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The conflict at the Lonmin (LSE:LMI) Marikana platinum mine is nearing epic proportions. Lonmin share price fell by 8% as the market opened, but staged a modest comeback to 636.00, down a more marginal 1.85% (12.00 pence) by early afternoon as investors try to cope with the increasing violence.
How Bad Is The Violence?
So far this morning, although reports vary slightly, it appears that another 34 miners died in yesterday’s violence as police had to defend themselves again “heavily armed” miners advancing in their direction. Police had to use “maximum force” to hold back the mob, which was armed with guns, clubs, and machetes. In addition to the 34 dead, 78 more miners were reported wounded.
South African President Jacob Zuma had been attending a meeting of African leaders at the Southern African Development Community summit in Mozambique. He has returned to the region to deal with the conflict first-hand. The outbreak has been called the worst civil violence in South Africa since the end of apartheid, the difference being that this time it was black police shooting black miners. The Democratic Alliance leader, Helen Zille, called it “an absolute tragedy – the worst we have had in a democratic South Africa.” President Zuma said that he was “shocked and dismayed at this senseless violence.”
How Bad Is The Outlook?
Lonmin has been more than forthcoming in communicating with its shareholders and the public. While this may temper some of the shareholder concern, if the conflict is not resolved soon, all the communication in the world will not be much help. As of this date, the violence has caused enough work stoppage that production is behind schedule by about 15,000 ounces. If the conflict continues for another two weeks, production could be down by as much as 40,000 ounces. That said, given the amount of inventory of metal in concentrate, the company may be able to temper losses in the short term by refining the raw material in sufficient quantities to satisfy demand.
Analysts at Panmure are adjusting their forecasts for Lonmin, including lowering the estimated EBITDA from US$181 million to US$138 million and increasing the projected net debt from US$516 million to US$539 million.
How Bad Is the Share Price?
The share price has dropped over 100 pence in the past week. The initial plunge this morning was the largest loss on the mid-cap index today. The share price has dropped about 20% since 7 August, meaning that the company has lost one-fifth of its value, or about £300 million in just nine days. The stock is now at a four year low on the LSE. It has hit a nine year low on the Johannesburg exchange.
How Much Worse Can It Get?
In a situation where a labour union is demanding a 200% increase in wages for some levels of employees, it’s difficult to predict what it would take to satisfy that kind of demand. There is sure to be a long term effect if Lonmin officials keep telling workers that they will be fired if they fail to report to work despite the potential for violence. The longer the violence continues, the more the reputation of the company – and the country of South Africa – will be besmirched. Although the violence at this point is coming from about 2,000 to 3,000 workers, some 20,000 are out of work.
Major investors will feel the pain. Xstrata, for instance, owns almost a 25% share in Lonmin. The devaluation of Lonmin stock has already forced Xstrata to write down its value held in Lonmin by £327 million.
Lonmin’s woes are being compounded by a 20% reduction in platinum prices in the last 3 months. Also, despite the fact that Lonmin has a good supply of raw materials to process, as that supply is depleted, the ability to continue to supply is compounded by the fact that it takes longer to extract platinum than most mined minerals, since the veins are smaller than average and buried much deeper in the ground.
To Cap It All Off
It seems that there always has to be a cherry to put on top. In this case, it is the breaking news that Johannesburg based CEO Ian Farmer has been admitted to the hospital with what has been described so far only as “a serious illness.” Sometimes timing is everything. For Lonmin, it’s just not the right time.
