quote of the day & this week’s opportunity – “The mining sector as a whole is currently trading at price-to-book levels last seen in the early 1980’s and late 1990’s”

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UPDATE (1) – 11:52 AM – Lonmin are up 3% today albeit on slim volume. With almost one fifth of the company’s stock sold short, IF Davis/Glasenberg come back with a control premium proposal we could have the short squeeze of the year. Additionally, the move by Xstrata is probably the first of a number of consolidatory moves by the stronger capitalised players over the next 6 months should valuations not improve and the very large discounts to net assets persist. This is likely to be a theme through 2013.

“The mining sector as a whole is currently trading at price-to-book levels last seen in the early 1980s and late 1990s,” Paul Whitburn, an analyst at RE:CM, said in a note. It was “offering the type of buying opportunity that only comes along once every decade”.

With ENRC, Lonmin, Bumi, Kazakhmys et al all trading at very oversold levels any additional weakness next week looks a strong buying opportunity to us particularly as base metals and certain commodties continue to rebound with platinum up nearly 20% over the last 4 months and iron ore rebounding to 3 month highs on renewed signs of strenght in the Chinese economy. For a more indepth look at the fundamentals on our mining picks take a look at our October edition here (page 21) –  http://issuu.com/spreadbetmagazine/docs/spreadbet-magazine-v9_generic

Additionally, weekend press stories surrounding the tussle for management control at Lonmin by the incumbent Board and major shareholder Xstrata looks to provide an interesting dimension on the proposed current rights offering. Xstrata have 2 plain choices – either participate in the rights offering to avoid being diluted at argubaly the bottom, or bid with a proper control premium. The most obvious route is a simple stock offer but the merger of Xstrata and Glenstrata is an additional complication. Still the time criticality of the convenant issue could be addressed through an interim loan to Lonmin by Xstrata.

Commenting on the rights issue and approach, another broker Barclays said – “While the size of the syndicate on the rights issue and the discount suggests advisers are worried about take-up, our view is the major shareholder is highly unlikely not to follow its rights given the issue is fully underwritten and book value impairment implications,” 

“Xstrata was being opportunistic in trying to secure control of Lonmin. But they’d be crazy not to try something at this stage,” the analyst said.

Lonmin rejected the proposal, but said it was open to receiving a revised proposal. Simons Scott commented today in response to questions surrounding the 2013 outlook for the company –

We will post a profit (for 2013) we anticipate the company will be debt free at the end of 2013. What we have in place is a funding plan that’s going to be for the benefit of all of our shareholders. On the basis of the proposal that Xstrata put to us that wasn’t the case. From our perspective we need to look after all our shareholders, and not just a single shareholder. With the plan we have on the table, that puts Lonmin back into a position of financial strength and ramping up the assets that we think is the right thing to do.

We have a plan in place that sees us ramping up productivity levels that we achieved prior to the strikes around the middle of the year. We started with the ramp-up and we got the return to work at the beginning of October so we have gone about that in a safe and measured way and we are focusing on relationships. We are very pleased to say that our productivity levels today are ahead of expectations so we have confidence in the plans we have in place.”

The Xstrata proposal surprised the mining community, but makes certainly sense to us as we mooted here some 2 weeks before the announcement – http://www.spreadbetmagazine.com/blog/could-lonmin-have-been-approached.html. 

Xstrata’s Eland platinum mine and its chrome activities are faring badly at present, partly because of high electricity costs in South Africa and low platinum prices. A merger with Lonmin, which produced 712,000 ounces of platinum in the year to end-September, would be a bargain at Lonmin’s current share price. A merger of the chrome and platinum smelters could unlock considerable synergy. “It could result in a much larger company and a new growth path for a new company that would be capable of further consolidation,” one analyst said. 

However, the timing is not ideal for such a transaction. Lonmin’s share price has plummeted, because of among other things the Marikana tragedy, and it is doubtful whether Lonmin’s shareholders would get value out of this in the short term. However, in the longer term it could be a very good vehicle for further consolidation,” he said.

We expect a few twists and turns here before the week is out…

With regards to Bumi, we also expect the Bakries to make another proposal to the Board of Bumi as detailed in previous blogs – the only way for them to gain clear control and bury the current investigation is to bid for the 53% that they & Samin Tan currently don’t own. The lid’s really off the sweetie jar today with the stock easier on weakness in its Indonesian investment PT Bumi. Yes sir, we’ll have some more.


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