Even prior to the surprise resignation of executive Ben Moolman last week, Lonmin (LMI) looked in horrible shape. After a year spent hammering away at its outgoings, the South African platinum miner's restructuring appeared to have run out of steam; in January, the company blamed a sharp drop in first-quarter production and a slump in productivity on strained labour relations, an effect further compounded by a strengthening of the rand. And while a small rally in platinum prices offered a slither of optimism, the fact remains that expected costs of ZAR10,800-ZAR11,300 (£675-£706) per ounce this financial year are above the 'basket' price fetched by each ounce of platinum and related metals mined by the company, which came in at ZAR10,372 in the final three months of 2016. In short, Lonmin is burning through cash. Worse still, platinum market authority Johnson Matthey expects the metal to slip into a surplus this year, amid soft demand from both Chinese jewellery buyers and car manufacturers.
- Cutting costs
- Potential bid
- Cash burn
- Labour issues
- Weak platinum prices
- COO resignation
Short of better prices, which we think is unlikely, the key question for investors is: how can Lonmin help itself? The most obvious course of action would be to cut its workforce. Having already culled more than 5,000 jobs following 2015's highly-dilutive $407m (£335m) rights issue, Lonmin will inevitably struggle to convince unions and the government about another round of layoffs. This also reduces the chance of a white knight making a bid for the London-listed miner. Johannesburg-based Sibanye Gold (SA:SGL) has been touted as a potential buyer, and made no secret of its intention to become a dominant player in the platinum industry through its acquisition of Amplats' Rustenburg mines. But Sibanye's recent $2.2bn bid for Stillwater Mining (US:SWC), not to mention Lonmin's loss-making operations, should throw doubt on that prospect.
Some brokers have suggested a peer could buy Lonmin to shut its operations and bump up prices. Such a move might look good on an investment bankers' powerpoint, but it would draw unprecedented regulatory ire from a government keen to prevent unemployment and protect its 29 per cent ownership of Lonmin through the state-backed Public Investment Corporation.
Another complication was added this month with the sudden exit of widely-respected chief operating officer Mr Moolman, after two years in the role. Like his predecessor, Johan Viljoen - who quit after just five months - Mr Moolman is ostensibly leaving for personal reasons, but this coincides with an unprecedented operational crisis and paints a picture of an executive team rapidly running out of options. On the current trajectory, total balance sheet liquidity - $414m at the end of December - looks destined to be further eroded, and could eventually place a strain on financial covenants.
LONMIN (LMI) | ||||
|---|---|---|---|---|
| ORD PRICE: | 87p | MARKET VALUE: | £245m | |
| TOUCH: | 86.5-87p | 12-MONTH HIGH: | 253p | LOW: 81p |
| FORWARD DIVIDEND YIELD: | nil | FORWARD PE RATIO: | 42 | |
| NET ASSET VALUE: | 591¢ | NET CASH: | $49m* | |
| Year to 30 Sep | Turnover ($bn) | Pre-tax profit ($m)** | Earnings per share (¢)** | Dividend per share (p) |
|---|---|---|---|---|
| 2015 | 1.29 | -456 | -209 | nil |
| 2016 | 1.12 | -23.0 | -36.0 | nil |
| 2017** | 1.03 | -85.7 | -9.7 | nil |
| 2018** | 1.06 | -31.4 | 2.5 | nil |
| % change | +3 | - | - | - |
Normal market size: 7,500 Matched bargain trading Beta: 2.61 £1=$1.21. *31 Dec 2016 **Peel Hunt forecasts, adjusted PTP and EPS forecasts | ||||
