South African miner Lonmin PLC, the world's third-largest platinum producer, is to raise $800-million (U.S.) from shareholders to cut debt and finance a recovery after weeks of strikes in which dozens were killed.
It will use the underwritten rights issue to restructure the balance sheet as soon as possible, the company said on Tuesday.
In August, Lonmin's Marikana mine was the scene of South Africa's most violent episode since the end of apartheid, when police shot dead 34 people involved in wildcat stoppages battering the country's already beleaguered platinum industry.
Most of Lonmin's miners have since returned to work, but the producer – which even before the walkouts and illegal strikes had one of the most-stretched balance sheets in the platinum sector – said it had lost 110,000 ounces of production and scaled back long-term plans to boost output and sales.
Lonmin said efforts to ramp up activity after weeks of strikes were progressing better than expected, but the return to business as usual would take months and, along with the rebuilding of stocks, would swell its debt in the short term.
That meant it would have breached current loan covenants at the end of March – even if higher-than-expected sales of stockpiled platinum help it meet a test this November; so the miner has turned to investors for a cash boost.
"We believe $800-million is the right quantum to support the plan we have in place," acting chief executive Simon Scott told reporters. "It will put the company in a position where it can reduce its current debt levels and manage the business on a stable platform."
Analysts had speculated that Lonmin could raise as much as $1.5-billion – virtually its current market value – after it warned in August that it could turn to investors for cash.
On Tuesday, Lonmin said it would rein in expansion plans and raise less than half that in gross terms – meaning the number includes fees paid to underwriting banks which are expected to include its advisers JPMorgan Chase & Co. and Citigroup Inc.. It did not provide full details on the timing or the extent of any discount.
It said in a statement that it planned to restructure its balance sheet at "the earliest possible opportunity."
It did not comment on any commitment from its largest single shareholder, fellow miner Xstrata PLC, which owns a 25-per-cent stake after a failed takeover attempt.
Xstrata, which is currently in the throes of a takeover by its own largest shareholder, Glencore International PLC, said it would consider its position after assessing Lonmin's revised strategy, business plan and management capability. Xstrata is not expected to remain a shareholder in the long term, but analysts say it could pay up to avoid further writedowns of its stake.
"I want to see what Xstrata does. It would be very interesting to see if it follows its rights – they are more important in this whole process than anybody else," said Sasha Naryshkine, fund manager at Johannesburg-based Vestact.
"Lonmin has to be a meaner, leaner machine after."
Lonmin said new debt conditions agreed with its lenders depended on the company raising at least $700-million in new equity capital by the end of the year, and using that to reduce its debt to $400-million from $700-million.
The current conditions, linked to a debt-to-profit ratio, will be replaced by conditions tied to the tangible value of its assets and limits on capital expenditure.
The changes will, though, slow Lonmin's previous plan to increase production to more than 900,000 ounces in 2015 to raise margins and its bottom line, efforts which had been based on development of growth shafts at Marikana – Hossy, Saffy and K4.
It now aims to sell 660,000 ounces in the financial year to the end of September 2013, Lonmin said, targeting sales of over 750,000 ounces in both 2014 and 2015. That would include output from a planned restart in 2014 of the mothballed K4 shaft.
"This is perhaps a less aggressive ramp-up – compared with the $450-million program before this summer to get K4 up and running sooner rather than later," analyst Tyler Broda at Nomura said, welcoming the capital raising. "This rejigged plan has taken into account the relative balance-sheet strength, and is also an indication of how poor the current end-market is."
The company, which had already warned the strike would cause it to miss targets, said production of platinum in concentrate almost halved in the three months to Sept. 30. Sales for the quarter, though, were down less than 4 per cent, thanks to stocks. Over the year, Lonmin sold more than 700,000 ounces.
While the rights issue from Lonmin will help it address the cost of months of unrest that have threatened growth in Africa's biggest economy, the sector remains beset by difficulties.
Amplats, the world's top platinum producer, is still struggling to get workers at its Rustenburg mines to return to work. Hundreds of miners barricaded a road to one of its mines on Tuesday with burning tires, while police fired rubber bullets.
Platinum production in South Africa
* In 2011 total supplies of platinum from South Africa were 4.855 million ounces, an increase of 5 per cent or some 220,000 ounces, accounting for 75 per cent of the global total. Given net global demand of 6.05 million ounces, the platinum market was in a surplus of 430,000 ounces last year.
* The increase in South African output was due to the release of metal from in-process and refined inventories, with at least 250,000 ounces of platinum supplied from South Africa coming from above-ground stocks.
* Underlying mine output actually fell by 3 per cent or around 120,000 ounces in 2011, a year that was supposed to show a rise in production. Safety stoppages were the main cause and illegal stoppages added to industry troubles.
* South African platinum miners Amplats, Impala Platinum and Lonmin were under pressure even before the wave of strikes in 2012, hit by rising labour and power costs and the expense of safety stoppages that were part of a government clampdown on fatalities. They have also been hammered by a steep drop in the price of platinum, down about a third from its record high in 2008.
* Platinum's sharp price drop has come as a result of falling demand for the metal, which is chiefly consumed by the automotive sector for use in catalytic converters. It is particularly heavily exposed to the beleaguered European car market, which has a higher concentration of diesel cars – which use a higher loading of platinum than petrol engines – than the United States or China. This has seen a significant decline.