AS IF the company has not already been to hell and back, Lonmin faces a crucial vote on Monday in which it is asking investors to approve yet another rights issue.
This is no small bumping up of the cash balances in its bank account; the company is asking for $800m, about 70% of its existing market capitalisation.
To say that shareholders are miffed at a huge dilution of their holdings is an understatement.
The cash call reflects the horrible place into which the company has slipped. Just one measure of its precarious position is that even this cash call will not cover existing debt by very much. By some other operational metrics, the company’s management has underperformed competitors. For example, it has only met production targets once in the past seven years. It is worth remembering, too, that Lonmin’s previous cash call in 2009 has not led to any noticeable improvement.
All of this has been visible in the share price, which has underperformed the larger Impala and Anglo American Platinum over almost any relatively recent time frame. And then, of course, there is the Marikana tragedy, which was not the company’s fault necessarily, but in which management cannot be said to be totally blameless.
In response, Swiss-based miner Xstrata, which owns 25% of Lonmin, has put two proposals on the table, both of which the company has rejected. The first was an innovative reverse merger and the second was for a wholesale management change. For many investors, the second idea at least is probably not only desirable but inevitable. Yet Lonmin’s board still refuses. Why?
Lonmin’s argument is somewhat technical. Xstrata’s proposal, it points out, is not only for a management shake-up but also for a formal management contract.
This, Lonmin’s board feels, is tantamount to a backdoor takeover. Xstrata’s views are obviously important, but they are only a quarter of the shareholder body. Lonmin also argues that the consequences for the company of shareholders voting against the special resolution would be dire, although this is something of a tautologous threat.
Naturally, it would be disastrous to vote against the resolutions, but it is management, not the shareholders, who have allowed the company to slip into a position where the question needs to be asked in the first place.
In any event, voting for the resolution is pretty bad too.
Still, as Lonmin argues, this is the time for cool heads, not for a settling of scores. By some measures, the company’s performance has improved, notably in safety, and nobody would claim that the past five years have been easy in the platinum industry. Industry leader Amplats, for example has gone through three CEOs. The industry has had to face huge cost increases, notably for electricity, and extraordinary social and labour unrest at the same time that a major buyer, the European car market, has been in the dumps.
Once the finances of the company have been stabilised, the management issues, business plan, and the right corporate structure can be examined afresh. As almost all the other shareholders are investment houses, it stands to reason that these discussions will focus on Xstrata. Lonmin claims it is open to these talks, but it needs to be more than open: it needs to be proactive.
It seems likely that institutional shareholders will back the rights issue for the simple reason that, examined on its own merits, it is a comparatively cheap way to build a position in the company. Xstrata will probably also follow its rights, if nothing else because the replacement costs of existing mines would be huge. Yet Lonmin should not interpret this decision as a validation of its business plan or its management. The oversight of the company has been too distant from operations and too generic in character. That will have to change quickly.
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