Market Report: Lonmin leads the way as miners head south

Weaker metals prices and news of a furnace shutdown unsettled Lonmin, the platinum producer which led the mining sector lower last night.

The stock was lodged at the bottom of the benchmark index, retreating to 1,300p, down 9.8 per cent or 141p, after the company said it had shut down its No 1 furnace in South Africa owing to a weekend production incident, estimating that assessment and repair work is likely to take 30 days. In order to mitigate the impact of the shutdown, Lonmin said it had fired up three alternative furnaces.

Evolution Securities stuck to its "sell" stance on Lonmin, while Liberum Capital said the news was "a blow to the new management team who had made strides in regaining investor trust, and in our view highlights that there are better ways to play the PGM [platinum group metals] cycle".

The news coincided with weakness in the price of leading metals, as commodities traders considered whether recent rises had gone too far and the US dollar strengthened, heaping extra pressure on Lonmin's share price.

The wider sector was also uneasy, with Rio Tinto falling to 2,900p, down almost 7 per cent or 216p, and Vedanta Resources declining by 7.2 per cent or 115p to 1,484p.

Xstrata, down 7.1 per cent or 54p at 706p, and Anglo American, down 2.1 per cent or 36p at 1,693p, were also weak, despite renewed chatter about a possible merger.

Overall, the miners dragged the FTSE 100 index down by 2.6 per cent or 115.94 points to 4,326.01. The mid-cap FTSE 250 index also traded lower, falling to 7,493.53, down 2.6 per cent or 197.84 points.

There was little activity on the upside, with only a handful blue chips managing to close in the black. Lloyds was the strongest, gaining 2.3 per cent or 1.5p to 66.8p following weekend reports of growing interest in the third party funds business of the group's Insight Investment Management arm. The wider sector was weak, with Royal Bank of Scotland losing 5 per cent or 2p to 37.9p and Barclays easing to 278.75p, down 4.5 per cent or 13.2p.

Pharma group AstraZeneca, which was upgraded to "buy" from "hold" at Citigroup, was 21p firmer at 2,650p. The supermarket group J Sainsbury managed to rise to a session high of 333p, but fell back by the close, losing 2.75p to 328.25p as investors awaited its first-quarter update, which is due tomorrow.

Elsewhere, oil-related plays, including BG, which fell to 1,100p, down 3 per cent or 34p, were under pressure as the oil price relaxed. Exploration and production (E&P) companies such as Cairn Energy, down 4.1 per cent or 101p at 2,358p, and Tullow Oil, down 4.8 per cent or 45.5p at 912.5p, were in focus after Goldman Sachs switched its stance on the sub-sector to "neutral" from "attractive". The broker was keener on the oil services sub-sector, which it moved to "attractive".

"The oil services sub-sector has underperformed integrated oils and E&P since mid-2007, and is now trading 23 per cent below the level suggested by its historical correlation with the spot oil price, in contrast to E&P, which is trading 7 per cent above," Goldman said. "If that correlation were to hold and the oil price rises to our current estimate for 2011 [$100 per barrel], this would imply 89 per cent upside potential for oil services, versus 46 per cent for E&P and 42 per cent for integrated oils. Hence, we would switch out of E&P into oil services companies."

International Power was caught in the market-wide downdraft, easing by 2.3 per cent or 5.75p to 246.25p. Morgan Stanley reduced its target price for the stock to 370p from 405p, citing weaker near-term commodity curves, but kept its "overweight" rating in place, citing the power group's "brightening" outlook.

Punch Taverns, on its first day of trading outside the FTSE 250, retreated to 104p, down almost 30 per cent or 44.5p, after raising approximately £375m via a share sale. KBC Peel Hunt welcomed the move and reiterated its "buy" rating, while Evolution Securities stuck to its "sell" stance.

"At Friday's close price, Punch's equity was £394m, so it's virtually a one-for-one issue. It's the most that Punch can raise but it's not enough," Evolution analyst Nigel Parson said. "All three securitisations will probably be cash trapped, leaving it unable to pay back the convertible."

Numis, which like Seymour Pierce maintains a "buy" rating, said: "Since the 29 April results, bond debt retirement has increased from £318m (cost £203m) to £404m (cost £258m), generating substantial shareholder value. We believe net debt could fall by £1bn in the current financial year."

In the wider sector, Enterprise Inns was 12.7 per cent or 19p weaker at 131p, while Greene King lost 5.4 per cent or 23p to 399.5p. Marston's was 7.8 per cent or 12.5p lighter at 148p after UBS issued a downgrade, switching its stance to "neutral" from "buy" on account of valuation.

"The next trading update is due in the end of July, but we do not expect it will be a catalyst for further outperformance as the comparatives are more challenging in the summer period," the broker said, keeping its 160p target price unchanged.