Shares in perennially troubled platinum miner Lonmin (LMI) shed more than 20 per cent last week, after a first-quarter trading update revealed platinum group metals (PGM) production had declined by a fifth year on year. Even worse, management effectively conceded that Lonmin is unable to make money at current spot prices. In fact, unit cost guidance for ZAR10,800-ZAR11,300 (£643-£673) per ounce for the coming year fell short of the platinum basket sales price of ZAR10,372 achieved in the three-month period to 31 December.
This leaves the year-end net cash figure of $49m (£39m) in a somewhat perilous position. And even though Lonmin had $414m in "total liquidity" at the end of 2016 after factoring in bank facilities, a focus on production over sales is clearly proving unsustainable. According to analysts at Investec, Lonmin's most likely course of action is to make further cuts to capital expenditure, although this could cause further production declines.
Management was at pains to point out that because of holidays and the group's sales profile, the working capital impact is "typically greater in the first quarter of our financial year". Labour relations were also once again cited as a major source of operational disruption.
"The relationship between operational management and unions at this shaft is not working as effectively as we expected," the company said in an overview of K3, Lonmin's biggest shaft. "The yielding of results from the implementation of business improvement initiatives at this shaft is taking longer than we would have liked to see". To redress the disappointing first quarter, Lonmin is deploying additional stoping and vamping crews in a bid to improve productivity.
