Lonmin sticks to sales forecast

Brendan Ryan | Thu, 23 Jul 2009 11:20
[miningmx.com] -- LONMIN, the world’s third largest platinum producer, is sticking to its forecast of platinum sales of between 680,000 ounces and 700,000oz for its financial year to September.

That’s despite the closure of its Number One furnace for a month from June 15 for repairs after a matte run-out and continuing problems since it was restarted.

CEO Ian Farmer cautioned in Lonmin’s third-quarter production report released on Thursday that “this result is dependent on the selling of metal-in-process inventory and on how the Number One furnace performs during the fourth quarter of the year”.

The production report indicated that, so far, the repaired furnace has not performed well since it was restarted on July 15.

Slag leaks occurred again after matte was first tapped from the furnace, and power to the furnace had to be reduced to deal with the cause of the leaks.

“The furnace is expected to tap matte again in the coming days and, in order to preserve its integrity and maintain safe working practices, it will be operated at reduced power until a redesign of the matte tap hole area can be completed and a rebuild initiated.

“This is currently planned for the first quarter of the 2010 financial year.”

Lonmin started up its three other Pyromet furnaces from June 15 to compensate for loss of production from the Number One furnace.

The group has been plagued - six events in the past six years - by major problems with its smelting operations, which are believed to be linked to the high chrome content of the increasing volumes of UG2 ore it is smelting.

A research reported published at end-June by JP Morgan analysts Steve Shepherd and Allan Cooke said that Lonmin’s Number One furnace has a circular design – the only one of its kind for platinum smelters - which “has drawn some controversy in the industry since inception”

They said: “We expect Lonmin to persist with the furnace. We estimate its replacement cost could be greater than $200m, putting this option beyond reasonable reach.

“All this said, we won’t be surprised if during the next up cycle management announces its intention to build another furnace to alleviate the need to operate the Merensky and Pyromet furnaces which are not particularly energy efficient.”

Lonmin sold 178,494oz of platinum in the June quarter (2008 June quarter – 180,270oz) while sales for the nine months to end-June amounted to 490,347oz (469,233oz).

Marikana , the group’s primary producing mine, reported a 10% drop in tonnes milled to 2.3 million tonnes for the June quarter. This was because of management actions to shut down uneconomic sections, but also the result of public holidays and associated absenteeism.

Lonmin also cited a “marked increase in the incidence, severity and impact of Section 54 shutdowns”.

These are linked to safety issues. Lonmin lost about 160,000t of production in the June quarter compared with about 107,000t in the third quarter of 2008 through Section 54 closures.

The Lonmin share price has been under considerable pressure since mid-June, falling 9% to R176.15 on the day the latest smelter problem was announced.

The current price is R148. In their June 30 report Cooke and Shepherd put a valuation of R142 on Lonmin, on the basis that it would take about two years for the group to turn its operations around.