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Posts Tagged ‘Lonmin’

Mining Week 46/’12: Lonmin vs. Xstrata & the CEO-carousel

November 10, 2012 Comments off

Top Stories of the Week:

  • Lonmin raises equity to stay independent
    • Lonmin announced a $800m rights offering, in that way fending of the proposal by Xstrata to increase its stake in the troubled platinum miner to a majority share.
    • The strikes in South Africa, which escalated at Lonmin’s operations, have caused significant lost production and urgent financial issues for Lonmin.
    • Sources: Lonmin press release; Financial Times; Wall Street Journal
  • BHP starts search for new CEO
    • BHP Billiton has started the search for the successor of CEO Marius Kloppers. Apparently the company will not necessarily promote an insider to the top position.
    • With Mick Davis leaving Xstrata if/when the merger with Glencore is approved and Cynthia Carroll leaving AngloAmerican next year, 3 of the top CEOs in the mining industry will change.
    • Sources: Financial Times 1; The Economist; Financial Times 2
  • India limits export of iron ore
    • Iron ore exports from the Indian state of Orissa will be limited strongly by new production quota for mines without processing facilities.
    • The government is trying to attract processing investment to prevent iron ore is only exported without significant benefit for the country. High export duties (raised to 30% early this year) and production quota are used to discourage exports from the world’s 3rd largest iron ore exporter.
    • Sources: Wall Street Journal; Commodity Online; Steel Orbis

Trends & Implications:

  • Orissa’s attempts to curb exports don’t do much to stimulate local investment in processing capacity. India’s government announced a year ago that it would make it more attractive for companies to invest by setting up mining right and process plant permitting packages. With the current uncertainty about both global demand and India’s local demand outlook it is unlikely that large investments in additional processing capacity will be made in Orissa in the near future. As a result the will mainly slow down the local economy.
  • Almost a year ago, after the announcement of Ferreira as new CEO of Vale, this blog conducted a poll among its readers to find out which top company CEO was mostly to be replaced first. The results showed most trust in the future of Kloppers at BHP. A year later 3 out of 4 are on their way out, while most CFOs have been replaced over the past 2 years too. The high level of activity in replacing top executives indicates a change of mindset in the boards of these companies: shifting from a focus on growth and investment to a focus on operational excellence and payout. The new group of top executives will mainly need to show a track record of cost-control and willingness to make tough decisions on closure of mines.

Results of Dec-2011 Poll on thebusinessofmining.com

2012 | Wilfred Visser | thebusinessofmining.com

Mining Week 42/’12: South Africa strikes; Glenstrate voting scheme

October 8, 2012 Comments off

Top Stories of the Week:

  • South African strikes spread; workers fired
    • Illegal (wildcat) strikes in South Africa have spread to more or less all major miners in the country. Anglo American’s Kumba iron ore and platinum operations are faced with production disruptions, as are Xstrata, GoldFields, Anglogold, and most other major mining houses in the country.
    • South African strikes escalated when police shot down Lonmin strikers. After Lonmin agreed to a 22% wage increase workers in other companies demanded similar increases, bypassing the traditional unions. Several companies are trying to set up structured wage discussions to come to a collective agreement.
    • AngloAmerican’s Amplats decided to fire 12 thousand striking workers, which is a fifth of its total workforce.
    • Sources: Anglo American press releases1 2; Financial Times 2; wall Street Journal
  • Xstrata board recommends Glenstrata deal and complicates voting
    • Xstrata’s board of directors issues advice for the company shareholders to accept the merger proposal to form Glenstrata. The voting structure has been set up to assess support for a deal both with and without an extensive retention package for Xstrata’s top management.
    • Shareholders will vote first on the merger proposal both including and excluding the retention package, requiring a 75% majority excluding Glencore’s votes. Then the vote on the retention package will be done separately, requiring only a 50% majority of votes.
    • Sources: BusinessWeek; Financial Times

Trends & Implications:

  • The voting scheme is set up by Xstrata’s board to have a safety net for the deal in case the shareholders don’t accept the management retention package. The Qatari sovereign wealth fund is the largest shareholder that can vote on the merger deal; it has not voiced its opinion on the improved Glencore offer and on the management incentives, but insiders indicate the group considers retention of Xstrata’s officers a key priority. Key unknown in the voting mechanism is whether or not the results of the first two questions (on the merger) are made public before the 3rd vote on the retention scheme.
  • The unrest in South Africa is much wider than the mining industry, and as such requires solutions that are much broader than the industry. In the short term a large part of the workers might return to work with a significant increase in wages as demonstrated in the Lonmin case. However, as long as this increase does not span across the industry the workers that have not been given a raise will turn to strikes to stress their demands. The mining houses will have to work nationwide to find a sustainable solution for the industry, which is hard because South African miners operate on the high end of the global cost structure for many commodities. The task is even harder when taking in account that social unrest will continue as long as the issues in related and supplying industries continue.

2012 | Wilfred Visser | thebusinessofmining.com

Mining Week 34/’12: Lonmin labor dispute turns deadly

August 18, 2012 Comments off

Top Stories of the Week:

  • Fights between police and striking Lonmin workers results in over 40 deaths
    • Over 40 miners and several police officers were killed in clashes with the police at Lonmin’s Marikana mine in South Africa, where workers had been on strike for about a week demanding wage increases.
    • Competing trade unions trying to ‘control’ the workforce are mentioned as part of the reason the conflicts turned into strikes and violence.
    • On August 16th, in the midst of the developments around the violence in South Africa, Lonmin’s CEO was diagnosed with serious illness and is temporarily replaced by the chairman of the board.
    • Sources: Lonmin press release; Mining Weekly; Wall Street Journal
  • Anglo American finalizes acquisition of 40% stake in De Beers
    • Anglo American paid $5.1bln for the 40% stake of De Beers previously owned by the Oppenheimer family. The company now owns 85% of the major diamond producer.
    • The deal was announced announced in November of last year; diamond prices have dropped significantly since that announcement.
    • Sources: Anglo press release; Financial Times

Trends & Implications:

  • The global platinum market is facing significant oversupply, keeping prices low and pushing platinum miners into the red. Lonmin is the highest cost producer among the major producers, putting it in a position in which is can’t keep workers satisfied without pay raises while it can not raise wages without making big losses. Anglo Platinum currently controls approx. 40% of global production in mines in South Africa and Zimbabwe. Various other miners have called on Anglo to cut production to make prices rise.
  • The social and political situation in South Africa is causing most international mining companies without strong ties to the country to think twice before investing in the country: high tax rates, active and unpredictable unions, political leaders calling for mine nationalization, and the startup of a ‘national mining company’ result in a very high country risk level.

©2012 | Wilfred Visser | thebusinessofmining.com

Lonmin to invest $2bln to boost production

May 10, 2011 Comments off

“Lonmin, one of three South African companies that mine most of the world’s platinum, plans to invest $2bn to restore its production to historic levels of about 1m ounces a year by 2015. In the six months to March, the London-listed miner raised earnings from a low base. Pre-tax profit doubled to $159m despite bigger pay packages for workers, rising electricity costs and the stronger rand which has been eating away at many South African miners’ profits.

Lonmin’s output has declined steadily over recent years, with the miner selling 706,000 ounces of platinum in its year to September compared to over 900,000 ounces in 2004 and 2005.”

Source: Financial Times, May 10 2011

Observations:

  • Lonmin currently depends on the Marikana mine for its entire production. The production increase to 2015 should come from this mine. The Limpopo mine currently is under care and maintenance, while the most company’s most promising growth opportunity is the Akanani deposit with just over 10 Moz platinum reserves. Global platinum production is concentrated in South Africa’s Bushveld complex and Russia’s Norilsk region, while demand mainly comes from car manufacturers in Asia and North America.
  • Lonmin is suffering from quickly increasing employment costs (8% increase over the year) and electricity costs (24% increase). Furthermore the appreciation of the South African rand makes costs increase while revenues (in dollars) are not equally increasing.

Implications:

  • Foreign exchange cost pressures are hurting miners with operations in both developing countries and developed countries in which currencies are not linked to the dollar when the dollar is weakening. With an increasing portion of production shifting to developing countries with high inflation rates exchange rates are becoming more and more important for business evaluation.
  • Several large diversified miners are hesitant to take a stronger position in platinum because of safety issues. Most existing projects have poor safety track records, making acquisition of producing assets a CSR-risk, while development of new projects would require significant capital expenditure and result in long lead times.

©2011 | Wilfred Visser | thebusinessofmining.com

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