Lonmin’s shareholders back plan to raise cash

2012-11-17 08:44

Management and ‘flawed’ business plan will come under scrutiny at general meeting

Lonmin’s major shareholders are likely to all take part in a drive to raise $817 million (about R7.3 billion) in new funds for the cash-strapped platinum mining firm. But even so, they have signalled their intention to square up with the board over the company’s management team and “flawed” business plan.

The fundraising is expected to be approved at a general meeting scheduled for tomorrow in London, England, as the company faces a race against time to repay a $550 million growing debt burden and appease its jittery banks.

Lonmin’s finances were already in a precarious position as a result of its regular failure to meet production targets, as well as prevailing weak platinum prices, when it became the centre of labour unrest across South Africa’s mining industry since August.

There was some uncertainty earlier this week over whether Lonmin’s biggest shareholder – diversified mining group Xstrata, which holds a 24.5% stake – would approve the fundraising after it launched a rebuffed bid for control of the company last month and a follow-up attempt earlier this month to bring about management changes.

Xstrata bought its Lonmin shareholding in 2008, at a time when the platinum mining firm was trading at about R500 a share.

In 2009, shareholders were also asked to contribute about £457 million (R6.5 billion at current exchange rate) in the wake of the global financial crisis. The company earlier this week traded at R63 a share.

Xstrata, however, said on Thursday it would support the latest fundraising, but only because it believed a delay would further imperil Lonmin. It also said it would seek the support from other shareholders to force a change in management.

“As a significant Lonmin shareholder, we are concerned about the destruction of value of our shareholding,” said Xstrata chief executive Mick Davis.

“Given the dire financial position of Lonmin, we concur that a substantial recapitalisation of the business is required. However, that recapitalisation must be backed by a suitable management team and business plan.”

Davis said Xstrata didn’t want to cause further uncertainty over Lonmin’s position that could hinder the company’s operational performance.

“However, we also have a duty to our shareholders and we cannot passively lend our financial support to a strategy that we believe is flawed,” he said.

“We will, therefore, be seeking change to the board and management promptly following completion of this rights issue.”

In response, Lonmin said it welcomed Xstrata’s support for the fundraising, adding it has so far received proxy voting instructions of 86% of shareholders in favour of the process.

It said: “The board continues to abide by the highest standards of corporate governance and will reflect on the comments made by all shareholders during the rights issue process.”

Analysts in Johannesburg and London’s investment communities seem to largely agree with Xstrata’s view that Lonmin needs more than the rights issue to secure the company’s long-term viability.

Research shows productivity levels per employee have steadily dropped to close to 45% since 2003, with costs outgrowing that of peers like Impala Platinum (Implats), Anglo American Platinum (Amplats) and Northam Platinum.

It also, since 2009, invested 6.6% and 5% more capital than Amplats and Implats, respectively, for every ounce of platinum mined.

In a report issued by Credit Suisse’s research division early this week, it shows that while Lonmin’s assets held long-term value for investors, the company required “several catalysts to unlock” its potential, including stronger platinum prices.

The report listed uncertainty over Lonmin’s ability to achieve the group’s production and costs targets as a risk, together with continued labour instability and political issues in South Africa.

“Lonmin (shares) is expensive on all earnings metrics,” Credit Suisse said, despite the fact that the company was trading at historic lows.

London’s Liberum Capital said it would only see some value on Lonmin’s shares once they hit 35p (R4.96) a share on the London Stock Exchange, still about 28% below its current level of 49p.

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