Join our community of smart investors

Lonmin in freefall

Lonmin's shares have tanked despite some fairly drastic restructuring measures
July 29, 2015

If you thought matters couldn't get worse for Lonmin (LMI), they just have. The South Africa-focused miner shed around 27 per cent of its market value in just two days this week. That means around half of Lonmin's value has evaporated over the past month. Lonmin's shares took a beating on the back of a downgrade by analysts at HSBC. The outlook on the stock was downgraded to 'hold' from 'buy' and the price target was slashed from 222p to 82p.

IC TIP: Hold at 59p

The analysts obviously weren't swayed by details of a restructuring plan released last week. Lonmin has decided to cut its losses by cutting up to 6,000 employees and closing or mothballing a number of its mine shafts. In total, Lonmin plans to take around 100,000 ounces out of annual production and cut costs by 15-20 per cent.

The drastic measures - not drastic enough according to some industry analysts - are being undertaken because Lonmin is highly geared to platinum prices. Because of this, Lonmin's financial performance could improve rapidly if we were to see a marked increase in prices for platinum group metals (PGM) - but there's no sign of that at the moment. The HSBC analysts also warned that the miner is faced by nearing maturity of some of its rand-denominated working capital facilities in June 2016. With PGM prices in the doldrums, Lonmin could have difficulties on the refinancing front.