[miningmx.com] – GAINS in Lonmin shares dating from October 30 were
trimmed about a third today as investors were reminded that the company is walking
a tightrope.
The gains, stemming from the $700m to $800m rights offer announcement, were
deceiving anyway. As one of the most heavily shorted stocks in London, investors
were short covering rather than applauding the rights issue, the general consensus of
which is that it’s too little.
Now there’s real fear that Lonmin is a hair’s breath from more trouble, with
potentially disastrous results for its newly crafted bank covenants.
What’s instructive about Lonmin’s rights issue is that it’s asking shareholders to
support a company determined to batten down the hatches rather than grow out of its predicament. Production is forecast to be 680,000 oz in the next financial year,
compared to its pre-strike annual totals of about 719,000 oz. Producing less metal
won’t lower costs and leaves Lonmin potentially vulnerable.
One convenant asks the company to stay within 10% of budgeted capex if net debt exceeds $300m when the covenant is next tested (end-March). Keeping to budgets, in these inflationary times, is a tough ask for most mining companies. Debt can’t exceed 25% of tangible net worth. The agreement with banks doesn’t allow for much production disappointment and is highly dependent on a recovery in metal prices.
The risk that miners will bristle at the prospect of retrenchments is not just societal;
rather, it’s also a risk to Lonmin’s survival. Although, restructuring is currently restricted to management levels.
Miners have been returning to work at the majority of South Africa’s mines, but
according to one market source, it’s an uneasy peace. As a result, Lonmin runs the
risk of more on-mine discontent. The wage increases of September may have seen
employees return to work, but they won’t feel that retrenchments are something that
they’ve signed up.
“The company is on a R200m savings drive, but management hasn’t been specific on
where it could make the cuts,’ says an analyst. Clearly, Lonmin is reluctant to say
where it will pull back because so much rides on the delicate process of retrenchment.
The relationship with unions and the pulling power of the National Union of
Mineworkers will also be tested in this difficult time.
