Lonmin’s solvency back in the mixer as embarks on shaft review

6
954
Ben Magara, CEO, Lonmin

THE solvency of Lonmin has again been cast into the crucible after a non-cash impairment took the value of the business to $1.1bn – the minimum required by lenders who recently waived two covenant tests provided it left $200m in debt undrawn.

The upshot is that were the business value to fall below $1.1bn, lenders may call in loans which would lead to a funding crisis – a day of reckoning the group today said called for its “undivided attention”.

In response to this risk, the group has gradually this year added more fundamental restructuring plans to its previous strategy to “pulling operational levers” to reduce costs. These include selling rights to its processing facilities, and shutting down unprofitable sections of its Rustenburg facilities.

So complex is this incomplete process, especially as it impacts the potential size of the impairment – which relates to the carrying value of the company – that it has delayed its full-year financial results announcement until it has clarity. The results were scheduled to take place on November 13.

As part of its cogitations, Lonmin could not rule out the possibility of having to refinance the business. Lonmin has raised $1.1bn in shareholder funds over the last five years in order to pay for capital expenditure and stay afloat.

This news has masked an otherwise strong fourth quarter performance where CEO, Ben Magara’s hands-on approach to shaft operations is beginning to take hold.

Platinum sales of 706,030 ounces for the financial year ended-September was in excess of the 650,000 to 680,000 oz guided, although 4% lower than last year’s number of 737,747 oz. Despite a shaky start in the first quarter, many of Lonmin’s key operations recovered well. Tonnes mined at its Generation 2 shafts – K2, Saffy and Rowland – were all higher. On an annual basis, total tonnes mined was 8.2 million tonnes compared to 8.1 million tonnes.

But there were significant weaknesses too. The older, Generation 1 shafts creaked in parts while a Generation 2 shaft – the 4B produced 18% less tonnes in the quarter which Lonmin described as lacklustre. As it wasn’t possible to allocate capital to the shaft ahead of its rival Generation 2 assets, 4B would be reclassified as a Generation 1 shaft which are not considered long-life or priority assets in terms of capital allocation.

However, Hossy shaft which was due to be closed at the end of year under review will be kept open for a further year depending on its performance. And the E3 shaft, by dint of the synergistic benefits it received from Lonmin’s acquisition of Anglo American Platinum’s shares in the Pandora Joint Venture, will be reclassified as a Generation 2 shaft as its ability to compete for capital improves.

It is also considering introducing funding partners for MK2 which, if developed, will extend the life of the Rowland shaft. This is an indication of the capital demands which Lonmin is juggling. Funding MK2 in such a way that it doesn’t tax the group’s balance sheet too greatly is a key focus of the operational review.

Another shaft, E2, would be put on care and maintenance in the first quarter of 2018 as Lonmin sought to separate the wheat from the chaff. Last month, Lonmin announced that some 1,000 jobs were at risk. Lonmin spokeswoman, Wendy Tlou, said the figure included contractors while up to 446 jobs permanent employees would be affected.

Lonmin cut about 6,860 jobs in its 2016 financial year taking down its full staff numbers to just over 33,000 souls. Then several months later it cut into its production target of about 700,000 ounces to about 650,000 to 680,000 oz for the 2017 financial year.

For the 2018 financial year, Lonmin guided to platinum sales of 650,000 to 680,000 oz while unit costs would remain under pressure at between R12,000 to R12,500 per PGM oz. However, capital expenditure would be increased from the R1.34bn in the year under review to 1.4bn to R1.5bn for each of the 2018, 2019 and 2020 financial years.

From a liquidity perspective, net cash improved again in the fourth quarter to $103m from the $86m in the June quarter and $75m net cash in the quarter before that. But Lonmin’s position remains precarious.

“The objective of the operational review is to achieve a properly funded viable business plan based on potential disposal proceeds, new debt capital and the continuing support of existing lenders,” said Lonmin. This would “… include obtaining their consents and waivers of any future potential covenant breaches and disposals under the operational review as required by the facilities agreements,” the company said in notes to its fourth quarter numbers.

6 COMMENTS

  1. Dear Fellow Readers,

    I hate to say this, but I was almost fooled by the incomplete disclosures by Lonmin’s management. I wrote the following then:

    ” 1. Non-contributing Production: This is still a serious problem for this mining company and am glad that it has taken my suggestions onboard given some of their recent announcements. OPEX escalations have stabilised thus affording the opportunity to baseline its mines properly and do away with fixation with running shafts at full-throttle.
    2. Reversed the intended sale of downstream processing capacity : This was just madness from the get-go and the engaged financial advisers did NOT have a clue as to the competitive advantage these assets bring during the pending , and awaited, PGM boom market. It was just plain dumb and should not have found its way into a news release. The current CEO seems to panic and has NOT shown any punctilious rectitude when confronted with strategic challenges. But then his chairman is Brian Beamish.I wish to challenge anybody to provide me with a successful project or initiative that Brian Beamish has ever come-up with in his supposedly long mining career. Very personable & likeable gentleman, but his corporate career is spotted at best ( i am being generous) from failed Murrin Murrin Nickel Mine…… ill-timed Los Bronces Project ……etc
    3. Operational focus : This is still lacking and i wish to see 3x qrts of costs guidance meet and mining to plan before being convinced that the discipline has returned. I just don’t believe this CEO is cut-out for this job. He is an Amplats-guy and must just leave this type of task to an ex-Implats or somebody.
    4. Balance sheets Issues : With the covenants waived, it seems now there is more flexibility , in the next 12 months, to go after the other low-hanging fruits on operational improvements without worrying about tripping-up on TNW or CAPEX spend covenants. But then again its execution! execution! execution!

    As per my previous post, the cash balance has recovered thus presenting an encouraging sign for the business.But lets await the full set of numbers to see which cylinders ( Mines/factors) are driving this stabilisation in performance. Hopefully, things have finally turned….”

    I posit now that the waiving of covenants was NOT a full disclosure. Furthermore, full-disclosure was that actually the lenders on hearing of a strategic shift indicated their displeasure, and this management jumped the gun and opted out of the facilities , which they have NOW discovered that are necessary for annual reporting as going concern. THIS IS UTTER RECKLESSNESS!

    NOW we are told that ” full-year results will be delayed as its operational review has required management’s “undivided attention”. Has the management attention being divided all along?

    The preoccupation with running shafts at full-tilt is insane at this point of the cycle. They need to be run for optimal profitability ( read: Optimal Net Mine Cash Flows) NOT optimal tonnage!

    Furthermore, It seems that this company is just NOT generating sufficient cash to pay its current liabilities , which stood at $153M in March 2017. I infer this from their own cash balance of $103M , thus indicating a change of a mere $28M, with loan interest charge of ±$80M to come.

    I am totally bewildered by Lonmin management and their actions. But refer to my previous comments about Lonmin management. They are just NOT cut-out for this task. Current unit costs of R11500/oz pgm ( a 4% increase y/y) are just too high and this management has done nothing to address this problem. When others unit costs are coming down, Lonmin’s unit costs are going up, why ? Because of this wishy-washy “key drivers” of management ” (a) Optimise hoisting Capacity ; (b) Improving Halflevel & crew efficiency ; (c) Improving Unit Costs ; (d)Increase value ; (e) Value Proposition in Cash”. This is just hocus-pocus. This is a classic line:

    ” Mining performance improvement has been sustained from March 2017. Tonnes mined by
    our Generation 2 shafts increased for the fourth quarter by 7.5% to 2.3 million tonnes compared with the fourth quarter of 2016, providing a 2.3% improvement for the year to 8.3 million tonnes for the year.”

    So the mining performance improvement is MEASURED by INCREASING TONNAGE when you have a COST PROBLEM ( or PGM basket Price Problem) ? Unreal!

    Mining performance improvement should be measured by Operations Profit Margins!

    In effect, the business model has NOT changed because of the above, so cost kept creeping-up unabated. I have given up on this crowd and let them sink , if it becomes inevitable. PIC must not rescue this lot but rather insist on BoD & management changes with any offered financing package. I wont bother to dissect results further, until the financials are released because it seems there is disclosure issues that cannot be ignored until all info is available.

      • Dear Alex,

        I have expressed my views on Sibanye-Stiilwater before. I see there are analysts who think the numbers are improving , i doubt it.

        Lets just list the key CF metrics , as of Q3 FY17 :

        1. Gold Division Net Operating Cash Flow YTD = R1358M ( FY16 : R5133M)
        2. SA Pt Net Operating Cash Flow YTD= R141M (FY16 : -R92M), Deal baseline fcast FY17 FCF= R1221M
        3. Stiilwater Pt YTD= R206M , with Deal baseline fcast FY17 FCF = $156M (R2100M)

        SBGL needs to generate EBITDA = R4700M in FY17 for covenants compliance ND:EBITDA of 3,5:1 , with a EBITDA YTD = ±R2131M there is a lot of things that need to go right for the Q4 FY17 to pass the test!

        SBGL is already missing their deals basellines numbers by significant margins, thus potents danger & burden for Gold Division.The Balance Sheet needs some repair to enable it to go after Lonmin Processing Facilities and more. But the Cash Flows are not coming through from the gold division and thats my worry.

        • Just some housekeeping on the numbers :

          ND = R21,6Bn – R3,67Bn = R17,93Bn , post Conv Bonds Issue
          YTD EBITDA = Au Div (R3860M) +SA Pt (R1068M) + US Pt (R1164M) = R6092M

          The thrust of the argument still holds….The Balance Sheet needs some repairs , and there is little headroom regarding covenants.

          For comparative purposes, AGA has similar covenant of 3,5: 1 ( ND: adj EBITDA) BUT its current ND: EBITDA = 1,49:1

  2. @GoldSpeculator – good points noted. I could not agree more with you, Magara tried to fight the battle, its time to throw-in the bloody towel. I hate to say this, but Executives with mining background measures mining performance with increased Tonnage, whether diluted or not. They are still stuck in the old school thinking of ‘skoontiers, etc’. Mining company paying monthly bonuses to a shaft based on their increased tonnage with diluted grade.

LEAVE A REPLY