Xstrata's bluff

Nov 12 2012 09:28
*Jarred Myers
THE inevitable reformation of the SA mining industry has unofficially begun - unsurprisingly, Lonmin is involved - with a reverse takeover attempt by their largest shareholder Xstrata.

The new paradigm in the mining sector has sunk in despite much of the debris still being airborne - boards have now had the time and breadth to digest it, and are rolling out strategies to cope, survive and even thrive.

Xstrata's reverse takeover attempt which was made public this week has left industry insiders cocking their heads, squinting their eyes and staring blankly at the floor trying to make sense of the whole ordeal.

Zooming in and then out of the situation will shed light on this peculiar unfolding of events.

Xstrata is the largest shareholder of Lonmin with a 25% shareholding; their offer would grow this to 70%. Their grievance is management's competency level and their proposal unbashfully allows them to refurbish the corner executive suite.

In this narrow context all seems well.

Zoom out a little, however, and we are left with the odd fact that Xstrata is the live-in girlfriend of Glencore and they're taking their relationship to the next level as soon as pesky shareholders give their blessings.

It is well known that Glencore CEO Ivan Glasenberg and his clan of merry commodity traders disdain platinum group metals, and after tying the knot would fast track dropping Xstrata's high maintenance deep shaft hobbies.

In short, Glencore doesn't like platinum, Xstrata has a single blemish which Glencore dislikes and it is platinum and Xstrata has decided the best wedding gift to Glencore would be, well, a platinum company.

So what game is Xstrata playing?

The simplest theory is that Xstrata are being responsible shareholders and are acting accordingly, firm in the belief that change needs to happen and now is the best time to action that change, and by taking control of Lonmin they can turn it around.

This in fact is the song which they're  singing to the public. Xstrata stated it was "concerned that the business [Lonmin] does not have the management capabilities to ensure a sustainable future, even if short-term funding issues are resolved, given Lonmin’s longstanding operational problems'".

Despite this all sounding quite logical, we are left with the minor technicality that Xstrata doesn't actually know anything about platinum mining; its bread and butter are alloys, coal, copper, nickel and zinc (granted, platinum refining produces some copper cathodes and nickel sulphates but this hardly constitutes a synergy).

To contextualise this further, Mick Davis, Xstrata's soon-to-be former CEO, is using his final moments at the helm to do a quick turnaround in an industry which he knows little about that is facing the toughest non-controllable macroeconomic and geopolitical climate in the past century.

Flipping this scenario on its head separates the signal from the noise.

If Xstrata fails in its reverse takeover and ignores the Lonmin rights issue, the likeliest scenario, their shareholding dilutes to a paltry 8.8% - a far cry from 70% - and places Lonmin in their "who cares" asset category.

In order to diagnose which strategy is the real Xstrata motive, we can apply simple logic; there are two stakeholders who need to be satisfied for a reverse takeover: shareholders and/or management.

Xstrata oddly annoyed both with their offer designed to specifically benefit Xstrata shareholders and alienate Lonmin management; I dare say a strategy engineered to maximise potential for failure.

There is, however, a third way to view this event.

Next week is November 20, the day shareholders vote for or against the Xstrata-Glencore merger as well as on the retention incentives for Xstrata key managers.

With the only likely party poopers - the Qatari investors holding 11% of Xstrata - quiet on the matter, we can assume silence means acquiescence and this deal is all but in the bag. 

The only real risk now is for Xstrata's directors regarding their pruned £144m pay-to-stay bonus, which requires a  separate vote of 50% in order to pass.

So as Glasenberg and Davis nervously wait under the wedding canopy, Xstrata has been conjuring up a diversion.

Xstrata shareholders are by and large getting a good deal out of this takeover. It is common knowledge that Glencore will toss Xstrata's platinum holdings at the first opportunity.

So what could possibly be motivating Xstrata to underwrite a $1bn rights offer - in arguably the riskiest mining sector in the world - and make a bid for a company which they do not want and will shortly be disposing of?

The answer, it appears, is that unbeknown to Lonmin, they are being cat-pawed by Xstrata.

Xstrata shareholders are being enlightened to the potential downside of a non-merger; they are receiving a preview of some of the dumb options available to Xstrata directors in the absence of their pay-to-stay bonuses in the hope that shareholders will rubber stamp the merger, warts and all.

Finally we can understand the reason for Mr Davis and his band of soon-to-be mega wealthy mining execs' new interest in the platinum industry.

 - Fin24

*Fin24 user Jarred Myers doubles as a columnist.

glencore  |  xstrata  |  jarred myers  |  platinum  |  myfin24



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