Xstrata drops Lonmin offer, then stocks up

The same day that it dropped a hostile US$10-billion bid for Lonmin (LNMIF-O, LMI-l),Xstrata (XSRAF-O, XTA-l) increased its stake in the platinum miner to nearly 25% — buying 22.2 million shares at a bargain price of 19.79 apiece.

Xstrata had proposed an all-cash offer of 33 per share for Lonmin only in August, a bid that Lonmin rejected as too low, with chairman John Craven calling it “an opportunistic move” that attempted to “capitalize on the current volatility in financial and metal markets.”

The offer was abandoned just before an Oct. 2 deadline for Xstrata to either make a firm bid for Lonmin or announce it would not make an offer. That announcement sent already suffering Lonmin shares, which had closed at 22.74 the day before, down to 18.13 at the end of trading on Oct. 1. The stock had traded as high as 35.96 in May.

But Xstrata isn’t dropping the idea of a takeover altogether, saying in a statement only that it won’t proceed within the deadline set by British competition authorities.

Chief executive Mick Davis said the volatile state of the financial markets and the terms of financing it was able to arrange for the acquisition were the reasons for the change of heart, rather than Xstrata’s belief in the fundamentals of platinum.

“The current lack of clarity and certainty regarding the future availability of credit introduces significant risks into the financing package available to Xstrata, in respect of the requirement in the proposed financing terms to refinance a substantial portion of the debt funding within twelve months,” Davis said.

Xstrata’s purchase of 14.2% of Lonmin’s shares, for a total of 440 million (US$768 million), brings its holdings in the world’s third-largest platinum producer to 24.9%.

Under U. K. takeover rules, Xstrata now cannot make a formal bid for Lonmin for six months, unless it can get the company onside. After 12 months, Xstrata can make an offer at less than 33 per share.

“Xstrata’s attempt to acquire Lonmin highlights the fundamental long-term value of Lonmin’s business and the scarcity of large-scale opportunities to enter the platinum group metal (PGM) market,” said Craven in a statement responding to the shelved bid. “Although recent unprecedented developments in world financial and economic markets are having a substantial impact on PGM and other commodity prices, the long-term demand fundamentals for platinum and other PGMs remain positive.”

Lonmin’s PGM projects, all located in South Africa, have a combined mine life of 30 years.