Lonmin in a race against time

Johannesburg - Every day, Lonmin [JSE:LON] sends thousands of miners hundreds of meters below ground, where they use drills, diggers and explosives to extract about 40 000 metric tonnes of rock laden with precious metals.

The ore is milled, crushed, concentrated, smelted and refined in a month-long process that eventually yields about 4 100 ounces of platinum-group metals each day. Yet for all its trouble, Lonmin’s revenue in the most recent quarter was barely $3 an ounce higher than its costs.

The razor-thin profit margin is the main challenge facing chief executive officer Ben Magara, but not the only one. Members of the local community near Lonmin’s Marikana operations in South Africa want the shafts suspended, the company said last week it’s close to breaching banking covenants and the stock is down 39% in the past six days in London.

It’s “like pushing water up a hill,” Magara said in an interview earlier this week, wiping sweat from his brow after unveiling a new road to benefit people living near its mines in South Africa’s North West province.

His plan: raise cash, and fast, through a series of asset sales that Magara says can together return Lonmin to solid ground.

READ: Lonmin's woes make its stock the top sell call on JSE

Lonmin’s difficulties are the latest twist in a 108-year history that stretches from Cecil Rhodes’s legacy in southern Africa to a conglomerate in the 1980s spanning mining, hotels and newspapers.

Lonmin chose to focus on platinum in the late 1990s and the stock surged along with demand for the metal in the mid-2000s, but the shares have been on a steady decline since 2011, dropping 99.5%.

At stake is not only the company’s long-term future but also the financial impact on its 25 000 employees and the nearby community, many of whom live in informal settlements without running water. Lonmin holds particular social and political significance in South Africa for its connection to the worst massacre since apartheid, when 34 people, including striking employees, were shot and killed by police in 2012.

Two years ago, Lonmin raised about $400m in a rights issue to buy time until platinum prices improved. While the metal has gained in that period, expenses also rose, meaning that the company’s focus is simply to break even each quarter.

'Hand to mouth'

“They’re living hand to mouth from quarter to quarter,” said Peter Mallin-Jones, a London-based analyst at Peel Hunt with a sell rating on the stock. “The plan needs to create a sustainable business but that may mean a smaller company.”

Unwilling to tap investors for more cash, Magara is pursuing piecemeal sales that together he says could make the company profitable, from merely breaking even now.

Lonmin has had “encouraging” proposals from fellow platinum miners to purchase capacity at its processing facilities, he said. Those deals could bring in cash payments up front and reduce costs due to economies of scale.

READ: Lonmin hits back at calls to shut down its operations

The CEO is also seeking ring-fenced finance for two low-cost projects at its K4 and Rowland shafts, and plans to sell non-core assets such as the Akanani project, a platinum deposit which is at least a decade away from being mined. Lonmin is also planning to cut as many as 1 139 jobs, including contractors, as it ceases production at some of its older shafts.

Lonmin is in no imminent danger of defaulting - the company has $103m million more cash on hand than total borrowings. However, the accounting value of its assets has dropped down to “the region of” the $1.1bn level required by its banks, the company said on November 3. It’s also delayed publishing its annual results while management tries to implement the cash-raising plan.

Sales, cost cutting and the addition of the recently-acquired Pandora mine to its books should boost the company’s so-called tangible net worth above the required threshold, Magara said. Lenders have granted Lonmin a temporary waiver for the covenants.

In the meantime, he’s open to all options to ensure Lonmin’s survival.

“We will entertain anything that’s in the interests of sustainability,” Magara said.

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