Lonmin write down an omen of stricken sector

[miningmx.com] – THE write-down of Lonmin’s assets for a maximum of R2.05bn could be the first of many in South Africa’s platinum sector.

There were no impairments booked by the country’s platinum producers in the year to June which accounts for the full-year and interim periods with companies hoping that the platinum price would effectively bail them out of an asset revaluation.

“If you add back another $200/oz to the platinum price, then maybe no write-downs would be required,’ said a senior metals analyst at an auditing firm.

The platinum group metal (PGM) market in dollar terms continues to indicate, however, that there’s significant oversupply.

Andrew Byrne, an analyst at Barclays Capital, said the announcement by Lonmin of a 50% plus write-down of its assets was “… a major step in addressing the underlying issues, and hopefully will spur peers into make similar announcements through 2016 in order to allow an improvement assumption environment for decision making over the next decade”.

“Yes, there’s much more to come from the rest still,” said a UK-based analyst on the likelihood of more write-downs. Commenting specifically on Lonmin, Leon Esterhuizen, an analyst for CIBC Capital Markets, said: “For a company to write down its value by 10 times its current market cap certainly tells you what the market thinks of real value.

“We don’t know (yet) what metal prices were used to still have a remaining value of some $1.7bn … but it is educational to see whatever the company’s value is, it can drop by 60% in one day and shareholders then still face a compounding dilution on a per share basis (in excess of 60%) after all that,” he said.

Analysts think that management of platinum producing companies in particular have been too optimistic about the recovery of the PGM market with Barclays forecasting a surplus in the market through to 2020.

So with its write-down out of the way, and with a rights issue most likely to be under control, what does the future hold for Lonmin?

“I would hope management delineate a long term – beyond three years – business profile since most of the remaining equity value in Lonmin would be based on long-term PGM prices, not today’s,” said Marc Elliott, an analyst for Investec Securities.

According to Byrne, Lonmin stands at the centre of a debate that runs to the heart of the entire South African PGM sector: essentially, whether the sector is ‘investible’ or if, in fact, some participants in the sector such as Lonmin, should be allowed to fail in order to revive the fortunes of the survivors.

“Despite announcing major cost cutting and ore reserve harvesting plans, and capex deferrrals, we calculate that without increases to the ZAR (rand) PGM basket, Lonmin will generate $231m of negative free cashflow over the next three years in a “best case scenario’,” said Byrne.

“More realistically, we expect the company to consume $575m and need to raise further capital in 2018 in order to remain solvent,” he said.

It’s a view that has the support of Esterhuizen.

“Unless the metal price picks up a lot from here – and that has to happen within the next three years – Lonmin is back in the hole with a much bigger problem,” he said.