Lonmin to cut 3,500 jobs as platinum market downturn persists

Lonmin is proposing to cut 3,500 jobs from its South African workforce in one of the largest restructurings planned by a platinum miner in response to persistent weakness in the market for the precious metal.

The downsizing outlined on Thursday would equate to a 10 per cent cut in the UK-listed miner's labour costs. They are set to test the state of industrial relations in South Africa's platinum sector, which was devastated by a five-month strike last year.

Lonmin, the third-largest platinum miner by output, is also dealing with big changes in its ownership structure.

lts largest investor, Glencore, confirmed on Thursday that its shareholders had approved a plan to divest its 23.9 per cent stake. Glencore shareholders will be given Lonmin stock in proportion to their investment in the Swiss-based commodities group.

Ivan Glasenberg, Glencore's chief executive, saw the Lonmin stake as non-core. It was accumulated by Xstrata, which Glencore bought in 2013.

Platinum - used mainly in jewellery and vehicle manufacturing - is at its lowest price in almost six years, leaving Lonmin and other producers in South Africa scrambling to cut costs while trying to avoid reigniting tension with their workforces.

"The mining industry is going through another challenging economic cycle and we need to make difficult decisions to maintain the resilience of our business and protect employment," said Ben Magara, Lonmin's chief executive.

South Africa supplies half of the world's platinum, mainly from labour-intensive deep underground shafts, where rock face miners work in tunnels less than 1.5m high.

"The underlying economics do not work in this industry today. It will take a big shake-up or shock event, a decisive reduction in capacity, to fix that," says Marc Elliott, an analyst at Investec.

Even before last year's strike, Lonmin was still recovering from the trauma of the Marikana tragedy of 2012, when 34 people were killed after police opened fire on strikers at its mines.

The further strike last year - at Lonmin and the two larger producers, Anglo American Platinum and Impala Platinum - was initiated by Amcu, a relatively new trade union.

The strike was ended by agreement on wage increases that pushed up companies' costs, while the stoppage did little to suggest that a squeeze in platinum supply could help to lift prices.

China's demand for platinum jewellery was hit by an aversion to gift-giving amid an anti-corruption purge.

Platinum's main industrial use - to scrub emissions from the engines of diesel-powered vehicles - is another difficulty. This is because diesel use faces growing opposition from some European cities because of concerns about air pollution.

While insisting that the longer-term imbalance between supply and demand should be good for prices - and could be boosted by platinum's use in incipient technologies such as energy fuel cells - the industry is taking steps to conserve cash and restructure.

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Lonmin estimates its unit cost of production this financial year will be about R10,800 ($880) per platinum ounce, leaving little margin for profitable output once investment is factored in. The company forecasts a prevailing price of R12,000/oz for the "basket" of platinum and associated metals that it mines.

Impala, the number two producer, expects prices to stay "lower for longer" and is cutting capital expenditure this year by one-third. Amplats, the market leader, is contemplating a restructuring, with proposals to exit some deep-level mines, possibly via an initial public offering.

Many analysts have been concerned about possible strain on Lonmin's balance sheet from prolonged low prices, with the benefits of a rights issue in 2012 largely eroded by the strike.

"The rights issue put Lonmin in a strong net cash position but the 2014 strike removed most of that cash surplus," said Citi analysts.

However, these analysts added that Lonmin's credit lines mean it could fund itself with more debt at a low point in the platinum cycle. Lonmin has $575m of bank facilities in place.

Lonmin's job cuts would not reduce production but the company has progressively lowered expectations for its output. Whereas a few years ago the group had hoped to raise annual production to 900,000 ounces, this year Lonmin is aiming for 730,000oz.

Lonmin lost $203m in its last, strike-hit financial year and its market capitalisation has more than halved since the start of 2014.

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