Embattled Lonmin has become the latest miner to ask for cash from its shareholders, as it struggles with an unwieldy debt load taken on at the height of the commodities boom.
The South African platinum producer outlined plans for a $400m (£259m) rights issue, which it needs for banks to agree to $370m in debt facilities that will mature in May 2020, to replace existing loans of $543m that end next year.
Its shares rose more than nine per cent in early trading, although this went little way to compensate for the 80 per cent decline this year. It closed trading down by 0.86 per cent.
“Part of the reason that its share price has been so badly hit is that its banking covenants are due to expire next year,” said Marc Elliott, analyst at Investec. “Operationally, Lonmin is hitting its targets, but in the current price environment, it would not be able to repay its debts.”
Lonmin, like many mining companies, borrowed during the commodities boom, expecting the good times to continue. But slowed global growth, particularly from China, the world's largest consumer of commodities, has caused prices to crash in recent years.
“Companies borrowed excessively during the raging bull market, but now they are stuck with this huge debt,” said Phil Swinfen, associate director of mining and metals equity research at Numis. “It's starting to look questionable whether they can pay it down or if they will breach covenants.”
Lonmin's debts stood at $185m at the end of September, which is worryingly close to its current market capitalisation of around £170m.
Mining giant Glencore has a whopping $30bn debt pile and a market value of £15.91bn. It announced a $2.5bn equity raising last month to help cut its debt. Hochschild Mining also announced a £64m cash call this month to pay down debts.
Rights issues may provide a temporary panacea, but a longer-term solution will take greater structural changes. “There is just too much supply. Miners are going to have to start shutting down unprofitable operations. This is the new reality,” said Swinfen.