reports of renewed offer for Lonmin from Xstrata

With Lonmin shares rising over 6% on Monday and Bloomberg reporting, citing 2 seperate sources, that Xstrata are considering making a renewed offer for Lonmin, it is noteworthy that the shares are up again today against a flat market and in rising volume. With continued comments from the current Lonmin management urging shareholders to vote in favour of the rights issue, it seems to us that the clock is ticking for Xstrata to decide whether or not to bid, certainly before the vote on the 19 Nov. Relative to a weak mining sector Lonmin are holding steady and the stock looks to be pricing in a 50% chance of a renewed move by Mick Davis. As detailed previously, if he is to move, then it is likely to be sooner rather than later given the pressing timescale with the right issue.

Xstrata management are speaking to other institutional shareholders in Lonmin this week and, as is always the case with the City which is as leaky as a rusty old ship, we should be vigilant for any smoke signals in the stock price, for example sharp moves on no news and blocks of stock being purchased. It always amazes me how the “insiders” leave a footprint like an elephant in the price history yet the FSA cannot, it seems, secure more convictions for insider trading….

We believe that only a control premium typical takeover is likely to sway both shareholders and management and a figure beginning with a 7 would be required to be entertained. Book value is approaching 800p per share and so this price would still be a very attractive acquisition price for Xstrata – essentially purchasing the company’s extensive platinum assets for less then replacement cost and near a nadir in the cycle. They would also be able to extract material synergies – synergies that could be extensive given that Lonmin’s CEO yesterday said that he anticipates Lonmin to return to profitability in 2013.

Ben Davis, an analyst at Liberum Capital Ltd. in London, said in a note – “We think Lonmin is fearful that Xstrata’s previous proposals have merit and shareholders may approve a separate offer under similar terms.” 

Xstrata presently owns 25 percent of Lonmin and this is a good platform to mount a bid from. They are said to be sounding out other shareholders’ views on the performance of management and its planned $817 million stock sale to investors. Xstrata may pursue options including a new proposal for Lonmin, or participating in the share sale on the condition that Lonmin agrees to replace senior management, the people said.

Mick Davis, Xstrata CEO

Either option would hand greater control to Xstrata, whose Chief Executive Officer Mick Davis is South African, as London- based Lonmin restarts its Marikana mine, where a violent strike and clashes with police have killed about 46 people. Strikes over pay in South Africa (SBK)’s mining industry have also hit firms including Impala Platinum Holdings Ltd. (IMP) and may wipe 0.5 percentage points off the gross domestic product of sub-Saharan Africa’s largest economy, finance minister Pravin Gordhan said this month.

Lonmin said Nov. 9 it had rejected a proposal that it buy Xstrata’s South African platinum and alloys businesses. The plan called for Lonmin to hold a $1 billion share sale that would be fully underwritten by Xstrata, and which would increase the Zug, Switzerland-based company’s stake to 70 percent in a reverse takeover.

Lonmin also rejected a second proposal from Xstrata to support the platinum producer’s rights issue, which is necessary to meet pledges to creditors, on the condition that Lonmin’s executive directors are replaced, Lonmin said. Xstrata would have provided management services to Johannesburg-based Lonmin under the deal. Lonmin shares rose 6.1 percent 483.2 pence by the close in London, valuing the company at about 981 million pounds ($1.6 billion).

An Xstrata official declined to comment. The firm on Nov. 9 said it was concerned about management and “longstanding operational problems” at Lonmin. 

The walkout at Marikana, which lasted from Aug. 10 to Sept. 20, cut about $170 million from the mine’s output before workers accepted pay increases of between 11 percent and 22 percent. Labor unrest in South Africa has since spread to manufacturing and win-making, with vineyards near Cape Town now experiencing strikes.