LONMIN thwarted Xstrata’s plans to create a new platinum and ferrochrome company by taking control of Lonmin, but the world’s third-largest platinum miner has left the door open for the diversified group to try again.
Lonmin is undertaking a fully underwritten and heavily discounted $817m rights issue that closes on December 10 to stave off falling foul early next year of covenants governing debt facilities it has with a consortium of banks. If the rights issue is successful, Lonmin will pay down debt and change the terms of the covenants.
The offering is underwritten by Citi, HSBC, JPMorgan Cazenove, Standard Bank, BNP Paribas, Investec, Rand Merchant Bank and Standard Chartered.
In the weeks after violence at Lonmin’s Marikana mines in which 44 people were killed during August, its largest shareholder, Xstrata, dusted off and tweaked an offer made early in 2011 and proposed to Lonmin that it reverse its platinum, ferrochrome and vanadium business in Xstrata Alloys into the world’s third-largest platinum producer, giving Xstrata 70% of the enlarged company.
The world’s largest ferrochrome producer, Xstrata, which now owns 24.9% of Lonmin, also proposed an inter-conditional $1bn equity issue by Lonmin. Xstrata would follow its rights for $250m and underwrite the remaining $750m.
Xstrata would then appoint a chairman, CEO, chief financial officer and two other directors to a board comprising 11 directors at the enlarged and diversified Lonmin.
Barclays said it saw synergies in Xstrata’s proposal, boosting Lonmin’s black empowerment ratings and giving it access to a "management team highly experienced in running chrome smelters".
Lonmin would also secure a "non-financially constrained backer to capitalise the assets appropriately", it said.
"While the size of the syndicate on the rights issue and the discount suggests advisers are worried about take-up, our view is the major shareholder is highly unlikely not to follow its rights given the issue is fully underwritten and book value impairment implications," Barclays said.
An analyst said Xstrata was being opportunistic in trying to secure control of Lonmin. "But they’d be crazy not to try something at this stage," the analyst said.
Lonmin rejected the proposal, but said it was open to receiving a revised proposal, which to date has not been forthcoming. Xstrata Alloys contributed $753m to Xstrata’s interim revenue of $15.55bn.
"The inter-conditionality of the rights issue and the acquisition, combined with the numerous other conditions and pre-conditions contained in the proposal, meant that it would have been impossible, in the board’s view, to conclude such a transaction on the timetable being proposed by Xstrata at a time when Lonmin’s priority was to restore the financial strength of the group," said Lonmin acting CEO Simon Scott.
"Lonmin’s board believed that the economic terms offered by Xstrata were not attractive for non-Xstrata shareholders in Lonmin and failed to compensate for the change of control which would occur," he said.
Xstrata was told of the decision on November 2. It then said it would follow its rights in the $817m equity issue on the condition that Lonmin change its executive directors and enter a management services agreement with Xstrata.
Lonmin rebuffed the conditions, saying it would not "cede such substantial control to a single minority shareholder".
On Friday, Xstrata said: "Lonmin has suffered longstanding operational problems and we are concerned that the business does not have the management capabilities to ensure a sustainable future, even if short term funding issues are resolved.
"Lonmin management rejected our proposals without substantive engagement and Lonmin has never proposed a constructive solution to its management problems. We believe our concerns are shared by other major Lonmin shareholders."
Xstrata must follow its rights or be diluted to an 8.8% stake in Lonmin. Considering Lonmin is offering the shares at 140p — a 69% discount to Thursday’s closing price — it is not only well below the £19.79 per share Xstrata paid for its 24.9% stake in October 2008, but also a relatively cheap way for Xstrata to retain a strategically important stake in the company.
With Glencore CEO Ivan Glasenberg replacing Xstrata CEO Mick Davis six months after the two groups have merged, it is unlikely Xstrata would have made the proposal to Lonmin without Mr Glasenberg’s approval.
"While the Xstrata offers come out the blue and suggest a willingness to stay in the platinum industry, we remain cautious about their intentions in the future," said Ben Davis, an analyst at Liberum Capital.
The scale and discount of the rights offer gives an indication of the difficulties in which Lonmin finds itself and the urgency with which it had to resolve its parlous financial situation. It is issuing 365.5-million shares compared with the 202.7-million it has in issue.
"A breach of any of the group’s covenants when they are tested at any test date could result in a significant proportion of the group’s borrowings becoming repayable immediately," Lonmin warned.
It is no position to do so. It has debt facilities of $700m and R1.98bn.
Lonmin shareholders vote on November 19 whether to approve the rights issue.