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Xstrata unveiled a £33/share offer for Lonmin, driving share in the platinum producer up by 50%. Lonmin rejected the deal as "opportunistic and unwelcome".
As part of its stated strategy to increase its exposure to platinum, Xstrata bought the Elandsfontein mine and concentrator in October 2007, the adjacent De Wildt property from Sydney-listed Nkwe this year, and it has a join venture with Anglo Platinum at the Mototolo platinum mine.
These projects and planned expansions will lift production to a million ounces in a decade. By buying Lonmin and its current 760 000 oz platinum group metals production, Xstrata vaults into third place as one of the leading platinum producers.
"We made a judgment after our investment in Eland that we have the operational capability of achieving a turnaround at a company like Lonmin and taking that into account, and the share price that reflects the operational challenges they have, it's a good time for us to make our proposal to Lonmin's shareholders," Davis said on a media call.
The plan is to restore Lonmin to production levels around a million ounces that it had two years ago and then look at expansion plans, he said. Xstrata is unlikely to list in Johannesburg, he added.
Davis was critical of the way Lonmin has been managed and operated and said Xstrata had the mining and processing expertise to rectify the difficulties that had caused Lonmin to revise production forecasts down four times in the space of a year.
The fixes for Lonmin will not be quick and the capital bill of restoring the company to health is not major, said Peet Nienaber, the head of Xstrata Alloys.
Davis, who said he spoke to Lonmin's management on Tuesday evening after the markets closed, said mechanisation at Lonmin's mines was a "great medium-term strategy", but Xstrata would revisit conventional mining to extract orebodies that didn't lend themselves to mechanisation such as Pandora.
Lonmin has pushed hard to mechanise its operations, something that hasn't met any great success. It has also had ongoing problems with its smelting process, which some analysts have ascribed to the high chrome content in its ore.
"I think a very important process is the thrust of operational responsibility and accountability and decision making back to the operations, for those to become empowered without any burden of overhead and no second guessing from their centre as to how they should operate," Davis said.
One of the criticisms levelled at Lonmin is that its CEO Brad Mills spends too much time in London, away from the operations. There has also been a steady trickle of senior people out of the company, which analysts have also pointed to as one of the weaknesses within Lonmin.
"I'm convinced, as we found in every other operation or company we've bought, that the talent to run great world-class operations exists within those companies. You don't have to bring in new talent, you just have to liberate that talent," Davis said.
"I think that is the most fundamental key to this turnaround."
It would seem Xstrata will conduct a complete review of the way Lonmin's mines and operates its processing plants.
"What we need to ensure... the full potential to mine is there and that requires a re-initiation of development in the mines where mechanisation is not a feasible option and that we should have no fear of going back to conventional mining and to spend time on that development," Davis said at a conference in London.
"The time frame to start picking up the production portfolio is going to be governed by the extent and time... spent on re-initiating development," he said.
"It's not big capital that needs to be spent, it's more a matter of horses for courses. There are certain mines that have to be mined conventionally and others mechanised," said Nienaber.
Conventional mining and related development was slowed by Lonmin.
The Elandsfontein mine reached steady state production in June this year, ahead of schedule, and has begun ordering the equipment needed to double production to 600 000 oz/year from 2013, Davis said.
Xstrata has spoken to Lonmin's South African empowerment partner Incwala, which has stakes in the operating assets, "as a courtesy" because they would be retained as partners if the transaction succeeds.
"I don't think they have a problem at all with the proposal," Davis said.
With the addition of Lonmin, the South African contribution from coal, ferrochrome and platinum group metals to Xstrata's EBITDA would rise to about 20%.
- Miningmx.com
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