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Johannesburg - For most of the mining industry, 2017 is turning out to be another good year. The big exception is Lonmin [JSE:LON].
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 $400m 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% in 2017, the most in the FTSE All-Share Basic Materials Index of 28 commodity producers. The overall index has gained 11% 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 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% of its net cash last quarter, leaving it with $49m, although it can draw on $414m, mainly through credit lines from banks.
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 mine workers. But it hasn’t been enough.
No plan B
The company has raised about $1.7bn from shareholders in the past eight years yet its current market value is about $330m.
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.
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.
"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% to 955.64 an ounce, while Lonmin rose 6.9% to R15.81 a share at 13:53 in Johannesburg.
Labour woes
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% due to safety stoppages, union disputes and absenteeism.
In February, a worker died in an accident at the shaft.
Chief Operating Officer Ben Moolman resigned in March after less than two 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, 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, spokesperson 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%, 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 [JSE:AMS] stake in Pandora, a mine near its Saffy shaft, in a deal that Magara said would save R2bn 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% 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.
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