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African and Mideast Business Lonmin stock discount signals trouble in South African platinum industry

A vendor sells fruit as the Karee mine shaft stands in the distance at the Marikana mine, operated by Lonmin Plc, in Marikana, South Africa, on Friday, Nov. 6, 2015. Lonmin's warning that it may be forced out of business shows just how dire the situation has become for some of the world's biggest mining companies.

Kevin Sutherland/Bloomberg

For the world's third-biggest platinum producer, it was a stunning admission of its precarious condition. Desperately needing money to stave off collapse, Lonmin PLC announced on Monday that it will issue its latest stock offering at a 94-per-cent discount.

The huge discount, allowing Lonmin to raise the $407-million (U.S.) that it needs to survive, is the latest sign of a major shakeout in South Africa's troubled platinum sector. But two Canadian platinum companies are still pushing ahead with their South African investments, convinced they can find profits with lower-cost projects.

The platinum industry has been stumbling from crisis to crisis for the past several years. Global platinum prices have dropped by more than 50 per cent since 2011. The industry has been plagued by rising costs and labour unrest in its South African heartland, including a heavily damaging five-month strike in 2014 and the notorious police shooting of 34 protesters at Lonmin's Marikana mine in 2012.

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Platinum producers have responded by shutting mines, selling assets and cutting thousands of jobs. Two of the biggest producers, Anglo American Platinum Ltd. and Impala Platinum Holdings Ltd., have been closing or selling mines, postponing projects, cutting costs and eliminating hundreds of jobs. One smaller producer, Aquarius Platinum PLC, which has lost about 90 per cent of its market value in the past several years, was recently swallowed up by a larger South African company, Sibanye Gold Ltd., as part of the shakeout in the industry.

But all of this is dwarfed by the near collapse of Lonmin, which has already been bailed out twice by shareholders over the past seven years. The latest equity issue, its third bailout, might only buy a further three years of life. Lonmin's market capitalization has dropped by about 95 per cent since 2008. In recent months, it has been frantically cutting costs and laying off more than 3,000 workers, with a further 3,000 jobs still scheduled to be eliminated.

The company has warned shareholders that it might have to cease trading if it fails to get their approval for its plan to raise at least $400-million in equity. It also plans to borrow a further $370-million in bank loans to help refinance debt that is due next May.

When Lonmin released its annual results on Monday, its chief executive officer Ben Magara called it a "tough year." It was quite an understatement. The company disclosed that it had lost $1.9-billion over the past year, compared with a loss of $203-million in the previous year, and it wrote down $1.8-billion in assets (mostly at its Marikana mines) as part of the losses.

The Canadian platinum companies, however, are plunging ahead. Platinum Group Metals Ltd., based in Vancouver, plans to begin production at its $500-million Western Bushveld project within the next month. Its vice-president of corporate development, Kris Begic, says there are already about 1,800 workers at the site, and it expects to begin shipping concentrate product to a nearby smelter in January.

The decline in platinum prices has affected the company's expected revenue, but this has been partly offset by the declining value of South Africa's currency, the rand, since its revenue is in U.S. dollars and its costs are in rand, Mr. Begic said.

Despite the industry's troubles, Platinum Group's mine still makes financial sense because of its low costs, mechanized production and high grades near the surface, he said.

The other Canadian company, Ivanhoe Mines Ltd., has announced that it plans to begin production by 2019 at its Platreef mine in South Africa.

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