Falling metals prices and soaring production costs have left much of South Africa's platinum mining industry at a crossroads. Miners can either continue operating expensive and sometimes dangerous mines, often at a loss, or they can place their worst-performing operations on care and maintenance regimes and wait for better times. And Lonmin - the world's third largest platinum miner and one of the sector's costliest producers - isn't immune to those pressures.
- Weak platinum price
- Capital spending programme on review
- Rising operating costs
- Earnings under pressure
- A gold price bounce might boost platinum
- Second-half performance could improve
So far, however, Lonmin has pushed ahead with expansion plans. True, a review of spending was launched in May, but management still hasn't significantly curtailed its ambitious capital expenditure programme - which is to average about $400m (£258m) a year until 2015 - and Lonmin remains committed to this year’s expansion plans and output targets.
That's in contrast to the trends emerging at it peers. A number of miners, including Aquarius Platinum, Eastern Platinum and Platinum Australia, have halted the construction of new shafts or suspended uneconomic operations. That has sent their shares tumbling, helped by falling platinum prices - reflecting softening demand and increased supply. Management at Aquarius Platinum has said that "the only defensible strategy for any platinum producer is to cut all non-essential capital expenditure", adding that the platinum outlook remains weak in the short to medium term.
LONMIN (LMI) | ||||
|---|---|---|---|---|
| ORD PRICE: | 701p | MARKET VALUE: | £1.42bn | |
| TOUCH: | 699-702p | 12-MONTH HIGH: | 1,416p | LOW: 680p |
| DIVIDEND YIELD: | 1.4% | PE RATIO: | 28 | |
| NET ASSET VALUE: | 920p | NET DEBT: | 11% | |
| Year to 30 Sep | Turnover ($bn) | Pre-tax profit ($m) | Earnings per share (¢) | Dividend per share (¢) |
|---|---|---|---|---|
| 2008 | 2.23 | 779 | 278 | 56.0 |
| 2009 | 1.06 | -272 | -164 | nil |
| 2010 | 1.59 | 240 | 56.9 | 15.0 |
| 2011 | 1.99 | 293 | 135 | 15.0 |
| 2012* | 1.80 | 143 | 39.0 | 15.0 |
| % change | -10 | -51 | - | 0 |
*Bank of America Merrill Lynch estimates (earnings per share data adjusted − not comparable) Normal market size: 2,000 Matched bargain trading Beta: 1.59 £1 = $1.55 | ||||
Yet pressure on Lonmin is mounting. At the half-year stage, it reported that profit margins had been squeezed by a 10 per cent fall in the basket price received for platinum group metals, as well as by a 10.9 per cent rise in operating costs. Consequently, first-half pre-tax profit fell to just $18m, compared with $149m a year earlier. But, as Lonmin is substantially funding its expansion programme with borrowings, that earnings slide looks worrying. Should the current platinum price weakness persist into the second half, broker JPMorgan thinks Lonmin could soon run the risk of breaching debt covenants.
Avoiding that may force drastic action. That could involve postponing up to $150m of the $450m of capital outlay that has been approved this year, scrapping some of next year's spending, pre-selling by-product base metal production, or even shutting down the highest-cost producing shafts. A decision is expected following Lonmin's capital expenditure review, possibly at around the year-end.
Although the platinum price could improve before then. After all, platinum prices have historically tended to follow the gold price and a further round of quantitative easing could trigger a gold rally. Yet that correlation reversed sharply last year and most analysts expect a substantial platinum surplus in 2012. It's also feasible that Lonmin's second-half production could improve more than expected, providing a healthier earnings cushion. Indeed, safety-related stoppages are down and management expects production to ramp up at the Karee, Hossy and Saffy sites in South Africa. That said, Lonmin does have a habit of missing targets and its South African operations can be trouble-prone.
