[miningmx.com] — PLATINUM producer Lonmin’s long walk back to
respectability is being seriously threatened by the sector’s mounting woes, with the
market looking to all the major players for cutbacks in production.
It is in this context that the group’s Vice President for Mining, Mark Munro, told
journalists last week it would require very difficult decisions if the group was to
amend its capital expenditure programme at this point in time.
The group’s guidance for 2012 is 750,000 oz, and it has already spent most of the
$450m capex earmarked for the year, which is part of its previously announced
$2bn expansion programme towards annual production of 950,000 oz by 2016.
The question that Munro and his CEO in London, Ian Farmer, now have to agree on
is what the capital expenditure for next year would be, and whether any cutbacks
could be made.
The group’s net debt at the end of March totalled $356m – a debt-to-equity ratio of
11%, which is very moderate for a mining company.
But the global platinum market’s annual surplus of between 400,000 oz and
500,000 oz would call for sacrifices. Munro said cutting capital expenditure at the
Saffy and Hossy shafts would result in an increase of the company’s production costs
as overheads have already been incurred.
“We have to try to find the right balance between the best of the assets on our
balance sheet, the market’s supply needs and the unlocking of long-term value,’
said Tanya Chikanza, the group’s spokesperson on investor relations.
TRANSITION
Lonmin has come a long way since its previous CEO, Brad Mills, in the early 2000s
thought it wise to operate Saffy and Hossy as mechanised shafts. Mills bought
expensive equipment and adapted the design of the two new shafts – which were
meant to herald a glorious era for Lonmin – for mechanised mining. But he made
two mistakes: firstly, the geology of underground precious metals in South Africa
was too complicated and varied for mechanised mining – and he wasn’t the first
mining chief to burn his fingers with this problem. The skills required to maintain
these advanced machines were also difficult to obtain here. Secondly, the ore on
which these two new shafts were built was predominantly the shallower UG2 ore.
The metallurgical properties of UG2 ore differ considerably from the richer Merensky
Reef. Removing the chromium from UG2 ore has for 30 years been one of
metallurgists’ greatest challenges.
The good news is that Lonmin seems to be the the first platinum producer to
overcome this problem, after struggling for years with a blast furnace that simply
couldn’t withstand the high temperatures required for extracting chromium and
other ancillary metals.
Lonmin’s No. 1 smelter has experienced no leakage since the beginning of last year.
Previously it was almost an annual occurrence that the smelter would start leaking,
had to be turned off and be entirely rebuilt using a new technique in the hope that
the furnace walls would not burst and start leaking again. Rebuilding it in this way
took up to eight months.
To put this in perspective, note that Lonmin’s larger peers, Anglo American Platinum
(Amplats) and Impala Platinum, use mixtures of 50% Merensky ore and 50% UG2
ore, and also have problems with their smelters from time to time. Lonmin mixes its
ore to 75% UG2 and 25% Merensky, which puts even higher demands on a smelter.
Correcting Mills’s biggest mistake – the conversion from mechanised mining at Saffy
and Hossy – started in 2008 when he left the company after an unpleasant board
meeting.
If a mine is designed for mechanised mining, it is very difficult and expensive to
change it. The underground tunnels of a mechanised mine, for example, are made to
house conveyor belts – not underground trains with ore trams and locomotives. Just
about all the underground tunnels have to be rebuilt.
That’s a time-consuming process, and one that requires enormous capital
expenditure. The Saffy shaft was supposed to achieve its design production capacity
of 200,000 tonnes of ore per month in 2010 already, but would now only reach this
level in 2016. To date, about R1.2bn has been spent on the conversion. Hossy is
slightly further along the curve and is now producing about 70% of its planned
quantity of ore.
Since the start of the conversion to conventional mining in 2008, the available ore
reserves in Saffy and Hossy have at least increased from 10 months of production to
nearly 20 months of production.
A third large shaft, K4, is a long way behind Hossy and Saffy on the development
curve and is now only producing about 10% of its design capacity.
– Sake24
