“I was amazed they showed any profit at all” – Peter Major on Lonmin’s surprise results

Lonmin announced that it earned an operating profit of $34m for the six months ended March 2014, down significantly from the $93m it earned in the same period last year, but much, much higher than any reasonable person would have expected. The period in question included both the traditionally quiet December/January period and the months-long platinum strike that has been crippling the industry, yet despite all this, Lonmin still managed to turn a profit. This is a remarkable achievement, and actually makes one consider that maybe South Africa's platinum producers are not yet played out. Any company that can produce a profit under those circumstances is, surely, a company worth checking out? Of course, I should caveat this by pointing out that the adverse consequences of the strike will also hit the numbers for the second half, as well as the longer-term prospects for the industry, and so it's advisable to wait for the full-year results before drawing any conclusions. Nevertheless, it's an impressive set of results delivered under the most challenging circumstances imaginable. – FD

ALEC HOGG:  Platinum miner Lonmin released interim results this morning, negatively impacted no doubt, by the 15-week long platinum strike.  Mining analyst Peter Major from Cadiz Corporate Solutions is on the line to take us through these numbers.  Peter, before we look into those, clearly the managers of Lonmin have done a very good job of prepping investors because the share price is up 24 percent in the past year.  It's sitting at a R28bn market capitalisation, possibly worth a whole lot more if you were to have a more normal environment but still, with a platinum strike continuing for as long as it has and the share price holding up, they've done their preparation quite well.

PETER MAJOR:  Without a doubt, Alec.  History has shown there's no more optimistic investors on the planet than those that want to invest in a black hole in the ground, especially when it's dependent on so many variables, which are totally out of your control.

ALEC HOGG:  We've seen that in the numbers today.  From an outsider's look in, perhaps they generated better profits or smaller losses than might have been anticipated.  You're the expert.  What did you make of the interims?

PETER MAJOR:  I'm not an expert, but I'm a bit of a veteran and I was amazed they showed any profit at all because these are six-month figures.  We know December-January are always weak months because of holidays and high absenteeism – planned and unplanned – and then you have a full-blown strike in February and March, which means absolutely no work.  No mining with just a little bit of processing to take out what's detailed, but Lonmin virtually has a 100 percent strike going on, so the fact that earnings were down from 93-million this time last year, to 34…I'm surprised they even had $34m earnings before and interest tax and production was down 41 percent.  Production is down 41, earnings before interest tax down virtually the same, and I'm just amazed it was that and it wasn't worse.

ALEC HOGG:  Do you think investors or those who own shares in the company will be satisfied with what they've seen so far?

PETER MAJOR:  I think they will, Alec.  I think everybody's going to give the company credit for holding up this well and for making such a huge effort to come to terms with workers who are asking for something totally out of orbit, and who don't seem to be willing to negotiate on a reasonable basis.  It looks like they're actually going to be able to resolve this strike in a week one way or another, so I think shareholders are willing to hang on.  They just can't see anything getting worse.  They believe it can only get better and the share price can only get better.

ALEC HOGG:  We just got hold of an internal memo, which suggests that Lonmin is preparing for a mass return to work on Wednesday.  We do know that Lonmin's been trying to get hold of its workers/employers directly through SMS's.  Is this realistic that you would see this mass return, despite the unions not wanting it to happen?

PETER MAJOR:  It's very realistic, because despite our atrocious education program here and the massive propaganda, which the poor miners have to put up with, I think they realise that anywhere in the region of an eight or nine percent increase on what they've been making in the current environment, is actually okay.  In fact, it's pretty good.  They see the mine wants them to come to work, and I think they understand that the mine is not making billions.  It's at break-even at best, and it's just very realistic to think that they will crack after three-and-half months of making no money at all and having no better prospect than this.

ALEC HOGG:  It will be interesting to see what happens on Wednesday.  Peter, over the weekend President Jacob Zuma was celebrating his victory by saying that for the next five years he's going to be a lot more business friendly in legislation, attacking jobs perhaps in a way that has been forgotten over the past five years.  If that is to be done, do you think that there might be some intervention or some more aggressive or serious intervention now in what's going on in the platinum sector, by the South African government?

PETER MAJOR:  It would be so good if there was, and it would not be difficult.  If our President, Parliament, and all the Ministers adhere to the Constitution towards every member of this country: workers, union, and management alike.  If they just said 'guys, you can go on a legal strike, but you have to play by the rules.  There's no special dispensation for certain unions and unions can't do things that aren't allowed in the Constitution for anyone else'.  If they just enforce this Constitution that will create more jobs than any type of government program they can ever dream up.

ALEC HOGG:  Back to Lonmin, they're sitting on net cash of $70m.  There's been quite a lot of that rights issue they did at the beginning of last year, but they also said in the numbers today that they have nearly $600m in facilities that they can access.  That would suggest there's a lot of powder that's still being kept dry if the strike continues.  Do you have any thoughts on how long Lonmin would wait it out?

PETER MAJOR:  I don't think Lonmin's been waiting this out since day one, Alec.  I think they've been as proactive as they can, and they go to bed at night saying 'there must be something else we can do.  What else can we do?  What else can we try again?'  Nobody is saying 'I have money in the bank and facilities available.  I can hang in there for another month or two'.  They're really going as though every day means the difference between life and death, that every day they must resolve this thing.

ALEC HOGG:  At least, as far as shareholders are concerned, there are reserves to draw on.

PETER MAJOR:  Yes, but I think those reserves have gotten them in more trouble.  I think all these banking facilities have gotten the industry in huge trouble as opposed to if they didn't have these facilities.

ALEC HOGG:  Are you a shareholder?

PETER MAJOR:  A little bit…very small.  I think it's the platinum share that's been bogged down the most and it has the best chance of a decent recovery when the strike's over.

ALEC HOGG:  If you were taking a bet that the strike is going to end soon, would you bet on this one?

PETER MAJOR:  Yes, I am betting on this one.

ALEC HOGG:  That was Peter Major – betting small, but betting indeed – Mining Analyst at Cadiz Corporate Solutions.  After the break, we hear from a WEF attendee who's made the Times 100 list.  Don't go away.