Lonmin: analysts cautious after disappointing Q3 production

City analysts responded to yesterday’s interim management statement from Lonmin (LON:LMI), particularly the firm’s “disappointing set of production data” for the third quarter, with caution.

J. P. Morgan advised ‘holding’ the shares while Goldman Sachs said it was putting its estimates, price target and rating (currently ‘neutral’) for the firm “under review”.

FTSE100-listed Lonmin – a South Africa-focused miner of platinum group metals such as palladium, iridium and platinum itself – revealed yesterday that during its third quarter (to 30 June) momentum of the business was affected by two fatalities in April as well as an illegal industrial stoppage in May at its Karee operation.

The firm said it had since made good progress in restoring production and expects to be back to normal operating levels by August. It added that considerable progress has been made with safety initiatives it has embarked on and that it is continuing to intensify its focus on these initiatives.

Underground operations at Marikana produced 2.4 million tonnes during Q3 2011 – a decrease of 8.1 per cent when compared with Q3 2010. This decrease was across all of the underground mining operations.

The overall reduction at Karee was 7.2 per cent, when compared with Q3 2010, due to the industrial action, which resulted in a loss of 258,000 tonnes of production.

Meanwhile, production at Lonmin’s Westerns, Middlekraal and Easterns operations saw a total decrease of 8.5 per cent compared with Q3 2010 as challenging ground conditions and mechanical breakdowns persisted.

Lonmin stressed that since the resumption of normal operations at Karee, it has made steady progress. It said that it has gained confidence that it will achieve its adjusted full-year guidance of around 720,000 platinum ounces for its current financial year (after producing 166,832 ounces of total refined platinum during Q3 2011), in the absence of further safety stoppages and strike actions affecting its operations.

The firm added that it was also now able to clarify the impact of the reduced production caused by the Karee disruption on its unit costs. It has increased its guidance from an annual increase of around eight per cent to one of around 11 per cent in its unit costs for the full year.

J. P. Morgan said that the numbers “are not good” but that this was “for reasons that have been well flagged and which centre around enforced stoppages to production during the period”. Meanwhile, it said that investors “should be relieved” that there is no further changes to Lonmin’s full-year guidance of 720,000 ounces of platinum and that the increase in unit cash costs to 11 per cent “is to be expected and reasonable given inflationary pressure right now”.

The investment bank added that Lonmin’s investment case “rests very heavily on a recovery in PGM prices, the lack of which continues to surprise us in this potentially weak currency environment” and that it would “advise holding until its seemingly inevitable arrival”.

Goldman Sachs said it was expecting 195,000 platinum ounces in refined metal for the quarter against the reported 160,000 ounces that Lonmin reported. “This is a disappointing set of production data,” said the bank. “Production disruptions from industrial action [are] increasing in South Africa. The impact is felt in the weeks in the run up to and the weeks following the actual strike as worker productivity falls.”

Consequently, the bank said it was reviewing its estimates, price target and rating for Lonmin.

J. P. Morgan reduced its adjusted earnings per share estimate for Lonmin to US$0.59 from US$0.77. It has a price target of 1,600 pence for the shares, which were trading for 1,332 pence each at 1:02pm today.