Lonmin May Struggle to Refinance Debt After Unrest, BMO Says

Lonmin Plc (LMI), the platinum miner that expects to breach conditions on its loans as output was stalled by labor unrest in which 44 died, may struggle to refinance the debt given weak metals prices, BMO Capital Markets Ltd. said.

“The company is currently in discussions with its lenders and is also considering other financial options,” Edward Sterck, a London-based analyst at BMO Capital, said in a note.

“Given Lonmin’s volatile operating environment” as well as “depressed platinum-group metal prices and the current state of capital markets, any refinancing on terms favorable to the company and shareholders could prove challenging,” he wrote.

Lonmin, the third-biggest platinum producer, said it would probably break so-called debt covenants and may need to sell new shares to raise funds as a strike and violence halted output at its biggest mine, Marikana, west of the South African capital of Pretoria. The mine, making up 96 percent of Lonmin’s output, is the latest South African platinum complex to shut this year, and unrest spread today to a Royal Bafokeng Platinum Ltd. operation.

“The balance of probabilities is that the impact on production of the current events will result in covenants being breached at the next test date on Sept. 30,” Lonmin said in a statement. The company is considering its options, including issuing stock, spokeswoman Susan Vey said by mobile phone.

Raise Funds

Lonmin may have to raise $1 billion by selling stock to current shareholders, Societe Generale SA (GLE) said Aug. 16. The company, like other South African producers of the metal, was already grappling with higher wage and power costs and lower prices for platinum, used in jewelry and anti-pollution devices.

The metal has declined by 20 percent in the past 12 months and was trading at $1,520.43 an ounce as of 4:59 p.m. in London. Lonmin shares today gained for a second day after declining since Aug. 10. They rose 0.1 percent to 613 pence in London.

“I don’t really see light at the end of the tunnel,” Abhishek Shukla, an analyst at Societe Generale in Bangalore, said by phone yesterday. Even after issuing stock to current shareholders, “they are not a sustainable operation.”

Lonmin is losing 2,500 ounces of output a day by closing the Marikana operation, hampering the company’s ability to meet the conditions set by creditors on its borrowings. It had net debt of $356 million as of March 31, the company said in May.

Marikana Deaths

Output has been at a standstill since Aug. 10 because of the unrest. Police shot dead 34 people near Marikana on Aug. 16 after a group of about 3,000 protesters gathering on a hill refused to disperse. Ten people, including two police officers, were killed in clashes around the property the week before.

Less than a third of the 28,000 workers at the mine reported for duty today, Lonmin said.

There probably won’t be any ``significant'' production restart this week, Lonmin's Vey said by phone from the mine. The site will be shut for a memorial service tomorrow, and starting next week “we’re hoping for a complete change,” she said.

Lonmin this week backed down from a threat to fire striking workers as it struggled to balance the need to calm the conflict and revive output to help meet its debt obligations. The company, which says it won’t take disciplinary action against those who don’t return this week, previously gave 3,000 striking rock-drill operators until yesterday to come back or face dismissal.

Deteriorating Position

The financial position of the company “is deteriorating faster than we had expected,” Nomura said today in a report. “The platinum market is anticipating that the Lonmin strike will persist. Or is perhaps suggestive of Lonmin not being able to raise sufficient funds to keep its operations open.”

President Jacob Zuma, who declared a national week of mourning on Aug. 17, has rejected criticism that his handling of the worst police action since the end of apartheid will hurt investor confidence in the biggest platinum-producing nation.

“Our observation is that nothing has happened to investor confidence,” Zuma, 70, said in an interview at his offices in Cape Town yesterday. “I am convinced that the action that was taken so far helped to show South Africa is in control.”

The violence that started Aug. 10 was the result of union rivalry, Lonmin said Aug. 16. The Association of Mineworkers and Construction Union has been recruiting members at Lonmin at the expense of the dominant National Union of Mineworkers.

Unrest Spreading

Worker discontent spread to the North shaft at Royal Bafokeng Platinum’s nearby Rasimone mine today as about 500 workers demanding higher wages started an illegal strike, the company said in a statement.

Earlier this year, fighting between union members at Impala Platinum Holdings Ltd. (IMP)’s operation near Marikana led to the closing of the world’s largest platinum mine for six weeks and four fatalities. The company lost more than 120,000 ounces of output in the strike that began in the middle of January.

Anglo American Platinum Ltd. (AMS), the largest producer of the metal, and Aquarius Platinum Ltd. (AQP), the fourth-biggest, have also idled mines this year, expecting the price of the metal to remain weak. They mine most of their platinum in South Africa, which accounts for more than three-quarters of global output.

Zuma will probably announce the terms of reference for a judicial commission of inquiry into the mine killings by the end of the week, his spokesman Mac Maharaj said by phone.

To contact the reporters on this story: Matthew Hill in Johannesburg at mhill58@bloomberg.net; Carli Cooke in Johannesburg at clourens@bloomberg.net.

To contact the editor responsible for this story: Amanda Jordan at ajordan11@bloomberg.net.

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