Lonmin Posts Unexpected Loss as Prices, Sales Decline

Lonmin Plc, the world’s third-largest platinum producer, fell to the lowest price in more than three years in London trading after reporting an unexpected loss.

Lonmin slumped 5.2 percent to 854 pence, the lowest close since Feb. 2, 2009. It posted a loss excluding one-time items of 6.9 U.S. cents a share in the six months through March, compared with a 45-cent profit a year earlier and a 9-cent median profit estimate from six analysts surveyed by Bloomberg.

Platinum mining companies have seen earnings squeezed by falling prices for the metal used in jewelry and pollution-control devices for cars. Anglo American Platinum Ltd., the biggest producer, cut its 2012 output target in February and froze employment after annual profit slid 30 percent. Competitor Aquarius Platinum Ltd. said last month it missed quarterly earnings estimates amid lower prices and higher output costs.

Platinum averaged $1,572 an ounce in London trading in the six months through March, 9.9 percent lower than a year earlier. Above-inflation gains in labor and power costs in South Africa, where most of the world’s platinum is produced, raised the rand-denominated expense of mining an ounce of metal by 11 percent.

Hedge Sales

To mitigate exchange-rate risk, Lonmin will hedge sales in the second half, it said. It struck agreements to sell gold at a set price and date in the first half and may consider selling forward base metals at fixed prices, it said. The London-based company’s platinum-group metal sales fell 10 percent in the six-month period to 608,579 ounces, while output dropped 12 percent.

Chief Executive Officer Ian Farmer is “constantly reviewing” his plan, announced a year ago, to invest about $2 billion expanding production to 950,000 platinum ounces in 2015. The company taps the Bushveld complex in northern South Africa.

“Lonmin is in a tight position,” Farmer told analysts in London today. It must stay “robust” amid weak prices to be able to benefit from an expected improvement in the market later, he said. The company will cut capital spending if needed, he said, adding that Saffy is currently the highest-cost shaft.

Higher-than-expected tax contributed to the loss, Edward Sterck, an analyst at BMO Capital Markets, said in a note. Mine operations met production estimates, he said. Lonmin reported a tax charge of $52 million, attributed mainly to currency effects. That compares with profit before tax of $18 million.

Stronger Second Half

Lonmin kept a full-year target of 750,000 ounces of platinum sales, implying a 36 percent increase in second-half sales from 318,402 ounces in the first six months. The second half is traditionally stronger than the first, Farmer said.

Lonmin forecast a “short-term period of price weakness,” saying industrial users had taken advantage of low prices and are well stocked at a time when the rate of global growth is “unclear.” Platinum slipped 1.9 percent to $1,447.50 in London today.

The platinum market will probably be in surplus this year, “which is likely to keep the price in a range of $1,450 to $1,750 per ounce in the next six months, averaging $1,600,” market researcher Johnson Matthey Plc said in a statement.

Platinum producers in South Africa have also faced labor action over the past year as workers campaign for higher wages. Pay disputes and rivalry between unions temporarily halted output at Impala Platinum Holdings Ltd.’s Rustenburg operation, the world’s biggest platinum mine, in February.

Sea Change

The country’s labor market is “going through a sea change” as the Association of Mineworkers and Construction Union challenges the dominance of the National Union of Mineworkers, Lonmin said today in a statement.

“The rivalry for membership between the unions could be a feature for the foreseeable future with a corresponding increase in the risk of escalation of costs and disruptions to production,” Lonmin said. The AMCU has been given limited organizational rights at the Karee mining division, where a third of employees are now members of the union, it said.

“The difficult operating environment in southern Africa looks set to continue, given rising cost inflation, structural safety issues, falling productivity and militant labor unions,” Ben Davis, an analyst at UBS AG, said in a note.

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