Lonmin, the platinum producer that’s struggled through years of losses, said its return to profit doesn’t undermine the logic of the takeover offer from Sibanye Gold.
While some analysts have questioned the value of Sibanye’s offer, Lonmin Chief Executive Officer Ben Magara continues to recommend it, saying the rebound in earnings isn’t sufficient to resolve the company’s long-term challenges. Operating profit was $70 million in the six months through March, after a loss of $32 million a year earlier, as platinum-group metal prices recovered.
“Despite the progress made, this does not provide a long-term solution to the capital structure challenges faced by Lonmin, as it is still inadequate to invest in the new projects necessary to avoid shaft closures and job losses and maintain our production profile,” Magara said in a statement on Friday.
Lonmin shareholders vote this month on the Sibanye takeover, which was originally viewed as a lifeline after the company was forced to seek debt-covenant waivers from lenders. The company’s net cash position increased to $71 million as of March 31, from $17 million a year earlier.
“Net cash, though healthy, is not sustainable for them to go ahead and develop projects,” said Prince Mopai, an analyst at All Weather Capital. “They need a cash injection to maintain their production profile.”
Sibanye agreed last month to raise its all-share offer for Lonmin, citing an increase in metal prices since the deal was announced in December 2017. Still, while Sibanye boosted the share ratio it’s offering to Lonmin investors, the value of the deal remains lower than when it was announced, after the company’s share price fell and it sold new equity last month to shore up its cash position.
Some analysts say Sibanye’s offer is insufficient.
Lonmin’s mines around Rustenburg, in South Africa’s platinum belt, are better than those of rivals, said Hurbey Geldenhuys, an analyst at Vunani Securities. PGM prices are also substantially higher, he said.
“Lonmin shareholders can do much better,” Geldenhuys said. “The argument that lonmin will need significant capital is moot; they can still sell some assets and we have seen their peers in recent weeks raise money for future growth.”
Lonmin’s shares dropped as much as 6.1% and were down 2.9% as of 9:10 am in London, after the company raised its cost guidance and said full-year sales would be at the lower end of its target range. The stock was little changed in Johannesburg.
In addition to requiring shareholder approval, the deal is also facing a legal challenge from the Association of Mineworkers and Construction Union, which appealed the conditional approval granted by South Africa’s competition authorities. That compounded operational challenges, Lonmin said.
“Our performance has been impacted by low morale and high management turnover, instability and uncertainty, due to the extended timeline to close the Sibanye-Stillwater transaction caused by Amcu’s appeal,” the company said.