Thursday, December 31, 2015


This article first appeared in the Business Times section of The Sunday Times on 15 November 2015.
The company founded in 1909 as the London and Rhodesian Mining and Land Company and renamed ‘Lonmin’ 90 years later after unbundling its diversified portfolio, to focus only on mining activities in Southern Africa, released it annual results and final details of its $407 million (about R5,8 billion) rights issue this week.

It was a reminder of just how damaging the recent drop in commodity prices has been for mining companies, especially this platinum group metals high cost producer.

For some context consider that in 2008 global miner and shareholder Xstrata valued Lonmin at $10-billion when it made an offer to buy out all other shareholders. Today Lonmin’s worth just under $90 million. The company is worth less than 1% of its value 7 years ago.

Further consider that the $407 million rights issue is the third equity raise in six years for the beleaguered PGM producer.

There was a $457 million issue in 2009, at a 44% discount, which was followed by a refinancing package of $575m that would push the maturity of the debt facilities by another 3 years to 2012.

Then came 2012. The Marikana tragedy happened in August. Three months later another rights issue is announced. This time it was for $817 million at a 45% discount, for the same purpose of trying to stave off a breach of covenants and maturing debt.

Speaking about the 2012 rights issue, then Chairman of Lonmin, Roger Phillimore said "This rights issue was designed with one thing in mind: to help our shareholders maximise returns from the Company's excellent assets and position in the market, when it improves." Unfortunately the market has not improved since 2012. The market has become much, much worse.

This year’s third installment is worth $407 million and comes at 94% discount. Can 94% even be called a discount? Its no different to someone needing R100 and asking you to help them out with R94!

The company says the funds will be used to ‘withstand a continuation of the weak PGM pricing environment, and as additional working capital, allowing the company to meet its obligations and commitments as they fall due’ – which is a courteous way of saying ‘Dear shareholders. Our selling price has halved, we’ve cut out all the fat from the costs, and the wolves are at the door. Please help.’

Over and above the rights issue the company has also managed to dodge the bullet of maturing debt facilities of some $307 billion. However, that refinancing package depended on a successful rights issue. The rights issue itself is now fully underwritten albeit at a heavy cost of some $38 million dollars in fees, according to reports.

So the suggestion that, Lonmin could’ve shut down had it failed to raise the capital it needed, is not far from the truth. Without the capital, it would have failed to refinance the debt, hence failed to honour its commitments when they become due. That also explains the heavy discount.

I have speak to expert equity analysts and asset managemers every day. For the past two weeks I have been posing the question: “Are you following your rights on Lonmin?”. Not one of them have said yes. One of them even lamented that “I am not in the business of keeping Lonmin’s mines openned, in the outside hope that it doesn’t run out of money before the platinum price recovers’.

However, the truth is the company has managed to get major banks to underwrite the offer. The likes of The Public Investment Corporation (PIC), which holds about 7% of the stock, have also followed their rights and even offered to sub-underwrite a “material portion” beyond its entitlement.

Why? Fees and Discount.

By anybody’s measure a $38 million (R536 million) payday is a good payday - notwithstanding the inherent risk taken by an underwriter of a share issue, which in Lonmin’s case is present and real.

The other reality of course, is that by its very nature rights offers, especially at such huge discounts, are dilutionary.

So every shareholder is faced with a tough choice.

Follow your rights, inject cash into Lonmin, take advantage of the discount, keep your relative shareholding at the levels you desire and place yourself in a good position when (and if) the market recovers.

Or don’t follow your rights, don’t part with your cash, you will end up owning much less than you currently do in relative terms, and you will surely miss the opportunity to cash in when the good times come back (if they come back).

It is therefore over to you Mr & Ms Shareholder. Next week Thursday, 19 November is decision day. All shareholders of Lonmin vote on the rights issue and essentially on the future of the platinum producer. Good luck.

Andile Khumalo is the CIO of MSG Afrika and MD of POWER 98.7. He also presents POWER Business on POWER 98.7 at 5pm, Monday to Thursday. This article first appeared in the Business Times section of The Sunday Times on 15 November 2015.

Click here to listen to Lonmin CEO, Ben Magara's interview on POWER Business with Andile Khumalo

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