[miningmx.com] — IVAN Glasenberg is reportedly betting on a recovery
in the thermal coal price to justify Glencore’s restructured $33bn bid for Xstrata.
However, Glasenberg has considerably less interest in platinum, according to
analysts. This raises the question about whether Xstrata’s 24.6% stake in Lonmin will
become available should shareholders approve the tie-up of Xstrata and Glencore, a
marriage over which Glasenberg will preside.
“I think they will hang on to the Lonmin stake for as long as possible,’ said Peter
Major, an analyst for Cadiz Corporate Solutions, where he’s head of the broker’s
mining and resources division. “If someone wants to make a bid for the Lonmin stake,
it will have to be at a hell of a premium.’ Major reckons shares in Lonmin, which have
fallen nearly two-thirds in value since the beginning of 2012, could be 100% higher 12
months from now.
“I don’t think there’s anyone not making money now,’ Major says of the platinum
sector. The irony is that there’s a short-term benefit flowing through to the platinum
sector owing to the undoubtedly long-term negatives attached to the strike action. The
rand has fallen to three-year lows while the platinum price has spiked about $280/oz
to test $1,700/oz. That means the rand-platinum price alone is 28% higher today than
it was in August before the mine strikes truly kicked off.
According to Macquarie Securities, about 5% of global platinum supply has been
knocked out by strike action, equal to 300,000 oz. In addition, some 20% of the
world’s platinum mining capacity is currently offline with no immediate solution in
sight. This is partly informed by the closure of four Anglo American Platinum
(Amplats) shafts last week with the dismissal of 12,000 workers out of a total 15,000.
Major thinks there’s little chance of Amplats reopening the shafts with important
implications for the estimated 500,000oz plus supply surplus in the platinum market.
“That sucker will disappear fast,’ he says of structurally lower production from SA
mines.
It all makes for some much-needed positive reading for the platinum producers in the
medium term. John Meyer, an analyst for UK broker Fairfax Securities, was even
moved to comment the outcome of the strikes would be net positive for labour
relations: “Ironically, the South African industry may emerge better set from the
strike action with closer ties between management and workers.’
From an investment perspective, there’s a case for looking at platinum and not just
the metal through an exchange-traded product. According to Linda Eedes, a portfolio
manager for RE:CM, the investment thesis of platinum stocks such as Lonmin remains
intact.
“The control SA has over platinum minerals is a huge barrier to entry and provides a
large value underpin,’ she says of the platinum industry. And the odds of a platinum
substitute in autocatalysis are dismissed by Eedes. “Alternative metal uses are
developed when prices are high,’ she says. Her argument is value-based, however.
The investment horizon is a firm five to seven years, a period in which the platinum
cycle, including demand from Europe for diesel autocatalysis, will turn.
She’s right, one suspects, although some remain cautious. Andrew Dittberner, senior
investment manager at Cannon Asset Management, says the outlook for platinum
shares continues to remain opaque, at best. “I suppose some of the larger companies
look interesting, such as Impala Platinum,’ he says. “But we think it’s a bit too early
to call at the moment.’
In the meantime, there’s the question of Lonmin’s short-term pain. It’s thought that it
is preparing an equity injection of between $400m and $1.5bn, according to analyst
estimates. Whether it achieves this through a rights issue, where all shareholders
have the option to buy new shares in the company, or through a book-build, where an
investment bank invites institutions to take up a parcel of shares on an auction basis,
is an unknown at present.
Major thinks there’s a chance that Lonmin’s bankers might even support a plan that
doesn’t involve a major equity issue. This would be through a waiver of the covenants
Lonmin is thought to have broken with its bankers. The prospect of production
closures might be a part of such a plan, however, and probably not preferred by
Lonmin management.
Issuing new equity in Lonmin will be a painful process. A large New York fund told
Finweek that it would seek a healthy discount were it to subscribe for the
company’s stock, possibly up to 40%. RE:CM thinks a 25% discount is possible, and
there are still questions over the long-term fortunes of the company.
First, it can expect to be leaderless for some time. Its CEO, Ian Farmer, is said to be
hopeful of a recovery, but it’s unlikely that he would be re-installed. The interim CEO,
Simon Scott, is not thought to be a long-term replacement.
Second, there’s the question as to Mick Davis’s views on Lonmin. The CEO of Xstrata
will be interim CEO of combined Glencore/Xstrata, if approved, for a six-month
period. He may decide that the shares he purchased in 2008, when Lonmin was valued
at $10bn versus the $1.7bn of today, was one of his few mistakes. As such, the value-
leaking shares in Lonmin represent unfinished business.
– Finweek
