Back when Lonmin was a leading platinum producer in an effervescent mining sector, it felt muscular enough to give short shrift to an unwanted $10bn takeover offer.
Xstrata’s £33-a-share offer was 42 per cent higher than Lonmin’s prevailing stock price — but was dismissed as “an opportunistic and entirely unwelcome attempt to acquire Lonmin at a price which undervalues its unique assets”.
That was 2008. To say that Xstrata’s offer looks generous with hindsight is to put it charitably.
With Lonmin’s market capitalisation down to £120m, the South African miner on Monday launched a massively dilutive rights issue in which investors can buy 46 new shares for each share they own. The price: 1p per share, or a 94 per cent discount to Lonmin’s 16.25p stock price on the eve of the issue.
As Lonmin shareholders ponder that choice — and as Investec analysts note, “management is effectively forcing shareholders to follow their rights or be diluted into obscurity” — they can reflect on a precipitous corporate fall from grace, even by mining’s cyclical standards.
When still known as Lonrho, the colonial-era conglomerate sprawled across the business landscape far beyond Africa, snapping up assets and earning swashbuckling boss Tiny Rowland a censure from former British prime minister Edward Heath as “the unacceptable face of capitalism”.
Post-Rowland, stripped of non-mining assets and renamed Lonmin, the company still seemed to be in the right place at the right time, with a healthy market capitalisation of $2.5bn in 2001 just as commodities were about to experience a decade-long boom.
Now Lonmin is on its third rights issue since 2009, which it insists is necessary, along with associated bank refinancing, to keep the company in business.
Across mining, the commodities downturn is forcing companies to tap investors for more equity. Glencore and Freeport-McMoRan have done so since September and Nyrstar, a zinc producer, also announced a rights issue on Monday.
But Lonmin’s problems have been compounded by a costly and ineffective attempt to introduce more mechanised mining a decade ago, as well as the complexities of operating in South Africa, which has about 80 per cent of the world’s proven platinum reserves but is dogged by soaring costs and regulatory uncertainty.
The company has been riven by labour unrest, reaching a nadir when 34 striking miners were shot by police at the company’s Marikana mine in 2012. A commission of inquiry criticised Lonmin for failing to respond appropriately to the threat of, and the outbreak of, violence.
Some analysts are ready to write the company off completely. “I will be amazed if Lonmin is still trading in five years’ time,” says Paul Gait, analyst at Bernstein Research.
Ben Magara, chief executive, says such doubts are misplaced. “The possibility of ceasing trading ... I think the announcement kills that fire properly,” he said on Monday. “This is a fully underwritten rights issue, the amended [loan] facilities have been agreed by all the banks, so we are on the right footing.”
The rights issue seeks to raise a net $369m to pay for some capital spending and lay-offs, as well as to cut Lonmin’s net debt, which stood at $185m at September 30.
Lonmin’s problems start with slumping prices for its output, leading to its underlying pre-tax loss of $143m in its 2015 financial year. The “basket price” for the platinum and associated metals that the company produces has fallen by 34 per cent since 2011, from almost $1,300 per ounce to $849/oz this year.
Platinum demand is fed mainly by its use in making catalytic converters for diesel-powered vehicles, in jewellery; and as an investment. In all three cases, “demand is suffering and is likely to be constrained for a couple of years”, says Ben Davis, analyst at Liberum. The latest question mark over demand is the emissions scandal at Volkswagen, which could “cement diesel’s decline”, add the analysts.
Given weak demand, aggressive supply cuts would be an obvious answer. But the platinum industry is built around deep mining shafts where closures are expensive and difficult to reverse, while labour militancy and political sensitivities in South Africa make redundancies complex.
The Marikana tragedy created fertile terrain for the Association of Mineworkers and Construction Union, a militant upstart that led last year’s unprecedented five-month strike at Lonmin and its two larger rivals, Anglo American Platinum and Impala Platinum.
While Lonmin plans 6,000 redundancies, the impact of more job losses would be difficult for the country to swallow. As Mr Magara said on Monday, jobs at Lonmin directly and indirectly support about 300,000 South Africans.
Lonmin and other South African miners are struggling with double-digit increases in labour and energy costs and for many investors in and outside the country, its mining sector is best avoided.
“We are a very unattractive investment environment, the government’s policy has been hostile,” says one South African mining veteran. “It is a really difficult situation for mining companies.”
Mr Gait predicts the platinum industry will migrate towards lower-cost, open-pit mines such as Amplats’ Mogolakwena, still able to generate strong profit margins. That will render deep-level operations such as Lonmin’s anachronistic, he adds.
A successful Lonmin rights issue, say many analysts, will simply delay the day of reckoning.
“For the platinum sector to recover, marginal supply like Lonmin must be rationalised,” says Mr Davis. “With capital markets and the South African government failing to let it happen, it will only prolong the pain.”