Lonmin, Impala may return to debt, equity markets

[miningmx.com] – LONMIN and Impala Platinum (Implats) may be forced into refinancing either through debt or equity with analysts believing the companies did not have enough capital stability to fund their production targets.

“Lonmin has significant challenges to overcome. These challenges centre mostly around the capital structure and specifically around the need for more capital to complete critically needed infrastructure such as the K4 Shaft,” said Leon Esterhuizen, an analyst for CIBC Capital Markets.

“We believe that an equity issue of as much as $300m must be considered and that this will have to be done sooner rather than later,” he said.

“Our numbers at today’s spot metal prices indicate little to no possibility of funding K4, implying a real drop in output – now only a question of when and not if,” he added in a note written on February 25 following a site visit to Lonmin’s facilities.

Lonmin said last year that it would take its K4 shaft out of mothballs in order to absorb employees deemed surplus to requirements at the old shafts.

Esterhuizen said Lonmin had taken a wait-and-see approach on the platinum market deciding not to act in the hope the price of the metal would improve – a view that is supported by Lonmin bear, Investec Securities.

“We believe Lonmin requires a considerably more favourable PGM [platinum group metal] pricing environment to pursue its current business plan,” it said in a morning note and has observed in the past that restructuring of output was inevitable.

The platinum price has failed to respond to a 20% cut in above-ground stocks last year falling 22.6% on a rolling 12-month basis – a development that Paul Wilson, CEO of the World Platinum Investment Council (WPIC) said today was confounding as “people were following the market” down.

Lonmin CEO, Ben Magara, told Miningmx in February the company had made “good progress’ in achieving its three-year, R2bn cost-saving drive. However, he could not say if further capital expenditure cuts would be avoided.

“We are seeing good progress in that we have lowered the staff by 750 people and re-deployed people to high value areas,’ he said. Of the R2bn in savings, some R600m would be through re-deployment of staff to areas of the business where an increase in mining activity had been pin-pointed.

In January, Lonmin cut its capital expenditure target to $185m from $250m and said it continued to review spending. Based on earlier budget planning, the company had targeted spend of $400m for the current year.

Gerard Engelbrecht, an analyst for Macquarie Research, said Implats may be under pressure to sustain production. “The key question is for how long can Impala sustain production at 850koz if older shafts are mined faster and capital spending at newer shafts are curtailed?

“We expect production to start declining rapidly around 2024,” he said.

Before that, however, Implats has to tackle the repurchase of R4.8bn in convertible bonds which fall due in 2018 as well as fund R30bn in capital expenditure over the next five years as outlined by the company in February.

The concern is that Implats may also have to pay close attention to its balance sheet in the coming years in the absence of an improved platinum price. The prospect of an improved platinum price this year was deemed remote by the company in terms of its lower for longer outlook.

Terence Goodlace, CEO of Implats, said the firm had enough firepower on its balance sheet for the remainder of its financial year, but it still made for sober reading with cash of R2.7bn set to be depleted as Implats met its capital commitments this year and kept net debt steady at R5.4bn.

There was also R3bn in uncommitted funds but with the recovery in the market hard to forecast, Implats had set about a cut in capital spending to R4.5bn, down R2.2bn by the 2016 financial year.

“We are okay for the foreseeable future, bearing in mind that we are cutting large swathes out of capital,” said Goodlace.