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Lonmin defends Southern Pt offer Posted: Thu, 05 May 2005 [miningmx.com] -- LONMIN CEO, Brad Mills, defended his company’s investment in Canadian firm, Southern Platinum, claiming the rand was “a natural hedge” that offset political risk and the company’s focus on platinum. Speaking at the Lonmin’s interim results this week, Mills said that new platinum ventures would be undervalued for another three to five years. Lonmin announced on March 22 it intended to buy Southern Platinum for $190m. Mills said this week that the transaction would be completed by July 1, 2005 subject to approval by Southern Platinum shareholders, and South Africa’s Competition Commission. Southern Platinum controls the Johannesburg listed Messina Platinum which currently produces 45,000 oz/year of platinum. Lonmin plans to follow through a strategy to lift output to 75,000 oz/year by 2007, and was investigating Southern Platinum’s intention to increase platinum output by 150,000 oz and 50,000 oz/year in subsequent phase two and three expansions. Mills said these expansions were “conceptual”, but would help Lonmin to platinum output of 1.1 million oz/year by 2008, and 1.2 million oz by 2010. Mills, who has been under fire for allegedly over-paying for Southern Platinum, said the world’s platinum ventures were undervalued. In comparison, other investments in separate commodities were proving expensive. Southern Platinum’s Messina Platinum was initially operated by Impala Platinum, but it placed the company’s operations in mothballs during the 1990s claiming difficult geology. Impala confirmed to miningmx recently that it had examined buying the assets again, but unsurprisingly, it could not justify the transaction. Lonmin hopes to succeed where Impala failed by mechanising the mine and injecting enough capital to make it work. Southern Platinum struggled to properly capitalise the mine. Meanwhile, Mills’ optimism about Southern Platinum is beginning to gain some traction among analysts. “It [Southern Platinum] is a great deal for Lonmin,” said Mark Smith, an analyst for RBC Capital Markets, the stockbroker that helped advise Southern Platinum on the transaction. Lonmin spent $15m cancelling a toll-refining treatment agreement between Impala Platinum and Southern Platinum. “We believe this agreement was worth $20m just for just the first phase expansion,” Smith said. “The acquisition of Southern Platinum should enable the business to significantly increase the scale of its business,” said John Meyer, an analyst for Numis Securities. “It set the business on a new path of production and earnings growth over the next five years,” he said. Steve Shepherd, an analyst for JP Morgan, said the acquisition of Southern Platinum could potentially add value on condition certain synergies were unlocked. Assuming a total acquisition price of $273m, including Southern Platinum’s existing debt and the cancellation of the toll refining agreement, synergies of $190m would have to be unlocked. “Superficially, the numbers look like Lonmin could be overpaying, but a number of underlying synergies could vindicate the price,” he said. “We think the market got it wrong on what Lonmin could recoup from Southern Platinum,” said Smith. There are risks to Southern Platinum, however. Most analysts agree that although the acquisition lifts Lonmin’s platinum reserve numbers by 20 million oz, the quality of the asset is below that of Lonmin’s existing mines. This valid observation is a reflection of Lonmin’s difficulty in finding outlets for growth. The to-ing and fro-ing on diversification is part of the same problem. In fact, Mills has not fully dealt with Lonmin’s strategic direction. Value-adding opportunities would be pursued in the future, but the focus was on platinum, Mills said. Shepherd observed: “We remain concerned that the group could emerge a ‘bit part’ player among London-based diversified miners, which causes us to ponder the group’s rating”. It also leaves the group open to potential hostile attack. Following the failure to capture WMC, Xstrata has been linked with Lonmin. If the group re-rates downwards, it would make hostile activity even more likely. Smith reckons Xstrata is generating enough cash flow to gobble up Lonmin in a single bite. Mills remains coy on the possibility, however: “Mick [Davis, Xstrata CEO] knows my number,” he said. In the meantime, Lonmin has set itself cost reduction and conceded this week that it needed to rebuild confidence in its technical abilities following a smelter explosion in 2004. There are worries regarding the departure of senior management but Smith said the employment of Alistair Ross, formerly of Inco, was a coup. He had “pedigree” and understood mechanised mining, the preferred mining technique envisaged for Messina. “It now looks like platinum is Lonmin’s commodity of choice. So if they’re going to do this, it will be done aggressively,” said Smith. Another $70m is being set aside for investment in Southern Platinum’s operations notwithstanding negative cash flow in the interim period. Higher grade mining news. Straight to the point. Straight to your mailbox. Subscribe now for miningmx's free news alerts.
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