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Lonmin faces ‘perfect storm’ of woes after South African mine killings

Policemen react after firing shots at protesting miners outside a South African mine in Rustenburg, 100 kilometres northwest of Johannesburg on August 16, 2012.


"You can never have enough enemies," Tiny Rowland once boasted, but even the buccaneering tycoon who built what is now Lonmin PLC might flinch before the "perfect storm" it faces after South African police killed 34 strikers at its Marikana platinum mine.

Never a stranger to controversy – in its days as Lonrho, a former British prime minister famously called its then-head the "unacceptable face of capitalism" – Lonmin can add human misery and a public relations nightmare to the labour struggles and falling demand afflicting all platinum producers.

The company already has one of the most pressured balance sheets in the sector and if production remains stalled after the bloodshed, its hopes of limiting a shortfall in its 2012 output target and meeting debt-to-earnings commitments may dim further.

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"Do yesterday's events change the picture for Lonmin? I do think yes, they do. What we would like to see is obviously the speedy resolution of this conflict and the striking rock drill operators return to work as quickly as possible," said Panmure analyst Alison Turner as investors stayed bearish on the stock.

"I think the kind of violence that you saw yesterday makes that increasingly difficult."

Adding to Lonmin's woes, it announced on Thursday that well-regarded chief executive Ian Farmer, a veteran of the group since well before the board ousted the late and controversial Mr. Rowland in 1994, was seriously ill in hospital.

"I just couldn't think of any more bad things that could happen to them," said a second industry analyst who spoke on condition of anonymity. "It's the perfect storm."

Lonmin shares dropped over eight per cent to their lowest in London since 2008 on Friday, before recovering to close down 1.3 per cent at £6.19 ($9.70 U.S.) near the close.

Platinum group metals (PGMs), on the other hand, rallied on Friday amid expectations that supply from South Africa will decline further.

Platinum rose more than 2 per cent on the day and ended the week up 5.5 per cent, its biggest weekly gain since late February. Palladium surged 4 per cent for its largest one-day rally since early July.

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Platinum and palladium, however, remain sharply below their highs set earlier this year. PGMs, used by the auto industry as catalytic converters to clean exhaust fumes, have come under heavy pressure as the European debt crisis and global economic slowdown curbed car production.


Like its peers, the world's third-biggest platinum miner has struggled with soaring wages and languishing prices, which have been hit by weak demand among car and truck makers and for jewellery. Struggles with unions in South Africa saw Lonmin sack, and then mostly re-hire, 9,000 workers last year after an unsanctioned walk-off.

But violence this week, fuelled by inter-union rivalries, is unprecedented and threatens the miner's already-troubled efforts to secure a profitable future by ramping up key shafts and bringing down costs. Even before this week, Lonmin had said it was slashing spending plans to preserve cash.

It has said it is keeping basic services ticking over at Marikana to speed up a return to work. But it has also already warned it will miss its full-year output target of 750,000 ounces of platinum and investors are fretting.

The clashes have put what was already one of the most pressured balance sheets in the sector under greater strain, prompting analysts to speculate on an overhaul of its finances, either via debt restructuring or a discounted cash call.

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Lonmin has agreements with lenders that require it to keep the ratio of net debt to core profit at no more than four times. That will be tested next month, but is already seen strained.

"Lonmin just doesn't have the balance sheet resilience to sort of cope with a prolonged strike," said another London industry analyst who declined to be named. "We always thought it was going to become strained come the first half of 2013.

"But now there's concern beginning to grow that actually the year ending in September could see a covenant breach."


Lonmin has an unenviable combination of expensive operations, hefty capital commitments and net debt estimated by analysts at Nomura to hit $400-million (U.S.) at the full year. But raising capital from shareholders may also pose problems.

"Pricing a rights issue on the basis of the long-term attractions of unique assets is extremely tricky, so we have neither added to nor reduced holdings," an executive at one of the company's 15 largest shareholders said. "Xstrata, with their 25 per cent stake, must be watching with furrowed brows."

It is unclear that miner Xstrata PLC, which took a $514-million hit over its Lonmin stake at the half-year and is in the throes of a takeover, would back a share sale, analysts said.

The final number of ounces lost and the ultimate impact on Lonmin's balance sheet are still unclear, but analysts say that unlike larger rival Impala Platinum Holdings Ltd., Lonmin would struggle with a long halt.

Analysts at Credit Suisse Group estimated a disruption of similar length to Impala's would cost Lonmin more than 100,000 ounces.

That would spell trouble for the company, which traces its roots back a century to the London and Rhodesian Mining Company. It owes much of its present asset base to Roland "Tiny" Rowland, the entrepreneur raised in Germany who courted African leaders and feuded with the British establishment for three decades as he built Lonrho into a diversified conglomerate from the 1960s.

Though a bitter takeover feud in the 1980s with Egyptian-born Mohamed al-Fayed for London's luxury department story Harrods left Lonrho, for once, empty-handed, it still had a global portfolio ranging from hotels and trading to newspapers.

But after Mr. Rowland was ousted in a boardroom coup in 1994 it sold off most of its other interests and, a year after Rowland's death, the remaining, mining business was renamed Lonmin.

The boom in catalytic converter use as governments battled to cut exhaust emissions saw the streamlined platinum company flourish. But as demand now slumps, miners strike and debts rise, even Mr. Rowland might now feel it has too many enemies.

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