Johannesburg - For most of the mining industry, 2017 is
turning out to be another good year. The big exception is Lonmin.
Investors are losing confidence in the world’s
third-largest platinum producer as it burns through cash to stay afloat, just
15 months after raising about $400 million from shareholders. Platinum prices
aren’t far from a seven-year low and Lonmin has its own set of operational
problems, including higher costs and lower output at its biggest mining shaft.
The stock is down more than 30 percent in 2017, the most
in the FTSE All-Share Basic Materials Index of 28 commodity producers. The
overall index has gained 11 percent this year.
“Lonmin can’t survive in its current form unless there’s
a very significant recovery in platinum-group metal prices,” said Marc Elliott,
a London-based analyst at Investec Plc with a sell rating on the stock. “I wouldn’t
be surprised to see them come back to the market for more cash in the next two
to three years.”
Other mining companies are looking to deploy new cash
into dividends and acquisitions, buoyed by a recovery in commodity prices and
deep cost cuts. Lonmin stands out for its years of problems. The company used
up 70 percent of its net cash last quarter, leaving it with $49 million,
although it can draw on $414 million, mainly through credit lines from banks.
More about the mining turnaround: from drowning in debt
to swimming in cash
Chief Executive Officer Ben Magara has pushed to get
Lonmin back on track and repair its reputation after the shootings at Marikana
in 2012, when police killed protesting mineworkers. But it hasn’t been enough.
The company has raised about $1.7 billion from shareholders in the past eight
years yet its current market value is about $330 million.
The problem is simple: Lonmin’s costs exceed revenue.
Each ounce of platinum-group metal costs R12 296 to produce, compared with a
sale price of R10 372 per ounce in the three months through December.
Capital spending
Lonmin said capital spending is usually higher at the end
of the year and sales are weighted toward the middle quarters. But the problem
isn’t new. Free cash flow has been negative each year since 2011, according to
data compiled by Bloomberg.
“We see cash burn ad infinitum at current PGM prices, and
at some point they’ll need to find more financing again,” said Edward Sterck, a
London-based analyst at BMO Capital Markets Ltd. “Management is doing a good job
with challenging assets, but there doesn’t seem to be a Plan B. Plan A is for
commodity prices to recover in rand terms and that’s it.”
With demand growing for electric cars, which unlike
conventional vehicles don’t use platinum, there’s no certainty that prices will
pick up soon. Platinum declined 0.2 percent to 955.64 an ounce, while Lonmin
rose 5.1 percent to R15.55 a share at 9:42 a.m. in Johannesburg.
Operational performance is another problem for Lonmin,
which mainly has deep, labour-intensive mines. First-quarter production at K3
shaft, the company’s biggest, dropped 14 percent due to safety stoppages, union
disputes and absenteeism. In February, a worker died in an accident at the
years in the role. Previous COO Johan Viljoen held the job for under a year.
“C-level resignations at Lonmin have in the past presaged
bad news, so COO Ben Moolman’s resignation - ostensibly ‘for personal reasons’
- is not an encouraging sign,” Yuen Low, a London-based analyst at Shore
Capital Stockbrokers Ltd., wrote in a report.
CEO Magara has temporarily taken over the COO role,
having had extensive operations experience at Anglo American’s coal and
platinum divisions, spokeswoman Wendy Tlou said in response to questions.
“We have seen the upward trajectory of our production
efforts in the past month from last quarter’s disappointing production
results,” she said.
Job cuts
Magara, a Zimbabwean national, has tried to arrest
Lonmin’s decline since taking the CEO job in 2013. He cut 6 000 jobs, or 15
percent, in the past two years, closed high-cost mining areas and reduced
capital expenditure to save cash. In November, Lonmin bought Anglo American
Platinum’s stake in Pandora, a mine near its Saffy shaft, in a deal that Magara
said would save 2 billion rand of capital spending over the next five years.
Magara is also looking to produce more low-cost metal
from waste dumps and has the option of shifting mining crews to ore-bearing
areas instead of developing corridors for future production.
Still, some investors are increasing bets Lonmin shares
have further to fall. About 7 percent of the company has been sold short, the
highest since the December 2015 rights issue, data compiled by Markit show.
What the company really needs is a rally in platinum
prices, according to Investec’s Elliott.
“We currently don’t anticipate that will happen any time
soon,” he said.