Lonmin Reports $698 Million Pre-Tax Loss but Rejects Xstrata Bid

On 9 November 2012, the world’s third largest platinum producer Lonmin (LON:LMI) published its final results for the year ended September 30. In line with expectations, the company reported significant pre-tax losses on account of the impact of the tragic events at the Marikana mine, which placed the company in the global spotlight in August and September. Lonmin recently announced that it was going to restructure its balance sheet by means of raising $800 million (£496 million) from shareholders, with the platinum producer offering the shares at around a 45 percent discount.

**Close of a “Painful Chapter”**
In what Lonmin described as “commendable operational performance in light of circumstances” in its press release, the company reported that the events at its South African Marikana mine had a negative impact of 110,000 ounces of mined platinum below what would otherwise have been production levels. Saleable metal in concentrate was down 5.5 percent, whereas platinum sales decreased by 2.6 percent, relative to 2011.

With underlying profit before tax of $57 million (£35.6 million), and special costs of $755 million, including $159 million for costs related to illegal work stoppage and impairment, Lonmin reported a pre-tax loss of $698 million (£436.7 million).
!m[The Platinum Producer Expected To Price Share Offer At 45 Percent Discount ](/uploads/story/755/thumbs/pic1_inline.png)“The publication of today’s results closes a painful chapter in Lonmin’s history,” said the company’s chairman Roger Phillimore in the financial results press release, adding that Lonmin was already looking ahead with renewed confidence. “We have secured our financial position and we have a clear strategic plan that management and workers alike need to deliver on for the sake of all our shareholders.”

**Balance Sheet Restructuring**
The London-listed miner recently announced that it would offer $800 million of stock to investors to help restructure its pressured balance sheet. In its quarterly results press release, Lonmin noted that it intended to raise approximately $817 million. “Lonmin needs this money to stay in the game,” CIBC analysts said in a note, as quoted by Reuters. “Current and prospective shareholders will have to chip in at least half the value of their existing holdings to allow their investment to remain viable.” Lonmin noted that it was going to use the proceeds from the share sale to reduce the company’s dollar-denominated borrowing facilities from $700 million to $400 million.

**Discounted Shares**
The platinum producer announced that the UK issue price of the new shares would be 140p, representing a discount of 44.4 percent to the theoretical ex-rights price (TERP), TERP being the market price the shares would theoretically have following the rights issue. In addition, the proposed price represents a 69.1 percent discount to the closing price of 452.8p per share on November 8. In 2012, Lonmin’s shares have declined by more than 53 percent in London.

Reuters quotes a source familiar with the matter as saying that there was “strong demand” for the rights issue at the current discounted levels. “I think people see value in Lonmin at where it’s priced,” the source pointed out, adding that the offer was expected to run from November 20 to December 11.
**Xstrata Proposal Update**
Lonmin, however, have rejected a reverse takeover bid by Xstrata (LON:XTA), its largest single shareholder. The Financial Times reports that Lonmin said that Xstrata made a proposal on November 8, in which it noted it would fully participate in the rights issue, on condition that Lonmin’s executive management was replaced with Xstrata personnel. “The board considered this [Xstrata] proposal and concluded that it would not be appropriate to agree to the conditions contained in it,” commented Lonmin’s acting CEO Simon Scott, as quoted by the FT.
Reuters reports that Xstrata, which holds a 25 percent stake, pointed out that the aim was not to take control, but to protect the value of its investment. “Lonmin has suffered longstanding operational problems and we are concerned that the business does not have the management capabilities to ensure a sustainable future, even if short term funding issues are resolved,” an Xstrata spokesman said.
In October, Lonmin rejected another proposal by Xstrata, with Xstrata proposing to sell its South African PGM, chrome and vanadium businesses to Lonmin for shares.
Reuters reports that following the rejection news, Lonmin shares went down 2.3 percent, although analysts noted that the news was not all negative. Xstrata declined 1.6 percent.