Lonmin sees higher platinum output, prices

Allan Seccombe | Mon, 16 Nov 2009 11:08
[miningmx.com] -- LONMIN, the world’s third-largest platinum producer, will ramp annual production up to a sustainable 850,000 ounces of platinum from 2013 after a year in which safety stoppages and mine closures weighed heavily on output. The outlook for platinum is improving, the company said.

Lonmin is also in talks with its empowerment partner Incwala, its shareholders and their financial backers over the future ownership of Incwala. Lonmin guaranteed loans for the black investors which took a stake in a company called Incwala, which is Lonmin's empowerment partner. Lonmin paid out R294m or $39m to Impala Platinum in October as part of that guarantee. It may have to pay a further $20m in December because of those shareholders defaulting on their debt. Lonmin has rights to the shares held by historically disadvantaged South Africa’s (HDSAs) in Incwala to recoup the money.

Mining companies are obliged to have 26% black ownership of their business by 2014 to comply with empowerment laws.

"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 whichy mutual aspirations can be realised," said Roger Phillimore, Lonmin's chairman.

Lonmin is studying whether it should build another smelter to absorb future production and to provide a backstop to its troublesome No 1 furnace, which has had a number of outages since its commissioning in 2002. Lonmin argued that the smelter’s performance was in line with others in the industry.

“It is crucial that the growth in mined production is supported by processing capacity and reliability, particularly at our smelting facility,” CEO Ian Farmer said.

The No 1 furnace has been rebuilt after a matte run-out in June. It resumed operations in November, with the first matte tapped a week ago. “As a result of the rebuild, refined production during the first quarter of the 2010 financial year will be well below that of the prior year period.”

Lonmin’s total refined output in 2009 was 657,317 oz of platinum and 1.24 million oz of platinum group metals, 6% and 7% lower year-on-year respectively.

Lonmin’s platinum sales in financial 2009 were fractionally below guidance at 682,985 oz. It forecast 2010’s sales at 700,000 oz, requiring capital expenditure of $270m.

During 2009, Lonmin shut down production at unprofitable shafts, shedding about 7,100 jobs, of which contractors comprised 2,300. The company also lost 30,000 oz of production during the year because of the government’s tougher stance on fatal accidents, which prompted it to temporarily shut affected areas pending investigations.

Lonmin’s production is now solely derived from its Marikana underground operations, but since it closed its Limpopo operations it needs another source of Merensky reef to dilute the chrome-rich UG2 reef it is predominantly mining. About 80% of mined ore is UG2. Lonmin is buying low-grade Merensky ore to feed into its smelters.

Lonmin has decided to reopen an opencast mine at Marikana from 2010 to produce about 25,000 platinum oz a year. Contractor rates have been revisited and management says these will be profitable ounces.

The longer-term plan is to derive Merensky ore from the K4 shaft, which is currently being built at Marikana and should be in production from the first half of financial 2012.

Together with the ramping up in production of the Saffy, Hossy and K4 shafts, which will generate half of Marikana’s production, the Pandora joint venture will ensure Lonmin reaches sustainable production of 850,000 platinum oz by 2013, feeding into a market recovery the company is expecting.

Lonmin's capex will be between $300m and $350m from 2011 to get to that production level. Pandora will in total produce 100,000oz after the expansion.

The partners in the Pandora joint venture – Lonmin, Anglo Platinum and Mvelaphanda Resources – are conducting a feasibility study into extending its underground production, which, if approved, could come into production in 2013.

“Looking at platinum specifically over the next few years, we expect demand to improve gradually in 2010,” Farmer said.

“This will be supported by a steady recovery in the automotives and industrial sectors, with the market being in balance for the year,” he said, adding investors in platinum-backed exchange-traded funds would influence short-term prices.

“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,” he said.