[miningmx.com] – LONMIN may need to take “drastic action” in order to protect its balance sheet possibly cutting up to 250,000 ounces in platinum production, said Investec Securities in a note published last week.
The bank added, however, that significantly cutting into production would be challenging for Lonmin amid union militancy and government pressure to protect jobs.
A production cut of 250,000 oz is about 33% of Lonmin’s stated output target of some 750,000 oz/year. In 2014, Lonmin sold 441,684 oz and 696,000 oz in 2013.
Lonmin said last week that it had deferred significant restructuring in favour of maximising returns from its older assets and phasing in development of newer ones whilst simultaneously transferring workers between operations.
“We believe that having looked at our set-up, the most sensible is to ramp-up to generate more cash,” said Ben Magara CEO of Lonmin last week. He added that the threat of strike pressure was a consideration when deciding to defer restructuring.
“We are utilising natural attrition, and we have frozen recruitment while there are a number of contracts … where we will be putting our own employees in instead,” he said. Lonmin employs about 28,000 people.
Investec Securities said, however, that the relatively poor state of the platinum market would continue to exert pressure on Lonmin.
“If the company undertook a radical reorganisation and closed three big shafts (Saffy, Hossy and K4) for the foreseeable future, delivering a production base of c. 500-600kozpa Pt over the next 8 years, this could help preserve the balance sheet, and potentially improve shareholder returns even on our base case assumptions,” said Investec Securities analyst, Marc Elliott.
“Such drastic action would, we believe, maintain balance sheet strength to the end of the decade, although we caution that it would likely prove exceptionally challenging in practice given union militancy and pressure from the government to combat unemployment,” he said.
Lonmin reported net debt of only $28m as of its year-end on September 30, but the majority of its debt falls due in 2016.
Debt facilities currently amount to about $575m, of which the $400m facility matures in May 2016, and much of the rand-denominated facilities mature in June 2016, said Investec Securities.
“If the PGM [platinum group metal] pricing environment and ZAR/US$ rate remain unchanged, we question whether these facilities are likely to be renewed,” said Elliott, adding that with most of the debt facilities due for renewal in Lonmin’s 2016 financial year, “… harsh action may become essential”.
“In our view, Lonmin either needs a considerably stronger PGM pricing environment (or a weaker ZAR/US$ rate) than we model, or needs to take drastic restructuring of its business before we can justify buying the stock,” Elliott said.
HSBC said in a note published on November 10 that the company required a 15% higher PGM basket price in order to generate free cash flow. Magara had earlier said the firm’s capital projects would only be financed through cash generation.
“We believe the group offers significant positive operational and financial leverage to rising prices, but its balance sheet remains vulnerable at prevailing prices,” it said.
In its note, BMO Capital Markets said that several more quarters of strong performance would be needed from Lonmin before its balance sheet worries could be put to rest.
Said Edward Sterk, analyst for BMO: “… PGM prices have fallen since the quarter in rand terms, and another quarter or two of operational success may need to be seen before any fears around balance sheet weakness can be put to rest”.
