Historic Lonmin faces “perfect storm” after killings

by Aug 21, 2012All Articles

LONDON – “You can never have enough enemies,” Tiny Rowland once boasted, but even the buccaneering tycoon who built what is now Lonmin plc might blench before the “perfect storm” it faces after South African police killed 34 strikers at its Marikana platinum mine.

Never a stranger to controversy – in its days as Lonrho, a British conservative prime minister of the 1970s famously called its then head the “unacceptable face of capitalism” – Lonmin can add human misery and a public relations nightmare to the labour struggles and falling demand afflicting all platinum producers.

The company already has one of the most pressured balance sheets in the sector and if production remains stalled after the bloodshed its hopes of limiting a shortfall in its 2012 output target and meeting debt-to-earnings commitments may dim further.

“Do yesterday’s events change the picture for Lonmin? I do think yes, they do. What we would like to see is obviously the speedy resolution of this conflict and the striking rock drill operators return to work as quickly as possible,” said Panmure analyst Alison Turner as investors stayed bearish on the stock.

“I think the kind of violence that you saw yesterday makes that increasingly difficult.”

Adding to Lonmin’s woes, it announced on Thursday that well regarded chief executive Ian Farmer, a veteran of the group since well before the board ousted the late and controversial Rowland in 1994, was seriously ill in hospital.

“I just couldn’t think of any more bad things that could happen to them,” said a second industry analyst who spoke on condition of anonymity. “It’s the perfect storm.”

Lonmin shares dropped over eight percent to their lowest in London since 2008 on Friday, before recovering to close down 1.3 percent at 619.4 pence near the close.


Like its peers, the world’s third biggest platinum miner has struggled with soaring wages and languishing prices, which have been hit by weak demand among car and truck makers, who use the metal in catalytic converters, and for jewellery. Struggles with unions in South Africa, saw Lonmin sack, and then mostly re-hire, 9,000 workers last year after an unsanctioned walk-off.

But violence this week, fuelled by inter-union rivalries, is unprecedented and threatens the miner’s already troubled efforts to secure a profitable future by ramping up key shafts and bringing down costs. Even before this week, Lonmin had said it was slashing spending plans to preserve cash.

It has said it is keeping basic services ticking over at Marikana to speed up a return to work, as and when the mine can put behind it Thursday’s bloodbath, which plunged South Africa into agonised examination of its post-apartheid economy. But it has also already warned it will miss its full-year output target of 750,000 ounces of platinum and investors are fretting.

The clashes have put what was already one of the most pressured balance sheets in the sector under greater strain, prompting analysts to speculate on an overhaul of its finances, either via debt restructuring or a discounted cash call.

Lonmin has agreements with lenders that require it to keep the ratio of net debt to core profit at no more than four times. That will be tested next month, but is already seen strained.

“Lonmin just doesn’t have the balance sheet resilience to sort of cope with a prolonged strike,” said another London industry analyst who declined to be named. “We always thought it was going to become strained come the first half of 2013.

“But now there’s concern beginning to grow that actually the year ending in September could see a covenant breach.”


Lonmin has an unenviable combination of expensive operations, hefty capital commitments and net debt estimated by analysts at Nomura to hit $400 million at the full year. But raising capital from shareholders may also pose problems.

“Pricing a rights issue on the basis of the long-term attractions of unique assets is extremely tricky, so we have neither added to nor reduced holdings,” an executive at one of the company’s 15 largest shareholders said. “Xstrata, with their 25 percent stake, must be watching with furrowed brows.”

It is unclear that miner Xstrata, which took a $514 million hit over its Lonmin stake at the half-year and is in the throes of a takeover, would back a share sale, analysts said.

The final number of ounces lost and the ultimate impact on Lonmin’s balance sheet are still unclear, but analysts say that unlike larger rival Impala – scene of clashes in South Africa earlier this year that forced the closure of the world’s largest platinum mine – Lonmin would struggle with a long halt.

Analysts at Credit Suisse estimated a disruption of similar length to Impala’s would cost Lonmin more than 100,000 ounces.

That would spell trouble for the company, which traces its roots back a century to the London and Rhodesian Mining Company. It owes much of its present asset base to Roland “Tiny” Rowland, the entrepreneur raised in Germany who courted African leaders and feuded with the British establishment for three decades as he built Lonrho into a diversified conglomerate from the 1960s.

Though a bitter takeover feud in the 1980s with Egyptian-born Mohamed al-Fayed for London’s luxury department story Harrods left Lonrho, for once, empty-handed, it still had a global portfolio ranging from hotels and trading to newspapers.

But after Rowland was ousted in a boardroom coup in 1994 it sold off most of its other interests and, a year after Rowland’s death, the remaining, mining business was renamed Lonmin.

The boom in catalytic converter use as governments battled to cut exhaust emissions saw the streamlined platinum company flourish. But as demand now slumps, miners strike and debts rise, even Rowland might now feel it has too many enemies.

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