Johannesburg – Among the four big platinum producers Lonmin is the prince that turned into a frog, but it's on the point of recovery.
If only it were not for the severe slump in the price of this precious metal – owing to a surplus in the global market which is estimated at between 400 000 and 500 000 ounces a year. This places onerous demands on all the platinum producers, but especially on Lonmin.
Early in the previous decade the group announced that it would operate its fancy new shafts, Saffy and Hossy, as mechanised shafts. That was the vision of Brad Mills, a former BHP Billiton executive, who was appointed Lonmin chief executive in 2004.
At the time Lonmin itself was a fairly unpopular sideshoot of British magnate Tiny Rowland’s Lonrho business empire.
Mills bought expensive equipment and adapted the design of the two new shafts – which were to herald a glorious era for Lonmin – for mechanised mining. The unions involved at Lonmin were naturally not happy about the idea.
Mills made two mistakes: first that the geology of underground precious metals in South Africa is too complex and precarious for mechanised mining – he was the umpteenth mining boss to have burnt his fingers in this respect. The skills required to maintain the sophisticated machines are difficult to get hold of in this country.
Second, the ore above which these two new shafts were built was predominantly shallower UG2 ore.
The metallurgical properties of UG2 ore differ considerably from the richer Merensky Reef. To extract the chrome from the UG2 reef has been one of metallurgists’ greatest challenges for 30 years.
The good news is that it seems that Lonmin is the first platinum producer to get things right after years of struggling with a blast furnace that simply could not withstand the high temperatures required for the extraction of chrome and related metals.
The No 1 smelter in Lonmin’s high-priced smelter plant has, for the first time, suffered no leaks for the past two years.
Leaks were previously almost an annual event – the No 1 blast furnace would start to leak, have to be switched off (it takes weeks to cool down) and be completely rebuilt to apply a new technique in the hope that the furnace’s inner walls would not again crack and leak. Reconstruction could take up to eight months.
To put the situation in perspective: Lonmin’s bigger brothers, Anglo American Platinum and Impala Platinum, use a combination of 50% Merensky ore and 50% UG2 ore.
Amplats and Implats themselves periodically have problems with their smelters because of the high chrome content and Northam, the fourth biggest producer, is currently in just such a predicament after its smelter started to leak in May.
Lonmin ore is a combination of 75% UG20 ore and 25% Merensky ore, which places even higher demands on a smelter.
The correction of Mills’s biggest mistake – the conversion to mechanised mining at Saffy and Hossy – started in 2008 when he left the company after an unpleasant board meeting.
If a mine is designed for mechanised mining, it's extremely difficult and expensive to change it. The underground passages of a mechanised mine are, for instance, made to house conveyor belts, not underground trains with cocopans and locomotives. Practically all underground passages have to be rebuilt.
This is a time-consuming process that also demands large capital expenditure. But, even worse, it means that the planned production plateau for the two shafts – which could take up to 30 years – has to be postponed for years.
The Saffy shaft would have reached its design production capacity of 200 000 tonnes of ore a month by 2010, but will now reach this level only in 2016. It is currently producing only half that amount. So far about R1.2bn has been spent on the conversion.
Hossy is slightly further up the curve and is currently producing about 70% of its planned ore.
Since the reversion to conventional mining started in 2008 the available ore reserves in Saffy and Hossy have however increased from ten months’ production to almost 20 months’ production.
A third large shaft, K4, is considerably behind Hossy and Saffy on the development curve and is currently producing close to only 10% of its design capacity.
To fiddle with the group’s capital programme at this stage will require extremely difficult decisions, says Mark Munro, vice-president of mining at Lonmin.
At the beginning of the financial year the group said it wanted to produce 750 000 ounces of platinum this year. By the end of March, the middle of its financial year, it has produced only 304 329 ounces.
In the year to end-September 2012 its capital expenditure will run to $450m. This has largely already been spent.
The issue that Munro and his chief executive in London, Ian Farmer, have to agree on is what the capital expenditure will be for the next year and which projects can be cut back.
The group’s net debt by end-March amounted to $356m – ’n debt ratio of 11%, which is very modest for a mining company.
But the surplus of between 400 000 and 500 000 ounces of platinum that is currently being delivered to the global market will require sacrifices. Munro says to hold back capital expenditure at Saffy and Hossy will mean that the company’s production costs for the remainder of its production will increase because the overheads for production growth at these two top-class shafts have already been incurred.
“We must try to find a proper balance between the best of the assets on our balance sheet, the market’s supply requirements and the unlocking of long-term value,” says Tanya Chikanza, the group’s spokesperson for investor relations.
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