Mining’s biggest loser Lonmin is burning cash to stay alive

Bloomberg

For most of the mining industry, 2017 is turning out to be another good year. The big exception is Lonmin Plc. Investors are losing confidence in the world’s third-largest platinum producer as it burns through cash to stay afloat, just 15 months after raising about $400 million from shareholders. Platinum prices aren’t far from a seven-year low and Lonmin has its own set of operational problems, including higher costs and lower output at its biggest mining shaft.
The stock is down more than 30 percent in 2017, the most in the FTSE All-Share Basic Materials Index of 28 commodity producers. The overall index has gained 11 percent this year.
“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.” Other mining companies are looking to deploy new cash into dividends and acquisitions, buoyed by a recovery in commodity prices and deep cost cuts. Lonmin stands out for its years of problems. The company used up 70 percent of its net cash last quarter, leaving it with $49 million, although it can draw on $414 million, mainly through credit lines from banks.
Chief Executive Officer Ben Magara has pushed to get Lonmin back on track and repair its reputation after the shootings at Marikana in 2012. But it hasn’t been enough. The company has raised about $1.7 billion from shareholders in the past eight years yet its current market value is about $330 million.
The problem is simple: Lonmin’s costs exceed revenue. Each ounce of platinum-group metal costs 12,296 rand ($965) to produce, compared with a sale price of 10,372 rand per ounce in the three months through December.
Lonmin said capital spending is usually higher at the end of the year and sales are weighted toward the middle quarters. But the problem isn’t new. Free cash flow has been negative each year since 2011, according to data compiled by Bloomberg.
“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.”
With demand growing for electric cars, which unlike conventional vehicles don’t use platinum, there’s no certainty that prices will pick up soon. Platinum added 0.2 percent to $959.42 an ounce. Lonmin rose 7.6 percent to 15.92 rand a share at 3:14 p.m. in Johannesburg.