Lonmin risks running out of cash

London - Platinum producer Lonmin [JSE:LON] may soon need to raise capital to survive South Africa's longest and costliest mining strike, which has paralysed its operations and slashed its revenue.

As prospects dim for a quick resolution to the strike, Lonmin risks running out of cash towards the end of the year, possibly forcing it to shut up shop unless it gets a fund injection and takes steps to save money, analysts and market sources said.

"I think they are the worst off among the producers and they will have to get capital soon. They could do that through a rights issue if that works," an industry source said.

Anglo Platinum (Amplats) [JSE:AMS] and Impala Platinum (Implats) [JSE:IMP] are also suffering from the strike but Lonmin, the smallest of the world's three top producers of the precious metal, is vulnerable as most of its operations are in South Africa's platinum belt.

"If they carry on the way they are they would have to start to implement a capital injection in the next 3-4 months," Liberum analyst Ben Davis said.

The strike, over wages by Amcu, which is now in its fifth month, has taken out 40% of global platinum production and is tilting the economy into recession.

A Lonmin spokesperson declined to comment for this story but the company said last month it had lost a third of its annual production due to the strike which the chief executive described as a "bleeding" that might lead to the firm's death if not stopped in time.

Hopes of quickly resolving the impasse between the producers and Amcu were dashed on Monday, when the newly appointed mining minister abandoned the deadlocked talks after failing to mediate an agreement.

The strike is estimated to have cost the three companies R18.6bn in lost revenue and employees over R8bn in wages, according to an industry web site that constantly updates the tally.

All of Lonmin's main operations are in the strike-affected Rustenburg area and unlike its peers, it cannot rely on mines in other areas of the country or abroad.

Even though before the strike it had the most solid financial position among the three producers, analysts said its balance sheet is now deteriorating more quickly than the others.

Chief executive Ben Magara said last month the London-listed company was losing cash at a rate of $60m per month. At the end March it had net cash of only $71m, compared with $194m a year before.

To gain breathing space Lonmin drew down all its debt facilities last quarter which brought the total cash in its coffers up to $660m. With mining operations still at a standstill these funds will run out quickly unless steps are taken.

Adding to the companies' problems is the muted response of platinum prices to the heavy supply cut which they may have hoped would make the metal more expensive.

The workers downed tools in January demanding their wages be doubled to R12 500 a month basic wage in four years which the companies have said is unaffordable given high production costs. The employers are offering pay increases of up to 10%.

Buying time

A rights issue is the most likely option for Lonmin and it would not be the first time it has turned to shareholders to shore up its financial situation.

Lonmin did one in 2012, after labour unrest and violence that left dozens dead and battered the company's balance sheet but it is not clear how much of an appetite there would be now.

"Would you buy shares in a company that is on strike for half a year? I am not so sure," the industry source said.

Another option would be to get more bank financing but this could prove tough after already drawing down $589m in debt facilities last quarter.

A sale of some of its assets would be hard to do quickly and there would not be many takers for platinum assets in the strike area at the moment, sources say.

To buy precious time the company is planning to take measures to raise some revenue and conserve cash.

It said it would restart its processing facilities to process the six to eight weeks worth of inventory it had left at the end of May in its pipeline to generate cash.

Sales of the resulting metal could raise an extra $200-300m and buy a few more months.

Magara has also said a restructuring of the South African platinum industry and job cuts are inevitable.

"No doubt it's getting increasingly worrying," said Investec analyst Marc Elliott. "If the situation drags on more defensive action will be required to cut costs such as restructuring the work force and salaries, that would likely only slow a recovery upon resolution of the strike. It's not a pretty situation."

Taking into account that even once the strike is over Lonmin estimates it will take about three months to ramp up production to a steady level, raising capital is starting to become urgent.

"Redundancies are expected so as to reduce cash burn, but past that, a dilutive rights issue is one of the few options open to them," Liberum's Davies said.

"It's tricky to say what else they could do if they don't get more capital. It would likely begin with closure of the more marginal assets."