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Glencore exit shines light on platinum bargain Lonmin

Jun 03 2015 09:25
Andre Janse van Vuuren


Company Data

ANGLO AMERICAN PLATINUM LIMITED [JSE:AMS]

Last traded 1317
Change -9
% Change -1
Cumulative volume 194816
Market cap 0

Last Updated: 01/01/0001 at 12:00. Prices are delayed by 15 minutes. Source: McGregor BFA

IMPALA PLATINUM HOLDINGS LIMITED [JSE:IMP]

Last traded 139
Change 0
% Change 0
Cumulative volume 7850525
Market cap 0

Last Updated: 01/01/0001 at 12:00. Prices are delayed by 15 minutes. Source: McGregor BFA

GLENCORE PLC [JSE:GLN]

Last traded 44
Change 2
% Change 4
Cumulative volume 2298153
Market cap 0

Last Updated: 01/01/0001 at 12:00. Prices are delayed by 15 minutes. Source: McGregor BFA

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Johannesburg - The world’s third-largest platinum producer has become so cheap, a buyer could acquire the whole company for about as much as it takes to build a single mine shaft.

Three years of falling platinum prices have left Lonmin [JSE:LON] near an all-time low and valued at just $1.3bn. That’s down from a peak of more than $12bn in 2007 for the miner of the metal used in cars and jewellery. And now the company’s largest shareholder, mining and commodities giant Glencore [JSE:GLN], is getting set to divest its 23.9% holding in Lonmin by distributing the stake to its shareholders.

Glencore, which acquired its stake in Lonmin in the 2013 takeover of Xstrata, is divesting the holding because “we do not trade platinum and have no special insight into the market”, chief executive officer Ivan Glasenberg said when the plan was announced in February.

After Glencore distributes its Lonmin shares on June 9, that may create a group of sellers that want to dispose of their holding, according to Investec. It also could create an opportunity for a buyer.

“Certainly they are a target -their market valuation is more or less the same as sinking a shaft,” Adrian Williams, a mining analyst at Avior Capital Markets in Johannesburg, said by phone. “It’s not a particularly well-run company, but they’ve got good assets.”

Early birds

While excessive stockpiles of platinum may continue to keep prices depressed for now, at some point the supply-demand balance will shift. The average price of the metal is expected to increase more than 25% to $1 618 an ounce by 2018, according to the median forecast of 23 analysts surveyed by Bloomberg.

For buyers willing to make an early bet on the rebound, Lonmin represents a bargain.

Lonmin may appeal to a larger competitor such as Impala Platinum Holdings [JSE:IMP], according to Stanlib Asset Management. Impala is building new shafts and has capacity to treat additional ore at its own processing facilities, allowing it to produce platinum cheaper. A Chinese buyer may be interested in acquiring Lonmin as a way to lock in a supply of the metal, according to Imara SP Reid.

A representative for Johannesburg-based Lonmin said in an email that the company does not comment on speculation. A representative for Impala declined to comment in an emailed response to questions.

Preserving cash

Lonmin plans to cut jobs and reduce capital spending over the next three fiscal years to preserve its cash. A buyer with money to spend on unfinished shafts would be better-positioned to benefit from rising prices, said Sibonginkosi Nyanga, an equity research analyst at Imara SP Reid.

“It’s all about someone with a bigger pocket, who’s willing to fund some of the operations,” Nyanga said. “It is difficult to time when these prices are going to start rising, but it is definitely coming. Someone that can spend on the assets now will be better able to capitalise.”

There are precedents. A consortium led by China’s Jinchuan Group bought a 45% stake in Wesizwe Platinum in 2010 for $877m in cash and loans. Hebei Zhongbo Platinum in November announced a $225m deal to acquire the South Africa platinum assets of Eastern Platinum, whose sole operating mine has been idle since 2013.

Lonmin is also the only platinum miner besides Anglo American Platinum [JSE:AMS] and Impala that operates its own smelters and metal refineries, Nyanga said. This means the company can conduct its own marketing and conclude deals with buyers, enhancing the potential profitability of the business.

Labour issues a 'poison pill'

One issue for prospective buyers is the fraught labour relations at South Africa’s platinum mines. Three years ago, at least 44 protesters and police officers were killed at Lonmin’s Marikana project in the worst mine violence in South Africa since apartheid ended. Last year, a strike over pay took five months to settle and resulted in basic-pay increases of as much as 20%.

“Lonmin is undeniably cheap, but the poison pill is that they carry with them the concern with regards to labour issues and union discontent,” Simon Hudson-Peacock, a money manager at Momentum Asset Management in Johannesburg, said by phone. “All of those kinds of things would make an operator who wants to get into platinum feel very nervous.”

Depressed prices and labour unrest have put all of the big platinum producers under strain. Lonmin is suffering the most, even after raising capital less than three years ago in an $817m stock sale, said Kobus Nell, an analyst at Stanlib Asset Management.

A deeper-pocketed operator may be better able to withstand platinum’s slump until prices rise again.

“Something’s got to give, we just don’t know when,” Nell said by phone. “If prices don’t improve, then you have to say a takeover of Lonmin can be possible.”

Peter Grauer, the chairperson of Bloomberg LP, the parent of Bloomberg News, is a senior independent non-executive director of Glencore.

glencore  |  mining  |  platinum
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