[miningmx.com] – GLENCORE is to unbundle its 23.9% stake in Lonmin, currently worth R4.3bn, to shareholders, but added the move was not a substitute for its annual cash distribution which it would maintain.
“This distribution, currently representing about $3 cents per Glencore share,
will not impact Glencore’s approach towards its annual cash distribution consideration,” the group said in a statement to the Johannesburg Stock Exchange.
With dividend payments clearly on its mind, however, the group also announced that it would cut capital expenditure to between $6.5bn to $6.8bn from $7.9bn it provided as a guide on December 10.
“Responding to the volatile market backdrop, we have comprehensively reviewed the planned level of sustaining and expansionary capex in 2015,” it said. Further details of the capital cut would be provided in its 2014 results scheduled for March 3.
The cut in capex was largely anticipated by brokers. “Under various spot price assumptions, Glencore would need to cut between $1bn to $2bn of capex to cover the dividend and eliminate concerns on credit metrics,” said Jeff Largey, an analyst for Macquarie Research.
Commenting on divesting of its Lonmin stake, which was inherited from Glencore’s merger with Xstrata in 2013, the group said a straight-forward market disposal would not be in the interests of shareholders “at this time”.
“The distribution in specie will enable shareholders to manage the investment for their own account,” it said, adding that the distribution would require the support of shareholders with a annual general meeting scheduled for May 7.
“Glencore will maintain the constructive relationship it has developed with Lonmin until shareholder approval for the proposed distribution is obtained,” it said. Glencore’s representatives on Lonmin’s board – Gary Nagle and Paul Smith – would step down.
“Glencore’s investment philosophy is to hold investments in production assets in the commodities in which we trade and so we have always regarded the stake in Lonmin as non-core,” said Ivan Glasenberg, CEO of Glencore.
“As we do not trade platinum and have no special insight into the market, we believe that it is better to leave to our shareholders the decision as to how to manage the Lonmin shares,” he said.
“Our desire to distribute the Lonmin shares therefore reflects our philosophy not a view on Lonmin or platinum,” he added.
The divestment will, however, create a potential overhang in Lonmin shares with Glencore shareholders perhaps mindful of some investment research which believes that Lonmin will have to cut production and jobs in the future.
Investec Securities said in January that given current platinum group metal prices “… we believe the company’s current business plan is unsustainable and will require drastic surgery”.
Lonmin cut capex to $185m from $250m for its 2015 financial year owing to low dollar platinum group metal prices, and added that it would keep spending under review.
In an interview with Miningmx today, Lonmin CEO, Ben Magara, said the company was keeping a watching brief on its capital demands. He acknowledged the group could not exclude the possibility of further capital cuts.
Glasenburg said, however, that the firm’s senior management team did not currently plan to sell Lonmin shares they would receive from the share distribution.
Said Investec Asset Management in a recent report: “Some of the higher cost platinum producers, such as Impala and Lonmin, are under strain’.
“It’s also noteworthy that at a current price of about $1,220 per ounce, most of South Africa’s platinum shares are not producing any free cash,” it said. Magara calculated that about 69% of the South African platinum sector was loss-making at current prices.
Lonmin said in a statement today that it viewed Glencore’s proposal as “… a constructive way forward which would enable Glencore shareholders to continue their participation in Lonmin’s future”.
