Despite the best efforts of many “anal”ysts and hedge funds (given the very large short position there currently is in the stock) to push Lonmins shares decisively lower in the last several weeks, it is intriguing to me that the stock price seem to be hugging the 500p firmly (see 10 day chart below).
There have also been numerous intra day spikes of 3-5% within minutes. This smells to me that somebody knows an announcement is imminent, either the rights issue details are about to be released or, could Lonmin have in fact been re-approached by Glenstrata given that they already own 24% from their aborted bid in 2008 (and which was at a price north of £20 lets not forget)?
The shares presently trade at a price to tangible book value (the only way to value commodity plays) of less than 0.7 times – marking intangibles and goodwill at zero. If you were waiting in the wings and looking to play the platinum cycle then you have got to fancy now is the most perfect time to strike.
Consider that Angloplats are looking to potentially close some of their SA platinum mines and, with the recent severe production disruption, it looks to us as if the platinum price is going only one way on a 3 year view. As the book value discount and price to NPV (net present value) of their proven reserves (around 0.5 times depending on the discount rate used) pay testimony to, Lonmin has never been cheaper.
If one assumes that the production disruption at Marikana and the labour issues are not likely to be regular future occurences then the present share price is, in our opinion, materially out of kilter with the true fundamental worth. Take a look at below which illustrates that the company was operating at a very healthy level of interest cover (8.4 times v 11.3 times in 2011) earlier this year and there is no reason to expect this will not again be the case unless platinum demand drops off a cliff.
One other thing that has not been mentioned of late is that, as the platinum price is traded in dollars (so Lonmin receives sale proceeds in this currency), the company’s primary cost base is however in rand. Thus, a weakening rand is a material positive to the Group. Indeed last year the weakening of the rand from just under 7 to the dollar to 8, produced a $60m positive impact on operating costs. With the rand weakening to 8.63 in recent months, this is another overlooked positive for the company. In fact, the company actually stated the following in their interim results statement –
“The approximate effects on the Group’s results of a 10% movement in the Rand to US Dollar based on the year-to-date 2012 average exchange rate would be as follows:
EBIT+/-$67m Profit for the year+/-$39m EPS (cents)+/-19.5c”
Thus, we can expect a positive effect on the results to offest to a degree the likely increased debt servicing costs as a result of the covenant issues. Bear in mind however that the weighted average funding cost of 4.6% is still a great rate to be borrowing at.
To conclude, with a reducing supply of platinum, a weakening rand, the massive discount to the current NPV of the Group’s platinum reserves and the discount to tangible book value, we personally fail to see any further downside to the shares. With demand for platinum expected to stabilise into 2013, and with the new Euro 6 emission legislation requirements for the 2014 model year, this will start to provide a boost for platinum in Europe in 2013 together with enhanced Chinese demand and the US also looks to be creating significant upward pressure on platinum from the auto industry into 2013. In short, 2013 could be a bumper year for Lonmin and the remaining platinum suppliers.
If a rights issue is announced of say a 1 for 2 at 450p then we’d expect the stock price to rise sharply in any event as investors begin to refocus on the company’s asset base and not liquidity fears. Fears that are overblown given that the company’s gearing level is only just into double digits and that the covenant issues are based purely on a test of debt to EBITDA levels – an EBITDA level that is artificially & likely only temporarily depressed.
Ian Farmer, CEO
With the company currently bereft of its CEO Ian Farmer who is seriously ill, the stock is a clear acquisition target to us. The lack of news recently on the rights issue is posing the question in my mind – have they already been approached?