[miningmx.com] – LONMIN said it would cut its $250m (R2.9bn) capital expenditure budget a quarter to $185m (R2.1bn) in 2015 owing to low dollar platinum group metal prices, and added that it would keep spending under review.
Lonmin unveiled a cost drive last year in which it said it would reduce costs over a three year period by R2bn of which R600m would be through redeploying staff to areas of the business where an increase in mining activity had been pinpointed.
Commenting in its December quarter production report today, Lonmin CEO, Ben Magara, said the firm would stick to its production guidance for its 2015 financial year of 730,000 platinum ounces – a target analysts have questioned.
Investec Securities said last year the production target was a politically-driven in order to stay industrial action as lower output would imply shaft closures and job losses. Lonmin produced 441,684 oz in its 2014 financial year and about 696,000 oz in 2013. The firm’s financial year-end is September 30.
Sales volumes were actually 9% higher in the December quarter whilst total platinum group metal sales were 11.7% higher at 274,425 oz. In rands, it derived a 1.7% increase in the basket price of PGMs, but in dollars, the basket price was 7% lower at $1,033 per oz.
This is the number which bothers Lonmin because a chunk of its debt – $575m – is in dollars of which about $400m falls due in 2016. The pressure placed on Lonmin’s balance sheet was also compounded in December when its two furnaces suffered technical failures associated with leaks and electrode breaks.
Lonmin said it was “disappointed” that repairs and maintenance to both its main furnaces required shutdowns at the same time and which had caused “… a temporary bottleneck in our processing operations”.
It hoped to have processed the metal in process by the end of the calendar year, but had restarted three smaller Pyromet furances as a stop-gap to help process concentrate. Furnace No. 2 had been repaired and had poured its first matte last week.
The repair of Furnace No 1 had been brought forward and the company was on track to have it operating again within three months, Magara said.
The smelter downtime would take borrowings higher by the interim (end-March) as Lonmin serviced working capital out of debt, but it maintained that it would not fail its covenants and its balance sheet was largely intact.
“We are confident of managing our working capital requirements through cost conservation measures and capital discipline to keep borrowings and debt covenants well within our committed debt facilities,” said Magara.
Investec Securities last year expressed some doubts that it would be able to avoid restructuring of its mining operations, especially with platinum prices under pressure.
The bank added today: “We are encouraged to see a cut in the capex and that guidance is being maintained that will help preserve the balance sheet.
“However, given the current PGM pricing environment we believe the company’s current business plan is unsustainable and will require drastic surgery,” it said. Lonmin said today it was concerned about the short- to medium term market.
However, Seten Naidoo, an analyst for Standard Bank Group Securities viewed the cut in capex to be “prudent” as the company had ore reserve flexibility.
“Given Lonmin’s enviable 20 months of immediately available ore reserves, this strategy can continue for the equivalent time period before operations start to feel the stress of limited ore reserves and the associated higher mining costs,” he said in a note today.
“Total refined platinum production for the first quarter was impacted by the smelter shutdowns and was down 28.8% to 139,823 ounces when compared against the prior year period,” said Lonmin. “Total PGMs produced in the first quarter were 265,128 ounces, a decrease of 31.1% on the prior year period,” it added.
