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Xstrata, Barrick tipped as Lonmin suitors
David McKay & Allan Seccombe
Posted: Fri, 17 Feb 2006
[miningmx.com] -- LONDON-listed Xstrata has been tipped as the front runner for Lonmin, the platinum firm which said on February 17 that it was in takeover talks. “With forecast free cash flow of $1.7bn, and a balance sheet of $260m, Xstrata has the firepower,” said Mark Smith, an analyst for RBC Capital Markets.
Lonmin had earlier announced that the run up in its share price, gaining as much as 34% intraday on February 17, was owing to talks with another company that could result in a takeover. Lonmin, which produced just under 1 million oz of platinum in its 2005 financial year from its South African mines, has a market value of about $6.87bn.
As pointed out by Miningmx, Xstrata has a certain level of comfort with South African mining. It owns coal and chrome mines in the country and recently concluded a joint venture with Anglo Platinum, known as Mototolo, in the platinum
sector.
The assets of Lonmin and Xstrata are similarly cash generative: Lonmin reported an operating margin of about 45% which is not unlike Xstrata’s business, Smith said.
“Xstrata has been late into the game and has to do something with its free cash,” said Smith. “It would make sense to the market.” Xstrata, clearly in expansionist mode, has hit its head a few times in the last two years having been outbid by BHP Billiton for Australian firm, WMC Resources. It was also unsuccessful in bidding for outright control of Falconbridge.
“We believe Mick Davis, Xstrata’s CEO, has long held ambitions to return to South Africa for an acquisition. However, we believe that Xstrata would be more likely to bid for Impala Platinum despite its larger size at £6.4bn market capitalisation,” said John Meyer of Numis Securities in a note.
“There are a host of possibilities, but it is most likely to be Xstrata,” said Simon Kendall, an analyst for UBS Warburg in
Johannesburg. “It has indicated an interest in platinum. The other big players have said they are not interested in platinum in South Africa,” Kendall said.
But gold companies – Barrick Gold and Polyus, a Russian firm seeking diversification, are possible dark horses.
“Barrick has never had anything outside its gold and its silver credits,” said Brenton Saunders of Craton Capital, a South African fund management company. “For a gold company to buy platinum ounces certainly makes sense as its earnings would become more consistent with the cycle,” he said.
“I’ve heard it could be Barrick,” said John Clemmow, an analyst for Investec Securities. “It would be a fantastic boost for Barrick if they were able to convert the platinum in Lonmin to gold equivalent ounces. They’d also be a healthy boost in earnings.”
Barrick recently completed the takeover of Placer Dome, a Canadian firm with copper by-product credits from its investment in Chilean mine,
Zaldivar. And on February 14, Barrick announced it had agreed with Antofagasta to buy a stake in a copper-gold project in Pakistan, Reko Diq. Antofagasta is buying the project owner, Tethyan Copper Company.
Polyus, a developing Russian gold producer, has been considering a US listing, possibly an ADR, but would acquire for itself unparalleled position in London for its gold and platinum combination were it to buy Lonmin. “There would be no platinum/gold company in London to rival it. It would command a huge premium,” said Smith.
Polyus intends to grow its gold output to 3 million oz/year from its current 1 million oz/year. Lonmin intends to grow platinum output to 1.3 million oz/year from 1 million oz by 2010.
“This would be a good time for Lonmin executives to get out of the market. If they could get £30-£35/share, they’d probably happily walk away. It’s the top of the market,” Smith said.
Impala Platinum, Anglo Platinum and Gold Fields have
been identified as other interested parties.
“It is unlikely to be Impala or Anglo Platinum. They have fallen foul of the competition authorities before in this,” said Kendall. Impala Platinum famously attempted to buy Lonmin in 1997, but after a court battle, Impala was prevented by the European Commission from doing the deal.
BHP Billiton, the world’s largest platinum producer, has been identified as a potential suitor, but it’s not considered to be considering a bid. Commenting on platinum assets, Mike Salomon, executive director at BHP Billiton said: “If we found something in exploration we would pursue it. Besides this, we feel good about our portfolio.” He was commenting at BHP Billiton’s interim results presentation on February 15.
“We do not believe that Lonmin is able to justify the current market valuation of £3.044bn and believe there is significant risk that the shares may have overshot the level which other miners might be prepared to pay,”
said Meyer.
Use Miningmx's share price tool (click on the share price towards the top of this article, underneath the 'Related articles' tab) to access a fully interactive share price graph for Lonmin.
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