Lonmin Tries A Lazarus

Published 9 years ago
Lonmin Tries A Lazarus

This year Lonmin, the world’s third largest platinum producer, will try to save its African business.

After a disastrous couple of years, the future of Lonmin hung in the balance in November as the platinum mining giant needed a $407-million bailout to keep going. It was the third capital raising in six years.

Wounded by declining platinum prices, electricity shortages, slow demand, and strikes, the company’s financial circumstances deteriorated sharply. To make matters worse, the company frittered away money.

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“In the boom times around 2004 and 2005, Lonmin went and bought a ground in the Northern Province around the Plat Reef, a property called Akanani. Akanani was bought for almost a billion dollars. Today, in our books, it’s worth zero. So that billion dollars went down the drain,” admits Lonmin CEO, Ben Magara.

Magara says a further billion dollars was wasted when Lonmin embarked on a failed mechanization program. The rock was too hard and shafts too narrow.

“To try and reverse all those challenges has needed even more money,” says Magara.

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On the morning of November 19, Lonmin went cap in hand to its shareholders for an emergency capital injection. Prior to the meeting, other shareholders sold out of Lonmin. The share price went down from $8 in December 2010, to just 16c in November just before the meeting.

In London, Lonmin offered shareholders a 94% discount as part of its rebuilding plan. The Public Investment Corporation (PIC) saved the day by increasing its stake in Lonmin by 23% from 7%.

Even though the bailout was successful, 6,000 job losses are expected by September. Paul Theron, the CEO of asset management company, Vestact, reckons Lonmin’s shareholders are growing tired of bailouts.

“It’s a bit like SAA (South African Airways) where they say ‘this is one last bailout please’, but unfortunately that is exactly what happened in the past. The management team has raised additional funding in order to increase equity and to pay down debt, but then proceeded to run business in a way that didn’t result in a sustainable profitable scenario,” says Theron.

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“No one anticipated that we would see this level of oversupply in the industry and this level of self-demand and this level of poor prices. A lot of people assumed that once the supply side started to calm down, there would be an immediate response in terms of higher platinum prices.”

Lonmin is hoping upon hope it can save its 106-year-old African operations and more than 30,000 jobs.