[miningmx.com] — IF I were Xstrata CE Mick Davis, I’d be thanking my lucky stars that “lack of clarity and certainty regarding the future availability of credit [that] introduces significant risks into the financing package available” has given him a cast-iron face-saving reason for not proceeding with his company’s mooted bid – or pre-conditional proposal, to use the technical term – for Lonmin.
Just look at what’s happened to both the platinum metal price and the Lonmin share price in the two months since the first announcement.
The platinum price has fallen from over $2,000/oz to about $960 – though, despite some newspaper headlines, that still leaves it a way to go before dipping back below a gold price now at $872.
The £33 a share Xstrata was then talking of offering was a 42% premium to the then market price of £23.19, even though, as I wrote in Finweek magazine, Lonmin had actually been as high as £33 in early June. After initially moving up close to that £33 notional bid price, it has since fallen steadily away, as the market increasingly doubted whether a bid would ever materialise.
On the same day that it announced there will be no bid, Xstrata also announced the purchase of 22.2m Lonmin shares, or 14% of the equity, for £440m cash, or about £19.79 a share. That took its total holding to 38.9m shares, or 24.9%, for a total cost of £991m, an average of about £25.45.
The market price at the time Xstrata was buying would have been around £22.75, so it was paying a premium of about 12%. The price has weakened further since the shelving of the bid, losing almost 20% in short order, and is now about £15.80.
It would be interesting to know where these shares were sourced. According to the Lonmin 2007 annual report, the only holdings of more than 5% were the Prudential Assurance group (21.4m shares, or 3.8%) and Threadneedle Asset Management/Ameriprise (11.5m, 7.4%). The group’s BEE participation is held at the Lonmin SA level.
Clearly, Xstrata approached institutional shareholders directly, and it wouldn’t have been able to accumulate a stake of this size on the market without driving the market price significantly higher. But statutory returns filed by Lonmin to date don’t allow us to identify the sellers.
If private investors weren’t given the same opportunity to get out, that’s sadly a fact of life.
True, Xstrata is showing a notional loss of about £375m on its holding. But it now has not just a two-, but a three-way bet on Lonmin, which will surely pay off one way or the other.
Consider:
* A 24.9% stake in practice blocks any bid by a third party, meaning that while Xstrata may not be able to positively dictate Lonmin’s future, it does in effect have the power to veto any proposal it disapproves of;
* It can make small additions to its stake through the market, taking its average price down further and cementing its pole position for a renewed bid when share and metal markets are more favourable, and regulations allow; or
* Should another suitor emerge, Xstrata will be able to use its blocking power to extract the best possible terms.
So Xstrata really can’t lose, unless you think the platinum market is bust, for good. I don’t think it is, and as South Africans we must certainly hope that it isn’t, given the importance of platinum mining to the economy.
It is true that Xstrata’s ambitions to be a major player in platinum have at best been delayed, but given the state of world markets that may not be a bad thing.
Meanwhile, just six weeks after Lonmin chairperson Sir John Craven was assuring us that Lonmin’s “new and experienced operational management team … is improving performance”, CEO Brad Mills has stepped down in favour of the current chief strategic officer Ian Farmer (46).
One of the chief criticisms of Mills was that he ran the company from London, which even in these days of instant communication was thought by many to be too remote, if not a colonial relic.
Though Farmer was also based in London, he served as finance director of Lonmin Platinum in SA from 1995-2001. It’s thought that he’ll be spending far more time here than his predecessor.
Five weeks ago, Farmer said that £33 a share for Lonmin was “a steal”. Now he’ll have to prove it.
Mind you, Davis isn’t exactly without challenges, either. His company’s share price has fallen from about £38 in early August to £13.57, or by almost two-thirds. That’s an even worse performance than Lonmin’s, and he needs to do something soon to prove that the decline is excessive.
