Citigroup thinks there is a “high likelihood” that under-pressure South-Africa-focused platinum group metals (PGM) miner Lonmin PLC (LON:LMI) will have to make another cash call later this year, leading it to downgrade its rating.
UBS cut its stance for the FTSE 250-listed firm to ‘sell’ from ‘neutral’ after chopping its target price back by 20% to 95p from 119p and reducing estimates following a recent update.
In reaction, Lonmin shares dropped 4.4%, or 4.25p lower to 93.5p in late morning trading.
In a note to clients, the US bank’s analysts said: “As we did in January 2012 and March 2015, we are again cautioning investors that there is a high likelihood that LON will have to approach shareholders for further capital in the next 6-12 months, especially if current PGM prices prevail.”
They added: “We estimate that LON’s tangible net worth (TNW) could fall below US$1.1bn when it reports FY17 results to Sept-2017.
“This level is significant since it would trigger LON’s debt covenants. We think this could result in LON’s fourth rights issue in eight years.”
UBS unsure about investor appetite to support another rights issue
The analysts said: “We are unsure about investor appetite to support another rights issue. This could call into question the future shape of LON’s business.”
They concluded: “We argue that, as the industry’s highest-cost player and with limited strategic flexibility, LON remains structurally challenged.”
In its first quarter update last week, Lonmin said it had warned lenders that it is in danger of breaching a rule on its debt facilities that means its consolidated TNW cannot fall below US$1.1mln.
READ: Lonmin reports disappointing first quarter production and warns on debt
The company’s TNW fell to US$1.4mln at 31 March, and Lonmin said further adverse movements could result in an additional impairment, which could push TNW lower.
The warning came as the miner reported a drop in first half production and wider pre-tax losses as revenues fell by 6%.
Lonmin’s first-quarter pre-tax losses grew to US$199mln, up from US$21mln in the same period a year earlier, in part due to an impairment charge of US$146mln as a stronger rand drove up costs in US dollar terms.