WHEN I SPOKE TO

Finweek English Edition - - Thecompanyyoukeep -

Xs­trata CEO Mick Davis in Lon­don last year, two firm im­pres­sions I gained were: (a) he’d rather be a preda­tor than a vic­tim in the con­sol­i­da­tion of the re­sources sec­tor and (b) plat­inum was a key area for ex­pan­sion. He al­most dis­proved the first point, though a mooted tie-up with Brazil‘s Vale came to naught; but the sec­ond has been ful­filled – in spades.

First, the friendly US$1bn takeover of Eland Plat­inum; cur­rently, a 10 times big­ger hos­tile bid for the world’s third-big­gest pri­mary plat­inum pro­ducer, Lon­min. Xs­trata is pre­par­ing to of­fer £33/share for Lon­min, a 42% pre­mium to the pre-bid price of £23,19. Pre­dictably, Lon­min chair­man Sir John Craven dis­missed the bid as “op­por­tunis­tic” and un­der­valu­ing the com­pany‘s “unique busi­ness” and long-term prospects.

Well, that pro­vokes a cou­ple of points. First, “op­por­tunis­tic” (like “pop­ulist”) is one of those words used as a term of abuse. But when you think about it, what it re­ally means is ac­tu­ally pos­i­tive. Isn’t seiz­ing op­por­tu­ni­ties what in­vest­ment is all about? And press re­ports in Lon­don say that Davis has had Lon­min in his sights since 2002, when Xs­trata listed – so this is no spur of the mo­ment foray.

Sec­ond, “long term”. We’re all familiar with the Key­ne­sian long term and though for Lon­min it may come in our life­time, the com­pany is on its (if I’ve kept count ac­cu­rately) fifth pro­duc­tion down­grade this year. Its man­age­ment isn’t highly re­garded and some won­der how it can ever be run ef­fi­ciently while its top brass re­main based in Lon­don.

Craven claims a new man­age­ment team ap­pointed ear­lier this year is im­prov­ing its op­er­a­tional per­for­mance. That’s hardly ap­par­ent to out­siders.

As far as price is con­cerned, Lon­min was ac­tu­ally above £33/share as re­cently as early June. The pre­cip­i­tous de­cline re­flects in part the gen­eral mar­ket (see Mer­afe, along­side) but also Lon­min’s spe­cific prob­lems, which have made it the worst per­former on the FTSE 350 min­ing in­dex over the past year.

Xs­trata claims that eight of Lon­min’s nine big­gest share­hold­ers sup­port it. Sadly, the ninth is the big­gest: as­set man­ager M&G, which has a stake var­i­ously re­ported as 15% or 17% but in ei­ther case enough to block Xs­trata from com­pul­sory ac­qui­si­tion of 100% of the eq­uity. So far, Xs­trata has built up an 11% stake.

Bet­ting in Lon­don is that no other min­ing ma­jor will in­ter­vene, as they’re all too in­volved in other things, and that Xs­trata will pre­vail, though maybe at a higher price – closer to £40/share. But what­ever hap­pens, this story still has months to run. Three fi­nal thoughts: It’s been sug­gested that buy­ing Lon­min is just part of pret­ty­ing up Xs­trata to make it a more at­trac­tive bid tar­get. That’s true in terms of as­set mix. How­ever, the big­ger Xs­trata be­comes, the more in­di­gestible. Also, it will take time for it to prove it can ex­tract value and syn­er­gies from Lon­min. And I still think Davis would rather cap­tain his own ship.

Sec­ond, if it goes through as a cash bid it will be a use­ful boost to SA’s bal­ance of pay­ments.

Third, un­like most of the ma­jors, Xs­trata has been in­creas­ing its de­pen­dence on SA. Could that some time lead to it seek­ing a sec­ondary list­ing on the JSE? It would be a wel­come ad­di­tion to our boards. (See story on page 30.)

MICHAEL COUL­SON coul­sonmh@gmail.com

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