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Lonmin offers a leveraged play on platinum prices

By Gary Newman | Sunday 5 March 2017

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.

Lonmin PLC (LMI) was one of my best performing share tips during 2016, and following the recent pullback I think it is well worth another look.

The South African platinum miner had been in financial trouble, but following a restructuring of its balance sheet via a rights issue it made a decent recovery for anyone getting in anywhere near the share price lows that we saw, and I covered it here as a buy at 55p.

Subsequently the share price rose by over 300% as platinum also went on a surge, and I covered it again a few months later as time to bank profits and sell up as it was hard to see much further upside from that level or above.

Recently its shares have dropped back to around 110p, giving it a market cap of circa £312 million, and that has largely been as a result of operational updates that have shown that the business still isn’t fully back on track, and also needs platinum prices to be higher than the current level of a little over $1,000/ounce.

This share certainly isn’t without risk, as if platinum and the associated metals which form the basket price the company bases revenue on doesn’t begin to rise, then it is going to continue to burn through cash and will have to try and raise more at some point.

Most mining companies of this type are very much a leveraged play on the prices of the commodity itself, but even more so in the case of Lonmin, as a significantly weaker platinum price would have a disproportionately severe effect on the share price here, due to the funding concerns that would be associated with it.

The flipside of that is that any larger sustained upwards movement in the cost of platinum could have a big positive effect, especially if it returned the company to a position where it was generating a decent net profit again.

Recent operational updates have been disappointing and have shown that production has fallen, down over 8% on the previous year – the Generation 1 shafts were in line with expectations, but Generation 2 was down 5.2% overall, but with the largest K3 mine 13.8% lower.

A knock on effect of that was that although PGM sales were only fractionally lower at 289,962 ounces, a drop of 0.2%, platinum sales took a bigger hit and were over 10% lower at just under 135,000 ounces. Guidance for full year 2017 remains at 650,000 to 680,000, which is lower than we’ve seen in previous years.

The last set of accounts up to the end of September showed an operating loss of $322 million, but that was largely down to impairment charges and similar, and the company made an operating profit of $7 million from normal operations and an overall net loss of $112 million.

That certainly wasn’t great, and at the end of 2016 it only had net cash of $49 million left, following capital expenditure of $106 million during that quarter. But total liquidity still stood at some $414 million and a review of expenditure is currently ongoing, following previous cuts.

Despite the constraints on its cash flow, Lonmin has been continuing to try and expand production and a few months ago it purchased a further 42.5% stake in the Pandora asset from Anglo Amercian Platinum, taking its total interest to 92.5%. That was in return for a deferred cash payment of 20% of the free cash flows from the operation over the next six years, with a minimum payment of R400 million (around £25 million) in total.

One other thing to keep an eye on is the costs of production, including labour costs which have risen as part of labour agreements that have been put in place, plus the lower levels of production adversely affected the average cost per ounce, which had risen 12.3% year-on-year to R12,296 for the latest quarter. Although the company is still confident of unit costs of R10,800 to R11,300 for the whole of the current financial year.

Longer term it is hard to predict what will happen with this company as so much is dependent on platinum prices, and its survival will depend upon those being higher than where they have been recently.

But in the meantime, if you are optimistic that we will see platinum rising higher, then this is well worth a look at today's shares price as this stock will provide a leveraged return on any such rise. 

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