Burning Cash to Stay Alive Is Mining’s Biggest Loser Lonmin

Even as 2017 is turning out to be another good year for most of the mining industry, Lommin Plc. is a big exception.

Just 15 months after raising about $400 million from shareholders, it is burning through cash to stay afloat and investors are losing confidence in the world’s third-largest platinum producer. Including higher costs and lower output at its biggest mining shaft, Lonmin has its own set of operational problems even as platinum prices aren’t far from a seven-year low.

“Lonmin can’t survive in its current form unless there’s a very significant recovery in platinum-group metal prices,” said Marc Elliott, a London-based analyst at Investec Plc with a sell rating on the stock. “I wouldn’t be surprised to see them come back to the market for more cash in the next two to three years.”

Buoyed by a recovery in commodity prices and deep cost cuts, other mining companies are looking to deploy new cash into dividends and acquisitions. But for its years of problems, Lonmin stands out. Although it can draw on $414 million, mainly through credit lines from banks, it is now left with $49 million as the company used up 70 percent of its net cash last quarter.

After the shootings at Marikana in 2012, when police killed protesting mineworkers, attempts to bring Lonmin back on track and repair its reputation are being done by Chief Executive Officer Ben Magara.

Lonmin’s costs exceed revenue and this is the simple problem ailing the company. While the sale price is of 10,372 rand per ounce in the three months through December, each ounce of platinum-group metal costs 12,296 rand ($965) to produce.

Sales are weighted toward the middle quarters and capital spending is usually higher at the end of the year, Lonmin said. But this is not a new problem. according to data available , free cash flow has been negative each year since 2011.

“We see cash burn ad infinitum at current PGM prices, and at some point they’ll need to find more financing again,” said Edward Sterck, a London-based analyst at BMO Capital Markets Ltd. “Management is doing a good job with challenging assets, but there doesn’t seem to be a Plan B. Plan A is for commodity prices to recover in rand terms and that’s it.”

There’s no certainty that prices will pick up soon since demand for electric cars is growing and unlike conventional vehicles it does not use platinum.

Lonmin mainly has deep, labor-intensive mines and operational performance is another problem for it. Due to safety stoppages, union disputes and absenteeism, first-quarter production at K3 shaft, the company’s biggest, dropped 14 percent. A worker died in an accident at the shaft in February,.

While Previous COO Johan Viljoen held the job for under a year, Chief Operating Officer Ben Moolman resigned in March after less than two years in the role.

“C-level resignations at Lonmin have in the past presaged bad news, so COO Ben Moolman’s resignation – ostensibly ‘for personal reasons’ – is not an encouraging sign,” Yuen Low, a London-based analyst at Shore Capital Stockbrokers Ltd., wrote in a report.

(Adapted from Bloomberg)


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