Lonmin axes 5,500 jobs and mothballs one mine as low prices take toll

Speculation about a rights issue is still rife, despite the company's denials

Lonmin, the world's third-largest platinum producer, is axing 5,500 jobs and mothballing the smaller of its two mines in South Africa.

The London-listed group will cut 4,000 staff from its 30,000-strong operation at Marikana, of which 300 will be management positions. A further 1,500 jobs will be cut from the 1,900 at the Limpopo facility, where activity will be reduced to care and maintenance only.

Demand for platinum has been devastated by the worldwide economic slowdown. With around half of all the metal produced used by the motor industry in catalytic converters, the collapse of vehicle sales from the US to Tokyo to Europe has caused major problems.

Ian Farmer, the chief executive of Lonmin, said: "With the current backdrop of challenging economic conditions, these agreements are an important milestone in our objective of restructuring the company."

He also commended the approach of the trade unions with which the staff cuts were negotiated. "Our dialogue has been constructive and pragmatic," Mr Farmer said. "We appreciate [the unions'] active engagement during this difficult period. Whilst they have understandably executed their mandate to protect the interests of their members, they have displayed an appreciation of our efforts to ensure the long-term sustainability of the company."

Despite the contraction in the global market, Lonmin says it will produce 700,000 ounces of platinum in the current financial year, which is only 25,000 ounces lower than the 2008 level.

But platinum prices are still languishing at around the $1,080 (£749) per ounce mark – less than half of last year's high of $2,260 – leaving revenues for its producers far from guaranteed. The price has gone up since the woeful $787 in November, largely as a result of speculators piling into the metal after it performed the rare stunt of dropping below the gold price in mid-December. But even with the current blip, a number of City analysts are still predicting losses for Lonmin when it reports its full-year figures in September.

The decline of the South African rand against the dollar in recent months has provided some relief, but rumours of a possible rights issue have also still not been laid to rest, despite denials from the group. Although $303m of debt on the balance sheet of a $2.2bn-plus company is not too substantial, and there are no major refinancings needed soon, there are concerns that falling earnings might breach covenants and force the group to explore other ways of raising money.

"If platinum prices stay where they are now and Lonmin can keep taking costs out, it might just be able to get away with things," one City analyst said. "It was a good decision to work on the cost and production base, but the cuts they've made are pretty small beer in terms of the overall structure of the company."

Lonmin has had a difficult year. Brad Mills, the former chief executive, stepped down in September amid speculation that Sir John Craven, then the chairman, had sidelined him from discussions about defending the group from a £5bn hostile bid from its rival Xstrata. Under Mr Mills' stewardship, the company saw production levels fall, reserves go undeveloped and attempts to mechanise Limpopo fail. Xstrata dropped its bid in October, citing poor market conditions.

"What will be important in the short term is the company's ability to show investors that it is overcoming its cost of production issues," Charles Kernot, an analyst at Evolution Securities, said.

Sir John resigned in January, leaving Roger Phillimore, the deputy chairman, to fill the interim role. A permanent replacement is yet to be found, making an imminent rights issue unlikely on corporate governance grounds.