London - Even after investors approved a $407 million plan to save Lonmin from collapse, there’s a chance it won’t be enough.
The world’s third-largest producer of platinum will eventually run out of cash if metal prices keep tumbling, according to Avior Capital Markets and Barclays. The company can withstand low platinum prices for at least three years, Chairman Brian Beamish said at a meeting Thursday, when shareholders approved plans to raise equity and unlock new bank funding.
Lonmin, which was forced to raise $817 million three years ago after protests at its Marikana operation led to police killing 34 people in a single day, has lost 94 percent of its market value this year as platinum prices reached the lowest since 2008.
“We expect them to come back to the market within the next two or three years, unless we see a real strong turnaround in prices that we don’t expect,” Adrian Williams, an analyst at Avior Capital Markets, said by phone. “There is no concrete Plan B.”
The stock dropped as much as 7.1 percent in London after investors represented at the meeting supported the stock issue. The shares traded at 10.25 pence by 3:17 p.m., valuing the company at about $92 million.
Reducing costs
There’s some additional room to reduce costs should price conditions deteriorate and the directors remain “confident” in the company’s future, Beamish said.
Barclays analysts haven’t been as optimistic. The company was overly confident on its assumptions for costs and operating conditions such as work stoppages, Andrew Byrne and Ian Rossouw said a report last week.
“The company is likely to remain cashflow negative for the foreseeable future,” they said. Given the probability that metals prices will stay low, Lonmin “is likely to raise further capital over the next two to three years,” they said.
Platinum’s slump
The producer has been hurt by platinum prices that have slumped more than 50 percent from a peak in 2011. Even after years of annual deficits, prices slid amid ample supplies of stored metal and slowing demand for commodities. Platinum will probably remain low until there’s significant production cuts in response to weak consumption, Goldman Sachs Group wrote in a report Wednesday.
Lonmin’s shareholders showed their confidence in the plan by backing the resolutions, Sue Vey, a spokeswoman for the Johannesburg-based company, said by phone. It’s “the right plan for the right time,” she said.
The mining company will now proceed to sell billions of shares at a fraction of the market price on top of plans to cut as many as 6 000 jobs and close unprofitable shafts.
The share sale is scheduled to end December 10 and is underwritten by three banks including Standard Bank Group. The Public Investment, which owns about 7 percent of the Lonmin, may increase its holdings to a quarter if some of the platinum producer’s other investors don’t follow their rights.
BLOOMBERG