Xstrata may turn gaze on Lonmin

[miningmx.com] — XSTRATA has closed the book on its $7.00/share bid for WMC Resources saying it would not attempt to trump BHP Billiton’s $7.85/share offer. The rival bid was confirmed by BHP Billiton today, a proposal that has, somewhat surprising in its haste, won the support of WMC Resources’ board. A “deed of undertaking’ has been signed between the Australian firms, with a A$92m break-free agreed. Viewed from this distant outpost, that would be that.

General opinion is that BHP Billiton is paying a high price for dominance entrenchment. It must, for instance, take certain valuation risks, such as a long-term copper price of $1.20/lb against a current record high of $1.49/lb, to justify the deal. Although WMC Resources adds uranium to BHP Billiton’s suite of assets – a by-product of the Olympic Dam mine – there isn’t any immediate short-term benefit other than shooing off a pretender to its crown. As BHP Billiton CEO, Chip Goodyear observed: “We expect the acquisition to add material value to BHP Billiton shareholders over the medium to long-term’.

Xstrata, meanwhile, is a firm with a proven track-record of acquisitions having bought MIM Holdings in 2003 and, in the year before that, Enex Coal (Australia) and Duiker Coal (South Africa). It will be debt-free next financial year, and once it resumes and completes a 10% share buy-back, will be wondering what to do with an idle balance sheet. The expectation is that it won’t be too long before the company sets its sights on a new target.

One passing thought is that Lonmin, a platinum firm, is an obvious takeover target, although it may be in expensive territory. Some analysts believe its target price is about £8,00/ share, about £2.00/share lower than its current price. Squeezing more production form its mines, and lowering costs will add value.

The 2% improvement in Lonmin’s share price (at time of writing) is reactive and indicative of its vulnerability. Is there a chance speculators already believe Lonmin to be open to an Xstrata attack?

Lonmin has vacillated on its strategy over the last two years and new CEO, Brad Mills, has added to the perception that the company is in a tactical limbo. His planned diversification strategy, unveiled within months of taking over, incurred the displeasure of shareholders because it was so ill-considered.

Now Mills said he’s content to remain focused on the platinum sector. But it’s a small industry and cabin fever might already be setting in. He would, for instance, probably have been tasked with the integration of some of WMC Resources’ assets into BHP Billiton’s base metals division of which he was the divisional head about 12 months ago.

Meanwhile, the pace at which BHP Billiton tied down WMC Resources has pricked the ears of some analysts “It looks like an Australian stitch-up,’ said John Clemmow, an analyst for Investec. “Non-Australians have not been invited to this party,’ he said.

BHP Billiton architect Brian Gilbertson upset the apple-cart several years ago hoping, it was rumoured but never confirmed, to merge BHP Billiton with Rio Tinto, or an oil company. This would have snatched BHP Billiton’s headquarters away from Melbourne and flung it to some distant quarter of the world!

Anglo American, meanwhile, could use some of Gilbertson’s dynamism since it remains the less preferred of the UK diversifieds. Might Anglo join the fray and bid for WMC Resources, thereby diluting the risk currently posed by South Africa? Unlikely, by any stretch of the imagination.

Gary Quinn, who helps run the $3.2bn Prudential Asset Management fund, says Anglo is probably not as cash flush as BHP Billiton. “They [Anglo American] have other capital commitments which might count against them,’ Quinn said. “However, Anglo is desperate to increase its commodity exposure because it has a particular focus on industrial minerals and paper,’ he said.

“Definitely not. They may not have said it publicly, but I doubt they’d in the running for WMC,’ said Dave Tunnington, a fund manager for Old Mutual Asset Management. Anglo American has declined to comment on the speculation.