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London - Platinum producer Lonmin [JSE:LON] said pre-tax profit tumbled in the first half of its financial year, as weak European demand weighed on prices and a record level of safety stoppages imposed by South African authorities hit its output and operating costs.
The world's third-largest platinum producer said production interruptions, a 10% drop in average prices and costs up almost 11% in the six months reduced pre-tax profit to just $18m. That compares to $159m a year earlier.
But the miner stuck to its closely watched spending plans, as it ramps up growth shafts to bring down the overall cost of producing an ounce of platinum. Chief Executive Ian Farmer said Lonmin would be prudent, however, with what analysts say is one of the weaker balance sheets in the industry.
"Lonmin is in a tough position. It has to walk a tightrope between creating a strong and robust company... and navigating the short term," Farmer said. "Mining is a long-term game. I can't flip-flop every time there is a Greek headline."
Miners across the board have been feeling pressure from investors to take a more disciplined approach to spending. Lonmin, which faces debt covenants of 3.75 times net debt to core profit, plans to spend $450 million this year ramping up growth shafts to cut unit costs.
Farmer said Lonmin consistently reviewed its position.
"In our view the medium- to long-term PGM (platinum group metals) market fundamentals, however, remain sound and this strategy will benefit our shareholders as the market improves," Farmer said.
Net debt stands at $356m, up from $234m at September 2011.
Lonmin's drop in profit and rising costs hit the miner's shares, down 3.6% at 869 pence at 09:40 GMT, but not far below a 2.7% drop in the broader sector.
"The numbers are the way they are because of the macro, and the platinum price in particular - the story hasn't changed," analyst Andy Davidson at Numis said.
"They have to be very careful that they don't destroy their own nest... for two or three years down the line when they expect the market to be in a much better place. So there is not a lot they can do in terms of cutting back, either on capital expenditure or on near-term production."
Lonmin reported as the industry met in London for its annual Platinum Week gathering, reviewing a South Africa-focused sector battered by stoppages, strikes, soaring costs and lacklustre appetite in its key European auto market.
Stoppages improving
Lonmin said it expected the platinum market to be in slight deficit in 2012 - reviewing its earlier expectation of a market in balance - adding that deficit would worsen through to 2015 as supply struggles to match any improvement in demand.
A sharp rise in so-called "section 54" stoppages, imposed after perceived safety violations or accidents, has haunted a South African precious metals sector already hit in recent quarters by labour disputes and soaring costs.
Lonmin said the impact in terms of lost tonnes was up almost 400 percent, but, like some of its rivals, said the situation was improving.
"The first half of the year was extremely frustrated. January was a watershed month," Farmer said.
"There was a reduction in February and March and our experience in April and May has been positive as well ... A more balanced approach is being taken all round."
Producers have complained in particular about the blanket nature of the stoppages, which can bring an entire mine to a standstill because of a problem in a single shaft.
Farmer said the company's decision to stick to its target of producing 750,000 platinum ounces at the full year, despite flat production at 318,402 ounces in the first six months was predicated on a "normal" level of interruptions, but output was typically weighted to the second half.
Revenues fell almost 20 percent, underperforming a 10 percent drop in prices in dollar terms, while expectations of an underlying profit per share were disappointed with a loss of 6.9 cents per share.
The miner stuck to guidance including a 2012 cost increase of 8.5 percent, as increased output in the second half will help to bring down a 10.9 percent rise in costs per ounce in the first half.
