Lonmin Share Discussion Threads

[dealy] 28/7/2015 14:59

Glencore's ante in a Lonmin rights issue would have been about £25m. Peanuts for them. That is just speculation.

[goldenfish2010] 28/7/2015 14:49

dealy

I tell you something. the No1 reason Glencore sold their stake was because they knew a rights issue will be coming and they didn't want to participate imo. same exists for the big mining investors at the moment. noone is willing to invest in platinum at current market conditions unless they get a ridiculous offer which risk/reward ratio can be justified in their investment committees.

in addition, noone currently buys mining companies in SA, so no takeover scenarios here.



lazyhisnibs

I know about POG. same story here with the upcoming rights issue IMO.

[dealy] 28/7/2015 14:44

I could tell a similar story of Corus, Barratts, Taylor Wimpey, WS Atkins which all looked like basket cases but were in fact just the victim of investor panic and over-reaction. They all recovered and rose 20 times from their low.

[lazyhisnibs] 28/7/2015 14:00

goldenfish,

Thanks for all of that. You seem very well researched so I'm not going to quibble about a few metrics I don't recognise. Thanks for them in fact.

I don't know if you are familiar with what happened at Petropavlovsk and although there are a couple of big differences there are far more parallels. A very rough timeline for that one is as follows and although every situation is different I now use it as a framework for other unprofitable mining companies in trouble:

* According to Google's basic chart the share price peaked at about £13.50 in April 2010.

* Like many other gold mining senior management teams Hambro Senior and the rest of the board called the gold market wrong but before they knew what they had done the debt was hideous and far worse than it is here. The share price tumbled.

* All the way down through £5 nothing much, if anything, was done and then just below £4 I think it was JP Morgan warned of covenants perils if gold went sub $1400 for long which of course it went on to do. (JPM's warning would have been circa May 2012, roughly.)

* Down, down, down it went with posters arguing all the time the share price was too low for a RI or a placing. But even the diehards started to wonder at a pound. Around this time I think it was management started to make some sensible changes including the selling of assets.

* At the end of April 2014 management finally acknowledged the covenants' risk and the share price tumbled from about 80p the day before. (There was also the Russian incursion in to the Crimea around that time which obviously made things worse share price wise than they would have been.)

* When the share price was about 35 for 40p (from memory) management gave the heads up on a RI but with precious little information so it tumbled some more.

* However many weeks later it was when management finally provided the salient details for the RI. Punters and investors figured out it was going to have to be at a dilution of about fifteen new shares for every existing one. The share price was about 20p the day before that announcement.

* The share price went on to fall to a low (in old money) of 6p and the dilution turned out to be closer to sixteen to one. The two founders and a few other members of the board finally put their hands in to their own pockets and bought shares. (The founders did more than that actually, they underwrote a chunk of the RI.)

* On the day the RI was executed the share price rose to 6p (in new, diluted, money but either later that day or the next it fell to 4p but then quickly started up again.

* It's ranged around the 6p to getting on for 7p most of the time since then but has been as high as 7.5 p (ish).

Long story short, broadly I agree with your expectations here. Good luck with however you are trading it or intend to.


PS: I'll be very surprised if either Anglo or Lonmin are not persuaded to drastically soften their plans for redundancies.

[dealy] 28/7/2015 13:46

Here's the shorters' theory:

Share price drips down from 200p to 100p on suspected problems (due in this case to Platinum price). Analysts flag problems just in case nobody has noticed. Price goes to 75p. Company confirms same problem (not more problems) and outlines actions to remedy:stock price falls to 60p.

Shorters come in and assume the company has no choice but to raise equity at 20p.

It isn't that simple. There are many alternatives open to the company.

[goldenfish2010] 28/7/2015 13:44

lets agree to disagree.

[dealy] 28/7/2015 13:42

The company is not in a worse position. The balance sheet is quite strong. The company has 300m USD in headroom. It has carte blanche to reduce headcount. The shorters are making a mountain out of a mole hill. The only thing that is troubling the company right now is the spot price for Platinum. That is a variable and can change. Demand for PGM is rising. So is the population of the earth and the number of cars on the road.

[goldenfish2010] 28/7/2015 12:32

last time the rights issue was priced at a 45pc discount. This time around with the co in much worse position how much?

[careful] 28/7/2015 12:27

such faith in the theory of supply/demand.
market manipulation and speculation is to blame.
no one quotes numbers, just hot air.

[pro_better] 28/7/2015 12:09

so no matter what LMI is and will remain for the next years in crisis and on top of that the rights issue in this environment will be at ridiculous price.
looks nasty!

[goldenfish2010] 28/7/2015 10:52

add the fact that there is slowing auto sector activity and weak Chinese jewellery demand and all economics point to low platinum prices.
LMI knows it as the rest of sector hence the 'survival mode' hibernation actions from their part for the next 2-3 years.

[goldenfish2010] 28/7/2015 10:44

It is all about demand and supply. Except the cost cutting idea, LMI is trying to bring down platinum prices by decreasing production. LMI's 100k oz cut represents 1.7% of global primary supply. However, the platinum price continues to sit at around the 70th percentile of the cost curve, signaling that further production cuts are still required. LMI's 2 major peers are still expected to grow production: Anglo Platinum by 200k oz over the next 2 years and Implats by 150k oz over the next 3 years. So supply will be increased instead of decreased and comparing to today's supply/demand ratio the platinum price will go down even further.

[careful] 28/7/2015 10:30

history teaches us that no one knows where platinum prices are going over the next two years.
but the morgan stanley people are paid well to make their best guess.

[goldenfish2010] 28/7/2015 10:27

lazyhisnibs

the numbers come from Morgan Stanley research team and it is comparable with other researchers having more or less the same set of numbers.

point is that for at least two years Platinum prices will remain very low and some argue they will even go lower from here. The restructuring of the debt is going to happen and with bad macroeconomics and company's ill state the consent is that it will be a rights issue. Which in turn points to a very dilutive one as investors with big pockets are not keen to invest in, unless there is a huge discount to current share price Be aware that investors all those years have not made their money back from the dividends distributed and with worse times ahead they are reluctant to enter again, unless the price is extremely low.

I believe there is nothing LMI can do or other SA platinum companies but for the next 3 years to just go into survival mode. the only solution is the metal prices to start picking up but then again they will need to start spending more in order to reach acceptable production levels to break even.

[wageslave] 28/7/2015 10:20

May drop down a lot more. But currently oversold and bouncing.

[pro_better] 28/7/2015 08:44

everyone and his dog knows LMI is going down....thing is how low can it go?? 20p, 15p 10p?

[the_insider] 28/7/2015 08:34

Dilutive rights issue coming at decade low platinum prices, cash constraints/loss making and with workers and unions on the riots.
10p is the word out.

[the_insider] 28/7/2015 08:23

This is going down big time. You heard it here first!

[goldenfish2010] 27/7/2015 20:41

Out of 19 analysts covering Lonmin, 6 rate it a Buy, 9 indicate a Hold while 5 suggest a Sell. The highest target is GBX 279.2 and the lowest is GBX 1.15 according to Thomson/First Call. The 12-month mean target is GBX 16.82, which means downside potential of 69.31% over the current price.

hxxp://www.octafinance.com/lonmin-lonlmi-decreased-by-analysts-at-hsbc-to-hold-rating-with-gbx-82-00-target-price/118508/#ixzz3h7ex3swd

[goldenfish2010] 27/7/2015 20:38

Fears of a rights issue sent Lonmin sliding 12.1 per cent to 54.8p, with the platinum miner having warned last week it was reviewing its capital structure ahead of debt facilities expiring in mid-2016. Deutsche Bank estimated that at spot prices Lonmin is burning through $240m a year and will end 2015 with net debt of $380m.

[goldenfish2010] 27/7/2015 20:36

With the latest production report spooking investors, brokers took action. JP Morgan Cazenove, Deutsche Bank and Citigroup all lowered their target prices on the company.

Analysts at Citigroup said Lonmin had given no guidance on how its restructuring will impact the company’s finances.

It came after Ben Magara, Lonmin’s chief executive, attempted to alleviate fears on Friday: “We are taking short-term pain to preserve the optionality for the long-term”.

However, investors were not convinced by the restructuring plan, as they offloaded the stock on Monday.

Analysts at JP Morgan Cazenove said Lonmin may need to launch a rights issue if it is unable to refinance debt facilities of around $560m, which mature next June.

[goldenfish2010] 27/7/2015 20:30

The cutbacks represent a large reduction in Lonmin's workforce, which employs 28,000 staff as well as 9,000 contractors, and will add to South Africa's dire unemployment woes.





Lonmin to cut 6,000 jobs, close shafts


Lonmin, which owns the Marikana mine in South Africa where 34 workers were shot dead by police during a wildcat strike in 2012, is likely to face a fierce battle with unions over the lay-offs.

"This is a bloodbath of job losses in the mining industry. It is a tragedy," the National Union of Mineworkers (NUM) said in a statement.

"We are going to fight against any job losses. It is very painful to see. The high number of retrenchments will contribute to (the) high unemployment rate in South Africa."


hxxp://www.timeslive.co.za/sundaytimes/businesstimes/2015/07/24/Economy-dealt-fresh-blow-as-Lonmin-cuts-jobs

[goldenfish2010] 27/7/2015 18:33

I wish I could give a better prediction but i see share price hitting the 30p mark in the very short term.

All in all, the Rand metal basket price is down 14% YTD and LMI is currently EBITDA negative at spot prices. So what LMI is doing? they are closing 5 higher-cost shafts, which will result in production of 650k platinum oz in FY16/17 and a MSe of 615k oz thereafter. This represents a 13% and 18% cut off the FY15 base.

The main point is that LMI is a marginal producer. Despite material cuts to FY15-17 capex to well below the MSe sustaining capex level of $200-250m pa and major restructuring (18% production cuts and 15-20% cost cuts), Morgan Stanley forecasts that LMI currently burning c.$175m pa at spot economics and Rand metal prices 15-20% higher are required in order to move to FCF breakeven
position.

Even if their base case metal price assumptions do play out over the medium term, they expect capital underinvestment to reduce LMI's future optionality to ramp capacity back up into a tightening market.

So net debt still continues trending in the wrong direction and Morgan Stanley
estimate that LMI is currently burning c.$175m pa at spot economics after
the restructuring !!! This is on an assumed reduced capex level of $130m
pa post restructuring, well below the MSe $200-250m required to sustain
production over the medium term. They also estimate that prices 15-20% higher
than spot are required for MI to achieve FCF breakeven.

All in all Morgan Stanley estimate net debt on hand of $198m at September 2015 year end. LMI has $565m in available revolving credit facilities and these are due for refinancing mid-2016. So another strong bear case is that a long-term capital structuring update is expected in November and that shall be quite painful for existing shareholders.

They even said it themselves, the business is unsustainable. Cost cutting is outweighed by a reduced production capacity to leverage into expectations of a tighter metal market over medium/longer term resulting in a -16% change in EBITDA post FY18 best case scenario!! Coupled with the expected cash outflow of c.R685m/$55m on employee retrenchment, add the continuous low driven platinum price, upcoming major strikes and unrest from employees and you get the big picture which is very ugly, not only for LMI but for the sector in general.