WHEN I SPOKE TO
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 email@example.com