Blood, toil, tears, sweat ahead - Lonmin

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Blood, toil, tears, sweat ahead - Lonmin Text Size

  By: Martin Creamer Published on 18th November 2008

JOHANNESBURG (miningweekly.com) – The world's third-largest platinum producer was planning for a Churchillian-type blood, toil, sweat and tears scenario to take the company through the difficult period ahead, Lonmin CEO Ian Farmer said on Tuesday.

Farmer told Mining Weekly Online from London that Lonmin was planning on the basis of platinum group metal (PGM) prices remaining weak until 2010.

No production guidance had been given beyond 2009, when production was expected to remain flat at 725 000 oz.

He said that 1 600 jobs at the troubled Limpopo operation were at risk as a result of the mine being uneconomical at current platinum prices,

Planning for blood, toil, sweat and tears till 2010 - and hoping for a peasant surprise - would not be a bad outcome, he added.

The company's internal restructuring had begun at the top.

"We have come down from three directors to two on the executive side, cut out a number of our vice-president positions, shrunk the size of the London office and initiated a process in South Africa to look where else we might restructure our business to slim down the size of the overhead," Farmer said.

This exercise had just been started and would be detailed during Lonmin's May interim results.

The company had not yet seen cost decreases on the procurement side, but was hopeful that lower costs would come through.

Although the potential of the business at the flagship Marikana operation, including Pandora, was around 900 000 oz/y, that was dependent on the level of capital expenditure, which had, however, been reduced to $250-milion from $378-million last year.

Most of the $250-million 2009 capital would be invested in Lonmin's growth shafts at K4, Saffy and Hossey.

In the year to September 30, Lonmin's long-life high-quality assets had been operationally disappointing.

"We will continue to see challenging markets for the next 18 months or so, through to 2010," Farmer predicted.

The changes, including the cessation of operations at Limpopo and the steering clear of outright mechanisation, were to "secure the company's the future".

"I can't control prices, but what I can control are costs and cash flow and that's the focus of my attention," Farmer said.

The first major issue of eliminating "non-value-adding ounces" was being done by ceasing opencast projects - which last yeat produced 35 000 oz - from the end of December this year.

Although Lonmin had indicated to its workforce that its currently loss-making Limpopo business was unviable at current PGM prices, it was hopeful that some of the 1 600 Limpopo employees could be redeployed to other mines as a consequence of Lonmin moving away from mechanisation.

Mechanisation would still be used for on-reef development, but in-stope mining would revert to conventional drilling and blasting.

Hybrid mining methods, involving mechanised development but conventional stoping, had taken over at Saffy and K4 shafts.

In shrinking head office and stripping out a layer of management, management focus had been transferred back to South Africa, where the heart of the business was located.

The sum total of the actions would, Farmer said, entrench Lonmin's low-cost position and leave the company in a "good strong position".

This would mean that, when platinum's long-term fundamentals reasserted themselves, Lonmin would be "well-positioned to enjoy the benefits".

Predicting platinum prices in the short term was "extremely difficult", as the automotive industry was going through a "seriously tough time", which would "not be resolved quickly".

Vehicles, jewellery and electronic goods were all areas of discretionary expenditure, driven largely by Western economies that were entering a recessionary period.

Farmer saw no let-up in the recessionary environments in the short-term.

The company had not yet seen cost decreases on the procurement side, but hopeful that lower cost would come through.

At end September 2008, Lonmin's net debt position was $300-million, and had committed lines of credit of up to $1-billion.

The company was coming out of a strong financial year. Even though its operational numbers were disappointing, its financial results were at record levels, leaving the balance sheet in "pretty good shape".

"The long-term outlook for PGMs is still attractive. People will start buying cars again. The average age of the automotive fleet is going to go up, and replacements will be inevitable.

"The actions taken around the world to address growth globally will have an effect at some point and the lack of investment in platinum supply is going to result in a lack of platinum again," he said.

Editor: Martin Creamer