Lonmin Seems to Be Tracking Spike in Platinum Price

When an FTSE 100 stock rallies more than 9% in one day in the absence of a bullish company announcement, as Lonmin (LNMIY.PK) did on Friday, it is well worth poking around to find out what exactly persuaded investors to think the company is worth £250 (US$410) million more than it was the previous day.

Lonmin is a platinum producer and its extensive South African operations have enabled it to become the 3rd largest supplier of the precious metal globally. Its business cycle encompasses everything from discovery, acquisition, and development to marketing.

Lonmin previously forecasted its platinum sales in the 2009 fiscal year would be in the region of 680,000 to 700,000 ounces.

In the firm’s most recent production report, over 172,000 ounces were mined in the 3 months to 30th June 2009, bringing the nine month production total to 491,000 ounces (490,000 ounces were sold implying the firm may narrowly miss the full year target). Production going forward is difficult to predict with a high degree of certainty as Lonmin is active in closing less profitable mine shafts, temporarily suspending other shafts for maintenance whilst elsewhere it continues to open new shafts and mines with some regularity in an effort to improve output and lower costs per ounce produced.

The platinum chart below (source: StockCharts.com) ably shows the metal’s volatility with the price falling sharply during 2008 before it commenced its decent recovery late in the year. The current price is still some way off the cyclical high and few commentators expect platinum to return to those heady levels anytime soon.

Platinum, like gold, did however have a strong run last week and it’s safe to attribute Lonmin’s 9% gain on Friday to that commodity price movement rather than weak rumors of industry merger and acquisition activity.

Long term holders of the stock can put the share certificate back in the drawer as despite Friday’s jump, the stock still represents fair value. Day traders, however, can congratulate themselves, presuming they have banked their leveraged profits, for spotting platinum’s midweek spike and jumping on the stock before it followed the metal’s upward move later in the week.

Disclosure: none

Comments

[nobby73:]

There's definitely lots to like with Lonmin. I am sure there is something in the rumours of Xstrata making a new offer, though this could be simply a tactic to keep the bankers at the table for debt refinancing by making them believe there's some M&A fees on the way. Maybe it's the Chinese buying stakes in commodity cos? However, given the action in gold and silver prices, platinum is looking undervalued at only 25% premium to gold... so Lonmin looks appealing from that perspective.

Sep 08 03:21 PM