Rising costs and softer PGM prices hit Lonmin

Lonmin, the world's third largest platinum producer, said production in the first three months of 2012 was little changed from a year earlier, despite losing 170,000 tonnes of production because of safety stoppages.

Total tonnes mined in the period - the second quarter of Lonmin's fiscal year - was 2.9m tonnes. Total tonnes milled in the quarter increased marginally to 3.0m, a 0.8% increase from the prior year. Underground tonnes milled increased by 177,000 tonnes, or 6.7%, to 2.8m tonnes, but this was largely offset by the 154,000 tonnes reduction in open-cast tonnes milled.

Output of total platinum metal in concentrate increased by 3.9% compared to the prior year period, but the refined platinum production was temporarily affected by a smelting stock build up due to an increase in sulphur in the feed to the smelter. This occurred as a result of a greater percentage of ore from the Merensky mine being milled due to a series of Section 54 and internal safety stoppages. The smelter is expected to operate at its normal levels in the fiscal third quarter as the ore mix returns to normal levels. The rate of stoppages reduced towards the end of the quarter as the benefits of dialogue around Section 54 safety notices with South Africa's Department of Mineral Resources (DMR) started to come through.

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The lost time injury frequency rate for the quarter was 4.69 incidents per million man hours versus 4.67 for the first quarter of fiscal 2012.

Platinum sales at 225,539 ounces were 10.5% lower than the prior year period as a result of production constraints and stock movement in the quarter. Total Palladium Group Metal (PGM) sales decreased by 15.4% year-on-year to 418,988 ounces.

The US dollar basket price at $1,164 during the quarter was 12.6% less than the prior year quarter. The corresponding rand basket price was 3.5% lower than the prior year period.

"We expect momentum to build up in the second half and we are maintaining our guidance, absent any abnormal disruptions, of safely and profitably producing around 750,000 platinum ounces for the full 2012 with a unit cost increase per PGM ounce of around 8.5% - in line with wage settlements," the group[ said.

At the same time as its production report, the group published its interim results which showed revenue in the six months to March 31st fell to $751m from $938m the year before.

Underlying profit before tax tumbled to $6m from $149m a year earlier, and underlying earnings per share turned negative, with a loss of 6.9 cents per share compared to positive earnings per share of 45.0 cents at the half-way stage last year.

The group said that it continues to face inflationary increases in its costs at the same time that the pricing environment for PGM remains unhelpful, thus affecting Lonmin's profitability and cash flows.

The price of platinum weakened by 10% from an average of $1,745 per ounce in first half of fiscal 2011 to $1,566 per ounce in the first half of fiscal 2012, while palladium declined 11% from $734 per ounce to $655 per ounce and rhodium lost 36% year on year to $1,524 per ounce. However, the price weakness in US dollar terms was largely offset by a 14% weakening of the South African rand against the dollar, resulting in the overall rand basket price declining by 0.5% to R9,600 per ounce over the corresponding period.

Net debt rose to $356m from $296m a year earlier, and gearing increased to 11% from 9%.

"Whilst we are continuing to invest in our growth shafts at Marikana to build our production profile and ultimately achieve the optimal cost profile for our operations, we do so with an element of caution in a market where demand is currently soft. In our view the medium to long term PGM market fundamentals however, remain sound and this strategy will benefit our shareholders as the market improves. We are therefore predisposed towards the continuation of our investment programme but we will defer capital to the extent deemed necessary to remain within prudent debt parameters," said Ian Farmer, Chief Executive Officer of Lonmin.

The group has altered its view that the platinum market will be marginally over-supplied in 2012, and now expects it to be slightly under-supplied, largely as a result of supply disruptions from South Arica.

JH