UBS has started coverage of South Africa focused platinum producer Lonmin (LON:LMI, JNB:LON), rating it a sell, citing that the firm is signifcantly exposed to major cost pressures.
In a note, analyst Ben Davis at the research arm of UBS, gave the stock a £15 price target (current share price £15.24).
"Lonmin is one of the highest-cost producers in the platinum industry, and is significantly exposed to the major cost pressures of wage inflation, electricity prices and the South African rand.
"Although the group offers premium leverage to the platinum price and good medium-term growth, given the current cost environment the risk/reward is not attractive at current levels, in our view."
The company is the world's third largest primary platinum producer and South Africa currently contributes nearly 80 percent of the global production of the metal.
Davis also points out that a bid for the company from Xstrata, which owns a 24.9 percent stake, is unlikely in the next year. Xstrata abandoned an approach for the firm in 2008.
"Xstrata has said it is in no rush to make another move on Lonmin, but retains its faith in the PGM (platinum group metals) market’s medium- and long-term fundamentals. While M&A may prove a long-term catalyst for Lonmin, we do not believe Xstrata, or indeed any other firm, will make a bid for it in the next 12 months."
In addition, he notes that Lonmin has to comply with a charter and increase participation of HDSA (Historically Disadvantaged South Africans) at its Marikana and Limpopo mines by May 2014, but if a partner cannot be foundm, it may have to fund this itself.