Mick Davis, CEO, Xstrata
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» Xstrata's ambitious Mr. Davis
» Xstrata offers $1bn for Eland Platinum
» At R8,5bn, Eland Platinum is a snip at the price
» Xstrata would consider Pt investment
» Norilsk trumps Xstrata's LionOre bid


Xstrata eyeing bigger things
David McKay
Posted: Tue, 14 Aug 2007

[miningmx.com] -- XSTRATA’S R7,2bn ($1bn) SWOOP on Eland Platinum, a Johannesburg-listed exploration firm, raises the question of how the British company intends to proceed now that it has a foothold in South Africa’s platinum sector.

Statements from Xstrata last week suggested Eland Platinum represented “an ideal platform” and raise the prospect of more to come. Analysts think there is.

One view is that Xstrata may turn its attention to other similarly placed platinum exploration firms, such as Eastern Platinum (EastPlats), principally listed in Toronto with an inward secondary listing in Johannesburg.

Xstrata is very bullish on metal prices
There’s also the suggestion Xstrata may bid for control of the Pandora project, which neighbours EastPlats. “Once you’ve got those two you’ve got a nice platinum-producing neighbourhood,” an analyst says.

But it’s not that clear cut. One conundrum is why Xstrata never threw its hat in the ring for Lonmin. It was long connected with the stock and more so lately, given the heavy 27% price decline in that stock since about mid-July.

Simon Toyne, an analyst at Numis Securities in London, says Eland represents far more value than Lonmin, notwithstanding the weakness in Lonmin’s share price lately.

“Eland offers long life, near term, low cost and substantial exposure to PGMs. Initial production of 176 000oz/year of platinum from an expandable asset base for a total cost of US$1bn appears attractive relative to Lonmin’s $9,7bn market capitalisation and upstream but expandable 1m oz of platinum production,” says Toyne.

However, another reason is that Lonmin would be so meaty a target it would prevent Xstrata from doing anything else. Xstrata CEO Mick Davis has much bigger ambitions.

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Instead of bidding for Lonmin, Xstrata is now becoming tighter with Anglo American, with which it shares Mototolo, a platinum joint venture signed two years ago.

It’s also worth remembering that Eland Platinum was created after it bought platinum-bearing land Anglo Platinum couldn’t use; and Anglo Platinum also has an agreement with Eland to buy its platinum concentrate, which it will refine into finished metal.

So the market tittle-tattle is that Xstrata may be skilling up its personnel in platinum production while simultaneously working down its debt for a friendly tilt at Anglo American, a company it’s getting to know well.

“Buying Eland Platinum won’t kill Xstrata’s ability to merge with Anglo,” says an analyst. “Eland is scaleable and Xstrata is very bullish on metal prices. But it knows it’s vulnerable to a correction in the metals market because its assets are predominantly tier 2.”

By merging with Anglo, Xstrata’s Davis improves the overall look of the company’s asset spread and makes it less vulnerable to downturns. “That’s the long-term strategy,” the analyst says.

So much for Xstrata, which appears to have warmed towards African mining exposure after spending several years seeking First World assets. (It also recently bid for LionOre, a nickel producer operating in South Africa and Botswana.)

Meanwhile, the deal is good news for Eland Platinum’s management, including Loucas Pouroulis and Eland Platinum MD David Salter, who have both been made fabulously rich by the transaction.

Eland Platinum Holdings, the principal in the transaction, only owned a direct 65% in the Elandsfontein mine. In fact, the balance was held by Penuell Maduna’s empowerment consortium – the Ngazana Consortium (26%) – and management (9%). It’s notable that Xstrata also spent an extra R100m ($14m) buying that 9% stake.

Scoring R100m will certainly put a smile on Pouroulis’s face and also help bury the ghost of Lefkochrysos Platinum, a prospect now owned by EastPlats. It was that project – once unkindly dubbed “Lefkocrisis” in the Eighties – that helped temporarily shatter Pouroulis’s reputation in South African mining circles.

The fact of the matter is that the bottom fell out of the platinum market before Pouroulis could develop that mine. No such bad luck this time.