JOHANNESBURG (miningweekly.com) – Platinum miner Lonmin, which on Monday reported a $1.9-billion loss for the 2015 financial year, will undertake a $407-million rights issue to refinance its debt.

CEO Ben Magara acknowledged on Monday that 2015 had been a “tough year” for the company. He attributed this to a number of factors including the “adverse” pricing environment and the imminent maturity of the company’s debt facilities in mid-2016.

“However, we have worked hard with all stakeholders and have reduced costs and started to restructure the group to focus our efforts on the four Generation 2 shafts, which are expected to account for 90% of our production. Our priority is to run the business with a focus on cash generation and profitable ounces.

“We are repositioning Lonmin and aiming for the business to generate positive free cash flow after capital expenditure (capex) in this current low-price environment. Additionally, we remain confident of the long-term market fundamentals for platinum and its associated group of metals even though our business plan is designed to ensure Lonmin is resilient in this low-price environment,” he added.

He highlighted that Lonmin had secured $370-million of bank facilities from all ten of its existing lending banks, which was conditional on the $407-million rights issue.

The rights issue would see Lonmin issue 46 new shares for every one existing share, thereby issuing over 26.9-billion new shares at 1p for every new share, or in the case of qualifying South African shareholders, 21.4c for every new share to raise net proceeds of about $369-million.

The Public Investment Corporation, which held about 7% of Lonmin’s issued share capital, had “irrevocably committed” to take up its entitlement in full in the rights issue and had sub-underwritten a material portion of the rights issue in excess of its entitlement.

Lonmin said the net proceeds of the rights issue would be used to fund the implementation of a business plan to improve the group's ability to withstand potential adverse movements in external factors.

These factors most notably included a continuation of the weak platinum group metals (PGMs) pricing environment; repositioning the group on the South African PGM industry cost curve and for general corporate purposes, including as additional working capital; strengthening the balance sheet and allowing the group to meet its obligations and commitments as they fall due; and reducing the group's borrowings.

The group noted that, upon the underwriting agreement with respect to the rights issue becoming wholly unconditional and certain customary conditions being met, the Amended Facilities Agreements which Lonmin entered into with its existing lending syndicate would come into effect.

This would provide the company with an extension of maturity of the existing US dollar facility from May 2016 to May 2020, assuming Lonmin exercised its option to extend the term up until this date, and a reduction in the amount of the amended US dollar facilities to $225-million, compared with $360-million for the existing US dollar facility.

This would also provide Lonmin with an extension of maturity of the existing rand facilities from June 2016 to May 2020, assuming it exercised its option to extend the term up until this date.

“The Lonmin board remains confident in the potential of the group, with its high-quality asset base and long-term mining rights, and in the medium- to long-term fundamentals of the PGM industry, and is focused on preserving and enhancing value for all shareholders,” stated chairperson Brian Beamish.

The rights issue is being underwritten by banking institutions HSBC, JP Morgan Cazenove and Standard Bank, except for the new shares which Lonmin’s directors have “irrevocably undertaken to take up”.

“The Lonmin board has received financial advice from independent investment bank Greenhill in relation to the rights issue,” Beamish noted.

OPERATIONAL OVERVIEW
Magara, meanwhile, said Lonmin had taken “decisive action” to mitigate the effects of the low-price environment. Cost of production for the year ended September 30, was R10 339 per PGM ounce, within the company’s guidance of R10 800/oz.

Capex was tightly controlled and reduced to $136-million, compared with Lonmin’s original guidance of $250-million. “Our strategy and hard work across the business, combined, are aimed to deliver well,” he asserted.
 
The Marikana mine’s Saffy shaft reached steady-state production and exceeded sales guidance at 751 560 oz of platinum.

“Our mined production of 704 776 oz of platinum was impacted by an increase in frequency and duration of Section 54 safety stoppages, resulting in lost platinum metal production of 48 000 oz,” he noted.
 
Magara pointed out that Lonmin had achieved R526-million of net benefits during 2015 as the company had realised significant cost reductions from the review of its operating model and the total cost of ownership programmes.

This was partially offset by the limited progress on productivity and efficiency enhancement, which had been hampered by the “high level” of Section 54 safety stoppages.
  
STRATEGIC DECISIONS
Magara said it was necessary for Lonmin to take some tough decisions as it sought to respond to the market conditions by continuing to manage the elements within the company’s control.

“We concluded that we needed to remove high-cost ounces, reduce production and overhead costs, as well as minimise capex. The decision to right-size our business was not taken lightly as it will impact 6 000 employees and contractors, but the reality is that it is essential to protect the business and the jobs of many thousands more who work for our company,” he noted.
 
The company found it was necessary to reduce high-cost production in an oversupplied market, which would result in the “orderly closure” of the Hossy and Newman shafts.

This would be achieved by stopping development and capital work. Instead, only the immediately available ore reserves would be used, reducing the overall costs of production and enhancing cash generation and profitability as the shafts were closed.

Additionally, 1B shaft of the 1B/4B shaft complex was closed and put on care and maintenance in October, Magara pointed out.
 
“We have re-examined the Generation 1 shafts, some of which are currently managed by contractors, namely W1 and E1. We are renegotiating the ore purchase agreements to include more favourable terms, which if concluded and subject to a favourable outcome of the Section 189 consultation process, will allow mining to continue at these shafts for the 2016 financial year.

“Going forward, we will focus on our Generation 2 large, long-life shafts – K3, Rowland, Saffy and 4B – which combined will represent 90% of production,” he said.
 
Magara stated that it was important to remember that when market conditions improved, Lonmin had “strong assets and projects”, namely its large, long-life and low-cost K4 project, the Rowland MK2 resource, opening up further levels at Saffy shaft, the Pandora E3 deepening project and E4 Pandora Deep.
 
GUIDANCE
The remaining shafts would allow for a more sustainable and agile business, stated Magara.

“We expect the sales profile will be about 700 000 oz of platinum in 2016, stabilising to about 650 000 oz for 2017 and 2018 and capex is anticipated to be limited to about $132-million and $110-million for 2016 and 2017 respectively,” he pointed out.

He added that Lonmin expected capex for 2018 to increase to about $188-million as the group’s investment in stay-in-business and replacement ore reserve development capex was expected to increase.
 
“Our actions are anticipated to reduce the cost base of financial year 2016 by R700- million in financial year 2015 real terms, when compared to the current year and a further R1.6-billion in 2017 when compared against 2016, in financial year 2015 real terms. 

“We aim to keep unit costs per PGM ounce in nominal terms broadly flat in line with the year ended September 30, 2015 at around R10 400 per PGM ounce, for three further years ending September 30, 2016, 2017 and 2018,” Magara said.