LONMIN, the world's third largest platinum producer, is considering buying assets in nonscreen-traded commodities, which include coal and raw materials in the ferrous metal suite.

Plans for new acquisitions are part of Lonmin's effort to meet a diversification strategy. The group is expected to build platinum production, exclusively from South Africa, to about 1m oz/year, possibly this financial year. However, Lonmin has no major scope for further growth in platinum. Conscious of that, the company has been mulling the benefits of diversification for about 18 months.

Lonmin CEO Brad Mills recently told analysts in SA that acquisitions of private companies were most likely, as listed entities were proving too expensive. He also identified potential targets in emerging markets, such as Peru, Russia and the rest of Africa. That would spread the group's geographic and commodity risk. Lonmin recently completed a major block of its empowerment strategy by helping to create Incwala Resources.

However, analysts question whether the world's mining sector needs another diversified resources company given the dominance of the big five: BHP Billiton, Rio Tinto, Anglo American, CVRD and Xstrata.

JP Morgan, in a recent note, said: 'Diversification could add value, in our view, if a transaction took place at the right price, but we're not convinced that a Rio/Anglo/BHP Billiton/Xstrata-type rating would be in prospect following diversification.'

Lonmin also runs the risk of losing its appeal as a pure platinum play. British institutional investors are sometimes not mandated by their funds to buy into Anglo Platinum or Impala Platinum, the world's first and second largest producers respectively. As a result, Lonmin is their sole pure exposure to the thriving platinum market.

There's also the question of whether accumulating unlisted assets would significantly build the critical mass Lonmin would require in a market such as iron ore. For example, BHP Billiton has more than doubled its output of iron ore to 100m t/year since 1994.

Nonetheless, the benefits of buying into ferrous metals, and the raw materials that supply the industry, are significant. Iron ore revenues are fixed in annual contracts whereas the platinum price changes daily. Coal and iron also have extremely sound fundamentals owing to the pace of industrial production in China.

Diversification would lead Lonmin in a circuitous route, having disinvested from coal in the late Nineties at relatively low valuations. It also sold its one-third stake in Ashanti Goldfields as part of a transaction that saw the Ghanaian company absorbed by Anglo subsidiary AngloGold.