Lonmin may face capital-raising dilemma

[miningmx.com] – ANALYSTS writing about the prospects for Lonmin in the wake of the five-and-a-half month strike over wages were sanguine about the firm, although one analyst said it faced a dilemma of growth versus shareholder returns.

JP Morgan Cazenove analyst, Allan Cooke, said he’s comfortable Lonmin has the ability to climb out of the strike effects.

“The group bore the brunt of the AMCU [Association of Mineworkers & Construction Union] strike and remains highly geared to PGM [platinum group metal] prices, in our numbers,’ Cooke said in a note dated July 25.

“Investor uncertainty should ease as production normalises and our forecast higher PGM basket price should assist a recovery in the group’s battered rating,’ he added.

Shares in Lonmin have been savaged this year. Since February 28, they were nearly 50% weaker, but have since recovered slightly after hitting a 12-month low in early July.

As of June 30, the company had a net debt/cash position of exactly: nil.

In other words, its cash of $586m was exactly balanced by debt of $586m. And as it sets about ramping-up production, in which it must also replenish its inventories, it will almost certainly slide into a net debt position.

Other analysts agree Lonmin is in a position to recover.

Seten Naidoo, an analyst for Standard Bank Group Securities, said Lonmin was his company’s preferred platinum pick, again on its ability to bounce back and leverage to higher platinum prices.

“In our view, the current management team is well positioned to maintain the momentum of the operational turnaround post labour strikes and drive returns for all stakeholders,’ he said.

Said Edward Sterck, an analyst for BMO: “As after the previous strike, Lonmin appears to have a good handle on the restart process and we see a projected quick return to a free cash flow positive position as definitely a positive’.

As can be expected, however, there isn’t universal agreement on the prognosis for Lonmin.

Andrew Byrne, an analyst for Barclays Capital thinks Lonmin’s management faces some uncomfortable questions in respect of its medium-term strategic plans.

He thinks Lonmin will struggle to reach normal production levels in the first quarter of its 2015 financial year as forecast last week by CEO Ben Magara and that in the absence of PGM price recovery, underlying debt will sink to $325m.

The ramp-up process has also been slower than projected and although 90% of Lonmin’s staff have returned after the strike, there’s still some 2,700 employees who declined to make the trip back to Rustenburg.

He also believes the company will struggle to finance its medium-term production plans because its estimate of stay-in-business capital of $250m for some 750,000 oz/year of PGM production is an under-estimation.

In order to maintain that output, it will have to spend $775m, said Byrne. “With underlying net debt position of $325m (post pipeline rebuild), and in the absence of a material increase in PGM prices, we believe that Lonmin does not have the ability to fund its medium term stay-in-business capital.

“We therefore suggest that the company faces a dilemma of raising capital to develop brownfield projects that generate negative IRRs [internal rate of return or the rate of growth a certain capital project is estimated to generate] at spot real PGM prices, or revise down the footprint and long-term production profile of the company,’ he said.