UBS cuts Lonmin to 'sell' on stretched valuation

UBS downgraded Lonmin to ‘sell’ from ‘neutral’ but lifted the price target to 140p from 110p, saying the valuation looks stretched following a strong share price performance.

The bank said Lonmin achieved good cost performance in the second quarter of 2016, with unit costs down 3% quarter-on-quarter.

“This is positive as labour reduction/cost-cutting initiatives start to bear fruit. However, we do not believe this level of performance is sustainable, especially as production declines into FY17/18E, and we expect costs to increase 8-10% per annum (versus company guidance of flat nominal costs).”

UBS reckons this will result in Lonmin being free cash flow negative in FY19, even if prices increase as it expects, and is likely to be a disappointment versus consensus.

The price target increase comes as the bank now bases it on a mix of EV/EBITDA and net present value - compared to NPV previously – bringing Lonmin in line with the rest of the South African platinum group metals sector.

UBS also initiated coverage on the South African line of Lonmin, at ‘sell’ with a ZAR30 price target.