Why Shares Should Keep On Collapsing At Lonmin Plc & Jubilee Platinum PLC

Shares in platinum producer Lonmin (LSE: LMI) have endured further turmoil during the course of midweek trading. The South Africa-focussed digger erased recent gains with a 6% decline on Wednesday, and a further 12% decline today has pushed values to fresh record lows around 1.1p.

Lonmin’s decline has been breathtaking — the company’s shares were trading above £19.50 five years ago, and were still trading as high as 175p in January. On top of this, a humiliating $407m rights issue last month, a move designed just to keep the lights on at the embattled firm, added an unwanted cherry on the cake.

Stock price performance over at Jubilee Platinum (LSE: JLP) has been more promising by comparison, the company spiking to multi-year peaks during the summer above 4.6p. The selling of assets to fund Jubilee’s revolutionary ‘surface processing projects’ was responsible for sending share prices through the roof.

Platinum keeps on tanking

Still, giddy investor appetite at Jubilee has settled back since then as platinum prices have resumed their downtrend. Following a solid break back above $1,000 per ounce in late summer, prices have collapsed once again, and the metal struck seven-year troughs below $825 just today.

Platinum has conceded a third of its value since the start of the year, and plenty of problems persist that could send prices still lower.

The metal’s main industrial usage is in the production of autocatalysts, particularly for those deployed in diesel vehicles. But thanks to the ongoing Volkswagen emissions scandal, regulators are re-examining the carbon footprint of diesel technology, a situation that could have massive repercussions for platinum demand.

Moreover, the possibility of slowing Chinese car and jewellery demand could throw another spanner in the works. Auto sales in the country flipped 11.3% higher in October, to 1.85m vehicles, as tax cuts on small vehicles kicked in. But these efforts could have little long-term value on aggregate platinum demand should Chinese macroeconomic cooling intensify.

Indeed, the boffins over at Morgan Stanley expect things to get worse before they get better — an average price of $1,079 per ounce for 2015 is anticipated to fall to $1,032 next year, a terrifying omen for both Lonmin and Jubilee.

Lonmin’s production issues set to reign

In response to these worrying demand factors, Lonmin elected back in August to shutter its Hossy and Newman shafts at its Marikana complex, a decision that will remove 100,000 ounces of production by 2017.

While a positive step in addressing the market imbalance, the prospect of falling volumes puts even more burden on Lonmin’s top-line prospects as platinum prices steadily erode.

And in spite of recent capex reduction and cost-cutting schemes, the financial considerations of mining in South Africa is likely to keep the pressure on Lonmin’s balance sheet as electricity, labour and general operational costs canter higher. Against this backcloth I believe the prospect of further capital raising cannot be ruled out.

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Royston Wild 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.