Johannesburg - To survive the slump in platinum prices, Lonmin may need to reduce production. The trouble is, it will mean fewer jobs in a country that can’t afford to lose any.
With prices of the metal near six-year lows, the current plan to raise $400 million in a share sale could prove inadequate, said Arqaam Capital and Avior Capital Markets. That would put Lonmin on a collision course with the government of South Africa, where one in four workers is unemployed.
More job losses risk deepening a rift between the government of the world’s biggest platinum producer and mining companies, which already plan to fire as many as 19 000 workers as commodity prices decline, costs surge, and the economy is close to recession. The ruling African National Congress is under pressure to placate its labour-union allies, create six millions jobs by 2019, and stem a loss of support to opposition groups such as the Economic Freedom Fighters, which has campaigned on promises to nationalise mines.
“It’s a politically explosive situation because job losses can trigger social instability,” Mzukisi Qobo, an associate professor at the University of Johannesburg, said by phone Thursday. “There is going to be a fallout. While some actors within government understand the dire situation that Lonmin is faced with, the rest have absolutely no clue.”
Survival options
For Lonmin, crippled by a five-month labour strike last year and a 58-percent drop in the platinum price since it peaked in March 2008, scaling back to focus on its most profitable assets is its only survival option, said Richard Hart, an analyst at Arqaam Capital in Johannesburg.
“The rights issue in our opinion is just plugging the hole for two years and then they’re in a cash problem again,” Hart said. “The business plan is entirely predicated upon a recovery in platinum prices. We don’t see that happening soon.”
Lonmin should reduce annual output by two-thirds to 250 000 ounces and outsource refining, said Adrian Williams, an analyst at Avior. This will cut the workforce of 35 000 people to a third of that, he said.
“If survival is what you want, then this is your answer,” Williams said. “Rather cut off the leg, or maybe both legs that are gangrenous and let the body survive.”
Positions cut
Lonmin has already cut 2 600 positions in the year to September. Further reductions will add as much as $150 million to its expenses and won’t be well received, Barclays Plc analysts Andrew Byrne and Ian Rossouw said.
“We question whether the government will allow these necessary shaft closures,” they wrote in a November 5 note. If the capital raising is successful, it will “simply prolong the financial stress of the broader industry and potentially jeopardise the sustainability of the other 1.5 million ounces produced in the region and associated 100 000 jobs,” they wrote.
So far, the Public Investment Corporation (PIC), which looks after South African state employees’ pensions and is the continent’s largest money manager, is the only investor backing the share sale and will underwrite an unspecified “material portion” of it.
It’s “the best decision under the current circumstances,” the Pretoria-based PIC said by email. “Not supporting Lonmin could put the company at risk and it could potentially be harmful to the industry and the communities where Lonmin operates as well as the economy at large.”
Ayanda Shezi, a spokeswoman for the Department of Mineral Resources, said by email she couldn’t immediately comment.
Lonmin may “cease trading” should the refinancing plan fail, the Johannesburg-based company said in a letter to shareholders. While it can also sell assets, there will be “no certainty” they could be realised “in the available timeframe on acceptable terms, or at all”, it said.
In August, the government, mining companies and unions adopted a 10-point plan to try curb job losses, which included finding buyers for distressed assets that could be run profitably under different management.
The Association of Mineworkers and Construction Union, which is the biggest representative of platinum employees, didn’t sign the proposals. It’s monitoring developments at Lonmin, spokesman Manzini Zungu said.
“It is of concern to us,” he said by phone. “We have people who work there who support families.”
* With assistance from Janice Kew in Johannesburg
BLOOMBERG