Mick Davis’s next move With Xs­trata back­ing away from An­glo for now, at­ten­tion has swung to­wards the platinum sec­tor as the next likely action zone

Finweek English Edition - - Insight -

NOW THAT XS­TRATA has opted not to make an of­fer for An­glo Amer­i­can, the $64 000 ques­tion con­cerns what it will do next – and in­vestor at­ten­tion is fo­cus­ing on Xs­trata’s platinum am­bi­tions. Xs­trata CEO Mick Davis’s de­ci­sion is be­ing viewed by most mar­ket ob­servers as a “strate­gic re­treat”.

RBC Cap­i­tal Mar­kets an­a­lyst Des Ki­lalea com­ments: “Davis has re­treated grace­fully and lives to fight an­other day. I don’t think the fail­ure re­flects badly on him, be­cause he stuck to his guns. He al­ways said it would be a merger of equals or noth­ing at all.”

Bar­clays Cap­i­tal an­a­lyst Chris LaFem­ina says Davis will now play a wait­ing game to see if An­glo can de­liver on its prom­ises of cost-cut­ting and pro­duc­tion and op­er­a­tional im­prove­ments.

LaFem­ina says: “If An­glo is suc­cess­ful its share price should per­form well and the eco­nomics of an Xs­trata ac­qui­si­tion of An­glo at a pre­mium would likely be unattrac­tive to Xs­trata.

“On the other hand, if An­glo is un­able to de­liver on its prom­ises – we’re most con­cerned about the planned growth, es­pe­cially at Mi­nas Rio iron ore – then the com­pany will prob­a­bly be much more vul­ner­a­ble to an ac­qui­si­tion by a stronger Xs­trata at a small pre­mium in mid-2010.”

Ki­lalea reck­ons An­glo CEO Cyn­thia Car­roll faces three par­tic­u­lar chal­lenges: to find a part­ner for its Mi­nas Rio project in Brazil and to keep An­glo Platinum and De Beers go­ing in the face of the strong rand.

Last week’s surge in the price of East­ern Platinum (East­plats) – which jumped 50% in three days to R6 on the JSE be­fore pulling back to around R5,60/share – has re­newed spec­u­la­tion about Xs­trata’s platinum am­bi­tions. East­plats oc­cu­pies a key strate­gic po­si­tion west of Brits be­cause its east­ern bound­ary ad­joins Eland Platinum, which is owned by Xs­trata, and its west­ern bound­ary is con­tigu­ous to Pan­dora, which in turn is con­tigu­ous to Lon­min’s Marikana op­er­a­tions.

Lon­min con­trols Pan­dora, and Xs­trata still holds a 24,9% stake in Lon­min, fol­low­ing its failed bid for full con­trol last year.

Some an­a­lysts say it’s no co­in­ci­dence East­plats’s share price started run­ning im­me­di­ately af­ter Xs­trata backed off from An­glo.

An Xs­trata spokesman de­clined to com­ment, say­ing the group has a pol­icy of not com­ment­ing on mar­ket spec­u­la­tion. How­ever, min­ing in­dus­try heavy­weights such as Im­pala Platinum (Im­plats) seem to be tuning in care­fully to the mar­ket spec­u­la­tion, given the im­pli­ca­tions for their op­er­a­tions should any of it turn out to be true.

Im­plats CEO David Brown says: “Xs­trata as­pires to be a tier one platinum pro­ducer. That be­ing the case, it’s log­i­cal to ex­pect more action in platinum from Xs­trata. I ob­vi­ously can’t speak for Xs­trata but the spec­u­la­tion we heard out of Lon­don was that Xs­trata prefers Lon­min and – were it to get con­trol of An­glo Amer­i­can – it would give An­glo Platinum back to An­glo’s share­hold­ers and spin it out as a sep­a­rate en­tity.

“If that were to hap­pen it would com­pletely trans­form the platinum sec­tor. You’d have Lon­min op­er­at­ing as a divi­sion within a ma­jor min­ing house, while An­glo Platinum would have to op­er­ate as a stand-alone busi­ness without hav­ing a big brother in the shape of An­glo Amer­i­can prop­ping it up.”

Xs­trata can’t make any fur­ther moves on An­glo for the next six months in terms of Bri­tain’s takeover reg­u­la­tions.

LaFem­ina says Xs­trata could act now to get its shares to out­per­form those of An­glo over those next six months so that a po­ten­tial ac­qui­si­tion will be much more value en­hanc­ing. “We wouldn’t rule out ac­cre­tive share buy­backs sim­i­lar to what the com­pany did in 2005 and 2007.”

MICK DAVIS

Stuck to his guns

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