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Is Jubilee Platinum PLC The New Lonmin Plc?

Even though Lonmin (LSE: LMI) and Jubilee Platinum (LSE: JLP) are both in the business of mining platinum, the two miners couldn’t be more different. 

Indeed, Lonmin seems to be at the end of its life, while Jubilee Platinum is just starting out and could benefit hugely from Lonmin’s demise. That said, it’s unlikely (at least in the short term) that Jubilee will be able to achieve the multi-billion pound valuation awarded to Lonmin back in 2007. However, the company has a serious shot at becoming one of London’s premier platinum producers. 

Pushing ahead 

Lonmin has been struggling with high labour costs and volatile platinum prices for the past six years, and the company has been unable to get its operations into a position where they are consistently profitable. 

On the other hand, Jubilee is starting from a position that should ensure that the company avoids the problems that have plagued Lonmin. 

According to Jubilee’s February investor presentation, the company’s platinum surface processing projects have the potential to produce 80,000 tons per month of platinum-containing surface material. Figures presented at the beginning of this year show that Jubilee’s production target of 80,000 tons per month could yield $14m per annum in operational cash flow.

Initial construction of Jubilee’s operations has already begun. The total projected capital cost for the completion of the company’s Platinum Processing Project is estimated at £4.9m. This cost will be covered by the £5.3m raised from the sale of Jubilee’s Middelburg operations. 

So, unlike Lonmin, which has always been reliant on debt to fund and finance operations, Jubilee is using cash to develop its business. Cash financing should give Jubilee more flexibility over the long term. 

Starting small

Jubilee is starting small, but the company has big potential. Management is hoping to start platinum production at the beginning of next year. Because the company is producing from highly sought-after platinum surface beneficiation projects, there’s little associated risk or cost of mining since all the material is at the surface. 

Lonmin doesn’t have the same advantage. Most of the company’s mines are high-cost, labour-intensive mines, which are complex to manage. The company did try to modernise its mines around 10 years ago, spending hundreds of millions on a programme to introduce more mechanised mining.

But this costly modernisation programme proved ineffective, left the company with plenty of debt and soured relations with its workers. A $475m rights issued followed in 2009 after the company had reported a pre-tax loss of $196m and revenue tumbled from $907m to $423m. During the first six months of 2009, Lonmin cut 7,000 staff and booked $44m of restructuring charges. 

With low-cost, low-risk surface mining operations and a cash rich balance sheet, Jubilee is unlikely to suffer the same pressures as Lonmin. 

A real hidden gem

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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.