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ANALYSIS: Lonmin buys time, but platinum is bigger problem

Lonmin is still on life support despite its $407 million rights issue.

The South African platinum miner announced a fundraising at an eye-popping 94% discount on 10 November. Even if approved by shareholders, it won't solve the bigger problems Lonmin faces, like low prices for the metal on which its fortune hangs.

As well as raising cash at a nominal share price of just one pence, Lonmin has got its banks to push its lending facilities out from 2016 to 2020, at a lower level of $370 million.

It will now be able to carry out a business plan through to 2018, which includes completing up to 6,000 job cuts - out of a total workforce of 38,000 - and reducing output from its mines.

Lonmin has been battered by a 27% decline in the price of platinum since January, which has wiped around 90% off the company's share price and contributed to a $1.8 billion writedown on its assets.

The trouble is that the highly unionised South African mining sector makes it hard to cut uneconomic production fast enough to offset falling prices.

Arguably, Lonmin investors are as much at risk from the Association of Mineworkers and Construction Union - which represents around two-thirds of its staff in the Marikana mines - as they are from the company's creditors.

Strikes in 2012 turned into a bloody massacre; further labour action paralysed South Africa's Rustenburg platinum belt for five months last year.

The rights issue is dramatic but it may not be enough. Barclays believes the company needs to raise over $500 million to cover the cost of reducing production by 300,000 ounces and other restructuring charges.

Although the company says it has stress-tested its current plan, which will see output fall to around 650,000 ounces, another rights issue in 2018 cannot be ruled out unless platinum prices improve significantly.

For a longer-term recovery that would restore value to Lonmin's shareholders, prices may have to recover by up to 50%.

Investors following their rights are effectively betting this will happen. If it doesn't, they will have to dig deep again before long.

Andy Critchlow is a Reuters Breakingviews columnist.

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