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
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.”
Stuck to his guns