Lonmin on recovery track

Brendan Ryan | Tue, 15 Dec 2009 10:23
[miningmx.com] -- LONMIN CEO Ian Farmer expects a recovery in platinum group metal (pgm) profit margins during 2010 as demand for the metals picks up.

In his 2009 annual review he said this forecast was based on the problems being experienced by the platinum mining companies trying to increase production to meet rising demand.

Those problems included under-investment by the mining companies as well as the increasing “prevalence and severity” of Section 54 safety stoppages which are affecting production.

Farmer pointed out Section 54 stoppages cost Lonmin more than 500,000 tonnes (t) of production in the year to end-September representing some 30,000oz of platinum equivalent to 5% of Lonmin’s total underground production.

“These stoppages are likely to continue in 2010 and beyond,” he added.

Chairman Roger Phillimore commented, “this is a high economic cost specifically to the company but no less to the nation due to the reduction in foreign exchange and tax receipts.

“There is an argument for the Department of Mineral Resources to sponsor and lead a co-operative process with pgm producers and organised labour to agree procedures to achieve a consistent application of monitoring measures and remedies, without jeopardising the pursuit of improved safety and reasonable economic returns.”

Phillimore also voiced some carefully worded warnings over the current regulatory environment in South Africa, in particular concerning the Mining Charter as well as the above inflation pay awards being granted to workers.

He commented, “Lonmin embraces the tenets of the Mining Charter and seeks in its actions to advance the transformation agenda prescribed by the South African government.

“In this context it is, however, inescapable that the economic realities imposed by metal pricing, currency exchange rates and general financial conditions – none of which the company can control - can have profound effects on the rate at which mutual aspirations can be realised.

“Constructive engagement also forms the basis of our current wage negotiations; industry settlements to date have been in excess of inflation despite the harsh revenue environment and lack of profitability.

“The long term health of the industry generally, and Lonmin in particular, depends on an appropriate balance being reached between increased wage awards, productivity improvements and the imperative of profitability to enable the business to invest for growth and earn appropriate shareholder returns.”

Farmer said the low rand basket pgm price squeezed industry profitability during 2009 and restricted capital investment.

“If this continues, further short term under-investment will be the natural consequence. We therefore anticipate that supply will struggle to keep up with recovering demand from 2010 onwards and, as demand returns, there should be a recovery in pgm profit margins.”

Farmer added he expected demand for platinum to improve gradually in 2010, supported by a steady recovery in the automotive and industrial sectors. He expected the market to be in balance for the year.

He added, “in early to mid 2011 we expect to see the start of a more significant upturn in demand supported by increasing momentum in the automotive and industrial sectors followed by a more pronounced market rebound with the market moving back into deficit.”

Farmer predicted Lonmin would sell around 700,000oz of platinum during financial 2010 which would be slightly ahead of 2009 sales volumes .

He forecast the group would spend $270m on capital expenditure during financial 2010 and between $300m and $350m annually from financial 2011 onwards.

Longer-term he believed that Lonmin would increase production to 850,000oz annually by 2013 as the ramp-up of production at three newer shafts more than offset declines at other shafts reaching the end of their economic lives.

Farmer added Lonmin was looking at “options for additional backup capacity” as a result of the persistent problems experienced in running its Number One furnace.