g[miningmx.com] — SHANDUKA’S deal with Lonmin over the mothballed Messina/Limpopo platinum mine “appears well-priced for Lonmin”, according to a research report from JP Morgan Cazenove.
Analysts Steve Shepherd and Allan Cooke said “it seems Lonmin management has negotiated a favourable deal that enables the group to retain an interest in Messina while sharing the considerable risk with its biggest empowerment partner”.
Shepherd and Cooke calculated that the “total value” payable by Shanduka amounts to “a 30% premium to the average transaction price at which transactions in the PGM (platinum group metals) industry have taken place over the last six years, in our view”.
But the analysts cautioned the deal could “prove costly for Lonmin shareholders in the end” if Shanduka failed to run the mine profitably.
The analysts noted that since 2003 “there have been no years when the mine delivered positive free cash flow. We wonder whether – and why – ‘it will be different this time.’
“We contemplate whether, one day, Lonmin might be faced with the prospect of having once again to bail out its BEE partner like it did in 2010 in order for its BEE credits to remain intact.”
The analysts said “Limpopo/Messina has been a difficult mine since its birth. Implats, Southern Era, Southern Platinum (all previous operators) and Lonmin itself would likely attest to this.
“The mine was, through its ‘on-off’ history, an almost permanent resident near the top of the industry cost curve. Safety was often an issue, too.
“We have to wonder why Shanduka should have any more success – presuming that a pending feasibility study provides a green light.
“It has crossed our minds that were the mine to restart and were it to continue to be problematical would Shanduka – an important BEE partner for Lonmin – have the financial fortitude? Or might Lonmin have to come to its rescue?
“At the current industry basket price (PGM plus nickel plus copper) of around R323,000/kg or around R10,400/oz we doubt Messina (well, the mothballed Baobab Mine at least) would have a hope of generating positive cash flow.
“It remains to be seen if Shanduka and Lonmin eschews the old mine and plumps to develop the as yet untouched – and possibly lower cost – Dwaalkop JV which would require Northam Platinum to come to the party.”
