May 28, 2012 / 2:58 PM / 7 years ago

Lonmin capex plans threatened by low PGM

JOHANNESBURG (Reuters) - Current platinum prices could endanger investment plans to allow platinum miner Lonmin to ramp up production at key shafts and slash unit costs, the chief executive of the world’s third-largest producer of the precious metal said.

Lonmin’s capital expenditure blueprint includes $450 million a year until to 2015 to boost production to 950,000 ounces a year, from 750,000 ounces targeted for 2012.

“It’s not the platinum price on a particular day that drives decision making, it’s your view of medium to long-term outlook. So you’ve got to have a view that the price environment over that (time) is going to support the investment programme,” Lonmin’s Ian Farmer said.

“Today’s price take is nowhere near sufficient to support that.”

Farmer said that the industry as a whole would need to cut back on investment plans if current prices persist.

“If you believe that the current soft prices we’re seeing are going to prevail for 18 to 24 months, then the industry is going to have to take its foot off the accelerator - it will have no choice,” he said.

Platinum prices are up 2.8 percent in the year to date, making them 2012’s best-performing precious metal, but they are down 20 percent from a year ago and nearly 40 percent below 2008’s record high.

For platinum producers hit by rising costs, lacklustre demand and union upheaval, this has meant a squeeze on margins that are, for some, at less than half their level a decade ago.

Lonmin said this month that its pre-tax profit tumbled in the first half of its financial year, as weak European demand weighed on prices and a record level of safety stoppages imposed by South African authorities hit output.

“We are still cash-flow negative at today’s prices. Looking forward there are two things that we need to consider as Lonmin. Can the market absorb that metal if we mine it?,” he said.

“If we believe that the medium to long-term outlook for the market is actually softer than we anticipated then the right thing to do is to slow down that spend,” he said.

BALANCE SHEET CAPACITY

Another key factor, he said, was balance sheet capacity.

“Can we actually afford to do it? Because balance-sheet risk is clearly something that the market is very, very focused on. And if there is further credit tightening then miners might not have a source of capital to turn to,” he said.

Platinum producers have lost hundreds of thousands of ounces to a government safety drive in South Africa that has meant ramped up inspections, leading to frequent, often blanket, stoppages for violations.

Farmer reiterated that the authorities were now taking a more “balanced approach.”

“If you take 5, 7 percent of the company’s revenue away but you are still incurring the costs, it takes what is already a marginal business and puts it under immense pressure,” he said, adding the government was “sympathetic to that point”.

The squeeze on margins and poor returns across the sector has prompted miners to review their operations, including Lonmin’s larger rival Anglo American Platinum, known as Amplats. Farmer said Lonmin was interested in talking to Amplats over its stake in their joint venture Pandora mine.

“We have indicated to Amplats that if they are disposing of their JV interest that we would be interested in having a discussion with them. But that is as far as it’s gone at this stage,” he said.

Farmer also said Lonmin now recognized the Association of Mineworkers and Construction Union (AMCU) at its Karee mine.

AMCU wants recognition from Impala Platinum at its Rustenburg operation and a violent turf war there with the dominant National Union of Mineworkers (NUM) has already taken close to 130,000 ounces out of global production this year.

AMCU, which is widely regarded as far more radical than NUM, represents the biggest challenge ever to the latter’s dominance among the mining labour force. The sector is seen as ripe for recruitment because it does not bargain collectively.

“AMCU have a membership of around 3,800 of our employees, which amounts to about 13 percent of our total workforce. Our employees have chosen to be represented by AMCU and it is our view that we should give them recognition commensurate with that level of membership,” Farmer said.

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