This company is slowly burning, make sure you don't own it…

by , 17 May 2017
This company is slowly burning, make sure you don't own it…
More bad news for the Lonmin share price In 2012 Lonmin asked shareholders for R7.12 billion in capital to keep the doors open. At that stage the company was worth R8 billion. But investing in Lonmin was a bad idea.

By 2015 the company burnt through all of that money. Its value crashed, with the company being worth a mere R1.2 billion in November 2015.

And then, as the creditors came knocking at its doors, Lonmin asked investors for another R5.6 billion bailout!

But this is far from over. In fact, I foresee that Lonmin will need to do another rights offer, or risk going bankrupt…

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Why Lonmin’s 60% share price crash in the past year isn’t over yet

 
In March 2016 Lonmin had a ‘net cash’ position of $114 million.
 
Its results, released on 15 May 2017, show that the company’s net cash position in March 2017 sat at $75 million.
 
That means a drop of $39 million in the past year. That equates to roughly R510 million cash that was burnt…
 
Even worse, Lonmin’s operating loss for the six months ending 31 March 2017 was $181 million, compared to a loss of $15 million in 2016.
 
Simply put, Lonmin is burning through its cash hand over fist. By this time in 2018, it will possibly have to start tapping banks for financing if it is to continue running.
 

The only way Lonmin can survive is cutting expenditure

 
Sitting in this situation, Lonmin needs to preserve cash.
 
To do so, the company is cutting expenditure.
 
As part of the capital expenditure and cost reductions, Lonmin said it would close its headquarters in Johannesburg and move administrative staff to its mine in Markana in South Africa’s North West province.
 
The company has also confirmed a cut in capital expenditure. It will drop capital expenditure by around R400 million in the coming year to be between R1.4bn and R1.5bn compared to previous guidance of R1.8bn.
 
That means the company is already cutting back on sustaining its mines in the future, to keep going today. 
 
Already two important financial figures for the company are deteriorating quickly.
 
That’s the quick ratio and the current ratio. These figures show whether the company can pay all its short term liabilities with its short term assets (the quick ratio does not include inventory, whilst the current ratio does).
 
Lonmin’s quick ratio has deteriorated from 2.81 in March 2016, to 2.38 in December 2016 and 1.09 in March 2017. That means it can only just cover its short term liabilities.
 
If you look at the current ratio, it’s a bit more encouraging. It has also weakened from 4.35 in March 2016 to 3.65 in September 2016 to 1.95 in March 2017. This means the company can still pay all of its creditors TWO times, with cash AND inventory on hand. But that would mean it will have to sell all of the inventory.
 
Back in 2015 when Lonmin nearly went bust and asked investors for money, these ratios were at 0.65 and 1.
 
Considering how quickly they’ve deteriorated in the past year, it isn’t impossible that Lonmin could sit in the same situation as 2015 by the end of 2018…
 
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Lower production costs, or a higher platinum price could save the Lonmin share price

 
If the platinum price improves significantly from here (and that would require the rand to weaken to the dollar as well as the dollar platinum price to increase) it would save Lonmin.
 
Similarly, if Lonmin manages to lower its production costs the company can also salvage itself.
 
But the problem is, in the past year production costs have risen from R10,668 to R12,059/oz.
 
Now the company does state that it managed to lower production costs back below R10,000 per ounce in March 2017. But it only did so for that month. There are no guarantees that it can keep production costs that low for an entire year.
 
One month of bad production, a safety stoppage or strikes at its mines could easily foil its efforts to lower costs, costing the company its sustainability…
 
I would be very wary of investing in Lonmin. It’s slowly burning through its cash, and I don’t see relief coming quickly. I don't see a recovery of the Lonmin share price any time soon.
 
Here’s to unleashing real value
 
Francois Joubert



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