Strike-hit Lonmin cuts costs, raises hurdles to return to profit

Lonmin said the savings would be achieved over 3 years through operational improvements and lower overheads.

FILE: Mineworkers return to work at Lonmin's Rowland shaft in Marikana on 25 June 2014. Picture: Govan Whittles/EWN.

LONDON/JOHANNESBURG - Platinum miner Lonmin, dragged into the red this year by a bruising five-month strike, said it would cut more than R2 billion of costs and set a higher hurdle for new projects as it battles to return to profit.

Lonmin, the world's third-largest platinum producer, said the savings would be achieved over three years, largely through operational improvements and lower overheads. It has also set a target return rate of at least 15 percent for new investments.

The company, under pressure from labour unrest, rising costs and weak platinum prices, also signalled it could as a result close Hossy, a costly shaft once at the heart of Lonmin's ill-fated push to mechanise South African platinum mining.

In early trade on Monday, shares in the miner rose almost 4 percent, lifted by a pre-tax loss for the year to September that was at the better end of expectations, a smaller rise in debt and its confirmation of a long-standing 2015 production target.

But analysts questioned Lonmin's ability to generate the cash needed to sustain even a spending plan that has come down to $250-$300 million from $400 million, most of that to be spent on its key Rowland, K3 and Saffy shafts.

"Lonmin have only generated sufficient operating cash flow twice in the past seven years to meet the new capex budget," said analysts at Liberum, who have a "hold" rating on the stock.

"Unless the PGM Rand basket price rebounds, the balance sheet will come under pressure and will require a further capital raise in 18-24 months."

Lonmin on Monday posted a full-year pre-tax loss of $326 million, compared to a profit of $140 million a year ago.

It said it expects output of around 750,000 ounces in 2015, after returning to production earlier than forecast following a crippling strike.

Lonmin said recent productivity improvements meant Hossy would remain active for now, but the additional capital needed to bring its cost down was "currently unaffordable and must rank behind other projects in attractiveness."

"Our employees were extremely keen to see what they could do to keep Hossy going and make a success of it," Chief Executive Ben Magara said in a call with journalists.

Magara also said the review had identified "excess labour" and the company would move some employees from older mines to longer-life shafts, as well as to freeze recruitment.

Sources told Reuters in August that the company was considering closing shafts and cutting jobs as part of its turnaround plan.