Xstrata signals faith in platinum

Xstrata (XSRAF-O, XTA-L) has signaled its faith in the platinum market by making a $10 billion pitch for London-based Lonmin (LMI-L).

While Xstrata’s offer is for 33 a share — a 42% premium on Lonmin’s closing price on Aug. 5 news of the hostile takeover attempt rallied Lonmin shares up to 34.26 on a volume of roughly 15 million shares.

Lonmin is calling the bid “opportunistic” as it comes at a time when its shares were trading for just 22.17 compared with their 35.96 close in the middle of May, but Xstrata insists that it will be its operational expertise that will help save the company from itself.

“Xstrata believes that Lonmin’s operations are attractive, but that a significant transformation of operating and management practices is required to return Lonmin to its former growth trajectory over time,” the company said in a statement.

Coinciding with word of the bid was news that Xstrata had upped its stake in Lonmin to 10.68% from 8% — Xstrata paid 33 for the additional shares.

If Xstrata can win over Lonmin shareholders, the acquisition would accelerate its stated platinum growth strategy. The company had set of target of reaching 1 million oz. of platinum production within 10 years, but expects it could get that amount from Lonmin in a single year with some operational and management changes.

If it does, it would make it the third-largest platinum producer in the world a position Lonmin currently holds.

Xstrata signaled its seriousness about the precious metal last year when it acquired South African platinum producer Eland Platinum for US$1 billion. It has expansion plans for the Elandsfontein PGM mine and concentrator it acquired that aim at increasing production to 600,000 oz. of platinum group metals by 2013.

Lonmin’s underperformance has been no secret to global markets, and its inability to right the ship has left it vulnerable.

The company has announced two reductions to its 2008 platinum production forecast. It had originality anticipated producing 900,000 oz. of the precious metal, then reduced that forecast to 770,000 oz. and again to its current project of 725,000 oz.

Lonmin has blamed both South African power shortages and maintenance issues for the weaker than expected production.

For its part, Xstrata claims it has the experience in South African-based platinum mining, smelting and refining to turn operations around.

Beyond the Eland acquisition Xstrata also has platinum experience through its Mototolo joint venture with Anglo Platinum (AMS-J).

On the same day it announced the Lonmin bid, Xstrata also said it will form a joint venture with Nkwe Platinum (NKP-A). The deal gives Xstrata a 50% option over five prospective properties in the Eastern Limb of the platinum rich Bushveld complex in South Africa.

Lonmin’s flagship project is Marikana which sits roughly 10 km from Xstrata Alloys’ Wonderkop complex.

Xstrata spared no punches in its assessment of the company which it says it has had no prior negotiation with regarding a takeover. It said Lonmin suffered erratic processing performance because of inconsistent ore feed and smelter failures and that Lonmin’s London-based management was complex and not well connected with its operational teams in South Africa.

Xstrata says the offer would be funded through cash at hand and bank debt.

As for company projections on the metal, it forecasts platinum demand will outpace supply by 500,000 oz in 2008 despite a weaker car market in the U.S. and Europe. Autocatalyst demand is expected to come largely from China where stricter environmental regulations will necessitate the use of platinum.

The metal’s price is also expected to be buoyed by the renewed interest in diesel engines. While palladium can be used as a substitute in catalytic converters for gasoline engines, platinum must be used for diesel.

News of the bid was seen as driving force behind platinum’s rally on Aug.6 it gained 4% to finish the day at US$1,613.50 per oz. That reverses a three day trend that had shaved 10% off the metals price.

Powerhouse metals dealer Glencore is the largest shareholder in Xstrata with roughly 35% of the company, hence the deal is seen as a positive indicator for where platinum prices could be heading.