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Lonmin on target but faces price slump Posted: Thu, 30 Oct 2008 [miningmx.com] -- SEPTEMBER quarter and year-end production numbers from Lonmin show the group managed to hit its latest, albeit twice-revised, production target for the year. That’s the good news. The bad news is that Lonmin faces a grim future at current platinum group metals (pgm) prices - as does the rest of the industry - but the company appears more exposed than its peers. Lonmin started out with a forecast production of 900,000 ounces of platinum for the year to end-September. That was revised to 775,000oz in April and then to 725,000 in early August. The group has now reported final sales for financial 2008 of 726,918oz of platinum mined from 12.4 million tonnes of ore - down 10.9% on financial 2007 - and at an underground milled head grade of 4.66g/t pgm, 4.5% lower than the previous financial year. Newly-appointed CEO Ian Farmer has predicted that production in the current financial year to end-September 2009 will be “broadly in line with that achieved in the 2008 financial year”. That is where it gets “very tricky”, according to Numis Securities analyst Simon Toyne, because of the level of pgm prices and the rand/US dollar exchange rate. Despite the recent sharp weakening of the rand against the dollar, much of the SA platinum industry is making losses at current spot prices for platinum ($848/oz), palladium ($201/oz) and rhodium ($1,500/oz). Toyne commented that “marking to market implies a double-digit EBIT (earnings before interest and tax) loss in financial 09 on our estimates, which is a fairly uncomfortable position given end-of-first-half net debt of US$506m. “This is an industry-wide situation. Aquarius reported a Q3 net loss yesterday (Wednesday) and we believe Anglo Platinum is in marked to market loss. “As such, the key will be the results commentary given on November 18. We expect substantial cuts to capex guidance but, especially given structural cost uptrends in power and labour costs in South Africa, we are sceptical on the extent to which operating costs can be reduced.” Farmer said the production target would be updated on November 18, when the group’s final results would be released. He said: “We are currently completing a review of our operations focused on improving performance and maximising value for Lonmin shareholders, with our emphasis being on achieving low-cost production rather than maximising volume.” That seems to imply cutting back on some of Lonmin’s higher-cost operations and the obvious candidate is the Limpopo mine. This is the former Messina mine which Lonmin took over and where former CEO Brad Mills insisted on introducing a mechanised mining system, despite complex geological conditions. According to JP Morgan’s SA platinum industry break-even analyser, the Limpopo mine is the highest cost producer in the industry and is way under water at current platinum prices. The report - produced by analysts Steve Shepherd and Allan Cooke - indicated on October 17 that Limpopo needed a platinum price of $1,750/oz just to break even, and a price of $2,041/oz to afford the capital expenditure required to maintain production at current levels. In their review of Lonmin’s September production results, Shepherd and Cooke recommend that the Limpopo mine be put on care and maintenance. Toyne said he expected substantial cuts of more than 50% in Lonmin’s capex to be announced on November 18. He said: “Operating cost savings are more tricky without affecting future production, and this represents a major first test for the recently-appointed CEO.” Shepherd and Cooke are more upbeat because they view the replacement of Mills with Farmer as a welcome turning point for the group. They said: “Lonmin’s core operation, Marikana, is high quality with excellent primary infrastructure and, on its own, should be able to deliver 1moz/year of platinum. “It has not been able to do so because, under the previous leadership, underground development was slowed and mechanisation was adopted in what we felt was an inappropriate way. “ Under Ian Farmer, and with experienced mining engineer Chris Sheppard calling the shots on the mining front, we look forward to going back to the ‘good old days’ when management consistently under-promised and over-delivered. “We will not be surprised if management announces changes in mining strategy to more conventional methods, with mechanisation being adopted where the geological setting makes this appropriate,” the analysts said.
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