Lonmin betting on platinum and palladium continuing their rallies LMI

As the platinum price continues to gain ground and palladium hits a 16-year high, shares in Lonmin Plc (LSE:LMI) are starting to perk up. Having taken a beating over the last 12 months, down from a high of 231p, Lonmin’s battered share price now trades at 82.5p on the mid. However, there are signs it could be about to stage a comeback.

One of the greatest concerns about Lonmin (understandably) is the company’s debt. Having secured a bailout rescue package in December 2015, the company managed to survive albeit at a heavy cost. Today Lonmin carries a $150million debt facility, which includes a number of fairly stringent covenants. Of these perhaps the most noteworthy is the condition that Lonmin’s tangible net worth (“TNW”) must not fall below $1.1billion. According to the company’s latest set of interim numbers its TNW was $1.434billion, giving it $334million headroom.

For long-term investors this might be a little close for comfort, but Lonmin’s latest quarterly production report offers some cause for hope. In this Lonmin announced, “Net Cash improved to $86 million (gross cash of $236 million less the drawn term loan of $150 million) at 30 June, up from $75 million (gross cash of $225 million less the drawn term loan of $150 million).” For a company, which the market fears is running out of cash, this is very good news. When you factor in continued price strength in platinum and palladium (which account for 75% and 25% of Lonmin’s production mix respectively) it is doubly positive.

A bit earlier in the summer Lonmin’s shares traded at a 52-week low of 61.5p. At this level the company was starting to look like it was being priced to fail. The rally over the last month has made the situation look a lot better, but a price pullback in the last fortnight has further called into question Lonmin’s ability to hold the gains.

Referring to the charts might offer some insight into which direction Lonmin’s shares will head next.

From a Technical Analysis point of view there is an obviously strong relationship between Lonmin and the price of platinum. Platinum is currently charging ahead. Its price recovery bodes well for Lonmin, which should follow suit if this continues.

The platinum price hit its low of $812 at the beginning of 2016. This year it has bounced around the $900 level three times and there are other encouraging signs of a sustained recovery now. On the daily chart platinum is above its 200 Day Moving Average (DMA) and recently ‘checked back’ with a confident bounce. The 20 DMA has crossed upwards through both the 50 and 200 DMAs. The price action is generally forming an upward trend. A break through long-term diagonal resistance (shown in red on the chart below) could signify a strong move towards $1200+,

At the same time Lonmin’s share price appears to be in an upward channel mirroring platinum. It has just passed a strong diagonal line of resistance again. Other promising signs are the recent Golden Cross by the 20 DMA and 50 DMA, and also a month long support line beneath the Relative Strength Index. A good first target might be the 200DMA, which is on its way to meet the top of the current price channel at around 110p. However, with Lonmin still pretty much priced to fail and optimistic signs in the platinum price, the upward potential for the share price could be much, much greater.

Opening a tightly managed, disciplined position at or around 82p appears to offer a favourable risk/reward ratio.

 

The author has a leveraged, long position in Lonmin

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