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Lonmin’s surprise pay deal carries its own risks

Striking miners dance and cheer after they were informed of a 22 per cent wage increase offer outside Lonmin's Marikana mine, 100 km northwest of Johannesburg, Sept. 18, 2012.

SIPHIWE SIBEKO/REUTERS

South Africa's platinum crisis isn't over yet. A pay deal struck by Lonmin will, if it holds, end a violent six-week strike that has claimed 45 lives. That's good for the work force. And it solves an immediate, potentially existential problem for the world's third-biggest platinum producer. But it sets up other big challenges for Lonmin and the industry. The big wage hike will hurt already weak margins. And the response may only encourage further strikes.

The pay deal was a surprise. Lonmin's shares opened 9 per cent higher in Johannesburg on Wednesday. Earlier this week, the two sides seemed far apart. But several weeks of shut production and no wages, along with police raids on mining villages at the weekend, seem to have forced the issue. The miners have agreed to go back on the clock in return for a pay rise of up to 22 per cent, plus a signing bonus.

The next few days should tell whether the agreement sticks. Lonmin's employees are due to return to work on Thursday, though in reality it will probably take longer to know whether the deal has support.

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Even if the settlement holds, the consequences for Lonmin and the industry may still be painful. Lonmin's higher-cost operations meant it was only just breaking even on its mines before the labour unrest began. Worker pay is 60 per cent of the company's cost base, according to Nomura.

Six weeks of disruption will force the company to spread its fixed costs over fewer ounces of mined material, hurting mining margins further. If platinum's recent price rally fades as concerns over supply ease, that will also challenge the industry's economics.

Lonmin may have had no choice but to agree to a big wage bump. What started as a local labour dispute turned into a national emergency after 34 workers were killed by South African police in August. Nevertheless, Lonmin has publicly blinked in the face of pressures that started well outside the standard labour relations channels. By Wednesday's close Lonmin's shares had given up most of their gains. That seems a fair reflection of the extent to which the benefits of resolving this tragic situation may come at a significant cost.

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