It takes a brave man to steer a company in an industry on bumpy ground. Take Lonmin, which this week announced that Ben Magara will become the new chief executive in July. The Zimbabwean must tow the London-listed South African platinum miner clear of an operational bind. The precious metal is in surplus at the same time as wages and power costs among platinum miners are rising.
It helps that Mr Magara is a graduate of the university of Anglo American. His two decades of experience in South African mining should help him navigate Lonmin through complex labour negotiations. What is more, Lonmin is already making progress. Its $800m cash call late last year has wiped out its $420m in net debt. Meanwhile, production in the first quarter beat expectations, which demonstrates that Lonmin is recovering from last year’s strikes. The miner is also addressing its weight problem as 150 non-mining management roles await the chop.
Still, the platinum price, which fell sharply on Thursday, remains a quarter below pre-crisis highs. On the supply side, the 400,000oz cut in platinum production by the world’s largest miner of the precious metal Anglo American Platinum is yet to go ahead. And secondary supply from platinum recycling is also rising. Meanwhile, demand remains under pressure due to the weak global auto market. As a result, any price increase that could occur is sure to be less than the rise in unit costs.
In the meantime, Lonmin must steer a fine line between capital expenditure to improve efficiency to bring down its high cash costs, and a return to positive free cash flow. The reduced capex this year and next might therefore be overdone if it is to meet the big 2015 production targets it needs to drive down costs. Mr Magara has a tough journey.
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