$200m metals deal delivers clean, brushed up Lonmin ahead of Sibanye-Stillwater merger

LONMIN reported a vastly improved net cash position of $114m for 2018, an increase of $97m for the year, and unveiled a $200m metals purchase agreement – developments that tick an important box ahead of is proposed merger with Sibanye-Stillwater.

The platinum firm’s lenders had waived covenants over its debt ahead of the merger with Sibanye-Stillwater, but the condition of the balance sheet was the single largest risk to the transaction. Were Lonmin “in the red”, the proposed merger would not have hurt Sibanye-Stillwater’s own deleveraging activities and potentially see it voted down by shareholders.

The improvement in net cash, up from $106m at the close of the third quarter, was based on a year-on-year 25% increase in the basket price for its platinum group metals (PGMs) for the fourth quarter, and better-than-forecast production for the year.

However, Lonmin CEO, Ben Magara, said the improved cash and metals purchase agreement did not mean the company could alter its restructuring plans in which about 12,000 jobs are to be affected over five years.

“Both the good business performance and the new funding arrangement we announced today enhance Lonmin’s short term liquidity,” he said in Lonmin’s fourth quarter production announcement. “However, the new facility is still insufficient to avoid the announced retrenchments and shaft closures,” he said.

“Accordingly, the board of Lonmin remains focused on completing the Sibanye-Stillwater all share transaction, which we firmly believe provides a sustainable solution and is in the best interest of all our stakeholders,” he said.

South Africa’s Competition Tribunal is due to deliberate over the proposed merger between November 12 and November 14. Assuming the tribunal gives its blessing, completion of the merger then requires UK court and shareholder approvals.

In terms of the metals purchase agreement, Lonmin will deliver platinum and palladium in a ratio 69:31 to Pangaea Investments Management Limited, an associate company of China’s Jiangxi Copper Company Limited (JCC). The proceeds of the upfront $200m will be used to repay a $150m term loan and cancel all its other pre-existing undrawn debt with both its South African rand and US Ddllar lender groups.

“We recognise Lonmin’s requirement to complete this financing transaction and we remain focused on completing the acquisition of Lonmin, and delivering on our strategy of creating value for all stakeholders,” said Neal Froneman, CEO of Sibanye-Stillwater in a statement.

The transaction, which will be amortised over three years, ought to be completed within the week, said Lonmin.

PGM PRICING

Lonmin turned in flat tonnes mined by its Generation 2 shafts in the fourth quarter of 2.1 million tonnes quarter-on-quarter. But it was overall sales of 681,589 ounces for the year which was most impressive for the group as guidance was between 650,000 and 680,000 oz for the year. Total PGM sales were 1,32 million oz for the year.

The rand basket price was 25.5% higher in the fourth quarter at some R14,512 per PGM oz and up 19.7% for the year at R13,447/PGM oz. Lonmin, as with other PGM producers, benefited from improvements in pricing for palladium and rhodium. Platinum continues to struggle, however.

Unit costs for the fourth quarter were R11,617 per PGM ounce (6E basis), an increase of 0.8% on the fourth quarter in 2017.

“This is a very strong performance and is likely to be taken very positively, in our view,” said Goldman Sachs in a note. It added: “Also- this has a positive readx for Sibanye – Sibanye is in the process of acquiring Lonmin – and the higher the cash balance at Lonmin, the better it is for Sibanye”.

Said Magara: “These pleasing results demonstrate once again that despite these uncertain times, we can dig deep and use all levers within our control to maintain our net cash position”. Lonmin said it would release its financial results for the year ended September 30 towards the end of November 2018.

6 COMMENTS

  1. Dear Fellow Readers,

    My anxiety levels are raised by this financing by Lonmin. Normally, when M&A deals are as advanced as the SGL/Lonmin deal, then it’s actually SGL which will be providing such stop-gap funding needs, more so for $200M (which should be affordable for SGL given the 2xqrt prevailing PGM & Au prices.

    Why such an expensive (15%/yr) & short-term ( 3 yrs) , with SGL as a co-obligator, impacting 2E production at this improved prices of ±$1000/oz 2E?

    This points to a deteriorating profitability within SGL! They took out a 30% gold production at R585k/kg – R600k/kg recently BUT allowing for this Lonmin financing boggles the mind.

    As for lonmin results , the bleeding continues :

    1. High costs shafts are producing more unprofitable PGM production
    2. Profitable shafts are sputtering , thus producing less profitable ounces
    3. Here is a joke for fellow readers to chuckle at pertaining to Immediate available ore reserves (IAOR) in months ( Industry avg = 12-15months) :
    __________FY17Q2____FY17Q3___FY17Q4___FY18Q1___FY18Q2___FY18Q3___FY18Q4
    IAOR(m)____21________20________24_______20_______22_______20_______21
    Prod(Kt)___500kt_____430kt_____650kt_____600kt____500Kt_____551Kt_____625Kt

    This were supposedly earmarked for closure ! Apparently, the CEO of Lonmin is still surprised why the liquidity was drying up! And he is suspecting foul play by the accountants for it !
    LoL… ha ha ha ha!

    So lets help him understand as fellow miners :

    Mr Magara, what is actually happening ( for the last 5xyrs) is that Lonmin continues to mine “non-contributing ounces”. The Gen1 shafts are being kept on life support by the contractors who are incentivised to keep them going because they ARE making money at the expense of lonmin! Hence their IAOR months are stable-to-improving. These shafts , as you have correctly diagnosed , are leaking cash out of the business! They keep costs elevated by providing false support to other services ( i.e Inventory/spares requirements etc). As you might have noticed that Lonmin’s Operating Cash Flows have been negative q-o-q since you’ve been the CEO and liquidity have steady decreased from R7,5Bn to now R350M……THE ACCOUNTANTS & BANKERS ARE NOT TO BLAME BUT YOUR INCOHERENT EXECUTION OF YOUR OWN FLAWED BUSINESS STRATEGY IN A DEPRESSED PGM MARKET!

    You see , free of charge business advise!

    Truly Yours,
    GS

  2. Hello David, I cannot comment on any liabilities you are concerned with, but I do think your website is getting too little maintenance, with the subsections or sub-directories it would appear not being suitably updated? Take under ‘News; for instance, it looks like you have 891 pages? It might be useful to just have the pages for a current year available and then have archives for each year thereafter – you could even consider months of the current year as you do have many articles – I am sure there are many other things you could also consider to keep it pertinent – most stories read in particular time frame, most ‘useful’ comments per story (you used to have number of reads per story that has since gone unless I missed it) etc.? I am not a web designer, but I think it must be getting difficult for you to keep it updated and still fresh if you are doing it yourself – surely not? Maybe a job for the Christmas break instead of your Cape Town holiday? Then again, December can be a busy time? Just a thought, take it or trash it, whichever you prefer.
    P.S. – No need to publish this – it is just ‘hopefully’ constructive comments regarding possible improvement to the website.

    • Hi – I thought I would publish this because I’d be interested in what others think, and to say that the ‘reads’ counter was taken off because it didn’t seem to tally with the info on story reads I was seeing in Google Analytics.

      Yes, as an independent, standalone owner it can get a bit exhausting from time to time, but the comments about pertinence are useful and I thank you.

      Best

      David

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