Lonmin sees no let-up for belt tightening

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Cape Town - Lonmin [JSE:LON], the world's third-largest platinum producer, said on Tuesday persistently weak prices meant it will be cutting costs further and increasing productivity, although job cuts remained a last resort.

Along with its rivals in South Africa, London-listed Lonmin has been battered by labour unrest over pay, rising costs and weak platinum prices, resulting in the company posting a pretax loss last year of $326m for the year to end-September.

The share price was down 3% on Tuesday at 172.7 pence, a 46% fall in the last 12 months.

CEO Ben Magara said on Tuesday that relations with labour had improved lately and there was less risk of strikes, but given the weak market conditions the company had to sharpen its focus on cutting costs and improving productivity.

"In a crisis like today, there are also opportunities to tighten our belt," Magara said in an interview on the sidelines of the Mining Indaba conference.

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He reiterated that the company's overall aim was for R2bn in cost savings, a 15% improvement in productivity and a 5% improvement in recoveries at the processing sites in the next three years.

"The market conditions have gone tougher than a year ago. However, this is mainly to do with market sentiment. I think the underlyng fundamentals are there but there is still a lot of negative sentiment that is weighing down on our prices."

Platinum prices have fallen by over 20% since July, hit by weak demand from Europe. However, Magara expected demand for the metal will grow due to rising car sales and a growing appetite for platinum jewellery in Asia.

The European Central Bank's move to print more money to help revive a flagging economy might help automotive sales in the key European market too, he said.

However, Lonmin has also been hit by technical problems that have temporarily put out of action its two smelters. This will delay sales of processed metal, raising the company's borrowing costs and forced the firm to reduce its capital expenditure for the year.

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Meanwhile, Magara said he continued to review the viability of all mine shafts including Hossy, the most costly, but said he was encouraged by productivity improvements seen lately.

"Job cuts remain a last resort. It may be an option but we are working hard with our unions to make sure it’s just the last resort," Magara said.

“We always look at headcount reduction as a solution to our costs. But sometimes it’s not,” he said, noting that just adding a couple of rockdrill operators to a crew could allow for an extra blast a month or more, which can lift production above the cost of the extra labour.

Increasing margins rather than volumes, however, is the key target.

"The days of thinking that more volume will give you benefits are gone. Otherwise we are driving the market down. Supply discipline is key. If you are loss-making you must stop it," he said.

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