Lonmin’s uphill debt battle

Lonmin’s options to refinance its debt get tougher as the plunge in shares of the world’s third-biggest platinum producer deepens.

Johannesburg - Lonmin’s options to refinance its debt next year are getting tougher as the plunge in shares of the world’s third-biggest platinum producer deepens.

The stock has dropped 68 percent since July 1, leaving it a market value of $331 million as it has debt facilities of $563 million to renegotiate next year. Lonmin will struggle to obtain similar terms from banks or sell shares, which would wipe out much value for existing shareholders, according to Momentum Asset Management and Liberum Capital.

“There comes a point in time when the share price is just so low that the dilution from the rights issue destroys the company and the valuation,” Simon Hudson-Peacock, who helps to manage more than $25 billion at Momentum, said by phone August 12. Momentum sold its stake in Lonmin earlier this year. “This kind of share price will lead them to look at other options.”

Lonmin may consider concluding infrastructure-sharing ventures with fellow producers or a sale of assets as a way to raise finance, Hudson-Peacock said. It’s reviewing its capital structure while it operates at a loss amid a plunge in platinum prices to a six-year low.

Job cuts

It is planning to cut as many as 6 000 jobs, or 16 percent of its workforce, as it closes shafts that contribute 100 000 platinum ounces to its existing annual production of 730 000 ounces.

Lonmin declined 3.9 percent to 36.26 pence by 10:52 a.m. in London. It’s this year’s worst performer on the broadest stock gauge in Johannesburg, where it has a secondary listing, declining 77 percent. Its price-to-book value is 0.1, the lowest among its peers, according to data compiled by Bloomberg.

Sue Vey, a spokeswoman for the company, declined by e-mail to comment and referred Bloomberg News to Lonmin’s July 24 statement in which the company said it plans to give an update on plans in November.

Should Lonmin succeed in renegotiating new debt terms, these will probably be more onerous and restrictive than the conditions on its current facilities, Ben Davis, an analyst at Liberum Capital in London, said by phone Thursday. Liberum has had a hold rating on Lonmin since October 20, and before that ranked the company as a sell for at least two years.

Find alternatives

The platinum producer should find alternatives to a share sale as a way of refinancing debt amid a rout in metal prices, South Africa’s Public Investment, which manages state pensions, said last month. The PIC is Lonmin’s second-largest shareholder with 9.97 percent, according to data compiled by Bloomberg.

“I hope they’ve got a plan B, it is difficult at this time to know what that can be,” Edward Sterck, an analyst at BMO Capital Markets, said by phone.

“Management have actually done a very good job of trying to turn the company around in what is a difficult and at times impossible situation, but sometimes the markets just run away from you.”

BLOOMBERG