| Mon 22 Nov 2004, 10:37 | | Explosion at Lonmin's SA smelter will prove costly |
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Explosion at Lonmin`s SA smelter will prove costly
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Design flaw may be the problem
Resources Editor
LONMIN may face a bill of millions of rand following the second explosion in two years at its main South African smelter.
Analysts also believe that the second accident may cast doubts on the technology that is being used, placing a further question mark over the company`s future smelting costs.
Lonmin said on Friday there had been `an incident overnight where cooling water leaked into the furnace at the smelter at its South African platinum mine, causing a steam explosion, which has resulted in structural damage to the furnace`.
There were no injuries as a result of the explosion, but the company warned that it `expected that the smelter will have to be closed for repairs for a period of between six and 12 weeks`.
`Contingency plans are currently being put into place, which should result in minimal or no effect on production for the current financial year.
`A detailed assessment of the extent of the damage is under way and a further announcement will be made in due course.`
The latest accident comes as Lonmin, like other South African miners, has had profit slashed as the rand has gained against the dollar, wiping out many of the benefits of the current buoyant commodities cycle.
The smelter accident and the effects of the stronger rand, which has doubled in value against the dollar since the beginning of 2002, would cause a `severe cut to earnings` for Lonmin, according to John Meyer, a mining analyst at Numis Securities in London.
A stronger rand cuts profit because SA`s miners pay most costs in rand and sell metal for dollars.
`They`ll catch up production, but there`ll be additional costs,` Meyer said. `Once is an accident, but twice and you are looking at a systemic problem in that smelter unit,` he said.
Meyer downgraded Lonmin to a reduce recommendation and has a price forecast of £9,64 on the stock.
Another SA-based platinum analyst recalled that Lonmin took a decision a few years ago to consolidate its smelting activities, which had been carried out at about five smaller smelters, into one huge unit.
`The intention was to raise efficiency and to cut costs through economies of scale,` he said.
`However, there was an explosion around Christmas 2002, which one jokester referred to as Lonmin seeing in the New Year with a bang. This blew the smelter to pieces. It took a year to get it up and running again, and now we have had a second serious accident.
`Last time, the damage cost around R250m, as these are not small facilities`, the analyst said.
`Anglo Platinum has a similar smelter in Polokwane, and has also done some precautionary work on its smelter.
`If this accident means there is a fundamental design fault, which would probably be related to the cooling system, it may be costly and difficult to deal with.`
He said that in the meantime, Lonmin would probably have to restart some of its older smelters, or the company might contract out smelting to rival companies such as Impala Platinum. `Both these options will cost money.`
Lonmin`s share price ended 3,26% lower at R115,60 on Friday.
