Tuesday, 13 May 2014 - 20:00

 

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Seed Weekly - Lonmin Plc Results

Lonmin Plc, the world’s third largest producer of Platinum Group Metals (PGMs), recently released its Interim Results for the six months ended 31 March 2014. The company also used this opportunity to update the market on the latest developments regarding the ongoing wage disputes, and attempted to soothe investors with a recovery plan to ramp up production when the strike finally ends.

Operations

Lonmin has a vertically integrated operational structure, ensuring that it is directly involved in the whole process from mine to market. Its Mining division extracts the ore, the Process division refines it and the Shared Services division provides infrastructure support to the two key units.

On the Mining side, the company’s chief asset is the now infamous Marikana mine near Rustenburg, which contributes more than 90% to annual production. Its second mine, Limpopo, is located near Polokwane and is currently on care and maintenance. Lonmin also holds a 42.5% stake in Pandora, a joint venture with Anglo Platinum.

The Process Division is responsible for converting the ore into refined metal. Concentrators are used to crush the ore into a liquefied concentrate, which is then sent to Lonmin’s smelting facilities. From the resulting metal-rich matte the company then extracts copper, nickel and ultimately refined PGMs.

Interim Results

As could be expected, the ongoing labour disputes had a devastating effect on Lonmin’s operations and subsequent results over the past six months. Total production was 3.2 million tonnes, of which 3.0 million tonnes was attributable to Marikana. This figure is down 43% from the 5.7 million tonnes mined in H1 2013. In Q1 the company suffered from safety stoppages and low productivity due to tensions around wage negotiations, while operations have been at a standstill for 9 out of a possible 12 weeks in Q2 as a result of the strike.

The graph illustrates the effect of labour-related events on underground mining volumes at Marikana over the past 3 years:

Platinum sales were down 19% on the previous period to 263,675 ounces, and management estimates that 155,720 of equivalent saleable ounces were lost due to the strike.

The company has increased its focus on cost containment and cash conservation, and has reduced normal cashfows by 60%. Capital expenditure amounted to $46m, while net cash reduced from $201m to $71.

The graph below illustrates the declining net cash position for the company:

Over the past 18 months Lonmin made significant progress with its unit cost reduction program, but the recent low production caused costs to increase again by 46% to R 13,058 per PGM ounce.

Lonmin benefitted from a weakening rand during the period, but the effect was partially offset by weak PGM prices.

Earnings before interest, tax, dividends and amortisation (EBITDA) amounted to $103m after excluding strike-related special costs of $165m, down 39% from the $171m achieved in the previous reporting period.

Lonmin’s operating loss for the half year amounted to $131 million when including strike related costs, compared to a $90m operating profit in H1 2013.

Finally, Earnings Per Share (EPS) dropped by 71% from 12.3 cents to 3.5 cents.

Outlook

Ben Magara, CEO of Lonmin, admitted to the short term challenges faced by the entire platinum industry but remained optimistic on the future fundamentals of PGMs. Platinum demand stems mainly from automotive production, which is in turn reliant on a strong economic recovery in Europe and the USA. An exciting emerging opportunity also waits in the increasing manufacture of fuel cell driven cars. Demand for jewellery manufacture, although much less than automotive, also remains strong.

Key risks remain a slowdown in emerging markets, global automotive sales not growing strongly, and the possibility of substitution materials being discovered in automotive applications.

Lonmin’s short term priorities are to resolve the labour disputes and to safely ramp up production, while persisting with cash conservation strategies in order to protect the balance sheet.

The Seed Equity Fund holds a 1.8% position in Lonmin, with the share forming a small part of both the Value and Momentum portfolios.

Kind regards,

Cor van Deventer

www.seedinvestments.co.za
info@seedinvestments.co.za
021 914 4966

Tue, 13 May 2014

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