Glencore made best of bad Lonmin situation

[miningmx.com] – GLENCORE CEO, Ivan Glasenberg’s comments about the group’s decision to unbundle to shareholders its 23.9% investment in Lonmin would appear to suggest the Swiss headquartered group thought it was making the best of a bad situation.

Glasenberg inherited the stake in Lonmin as a consequence of the merger with Xstrata which had bought the minority holding in the platinum firm as a measure to block rival offers for it – a strategy former Xstrata CEO, Mick Davis, later acknowledged was a mistake.

In any event, Lonmin was immediately identified as a non-core investment by Glencore, largely because the metal couldn’t be screen traded. Given its lack of experience in the platinum niche, Glencore had no expertise in that market, said Glasenberg.

“On Lonmin, we had to assess the situation there,’ said Glasenberg earlier this month.

“Two of our colleagues sat on the board and tried to ascertain how we could assist,’ he said. This included installing a new chairman and adding Ben Moolman, formerly head of Eland Platinum which Glencore also inherited from Xstrata, to the executive committee [Moolman has since been appointed chief operating officer].

“We believe we did as mch as we could to get it in the right space,’ said Glasenberg.

“But we are not experts on platinum. We could have sold it on the market if there was a buyer; there were hints at potentially buying it, but no-one would buy it at a premium, so we decided to unbundle it,’ he said.

“We took it to best level we could do,’ he said.

Quite what Glencore investors will do with their Lonmin shares is quite another matter; the fear is that they will sell it – a possibility played out in the performance of the stock since Glencore announced its unbundling strategy for the company.

Lonmin is now worth 54% less than 12 months ago and at a current market capitalisation of R13.4bn, the company is valued R6.3bn less than Northam Platinum thus losing its status as bronze behind the gold and silver of Anglo American Platinum and Impala Platinum respectively.

A report by Leon Esterhuizen, an analyst for CIBC Capital Markets, suggested Lonmin needed to raise $300m to finance growth whilst Investec Securities, long a bear on the UK-listed stock, said the firm has been delaying inevitable restructuring.

“We believe shareholders in Lonmin need to realise that more money is needed if this company is to have any real prospect of remaining a prominent player in the PGM space and that delaying the inevitable could only jeopardise the immediate future but see Lonmin left out in the cold with respect to lower cost, longer-term output potential,’ he said.

There was a resurgence in Lonmin shares last week, up about 9% in a day, owing to a report by Citi which said the share represented a buying opportunity, albeit it a high risk one. Citi added that operationally, the company’s Marikana asset had been relatively well run over the past three years.

“The fall has taken the price to a level which now offers 29% upside to our target price, despite us reducing that target price … because of the fall in the platinum price and due a a re-evaluation of costs,’ Citi said in its report.

“Marikana’s only problem, in our opinion, is the currently low platinum price which has resulted in a low margin and a threat to its cash generation,’ said Citi in its note.

It did not see the depressed platinum price to be a long-term consideration as it had forecast an improvement to $1,700/oz from the current level of $1,115/oz before “… the end of the decade’.

Analysts, however, were sceptical that buying Lonmin when a share issue was likely, and in the absence of fundamental restructuring, was a wise move for investors. “You can’t catch a falling knife,” said one.