Lonmin – now so cheap you can buy company for cost of single mine shaft

Lonmin's share price over the past three years
Lonmin’s share price over the past three years

Lonmin’s shares are now priced for liquidation. Down another 42% in the past 12 months after an already tumultuous ride for some years before, as this Bloomberg report explains, the entire company is now worth the same as the cost of a single new shaft. For a couple years already, deep value investors have been accumulating shares in Lonmin and the other big platinum producers AngloPlat and Impala. In Lonmin’s case, however, the drop has been exaggerated by mining giant Glencore’s decision to exit the holding it inherited during the acquisition of Xstrata. For private investors, there will rarely be a better time to buy so cheaply into the platinum sector. – Alec Hogg    

By Andre Janse van Vuuren

(Bloomberg) – The world’s third-largest platinum producer has gotten so cheap, a buyer could acquire the whole company for about as much as it takes to build a single mine shaft.

Three years of falling platinum prices have left Lonmin Plc near an all-time low and valued at just $1.3 billion. That’s down from a peak of more than $12 billion in 2007 for the miner of the metal used in cars and jewelry. And now the company’s largest shareholder, mining and commodities giant Glencore Plc, is getting set to divest its 23.9 percent holding in Lonmin by distributing the stake to its shareholders.

Glencore, which acquired its stake in Lonmin in the 2013 takeover of Xstrata Plc, is divesting the holding because “we do not trade platinum and have no special insight into the market,” Chief Executive Officer Ivan Glasenberg said when the plan was announced in February.

After Glencore distributes its Lonmin shares on June 9, that may create a group of sellers that want to dispose of their holding, according to Investec. It also could create an opportunity for a buyer.

“Certainly they are a target — their market valuation is more or less the same as sinking a shaft,” Adrian Williams, a mining analyst at Avior Capital Markets Ltd. in Johannesburg, said by phone. “It’s not a particularly well-run company, but they’ve got good assets.”

Early Birds

While excessive stockpiles of platinum may continue to keep prices depressed for now, at some point the supply-demand balance will shift. The average price of the metal is expected to increase more than 25 percent to $1,618 an ounce by 2018, according to the median forecast of 23 analysts surveyed by Bloomberg.

For buyers willing to make an early bet on the rebound, Lonmin represents a bargain.

Lonmin may appeal to a larger competitor such as Impala Platinum Holdings Ltd., according to Stanlib Asset Management Ltd. Impala is building new shafts and has capacity to treat additional ore at its own processing facilities, allowing it to produce platinum cheaper. A Chinese buyer may be interested in acquiring Lonmin as a way to lock in a supply of the metal, according to Imara SP Reid Pty Ltd.

A representative for Johannesburg-based Lonmin said in an e-mail that the company doesn’t comment on speculation. A representative for Impala declined to comment in an e-mailed response to questions.

Preserving Cash

Lonmin plans to cut jobs and reduce capital spending over the next three fiscal years to preserve its cash. A buyer with money to spend on unfinished shafts would be better-positioned to benefit from rising prices, said Sibonginkosi Nyanga, an equity research analyst at Johannesburg-based Imara SP Reid Ltd.

“It’s all about someone with a bigger pocket, who’s willing to fund some of the operations,” Nyanga said. “It is difficult to time when these prices are going to start rising, but it is definitely coming. Someone that can spend on the assets now will be better able to capitalize.”

There are precedents. A consortium led by China’s Jinchuan Group Ltd. bought a 45 percent stake in Wesizwe Platinum Ltd. in 2010 for $877 million in cash and loans. Hebei Zhongbo Platinum Co Ltd. in November announced a $225 million deal to acquire the South Africa platinum assets of Eastern Platinum Ltd., whose sole operating mine has been idle since 2013.

Lonmin is also the only platinum miner besides Anglo American Platinum Ltd. and Impala that operates its own smelters and metal refineries, Nyanga said. This means the company can conduct its own marketing and conclude deals with buyers, enhancing the to potential profitability of the business.

Labor Issues

One issue for prospective buyers is the fraught labor relations at South Africa’s platinum mines. Three years ago, at least 44 protesters and police officers were killed at Lonmin’s Marikana project in the worst mine violence in South Africa since apartheid ended. Last year, a strike over pay took five months to settle and resulted in basic-pay increases of as much as 20 percent.

“Lonmin is undeniably cheap, but the poison pill is that they carry with them the concern with regards to labor issues and union discontent,” Simon Hudson-Peacock, a money manager at Momentum Asset Management in Johannesburg, said by phone. “All of those kinds of things would make an operator who wants to get into platinum feel very nervous.”

Depressed prices and labor unrest have put all of the big platinum producers under strain. Lonmin is suffering the most, even after raising capital less than three years ago in an $817 million stock sale, said Kobus Nell, an analyst at Stanlib Asset Management Ltd.

A deeper-pocketed operator may be better able to withstand platinum’s slump until prices rise again.

“Something’s got to give, we just don’t know when,” Nell said by phone. “If prices don’t improve, then you have to say a takeover of Lonmin can be possible.”

Peter Grauer, the chairman of Bloomberg LP, the parent of Bloomberg News, is a senior independent non-executive director of Glencore.

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