www.miningmx.com | mybk07 Mills under the microscope

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Brad Mills, CEO, Lonmin

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Mills under the microscope
David McKay
Posted: Mon, 16 Jul 2007

[miningmx.com] -- WHY DOES LONMIN CEO Brad Mills have such a bad rap in some quarters of South Africa�s investment sector?

The criticisms are that the company has limited depth in management, particularly on-mine. Analysts have also expressed concern that Mills has made some poor acquisitions, such as buying for $190m in 2005 a mine formerly owned by Southern Platinum and held in the formerly JSE-listed Messina Platinum that Lonmin renamed Limpopo.

Smelter problems at the company�s Western Platinum mine haven�t improved his reputation in Johannesburg either.

Speaking at the recent half-year results, in which platinum group metal production had dropped off badly, Mills said he was optimistic of a turnaround. But it wasn�t a universally shared feeling. �A theme we see in the outlook is optimism on management�s part,� says Steve Shepherd, an analyst at JP Morgan in a recent note. �We have some misgivings about this.�

This wariness has been supported by poor third quarter results from Lonmin released on July 16 in which it said continued operational problems would mean it would fail to meet its 1 million oz target for the 2007 financial year. �Lonmin of old used to known as a company that under-promised and over-delivered � things seem to us to have radically changed,� said Shepherd.

A theme we see is optimism on management�s part

Responding to criticism he received at the group�s half-year point, Mills was sanguine on the vote of no confidence. Taking the management churn as an example, he reflects that profound changes in how the company operates will unavoidably cause turnover. �Those who don�t like it [the changes] have left. If they�re uncomfortable, they go.�

One major strategic change for Lonmin has been its aggressive move into mechanisation. If successful, mechanised mining will eat massively into labour costs � from 65% of total on-mine costs down to 35% � says Mills. And safety levels, notoriously erratic at South Africa�s mines, will be reduced.

Mills surprised analysts earlier this year when he announced plans to ditch the Pandora joint venture project, which Lonmin owns with Anglo Platinum and Mvelaphanda Resources. It can�t be mechanised and is now non-core.

Over and above that, Mills says he�s less interested in South African investors, which may account for their apathy towards him. �The principle issue with South African investors is that we don�t put the effort in. Only 4% of shareholders reside in South Africa. It�s intentional,� Mills says bluntly.

However, he�s keen to say that more emphasis is placed on mine relations. He spent a night in one of the mine hostels and met labour groups all day listening to grievances. Labour groups were suspicious and told Mills they only ever saw management when there was a crisis. That spoke volumes about previous company culture. �Lonmin was a hierarchy of command and control,� says Mills. �But without leaders.�

Lonmin was a hierarchy without leaders

Though he hopes it�s altering at Lonmin, Mills is clearly frustrated by the on-going technical problems at its No 1 smelter. There was another leak in December, which delayed a third of finished metal production. Mills decided to stockpile concentrate and take the cash flow hit upfront rather than pay a rival platinum producer to smelt for him.

More worryingly, the technical issues at No 1 smelter have been a regular event for Lonmin � in fact, three in four years. Mills says the management team has been �completely rebuilt� with a metallurgist replacing the environmental engineer running the smelter. He hopes the problems are now a thing of the past.

And notwithstanding other management departures elsewhere in the organisation, Mills is confident of what he terms �a net upskilling� � a view that�s more readily adopted in London, where the company is headquartered. �Lonmin continues to be an attractive proposition,� said Simon Toyne, an analyst at Numis Securities in May before the third quarter figures were published.

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Heye Daun, a fund manager at Old Mutual Investment Group, acknowledges the changes Mills has made. Though credibility still needs to be settled once and for all, Mills�s so-called soft skills, safety improvements and South African government liaison are unsurpassed by his peers in the sector, Daun says. �He's got a much more enlightened approach than most of the other South African producers, some of whose relationships have been very adversarial in the past � for example, with government or other stakeholders.�

Mills joined Lonmin in 2004 after having previously run the base metals division at BHP Billiton. His first year at Lonmin�s helm was controversial owing to an intriguing ping-pong between management and shareholders: the former seeking to diversify Lonmin, but shareholders resisting. �It became a messy, public debate,� says Mills.

City investors recognise in Lonmin a rare platinum opportunity, as some funds aren�t mandated to invest in South African-listed Anglo Platinum or Impala. Mills says any commodity Lonmin had bought into would have worked out, given the subsequent bull run in anything from copper to molybdenum. But he�s currently content enough with platinum. �Once we�d made the fundamental decision to double up on platinum we didn�t regret the decision,� he says. Lonmin is hoping to produce 2 million oz of refined platinum in an unspecified period after 2012. The target for 2007 was just over 1 million oz, despite the smelter setback. Management concedes, however, that�s an unlikely target believing production is likely to come in at 820,000 and 840,000 oz.

The platinum market has thrived as supply promises faltered while demand steadily increased, largely owing to platinum�s use as an autocatalyst. Diesel autocatalysts in the US remain the big imponderable helping drive the market. Every 10% increase in diesel autocatalysis usage mops up another 300 000 oz/year of platinum. Given annual production of 6.75 million oz, that�s significant.

But finding new sources of production has been critical. Lonmin has been an active acquirer of platinum producers. After the Limpopo mine, which is expected to produce 93,000 oz/year in a second phase expansion by 2012, Lonmin spent a further $440m buying Akanani, a project in the northern part of the Bushveld. The seller was AfriOre, a Canadian-listed business, backed by Tau Capital. In Lonmin�s hands, Akanani could produce an estimated 625,000 oz/year.

It became a messy, public debate

Further growth through acquisition will be more difficult. �The days of hoovering up what we wanted to is probably over now,� says Mills. Impala Platinum has stepped into the acquisition market. �We�ve had a free pass though,� he says. �We�ve taken the assets we wanted.�

The Limpopo division is struggling, as some feared it would � problems Lonmin believes can be tackled by training. The key at Limpopo, says Mills, is to have about 12 to 18 months of ore developed to provide flexibility compared to the four months of reserves.

However, earlier this year only four months of reserves were available. Production was also down. Output in March was 19%, compared with December. The concern is that Limpopo is a �ramp-up� mine, continually lifting production every month. �New management just dropped the ball. It was a mistake,� says Mills of Limpopo�s problems.

As for Akanani, Mills claims to be wowed by the geology which, he says, is atypical of the Bushveld, where most of the world�s platinum is found. �Akanani will triple in size,� Mills says. The ore is particularly thick and the average grade higher.

But JP Morgan�s Shepherd is sceptical. �It�s very early days, in our view, to make brave forecasts on this deep level, more massive orebody.� There are also water shortages in the region, which has prevented Anglo Platinum expanding its PP Rust mine.

Mills acknowledges the risk. �We have to spend money to get water. We�ve identified about five sources. It�s not a barrier for the company,� he says confidently.

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