Battle weary Lonmin slashes capex further

[miningmx] — LONMIN has reined in its capital expenditure for the next two years by
another 23% as the company seeks to map its way forward following the events at
Marikana during August, saying the group’s priority would be to maintain ore reserve
flexibility without pursuing significant production growth.

The company has now truly abandoned its previously stated objective of achieving
output of 950,000 ounces of PGMs by 2016, saying its new target for that year would
be 800,000 oz. The guidance came with the disclaimer that it was “contingent upon
performance in the earlier years (2013/14) and . sufficient market demand and
sufficiently attractive pricing for PGMs to warrant increased investment’.

Lonmin’s previously envisaged target of 950,000 oz by 2016, from 750,000 oz in 2012,
would’ve been achieved by consistently spending $450m in capex each year until that
time. It was pushed to reduce its capex forecast for 2013 and 2014 by 40% – to
$250m per year – in July, largely motivated by the ongoing weak market prospects
for PGMs.

The company’s revised strategy now forecasts investment of around $175m in 2013
and $210m in 2014, targeting sales of 680,000 oz in 2013 and 750,000 oz during the
two years after that.

For 2013 and the following year, most of Lonmin’s capex would be directed at
maintaining the group’s ore reserve flexibility which equated to 18 months of mining
on September 30. “The company’s planned capital expenditure over the next two
financial years is expected at least to maintain this level of reserve availability,’
Lonmin said.

In the 2015 and 2016 financial years, the directors expect capital expenditure would
rise to around $400m per year to fund the further development of the Hossy, Saffy
and K4 shafts.

The K4 shaft, which has been put on care and maintenance in September, would
remain the thrust of Lonmin’s future output growth and is expected to come back into
production towards the second half of 2014.

DISRUPTION TO PGM SUPPLY

On its outlook for the PGM market, Lonmin said the events at Marikana and
subsequent strike action at most of the other major producers, have “in a short space
of time’ altered the outlook for the supply side of the industry.

“These events have increased operating costs for Lonmin and other companies in the
South African PGM industry, while at the same time creating supply constraints that
have contributed to an increase in PGM prices,’ the company said.

“The disruption . is also likely to result in some capacity reductions as higher cost
operations are forced to reduce output or close down, which the board believes should
sustain improved pricing for PGMs.’

MANAGEMENT UPDATE

The company said its CEO, Ian Farmer, would remain on sick leave for the time being
and that CFO Simon Scott would continue in his temporary position as acting CEO.

“The current arrangements are appropriate for the time being and are working well to
stabilise the company and bring production back to normal,’ the group said.