Lonmin to issue shares at deep 94% discount

[miningmx.com] – LONMIN has been granted a temporary reprieve from bankruptcy after the UK platinum producer agreed to a heavily discounted rights offer of 46 for 1 in which it would raise $369m after fees.

Key among the fund-raising effort is the co-operation of 7% shareholder, the Public Investment Corporation (PIC), a state-owned pension fund, that has committed to take up its full entitlement.

The PIC has has sub-underwritten a significant part of the issue far beyond its entitlement which paves the way for Lonmin to refinance of $370m in debt whilst saving thousands of miners’ jobs in the event Lonmin’s was put into business rescue.

The outcome is that Lonmin is issuing shares at a deep discount of some 93.85% to its last closing price – equal to 21.4 cents/share – a development Investec Securities described as “spectacular” and that forced the hands of shareholders.

“A spectacular dilution event that has been brewing for some time,” the bank said in a note.”Management is effectively forcing shareholders to follow their rights or be diluted into obscurity,” it added.

Shareholders will vote on whether to approve the rights issue on November 19 amid criticism by analysts that the fund-raising may only delay the inevitable as Lonmin did have enough operational levers that would help it generate cash.

Goldman Sachs believed that Lonmin’s ability to generate free cash was still in question whilst the 700,000 ounces it has committed to producing in platinum would keep the market over-supplied.

“Although a short-term positive for the stock, we believe that the longer-term issues remain the same,” said Goldman Sachs.

“Lonmin, on our estimates, will continue to struggle to generate cash, and as such we believe that investor returns will remain depressed,” it said. Shares in Lonmin rose just over 3% in early Johannesburg trade.

“Additionally, with Lonmin continuing to operate we expect the platinum market will remain in significant surplus for the foreseeable future, which will see the platinum price likely remain depressed,” said Goldman Sachs.

These sentiments echo comments last week from analysts who think that it might be better to have allowed Lonmin to go into bankruptcy.

“Such a strategy [of the rights issue] simply places even bigger question marks around survivability if metals prices do not increase and, in our opinion, reflects poorly on management given an unwillingness to take tough decisions,” said Leon Esterhuizen of CIBC Capital Markets.

Set against Barclays Capital’s forecast of a platinum surplus until 2020, Byrne remarked: “Despite announcing major cost cutting and ore reserve harvesting plans, and capex deferrals, we calculate that without increases to the rand PGM basket, Lonmin will generate about $231m of negative free cashflow over the next three years in a ‘best case scenario’.

“More realistically, we expect the company to consume $575m and may need to raise further capital in 2018 in order to remain solvent. In light of this, we do not believe investors should follow their rights,” he said.

Lonmin reported an underlying loss of 16.2 cents/share for the year ended September which marked a heavy deterioration on the 5.4c/share profit booked in the previous financial year. The net loss per share deepened to 285.5c/share from a loss of 33c previously.

REFINANCE

In terms of the bank refinancing, Lonmin will be able to extend its US dollar facility from its current due date of 2016 to 2020, and will also be reduced to $225m from $360m. A rand facility would also be extended to 2020.

“The board remains confident in the potential of the group, with its high-quality asset base and long-term mining rights, and in the medium to long term fundamentals of the PGM industry and is focused on preserving and enhancing value for all shareholders,” said Brian Beamish, chairman of Lonmin.

He added that the group’s new business plan would aim to achieve positive cash flow after capital expenditure.

Said Ben Magara, CEO of Lonmin: “I am pleased that we have secured $370m of bank facilities from all ten of our existing lending banks which is conditional on the $407m rights issue.

“It is encouraging that our Rights Issue has been fully underwritten and we hope shareholders vote positively on 19 November 2015. We firmly believe that the rights issue is in the best interest of our shareholders”.