Lonmin’s Magara frets over irreparable damage of PGM slump

Ben Magara, former CEO, Lonmin

PLATINUM consumers do not believe the dire warnings over a future supply crunch in the metal being sounded by the South African platinum miners and could be playing a “winner takes all” game in the market.

That’s according to Lonmin’s Ben Magara who is the latest platinum company CEO to warn about the likely impact on production from years of low platinum prices which have resulted in under-investment on the platinum mines.

According to Magara, the platinum price is “unsustainable” at current levels and causing “irreparable” damage to the platinum mining sector.

He coupled this with the increasing costs of mining platinum as operations got deeper while management increasingly had to deal with “conflict” situations concerning labour relations, and the impact of regulatory interventions such as Section 54 stoppages.

He described the current operating environment for the platinum miners as “volatile” and “debilitating”, pointing out that the benefits from Lonmin’s operations to shareholders in recent years had been “miniscule”.

“We have not paid dividends in five years. The bulk of the money we have made has gone to suppliers and employees with government getting 8% in taxes and lenders taking 3%.

“Platinum is becoming more difficult to extract. It’s deeper; it’s hotter; the labour environment is tough; the social and community environment is tough; so it is only going make it more difficult and more expensive. Also, the industry no longer has the financial buffer it had in the past to cope with these downturns”.

WINNER TAKES ALL

Asked why the price was still not responding despite these warnings, Magara replied: “Maybe there’s a ‘winner take all’ attitude from customers. People still believe that if they want more platinum they can have it tomorrow. But this situation is not sustainable”.

His perception was that customers simply did not believe what the platinum miners have been telling them about the pressure of unsustainably low prices. “My perception has to be that”.

While Lonmin’s results for the year to end-September showed a marked improvement in the group’s financial position, some analysts still view Lonmin as in a difficult situation.

JP Morgan Cazenove published a report in November predicting that Lonmin would start losing money again if platinum prices remained at current levels and estimated the group could lose about $100m of free cash flow in its 2017 financial year if its all-in cash costs remained at a level of R12,400/oz.

Asked if this estimate was correct, Magara replied: “I cannot confirm the JP Morgan analysis. The reality is that we reduced costs last year by R1.3bn which is why we returned to profitability. It was tough. Are there more opportunities to reduce costs? It’s getting tougher but we continue to look at how to do it and how to remain a sustainable business”.

PIC NEGATIVE CONTROL

One of the most significant developments from Lonmin’s recent tribulations is that the Public Investment Corporation (PIC) now holds 29.3% of the company after it picked up unwanted shares from the group’s most recent $400m rights offer.

That amounts to negative control of the company and investors with long memories may recall the trouble that Impala Platinum created for Lonmin during the years it had negative control of Lonmin after a failed takeover bid.

Asked about the possible negative implications of this situation – given that the PIC has clearly shown it has its own social investment and strategic agendas – Magara replied: “It’s only negative if you disagree but there’s no disagreement.

“You need to engage early enough to make sure that that everybody knows the economic realities and the priorities of what you need to do. I mean, we went through 6,000 jobs and the PIC did not stop us.

“The benefits of this situation include that you have fewer shareholders to convince.

“My experience with the relationship is that it (the PIC) is focused on sustainability; on our growth aspirations and on returns. It is also focused on jobs which we are as well given the South African national development plan”.