Resizing the platinum jigsaw

Xstrata’s delay of full acquisition of Lonmin intensifies the battle for South Africa’s platinum group metal riches.

JOHANNESBURG - 

Could anything have been less surprising than Xstrata announcing on Wednesday that it has effectively delayed its acquisition of Lonmin?  The battle was unofficially launched on 6 August 2008, when the Anglo-Swiss diversified miner announced intention of a hostile GBP 33 a share cash bid for Lonmin, effectively valuing Lonmin at around USD 10bn.

Over the past couple of days, prior to Xstrata's announcement, Lonmin had traded as low as GBP 21 a share. This is the way that investors tell the market that there's no way the deal is going to be consummated, at least not on the terms envisaged nearly two months ago. In a further announcement on Wednesday, Xstrata said it had acquired additional Lonmin shares, such that it now holds around 25% of the entity, ranked the No 3 platinum group metal (PGM) miner in the world, after Anglo Platinum and Impala.

As analysts at RBC Capital Markets argue, with the "basket" PGM price - calculated mainly from the prices of platinum, palladium, rhodium and gold - now hovering around USD 900/oz (against USD 2,000/oz  six months ago), "the logic makes sense. We expect Xstrata to acquire Lonmin over time. Our ‘back of the envelope' value for Lonmin is approximately GBP 15, against the current market price of around GBP 19. Exit via the market door". Lonmin's market value has halved to USD 5bn in the past two months.

In announcing that it has no intention to make an offer for Lonmin, Xstrata was keen to emphasise that the main reason was the requirement to refinance a significant portion of the acquisition debt facility in the short term, something that would not be in Xstrata's interest, given the current uncertainty in the financial markets. It is also no secret that PGM metal prices have haemorrhaged of late; analysts estimate that at least half of southern Africa's PGM production is currently unprofitable.

Under the London City Code on Takeovers and Mergers, Xstrata won't be able to make an offer for Lonmin for the next 12 months, unless there is a rival bid, but it can participate or make a new bid within six months in terms of the rules, if agreed by Lonmin's directors, or following an offer for Lonmin by another party, or following the announcement by Lonmin of a "whitewash" proposal, or if there are material change in circumstances.

The City Code also does not preclude Xstrata bidding for other entities. Xstrata has already concluded a number of PGM transactions, not least the 2007 acquisition of Eland for USD 1bn in cash. Into the fray, on 12 September 2008, arrived Impala, the world's No 2 miner of PGMs, which officially announced that it is in talks with Northam and Mvelaphanda Resources, which holds 66% of Northam, "to create a South African controlled platinum champion". 

This followed weeks of buzzing activity around the PGM sector; the day before Impala's announcement, Aquarius Platinum said it was "considering options for participating in South African platinum industry consolidation", adding, however, that "the options under consideration do not include a possible offer by the company for Lonmin".

One of the most desirable assets in the overall story is Booysendal, recently acquired by Northam. Northam, crucially, ranks as the only PGM miner with smelters, outside of the Big Three. Booysendal has boosted Northam's PGM ounces-in-the-ground, massively, to a total of 120m, ranking fourth only to Anglo Platinum, with 725m, Impala, with 415m, and Lonmin with 166m. Aquarius holds a relatively modest 71m, but is highly regarded for excellence in management, led by Stuart Murray, and powerful cash generation.

The corporate battles could play out in various ways, but the focus will remain for the meantime on southern Africa, which produces around 75% of the world's PGMs, most of it from the Bushveld igneous complex in South Africa. Anglo Platinum is out of the fray, given that it's held close to 80% by Anglo American, and, beyond competition barriers, it also recently sold significant PGM ounce properties to Tier II PGM players Anooraq and Northam, driven mainly by South Africa's black economic empowerment (BEE) framework.

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Related Links ARTILCES:  Noble metals bleed  Xstrata walks away from Lonmin platinum bid  Platinum price could bounce back as margins reduce  Platinum stocks still suffering from demand worries  OTHER PAGES:  PLATINUM GROUP METALS AFRICA

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