Initially, when Lonmin (LSE: LMI) announced its 46-for-1 rights issue yesterday, the market reacted positively. Indeed, Lonmin’s shares jumped by as much as 10% in early trade on Monday.
However, as investors have digested the news, Lonmin’s shares have slipped to a new all-time low. Since the close on Friday, Lonmin’s shares have declined by 40% and investors now face a binary choice, either double down or get diluted to zero.
Struggling
Lonmin’s troubles go back almost ten years. The company embarked on a costly and ineffective programme to introduce more mechanised mining to its South African mines a decade ago. This ill-fated modernisation drive left Lonmin with plenty of debt and soured relations with its workers. A $475m rights issued followed in 2009 after the company had reported a pre-tax loss of $196m and revenue tumbled from $907m to $423m. During the first six months of 2009, Lonmin cut 7,000 staff and booked $44m of restructuring charges.
Lonmin was forced to undertake another rights issue in 2012 after the Marikana violence, which cost Lonmin 10,000oz of platinum production. This rights issue raised $817m in cash but Lonmin’s reputation was left in tatters. Labour unrest at the company’s Marikana mine left 34 striking miners dead and an enquiry criticised Lonmin for failing to respond appropriately to the threat of, and the outbreak of, violence.
The latest rights issue will raise $369m: it’s fully underwritten by banks, so the company is certain to get the full proceeds. And just as it has done many times before, Lonmin is planning to cut costs following the cash call. How the company’s workforce will react to this news is a critical factor here. As we saw in 2012, Lonmin’s workforce doesn’t respond well to threats of redundancy.
Heard it all before
Lonmin’s management will use the cash from the latest rights issue to pay down debt, cut costs and return the company to profit. These are precisely the same objectives the company had in mind for each of its last two rights issues.
And even though the company has raised just under $1.3bn from investors since 2009, Lonmin has been unable to remain consistently profitable. The company has earned less than $600m from operations since the financial crisis.
Also, there’s a big problem with Lonmin’s current plans. The company has been chronically underinvesting in its mines for some time, and while management believes the group can reach cash flow break-even by the end of 2016 by cutting costs further, at some point Lonmin will be forced to increase capital spending to bring mines up to standard.
One set of City analysts believes a more realistic prediction is that Lonmin will rack up cash losses of $231m during the next three years, although this is a low-ball figure. In the worst-case scenario, Lonmin’s cash losses could exceed $575m by 2018.
