[miningmx.com] – LONMIN is expected to raise $400m through a rights offer, but analysts have reservations about the future sustainability of the firm which earlier this week impaired up to $2.05bn in assets.
They argue that the rights issue – the terms of which will be made public on November 9 – implies a platinum price forecast still way above the current spot price and once completed, it does not change the prospects of the company.
“We view the too little too late rights offer as only buying the company some time and perpetuating the company strategy, which has been to rely on the view that metals prices would rise,” said Leon Esterhuizen, an analyst with CIBC Capital Markets.
“Such a strategy 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,” he said.
“They [Lonmin] are making the case that the company is worth $2bn versus the current market cap of $230m,” said a UK analyst who asked to remain anonymous.
“The prices used to calculate that value is most certainly above today’s spot [PGM] prices at which they still burn cash,” he said.
“In the end, you are buying now because at least some of that $2bn is real and all the downside is priced in if you assume a 20 pence per share issue price. If the issue price is much lower than 20p, the game changes,” he added.
“My expectations is that the investment banks will put a proper discount on the rights issue and with the pre-warning of the equity issue, I can’t see that any exisiting shareholder would be surprised and not support,” said Hanre Rossouw of Investec Asset Management.
He added, however, that Lonmin’s production update on November 2 had eased some investor fears as it demonstrated he company was halfway through a retrenchment programme of 6,000 employees that would assist in reducing cash burn at current platinum group metal (PGM) prices.
Said another analyst: “I guess that there is always a chance it would fail, but shareholders are generally there because they believe … and so want to keep the belief alive. Bankers also generally underwrite”.
The expectation is that the Public Investment Corporation, the asset management firm owned by the South African government, will underwrite a significant portion of Lonmin far beyond its 7% investment.
At stake is some 35,669 souls employed by the company (as of Lonmin’s September 30 financial year-end. This is about 3,000 less than in September 2014, but it’s the most important reason why Lonmin cannot be allowed to fail.
Some though say saving the company will perpetuate market distress.
In a strongly worded note on Lonmin’s proposed rights offer, Andrew Byrne, an analyst for Barclays Capital, urged investors not to take up the offer, suggesting that business ought to fail in order to restore the fortunes of the PGM market.
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.
Analysts argue that the rights issue does not change the management or its strategy which was criticised previously by Esterhuizen as a case of “playing chicken with the market”; in other words, hoping gross revenue will improve.
“In our opinion, the company remains uninvestable and we find it hard to believe that there is no change to the board and/or the management structure given this significant value destruction,” he said.
