Lonmin may buy revenue – and time – in asset sale strategy

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LONMIN states in its announcement on August 7 that proposals to sell the rights to some 500,000 ounces of platinum group metal (PGM) processing capacity, as well as brownfield and greenfield projects, are “subject to consents and approvals”.

This is almost certain to mean its banking partners since part selling of assets alters carrying values and changes the limits of Lonmin’s debt covenants. It’s unlikely, however, Lonmin would have made this announcement without there being a level of discussion with lenders. One would expect they are already in agreement with the conditions under which covenants might change.

As one industry participant put it: “When you change the business plan you have to sit with the banker and Lonmin would have done this”. Nonetheless there are some important questions raised about Lonmin’s strategy.

One, voiced by a Miningmx reader, is that Lonmin is giving away future expansion capacity by selling for cash rights to its refineries. In a similar vein, selling a share of its MK2 Rowland shaft extension suggests an obsession with keeping to production guidance instead of cutting production and leaving the resources in the ground for better days – akin to Glencore’s strategy with its coal, copper and nickel assets during 2015 and 2016.

The way Lonmin probably sees it is that this strategy is about survival, not just in the sense of buying time, but by buying revenue. It needs to generate cash because it’s found spending $25m could allow it to produce and sell crude nickel sulphate from its Generation 2 shafts, enough for an annual profit of $10m and a 2.5 year payback on the investment.

There’s also a metallurgical process Lonmin CEO, Ben Magara, wants to commercialise in which iridium and ruthenium, lesser known PGMs, are distilled and sold.

As for selling assets, it’s possible Lonmin might be seeking one of several options including metals streaming a la Glencore in which 25% of the developed asset is sold to the third party lender at production cost. Magara would probably point to the firm’s $50m tailings project which has third party funding already in place.

Given the strategic nature of the employment Lonmin provides, in the socially umbrageous district of Marikana, it might be possible to attract the developmental funding of the Industrial Development Corporation or the Development Bank of Southern Africa; after all, there’s some 5,000 jobs on the line at the Rowland shaft.

One of the potential partners with which Lonmin could cooperate on the processing side of its plans is Sibanye Gold. That company’s spokesman, James Wellsted, was somewhat noncommittal though on the prospects. “As usual it all depends,” he said in an e-mailed response to a question.

“We move from a Purchase of Concentrate (PoC) to a toll treatment arrangement at the end of 2018,” he said of the down streaming agreement with Anglo American Platinum (Amplats) from which it bought the Rustenburg shafts. “We can give 24 months notice from then if we get better terms elsewhere that Amplats is unable to match,” he said.

There are other potential partners, however. Lonmin already processes concentrate from Jubilee Platinum, but not all, while IvanPlats, Wesizwe Platinum, Tharisa and even Platinum Group Metals (PTM) may become potential partners, assuming PTM – which like Lonmin – is able to prevail in the current market.

The view of Citi analyst, Johann Steyn, is that while the consolidation of processing activity and assets in the Bushveld Complex ought to be applauded, Lonmin finds itself in a weak negotiating position. Said Steyn: “… [F]ailing to monetize these initiatives could result in a fourth ’emergency’ rights issue in eight years. Potential suitors will know this.

“Still, we think they are in a better negotiating position now than they will be in a potential business rescue situation if, for example, shareholders are unwilling to provide further funding in a rights issue situation”. He lists Sibanye Gold as the most likely joint venture partner on potential asset buy-ins at K4, the Limpopo asset, Akanani, and MK2 “… given the geographical proximity of Sibanye’s Kroondal assets”.

4 COMMENTS

  1. Dear fellow readers,

    The contributions made by the above analysts are valid and insightful.

    I hereby wish to reiterate that there is a potential flaw in this strategy pursued by Lonmin which cannot be ignored. Here are my broad analysis:
    1. You cannot monetise assets for value in a depressed market full of asset sellers. Pt assets for sale in RSA are plenty.
    2. Lonmin cash burn , according to their 3Q Ops results was deemed stable. It was reported that Net cash improved to $86M ( March = $75M). I suspect the must have been a cash call somewhere which caught them unawares hence the scramble. Bridging banking covenants maybe on the $150M facility????
    3.Lonmin is focusing on incorrect things for the current Pt market. In their investor ppt they state the following as key drivers : (a) Optimise hoisting Capacity ; (b) Improving Halflevel & crew efficiency ; (c) Improving Unit Costs ; (d)Increase value ; (e) Value Proposition in Cash
    Frankly, Lonmin management is misguided in these key drivers , I would do the following :
    (a) Decrease Operating Leverage to lower absolute costs (in R’M) at K3, Rowland and 4B shafts ; (b) Manage for Cash all Generation1 shafts(with Hossy on C &M) for unit costs= 400m2/crew efficiencies at Generation 2 shafts ; (d) Defer all Growth CAPEX (including CEO’s fantasies about new PGM processes); (e) Monetise the excessive mining flexibility ( 20 months ) to something sensible ( 10 months) given the debased new production targets

    All of my key drivers will deliver improved operating margins , which will deliver improved Net Mine Operating Cash Flows ( which is VALUE). Production will decrease because of my proposed key driver (a) as it will imply determining a Volume/Costs balance for maximum Operating Margin. The Rationale being that rather generate higher Cash flows per tonnage(read costs) THAN Low Cash per tonnage. Tonnage costs money so the less of it the better given that PGM basket prices are low at R11500/oz pgm ( lower than R12340/oz of 2011!!!).
    4. Lonmin high average unit costs of ±R11300/oz pgm ( 2011 : R7534) stem from excessive non-contributing production ( sources : Hossy etc , some mining areas in generation 2 shafts ). Even some Generation1 shafts. The Generation 1 shafts must be kept < R700/t unit cost. R700/t unit costs at 4,56 g/t pgm with basket price of R11500/oz deliver a 35% C1 operating margin for Lonmin with the current cost structure. By reducing the underlying Costs ( 2016 : ±R14Billion) to deliver profitable production at whatever revenue ( Production oz x Basket Price) will sustain Lonmin by keeping the lights on until better times arrive!
    5. Lonmin STOP obsession with running shafts at tonnage capacity .Mining costs are associated with moving tonnage so maximum tonnage = maximum costs!

    There is some business logic in SBGL (with R+ R =±80Moz PGM) acquiring downstream processing capacity from those who don't value it much at this point of the cycle.

    • That does provide some relief, but I think the larger picture is the sustainability of the business over time. There are concerns.

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