Xstrata all out to win platinum prize

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Mick Davis, the chief executive of mining group Xstrata, has eyed plenty of deals over the years. But Lonmin, the platinum producer, is the one target that has been perennially at the top of his wish-list.

In an interview with the Financial Times on Wednesday, Mr Davis said he had kept tabs on Lonmin ever since he launched Xstrata as a public company in 2002.

“Platinum is a great industry to be in. We have been looking at Lonmin and Impala Platinum [the South African platinum miner] since day one. Previously the valuation didn’t stack up, but now we think it does. The stars are aligned for us now.”

Lonmin’s share price has fallen 34 per cent in the past two months, reflecting a correction in the platinum price but also the market’s frustration with its repeatedly missing production targets.

With Lonmin’s market valuation languishing at its lowest level since early 2006, Xstrata saw its opportunity and pounced. Without approaching Lonmin management first, Xstrata contacted the company’s main shareholders on Tuesday night and offered them £33 a share, a 42 per cent premium to the closing price of £23.19. Within a matter of hours, Xstrata had scooped up 8 per cent of Lonmin and, today, it added a further 2.68 per cent.

Xstrata plans to fund the acquisition with $10bn bank debt. Trevor Reid, Xstrata finance director, said he was not worried about the fundraising. He said he had started contacting potential lending banks on Wednesday morning.

“Given the response on my Blackberry, it looks like we will have no problem.” The group has strong cash flows, especially given recent record-breaking price settlements for its coking coal, and said it would aim to start pay off the debt facility quickly.

Mr Davis said he was very bullish about the outlook for platinum in spite of worries that the US slowdown would hit demand for cars and trucks. Platinum is the key component in catalytic converters. “In China and India, there will continue to be massive growth in the market for cars, and how long will the US be off the boil? Maybe 18 months. Our view is that the platinum market is very strong.”

Mr Davis added that, as 76 per cent of all platinum supply came from South Africa, the country’s power shortages would prevent a glut of metal coming on to the market and would underpin the price.

The market was buzzing on Wednesday with speculation that Xstrata’s move on Lonmin might attract other potential buyers and trigger a bidding war. One mining banker said that, although Lonmin’s recent performance has been poor, the scarcity of sizeable platinum assets meant that the company would attract a lot of interest.

But several analysts said that the most likely bidders were otherwise engaged.

BHP Billiton has shown interest in the South African platinum industry in the past but it is too busy pursuing its massive hostile bid for Rio Tinto to undertake any other deals.

Norilsk Nickel of Russia is embroiled in an ownership struggle between its biggest shareholders, which is distracting management from looking for acquisitions. Analysts also said the group’s strength in the market for palladium – one of the platinum group metals – meant it would run into antitrust barriers if it was to bid for Lonmin.

Another idea is that one of the major North American gold producers – Newmont of the US or Barrick of Canada – could buy Lonmin and create a diversified precious metals group. Early in 2006, Lonmin explored a tie-up with Gold Fields of South Africa, so the idea of a platinum-gold combination has been mooted before.

The market was also wondering if Xstrata’s bid for Lonmin meant there was no prospect for future tie-ups between Xstrata and Anglo American or Vale of Brazil.

Anglo American’s 78 per cent ownership of Anglo Platinum of South Africa, the world’s biggest platinum producer, means that Xstrata could not own Anglo and Lonmin. Mr Davis said that, although he would like to buy or merge with Anglo, Lonmin was a more realistic target. “I have to operate in the universe of the possible. [A combination with] Anglo has been a nice thought in everybody’s mind for such a long time but nothing has happened.”

As for Vale, Mr Davis said there had not been any contact between the Brazilian group and Xstrata since talks between the two sides broke down in March. But a bid for Lonmin would not rule out a future combination with Vale, he said.

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