Join our community of smart investors

Lonmin's rescue rights issue

TIP UPDATE: Lonmin's annual results and subsequent rights issue have exposed the company's fragile financial state
November 12, 2012

Beleaguered platinum miner Lonmin (LMI) revealed the depth of its financial and operational problems last week. Not only has the much-publicised, violent labour dispute at Marikana held back the South African miner's ambitious expansion plans, it has left the company in danger of insolvency.

IC TIP: Sell at 472p

While the company generated underlying operating profits of $67m (£42m) in the year to the end of September (down from $311m the year before), one-off costs of $769m - including a $602m write-down at Akanani and $159m of strike-related costs - meant Lonmin reported an operating loss of $702m for the year. Worse still, Lonmin announced it doesn't expect to generate any free cash flow for at least two years and that lenders have decided to call in part of their loans. Since the company doesn't have the money, Lonmin is launching an $817m, nine-for-five rights issue at 140p a share that will net it $777m once completed.

Reflecting the company's dire straits, Lonmin will issue the underwritten rights issue at a deep 69 per cent discount to its pre-announcement share price, or a 44 per cent discount to the theoretical ex-rights price of 250p. The offer closes on 10 December assuming it receives at least 50 per cent approval from shareholders at a special meeting on 19 November.

And while it is likely shareholders will approve the deal, the outcome is still far from certain. Xstrata (XTA), Lonmin's largest single shareholder with a 24.5 per cent interest, says it is prepared to support the rights issue but only if it could replace Lonmin's executives with an Xstrata-backed management team. Lonmin's board has rejected the proposal.

Looking ahead, Lonmin expects next year's production to be impacted by the rebuilding of stockpiles following the strike and lower margins based on wage settlements. It forecasts 680,000 ounces of platinum output in fiscal 2013, down from 687,400 ounces this year and 720,800 ounces the year before.

Prior to these results, broker UBS forecast EPS of 23.1¢ for fiscal 2013.

LONMIN (LMI)

ORD PRICE:472pMARKET VALUE:£959m
TOUCH:471-472p12-MONTH HIGH:1,142pLOW: 427p
DIVIDEND YIELD:nilPE RATIO:na
NET ASSET VALUE:1,225¢NET DEBT:17%

Year to 30 SepTurnover ($bn)Pre-tax profit ($m)Earnings per share (¢)Dividend per share (¢)
20082.2377927856
20091.06-272-164nil
20101.592405715
20111.9929313515
20121.61-698-202nil
% change-19---100

£1=$1.59