Bloomberg News

Lonmin Output at Standstill as Drillers Given Day to Return

August 20, 2012

Lonmin Issues Workers Ultimatum as Government Meets on Killings

About 3,000 workers embarked on an illegal strike Aug. 10, demanding higher pay. Photographer: Stringer/AFP/Getty Images

Lonmin Plc (LMI), wracked by the deadliest mine-industry violence since apartheid ended, is managing itself “very carefully” to ensure it doesn’t break rules set by creditors as output remains halted at its Marikana site.

Production is “at a standstill,” acting Chief Executive Officer Simon Scott said in a speech near Marikana today. “We would like to see the operations start ramping up definitely some time next week,” he said in a separate interview.

Lonmin, the third-biggest platinum producer, said more than two-thirds of its 28,000 workers, including 83 percent of rock- drill operators, stayed away today. Lonmin gave striking miners another day to return to work or face dismissal. About 3,000 drillers started the illegal stoppage on Aug. 10, demanding higher pay.

The disruption will crimp revenue needed to fund operations and service debt. Lonmin may have to consider raising $1 billion by issuing stock to current shareholders, Societe Generale SA said on Aug. 16. The mine operator, like other South African producers of the metal, was already grappling with higher wage and power costs and lower prices.

Police killed 34 people on Aug. 16, firing into a crowd as they sought to clear a hilltop near the mine. The storming of the hillside followed clashes between rival labor unions that resulted in 10 deaths, including two policemen, and a six-day standoff.

Debt Facilities

Lonmin has debt facilities of $945 million, including $700 million of five-year loans provided by seven banks in May 2011, it said in its 2011 annual report. The loans are subject to covenants including a maximum ratio of net debt to earnings before interest, tax, depreciation and amortization of 4 times, and a minimum Ebitda to net interest ratio of 3.5 times.

There is a “very real risk of Lonmin breaking covenants” if they do not benefit from working capital inflows from drawing down inventories, UBS AG analysts Ben Davis, Myles Allsop and Danielle Chigumira wrote in an Aug. 17 report.

With each day of strike action, Lonmin is losing about 2,500 ounces of platinum, used in jewelry and auto catalysts, and an estimated $3 million, Absa Capital said the same day.

Lonmin fell 4.6 percent to 610 pence by the close in London, taking its drop since the strike started to 19 percent.

“Everybody in the mining industry is on high alert,” Martin Prinsloo, chief financial officer at Johannesburg-based Royal Bafokeng Platinum Ltd. (RBP), said by phone from the city today. The company operates mines in the same area as Lonmin. “We’ve already seen some effect” on the platinum price, he said. “It’s a very high price to pay to get the price up.”

Amplats Concern

Platinum surged 5.3 percent last week, the biggest weekly gain since the five days through Jan. 27, on expectations the violence in South Africa, which accounts for three-quarters of world output of the metal, will reduce a surplus. The metal rose 1.1 percent to $1,490.49 by 4:40 p.m. in London.

“The situation in South Africa is unlikely to be resolved swiftly, and will probably continue for the next six to eight weeks,” UBS wrote in a note today. “Platinum is also pricing in the increasing likelihood of contagion, with market focus now shifting to Amplats,” as Anglo American Platinum Ltd. (AMS) is known, it said. “The current strength in platinum prices is reflective of growing concerns that the company might be next.”

Amplats is the world’s biggest producer of the metal, followed by Impala Platinum Holdings Ltd. (IMP)

Earlier this year, fighting between union members at Impala’s operation near Marikana led to the closure of the world’s largest platinum mine for six weeks and four fatalities.

Government Investigations

“Given the severity of the unrest at Marikana over the past week, we think it is likely that Lonmin will lose 50,000 ounces, or three weeks of production, as a minimum,” Deutsche Bank AG said in a note. That’s about $74 million at today’s prices. There’s a “strong likelihood” Lonmin will issue shareholders the right to buy more stock, the bank said.

A committee appointed by South African President Jacob Zuma to assist the families of those who died in the police shootings met for the first time today.

Minister in the Presidency Collins Chabane led the committee, which met in Rustenburg, about 120 kilometers (75 miles) northwest of Johannesburg, the presidency said in an e- mailed statement yesterday. It includes ministers from the departments of mining, police, social development, labor and state security.

The members and terms of reference of a judicial commission of inquiry into the Marikana killings will be announced in the next few days, it said.

The government, mining companies and labor unions will form a separate group to investigate how to improve conditions in the platinum industry, the South African Press Association reported Aug. 18, citing Mines Minister Susan Shabangu.

To contact the reporters on this story: Matthew Hill in Johannesburg at mhill58@bloomberg.net; Carli Cooke in Johannesburg at clourens@bloomberg.net

To contact the editor responsible for this story: Antony Sguazzin at asguazzin@bloomberg.net


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