A recent North West High Court case pitted the Mining Forum of SA against Lonmin. The Mining Forum is asking the court to suspend Lonmin’s mining license on the grounds that it has failed to honour its five-year Social and Labour Plan (SLP), which is a condition of all mining licences issued by the Department of Mineral Resources and which is intended to uplift workers and surrounding communities.
The Forum claimed Lonmin had the money to spend on the SLP but had not done so.
The case highlights the dangers – and limitations – of cherry picking data from financial statements. As Moneyweb reported, the Forum’s president Blessings Ramoba’s referred to Lonmin’s 2017 Ebitda (earnings before interest, tax, depreciation and amortisation) of US$40 million (R572 million) as evidence of its supposed financial health.
Lonmin reported an operating loss of US$1.08 billion (R15.4 billion) in 2017, this “does not translate into cash going out of the company,” said Ramoba. The Forum claimed that non-cash items such as amortisation and depreciation, which were dependent on the judgment of management, accounted for the loss.
This is a case where the interpretation of financial statements can have dire consequences. One interpretation suggests Lonmin is a company with plenty of cash. Another interpretation suggests the company is on the brink of oblivion. If anything, this reminds us of the importance of accurate financial reporting, alongside a narrative that is comprehensible to the layman. The judge was wise to this and asked the Forum how could Lonmin fulfill its SLP obligations if its operations were suspended.
Lonmin turned to Wits University’s Harvey Wainer, professor at the School of Accounting, to rebut this interpretation of the accounts. Wainer replied that the cash position of the company should be gleaned from the cash flow statement, not the Ebitda in the income statement. In fact, Lonmin’s aggregate loss over the previous four years came to a staggering R49 billion.
The company reported cash inflow of just US$33 million (R485 million) in 2017, which was substantially less than the US$99 million (R1.4 billion) required to fund basic capex for mining. Free cash flow refers to cash left after the basic needs of the business have been satisfied. A proper reading of the accounts show Lonmin has been generating negative cash flows for several years due to a steadily deteriorating commercial climate.
The stakes for Lonmin could not be higher. Its very existence could well depend on the planned R5 billion takeover by Sibanye Stillwater. Banks have stopped lending it money. It has had to go back to shareholders by way of rights issues to raise additional capital. Shareholders are essentially hostage to Lonmin’s capital demands – they either follow their rights or they stand to lose their investments.
“It is abundantly clear from the annual report that Lonmin is in both a precarious and parlous financial position,” says Wainer’s affidavit. “The Lonmin group has incurred vast and repeated losses in each of the last four financial years.”
Lonmin has been a consumer rather than a generator of cash in each of the last five financial years, and it is clear that the “very existence of Lonmin as a going concern is materially uncertain,” added Wainer. “Any suggestion that Lonmin is in anything other than a precarious and parlous financial position is misinformed and misguided – and contrary to the obvious facts.”
From Moneyweb: The Forum intimated, based on figures of executive remuneration listed in Lonmin’s annual report, that business was booming notwithstanding the poor performance reported by the company. Wainer replied that it was not uncommon for executives to be remunerated based on returning a company to profitability and retaining key executives.
The Forum also intimated, based on figures of executive remuneration listed in Lonmin’s annual report, that business was booming notwithstanding the poor performance reported by the company. Wainer replied that it was not uncommon for executives to be remunerated based on returning a company to profitability and retaining key executives.
Some 95% of Lonmin’s output comes from its Marikana operations, where 34 striking miners were shot in 2012. The Marikana assets were impaired on the financial statements by US$1.38 billion (R19.7 billion) over the previous two years. This was explained in the Independent Auditor’s Report: “The PGM (Platinum Group Metals) industry has experienced rising costs and subdued demand resulting in a depressed pricing environment. In addition the group is experiencing unit cost inflation. The board and executive management have conducted a review of the group’s operations including closing non-profitable shafts.”
The auditor’s review goes on to say that the impairment may be inadequate, and that further impairments may be forthcoming.
Wainer says it was inappropriate to trivialise the 2017 impairment loss of over US$1 billion (R14.3 billion) as simply a ‘non-cash item’. “Although it was not a cash flow loss in the 2017 year, it was certainly a loss of cash historically spent, and a vast loss in value for the group (and its shareholders).” It was also incorrect to say the impairment was dependent on the judgement of management, as the methodology used in arriving at the impairment was detailed by the auditors.
The Forum also pointed to finance costs of U$137 million (R1.96 billion), of which just US$18 million (R257 million) was recorded as being paid in cash. Not all the finance costs were paid in cash, but the full amount was incurred and owing by the group in the 2017 financial year, Wainer replied.
Ramoba also intimated that Lonmin’s financial position was better than it made out, based on current assets exceeding current liabilities, and total assets exceeding liabilities. Wainer replied that this was meaningless if Lonmin was unable to continue as a going concern.
The Forum further claimed that Lonmin had access to the capital markets, which was an indicator of its financial health. Wainer rebutted this by pointing out that Lonmin’s capital raising has been by way of rights issues. Those that did not follow their rights could lose all their money.