Lonmin Plans $800 Million Share Sale After Deadliest Strike

Lonmin Plc (LMI) will offer $800 million of stock to investors to help the third-largest platinum company meet pledges to creditors as it needs funds to resume operations after the deadliest post-apartheid strike in South Africa.

“Debt levels will rise significantly over the coming months to fund the production ramp-up,” the Johannesburg-based producer said today in a statement. The company also reached a deal with dollar and rand lenders on amending debt facilities.

Fourth-quarter output slid 46 percent from a year earlier on the strike, Lonmin said. The six-week walkout at the Marikana mine from Aug. 10 cut 110,000 ounces of platinum output valued at about $170 million at prices in London today. Lonmin stock lost more than half its value in the past six months before today, the second-worst drop on the FTSE 350 Mining Index.

Strikers only returned to work after Lonmin agreed to raise pay by 11 percent to 22 percent and following the deaths of 46 people including 34 protestors shot dead by police on Aug. 16.

“This is a large rights issue for the company given the shrinking of the market capitalization,” Fairfax I.S. Plc said in a note. “Given a soft demand environment for car demand and margin erosion from higher wage settlements, platinum prices still need to rise from here to make this a clear buy case.”

Platinum was at $1,546.74 an ounce today in London, a third lower than the 2008 record of $2,301.50. Lonmin rose 7 percent to close 71.95 rand in Johannesburg. The company said it agreed on a “standby equity underwriting letter” in which its rights offer is underwritten at a minimum $1 a share.

London Shares

Lonmin gained 7 percent to 513.5 pence in London.

The company avoided breaking debt conditions Sept. 30 after banks agreed to amend the covenants and reduce credit facilities to $400 million from $700 million, it said today. Lonmin agreed to keep net debt and capital expenditure within set thresholds.

“They have done what needed to be done to sure up the balance sheet but capex and costs are still high,” Liberum Capital Ltd. said today in a note. Thirteen of 23 analysts surveyed by Bloomberg recommend selling the company’s stock.

Lonmin may cut jobs after lowering targets for investment and output, acting Chief Executive Officer Simon Scott said on a call. The company, which mothballed its K4 shaft in September, plans to produce 680,000 ounces of platinum this fiscal year and cut sales targets to a minimum 750,000 ounces for the following two years. CEO Ian Farmer, being treated for an illness Lonmin hasn’t disclosed, had planned to spend an average $400 million a year to boost annual output to 950,000 platinum ounces by 2015.

Output Cut

The company produced 700,000 ounces in the year ended Sept. 30, 6.7 percent below its May 14 target of 750,000 ounces.

Lonmin will discuss its rights offer with Xstrata Plc (XTA) in coming weeks, Scott said on the call. Zug, Switzerland-based Xstrata owns a 25 percent stake in the platinum producer.

“We’ll assess the company’s strategy, business plan and management capabilities to ensure an attractive and sustainable future for the business before making any decisions about our intentions in respect of the proposed rights issue,” Alison Flynn, a spokeswoman for Xstrata, said today by phone.

The offer price mostly depends on Xstrata’s support, Edward Sterck, an analyst at BMO Capital Markets, said in a report.

“Although the rights issue potentially alleviates near- term financial constraints, it could be dilutive to existing shareholders if not taken up evenly,” Sterck said, adding the theoretical price after the rights offer, of about 1.51 pounds a share, is about a 70 percent dilution to yesterday’s close.

Diluted Stakes

Shareholders’ stakes may also be diluted should Lonmin issue further shares to meet South Africa’s requirements for local investors to own at least 26 percent of mining operations by 2014, Lonmin said. Proposals haven’t been decided, it said.

HSBC Holdings Plc, Citigroup Inc., JPMorgan Chase & Co. and Standard Bank Group Ltd. will manage the rights offer, said two people familiar with the plans, declining to be named because of company policy. Lonmin wouldn’t comment. The company will reveal details of the share sale later, it said in today’s statement.

Labor unrest at Lonmin spread to Anglo American Platinum Ltd. (AMS), the world’s largest producer of the metal, as well as to South African gold, coal and iron ore operations. The spate of stoppages shaved 50 basis points off the country’s economic growth, Treasury Director General Lungisa Fuzile said Oct. 26.

Producers of platinum in South Africa, which accounts for most of global output, were struggling before the unrest in the second half. Labor and power costs rose faster than inflation in the last three years as metal prices held steady, cutting profit and prompting Aquarius Platinum Ltd. (AQP) and Anglo Platinum to shut some operations. Strikes continue at Anglo Platinum mines.

To contact the reporter on this story: Carli Cooke in Johannesburg at clourens@bloomberg.net

To contact the editor responsible for this story: John Viljoen at jviljoen@bloomberg.net

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