[miningmx.com] — IT can be challenging getting a consensus opinion on
Lonmin’s prospects. The world’s third-largest platinum producer has underperformed
badly in recent years, with the only constant being its ability to be hit by bad news
the moment its share price develops some positive trend.
While the stock has so far fallen around 20% this year – not unlike its peers, but
exacerbated by a downgrade revision of its production forecast – some analysts
suggest it’s now poised to outperform the industry, having done most of the hard
work to cash in on the rising demand for platinum group metals (PGM) for the
foreseeable future.
Says RBC Capital Markets analyst Leon Esterhuizen: “Lonmin should be better placed
than its peers to deliver production growth and costs containment, and remains our
preferred PGM major in a positive metal price environment.’ RBC has a price target of
1,800 pence for Lonmin; a premium of almost 30% to current price levels below
1,400p.
Sharing RBC’s optimism is Investec Securities, which sees the share moving to
2,204p, as well as Credit Suisse to a lesser extent; its target being 1,690p.
Yet for every bull there’s a similar bearish sentiment, with the forecasts of analysts
at AlphaValue, BMO Capital Markets and SBC Securities ranging between 1,500p and
1,550p.
If any consensus was possible, it would be that the share’s performance could only
improve, with the extent of this improvement up for debate.
The optimists are, however, making a good case for their stance. One of the most
important reasons for Lonmin’s past operational underperformance on the mining side
has been the lack of underground development. Esterhuizen says a key component of
the company’s turnaround plan – apart from closing loss-making operations and
lowering overheads – was to expand developments underground to increase mining
flexibility. That has seen immediately available ore reserves increase to almost 17
months from a low of less than 12 months in 2008.
“One of the biggest contributors is often a lack of mining flexibility due to a lack of
development. Lonmin has addressed this issue, and we believe the current increased
ore reserves should put Lonmin in a better position to execute its plans,’ says
Esterhuizen
Ian Farmer and his management team would have to cope with all the market
conditions that are squeezing South Africa’s entire platinum sector.’
Analysts at JP Morgan Cazenove also point to the fact that Lonmin’s growth plans –
an additional 50,000 oz per year for the next four years – are credible, given that it is
ramping new shaft infrastructure and is not constrained by hoisting capacity.
“The risk is therefore more to a cost blowout than achieving the 950,000 oz target, as
management can always throw more resources at any potential problem,’ it says in a
note.
Lonmin has also seemed to find a solution to that traditional thorn in its flesh: the
persistent technical problems with its main smelter, which has operated smoothly for
six months after a rebuild.
“We’re six months down the line, so we’ve got through the new wear pattern,’ said
vice president in charge of smelting, Frans de Beer. “Will it keep on for two years?
We’ll have to wait and see, but the furnace so far acted in the way we’ve predicted.’
The construction of a new 10 MW second smelter will give Lonmin much-needed spare
capacity to back up its 20 MW number one smelter. The new one is due for first
production in May next year. Management will decide over the next 18 months
whether to build a third furnace for additional backup.
But for all this to translate into meaningful share price gain CEO Ian Farmer and his management team would have to cope
with all the market conditions that are squeezing South Africa’s entire platinum
sector. Those include the strong rand, excessive pay demands from an aggressive
workforce and the impact on production from the rising number of safety stoppages.
Though Lonmin’s prospects may seem good, it won’t be an easy ride.
