Lonmin could a basket case for not investing in South Africa

South African troubled platinum producer, Lonmin Plc has responded to investors deliberate refusal to support a rights issue announced last month in an effort to raise $400 million to help reduce its debt exposure as the company is battling to plug the seepage on its financial statements following a plunge in the price of platinum that's resulted in the company being forced into a corner.

I touched on the topic briefly in yesterday's blog where I was discussing the possibilities of seeing a revival in the price of most commodity prices after an unusual strength in the dollar and lack of demand coming out from China.

The ailing platinum producer has had it's fair share of negative press over the past three years with the most notable being the massacre of 34 miners in Marikana who were gunned down by the police following an illegal strike over wage demands. Since then the spotlight has been firmly on the platinum sector and more importantly Lonmin management.

Platinum producer Lonmin plunges to a record as investors exit before rights offer https://t.co/vSrQa7pa1S #mining

— BN Commodities (@BNCommodities) November 10, 2015

Government's role in pressuring the major mining players in the platinum industry to hold out on retrenchment has led the company to seek out the option of borrowing debt to cover it's cost as the platinum price continues to tumble leading to a financially dire situation. The company has nowhere else to turn except shareholders who are refusing to budge after footing a previous capital raising exercise only a few years ago to the tune of $800 million.

I tend to sympathise with shareholders anger after placing its trust with management who have only squandered the cash to appease political role players without taking a firm stand on what would be deemed in the best interest of shareholders who retain the biggest risk out of all role players.

The deal however has been underwritten by the government investment arm PIC (Public Investment Corporation) as well as Standard Bank and JPMorgan & Chase but to name a few. This was enough to satisfy shareholders only momentarily as management proposed that the rights issue will be priced at 1 pence or 22 South Africa cents adding that every 1 share held will entitle the shareholder who takes up the offer to 46 new shares.

Following the rumblings in sentiments pre-announcement of the details of the rights issue, management basically came to the conclusion the only chance it has to raise the necessary funds is to force the hand of shareholders by offering such a significant discount in the price that it would result in complete dilution of a shareholder's stake if they didn't take up the offer which does smack in the face of shareholder confidence

Lonmin CEO Ben Magara told The Money Show last night shareholders have no choice but to follow rights. Wrong. They can sell. And they are...

— Bruce Whitfield (@brucebusiness) November 10, 2015

Shareholders are voting with their feet today and have smacked the price of the stock by a whooping 35%  today as they show disapproval of management's tactics. If management is shovelling out such distressed actions in response to no confidence on behalf of shareholder you really have to wonder how much longer the company has as a going concern.

We have to face a number of realities that have caused the situation to spin out of control as it has, one being that the government's role has only made things worse instead of improving it. At the time when retrenchments were vehemently shouted down, there was already a glut of supply in the platinum market. If producers were allowed to cut back as proposed we probably wouldn't be in this situation today.

The continued production of platinum to fund this political power struggle has only resulted in more supply coming to market exacerbating the glut further, driving down the price of platinum. The trade off has been short term gain and long term pain which should've been the reverse.

Seeing Lonmin going bankrupt might be the best outcome for both Anglo Platinum and Impala Platinum who are both the world's biggest and second biggest suppliers of platinum as less platinum would come to market curbing the supply side of things but one really has to question the action of government.

Lonmin might be the face of future investment decision made by foreign investors seeking opportunities outside the borders of their home nation. If the government is willing to allow a company with such a elaborate history spanning over 100 years go to waste then what are the chances of the rest of the already listed companies of being saved from the same fate?