After violent labour strikes in August and September kicked off a wider worker revolt in South Africa, resulting in 40 employee fatalities, Lonmin 's (LMI) board of directors has come up with a strategy for the future.
Dubbed the "Lonmin Renewal Plan", the company announced it will restructure its balance sheet, reduce capital spending and slow down the scheduled ramp up in platinum production. Pivotal to this strategy is an $800m (£500m) rights issue, which management says will enable the South African miner to pay down some of its considerable debts.
Although Lonmin has yet to reveal the price of the offering - further details will be revealed in due course following consultations with shareholders - the company did disclose the signing of a underwriting agreement with a minimum price of $1 per share (approximately 62p), "or such higher price as may be agreed". It did not divulge the name of the underwriting party or parties. Certainly, with Lonmin's share price settling around 512p a share following the announcement, this extreme minimum price is likely to be adjusted well upward. But as analysts from Bank of America Merrill Lynch rightly point out, "In our view, the extent of the discount in the standby equity underwriting is an indication of a company in distress".
Lonmin's management also stated the company has signed agreements with its main lenders to amend the terms of its debt covenants, as long as it raises a minimum of $700m through the rights offer and uses a large chunk of that to immediately pay down debt. In essence, this is positive, yet it will limit the amount of money Lonmin has at its disposal to increase production - thereby dashing hopes of the company lowering its high operating costs through economies of scale.
Analysts at Citigroup voiced their concern over the change in strategy in a note to clients: "We are…surprised that Lonmin will not use the proceeds to reinstate its 'growing down the cost curve' strategy." Indeed, a previous note from Citigroup suggested that "Without reinstating its old strategy, Lonmin will remain a high-cost, marginal company at the mercy of platinum group metal prices in our view. Judging by how this has played out over the past three years, this may not be an optimal long-term strategy." However prudent cutting costs may be, almost all of Lonmin's competitors are doing the same and questions abound regarding whether or not Lonmin can move down the cost curve by 'out-cutting' its peers.
