LONMIN’s shares soared on the JSE yesterday, a relief rally that was to be expected given that the platinum miner was heavily sold during the protracted wildcat strike that led to 45 deaths at its Marikana mine. The question shareholders should be asking now is whether the rebound level is sustainable given the damage that has been caused to the company’s finances, infrastructure and cost base.
The K4 shaft at Marikana has been put on "care and maintenance" with effect from October 17 after Lonmin terminated a R65m contract with Murray & Roberts as part of an "ongoing expenditure review". Although not a direct consequence of the strike — Lonmin announced on July 26 that capital expenditure on the K4, Hossy and Saffy shafts would be deferred in the light of the weak platinum price — cost cutting has certainly been made more urgent by recent events.
The jobs of 1,200 Murray & Roberts contract workers are now at risk, and with the platinum price cooling rapidly as supply fears fade, there is every likelihood that the development of other shafts at Lonmin and elsewhere on the platinum belt will also be reviewed. Nomura estimated in a client note yesterday that the 22% wage increase accepted by the Lonmin strikers could add 13% to the company’s recurrent costs, in addition to the R82.35m one-off bonus that was promised to workers to encourage them to get back to work quickly.
Lonmin’s shaky balance sheet, which it is trying to repair by cutting capital expenditure in the 2013 and 2014 financial years to about R2bn a year and raising additional funds through a share issue, will inevitably restrict its ability to expand production if commodity prices improve. And with the political spotlight on mine employees’ living conditions as a contributor to the circumstances that led to the wildcat action and associated violence, the pressures on Lonmin’s balance sheet are unlikely to diminish soon.
As far as the mining industry is concerned, there is a real danger that the way the Lonmin dispute unfolded and was eventually settled will encourage further strikes, and associated violence, in other sectors. The moral hazard created by allowing employees to ignore a legal wage agreement negotiated in good faith by management with legitimate worker representatives, cannot be underestimated. This did not start with Lonmin — Impala Platinum (Implats) was the first to fold under pressure from rock-drill operators, despite a wage agreement being in place — and there are signs it will not end there either.
Reuters reported yesterday that police fired tear gas to break up a protest near a mine run by Anglo Platinum (Amplats) as news of the Lonmin deal spread, and representatives of workers at Implats mines said they were now demanding all wages to be raised to match those of the drill operators. Amplats had to suspend its Rustenburg operations last week because of unrest, and 15,000 miners at Gold Fields’s KDC West operation are already on an illegal strike.
While Gold Fields management seems to be aware of the need to draw a line in the sand, JP Morgan said in a research note the deal would inevitably set a new benchmark for the industry and "wage costs are set to rise substantially".
The mining-sector unions have been shocked to the core by their rejection by the Marikana strikers and will therefore be under pressure to win back their loyalty. This is bound to encourage more radical demands and inter-union competition, which does not augur well for either improved relations with management or the eradication of violent conflict.
It is clearly good news that a settlement has been reached to end the Lonmin strike and avoid further violence, but a postmortem is essential. This is an opportunity for the National Economic Development and Labour Council to show it is more than just a talk shop.