Lonmin – the squeeze is on…! Cue Beverly Hills Cop music

Time is running short for Mick Davis, CEO of Xstrata if he is to make a renewed move on Lonmin before the vote on the rights issue on the 19 Nov.

We have covered Lonmin extensively both on the blog and here on page 22 of our special Mining October edition of our magazine. Link here – http://issuu.com/spreadbetmagazine/docs/spreadbet-magazine-v9_generic.

Mick Davis first made a move on Lonmin at a price of £33 per share back in 2008 – that’s right £33 valuing the company at nearly £7bn compared to less than £1bn now! The platinum is still there and the only difference is that Lonmin now has incremental debt equivalent to £1.70 a share. £33 – £4.90 current share price and adjusted for the debt level still leaves a gaping £26.40 value differential between what Davis thought the company was worth in 2008 and now. Any normalised measure of the NPV of the platinum that Lonmin holds, even with conservative forward platinum prices, still puts the true value of Lonmin at at least twice the current share price.

Here’s the statement from 2008 from Davis – 

Proposed offer price fully and fairly values Lonmin’s asset base and growth pipeline, while recognising the inherent risks, time and investment required to restore production to previous levels

South African based platinum mining, smelting and refining expertise, successful track record and unique synergies position Xstrata to turn around Lonmin’s operations 

Transaction accelerates Xstrata’s platinum growth strategy and would establish Xstrata as the third largest producer of platinum with further earnings diversification.

Every element of the then statement still holds true, albeit with higher political risk attached to SA. Will Davis really let his prize slip for the sake of a few hundred million pounds? We expect a revised clean cash offer north of £7 if he does move and this would be a coup and a half for Xstrata given that it is a discount of some 80% to the original bid. Since which platinum reserves have gone up and the rand weakened – a net benefit to Lonmin given the selling in dollars v payment in rand business dynamics. The more I ponder this situation, the more it seems inconceivable Davis would not press ahead with a renewed move that offers a modest control premium.

Watch this space, particularly given the crazy short level in the stock of nearly 20% of the float – very few of these have been covered and so if there is a scramble for stock we will move very quickly indeed! I certainly wouldn’t like to be the underpants of the fund manager at Sothic Capital Management today responsible for the 1.5m shares short position and which I estimate was put on around this level!! As for the “anal”yst at Soc Gen responsible for covering Lonmin… I’ll leave you to guess my retort.

10 day chart of Lonmin