November 9, 2012 7:36 pm

Lonmin – plus ça change

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Under ground, under water

Omnishambles can spread like wildfire in the bushveld. Even before August’s tragic shootings at Lonmin’s Marikana mine in South Africa, the world’s third-largest platinum miner was struggling with falling commodity demand, rising costs and debt. Lonmin’s narrative is unchanging: there is always some excuse or other for production misses.

And now it is back in its post-financial crisis bind. After the disruption of the tragedy its bankers have forced it into an $800m rights issue. Although returning to the same watering hole is not ideal (it raised nearly $500m in a debt-cleansing cash call in 2009), Lonmin was in danger of breaching loan covenants again. On past form, the proceeds will be little more than sticking plaster.

Sure, there is enough to reduce a net debt pile last put at $550m and rising, and cover a sharply curtailed capital expenditure programme while Lonmin tries to right itself. And the money is in the bag, even if the underwriters are casting nervous glances at Xstrata, with just under a quarter of the miner after its never-consummated £5bn merger approach in 2008. Lonmin’s shares have lost 85 per cent since then. Xstrata has twice approached it since Marikana, with a plan to sell its own platinum and chrome assets in the bushveld complete with management, in exchange for Lonmin shares – and a $1bn rights issue underwritten by Xstrata. That would have lifted its stake to 70 per cent. Lonmin rejected that and a further offer to back the cash call but inject Xstrata management. Never mind that, given Lonmin’s performance since Xstrata last came knocking, investors may wish it had been less hasty in its rejection.

Lonmin’s debt clean-up, capex sparing and cost-cutting aim to make it free cash flow-positive by 2014. Trouble is, those optimistic plans rely too much on a rebound in demand – and shuttered capacity by bigger producers. It feels eerily like 2008 redux. Say yes this time.

Email the Lex team in confidence at lex@ft.com

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