Lonmin’s South African Nightmare Far From Over

on Sep 13, 2012

For publicly-held corporates generally, worker strikes are bad news at the bottom line – and bad press. For precious metals miner Lonmin, grappling with the strike at its key platinum mining operation at Marikana in South Africa, it’s hard to imagine a situation which from an economic and a PR perspective could get any worse. Production has ground to a halt since the strike started on 10 August, seemingly a wildcat action orchestrated by the Association of Mineworkers and Construction Union (AMCU), an emergent rival to the long-entrenched National Union of Mineworkers (NUM). Early attempts by the company to defuse the tense situation counted for naught when, a week later, over 100 protesting miners were shot at close range by the South African police, some 34 of them fatally. Video of the shootings quickly appeared on global news media and comparisons were inevitably made with police atrocities during the apartheid era.

For Lonmin, the world’s third largest platinum miner, this strike is turning from bad news to disastrous. With the strike now into its second month and production losses of over 2,000 ounces per day, the company has advised that it will almost certainly miss its 12-month production target and, more worryingly, speculation is mounting that it faces the prospect of defaulting on its sizeable bank debt, with 30 September looming as a crunch date for covenant compliance.

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!m[](/uploads/story/347/thumbs/pic1_inline.png)Before the strike started, few people outside the mining and minerals investment sectors would have heard of Lonmin. Now of course for millions around the world the name is indelibly associated with ‘the Marikana Massacre’. Following the disastrous events of 16 August, and in the face of criticism for its heavy-handed approach in the past to worker grievances, Lonmin’s acting chief executive Simon Scott was reported as saying: “We have not been arrogant. We have to rebuild the Lonmin brand, rebuild the platinum brand and brand South Africa.”

Needless to say, Lonmin’s share price has been hit hard by the strike and ensuing events. Already well off its 12-month high of 1,270 pence when the strike started – reflecting a fall in world platinum prices, amongst other factors – the company shed nearly 20 percent of its market worth, dropping from around 750 to 612 pence, in the two weeks following the start of the strike. A further fall to 571 pence saw Lonmin at its lowest price since 2008, with sentiment not helped by the likes of The Telegraph’s Questor column advising its readers on the 26th to steer clear of the stock.

Yet, markets being markets, other pundits are seeing opportunities in Lonmin’s misfortune. On 29 August, a mining sector analyst at broker Panmure Gordon tipped Lonmin as a buy on CNBC’s Squawkbox show. The analyst was talking up a long-term position in Lonmin but it seems that most buying at present is associated with a widespread shorting of Lonmin – over the weekend of 1-2 September, The Telegraph reported that nearly 20 percent of Lonmin stock is out on loan, against an FTSE average of under two percent.

The company itself is reportedly turning to existing shareholders to meet the crisis. Talk abounds in the financial media of planning for a rights issue of up to $1 billion, underpinned by support from major shareholders Xstrata (25 percent), South African magnate Cyril Ramaphosa and the South African Industrial Development Corporation. Whether the issue proceeds, and the level of uptake from existing investors, remain to be seen but if Lonmin is found to have breached its bank covenants at the month-end review, the stock market may prove to be its only available source of cashflow funding while it rides out the storm.
Meantime, its mine-workers at Marikana continue to hold out for a three-fold wage increase and, although the white-hot tensions of two weeks ago have dissipated to some extent, there still seems an enormous gulf between all parties to the strike-talks. Lonmin’s nightmare is not yet over.


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