Lonmin to press ahead with debt talks after pay deal
THE end of a bloody strike by South African workers at Lonmin will give the miner a stronger hand in its refinancing talks with lenders, say analysts, who believe the firm can withstand higher wages, despite its stretched balance sheet.
Lonmin expects to see production at its Marikana mine resume on Thursday when striking workers return after it agreed an 11% to 22% pay increase, a deal which it hopes will put an end to six weeks of disruption.
With mining operations due to restart, Lonmin will have a stronger platform from which to try to sort out its pressured balance sheet ahead of what most analysts say is likely to be a breach of debt agreements.
"Having a mine that’s back up and running provides the base for Lonmin to start having those discussions with lenders," Panmure analyst Alison Turner said.
Analysts said the higher wage for next year would add to pressure on the company’s margins, but they called the estimated sums involved "manageable" and thought it would not have a material impact on the scale of a possible equity raising.
Lonmin has agreements with lenders that require it to keep the ratio of net debt to core profit at no more than four times.
That ratio will be tested at the end of this month and is already seen as strained.
Without active mining operations taking place, the company would have found raising additional financing difficult, whether that be through a debt deal or an equity raise, both of which it has said it is considering in order to shore up its balance sheet.
Lonmin said it would issue an update on the financial impact of the pay deal in due course.
The company, which could take months to get production up to levels seen before the strikes, could look to raise between $500m and $1bn should it proceed with an equity raising, analysts at Investec have forecast.
Lonmin, whose shares pared earlier gains to close up 0.25% at 651.5 pence, has been battered by rising costs and weak platinum prices and the recent prolonged stoppage, which prompted it to cut its 2012 sales forecasts.
Panmure said Lonmin’s annual costs could rise by around 3%, or $50m, as a result of the wage rises, while Nomura, which estimates that 60% of Lonmin’s annual costs come from its wage bill, forecast that the company could see its costs rise by between 5 and 10%.
South Africa has over the last six weeks been rocked by industrial action in the mining sector, which has cost dozens of lives and turned the spotlight on the alliance between big unions and the African National Congress.
Xstrata, which has a 25% stake and is Lonmin’s biggest shareholder, could play a key role in any equity raising, although it is difficult to tell what support it would give as it is in the throes of a takeover by Glencore.
One analyst who declined to be named said he expected Lonmin’s lenders, which include Royal Bank of Scotland and Lloyds Banking Group, to be flexible in the short term. Lonmin has total debt facilities of $945m.
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