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Disappointing updates from Lonmin suggest further weakness to come

By Gary Newman | Tuesday 16 May 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 (LMI) is a company that I have followed closely for several years, but after the latest updates this week, and with platinum still looking weak, I wouldn’t be in any rush to buy.

Shares in the company have remained volatile with the sort of regular intra-day swings that you don’t really expect from a company with this sort of market cap – currently just under £300 million – and it is one that I have traded regularly, both long and short, although I don’t currently have a position.

The biggest problem here is that the company is highly geared to commodity prices and with platinum currently back down in the $930 area – as well as other platinum group metals such as palladium having pulled back slightly, albeit it still being at decent levels – and although the cost per PGM ounce reduced to R9,695/oz (around $735/oz) for March, guidance for the full year still isn’t great.

That is currently estimated at R11,300 to R11,800 per ounce ($857 to $895) and at current prices doesn’t point to the profitability of Lonmin’s mines improving in the near term unless we see either a significant improvement in platinum price, or further significant weakening of the Rand.

The interim results up to the end of March showed that total mined output was down by 7.6%, and although that was partly expected due to the planned removal of Generation 1 production, the biggest producing shaft, K3, also suffered from poorer than expected performance.

But one positive from K3 is that measures taken by the management did see a vast improvement during March, with 276,000 tonnes mined during the month, as compared to just 126,000 tonnes during January. Overall production was also up significantly, and that was partly down to the Saffy shaft producing its highest amount ever at 213,000 tonnes during March. This meant that the company maintained guidance at 650,000 to 680,000 ounces for the full year.

The problem here though is that the company is burning through the cash that it raised during the re-financing last year, and although it saw net cash balances improve during the second quarter, the net cash position was still $75 million compared to $114 million at the same point in 2016.

The lower production obviously had an impact on revenue, down 6% to $486 million, and that resulted in an operating loss of $181 million – although $146 million of that was due to an impairment charge, so you could easily argue that it looks worse than what it actually is. But the reality is that the company can’t afford to keep on losing money at the current rate and needs commodity prices to pick up – platinum averaged $960/oz during the period, with palladium at $727/oz and rhodium at $800/oz.

The company did still have cash and cash equivalents of $229 million so is in no danger of running out of cash any time soon, although currently its credit facilities are only in place up until May 2020 at the latest unless there are further extensions.

Longer term I am still bullish on platinum – certainly from back at these levels – and this could ultimately still turn out to be a good recovery play, but currently I wouldn’t be rushing to buy based upon these results as they would suggest that there will be an opportunity to buy in lower.

I can see the price dropping back to the mid-80p range in the near future barring a sudden upsurge in platinum, especially when taken alongside the current political uncertainty in South Africa and further possible labour disputes, given that they were one of the main contributing factors to the downfall of Lonmin a few years back and which certainly contributed to the financial problems that it found itself in.

If anything at the moment I can see an argument for shorting the company's shares, and there could be 15-20% to be had from taking such a position, but if I was to take such a position I would keep a very close eye on commodity prices as this one can also move upwards very quickly when it gets going. I would also probably only be tempted to short it if the recent strong support around the 102-103p share price level were to be properly broken with closes below that level for a couple of consecutive days.

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