Lonmin Pre-Tax Profit Triples in First Half

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The world’s third-largest platinum miner, Lonmin (LSE:LMI), announced its six-month results this morning.  The news was a far cry from the year-end results they published on 09 November 2012.  The thing that stood out the most last November was Chairman Roger Phillimore’s statement that “The publication of today’s results closes a painful chapter in Lonmin’s history.”  He and CEO Simon Scott had said, that “There is no way to begin our Annual Report this year without addressing the terrible events which took place at Marikana in August and September.”

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Today, however, is an altogether different story, as Lonmin reported a gain in momentum and production.  But the real eye-opener was the company’s pre-tax profit tripling year-on-year from $18 million to $54 million.  Whilst the tragedy of last summer’s strikes will not soon fade away, the company has focused on safety and production as part of its renewal plan.

The company moved from a debt position of ($356) million at this same time last year to a cash position of $194 million at 31 March this year.  Earnings per share, of course, moved relative to the trebled profits, from a (6.3 ) cent loss on the half in 2012 to 13.3 cents in 2013.  Lonmin’s share price rose 5.6% to 294 on the London Stock Exchange in early trading, but had receded somewhat to 285.4 by 2:00 pm.

Scott prefaced the report, saying, “We are pleased to have maintained the momentum of the safe re-start and ramping up of production at our operations to deliver a strong operational and financial performance in the first half of our financial year.  The successful refinancing of the business, the return to profitability during the period under review and the revised growth strategy and streamlined capital investment programme have allowed us to de-risk the balance sheet and it is pleasing to note that the business has generated positive free cash flows in Quarter Two. We expect to continue to build operational momentum in the second half of the financial year and we are increasing our metals in concentrate guidance from 680,000 ounces of Platinum to in excess of 700,000 salable Platinum ounces.

The reason for Scott’s last sentence is that the company is currently producing at near capacity for the smelting operations.  That has not been nearly the problem for Lonmin that operational costs have been.  In fact, the company is known as one of the highest cost producers in the sector.  Nonetheless, the good thing, if your costs are the highest, is that there must be some way to lower them.  Lowering costs has been a primary concern for and objective of Lonmin.  The South African economic climate is, however, going to continue to generate increased costs, so the company’s real objective is to keep rising costs to a minimum.  Having suffered an average 14% increase in cost per year since 2007, for the first six months of FY2013 LMI was able to hold those increases to 5.8%.  It has adjusted its projected cost increases for the second half from 10% to less than 8%.

Moving forward, labor negotiations may still be the single biggest challenge for Lonmin and other miners in South Africa.  That’s an intangible, but one with the ability to disrupt the flow of business and, therefore, revenue and profitability.  Whether it is a reality or not, Scott said that the company is “positive on wage talks.”

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