LONMIN_PLC(LMI.L)：RIGHTS_SIZING_THE_BUSINESS-2012-11-11.ppt

20,16,12,8,4,lonmin plc,deutsche bank markets research,rating hold sub-saharan africa south africa,company lonmin plc,date 9 november 2012 results,platinum,price at 8 nov 2012 (gbp) price target (gbp),452.80 515.00,reuters lmi.l,bloomberg lmi ln,exchange ticker lse lmi,52-week range (gbp),1,128.00 - 452.80,rights sizing the business,grant sporre,research analyst (+44) 20 754-58170 the strike impacts cash more than expected,we were looking for two aspects out of todays announcements. firstly, to what extent had the strikes impacted the companys cash burn. the answer was more drastically then we had expected to the tune of c.us$90m. secondly, we were looking for the size of the discount on the rights issue as a signal whether all shareholders were likely to follow. however the size of the discount and the commentary around xstrata means that this is not certain. adjusting for the results, we still think there is modest upside on an nav basis, but the company only trades on a sensible per in fy15. hold. the end of a painful period: fy12 results ex the strike are fair lonmin reported an underlying profit before tax of us$57m, excluding a us$159m charge for costs relating to the illegal strikes in 4q12, and also an impairment charge of us$602m for the akanani deposit. including the charge,anna mulholland, cfa research analyst (+27) 11 775-7270 rob clifford research analyst (+44) 20 754-58339 key changes,for the illegal work stoppage, we reach an underlying loss of us$(102)m,target price,490.00 to 515.00 ,5.1%,which compares to our forecast of us$(13)m - the strike had much more of an,impact than we had forecast. the companys net debt of us$421m was better than our forecast, a function of a much higher inflow from the liquidation of working capital. however, this is a temporary positive movement as management confirmed that net debt had risen to us$550m by end october. the rights issue ensures survival, but management will “sweat” to flourish lonmin announced a 9 for 5 underwritten rights issue of up to 365.5m new shares at 140p or r19.4872 per new share to raise net proceeds of us$777m.,price/price relative,we think the size is enough to ensure lonmins survival over the next three,11/10,5/11,11/11,5/12,years, in a very modestly rising rand basket price environment. however,management will need to “sweat” by cutting overheads and being very,ftse 100 index (rebased),judicious on capex, to drive significant value. given the high operating leverage however, every dollar saved will be seen on the bottom line. fair value reduced to 5.15/r67, discount to npv now removed; risks,performance (%) absolute ftse 100 index,1m -12.3 -1.1,3m -40.3 -1.2,12m -57.5 3.7,our target price was set at 1x nav, based on a life of mine dcf, using a wacc of 10%. previously we applied a 20% discount to our fair value to account for uncertainty around the timing and size of a rights issue. our target price reflects the revised fair value of 5.15/r67, down from 6.12/r81 due to a cut to our valuation of the akanani and limpopo deposits, given the impairment of akanani announced today. a key downside risk is a resurgence in worker unrest and an upside risk is higher than expected cost savings. forecasts and ratios,year end sep 30 ebitda (usdm) db eps (usd) % change p/e (db eps) (x),2012a 193 0.07 -139.7% 193.9,2013e 93 -0.29 5.3% ,2014e 233 0.12 -21.7% 62.2,2015e 352 0.47 15.3,source: deutsche bank estimates, company data _ deutsche bank ag/london all prices are those current at the end of the previous trading session unless otherwise indicated. prices are sourced from local exchanges via reuters, bloomberg and other vendors. data is sourced from deutsche bank and subject companies. deutsche bank does and seeks to do business with companies covered in its research reports. thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. investors should consider this report as only a single factor in making their investment decision. disclosures and analyst certifications are located in appendix 1. mica(p) 072/04/2012.,9 november 2012 platinum lonmin plc,model updated:09 november 2012,fiscal year end 30-sep,2010,2011,2012,2013e,2014e,2015e,running the numbers,financial summary,sub-saharan africa south africa platinum lonmin plc,db eps (usd) reported eps (usd) dps (usd) bvps (usd) weighted average shares (m) average market cap (usdm),0.70 0.57 0.15 13.8 197 5,335,1.11 1.34 0.15 14.5 202 5,177,0.07 -2.01 0.00 12.3 203 2,885,-0.29 -0.29 0.00 13.2 203 1,466,0.12 0.12 0.16 14.5 203 1,466,0.47 0.47 0.15 16.1 203 1,466,reuters: lmi.l,bloomberg: lmi ln,enterprise value (usdm),6,083,5,822,3,563,2,451,2,686,2,919,valuation metrics,hold,p/e (db) (x) p/e (reported) (x),38.7 47.7,23.0 19.0,193.9 nm,nm nm,62.2 62.2,15.3 15.3,price (8 nov 12) target price 52 week range market cap (m),gbp 452.80 gbp 515.00 gbp 452.80 - 1,128.00 gbpm 918 usdm 1,466,p/bv (x) fcf yield (%) dividend yield (%) ev/sales (x) ev/ebitda (x) ev/ebit (x),1.91 nm 0.6 3.8 17.4 26.7,1.13 4.2 0.6 2.9 13.5 19.0,0.73 nm 0.0 2.2 18.5 53.2,0.55 nm 0.0 1.6 26.4 nm,0.50 nm 2.2 1.4 11.5 27.1,0.45 nm 2.1 1.4 8.3 13.6,company profile,income statement (usdm),lonmin specializes in the mining of pgms (platinum group metals). the group operates a number of platinum mines, concentrators, smelters and a refinery within its core marikana operations, all situated in the bushveld igneous complex of south africa. after declining production from 2006, the companys new growth target is 950koz of platinum ounces by 2015 price performance 20 16 12 8 4,sales revenue gross profit ebitda depreciation amortisation ebit net interest income(expense) associates/affiliates exceptionals/extraordinaries other pre-tax income/(expense) profit before tax income tax expense minorities other post-tax income/(expense) net profit db adjustments (including dilution) db net profit,1,585 359 350 122 0 228 1 8 3 0 240 118 10 0 112 26 138,1,992 425 431 124 0 307 -5 9 -18 0 293 -28 48 0 273 -47 226,1,614 202 193 126 0 67 -14 4 -755 0 -698 -148 -140 0 -410 425 15,1,563 102 93 132 0 -39 -52 8 0 0 -83 -25 1 0 -59 0 -59,1,977 242 233 134 0 99 -53 7 0 0 53 16 13 0 24 0 24,2,113 361 352 137 0 215 -49 6 0 0 172 52 24 0 97 0 97,nov 10,may 11,nov 11,may 12,cash flow (usdm),cash flow from operations,80,630,263,-193,-2,222,lonmin plc margin trends 24 20 16 12 8 4 0 -4,ftse 100 index (rebased),net capex free cash flow equity raised/(bought back) dividends paid net inc/(dec) in borrowings other investing/financing cash flows net cash flow change in working capital balance sheet (usdm),-264 -184 234 -22 123 0 151 -229,-410 220 1 -40 -223 -30 -72 232,-404 -141 0 -45 424 1 239 275,-175 -368 0 0 175 10 -183 -259,-220 -222 0 0 250 0 28 -165,-400 -178 0 -31 100 0 -109 -30,10,11,12,13e,14e,15e,cash and other liquid assets,148,76,315,184,212,103,ebitda margin growth & profitability,ebit margin,tangible fixed assets goodwill/intangible assets associates/investments other assets total assets interest bearing debt other liabilities total liabilities shareholders equity minorities total shareholders equity net debt,2,199 1,091 576 810 4,824 523 1,219 1,742 2,709 373 3,082 375,2,742 1,106 400 538 4,862 310 1,211 1,521 2,930 411 3,341 234,2,889 502 578 339 4,623 736 1,072 1,808 2,488 257 2,745 421,3,107 502 578 899 5,270 911 1,373 2,284 2,682 258 2,940 727,3,414 502 578 732 5,437 1,161 1,042 2,203 2,941 271 3,212 949,3,927 502 578 782 5,892 1,261 1,065 2,326 3,273 295 3,568 1,158,key company metrics,solvency,sales growth (%) db eps growth (%),49.2 na,25.7 59.0,-19.0 -93.4,-3.2 na,26.5 na,6.9 307.3,35 30 25 20 15 10 5 0,70 60 50 40 30 20 10 0,ebitda margin (%) ebit margin (%) payout ratio (%) roe (%) capex/sales (%) capex/depreciation (x) net debt/equity (%),22.1 14.4 26.3 8.6 16.7 2.2 12.2,21.6 15.4 11.1 20.7 20.6 3.3 7.0,12.0 4.2 nm -30.6 25.0 3.2 15.3,5.9 -2.5 nm -4.4 11.2 1.3 24.7,11.8 5.0 136.5 1.8 11.1 1.6 29.5,16.7 10.2 31.4 7.2 18.9 2.9 32.4,10,11,12,13e,14e,15e,net interest cover (x),nm,61.4,4.8,nm,1.9,4.4,net debt/equity (lhs) grant sporre,net interest cover (rhs,source: company data, deutsche bank estimates,+44 20 754-58170 page 2,,deutsche bank ag/london,9 november 2012 platinum lonmin plc flourish or merely survive? fy12 results: the end of a painful period lonmin had already reported production results for the year to september 2012 on 30 october, so todays results were merely a confirmation of the underlying financials attached to the known production and sales numbers. lonmins production for fy13 - fy15, associated capex and cash costs for fy13 had already been disclosed. we were looking for two key items out of todays results; the cash burn due to the extended strike and of course the terms of the rights issue. overall, the results are reflective of the painful 2012 had by lonmin. the company reported an underlying profit before taxation of us$57m, but this excludes a us$159m charge for costs relating to the illegal strikes in 4q12, and also an impairment charge of us$602m for the akanani deposit. if we include the charge for the illegal work stoppage, we reach an underlying loss of us$(102)m, which compares to our forecast of us$(13)m, thus the strike had much more of an impact than we had forecast. the companys net debt of us$421m was better than our forecasts, a function of a much higher inflow from the liquidation of working capital than we had estimated. however, this is a temporary positive movement as management confirmed that net debt had risen to us$550m by end october. this increase in debt levels, in our view, serves to highlight the need for an equity capital raising. the “discount” on the rights issue was higher than our expectation which we think signals a degree of uncertainty that all major shareholders will participate. we discuss this in more detail later on. figure 1 shows the results compared with our estimates. our estimates include an element of the “exceptional” costs caused by the strike, so the fact that underlying earnings were better than our forecasts is perhaps not a true reflection of the result. figure 1: lonmin fy12 results vs. our forecasts,2011,2012 % chg y-,2012e,% diff,on-y production,mined platinum in concentrate refined platinum incl. toll refined platinum sales cash costs: c1 pre-base metals credits,koz koz koz r/pgm oz,719 731 721 7,534,680 687 702 8,507,-5.5% -6.0% -2.6% 12.9%,671 671 686 8029,1.3% 2.4% 2.3% 6.0%,financials,revenue cost of sales underlying ebitda underlying ebit underlying eps dps net debt capex,us$m us$m us$m us$m usc usc us$m us$m,1,992 1,681 433 311 112 15 234 408,1,614 1,547 193 67 7.4 - 421 404,-19.0% -8.0% -55.4% -78.5% -93.4% -100.0% 79.9% -1.0%,1542 1420 122 -1 -18.8 0 460 430,4.7% 8.9% 58.2% -8.5% -6.0%,source: deutsche bank estimates, company data,deutsche bank ag/london,page 3,9 november 2012 platinum lonmin plc operating performance was solid despite strike interruption as reported last week, lonmin produced saleable platinum in concentrate of 680oz, down 5.5% y-on-y and sold 702koz of platinum in the period, down 2.6% y-on-y. the latter was despite a loss of 110koz of mined platinum from the strike at marikana in august and september, which was mitigated somewhat by the draw-down of pipeline stocks. notwithstanding the strike disruption, lonmin continued to improve its development, with immediately available ore reserves at 3.3m centares, up 14% y-on-y. this equates to just over 18 months of development, the highest level of development (and therefore mining flexibility) that lonmin has had in the past six years: figure 2: immediately available ore reserves,3.5 3 2.5 2 1.5 1 0.5 0,20 18 16 14 12 10 8 6 4 2 0,fy07,fy08,fy09,fy10,fy11,fy12,centares,months,source: lonmin lonmin reported a good processing performance last week in its 4q12 production report: to recap, there has been a sustained improvement in concentrator recovery rates, up to 82.4% by end fy12; in terms of smelting, the no. 1 furnace was stable throughout the year and, having been kept warm during the strike, is now back to normal operating levels; the no.2 furnace was commissioned successfully, with first slag tapped 11 july 2012 and first matte tapped 16 july 2012. in terms of costs, lonmins group cost per pgm ounce produced increased 12.9% to r8,507. this includes the us$159m of costs associated with the work stoppage as well as reflecting the agreed fy11-12 8.5% wage increase and eskom tariff increases of 24%. the increase was mitigated somewhat by a 15% weakening of the zar/usd rate y-on-y. lonmins estimate of the normalized cost increase; excluding events at marikana were 5.2% yoy. if this were the case, that would have been a very good performance. cash and balance sheet as at 30 september 2012, lonmin had net debt of us$421m, comprising us$739m of drawn facilities, less us$315m of cash and equivalents. this represents an increase of us$187m y-on-y, driven in particular by a drop of us$382m in operating cash flow, capex of us$408m (flat y-on-y), offset by a release of working capital which saw a positive us$278m swing.,page 4,deutsche bank ag/london,9 november 2012 platinum lonmin plc despite the fact that net debt was slightly lower than our forecast of us$460m, mainly due to the swing in working capital, management confirmed that the current ramp-up at marikana mine is now consuming working capital and by end october net debt had risen to us$550m. in terms of future cash uses, lonmin reiterated its plans for capex of us$175m in fy13. much of the capex in the near term will be focused on the saffy shaft which is only at 50% utilization and struggling with difficult ground conditions hence the highest cost shaft. offsetting this cash outflow are lonmins plans to cut operating costs by r200m per year from a review of its operating model, and the companys pre-paid sale of gold production. lonmins contract to sell forward its gold production remains in place and was unaffected by the work stoppages - as announced in 1h12, lonmin entered into a pre-paid sale of 75% of its current gold production for the next 54 months. under the contract, lonmin will deliver 70.7koz of gold for the upfront payment of us$106.7m at an average realized price of c.us$1,510/oz. figure 3: net debt increased by us$187m in fy12,100 0,107,-27,-100,202,171,-200 -408 -234,-300 -400,-176,-46,-500,us$m,-10,-421,opening underlying special,working,deferred,net,capex,equity tax/other closing,net debt ebitda,costs,capital,revenue financing,dividends,net debt,source: lonmin, deutsche bank fy13 outlook: production, cost and capex plans reiterated lonmin expects to mine 680koz platinum in concentrate in fy13, and use 20koz of this production to rebuild its pipeline stocks which were drawn down throughout the strike, thus sales are expected to be 660koz. this compares with our previous forecast of 708koz. we note that lonmin management see the ramp-up post the strike, progressing well ahead of expectations, and that october productivity was at 85% of pre-strike run rate levels a commendable performance in our view. thereafter, lonmin aims to grow production to 750koz for fy14 and fy15 and up to 800koz for fy16. on the above production base, the company expects unit costs to average r9,350 per 4e oz in fy13. this is higher than our previous estimate of r9,252/4pge oz. cost savings will be sought throughout fy13 from a review of lonmins operating model, procurement and productivity initiatives. lonmin expects steady-state cost savings from these initiatives from fy14, including r200m per annum from the review of the operating model (primarily from reducing headcount, in our view), r100m from procurement initiatives and an unspecified amount from a new “productivity,deutsche bank ag/london,page 5,9 november 2012 platinum lonmin plc enhancement programme”. in lonmins view, these cost saving initiatives will keep unit cost inflation to below wage increase levels beyond fy13 we assume this means less than 8%. given the high operating leverage, management can release significant value by addressing the fixed cost based, and even modest savings will be seen on the bottom line. management reduced its guidance for near-term capex, planning to spend us$175m in fy13, us$210m in fy14 (as saffy shaft ramps up) and us$400m in both fy15 and fy16 as k4 shaft ramps back up (currently on care and maintenance). our forecasts reflect this plan our assumptions are summarised in figures 4 6:,figure 4: lonmins revised production plan,figure 5: lonmins capex profile,1000 950 900 850 800 750 700 650,koz,500 450 400 350 300 250 200 150 100 50,us$,0,previous forecast source: deutsche bank estimates, company data figure 6: lonmins unit cost evolution,new forecast,source: company reports, deutsche bank,we model unit cost inflation,14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% unit cost inflation - lhs source: deutsche bank estimates, company data page 6,unit cost r/4 pge oz - rhs,16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0,above 8% over the next 7 years, although on average lower than 2011 and 2012 deutsche bank ag/london,9 november 2012 platinum lonmin plc rights issue terms and timetable announced lonmin announced the terms of its proposed rights issue: 9 for 5 underwritten rights issue of up to 365,503,264 new shares at 140p or r19.4872 per new share to raise net proceeds of us$777m; net proceeds to be used to repay us$300m term facility in full and repay some of us$400m revolving credit facility; upon receipt of the net proceeds, the agreed amended debt facilities and amended covenants will come into effect. covenants will now be applied on the basis of “consolidated tangible net worth”, net debt