Markets

Liam Denning is a Bloomberg Gadfly columnist covering energy, mining and commodities. He previously was the editor of the Wall Street Journal's "Heard on the Street" column. Before that, he wrote for the Financial Times' Lex column. He has also worked as an investment banker and consultant.

Precious metals are supposed to guard against hyperinflation. But Lonmin has turned that on its head.

The platinum miner announced on Monday the sort of rights offering that ought to come with a free wheelbarrow. Under the plan, existing shareholders -- sitting on a loss of more than 90 percent over the past year alone -- can buy 46 new shares at a further discount of 94 percent for each one they already own. That is 27 billion extra shares costing a penny each on top of a mere 587 million floating around now.

Deep Mining
Lonmin's share price
Source: Bloomberg

Alternatively, shareholders can stand pat and end up owning less than 3 percent of the company. If that sounds more like the sort of dilution you might see in a debt-for-equity swap, your instincts aren’t far off the mark. Lonmin warned last week that without the money raised from the new shares it would struggle to refinance existing debt and might shut down within months.

So buy many more shares of a money-losing enterprise mining a commodity that has lost about half its value in the past five years, or lose what little value is left. It isn’t the best motivation, unless you happen to be convinced platinum prices will turn around soon or are a shareholder who just really wants Lonmin to keep the lights on, come what may.

Luckily for the company, it likely has such a shareholder in the form of South Africa’s state-owned Public Investment Corp., which oversees state employees’ pensions and currently owns about 7 percent of Lonmin. Lonmin has tens of thousands of employees and contractors  in South Africa, a country with an unemployment rate north of 25 percent. It is a reasonable bet that the PIC ends up owning a bigger chunk of Lonmin by year-end if the offering goes ahead.

Yet, in saving Lonmin and many mining jobs -- at least for now -- such efforts inflict collateral damage on the platinum market that ultimately has to underpin all of it.

Platinum Futures Price Per Ounce
Bloomberg

After years of supply deficits drove up platinum prices, the metal now faces a perfect storm. Catalytic converters in diesel vehicles account for 40 percent of demand, and Volkswagen has put a cloud, quite literally, over that. Meanwhile, platinum jewelry demand in China has weakened, and the incremental platinum buyers in recent years, investors in metal-backed exchange traded funds, have pulled back.

What platinum needs are deeper cuts to supply to rebalance the market. Yet, as Liberum Capital pointed out in a recent report, if Lonmin sells roughly $400 million worth of new shares, the sector will have managed to raise some $5.4 billion from selling shares or assets since the start of 2010 despite deteriorating economics. So surplus supply will keep building up.

It is a story echoed across the commodities sector, be it struggling Chinese iron ore mines and steel foundries staying open and crushing global prices or U.S. oil companies raising cash and squeezing services firms to keep pumping in the face of $40 oil. The commodities supercycle has entered its bust phase, a point illustrated by the news that Goldman Sachs is effectively pulling the plug on its BRICs fund after years of losses. Until the bust actually forces more capacity out of the market, though, the recovery will remain far off.  

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Liam Denning in San Francisco at ldenning1@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net