Johannesburg - Lonmin chief executive Ben Magara has said the world’s third-biggest platinum producer had learnt that cash was king following its “near death” experience, which saw it complete the crucial R5 billion rights issue last year.
Risk averse shareholders have voted with their feet because there was too much noise owing to the labour strife and political and policy uncertainty, which contributed to making South Africa an unfavourable investment option.
Magara told mining analysts, investment bankers and captains of industry at the Johannesburg indaba that the beleaguered platinum producer was on the brink of collapse and had to make tough decisions, including cutting 6 000 jobs to stay afloat.
“I learnt that cash is king, and it was fantastic that our shareholders and banks came on board and we were able to complete the rights issue,” Magara said. “I am encouraged by efforts we have made to ensure that Lonmin can withstand the low commodity price environment.”
Magara also reflected on some of the company’s missteps, including investing $3 billion (R41bn) in the mechanisation of its underground mines, which it later reversed, buying equipment, as well as property.
“We had a near death experience last year, but that was nothing if you compare it to money that was thrown to the wind. At that point we had cheerleaders who were saying buy more.
“In our death experience last year, my worry was our cash position and the strength of the balance sheet. You could not put your head in the sand,” he said.
Lonmin was at the heart of South Africa’s biggest labour relations strife, which resulted in the Marikana massacre in mid-August 2012. “We lost 6 000 jobs without a single day of a strike, and we saved as many people as we could,” he said.
The mining industry, barring the gold sector, is in a downturn due to commodity price volatility, which resulted in cutting on costs and capital expenditure and the selling of non-core assets.
Magara was part of a panel of chief executives that came face to face with investment analysts, where chief executives heard how shareholders required mining companies to “get real” about reality.
Fiona Perrott-Humphrey, a senior adviser for the Mining Team at Rothschild in London, said shareholders were not happy with the manner in which mining companies had destroyed value through poor capital allocation.
“Shareholders are saying get real with yourselves. They believe that the first industry to have got real with itself is the gold industry. They are hoping the other industries will follow suit,” Perrott-Humphrey said.
Uncertainty
Stephen Arthur, the head of equity research at Absa asset management, said that investing in South Africa was a risk due to uncertainty.
“My decision everyday is, do I buy Shoprite or a South African mining company? This is because in South Africa a lot of time is spent on political and community issues. Very little time is spent on actually running the mining operations,” Arthur said.
“I know Pick n Pay will open 365 days of the year, and people will have to eat. I do not know how long mines will be open, because of incidents including... (a) fall of ground.”
He also said there was too much noise and too much hassle in South Africa.
“Unless you eliminate the noise, companies will vote with their feet.”
BUSINESS REPORT