SHARES in Lonmin leapt 18% on the Johannesburg Stock Exchange after the platinum mining firm announced today its lenders had given it more leash in its efforts to stay alive in a margin-constricting platinum group metal (PGM) price environment.
On condition it leaves untouched $200m in undrawn debt, Lonmin’s lenders will waive the next two debt covenant tests for September just passed and March 2018. This takes pressure off Lonmin which analysts feared may have to seek public and private funds again following three capital calls on shareholders since 2009 totaling $1.1bn.
The test criteria is that Lonmin’s tangible net worth does not fall below $1.1bn. Its tangible net worth – broadly defined as the total of its tangible assets minus goodwill, intangible assets and total liabilities – was $1.4bn as of end-March 2017.
The other important condition to the waiver is that Lonmin press ahead with an operational review. The company reduced employment by about 6,860 in its 2016 financial year, but Lonmin CEO, Ben Magara, told Miningmx in September, that the company will continue to find ways of cutting costs. There are indications he is making headway.
Lonmin said today it had generated cash in the fourth quarter of its 2017 financial year taking its net cash position to $100m from $86m at the close of the third quarter which was, in turn, an advance on the $69m net cash position on the previous quarter. The firm’s gross cash, which includes its bank facilities, at the close of the fiscal year ending September 30 was $250m, it said today.
Lonmin also assured lenders that it would cancel is revolving B2 facilities of $21m in order to secure the pre-emptive waiver of its covenant tests.
What Lonmin’s gets in return – in addition to valuable breathing space – is support for its acquisition of Anglo American Platinum’s (Amplats’) 42.5% stake in the Pandora Joint Venture it shares with Amplats. The transaction is worth between R400m to R1bn. The variance in the consideration is owing to the transaction structure in which 20% of Pandora’s free cash flow will be distributed over six years whilst also allowing Amplats the use and full operational control of Lonmin’s Baobab concentrator for three years.
“The completion of the Pandora transaction unlocks significant synergies. It allows Lonmin to extend mining at its Saffy shaft without having to spend R2.6bn of capital expenditure, of which R1.6bn would have been required over the next four years,” said Lonmin in an announcement today. “Lonmin expects to complete the acquisition before the announcement of its full-year results in November 2017, having met all the remaining administrative conditions precedent,” it said.
Said Magara in September: “Those $2.6bn capex synergies definitely transfer to net present value as a saving. So on completion of this transaction there must be an uplift in the tangible net worth as well. Our aim since the rights issue has been to be at least cash neutral in this low-price environment and strong rand,” he said. “We are essentially there and thereabouts”.
“Lonmin will continue to regularly update its lending banks to ensure their consent for the implementation of initiatives identified by the Operational Review. The remaining revolving credit facilities will be available following the end of the Waiver Period subject to the banks being satisfied with the resulting business plan and Lonmin’s ability to pass the TNW covenant tests at that time,” it said.
“The group’s liquidity is expected to be adequate for the Waiver Period, taking into account the company’s past working capital requirements, particularly during the first quarter of the financial year, with the continued support of the lending banks and absent any material unforeseen adverse events,” it said.
MY INVESTMENT THESIS FOR LONMIN
Fellow readers, I am starting to develop a crush for Lonmin, and maybe starting to accumulate a position and nibble at this PGM miner. But here are the risk, of which depending how they pan-out, might be opportunities in disguise:
1. Non-contributing Production: This is still a serious problem for this mining company and am glad that it has taken my suggestions onboard given some of their recent announcements. OPEX escalations have stabilised thus affording the opportunity to baseline its mines properly and do away with fixation with running shafts at full-throttle.
2. Reversed the intended sale of downstream processing capacity : This was just madness from the get-go and the engaged financial advisers did NOT have a clue as to the competitive advantage these assets bring during the pending , and awaited, PGM boom market. It was just plain dumb and should not have found its way into a news release. The current CEO seems to panic and has NOT shown any punctilious rectitude when confronted with strategic challenges. But then his chairman is Brian Beamish.I wish to challenge anybody to provide me with a successful project or initiative that Brian Beamish has ever come-up with in his supposedly long mining career. Very personable & likeable gentleman, but his corporate career is spotted at best ( i am being generous) from failed Murrin Murrin Nickel Mine…… ill-timed Los Bronces Project ……etc
3. Operational focus : This is still lacking and i wish to see 3x qrts of costs guidance meet and mining to plan before being convinced that the discipline has returned. I just don’t believe this CEO is cut-out for this job. He is an Amplats-guy and must just leave this type of task to an ex-Implats or somebody.
4. Balance sheets Issues : With the covenants waived, it seems now there is more flexibility , in the next 12 months, to go after the other low-hanging fruits on operational improvements without worrying about tripping-up on TNW or CAPEX spend covenants. But then again its execution! execution! execution!
As per my previous post, the cash balance has recovered thus presenting an encouraging sign for the business.But lets await the full set of numbers to see which cylinders ( Mines/factors) are driving this stabilisation in performance. Hopefully, things have finally turned….
Punctilious rectitude eh? Heish…