all big mining companys would like to have a pice of the platinum cake
placer dome some weeks ago, now xstrata
LONDON (Mineweb.com) – Mick Davis, acquisitive chief executive of Xstrata, the London listed diversified mining and metals group, would dearly love to take over Impala Platinum. But the South African authorities have put up almost insurmountable obstacles to stop their domestic companies moving – or being moved – offshore. As one insider says: “Impala is very attractive [for Xstrata] but structuring a deal would be complex. How do you get money out of South Africa?”
While Impala is probably Davis’s preferred route into the platinum business, its rival, Lonmin, would make an easier target because it is domiciled and listed in London. However, Lonmin’s share price has nearly doubled in the past year and it would be a very expensive acquisition in today’s markets.
Also, as another insider points out, Lonmin has a brand new chief executive about to join - Brad Mills, hired away from BHP Billiton.. “And you can be sure he hasn’t been brought in just to sell the company.”
The upshot is that Xstrata’s management is not spending very much time at present towards fulfilling Davis’s ambition to add platinum to his group’s other operations.
All this encapsulates what analysts and insiders are telling Mineweb as part of a debate triggered by suggestions that Lonmin’s chairman, Sir John Craven, had virtually put a “for sale” sign on his company during meetings with some big institutional shareholders. And you don’t have to be a genius to identify Xstrata as the most obvious potential buyer.
The reports about Craven’s meetings with the institutions are described by Lonmin’s spokesperson, Anthony Cardew, as “complete bunk.” Apparently, in private Lonmin’s reaction has been even more fierce, with the senior independent director, Sir Alastair Morton, calling the stories “complete balls.”
At Xstrata, Davis makes no secret of his hankering after a platinum play. At his results briefing recently he told Mineweb his group was still very keen to get into the platinum business. The problem was that the only two reasonable potential targets were Impala and Lonmin.
He said Xstrata could afford now to increase its operations in South Africa – where both platinum companies do their mining and processing – because his group’s takeover of Australia’s MIM had given it increased geographic and commodity diversification.
Like others among the top brass at major mining companies, Davis said acquisitions for cash were at present unlikely because share values had shot up in recent months, following commodity prices. But swapping high priced shares for other high priced shares was a possibility.
Davis pointed out that Xstrata’s balance sheet, despite the MIM takeover, was strong enough to allow the group to finance any acquisition it might be interested in making. But he was determined not to over-pay, however attractive an asset might be.
Because Lonmin shares have had such a good run this year, some analysts believe they are now expensive. For example, the mining team at Deutsche Bank has increased its Lonmin price target to 1250p but cut its rating from “buy” to “hold” because the shares have been so close to the target. The shares topped the target on March 2, reaching 1255p. (At the close on Friday the price was 1186p, giving Lonmin a market value of £1.677bn. Xstrata’s stock market value was £4.5bn).
Those suggestions that Lonmin was up for sale emerged after Craven visited some big shareholders, including Prudential and Threadneedle, institutions that between them own nearly 26% of Lonmin, to introduce them to Brad Mills.
Mills was head of BHBP’s base metals operations and his appointment was immediately taken to indicate that Lonmin would push ahead with a diversification strategy and would look for operations not involved in platinum and outside of South Africa.
Mills’s appointment split opinion in London. But most analysts insisted the diversification would be unpopular with the market which would prefer Lonmin to continue to benefit from the rising platinum price. Some also suggested institutional investors were disappointed that Lonmin had not chosen a “bigger name” as chief executive.
Lonmin’s strategic review and potential diversification loomed large in the recent meetings between Craven and institutional shareholders.
The review was kicked off about 18 months ago. Lonmin recruited Brian Gilbertson, who had just left BHBP where he was chief executive, as a consultant to help with this process. It is widely assumed that Gilbertson had some say in Mills’s selection as Lonmin’s chief executive. Craven told the institutions that Mills’s experience and knowledge would help to accelerate the strategic review.
Craven gave a clear indication of his views at Lonmin’s annual meeting on February 5, when he said: “"It may well be that he [Mills] and the board will conclude that our pure platinum plan is the best way forward for the foreseeable future. However, while no plans exist for any diversification at this stage, we cannot ignore the fact that, through the cycle, the market ascribes a higher value to mining activities that are diversified both in terms of sector and geography. It may be that the best way forward to protect and enhance shareholder value - and the future dividend stream - will be by some measure of diversification."
Craven’s main difficulty, according to insiders, is that, while he seems convinced that diversification would be good for Lonmin’s long term future, most institutional shareholders have still to be convinced.
They bought into Lonmin because they bought into its strategy of being a “pure platinum play” – which is what previous managing director Ed Haslam, a 23-year Lonmin veteran, succeeded in turning it into.
London institutions have no shortage of big, liquid diversified mining groups to choose from. But Lonmin is the only London listed platinum company.
Obviously it will take time for Lonmin’s strategy to become clear. Mills will need some months just to get to know his way around his new company, let alone reach a conclusion about its future direction.
Meanwhile, there is the important matter of unravelling the links between Lonmin and Impala. At present Impala owns 27% of Lonplats, Lonmin’s platinum metals business, but the two groups announced in September that they had reached provisional agreement to unwind this arrangement. The idea is for Implats to offload its stake in Lonplats, with part of the holding going to a new black empowerment company, Incwala, where Gilbertson will be non-executive chairman.
Finalising these arrangements is taking longer than Lonmin hoped, mainly because the South African government is making some input. And, like governments the world over, it takes its time reaching decisions.
One reason Lonmin failed to kill the story about Craven’s intention to sell the company before the tale winged its way around the world via news agencies following up speculation in a London based Sunday paper, was that the two executive directors analysts particularly rely on for information, Ian Farmer and John Robinson, are in South Africa and up to their necks in the Impala negotiations.
To sum up: it is quite likely that Lonmin eventually will become part of Davis’s growing empire at Xstrata. But don’t expect a Xstra-Lonmin merger any day soon.
