Lonmin New CEO Shoulders Output Push as Costs Soar

Ben Magara will lead Lonmin Plc (LMI) in an effort to restore output at the world’s third-largest platinum producer and repair its reputation after a six-week strike at the company’s main mine led to at least 44 deaths.

Instead, he may be forced to close shafts and cut staff. Magara, whose appointment was announced yesterday, will take the helm at Lonmin on July 1 as it grapples with higher wages, inflation-busting power costs and social-spending commitments.

Platinum producers in South Africa are taking steps to boost earnings after pay strikes in 2012 cut output and raised costs. At stake for Lonmin is its recovery from a $698 million annual loss, which led it to cut expansion plans and renegotiate debts as stagnating prices capped profit from the Marikana mine, which accounts for 96 percent of the company’s production.

“Even with a new CEO in place, the challenges are significant,” Ben Davis, an analyst at Liberum Capital Ltd., said in a note to clients. “Coupled with Lonmin’s lack of operational diversification -- one major asset at Marikana -- Lonmin is most likely to underperform in the coming months.”

Magara, 45, is currently executive head of engineering and capital projects at Anglo American Platinum Ltd. (AMS), Johannesburg- based Lonmin said yesterday. Amplats, as the world’s largest producer is known, has proposed to cut 400,000 ounces of annual production, or 7 percent of global volumes, to help return to profitability. That may lead to as many as 14,000 job cuts.

Mine Violence

The August walkout at Marikana, 170 kilometers (106 miles) northwest of Johannesburg, resulted in the loss of an estimated 110,000 ounces of platinum production. As tensions rose, police killed 34 protesters in one day in the worst mine violence since apartheid ended. The same day, then-CEO Ian Farmer was hospitalized with an illness. He quit in December.

Lonmin, which in February said it would cut about 150 management positions, could shut its Westerns 1 and Easterns 1 assets, or put its Hossy and Saffy shafts on hold, Davis said.

“I’m on the no-hope side of things,” he said. Lonmin may prefer to focus on reducing overhead costs as it lacks Amplats’ size to cut output without it being “keenly felt,” he said.

In December, the company raised $792 million selling stock to existing shareholders, using the proceeds to meet pledges to creditors as it resumed operations. Its share price has plunged 50 percent in 12 months, while the price of the metal has dropped 5.4 percent.

Community Spending

In an effort to reduce labor conflicts, Lonmin is working to improve housing, employee relations and black-ownership structures.

The number of people living in unheated hostel blocks, built almost 30 years ago, has dropped by about 80 percent to less than 3,000 as workers use their living allowance to stay off-site, said Natascha Viljoen, the company’s executive vice president of processing and sustainability.

Lonmin, which produced 690,000 of platinum in the year through September, expects 660,000 ounces of output this fiscal year, in which it will spend about $175 million, it said in January. The stock has declined 2.5 percent this year, closing at 277.1 in London.

“The company is doing the right things but we believe the stock is trading at a level reflecting a more dramatic increase in production than the company is guiding to,” Eugene King, a Goldman Sachs Group Inc. analyst, said in March. He kept a sell rating, and estimated the stock at 280 pence in a year’s time.

Marikana Footage

Magara will replace Simon Scott, who became acting CEO during the August violence at Marikana, which was broadcast around the world.

“It was very traumatic, obviously, what you saw on television,” said Mark Munroe, executive vice president of mining. “Since then we have to look at ourselves, where we’re going, who we are, and what we stand for.”

Munroe spoke at Lonmin’s conference center in Mooinooi, on a game park south of its operations where giraffes, kudu and zebras roam between meeting areas, guest villas and a helipad. The company has considered selling the property, Viljoen said.

“They still know how to run leaner and meaner,” according to Peter Major, head of mining at Cape Town-based Cadiz Corporate Solutions, who said the company’s community spending is adequate. “Lonmin has a history of being the most effective platinum producer,” he said in an interview last month.

Upliftment Projects

Lonmin, which has 27,800 full-time employees and several thousand contractors, ranks ninth among miners in South Africa in community spending as a proportion of revenue, according to data compiled by Bloomberg. It spent the equivalent of 0.3 percent of revenue on so-called upliftment projects according to its most recent annual report, matching the industry average.

The company said in January that fiscal first-quarter platinum sales rose 17 percent from a year earlier to 108,342 ounces after production climbed following the labor unrest.

“Simon has done a huge job in ramping up production,” Sue Vey, a spokeswoman for Lonmin, said today by phone. “Ben starts on July 1 and from there we believe it’s onwards and upwards.”

Total platinum group metal sales fell 3.7 percent in the quarter to 182,576 ounces. The rand basket price rose 10 percent on the prior year.

Lonmin “is concentrating on quality, not quantity,” said Justin Froneman, a Johannesburg-based analyst with Standard Bank Group Ltd.’s securities unit who recommends buying the stock. “If they can maintain their current forecast and keep up current run rate, there’s a chance that they may go ahead of that forecast.”

To contact the reporter on this story: Paul Burkhardt in Johannesburg at pburkhardt@bloomberg.net

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

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