Lonmin’s Record Pay Increase After Strike Seen Setting Precedent

Lonmin Plc’s record pay increase for employees to end an illegal strike at its biggest mine in South Africa sets a dangerous precedent for rivals and for other industries because the platinum producer met demands backed up by violence, labor analyst Loane Sharp said.

“The lesson that workers have learnt is that violence and intimidation lead employers to capitulate,” Sharp, who’s at Adcorp Holdings Ltd., said by phone yesterday.

Employees agreed to return to work at Marikana, which accounts for about a 10th of global platinum supplies, today after winning increases of as much as 22 percent. That’s the single biggest raise by a mining company in the country’s history, Sharp said. Worker attendance at the mine today exceeded 80 percent, acting Chief Executive Officer Simon Scott said in a speech in Johannesburg.

About 3,000 rockdrill operators not represented by unions went on strike on Aug. 10 at the mine, which employs about 28,000, demanding an increase that would about double their pay to 12,500 rand ($1,515). The strike coincided with the Association of Mineworkers and Construction Union recruiting members in a challenge to the dominant National Union of Mineworkers.

Labor upheaval and a drop in platinum prices have shut down mines in South Africa, which produces three-quarters of supplies of the metal. Workers at Impala Platinum Holdings Ltd. want similar increases to those won at Lonmin. The Congress of South African Trade Unions said the pay deal may encourage workers in other industries to start unauthorized strikes, hurting the future of the central bargaining system.

Output Drop

“It could set the tone for more aggressive wage negotiations by other unions in South Africa, which could have negative impacts on rated mining companies,” Soummo Mukherjee, a senior credit officer at Moody’s Investors Service, said in an e-mailed statement today.

Mining accounts for 8.8 percent of the economy and makes up about two-thirds of exports, according to the statistics agency and the revenue service. Output has dropped in seven out of the past 10 years, official statistics show.

Cyril Ramaphosa, who is the founder of the NUM and whose Shanduka Group Ltd. has a stake in Lonmin, said mining companies did “too little, too late” in response to the violence. “The Marikana wage settlement sets a very dangerous precedent,” he told SAfm, a state-owned broadcaster, today. “The NUM should use Marikana as a mirror.”

The total number of workers on all South African mines fell to 498,141 in 2010 from 518,729 in 2008, according to the Chamber of Mines, an industry body. The nation’s gold industry had 157,019 workers in 2010, while platinum group metals companies had 181,969 employees.

Lost Production

“The government and business people have to reconsider their position, but the status quo can’t remain the same,” Joseph Mathunjwa, president of the AMCU, said by phone yesterday. “They should come out from their comfort zone and address the plight of the workers.”

Impala, the world’s second-largest platinum producer, which had a six-week strike at the beginning of the year in which four people died and 120,000 ounces of metal were lost, said Sept. 13 the AMCU has put forward new pay demands, and negotiations are under way.

Impala miners want the same deal that Lonmin workers got, “nothing less,” NUM General Secretary Frans Baleni said in Johannesburg today.

Worker Protests

Lonmin agreed with the NUM in December to raise pay by as much as 10 percent this year. That’s twice August’s inflation rate. Workers in South Africa, where about one in four people don’t have a job, may strike legally if an independent mediator agrees to a stoppage and after talks between unions and companies fail.

Platinum fell 1.4 percent to $1,617.75 an ounce by 5:03 p.m. in London, paring its advance since Aug. 9 to 15 percent. Lonmin dropped 6.3 percent to 610.50 pence by the close in London.

Lonmin workers last month began protesting at Wonderkop hill near the Marikana property, carrying spears and fighting sticks. Police shot and killed 34 people in protests, while at least 11 others died in fighting, including two policemen whose bodies were mutilated after they were hacked to death.

“We are very worried about what the way in which these increases were secured means for other industries,” Justin Froneman, an analyst at Johannesburg-based SBG Securities Ltd., said by phone yesterday. “It may well set a precedent.”

A day after the Lonmin wage agreement was struck, protesters at Anglo American Platinum Ltd., the world’s largest producer of the metal, were dispersed with tear gas and stun grenades. Miners at Gold Fields Ltd.’s KDC West mine are on an illegal strike for a 12th day.

No Precedent

Anglo American Platinum and Aquarius Platinum Ltd. declined to comment on the Lonmin wage deal.

South African President Jacob Zuma said he didn’t expect the accord to set a precedent for pay negotiations.

“The unions were not at the center of this,” he told reporters in Brussels on Sept. 18. “I think we go back to the old style. I don’t think we’re setting up a new one.”

Lonmin had cut spending on growth projects prior to the strike as platinum prices fell and labor and electricity costs rose at above-inflation rates.

The strike reduced daily output by about 2,500 ounces at Marikana, which produces almost all of the company’s metal. Without production, the company said last month it will probably breach loan conditions. Lonmin will probably fail the tests when it’s scrutinized on Sept. 30, Nomura Holdings Inc. analyst Tyler Broda said yesterday.

Restarting Output

In a bid to restart output and stem losses, Lonmin agreed to raise drillers’ pay by 22 percent after an initial offer was rejected last week. Increases for the three other categories of workers would be from 10 percent to 18 percent.

The continent’s biggest economy ranked last on labor-employer relations among the 144 countries in the World Economic Forum’s 2012-13 Global Competitiveness Report. Pay strikes increased to near-record levels last year and communities held protests, saying their living standards haven’t improved sufficiently since the first all-race elections in 1994.

South Africa’s largest gold and coal companies, including AngloGold Ashanti Ltd. and BHP Billiton Ltd., negotiate wages jointly through the Chamber of Mines.

“We’re trying to make sense of what has happened,” Vusi Mabena, executive of stakeholder relations at the chamber, said by phone from Johannesburg yesterday about the Lonmin accord. “We don’t know what the consequences are.”

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