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Some Lonmin miners return to work: Claude Baissac (Eunomix) & Paul Whitburn (RE:CM)

Two views on mining in SA – one rather wary and another thinking Lonmin shares a buy.

ALEC HOGG: Lonmin – it is now a week of national mourning in our country. The rock-drill operators who were at the centre of this, one in five returned to work today. So some of them are going back. A third of the staff overall – 28 000 staff of which about 2 000 are rock-drill operators who caused – well, who caused the chaos? We’ll find out later.
   But the problem now moves to the financial side, and this company has got lots of debt, it’s got covenants with banks. What does that mean?

DAVID SHAPIRO: It means that when you issue debt, you have to ensure that you have certain income to cover that debt, otherwise you have to repay that debt or sell assets. This is the protection that the banks have, or the people who bought the debt.

ALEC HOGG: The people who are lending you the money.

DAVID SHAPIRO: So yes, you’ve got to operate your company subject to certain conditions, otherwise we can demand a return…

ALEC HOGG: There are certain hurdles that they have to achieve. Now with all that’s happened in the last week-and-a-half, today Lonmin admitted those hurdles are not going to be achieved. And 28 000 people are employed there.
   Let’s hear what the offshore view is. We now pick up with Claude Baissac. Claude is the managing director of Eunomix. Claude, our colleague at, Geoff Candy, says you’ve got some pretty strong views on what’s going on at Lonmin.

CLAUDE BAISSAC: Well, I wouldn’t say I’ve pretty strong views on what’s going on at Lonmin because I think that what’s happened at Lonmin is a catastrophic manifestation of what’s going on in a more general way in the platinum belt of South Africa – and the mining industry. And my view is that what we are seeing is possibly a fundamental realignment in the labour movement away from NUM and I’m curious as to the good action that exists between that fundamental realignment and some of the difficulties that South Africa is experiencing in service deliveries, for instance, and in the ANC’s policy direction.

ALEC HOGG: So you are making a connection between the two? Some people in this country have said there’s a lot more to this than just the rock-drill operators wanting more money.

CLAUDE BAISSAC: Absolutely. I think it would be a mistake and it could be a somewhat dangerous mistake to make to see this simply as a problem of a few workers who are feeling aggrieved because of their working conditions or their salaries. The fact of the matter is that it’s been happening at other mines and is probably going to happen at all the mining companies in the region.

ALEC HOGG: Now, you’ve got the whole world to invest in. What does it make you think about investment prospects in South Africa?

CLAUDE BAISSAC: Well, if it was an isolated incident I would probably take it in my stride. But the bottom line is that we’ve been seeing a lot of factors in South Africa and events in South Africa related to the investment climate that lead one to really question where the country is going in terms of creating or maintaining an environment in the long term which is sustainable in the mining sector. But not just in the mining sector.
   We know what the problems are. There are significant problems with the costs side of the mining industry, labour costs, and the strike is one of those. But electricity costs have been rising at way faster than inflation, there are problems with infrastructure provisions, there are problems with service deliveries which are leading some communities to reach a more or less permanent level of low-level quasi-insurgency. That’s what we see on TV.

ALEC HOGG: So what you are telling us then is we’d better get our act together – and fast?

CLAUDE BAISSAC: I think so. I think that’s very clear. And if you add to that the whole debate about nationalisation of the mines, and what kind of policy is the ANC going to adopt in Mangaung, and the difficulty in getting some clarity as to what those policies are going to be, there really is a sense that South Africa is in a difficult spot.

ALEC HOGG: Well, let’s hope we can surprise you on the upside, Claude Baissac, the managing director of Eunomix.
   David, we asked him to talk on the programme to give us an understanding of what people overseas are thinking, remembering that at a mine like Lonmin, with 28 000 people, if the foreign capital didn’t come in those 28 000 people wouldn’t have jobs.

DAVID SHAPIRO: Of course. And if you look at Trevor Manuel’s plan, his growth plan, a lot depends on developing the mines. That’s where labour is going to come, the beneficiation programmes and so on. So if we don’t develop that area, if we don’t get the foreign income to do that, the plan is useless. It has no merit, it has no foundation.
   The irony is that our market hit a new high today. All the people who went out on Friday and sold down came back today. Our retailers were up and so on, so it’s almost as though this is a side show. But I don’t see it that way. On longer term basis this is a very serious issue.

ALEC HOGG: Well, let’s hear from Paul Whitburn now. He’s an analyst with Regarding Capital Management, an investor in Lonmin. Paul, have you been selling your Lonmin shares?

PAUL WHITBURN: No, absolutely not. We have not been selling our shares. In fact we’ve been buying some shares as the price to value relationship has increased.

ALEC HOGG: And today’s news that came out after the market closed, that Lonmin’s got problems with its debt covenants?

PAUL WHITBURN: Right. That was very much known. They kind of disclosed that to the market from the beginning, what their credit facilities are – US $900m-odd – and what the covenants on those facilities would be. And we value the business assuming that the rights issue would occur, and we still think that there is enough of a discount and enough to actually own the share for our clients.

ALEC HOGG: So the decline in the share price – down by 40% in the past year, and certainly the drop of 37% in the last six months or 12% in the last week – is not worrying you?

PAUL WHITBURN: Well, you must understand where this comes from. If you look at the three big platinum miners over the last 30 years – they’ve generated fantastic returns. I’m talking returns above their cost of capital. So that’s really an access to resource, and they enlarged mines that are irreplaceable. People were willing to pay sort of two times book for Lonmin, a lot more for an Anglo Platinum and an Impala, but the long-term price-to-book of Lonmin itself is two times. Currently it’s trading at a price to book of 0.6 times. So you’ve got to put it into perspective of what is the actual valuation.
   I know that emotions are running high on this thing and there’s a lot of news, but you’ve got to kind of cut through that and say well, what is the asset base, what happened here? What do they need to do? So what is a worst-case scenario of a potential rights issue, at what discount, and is there still value in the share? And we think so. So the platinum sector itself – as value managers obviously we are attracted to it because returns are far below normal.

ALEC HOGG: Paul Whitburn. Clearly, even if you don’t understand all the technical issues that he was saying, Lonmin trades usually at twice the book value. Now you are getting it at 0.6 of the book value, so if you are a value investor you are getting it at a two-thirds discount as a shareholder. That’s quite a compelling argument.

DAVID SHAPIRO: He’s a brave man.

ALEC HOGG: Still a brave man at this point in time. The risks are still high. Paul Whitburn, a colleague of Piet Viljoen, a darling of investors in South Africa, thinks it’s time to buy the shares.

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