Lonmin distress unsustainable after suffers $1.05bn impairment

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Ben Magara, CEO, Lonmin

THE full extent of Lonmin’s financial distress was made plain today following the publication of its 2017 financial numbers in which it posted a $1.08bn loss (2016: -$322m) including an impairment of $1.05bn.

“Lonmin continues to be hamstrung by its capital structure and liquidity constraints,” said Ben Magara, CEO of Lonmin in notes to the company’s figures. The impairment was following changes to its business plan’s assumptions.

As a result of the impairment – which Lonmin alluded to last week – Lonmin’s tangible net worth fell below the $1.1bn threshold required of the firm’s lenders. Lenders waived the covenant, however, provided Lonmin is successfully bought by Sibanye-Stillwater which on December 14 launched an all-share bid for the company.

However, they took the extra insurance of cancelling some $66m in revolving credit facilities while a further $150m in debt facilities were draw-stopped. The group has managed to stabilise its cash position following a poor first quarter of production at $103m as of September 30. Net cash was $49m as of the first quarter’s end, but on a year-on-year basis Lonmin’s cash position is $70m worse off.

Magara acknowledged it was becoming “tougher and tougher” to keep cutting costs at the organisation which has not been much assisted by the rand platinum group metal basket price which was about 3% lower at some R11.236 per ounce year-on-year. “But we still have to keep cutting our cloth,” he said. Unit costs were 8.9% higher at R11,701/oz.

The deteriorating nature of the business was underlined by its first quarter performance which the group also reported today. (The full year figures were delayed last year in order that Lonmin could complete a business re-engineering study, hence the write-down). Cash fell to $69m as a result of some $40m in cash burn.

“Cash burn remains a concern,” said Goldman Sachs in a report. “Given that Lonmin is trading close to where SIbanye has bid it for, we expect limited impact on the stock,” it said.

Mined and refined production came in at 651,307 and 687,529 platinum ounces respectively while sales of 706,030 platinum ounces exceeded the sales guidance of 650,000 to 680,000 oz. “Platinum prices continue to be depressed but the operational results achieved this financial year have been pleasing,” said Magara who also paid tribute to his 33,000 ‘Lonminites’ who he described as “resilient”.

For the 2018 financial year, Lonmin has targeted sales of between 650,000 to 680,000 oz while unit costs would be higher again in the range of R12,000 to R12,500 per PGM oz. Capital expenditure would be “limited” to a range of R1.4bn to R1.5bn following expenditure of R1.3bn in 2017 – lower than the guided R1.4bn to R15bn. Magara said the industry was not spending enough for the future.

Asked for his view on speculation of a rival offer for Lonmin, Magara said that “… anybody can make a counter offer”. He did not feel it necessary for Lonmin to alert shareholders, however.

Shareholders, including the Public Investment Corporation which owns about 30% of the company, will shortly be posted the firm’s circular regarding Sibanye-Stillwater’s offer which both boards have endorsed. “The PIC will make their decision, but we have to wait until the lady sings,” said Magara. Lonmin said it anticipated completing the transaction during the second half of the current year.

Magara was also asked whether he had been offered a position in the combined Lonmin/Sibanye-Stillwater company, to which he replied: “That is not a conversation we have had. I am not even contemplating entering into that yet”.

7 COMMENTS

  1. Dear Fellow Readers,

    I hope this is my final comment on the sorry-saga that is Lonmin. This company has destroyed shareholder value due to mismanagement. The BoD of this company have failed their shareholders. However, the shareholders have Froneman & Richard Stewart to thank for the respite. It should be a lesson to all that you cannot manage mining costs on hope that the commodity price will provide you with the margin. MINING OPERATIONS NEED TO BE MANAGED FOR THE MOMENT.

    I am going to reiterate what i previously said about this Lonmin management:

    “The challenge is the PGM volumes which are just not increasing at low costs shafts. Furthermore, this is constrained by low PGM prices which is an industry problem. The solution is curtail loss making and marginal ops whilst improving efficiencies at high-tonnage low costs and high margin shafts. Lonmin management seems to be missing this solution.”

    Fellow readers, I hate playing a “monday night quarterback” or more appropriately a “Naas Botha after a Rugby Game” of Lonmin. Please indulge my analysis of “what if” Lonmin had taken my gratis advise here on miningmx.com :

    (a) Decrease Operating Leverage to lower absolute costs (in R’M) at K3, Rowland and 4B shafts : Lonmin DID NOT do any of this. Matter of fact , the numbers indicate that they ramped up costs of Generation 2 shafts in that tonnage was flat FY17 : 8,250Mt( FY16: 8,06 Mt). Unit costs increased to R903/t ( FY16: R857/t). This in a flat-cum-decreasing realised PGM basket of R11236/oz (FY16:R11637/oz) and seemingly high grade of 4,61 g/t ( FY16:4,6 g/t).

    If Lonmin had kept unit costs at ±R850/t, due to supposedly limited success in reducing costs , Generation 2 shafts would have provided some EBITDA = R2200M ($164M) (FY17 : EBITDA :$40M). Thats the scale of the damage ( ±$120M) of non-contributing production & needles CapEx.

    (b) Manage for Cash all Generation1 shafts(with Hossy on C &M) for unit costs= 400m2/crew efficiencies at Generation 2 shafts: Again the opportunity was missed here, Generation 2 crew efficiency is 295m2/crew ( FY16 : 316m2/crew). Uncontrolled Labour reshuffling , thus resulting in over complement in some work areas. Some Generation1 shafts ( E3 & Pandora) are now being reclassified as Generation2, and still have IAOR of 21months. Because of this perceived 21months IAOR, mining chaps are just overzealously mining without due consideration to profitability. If an instruction was that do NOT bring anything to surface with unit costs >R600/t , then Lonmin would have ensured that Generation 1 production has EBITDA margin > 35% at realised PGM basket of R11236/oz. Thus eliminating non-contributing production volumes.

    (c) Defer all Growth CAPEX (including CEO’s fantasies about new PGM processes); If Lonmin had deferred BTT (R370M) and MK2 (R170) , which are growth related , then actual capex would be R800M ( actual FY17 : R1336M).

    (d) Monetise the excessive mining flexibility ( 20 months ) to something sensible ( 10 months) given the debased new production targets : This was the lowest hanging fruit. If this was monetise to even 15 months for Generation 2 ( actual FY17 : 18), ORD Capex would have been reduced by a further R250M.

    CONCLUSIONS

    LONMIN was cash flow negative by -$73M ( FY16 = -$29M). From the above proposed, now expired/irrelevant, measures Lonmin would have been +ve FCF = $97M. With this, they would have easily renegotiated an amendment to covenants of a mere $150M facility including reducing it to ±$100M to strengthen their negotiating hand given improved PGM basket prices!

    THATS HOW LONMIN HAVE DESTROYED VALUE FOR ITS SHAREHOLDERS ! By preoccupation with tonnage volume and disregarding profitability!

  2. The current strengthening of the Rand as the ANC is busy house cleaning, is going to add additional stress to all mining companies.

  3. I guess no surprise that the Lonmin Audit Committee has had Dr Len Konar in charge, who also until recently had the same role at Steinhoff.

  4. Dear Goldspeculator

    Whats you thoughts on the TO and the enlarged Sibanye-Stillwater group as a whole?

    I am a long suffering LMI holder from the UK, are you in SA? would you convert to SA or US shares if located in the uk?

    Many thanks in advance

    • Dear Trader Jason,

      My sympathies on your unwarranted prolonged suffering. I am in South Africa. Please note that according to RSA law , i am prohibited from providing financial advise to third-parties that can be relied on.

      However, i can freely share my thoughts on Sibanye-Stillwater. I hereby refer you to comments to the following articles on this forum:

      Newsmakers of 2017: Sibanye-Stillwater CEO, Neal Froneman

      Sibanye suspends cash dividend as net debt hits R22bn

      My next instalment will be at the release of the FY17 results. But the gist is that Sibanye-Stillwater Balance Sheet is precarious from debt-fueled M&A, coupled with operational ill-discipline at its Gold Division, and it is at risk of an “expensive shareholder value destructive bulimic event” unprecedented in RSA!

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