Saturday, August 25, 2012

The Fall and Fall of Lonmin

The fall and fall of Lonmin

24 Aug 2012 09:25 - Lisa Steyn
South African Mail & Guardian

A rights issue makes sense and could be good news for investors, an analyst claims

A bright star in the platinum firmament just four years ago when global miner and shareholder Xstrata valued it at $10-billion and offered to buy out other shareholders, Lonmin has seen its market value fall to $2-billion. In rand terms, it fell from almost R80-billion in 2007 to R27-billion last year and R16.2-billion this week.

The world's third-largest platinum miner faces uncertain times. Lonmin is losing money and faces the prospect of going cap in hand to shareholders to raise cash to keep it going. It is unclear whether its key shareholders, which include Xstrata, Cyril Ramaphosa's Shanduka and the Industrial Development Corporation (IDC), will exercise their rights in any capital raising exercise.

Xstrata, Lonmin's biggest shareholder with a 25% stake, is itself the subject of a takeover bid by commodities trading behemoth Glencore. But Glencore's Ivan Glasenberg this week threatened to walk away from the Xstrata deal if its shareholders, who have been holding out for a better offer, do not accept the deal on the table.

Shanduka and the IDC hold their share through the black economic empowerment (BEE) company ­Inc­wala Resources, which holds 18%. Shanduka has 50% in Incwala and the IDC and Lonmin have 23.6% each.

Lonmin has debt facilities totalling about $945-million. "That massive loan is one thing which is exposing them tremendously," said Gideon du Plessis, general secretary of trade union Solidarity.

All Lonmin's mining operations are in the Bushveld complex, and Marikana, where 34 miners were killed by police on August 16, contributes 92% of its annual production. Production there has been disrupted by an illegal strike for the past two weeks.

Covenant compliance

On Wednesday, Lonmin warned that, because of recent events, agreements with its financial lenders were likely to have been breached when its covenant compliance was tested on September 30. "Consequently, constructive discussions are now taking place with Lonmin's banking group to address this potential situation. Alongside these discussions, the company is reviewing all the options available to strengthen its financial structure, including possible access to the equity capital markets."

The platinum industry is struggling against low commodity prices and rising input costs. But Lonmin, which produces about 15% of the world's platinum each year, received a double whammy when, already dogged by financial losses and massive debt repayments, the illegal strike turned into tragedy as the striking workers were killed.

With operations disrupted since August 10, it is speculated that Lonmin is considering a $1-billion rights issue – half of its $2-billion market capitalisation – to raise capital. The London Sunday Times reported the rights issue could start as early as next month and said Xstrata would follow its rights.

Xstrata's bid four years ago was rejected and described by analysts as opportunistic given the prevailing recession.

Peter Major, an analyst at Cadiz Corporate Solutions, said: "Lonmin isn't broken financially. But, if you look at its cash flow this year and how the debt is building up, it's getting there, so talk of a rights issue is not just hot air."

The company has total liabilities of about $2-billion, of which only 25% is long-term debt, and total current assets of about $700-million.

Debt funding
Major said that, because of the recent dramatic loss of life, banks would be even more hesitant to offer debt funding, "so a $1-billion or so rights issue does look likely".

To ensure a successful rights issue, he said, shares would have to be sold at an attractive price to ensure that investors took them up. But banks or some appropriate financial institution would have to underwrite the rights issue and they would demand a large margin of safety – a discount to a fair price – to lower their risk in case they were stuck with unwanted shares.

"Shareholders like Xstrata obviously get first preference. But if they don't want to take up the shares, then anyone else can take up the new shares on offer," Major said.

Xstrata's media relations officer, Alison Flynn, said the company would not comment on the matter.

Glencore, the world's largest commodity trader, made a $30-billion bid for Xstrata, but this week insisted it would not bow to demands for an improved offer from key Xstrata shareholder Qatar Holdings, the London Financial Times reported.

Would Incwala be able to follow its rights?

"The government would undoubtedly be sure that the money is loaned to them," Major said. "Incwala definitely doesn't have that kind of cash on their balance sheet or even available to them."

Good investments

Incwala and Shanduka did not respond to questions.

But a rights issue could be good news for investors. "Generally, as long as everyone follows their rights, no one has to lose," Major said. "In many cases, investors who lost a lot of their money on their initial investment can make a large part back after the rights issue … Rights issues at discounts are usually good investments."

Platinum prices at about $1480 an ounce were not bad, Major said, "nothing like the 1990s when platinum averaged less than $400 per ounce. But there are a lot of bad, in­efficient practices built up around and in the platinum industry."

Lonmin's 2011 annual report shows unit costs increased by 11.2% from the previous year, and Anglo Platinum's 2011 annual report showed cash unit costs were up by 16%.

Lonmin employs 28000 workers, about one-third of whom are at work. The National Union of Mineworkers has said that a minority of 2 000 workers who are on the illegal strike are threatening the livelihood of other workers. "They are holding to ransom the future of all the workers at Lonmin," said spokesperson Lesiba Seshoka.

No comments: