So we were right – Xstrata proposed a de facto takeover of Lonmin last month. What chance Davis goes hostile to finally get his prize?

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UPDATE – News from a “sensible” analyst (not not Soc Gen) that backs our assesment of the situation – It’s fairly clear that what Xstrata was looking to do was to do a deal with Lonmin at a time when Lonmin had balance sheet problems… giving Xstrata potentially a chance to get quite a good deal,” Panmure Gordon analyst Alison Turner said.

For Lonmin shareholders I take it as a positive… although Xstrata hasn’t come forward to say that they would support this rights issue, they have put proposals on the table that clearly indicate that they do see value in the Lonmin asset base.”

Lonmin, the London-listed platinum miner that was at the heart of weeks of industrial unrest in South Africa, revealed today that it had rejected a reverse takeover bid by Xstrata, its shareholder. Lonmin said Xstrata made the bid last month when the latter proposed the potential acquisition by Lonmin of its platinum and alloys division in return for an inter-conditional rights issue of $1bn.

Here’s the link to our blog from 2 weeks ago –

Under the proposal, the rights issue would have been fully underwritten by Xstrata, with its shareholding in Lonmin raised from 25 per cent to 70 per cent. But Lonmin said it had rejected the offer. Without a premium for existing shareholders then I don’t blame them!

Lonmin, the world’s third-largest platinum producer, has been under financial pressure for months and last month said it was seeking to raise $800m in a rights issue to reduce its debts and help it ramp up production to its usual levels after it endured a six-week strike that halted its South African operations. The company said Xstrata made a second proposal on Thursday in which it said it would fully participate in the rights issue, on condition that Lonmin’s executive management was changed and replaced with Xstrata personnel. Lonmin also rejected that proposal, saying it could not cede such control of the business to a minority shareholder in return for no premium.

Mick Davis, Xstrata CEO

The group, however, said on Friday that it was launching an $817m rights issue that will be fully underwritten by banks at 140p per new share. It is not clear if Xstrata will participate in that issue but we personally doubt that Mick Davis, Xstrata CEO, having pursued Lonmin north of £20 a few years ago and clearly still seeing value in the business with the current proposal would allow themselves to be diluted in not participating. There is still the possibility that Xstrata actually go hostile with a bid to usurp the rights proposal – something we have opined on our blog recently in numerous posts.

“The board considered this [Xstrata] proposal and concluded that it would not be appropriate to agree to the conditions contained in it,”said Simon Scott, Lonmin’s acting chief executive.

“In particular, whilst the board of Lonmin continues to hope Xstrata will be able to support the rights issue by taking up its rights in full, it believes it would be wholly inappropriate for the board to cede such substantial control to a single minority shareholder. We have a clear and balanced plan in place that is conservative in the near-term as we respond to current circumstances and seek to stabilise the business.”

Xstrata said on Friday its proposals were “not about attempting to gain control of Lonmin”. Pull the other one Mick!

A spokesman said: “It is about protecting the value of shareholders’ investment in the company. Lonmin has suffered longstanding operational problems and we are concerned that the business does not have the management capabilities to ensure a sustainable future, even if short-term funding issues are resolved.

“Lonmin management rejected our proposals without substantive engagement and Lonmin has never proposed a constructive solution to its management problems. We believe our concerns are shared by other major Lonmin shareholders.”

The spokesman said Xstrata remained open to “all constructive solutions to strengthen Lonmin’s management and operational capabilities to ensure that the business returns to profitability and a firm footing for the future”.

Lonmin’s total revenue declined by $378m to $1.614bn from 2011 as a six-week strike cost it 110,000 platinum ounces in lost production. It said those production losses could rise to more than 200,000 ounces for the year.

The nine-for-five rights issues was priced at 140p per share and for existing shareholders we suggest that you definitely take up the rights. 

If Davis really does want Lonmin then now is the ideal time to go hostile. A modest premium of 40% would probably just do the trick and it still puts Lonmin at a discount to its net tangible book.

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