVIDEND YIELD: | 2.6% | FWD PE RATIO: | 10 | |
| NET ASSET VALUE: | 599¢ | NET CASH: | $201m | |
| Year to 30 Sep | Turnover ($bn) | Pre-tax profit ($m) | Earnings per share (¢)** | Dividend per share (¢) |
|---|---|---|---|---|
| 2011 | 2.0 | 293 | 71.2 | 15.0 |
| 2012 | 1.6 | -698 | -108 | nil |
| 2013 | 1.5 | 140 | 31.2 | nil |
| 2014* | 1.8 | 215 | 25.0 | 5.0 |
| 2015* | 2.3 | 493 | 48.0 | 13.0 |
| % change | +28 | +129 | +92 | +160 |
Normal market size: 7,500 Matched bargain trading Beta: 1.59 *HSBC forecasts **Adjusted to reflect December 2012's nine-for-five rights issue £1 = $1.67 | ||||
