407m reasons to sell Lonmin PLC

Tuesday, Nov 10 2015 by

It is now clear that Lonmin’s management has admitted to the ‘huge’ problems facing the third biggest platinum producer.
Yesterday, they dropped ‘bombshell’ on Lonmin’s shareholders by discounting its latest Rights issues at 97% to the current price.
Now the discount is at 90%, given the dramatic decline in share price in 36 hours!

I like to point out several things to Lonmin’s shareholders even though it is a bitter pill to swallow about the Rights issue.
The FT did a piece on Lonmin (albeit a very brief one) about the Rights issue. They alluded that 10% of the issue will go the bankers or $38m of shareholders’ cash (like they haven’t suffered enough!).
Also, $135m of the proceeds goes directly to banks paying down Lonmin’s US dollar facility of $225m.
So, only $234m (£155m) of the Rights issue goes into the company’s coffers.

Is there any value in Lonmin?
Right now the answer is a big ‘NO.’
The reason being is 27bn new issues flooring the market for starters.
Secondly, there’re uncertainties surrounding the Rights issues. What I mean is: Would current shareholders fork out more money for Lonmin, despite seeing their current shareholdings of Lonmin being decimated.
To phrase this different: Are current shareholders willing to fork out a further £3,000 for every £1,000 they owned in Lonmin’s shares (based on last week market value)?
Or, would current shareholders put MORE good money after bad money?

But what will happen if Lonmin’s shareholders don’t take up the Rights issue?
Six days ago we had our answer from Lonmin’s management and that would be to go bankrupt!!

More importantly, this isn’t the first time Lonmin did a Rights issue! Back in 2012, the company raised $767m in fresh equity at £1.25/share.
The surprising thing about the 2012’s Right issue is the major shareholders ponied up the cash while its minority shareholders didn’t take up any of its Rights, therefore got immediately diluted.


Source: Lonmin’s annual reports.


So who is this mysterious shareholder?

Well it’s Incwala Platinum Limited (IP), a mining investment vehicle that has a vested interest in Lonmin’s subsidiaries (more below).

Here is an excerpt from my piece on Lonmin about its HDSA receivables:


Further investors warning ahead


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Lonmin Plc is a producer of platinum group metals (PGMs). The Company is engaged in the discovery, extraction, refining and marketing of PGMs. The Company's segments include PGM Operations, Evaluation, Exploration and Other. Its geographical segments include The Americas, Asia, Europe and South Africa. The PGM Operations segment includes operational mines and processing facilities, which are located in South Africa. The PGM Operations segment's activities are integrated and designed to support the process for extracting and refining PGMs from underground. The Evaluation segment covers the evaluation through pre-feasibility of the economic viability of newly discovered PGM deposits. Its evaluation projects are based in South Africa. The Evaluation segment relates to the Akanani asset, which is located in South Africa and is in the evaluation stage. The Exploration segment covers the activities involved in the discovery or identification of new PGM deposits around the world. more »

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5 Posts on this Thread show/hide all

Novice Investor 10th Nov '15 1 of 5

Orangetree, the rights issue is underwritten isn't it; although I've not read all the small print...


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Orangetree 10th Nov '15 2 of 5

In reply to post #111177

You are right it is being underwritten. But the dilution to the current share price is severe.

Wait until the shares drop to 1.2 to 1.5 pence per share (which values the business at £350m-£420m) before considering them.

IMO, in the medium term Lonmin's shares will go sub 1p per share.


Blog: Walbrock Research
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cig 10th Nov '15 3 of 5

In reply to post #111195

Am I missing something or are you saying they're a strong buy at the current price of 1.17? (if you buy 1 share at 9p to get the rights to 46 1p shares and participate, you pay an average price of (9+46*1)/47 = 1.17p for your 47 shares.

(Does anyone know if you actually can participate in the rights issue if you buy now?)

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Orangetree 10th Nov '15 4 of 5

In reply to post #111198

Nope, I'm saying the share price will drop to that level.

As for participating in the Rights issue, you have to have owned the shares before they made the announcement because anyone can buy now at 1p and sell at 8p which is a big arbitrage. LOL

I like to point out Lonmin's previous Rights issue in 2012 @ £1.25 per share did go too well! So, don't hold your breath that management is going to turn the business around.


Blog: Walbrock Research
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cig 10th Nov '15 5 of 5

In reply to post #111201

If shares are to "drop" to 1.2-1.5 and the (implied) price today is 1.17 it is clearly a good deal.

There's no arbitrage even if we are before the exdate (as I expect, otherwise the price would be closer to 1p). The current shares are effectively options to participate in the rights issue: basically in 9p for old shares there's about 1p for the one new share you will get anyway and 8p for the option to buy 46 more. You just cannot price the current share by comparing its nominal value with the estimated value of the new shares after the issue.

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