Lonmin's lack of refinement

Lonmin's (LMI) first-quarter production report revealed a sharp reduction in the platinum producer's capital budget. The September year-end estimate has been cut by $65m to $185m, and this could be subject to further review. The news - though hardly surprising in light of prevailing market conditions - was broadly welcomed by industry analysts. But some are convinced more radical remedial actions are still required to ensure the future viability of the business.

Refined platinum production was down 29 per cent as technical issues prompted temporary shut-downs at the group's two main smelters. More importantly, however, the group's operational performance continued to strengthen across its mining complex, driving first-quarter production of platinum feedstock to its highest level since 2007. Lonmin is then using three smaller furnaces to treat concentrate, which is being stockpiled for refinement once the furnaces have been returned to service. Short of any other unforeseen problems, the group should easily be able to clear the backlog of concentrate.

Lonmin confirmed that net debt, which stood at 1 per cent of net assets at the end of September, is set to increase in the short term because of lower anticipated sales of platinum. However, the group maintained its full-year sales guidance at 730,000 ounces.

Deutsche Bank says...

Buy. Lonmin has demonstrated a strong, controlled recovery from last year's strike. It has managed the unplanned processing stoppages well so far. Despite the refining slowdown, Lonmin increased its sales volumes by 9 per cent year-on-year to 147,000 ounces. Weak platinum prices are sustaining the pressure on Lonmin's balance sheet, and the group has cut its planned capital expenditure by 26 per cent. But net debt remains well within committed facilities. We reiterate a discounted cash-flow valuation of 364p a share and predict cash profits of $158m in 2014-15, rising to $210m next year.

HSBC says...

Overweight. The operational momentum in evidence in the last quarter of 2013-14 has continued. Higher mined volumes were driven by year-on-year improvements at all key shafts, while the mills delivered 200,000 ounces of platinum-in-concentrate - up 11 per cent and a multi-year high. A moderate recovery in platinum pricing from the fourth-quarter lows and reduced capital expenditure reduces the expected cash burn at Lonmin this year. Still, rand revenue would need to rise 5 per cent from current levels for the group to generate free cash-flow this year. Our target price of 237p is based on long-term, through-cycle multiples of enterprise to cash profits (7.5) and price to earnings (18.6).