Chip Goodyear, CEO, BHP Billiton
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» Xstrata studying Eland Pt
» Eland share not crashing - Leon Esterhuizen, Investec Securities
» Eland tumbles on share price concerns
» Xstrata's link to Eland Platinum questioned
» Eland received takeover calls
» Eland sells shares for R350m


At R8,5bn, Eland Platinum is a snip at the price
David McKay
Posted: Tue, 26 Jun 2007

[miningmx.com] -- SPECULATION CONCERNING Eland Platinum and another platinum exploration firm – Wesizwe Platinum – has obscured what’s really going on in efforts to find new sources of the metal.

Media reports have suggested that the two companies’ share prices have increased to levels far in excess of their fundamental values.

The argument is that both are hyped up exploration plays and that investors are forgetting they only own small amounts of mineable metal in the ground – and even then that can only be extracted at high cost.
the new generation of platinum mines
On that basis the 400% plus increase in Eland’s share price since January appears to be market froth, the zealous enthusiasm of irrational investment in an overactive bull market.

Compounding interest in Eland is the suggestion that Xstrata, an acquisition-hungry diversified mining firm listed in London, wants to buy Eland Platinum. BHP Billiton is also said to have been interested.

However, online publication Moneyweb reported that both BHP Billiton and Xstrata had walked away from Eland. Perhaps as a result, 25% of Eland’s market value evaporated in days – a development that clearly shocked its management and moved it to ask that the JSE investigate recent trades in the stock after the Moneyweb report.

At the time of writing it appears Moneyweb may have got it wrong concerning the lack of interest in Eland. According to our sources, Xstrata is wrapping up a due diligence on Eland Platinum and may submit an offer. As for BHP Billiton, it’s walked away – but not necessarily because it found Eland too expensive. Rather, BHP Billiton is worried about the potential for fatalities mining underground amid South Africa's infamously poor safety record.

However, the muddying effect of all this speculation is that investors are forgetting that the new generation of platinum mines under development in South Africa tend to be riskier than established ones.

Colin Bird, CEO of Jubilee Platinum, which recently unveiled the scope of its Tjate mine, which it’s developing, expressed that point. In its study, Jubilee Platinum (a secondary listing on the JSE) said it would sink a mine to around 1km at a cost of nearly R2,8bn (about US$400m). That looks expensive and deep.

Says Bird: “You can’t mine the near surface stuff again. And many of the other western limb projects are also relatively deep. This represents the new generation of platinum mines.”

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There’s other evidence that the scope of new platinum projects has shifted and that mining companies are prepared to take on higher risk projects. Impala Platinum spent R4,2bn buying African Platinum, a company that owns a mine descending to about 1,3km with planned production of 300 000 oz/year of platinum. And Lonmin spent R3bn buying the Akanani mine from Afriore, an orebody with relatively little exploration.

Compare those deals to Eland Platinum, for which either BHP Billiton or Xstrata were considering a minimum R8,5bn offer. Eland hopes to produce 160 000 oz/year of platinum, with the potential to increase that to 260 000 oz/year by going underground. It also now owns the neighbouring Madibeng property, which it claims contains enough resources to help take production to 1m oz/year of platinum by 2015.

In addition, Eland Platinum is a near cash operation, having stockpiled ore and already refined some on a test basis. That lessens risk on the stock and makes it more attractive for a diversified firm wanting to access the platinum sector for the first time.

On that score, where do you go if you want to break into the high concentrated platinum industry in South Africa, where four main players hold 70% of known world reserves?

A R980bn ($140bn) company such as BHP Billiton could certainly make a play for Lonmin, which currently produces 1m oz/year. But at a market capitalisation of R80bn ($11,5bn) that’s a chunky acquisition – even for BHP Billiton. As for Xstrata, Lonmin would represent a quarter of its market capitalisation.

BHP Billiton CEO Chip Goodyear, speaking to Finweek last month, said companies do pay up for assets if they feel they have a unique business case for owning it. “Beauty is in the eye of the beholder,” Goodyear said.

BHP Billiton’s $9,2bn bid for Australian firm WMC was far in excess of its competitors because it believed it could add value where others could not. Perhaps Xstrata will take a similar view on Eland Platinum. Meanwhile, any potential bid for Eland has become a damn sight cheaper than a fortnight ago.