Sibanye’s Takeover of Lonmin May Fall Through, Liberum Says

JOHANNESBURG (Capital Markets in Africa) – Sibanye Gold Ltd.’s deal to buy Lonmin Plc is at risk of falling apart as the struggling South African platinum miner burns through cash, according to Liberum Capital Ltd.

One of the conditions of the deal is that Lonmin is net cash positive, but because of low metals prices and the strength of the rand, the company is burning through cash, said analysts in a note on Monday.

“At the current rate of cash burn Lonmin will be pushed into net debt before the year, scuppering the proposed merger before it has a chance to complete,” wrote Ben Davis and Richard Knights.

Metal prices, such as platinum and palladium, need to increase by 10 percent to 15 percent, for Lonmin to be cash-flow neutral, the analysts said. They believe that’s unlikely to happen, adding that if prices stay near current levels, the company will be in debt by September.

Lonmin “has adequate liquidity to see it to the completion of the transaction,” spokeswoman Wendy Tlou said Wednesday. The company had net cash of $63 million at the end last year and a covenant waiver from lenders until February 2019.

Another problem for the Lonmin and Sibanye deal is the fraught relationship between Lonmin, its main worker union and new President Cyril Ramaphosa. The companies have said 12,600 jobs are at risk in the next three years because of old, unprofitable shafts that need to be closed. That will bring “multiple social issues” and will make it tough for the deal to get political approval, the analysts said.

For Sibanye, a failed takeover would be a major setback for Chief Executive Officer Neal Froneman. The company is under pressure to reduce debt after a rapid-fire series of deals that transformed the company from a staid and steady gold producer to a diversified precious-metals miner with both southern African and U.S. assets.

“Sibanye’s bold ambitions have stopped being rewarded by the market,” Liberum said. “If Lonmin is in the red before the deal closes, it is going to make hitting its targets even harder.”

Source: Bloomberg Business News