Lonmin Closes Mines and Defers Projects as EPS Rises

Lonmin, the world's third-biggest platinum producer, said on Tuesday it will close some high-cost mines and cut costs to survive a market downturn, after posting a 19% rise in annual profit.

The company, seeking to reassure shareholders after repeated cuts in sales targets and an attempted takeover bid, announced a sweeping restructuring with a slimmed down management structure.

"Today we are exercising producer discipline by announcing that we will close those portions of our operations which are uneconomic and cut back on capital expenditure. We are also changing our approach to mechanised mining and cutting costs across the business," Chief Executive Ian Farmer said.

The company scrapped its final dividend to save cash, deferred expansion projects and said capital spending would fall by 34% to $250m.

Lonmin shares, which have given up three quarters of their value since early September, fell 5.7% to 824.5 pence by 10.27 GMT, underperforming a 3.9% decline in the UK mining index.

The mining sector, which saw booming prices over the past several years as demand surged from China, has been hit by a sharp pullback in prices as metals consumption slides.

Analyst Simon Toyne at Numis Securities said even with the proposed cutbacks, Lonmin would likely see a slight operating loss in the 2009 fiscal year.

"We therefore see the measures announced today as a 'first pass' at aligning the business with current conditions. If those conditions continue, more drastic action will be necessary."

Stop chasing volume

Underlying EPS rose to 351.9 cents for the 12 months to end-September from 295.9 cents the previous year as stronger platinum prices for most of the year outweighed lower output.

Lonmin, whose biggest shareholder is mining group Xstrata with 25%, warned on 30 October that sales would be flat during the 2009 fiscal year after the firm sold 726,918 ounces of platinum in 2008.

The company, which owns mines in South Africa, had originally hoped to sell 900,000 ounces of platinum in 2008, but cut the target several times due to operational problems.

Farmer, formerly chief strategic officer, took over from Brad Mills on 29 September following criticism of management by analysts and investors, including predator Xstrata.

"We're going to stop chasing volume and we're only going to produce added-value ounces. We're therefore announcing a suspension of all of our open cast operations," Farmer told a conference call. The firm also said it sees its Limpopo mine as uneconomic and it was holding talks with unions on the issue.

He said the review addressed past operational problems, such as too great a reliance on mechanised mining, and also the current weak market conditions.

Platinum has been hit hard as the downturn hammers the sector's top customer, the auto industry, which uses platinum to clean exhaust fumes in catalytic converters. Prices have slid 65 percent since touching a peak of $2,290 per ounce in March.

Farmer said Lonmin did not expect any quick return to high prices. "We believe the market outlook will continue to be challenging and not we're planning on any material recovery in metal prices before 2010 at the earliest."

He called on rivals to join Lonmin and cut back production. Number one producer Anglo Platinum told Reuters on 15 October that it did not plan to trim output due to lower prices.

Xstrata walked away from a formal $10bn bid for Lonmin on 1 October, but boosted its stake in the company, setting the scene for a possible future bid.

Farmer said one meeting had been held between Lonmin chairman John Craven and Xstrata CEO Mick Davis, during which Davis said Xstrata planned to be a supportive shareholder.

Farmer told a presentation that Lonmin would eye possible takeover possibilities, but the restructuring would remain the primary focus for now.

By Eric Onstad, Reuters.