Financial Strength of Lonmin Plc - Essay Example

Lonmin Plc company analysis Introduction Lonmin Plc is a UK incorporated company that was established in 1999, first as an affiliate of a company registered under the name of London and Rhodesian Mining in 1909, which also became popularly known as Lonrho plc (4-traders, 2014:n.p.). The company was established in 1998 after its parent company split to form two affiliates, where one, Lonrho Africa plc, was tasked to handle the African continent business of mining, while the other company was left to deal with the non-African business. The company deals with the mining business, where its operations include mining, refining and marketing of platinum group metals, and it has its base in South Africa (Lonmin Plc, 2014:n.p.). It is this affiliate formed to handle the mining business that eventually became renamed as Lonmin Plc in 1999 (4-traders, 2014:n.p.). The company operates in three major segments of the mining industry, where it has an exploration department, an evaluation department and a PMG operations department. Despite the fact that the company runs its operations in different countries in the Weste African region, most of the operations of the company, which entail the refinement and marketing of the metals after being mined in different regions is undertaken in the Bushveld facility in south Africa (Lonmin Plc, 2014:n.p.). The company is listed in three different stock markets, where its shares are trade in Germany, USA and in the UK. The market capitalization of the company as at 2014 was worth US$ 146.7 billion, which is equivalent to 95 billion British pounds (Guru Focus LLC, 2014:n.p.). The company has total 583.8 million outstanding shares, whose prices in the stock market ranges at between 160.70 and 163.64 British pounds (Guru Focus LLC, 2014:n.p). The company held a total of 38,2923 employees by the close of the financial year 2014, with 28,276 of the employees being employed full time, while 10,016 operated as part time employees. Full time employees Part time employees 28,276 10,016 The company holds a considerable value of assets, both in its operating assets such as the machineries and equipment, as well as the stock of minerals in the various mines that the company has explored. While some of these minerals are already extracted and their value well verified, there is still some more whose value is still to be ascertained. The graph below presents the assets of the company that are held in minerals. Lonmin Plc Mineral Assets In the year 2014, Lonmin Plc made a total sale of 441,684 ounces of Platinum, at a market price value of $1,537 per ounce, which contributed to a higher percentage of the company’s revenues for the year (Lonmin Plc, 2014:n.p.). While the company mostly deals with the sale of three kinds of metals, platinum sales for the year 2014 by the company contributed to 64% of the company’s total turnover (Lonmin Plc, 2014:n.p.). In the same year, Lonmin Plc made a total sale of 212,500 ounces of Palladium, whose market price was valued at $1,426 per ounce, accounting for the second best source of revenues for the company, which constituted 17% of the 2014 turnover of the company. Additionally, the company made a sale of rhodium that constituted 11% of the total turnover of the company for 2014. The final sale of the Lonmin Plc in the year 2014 was comprised of gold and the other base metals, whose sale combined contributed 8% of the total turnover of the company for year 2014 (Lonmin Plc, 2014:n.p.). A graph of Lonmin Plc 2014 Sales and Turnover Financial strength The financial state of Lonmin Plc is not promising, owing to the fact that the company indicates negative returns both on the assets and the investment made by its shareholders. The total sales for the half financial year for the company accounting for the six months ending the September of 2014 was $387.0 million (Guru Focus LLC, 2014:n.p.). On the other hand, the total assets of the company for the quarter ending September of 2014 were $4,572.0 million. Thus, the company indicates an unhealthy asset-to-sales ratio owing to the fact that the asset turnover, which measures the relationship between the sale of a company and its assets, was 0.09, for the quarter ending the September of 2014 (Guru Focus LLC, 2014:n.p.). The unhealthy financial status of Lonmin Plc can also be indicated by the fact that the Return on Equity (ROE) for the company for the period ending September 2014 was also low, owing to the fact that the company had an RO of 0.83% (Guru Focus LLC, 2014:n.p.). This is a clear indication that the company is not able to create reasonable wealth for the equity that is held by the company’s shareholders (Levi, 2009:27). Finally, the financial health of Lonmin Plc can be measured through the Return on Assets (ROA) ratio, which measures the returns that a company generates on its assets for a particular financial period. In this case, the ROA for the company for the period ending September 2014 was 0.61%. This is also an indication that Lonmin Plc financial status is unhealthy, due to the fact that the company is no longer able to make reasonable returns on its assets (Marios & Spyros, 2007:41). The assets value of Lonmin Plc has also continued to decrease with each passing year, such that the company is no longer able to sustain a good asset base. The graph below shows how the asset value of Lonmin Plc has declined over the last five years. A Graph of declining Asset Values of Lonmin Plc Further, in the last five years, the company has indicated an unhealthy decline in its financial status, with the turnover of the company deteriorating with each year starting the year 2010. The table below shows the turnover of Lonmin Plc for the last five years: Year Sep10 Sep11 Sep12 Sep13 Sep14 Turnover 0.35 0.41 0.34 0.33 0.22 Additionally, the past five years have seen the company continue to decline in its revenue generation capacity, such that it has moved from a profitable company five years ago, to becoming a loss making company currently. There has been a drastic reduction in the profitability of the company, where the company was able to make a profit of $166 million in 2011, but moved to a loss of $188 in 2014 (Lonmin Plc, 2014:n.p.). The revenue stream has indicated a constant rate of decline, mostly due to the political factors such as longstanding worker strikes and the Ebola epidemic that hit South Africa and West Africa respectively. These regions comprise the major regions where Lonmin Plc operates its business. The graph below shows how the revenue generation capacity of Lonmin Plc has continued to dwindle in the last four years. A graph of Lonmin Plc Revenues for the Four-year Period (2011-2014) The consistent reduction in the revenues generated by Lonmin Plc over the last five years has meant that the company has been making loses, and increasing its losses with each year that passes by. The net profit for Lonmin Plc for the year 2011 was $273 million, which then reduced drastically to have the company make a loss of $410 million in the year 2012 (Lonmin Plc, 2014:n.p.). This can be accounted by the fact that the company was faced by a longstanding standoff with its employees, who were striking in demand for a salary hike. After the standoff was cleared, the company was able to get back on its feet and consequently made a profit of $166 in the year 2013 (Lonmin Plc, 2014:n.p.). However, the same political issue of the workers strike would face the company again in 2014, when its workers went into a strike once again, demanding for the increment of their basic salaries starting from the January of 2014. The standoff once again saw Lonmin Plc incur a loss of $188 for the year closing the September of 2014 (Lonmin Plc, 2014:n.p.). Major corporate actions and other developments over recent years The major developments in the mining and metal supply industry where Lonmin Plc specializes includes reduction in the prices of the metal products, which then threatens the future survival of the companies operating in this industry. This is owing to the fact that the costs of operation continues to rise in this industry. The costs of operation have been rising over the past years in the mining industry, most especially due to the high salary and wage increment demand by the mining industry workforce (4-traders, 2014:n.p.). This notwithstanding, the market for the platinum group metals, which are the basic products that the company deals with, has been shrinking over the years. Such a development then puts the company at an even higher risk of future financial crisis (Johnson, Whittington, Angwin, Regner & Scholes, 2013). The fact that there has been an increase in the industrial recycling of the platinum group metals also means that the industrial demand for these metals continues to shrink. This also poses a threat to the future financial performance of the companies operating in this sector (Butler, 2012:36). The increase in the industrial and jewelry recycling of the platinum group metals has seen a general reduction in the supply of the PMG group metals globally, which is an occurrence that threatens the productivity of the industry even further. The graph below shows the change in the supply of platinum group metals globally between 2013 and 2014. A graph of change in the metal supply globally between 2013 and 2014 Nevertheless, there is a promising future for the business of the company, most especially as regards to the increased growth of the jewelry industry in India, which is likely to increase the demand for the platinum group metals (Lonmin Plc, 2014:n.p.). Further, Lonmin Plc has an opportunity for increasing its revenue generation capacity and thus redeem its financial performance, owing to the fact that there is an increasing growth in the global vehicle sales, which will push up the demands for the metal products that the company deals in (Lonmin Plc, 2014:n.p.). The industrial sector is also growing and expanding, most especially in the developing economies, which offer an opportunity for Lonmin Plc to venture into new markets or even increase its sales in the already ventured markets. Conclusion Lonmin Plc is a company that operates in the mining industry, which was incorporated and registered in the UK in 1999. The company has its headquarters in South Africa, where it runs most of its operations, although it has other regional operations in the West Africa. The financial situation of Lonmin Plc is not promising, owing to the fact that the company has not made good profits in the past years, while its assets and revenues continue to decline with each passing year. The political factors such as workers strikes have contributed to the poor financial performance of the company in the past few years. Nevertheless, the increased growth of the jewelry industry in India, coupled with the global increment in car sales, provides a prospective for the company to increase its sales and thus redeem its financial position in the future. References 4-traders. (2014). LONMIN PLC (LMI): Business Summary. February 24, 2015. Accessed: < http://www.4-traders.com/LONMIN-PLC-4000608/company/> Butler, K. C. (2012). Multinational finance: Evaluating opportunities, costs, and risks of operations. Hoboken, NJ: Wiley. Guru Focus LLC. (2014). Lonmin PLC (OTCPK:LNMIF) Asset Turnover. February 24, 2015. Accessed: Johnson, G., Whittington, R., Angwin, D., Regner, P., & Scholes, K. (2013). Exploring strategy: Text & cases. Levi, M. D. (2009). International Finance: Fifth Edition. Routledge. Lonmin Plc. (2014). Annual Report and Accounts For the year ended 30 September 2014: Market Review and Outlook. Lonmin Plc. February 24, 2015. Accessed: < https://www.lonmin.com/Online_Annual_report_20141/strategic_report/market_review.html#> Marios, K. & Spyros, H. (2007). International business: a global perspective. Publisher: Boston, Mass. Read More