Lonmin’s dire financial status was laid bare in a court case last week, showing the group had made a staggering R49 billion loss over the previous four years.
Last Friday the Mining Forum of SA and its president Blessings Ramoba asked the North West High Court in Mafikeng to suspend Lonmin’s mining licence due to non-fulfilment of its five-year Social and Labour Plan (SLP). It also asked the court to suspend the licences of Eastern Platinum and Western Platinum, both controlled by Lonmin. Judgment was reserved in the case. One of the conditions attached to the issue of mining licences is the fulfilment of a SLP intended to uplift workers and surrounding communities.
The Forum argued that Lonmin had the financial resources to make good on its SLP originally submitted to the Department of Mineral Resources (DMR) in 2014, but had failed to do so and should therefore should have its mining licence suspended. The Forum is also attempting to block the takeover of Lonmin by Sibanye-Stillwater on the grounds that this would erode the mining group’s commitment to the community.
Lonmin conceded that it had not spent what was originally planned when committing to its 2014-2018 SLP due to the deterioration in economic and operating conditions. It nevertheless spent close to R680 million on upliftment programmes and nearly R12 billion on BEE suppliers over a period of three years. This, Lonmin claimed, was exemplary given the financial straits the group found itself in.
Lonmin presented an affidavit by Harvey Wainer, professor at Wits University’s School of Accountancy, arguing that the Forum had misread the group’s financial statements in arriving at the conclusion that it had funds to spend on the original SLP but had shirked its obligations.
Vast and repeated losses
“It is abundantly clear from the annual report that Lonmin is in both a precarious and parlous financial position,” says Wainer’s affidavit. “The Lonmin group has incurred vast and repeated losses in each of the last four financial years.”
Lonmin has been a consumer rather than a generator of cash in each of the last five financial years, and it is clear that the “very existence of Lonmin as a going concern is materially uncertain,” added Wainer. “Any suggestion that Lonmin is in anything other than a precarious and parlous financial position is misinformed and misguided – and contrary to the obvious facts.”
The Forum intimated, based on figures of executive remuneration listed in Lonmin’s annual report, that business was booming notwithstanding the poor performance reported by the company. Wainer replied that it was not uncommon for executives to be remunerated based on returning a company to profitability and retaining key executives.
Ramoba’s affidavit referred to Lonmin’s 2017 Ebitda (earnings before interest, tax, depreciation and amortisation) of US$40 million (R572 million). Though Lonmin reported an operating loss of US$1.08 billion (R15.4 billion) in 2017, this “does not translate into cash going out of the company,” said Ramoba. The Forum claimed that non-cash items such as amortisation and depreciation, which were dependent on the judgement of management, accounted for the loss.
Wainer replied that this was misleading and incorrect. An examination of the cash position of the company had to be gleaned from the cash flow statement, not the Ebitda in the income statement. The company reported cash inflow of just US$33 million (R485 million) in 2017, which was substantially less than the US$99 million (R1.4 billion) required to fund basic capex for mining. Free cash flow refers to cash left after the basic needs of the business have been satisfied. A proper reading of the accounts show Lonmin has been generating negative cash flows for several years due to a steadily deteriorating commercial climate.
Some 95% of Lonmin’s output comes from its Marikana operations, where 34 striking miners were shot in 2012. The Marikana assets were impaired on the financial statements by US$1.38 billion (R19.7 billion) over the previous two years. This was explained in the Independent Auditor’s Report: “The PGM (Platinum Group Metals) industry has experienced rising costs and subdued demand resulting in a depressed pricing environment. In addition the group is experiencing unit cost inflation. The board and executive management have conducted a review of the group’s operations including closing non-profitable shafts.”
The auditor’s review goes on to say that the impairment may be inadequate, and that further impairments may be forthcoming.
Wainer says it was inappropriate to trivialise the 2017 impairment loss of over US$1 billion (R14.3 billion) as simply a ‘non-cash item’. “Although it was not a cash flow loss in the 2017 year, it was certainly a loss of cash historically spent, and a vast loss in value for the group (and its shareholders).” It was also incorrect to say the impairment was dependent on the judgement of management, as the methodology used in arriving at the impairment was detailed by the auditors.
The Forum also pointed to finance costs of U$137 million (R1.96 billion), of which just US$18 million (R257 million) was recorded as being paid in cash. Not all the finance costs were paid in cash, but the full amount was incurred and owing by the group in the 2017 financial year, Wainer replied.
Ramoba also intimated that Lonmin’s financial position was better than it made out, based on current assets exceeding current liabilities, and total assets exceeding liabilities. Wainer replied that this was meaningless if Lonmin was unable to continue as a going concern.
The Forum further claimed that Lonmin had access to the capital markets, which was an indicator of its financial health. Wainer rebuts this by pointing out that Lonmin’s capital raising has been by way of rights issues. Those that did not follow their rights could lose all their money.
Bankers had stopped lending Lonmin money and were now merely hoping for a recovery of money already advanced.