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,"
Net debt stands at $356m, up from $234m at
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.
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
"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